Flashback: Rhetoric around directive principle on economic matters

Predictably, the draft constitution, in both its process and content, has generated controversy. And not only on matters of federalism and religion. The directive principle concerning the economy has also been criticized by some quarters, notably organized private sector representatives, for listing cooperatives as one of the three pillars of the economy (the other two being the public and private sectors) and envisioning an economy geared towards "socialism". Since the criticism is coming also from Nepali Congress types, it makes me wonder what the current position of the largest (and non-communist) party is on BP socialism--a variant of socialism attributed by party faithful to their late leader BP Koirala who they eulogize as Mahamanav,or Superman. For a party that ditched BP's pro-constitutional monarchy stance as it marched to bed with the Maoists, abandoning another BP principle that it paid only lip service to may not be an awkward moment. There was a similar debate on a proposed directive principle on economic matters in early 2011 during the first Constituent Assembly period. Then, it was "mixed economy" instead of socialism. I find the arguments I made in an article then still relevant in the second Constituent Assembly period.

When rhetoric rules

(Published in Republica daily, 1/16/2011, http://archives.myrepublica.com/portal/index.php?action=news_details&news_id=27201 )

-- Paras Kharel

Perhaps it was another manifestation of the essence of the present Nepali times, where form takes precedence over substance, rhetoric over action. After some haggling over semantics, the high-level taskforce on Constitution-making decided that a three-pillar economic model—consolidating the national economy through “independent development and participation” of the public, private and cooperative sectors—would be enshrined as one of the directive principles of the state in the new Constitution. It took “days” of deliberations among the honchos of the big political parties to “agree” on what is nothing but a longstanding policy of maintaining a mixed economy dating from the Panchayat era.

Naturally, CPN-Maoist, whose chairman heads the taskforce, would insist there is something different about this model, while Nepali Congress and CPN-UML would claim it as a policy they introduced and pursued after the restoration of multiparty polity in 1990. But merely codifying what the economic system should be in the Constitution would serve little purpose other than perhaps setting a world record for the longest directive principles. This is especially so because the constitutional experience so far has been one of political expediency riding roughshod over constitutionalism, with the law of the land being interpreted to serve partisan interests. The 1990 Constitution, once billed as the world’s best by NC and UML, too, had high-sounding economic objectives of the state written out in the directive principles, as has the amendment-ridden 2007 Interim Constitution, but with no operational significance.

All kinds of specific economic policies and decisions, whether in the national interest or not, can be compatible with the broad rubric of a mixed economic system. The guiding philosophy must, therefore, be safeguarding national interest. Whether it actually is critically depends on the integrity of the political class and its "intellectual" sidekicks, not a non-binding directive principle in the Constitution.  It would be a worthwhile exercise if the leading political parties were to engage in earnest soul-searching as to why and how they failed to deliver the economic miracle they promised the hoi polloi.

Take the case of the policy on water resources, one of the very few natural endowments of the nation with a potential to transform the Nepali economy. Properly tapped, the country’s water resources can help bring about an agricultural revolution through expanded irrigation and foster industrialization (e.g., from energy-intensive industries like cement to agro-processing industries with high domestic value addition) through the availability of cheap power. They can also help gradually reduce dependence on imported fossil fuels for commercial energy needs, thereby improving energy security and addressing a major structural component of trade deficit.

Despite the vast domestic demand, existing and potential, the past few years have seen choice hydropower projects being awarded to joint ventures for export purpose. The justification peddled is that of domestic resource constraint. While no effort has been made to tap the resources in the financial system flush with remittance money for hydropower development, there is also no answer as to why foreign investors willing to cater to the Nepali electricity market cannot be attracted.

Tax incentives are offered to hydropower developers, regardless of whether they are producing for the domestic market or the Indian market—which, in effect, implies a subsidy for foreign consumers even as domestic consumers reel under crippling power cuts. A 400 kV transmission line is being built by Nepal with a foreign loan to make exports possible when the export-oriented projects come on stream, although it is the importer who should be paying for it—a point persistently raised by water resource analyst Ratna Sansar Shrestha, but which is yet to be appreciated by the officialdom.     

