On wrong track

First published in Republica Daily

Nepal-China-India
Last January, the Department of Industry (DoI) released updated statistics showing that China had overtaken India to become the largest contributor of foreign direct investment (FDI) to Nepal over the previous six months. Does this increased FDI inflow from China mean anything at all, or is it just another statistic? Is it time for Nepal to rethink its economic and political ties with its two giant neighbors?
Yes, we believe this is the right time.
It is naïve to believe that China and India are interested in a prosperous and stable Nepal. The only thing they care about is their interests, whether security-related or geostrategic. The idea of being a ‘vibrant bridge’ between the two rising economies seems a distant fantasy, since Nepal can neither bring them to a common table, nor are they interested in any such mechanism.
Traditionally, compared to China, Nepal has been much closer to India. But Nepal needs to revisit at least the last few decades and evaluate what it gained by being closer to India. Nothing!
If Nepal wants to speed up its economic development by attracting FDI from both China and India, first it has to maintain ‘equi-proximity’ with the two neighbors. Nepal needs to work on scientific management of its border with India, and India needs to support Nepal in the same since border issues have been a major problem for both the countries.
The establishments of China and India are not very interested in dealing with Nepal and acknowledging it as a partner in development. Rather, both of them are inclined to deal with Nepal through their intelligence agencies and bureaucracy. Nepal has to understand this and be firm in dealing with its neighbor with clarity and respect. This is also the reason Nepal should maintain an organized border with India.
It can be argued that Nepal has gained a lot from the open border, but it has also lost a lot. In bilateral talks, Indian officials use issues of illegal re-export of beetle nuts and Chinese umbrella to Indian market to bully Nepali government officials. It is reported that Nepali businessmen import lentils from India and re-export to Bangladesh. Officials at Indian Embassy in Kathmandu try to humiliate Nepali officials for letting businessmen carry out these illegal imports, but do not take action against Indian businessmen who export those lentils illegally in the first place.
The South Block does not hesitate to deploy officials in its Kathmandu embassy to deal with journalists, opinion makers, and of course, businessmen and political cadres. Officials at the Indian Embassy allegedly distribute money from their drawers. But their beneficiaries would rather cover their eyes than admit this dirty truth.
Coming to China, it does not seem interested in dealing with Nepal as a special case and as a neighbor. Rather, it puts Nepal in the basket of ‘least developed countries’ along with many African countries. A good example is China’s decision to provide zero-tariff facility to 7,787 goods and services from all LDCs. China does not give any special treatment to Nepali goods and services—in which Nepal has comparative advantage—that it does not give to other LDCs. China is more interested in African countries to counter the West and prove its rising economic and political power in world politics.
In September 2013, Prof Wang Jisi from Peking University gave a talk in Beijing, China’s dilemma: marching West, thinking East. He mentioned India and other neighboring countries like Burma several times as he talked about China’s development, its foreign policy and neighbors, but there was no mention of Nepal. When asked about his views on Nepal, he briefly stated that Nepal is important to China because of Tibet. This shows that China and Chinese scholars are not much interested in Nepal.
Nepal neither has military strength to compete with its neighbors, nor the ability to deploy intelligence officials in Beijing, Delhi or border areas. Being a poor country between two giants, it has let itself be used by its ‘friendly neighbors’. Sometimes, they seem gentle and sometimes anything but..
Political parties should understand that the country’s future relies largely on their policies. They are the ones who should steer the country’s economy and politics.
The China-Nepal-India trilateral cooperation proposed by Nepal in 2010 has been taken very lightly in both Beijing and Delhi. That means neither country is ready to sit down with Nepal again. China and India are emerging giants in world politics. The two compete in many areas, from trade to military strength. Nepal should understand there is no space for it in the same table. It should not take any kind of action to please the southern neighbor at the cost of alienating the northern neighbor, or vice-versa.
Nepal should understand that having a scientifically organized border with India and allowing Chinese investors into Nepal without the fear of India is the only way of filling the infrastructure gaps. If Nepal allows India to build a 1,450 km highway in Tarai with its own contractors, then why not let China build a railway network in northern Nepal?
This does not mean Nepal should allow its land to be used by either power as they want. But if it wants to maintain equidistance with its neighbors, it should be more organized in dealing with India. The long relationship with India didn’t help us develop, but rather made Nepal more vulnerable, both politically and economically. Now it is time to be more professional and diplomatic with both neighbors and focus on building the country’s economy.
Poudel is a graduate student at Tsinghua University and Sapkota is a PHD candidate at Renmin University in Beijing

