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. 

Can tourism encourage better export performance

Giving an example of pashmina, authors Jose Guilherme Reis and Gonzalo Varlea discuss on ‘can tourism encourage better export performance in diversification in Nepal’. The paper has highlighted the importance of brining “fair” in the country without much expenses. The paper, which has given a detailed description of the Nepal’s pashmina and firms’ behavior in the past, has following part: 

Entering and successfully surviving in export markets is a costly process for firms. Key steps for success include learning about the existence of foreign demand, determining the production costs of exportable goods, building a high-quality reputation, succeeding in product branding to reduce competitive pressures, constant upgrading of quality standards to better serve demanding international clients, and remaining competitive with other players in the global marketplace. Drawing on the findings of recent research (Reis and Varela 2013), this note argues that tourism can help alleviate some of these costs by providing a relatively inexpensive platform for cost discovery and acting as a low-cost in-house trade fair, accessible to all domestic producers. Combining product-level data on the world’s and Nepal’s exports (for goods that are both related and unrelated to tourism) with Nepalese data on tourist inflows and expenditures and macro indicators on relative prices results in a positive association between tourist inflows from given destinations and their expenditures with future merchandise exports of tourist-related products to those destinations. For goods previously unrelated to tourism, data reveal no connection between tourism flows and their future exports. The spillovers from tourism into merchandise export performance and diversification imply that there are gains to be had from cooperation between tourism and export promotion activities.

IMF’s global policy agenda

Though Nepal has very limited effect from the global economy it is always interesting to see how international institutions look into economy and what they prescribe for countries. The International Monetary Fund (IMF) has come out with a policy paper on what should be the agendas for the period of time ahead. The agendas varies from country to country. Here, we can see some highlights of those policies and priorities.

From the policy paper:

Advanced economies - Macroeconomic policies should remain supportive, with gradual 

fiscal adjustment anchored by credible medium-term plans. The United States needs to raise 

the debt ceiling and agree on a medium-term fiscal adjustment roadmap, carefully manage 

the normalization of financial conditions, and strengthen appropriate oversight of shadow 

banks. The euro area requires more actions to reduce financial fragmentation and address 

architectural issues of the union, as well as structural reforms to revive growth. In Japan, 

reform success hinges on ambitious fiscal medium-term adjustment and measures to 

invigorate growth.

Emerging market economies - Policy responses to recent financial turbulence should be
anchored by sound and credible monetary policy frameworks. Exchange rates should be
allowed to respond to changes in fundamentals, with buffers used to avoid excessive and
disorderly adjustment. Gradual fiscal consolidation should continue in countries with high
deficits and debt. Removing structural obstacles—including infrastructure deficits and entry
barriers in markets—will be critical to support high growth going forward.

Note: Nepal is taken as one of the low income countries

Low-income countries - While growth has remained resilient in most countries, global
downside risks point to the need for proactive macroeconomic policies. Bolstering foreign
reserves and maintaining domestic fiscal space are priorities. Action on many fronts is
needed to promote inclusive growth.

Globally - Addressing remaining external imbalances requires further progress in closing
policy gaps in major economies. Pending regulatory reforms must be completed to ensure
that the global financial system will transition to a safer state. 

Potential domestic demand boost the growth rate in China, India

The Economic Outlook for Asia, China and India 2014 shows the region’s situation beyond the middle-income trap.

The report has highlighted that the domestic demand will be in rise in the coming years. The report reads:

 Real GDP growth in Emerging Asian economies is projected to be moderating gradually but remains robust over the 2014-18 period, according to the results of the OECD Development Centre’s Medium-Term Projection Framework for this 2014 edition of the Economic Outlook for Southeast Asia, China and India. As a whole, the Emerging Asian Economies are expected o grow by 6.9 per annum in 2014-18.

                                                                                    

Local farmers panic as India endorse food security bill, 2013

Indian Food Security Bill 2013 has panicked the Nepali market as experts saying that it would have an adverse impact. Republica reports, “Given Nepal’s increasing dependence on India for food and other farm supplies, introduction of the food security law is all set to weaken the competitiveness of rival products in Nepal. It further reports that the newly passed law is aimed at reducing farm costs, Indian products will be available at far cheaper prices in Nepal itself, compared to the prices of locally produced products.

The government has already endorsed the draft of the Agriculture Development Strategy (ADS) aiming to improve the livelihood of farmers in the country. The effect that is resulted from the Indian Food Security Bill is less important than increasing food insecurity in the country. According to the World Food Program (WFP), people from more than 42 districts in Nepal under food insecurity.