A sensible strategy would have been to generate as much electricity as possible, from multipurpose projects, to meet the domestic need, and then export the surplus at a right price. At Rs 3 per unit or less, the export price is unjustifiably low, lower than what the market can pay in India, lower than what Nepal Electricity Authority charges domestic consumers and much lower than the price of electricity imported from India. Lower price implies lower royalty for Nepal government.

All the three largest parties have been party to this tomfoolery, although the Maoists, after losing power, have started making noises against export-oriented hydropower projects. One is free to call this hydropower policy as being part of a “mixed” economic policy—after all, the private sector (foreign and domestic) is involved, as is the public sector (NEA). But can anyone explain how this helps “transform the national economy into an independent, self-reliant and progressive economy”, as stipulated in the directive principles of the state in the Interim Constitution, without taking recourse to the wonky economics of the economic thinkers of these parties?

There are many other policies, decisions and practices that have cost the economy and public welfare dear. The directive principle in the 1990 Constitution concerning the economic objective, which also envisioned an “independent and self-reliant” economy, did not prevent NC from launching a mad privatization drive, which reeked of corruption at the highest level and political puppetry. The directive principle did not prevent NC, UML and RPP from ratifying the infamous Mahakali Treaty (albeit with strictures never to be followed up), with RPP leaders claiming the sun would rise from the west. The directive principle did not prevent governments spanning the political spectrum—from avowed adherents of BP socialism to disciples of Marx, Lenin and Mao—from politicizing the bureaucracy and staffing public organizations and enterprises with party faithful.

For all their rhetorical emphasis on strengthening the public sector and despite the fact that even many advanced economies are not prepared to privatize utilities, the Maoists did not have any qualms about acquiescing in the privatization of the water supply utility for Kathmandu valley, instead of reforming Nepal Drinking Water Supply Corporation. It is another matter that the focus of mainstream media coverage then was on how a minister was standing up to a multilateral lending agency foisting a notorious foreign company on Nepal. Few seemed to notice the irony of a Maoist minister failing to resist privatization itself.

Call the awarding of state contracts for local development works to the private sector public-private partnership, if you like. Local leaders, cadres or simply people close to the leaders of the ruling and opposition parties invariably bag such contracts, regardless of whether they made the best bid or not. While their bosses appear to bicker in Kathmandu, local-level party leaders are busy divvying up the spoils among themselves. It seems that keeping the local bodies sans elected representatives is in the interest of the major parties as their slice of the local-level corruption pie is assured through collusive politics.

These are just a few examples of bad policies and practices that have brought us to the current mess. Without integrity and a serious commitment to development and public welfare at the highest political level, no ism or lofty constitutional provision can deliver.

On Nepal-India relations

Below are my comments on Nepal-India relations published in an Indian think tank's periodical -- Foreign Policy Research Centre (FPRC) Journal-19 (http://www.fprc.in/Pragya-NEPAL-19.pdf). 

1.  Why India bashing has become a favourite sport with most Nepalis who blame New Delhi for most of the ills in their country  little knowing the dynamics of relations between both countries? 

Whether most Nepalis blame New Delhi for most of the ills in their country can only be ascertained through a credible survey/opinion poll, of which I am not aware. If this view of an average Nepali’s attitude towards India is based on media contents and slants, then that itself is a distorted view. For every report or commentary that is “hard” on India, one may spot another that seeks to wish away bilateral problems, with Nepal at the receiving end. Few media, or for that matter opinion makers that spill ink or hog airtime, are independent, what with business, political and foreign interests determining coverage of issues and events. The mainstream media—particularly the influential ones—are wanting in consistent, sustained and critical coverage of bilateral problems and issues going to the heart of the matter, essential to persuade decision makers to resolve the same. Doing so would jeopardize the receipt of advertisements from Indian business houses. So if some media or analysts here appear to raise the problems a tad too critically and stridently than the rest, those on the other side of the border who wish for good bilateral relations should not be too concerned. It should be taken in the spirit of a free marketplace of ideas. Moreover, they would be familiar with the nationalistic slant of the Indian media when it comes to matters foreign relations, faithfully toeing the South Block line.