Between the lines

First published in Republica Daily

Privatization in NepalIn the midst of the Great Depression of the 1930s, John Maynard Keynes wrote in his magnum opus The General Theory, “I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas…. Soon or late, it is ideas, not vested interests, which are dangerous for good or evil.”
I am taking this reference from Keynes to explore some recent arguments from intellectuals on Dr Govinda KC’s recent fast to ‘purify’ health and education sector, and subsequent attacks on the privatization drive post-1990. I want to clarify that I am not against KC’s admirable steps for the sake of the country’s poor people, who cannot afford quality health service at private clinics.
The debate begun by KC’s fast is not just limited to health and education sectors now. It has touched a wide range of issues, from the country’s post-1990 privatization drive to the difficult political philosophical question of whether political parties are shopkeepers. I take Yubaraj Ghimire’s “Should political parties be running profit making ‘institutions’?” from Setopati and Mahabir Paudyal’s “Alarming signs,” (Republica, Jan 30) to build arguments.
Both the articles give enough reasons for a strong government mechanism that can ensure quality health services to people. Yes, the government should provide quality health services to people, mostly to the needy. The argument goes that the health sector is going to be polluted by corruption and politics. True, but these are the results of vested interests, and they do not hold much meaning in the long run. But the dangerous thing is denouncing the whole privatization drive that was started in 1990 and attacking political parties with the provocative question of whether they should run profit making institutions. The latter question demands careful and honest debate in society. We have to be clear that political parties are the result of our civil society, media and entire composition of people.
Yes, political parties are shopkeepers, and even the nation-state is a collective force of many shopkeepers. If we go back to the history of human civilization in the 17th and 18th centuries, progress has been made by small and large shopkeepers. Slowly states started to do what shopkeepers used to do, from providing health services to selling fuel. And most of them are inefficient; we have enough examples of that.
On the one hand, shopkeepers are not as bad as Ghimire connotes in his piece. On the other hand, political parties are not interested in keeping a distance from state-owned agencies, in a country where a Finance Minister’s success is measured by his ability to raise higher amount of revenue. Our dual nature of demanding everything from the government and asking political parties to stay away from appointments does not work. Of course, political parties will play important roles in all sectors if you ask for everything from the government! Public’s lack of faith in the private sector gives enough space to political parties to get involved in businesses. Either we have to be careful about the government’s size and believe in the private sector, or let government and political parties do their business. There should be a balanced approach—that’s what Keynes suggests. The government should have the ability to monitor the private sector, but the private sector should be running business as usual.
The attack on people with vested interests should not dismiss ideas that largely drive the society and leave a long-lasting effect on the social, economic and political framework of the society. Dr KC’s fast and aftermath happened under a government led by the country’s Chief Justice Khil Raj Regmi. This is the result of the shameful act of having the same person head two institutions—judiciary and executive. This is just one result of our collective failure to stop that from happening. The Regmi-government was formed in the name of conducting the Constituent Assembly II election. But that was ‘rape’ of the beauty of democracy—the separation of powers. We will have to pay much more for this horrendous act. Political parties are not the only ones responsible for that action. History will hold each of us responsible. This gross sin will not go unstudied in the coming generations.
Regmi is a self-centered person with vested interests, who could not even give up one position for the sake of purity of democracy. And definitely he is not uncomfortable in letting the ‘vested interest groups’ flourish. That’s what forced KC to sit for a fast-onto-death.
Regmis will come and go, but intellectuals and philosophers in economic, social and political fields should be careful about protecting the ideas that we believe in.
The arguments from Paudyal in “Alarming signs” do not come from careful research. “Government health institutes and education establishments used to command respect until 1990,” he writes. This statement has come in a daily run by a fortune made in the country in post-1990 open society. The post-1990 privatization drive has definitely created a level of inequality in society, and it certainly has some vices. But we have to look at how much we have been able to achieve since then.
Public services are free to the people, but often unavailable to those who work hard to earn it. State-owned service providers are nothing more than brokers in the stock market. They spend one person’s money on another. If we think that privately run firms are making unnecessary profit, then we have to ask government to take actions against it, or civil society should stand up against it, as KC did.
Ideally, we look for better services at relatively low price from the government. At the same time, we should not forget that our society is hesitant to pay tax, let alone pay on time. And, even if we pay our tax on time, it might not be spent on any of the areas that we would like. As I am referring to Keynes and his words to explore the effects of vested interests and ideas in society, I definitely believe in some sort of government intervention. But denouncing the entire privatization process and its result just to get rid of people with vested interests in some sectors is short-sighted. The whole debate has been possible in privately run media outlets, which is the fruit of privatization drive. We should not forget that!
Of course, KC is a man of principles and high moral integrity. But he never denounced the private sector. The government officials involved in the monitoring of the sector might be corrupt, but that should be dealt with separately, not lumped with privatization.
Lastly, political parties definitely should not be running profit making institutions, but they always work with rigorous analysis of gain and loss. No matter how you define it, human history is the result of calculation of gain and loss. Our political parties will definitely turn all state-owned institutions into profit making institutions if we let ideas be killed in the name of controlling interest groups.

Path to prosperity

First published in Republica Daily

“I have never been to Nepal, but the first thing that comes to my mind when I think of Nepal is tourism. I want to visit there one day,” one of my German friends said over dinner as we talked about Nepali economy. He further added that he assumed tourism sector made significant contribution to Nepal’s gross domestic product (GDP). In reality, tourism contributed a mere 1.8 percent to our economy in 2012/13. But my friend’s assumption is not wrong, as our government has acknowledged that tourism sector might help us maintain a healthy balance of payment (BoP).
Tourism’s paltry contribution to GDP indicates we have failed to tap the resources we have. The tourism sector—which neither demands large-scale investment nor requires significant policy reforms—can lead us out of underdevelopment. This sector can create job opportunities for all sorts of people—skilled and unskilled, educated and uneducated. Already, more than 160,000 people are employed in this sector in Nepal.
As our conversation progressed, we started talking about how, historically, no country has become rich without a foundation of industrialization. Nepal is not going to have an industrial revolution in the near future that will help it break the vicious cycle of underdevelopment. And even if it does, it cannot penetrate big markets in the world. Constraints like difficult geography and weak competitive edge will severely limit it. The services sector, especially tourism sector, is our only hope for prosperity.
Nepal can neither invest big to increase economic growth, nor does it have a competitive advantage in manufacturing sector. Our agricultural sector is still at subsistence level, remittance is not being utilized productively, and manufacturing is under pressure from long power cuts and trade unionism. In this scenario, focusing on the tourism might give it the impetus to economic development.
Additionally, the most beautiful part of focusing on tourism sector is that it gives us the incentive to preserve our culture, natural resources and customs. We can become an exemplar country by attaining economic growth without ruining the environment and natural resources.
In a recent report, Nepal Rastra Bank (NRB) stated that the country can accommodate around 7.44 million tourists annually. The report, based on field study, also highlights how Nepal’s failure on tourism promotion impacts tourist inflow. This was reflected in tourism’s decreased contribution to GDP: 2.8 percent in 2008/09 to 1.8 percent five years down the line.
We have had different programs in the past to promote tourism, but we could not achieve as much we wanted. Tourism’s contribution to GDP never reached higher than 2.8 percent. Given our comparative advantage in the sector, we could achieve much more. The economies of China and India are growing, and the emerging middle class of these countries are looking for short and reasonably priced holiday destinations. We could attract many of them.
We don’t have to build star hotels or construct multilane highways or invest billions to attract tourists. We already have many things tourists like. What we have to do is coordinate among ourselves, come up with different packages, and advertise them around the world. People make decisions based on the information they have at hand or receive easily. So we need to make our country’s name familiar across countries.
We need not focus too much on high-end tourists, though they are important. We can be a destination for tourists who seek places that are natural, calm and spiritual. Many such tourists are backpackers. If they venture into hidden nooks and crannies of the country, that will create jobs at the local level.
There are certain things, however, that we need to do to make tourism sector more productive. The first is to improve the quality of our international airport and create a smooth transportation system. We have to stop frequent bandas and our habit of making too much political noise, which spreads fear among potential tourists. If the government could ensure this, there are many local entrepreneurs who would be happy to serve tourists who come for short vacations.
The United Nations believes that sustainable tourism can contribute to achieving Millennium Development Goals (MDGs) in least developed countries. The tourism package program called KONSO Project in Ethiopia is an example of how this sector can help create small scale jobs and reduce poverty. The project was launched by World Tourism Organization (UNWTO) in 2007 in response to a request from the Ethiopian Ministry of Culture and Tourism. It was supported by other development agencies in Konso district in Ethiopia. Following the example of this successful project, we too can urge different agencies working in Nepal to help launch different programs to accelerate the development of tourism sector.
Our expenditure in the tourism sector is limited to 2.4 percent in 2012/13, which we can increase in coming years. Increased focus on tourism might encourage entrepreneurship among the youth who leave for the Middle East in search of jobs.
“Achievement from tourism sector could not be made as expected despite abundant potential of this sector, as it could not be developed to its maximum,” reads the economic survey of 2012/13. Development and marketing of touristic commodities and services is our challenge. Let’s overcome it.