Just as to say that most of the ills of Nepal are attributable to India would be naivety, so too would be the argument that none of them are. The imposition of a blockade by India in 1989 did hurt landlocked Nepal. Indian officialdom’s attitude towards Nepal was also questioned in the context of its refusal to endorse Nepal’s proposal that it be declared a Zone of Peace, first made in 1975 and which by the late 1980s had been endorsed by over 120 countries. India’s role in the Bhutanese refugee impasse that burdened Nepal with 100,000 Bhutanese refugees for two decades did not put the world’s most populous democracy in good light. It allowed Lhotsampa Bhutanese evicted by the Druk regime—whose defence and foreign affairs it controlled—free passage to Nepal but denied them return passage to their homeland.  Transit travails still handicap the Nepali economy. Nepali goods’ access to the Indian market is constricted by a host of para-tariff and non-tariff barriers. Border encroachment remains unaddressed.  Crimes committed on Nepali soil by elements exploiting the open border have been a problem for ages.  The practice of the Indian embassy doling out aid unilaterally, without keeping the Nepal government in the loop, casts suspicion over the intent.

Not helping matters are comments on Nepal’s internal affairs made by Indian diplomats and leaders, something that is almost unheard of in India. It is hard to interpret the open support extended to one political party by India’s ruling party in Nepal’s first elections to a constituent assembly in 2008 as anything but interference. The perception of Indian officialdom micromanaging Nepal’s political affairs, including the regime change of April 2006 that subsequently saw the overthrow of the monarchy, was substantiated, unwittingly or otherwise, in recent writings by former top Indian bureaucrats, among others. Related to this is India’s apparent policy of running with the hare and hunting with the hound with regard to Nepal’s Maoist movement that claimed over 12,000 lives, destroyed the social fabric and hugely damaged the economy: the Indian government declared the rebels terrorists even before the Nepal government did so, but continued to allow the rebel leadership to operate from its soil, including New Delhi and its outskirts!   

When genuine concerns are not addressed, there is bound to be a reaction at some level, say, the occasional demonstration at the grassroots or the waving of black flags at an Indian envoy. For better bilateral relations—one that is based on mutual trust and is on an even keel—initiatives must be taken at the highest political level to tackle burning bilateral problems and issues. For Nepal that would require key political actors to rise above petty interests, forge a common stance on foreign policy matters, and, above all, stop dashing off to the city that Lutyens built with exclusively domestic problems. For India and its new government that represents a fresh break with the past in many respects, that would mean freeing its Nepal policy from the stifling clutches of spooks and parochial bureaucrats, to be steered by open-minded political leaders who appreciate the fact that close cultural ties between the two countries have been subsisting for thousands of years, much before 1947. That no Indian prime minister has paid an official visit to Nepal since 1997 (ignoring a visit for SAARC Summit) despite invitations is telling—unless the argument, however lame, is that the “close”, “special” ties between the two neighbours obviates the need for such a visit.

2 Do you believe transforming the India-Nepal border from an 'open border' to a 'closed border' would severely damage the traditional socio-cultural,economic  ties?

Maintaining an open border with a country 41 times bigger than itself imposes a stifling constraint on economic policymaking. People can freely cross the border with gold bars in their pockets. There aren’t many places in the world where you can do that. The open border sanctions smuggling and, worse, erodes the state’s power to govern. Still, the crucial issue is not “open” versus “closed” border, but rather the unregulated border as it currently exists versus a regulated one. Cross-border crime is well-nigh impossible to check when no record is kept of people crossing the border. The proliferation of armed groups in the Tarai belt, which borders India, was made possible by the unregulated border. It is the ordinary people there whose cross-border cultural affinity is oftentimes invoked to defend the unregulated border that bear the brunt. Unregulated border-induced crime has been witnessed in the capital city too—for example, high-profile shootings. An unregulated border renders the distinction between internal and external security irrelevant.  A seemingly “domestic” insurgency or political movement that exploits the unregulated border as a matter of operational policy, with support from assorted elements on the other side, cannot be considered just an internal security threat. Free-Tibet movement footsoldiers from Dharmashala have also exploited the porous border to conduct anti-China activities from Nepali soil—which should be as much a source of concern for Nepal as any anti-India activity.