Public eyes needed

First published in Republica Daily

Civil society and economy
It is believed that a society is largely driven by its political framework. But the history of human development hints at something different. It is often the economic status of a country that gives it a stable political framework.
Historically, Nepal’s civil society has been concerned, perhaps too much, about politics and political institutions. Its role in guarding politics and political institutions has been impressive throughout history. During every major political change, civil society has perhaps been more important than political actors themselves. But we never had a strong civil component to watch over economic institutions.
Theoretically, civil society need not be involved in the economic sphere at all, as all individuals are rational beings and can make decisions for their own betterment. But that need not be the case. Our government’s expenditure is large, and not transparent. To make government aware of its inefficiencies, we need a civil society focused on economic activities.
The civil society’s role is not limited to overseeing the management of tax money. It should also speak out against corporate giants. The recent attempts to bring Monsanto into the country, and Rajya Laxmi Golchha’s entry into the Constitution Assembly are extreme cases that call for a strong civil society on the economic front. Economic development is a collective effort of the private and public sector; the problem is that our private sector has become rather irresponsible.
Economic development is not a single incident. Prosperity is the result of many small and large scale activities and sound economic policies. But at the bottom of all these things, there should be an honest private sector and functional public sector.
The opening up of the economy in 1990 brought significant changes to people’s lives, but they were not enough to improve daily lives of people. The private sector in other countries has been able to create jobs and increase production even when the political situation is not favorable. Bangladesh is an example. In our case, private sector is always demanding one thing or the other. The umbrella organizations of the private sector, Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and Confederation of Nepalese Industry (CNI), both are inactive.
In our country, economic development is not synchronized with social and political development. Our social and political awareness are way ahead of our economic awareness. In theory, no economist, policymaker or businessperson would agree to have a civil society that is a hindrance to economic activities of the private sector. But in practice, it has been a necessity in a country where there are far more traders than real entrepreneurs, and there is a vast difference between the two. Making profit is neither bad nor dishonest, but it should be fairly gained and socially responsible.
Francis Fukuyama writes that economic activity represents a crucial part of social life and is knit together by a wide variety of norms, rules, moral obligations and other habits that together shape society. The idea of a civil society that looks after economic activities is to build a society where trust prevails.
The question here is whether media can be that civil society that safeguards the ethics of the economy, as it does in politics and governance. No media seems ready to speak against private sector ‘mafias’. Government and political dictators have repeatedly failed to manipulate the media. But corporate interest groups, unlike the government, can easily make a media house blind to their wrongdoings, and thus prevent them from being honest watchdogs of society.
The need for a civil society that carefully watches over economic and development activities that have a significant impact on people’s lives has been felt in many instances, including in Upper Trishuli 3A and the development of Melamchi Drinking Water Project. But we hardly get news of such activities because the media is run, directly or indirectly, by corporate giants that are involved in these activities. Most journalists have had their journalistic freedom compromised while covering issues related to private sector’s mischief.
The media should be able to play the role of civil society in any area. Journalism’s roots come from gossip-mongers. Historian Yuval Noah Harari from Hebrew University in Jerusalem writes, “Gossip usually focuses on wrongdoings. Rumor-mongers are the original fourth estate.” This historical background of journalism should enable it to warn society about cheats and freeloaders in the private sector. But it has failed to do so in many cases.
A strong civil society in the economic sphere has become necessary as the country’s political situation seems more and more uncertain. Therefore, it is time to call for an effective civil society that monitors the economy. We need an independent civil society that works to make economic institutions accountable and urges public offices to perform better.