Complaints about India being at the receiving end of the unregulated border are also heard from time to time, including in the Indian media.  Fencing and regulating the border with identity cards would help address the security concerns of both countries. That would help strengthen bilateral ties in the long run. Remember, it was at India’s insistence, on security grounds, that identity cards were made mandatory for Nepali and Indian nationals travelling by air to each other’s country.

3.Nepal’s Trade deficit with India is increasing at an alarming pace.What should  be done to correct the imbalance?

Exports are low due to trade barriers and domestic supply-side constraints. True, the bilateral trade treaty accords customs duty-free market access to almost all products from Nepal. However, para-tariff and non-tariff barriers, and the unpredictability in their imposition, dampen exports. The high-level mechanism for resolving bilateral trade problems must be made robust. A timeline must be agreed for mutual recognition of standards. The restrictiveness of standards-related measures is linked to Nepal’s own supply-side constraints, too. The provisions in the trade treaty for assistance in enhancing standards-related capacity ought to be effectively implemented. Power shortages are the most crippling supply-side constraint on production, the basis for exports. Without addressing the power crisis, fast growth in exports cannot be sustained. Investment in hydropower projects to cater to domestic needs, coupled with a comprehensive plan to partly substitute petroleum products, can help contain the burgeoning petroleum import bill. Foreign investment, including Indian, in power projects will help—but these should target domestic needs first. It is a shame that a number of big hydropower projects with foreign investment are export-oriented ventures. In line with Nepal’s natural comparative advantage, agro-food production must be leveraged for industrialization purpose, by achieving horizontal and vertical product diversification, value addition and processing. Trade support institutions for, inter alia, market research, promotional activities, capacity building, information sharing and overcoming non-tariff barriers must be strengthened.

4.There seems to be a certain level of nervousness about Chinese investments in Nepal in the Indian intelligentsia and among its think tanks, which is clearly reflected in the Indian media. Do you agree? 

Needless to say, as a sovereign country Nepal has the right to maintain economic relations with any country it wants to. Nepal needs foreign investment and technology for high economic growth and job creation. It matters little whether it is Indian, Chinese or Western. China is a major source of foreign direct investment worldwide. Nepal should be concerned that it has not been able to attract more Chinese investment despite proximity and existence of high potential sectors.

If the nervousness in question stems from the involvement, direct or indirect, of the Chinese state, it is misplaced. The nature of the Chinese political and economic systems is such that some, particularly large, investments are apt to be channelled through state agencies. As long as those investments match Nepal’s needs and Nepal’s laws are respected, there must not be any issue. In particular, Chinese investment in hydropower projects to meet Nepal’s power needs is welcome.

It would be naive to think that private companies of non-communist states are never hand in glove with their home states, particularly when venturing abroad. It is hard to believe that the Indian government had no hand whatsoever behind private Indian companies landing contracts to develop choice hydropower projects meant to export power to their mother country.

5.   What steps should be under taken to link Nepali business to the global economy?

A host of measures must be taken to enhance the competitiveness of Nepali businesses, and facilitate foreign investment—details of which are beyond the scope of this response. Effective implementation of trade policy and trade integration strategy would go a long way. Better transit facilities are crucial for export diversification. A South Asian regional transit arrangement can help Nepal integrate with the entire region and beyond. 

6. It is said that Nepal cannot prosper "without good relations with India". It’s also argued  that the economic development of Nepal was in the larger interests of India and China. The tripartite cooperation would neither undermine nor replace the bilateral relationship between India and Nepal. Do you see India, China and Nepal as an Emerging Trilateral Relationship  in the 21st Century?

Although the frequency and intensity of interaction at the people’s level is greater between Nepal and India than between Nepal and China, in large part due to the geography of the plains and the Himalayas, Nepal’s foreign policy has historically been guided by the principle of equidistance between India and China, recognizing that good relations with both countries are central to its sovereign interests. This augured well for peace and stability in Nepal. When that delicate balance was systematically disturbed in the 1990s, Nepal descended into conflict, tearing apart its socio-economic fabric. It is now in the throes of unprecedented foreign interference aimed at clobbering the Nepali state (discussed in my response to question 7 below). A section of the extraneous interests is thriving in real or perceived rivalry and mistrust between India and China. Instability in Nepal can easily spill over to its immediate neighbours. National interests of both India and China would dictate that they bury their rivalry to implement a mutually compatible Nepal policy that will help arrest Nepal’s slide to a failed state. Two important avenues are engaging with Nepal at the highest political level while respecting its sovereignty (which will also provide powerful signals to other external actors), and scaling up contributions to help meet Nepal’s development needs, including via trade and investment.

7.The increase in Western spending in Nepal reflects in part an increasing appreciation among Western donors of the connection between security and development and of the need for higher levels of support to be provided in contexts that are fragile and  to examine the full range of international interests in Nepal and their implications for conflict and security. However, it does highlight the importance of understanding how the interventions of Western actors too may aggravate or mitigate conflict risks in Nepal. Do you agree with this viewpoint ? 

Foreign aid is an important source for funding Nepal government’s budget. Historically, infrastructure has been a key area where foreign aid has made a positive contribution. The conventional challenges to aid effectiveness in its various dimensions—from alignment to national needs, to outcomes—remain. However, the last eight years, as the Nepali state weakened further, have seen massive inflows of foreign aid in the name of peace process and constitution-making, with unprecedented levels of corruption. Worse, foreign agendas inimical to Nepal’s national interests have been pedalled, blatantly or subtly, as never before. For example, considerable foreign funds have been invested in one side of the debate on state restructuring in its various aspects. Seeds of ethnic and religious discord have been sown; federalism along ethnic lines has been promoted. Non-issues are raised and real issues are swept under the carpet. The insidious influence is far, wide and deep: conferences/workshops, rallies, media reports and analyses, discussions within political parties, debates in parliament. The activities of a handful of bilateral aid agencies, many I/NGOs and their pet NGOs are especially suspect.

Earlier, India stood out for attempting to overtly or covertly influence Nepal’s internal affairs, including its more than casual interest in developments related to the Tarai belt. Now it faces competition from a section of Western actors— whose interests in Nepal lie primarily in an environment potentially conducive to rattling China (via its so-called soft underbelly Tibet) and advancing an evangelical agenda. The weapon being deployed is state restructuring of a variety sure to emasculate the Nepali state. An unstable Nepal would have serious implications for India, where fissiparous tendencies lurk not far below the surface. For its own sake, India must reassess its unstated position on state restructuring in its neighbour: it must weigh any short-term gains it fancies from a putatively “India-friendly” autonomous Tarai against the long-term ramifications for itself from an unstable Nepal divided into numerous provinces.

8.Currently, Nepal is  in the middle of completing a peace process and a constitution. Do you see these processes heading towards the right direction, or what challenges do you see in completing them? 

As mentioned earlier, the constitution making process has been sabotaged by external interests bent on weakening the Nepali state. Even eight years and two constituent assemblies (with the life of the first repeatedly extended) after the political changes of 2006 that dumped the 1990 Constitution—once dubbed the “world’s best” by some major political parties—a new constitution is nowhere in sight. In the final analysis, far more important than writing a new constitution per se is the question as to whether it will find widespread support among the Nepali people and not undermine national cohesion, and whether the political actors will embrace constitutionalism or continue to interpret and mess with the rule of the land to suit their own interests.

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