Time for Rethink

First published in Rebublica Daily

It is a shame that Investment Board Nepal (IBN), established to bring foreign direct investment into the country, is wasting time holding meetings with donors seeking aid.
Former Prime Minister Dr Baburam Bhattarai had announced that the IBN’s aim was to bring in investment of US $1 billion in the first half of the fiscal 2011/12.
 Two years down the line, it has turned into just another government agency that hobnobs with donors.
The country needs infrastructural reforms that can accelerate economic growth which has stagnated since 1993/94. People were expecting the IBN to bring FDI, help large scale-projects materialize, and create ripple effects by generating jobs. The long-term goal was to develop an institution that works efficiently to implement projects to fill the infrastructure gap in Nepal.
The IBN was formed based on the Investment Board Nepal Act 2011, aiming to accelerate implementation of the projects that had been in limbo for decades. The Bhattarai-led government then handed over 14 different large-scale projects, including five hydropower projects, to the IBN in May 2012. The board of the IBN, which is chaired by Prime Minister, in turn gave it the mandate to negotiate with foreign investors directly. This decision had generated a lot of hope regarding FDI and infrastructure development in Nepal.
The IBN had received a mandate from the Bhattarai-led government just a day before the first Constitution Assembly (CA) was dissolved. The then PM Bhattarai had expressed his zeal to develop infrastructures even in the midst of political chaos, for which he should be appreciated.
Currently, the IBN is responsible for facilitating the implementation of 14 projects, including West Seti (750 MW), Upper Karnali (900 MW), Kathamdnu-Terai Fast Track, Nijgadh International Airport, upgrade of Tribhuvan International Airport and establishment of star hotels. Unfortunately, none of these projects have any momentum, even after two years of IBN formation.
So far, the IBN has not been able to make any achievement public. It is led by a CEO whose experience in private sector is limited to working in commercial banks. In an article more than a year ago, IBN CEO Radhesh Pant had said, “Our hydro resources belong to all the people of Nepal. It is the responsibility of any government to ensure that our nation’s resources are managed wisely for the benefit of our people.” He was right.
 The question, now, is whether the IBN is really working to bring in FDI to implement these projects! Pant must be aware that there would be no point of IBN if it does not succeed in sealing deals with investors.
No doubt, there are problems. Foreign investors are not waiting in line to invest as and when we want them. But this does not justify IBN’s increasing involvement with donors. Honestly, we already have too many institutions that work with donors.
After two years of its existence, there should be an independent review of the IBN, its progress, achievement and the people involved in it. It is an institution created for efficiency. Mediocrity and inefficiency have no place in this institution.
We already have a number of inefficient public institutions, including 37 public enterprises. The office of the IBN is receiving assistance from Centre for Inclusive Growth (CIG), an initiation of British government’s aid agency Department for International Development (DFID). But what has it achieved so far? There are questions to be asked and issues to be discussed before jumping into consolidating funds for the IBN.
We should appreciate that the bilateral and multilateral donors are interested in helping develop Nepal’s infrastructure. But we should also use our judgment in deciding when to ask donors for money and when to make do with what we have.
Going further, bringing additional FDI in the country is not an easy task. The IBN should let people know what it is doing to take forward the 14 projects that it is responsible for. The IBN should not get involved in just about anything to develop infrastructure. It should focus on what it has been assigned to do—convince investors to come to Nepal. People would like to know what is going on with the five major hydropower projects. How serious are Indian and Chinese investors about coming to Nepal?
We need both foreign aid and FDI for economic growth. Eugene Bramer Mihaly in his book Foreign Aid and Politics in Nepal makes a vital but provocative point when he asks whether Nepal consumes aid or aid consumes Nepal. Foreign aid is the holy cow that no one wants to question for reasons well understood. With this in mind, we need to be cautious when we use aid money.
The IBN has become synonymous with infrastructure development, and it should know that more than half a century of aid in Nepal has not resulted in any large scale infrastructure project. These projects can be developed with FDI. Spend time with investors. Time with donors might be fun, but will prove futile in the long run!

Failed policies and plans of Nepal since 1950s

Author Narayan Khadka, in his paper on ‘Challenges to Developing the Economy of Nepal’, which published in 1998 in Contemporary South Asia, argues that the main reason for the underdevelopment of Nepal was because of poor execution of the policies and plans it formulated. It’s been more than one and half a decade since the paper was published, the situation of the country has not been improved much. Some of the sectors such as media, telecommunication and services sector have been performing relatively better but the overall macro economy of the country is still frustrating. 

The abstract of the paper:

Nepal initiated a development policy and plans to both modernize and develop its predominantly agricultural economy only in the early 1950s. In the last four decades, the country has implemented nine five-year plans and invested billions of rupees to developed its economy. This article examines the poor performance of past development efforts in the light of myriad of challenges, local and global economic and political, structural and institutional. It includes that the economic reforms which have been introduced vigorously since the restoration of democracy in 1990 will not yield the desired results unless they effectively and positively contribute to improving the agricultural sector, lead to higher productivity and growth, generate increase mobilization of domestic resources, alleviate poverty and bring greater social equity.

Further, the author discuss the challenges of the economy of the Nepal as, Nepal has been experiencing with different development strategies every decade of so since 1950s. An inflow of aid helped create a minimum of socio-economic overheads in the country. However, the country is caught in a poverty trap and despite 40 years of planning and development efforts, 45 percent of the population have an income of less than a US$ 1.00 a day. The problems Nepal has been facing with regard to the development of the economy are not only socio-economic but also geographic and structural. 

FDI, foreign trade as factors of inequality: Case from China

Authors Xiaobo Zhang & Kevin H. Zhang demonstrate how two major factors of the globalization, foreign trade and foreign direct investment, have been contributing for regional inequality within a developing country, with the evidence from China. The paper has applied same production function in all 28 different provinces of China. “Gains of economic growth have not been evenly distributed across regions. The inequality might have been caused by many factors but foreign trade and foreign direct investment (FDI) also has a major role to play in it,” reads the paper. “A striking feature is that coastal provinces have generated more trade volume (over 86 percent of total) and attracted far more FDI than inland provinces.”

Abstract of the paper:

Developing countries are increasingly concerned about the effects of globalization on regional inequality. This article develops an empirical method for decomposing the contributions of two major driving forces of globalization, foreign trade  and foreign direct investment (FDI), on regional inequality and applies it to China. Even after controlling for many other factors, globalization is still found to be an important factor contributing to widening regional inequality. The article ends by investigating the role of factor market segmentation in aggravating the distributional effect of changing regional comparative advantages in the process of globalization.

Note:

While wondering to connect this framework to Nepal (Though Nepal is a under developed country), the role of foreign trade and foreign direct investment in the economic growth has been limited due to our supply-side constraints. The acute shortage of power for smooth operation of manufacturing sector has always been a major bottleneck for the development of Nepal. There is very rare chances of attracting FDI at a time while domestic firms are shutting down their business due to lack of enough power supply in their firms.