Views of a Nepali Economist

A day after we missed the deadline for drafting the new constitution, I was at a barber’s shop waiting to get a haircut. The shop had two benches outside for people to sit and wait for their turn. The benches were occupied by middle-aged Nepali men who, as we’d all guess, were discussing politics and cursing the politicians for their failure to deliver the constitution.

They condemned Maoist Chairman Prachanda, Prime Minister Baburam Bhattarai and leaders of the CPN-UML, NC and Madhesi parties. Soon, Ang Kaji Sherpa’s name popped up during a conversation on ethnic federalism. “It was gravely irresponsible of Prachanda to ask the ethnic minorities to rebel. What was he thinking? Has he lost his mind?” they discussed. These people, however, had failed to understand that all of Prachanda’s actions and words now are motivated by his ambition to become the President someday. He was only trying to muster future votes from the minorities for his presidential bid. A person who led a decade-long insurgency, and succeeded, cannot be stupid to do/say something without a reason.

The most heated debate was on the restructuring issue in federal Nepal. One of the arguments was particularly compelling. ‘Suppose you are a father and you have three sons and three pieces of land with varying quality; will you give the best piece to one son, the good piece to another and the barren (the worst piece) to the last one? Or, will you try to figure out a more equitable and just distribution so that none of your children feel cheated?’

If the father does not figure out a way to scientifically distribute his land fairly amongst his children, they will not be able to live in harmony. The same is going to happen in Nepal due to unequal distribution. How can you give the entire Tarai—the most productive land in Nepal—to one group of people? Those people outside the barber’s shop had a point. For example, if Tharuhat becomes a federal state, aren’t you doing injustice to the other group of people who live in the hills and mountains in the Far-west? If Tharuhat refuses to send food, people in the hills and mountains of Karnali will starve.

Those awaiting outside the barber’s shop in Kathmandu aren’t the only people echoing such sentiments. In the past month, I have had interactions with politicians in Jhapa and Janakpur. Politicians in Jhapa believe in giving equal respect to all people in Nepal. Therefore, they reject any ethnic federalism proposal. Politicians in Janakpur want recognition and promotion of various ethnic groups in the region, but they reject designing the states based on ethnicity. They believe that proportional representation and economics should drive the federalism debate. Ethnic federalism, as it turns out, is not a demand from the grassroots.

It is essential that the federated states pay attention to geography, economic capacity and ethnic identity. Attention to ethnic identity, however, does not mean an ethnicity-based federal state but conservation and encouragement of all ethnic groups with proportional representation in politics. Also, people at the grassroots reject some claims that federalism and state restructuring in Nepal will diminish social harmony. They instead believe that such a federal structure will actually enhance the social fabric and make it stronger.

Both groups—from Jhapa and Janakpur—agree on the provision of preferential rights on resources to marginalized and deprived groups. However, the agradhikar concept is neither proportional nor inclusive and, therefore, un-democratic. On some issues like jobs and employment to groups that have been ignored in the past, agradhikar may be good. But, the proposal that the first two chief ministers of the newly federated states should be from the dominant ethnic group is not acceptable. The federal states should either decide on this issue through voting or all political positions should be determined by who wins elections. After all, we still live in a democracy and therefore, should honor democratic principles by electing representatives through elections.

Economic growth in Nepal has not been across the board. Agriculture has been languishing for decades. The Maoist conflict and lack of electricity caused a further decline of agriculture, as well as manufacturing. Luckily, education, construction and the newly rejuvenated banking sector have provided a sense of normalcy and stability. However, there are still three basic hiccups in the administration of development activities in Nepal.

First, our planning capacity is weak. There are many able and competent planners at the national level. However, people with significant and competent planning and implementation skills are in short-supply at the decentralized level. Second, our fund flows are irregular. The central government allocates funds for development, but it reaches the destination only after a few months. In addition, funds vary drastically from one year to another, which confuses the people working at the ground level.

Third, the absorptive capacity of development funds is very low. When funds are distributed, there is a pre-condition attached with the fund, especially regarding how and where it can be used. In some cases, funds are insufficient, while in other instances, the funds could be in excess.  In case of excess funds, such funds cannot be diverted to other important causes due to the binding pre-condition attached with the funds. Therefore, if the personnel at the ground feel that funds from one program should be diverted to another more immediate need, they are unable to do so. This causes the funds to go unused or distributed via corrupt schemes.

While Nepal has made significant progress in defining and enforcing the concept of property rights on public goods and resources, as is evidenced from the success of community forestry, there are many areas where property rights for environmental resources have not been well defined and enforced. Unused land exist under the domain of the Nepal government in areas where famine and hunger risks are persistent—for example, the far-west region. These should be used in manners similar to community forestry so that people can use it for income generation and food security purposes. Once that is successfully implemented, the government should improve the transport infrastructure to reduce the transaction costs of their produce or products. Increase in economic activities and productions serve no purpose if access to market is difficult.

Speaking of economic activities, it has to be ensured that every player in the market has equal odds of succeeding. One group of producers should not be able to dominate the market and dictate the rules. Economists use the Hirschman-Herfindahl Index to observe if any single producer or a group of producers is unfairly dictating the terms in the market. For the Nepali airlines industry, the “Hub and Spoke” observation could help us learn if Buddha Airways, the largest airline in Nepal, is charging the highest price simply due to the fact that it is the largest domestic airline. If this is true, it hurts the consumers and the development process. Then, the government needs to intervene.

However, government interventions are going to be trickier once Nepal gets federalized. Some development concepts like Horizontal equity rationale will continue to be discussed. It has greater appeal than vertical equity because it ensures equity across different regions. In theory, it ensures that equals are treated equally. However, even if federal states of Nepal are considered equal by the constitution or any other mandate, it is inevitable that some states will end up with richer endowment of natural or other resources essential for development. Horizontal equity in that situation is impossible although it is a desirable outcome.

Government interventions have to consider the resource argument, especially because economic development rests on the shoulders of available resources. Residents of Manang are killing residents from neighboring Gorkha district who came to “steal” their yarchagumba. So, we cannot guarantee that violence over the rights to a particular resource will not flare up when Nepal gets federalized. In fact, it is only going to escalate. Despite these fights over natural resources, development practitioners know that capital is the most important resource because absence of capital renders other resources almost unusable.

On one hand, according to law of diminishing marginal returns, if capital is taken to capital-deficit areas, i.e. poorer areas, the marginal productivity of that capital will be higher than if it were invested in an already prosperous area. This argument suggests that capital should go where labor is abundant. An example of this is the miraculous growth of China where favorable policies created by the government ensured that investors brought their money and established factories because there was no shortage of cheap labor in China.

On the other hand, poorer regions have low marginal as well as average productivity. Therefore, moving capital and spending it in areas with low productivity is wasteful because that capital could instead be used for accomplishing significant economic growth in areas with higher productivity. This argument suggests that labor should go where capital is abundant. The movement of people from all over Nepal to urban areas and cities for jobs and opportunities is an example.

However, this second economic thought overlooks the fact that urban areas get larger and larger every passing year due to rural-urban migration to capital rich areas. This phenomenon creates “urban giants” that often suffer from stretched public service delivery scenarios where delivery of even essential services becomes logistically a nightmare. Kathmandu has been suffering from urban giantism for some time now. This approach to development is not desirable.

Economies of agglomeration are useful in the sense that cities foster economic growth due to proximity to jobs, labor, capital and infrastructure. However, Nepali cities and urban areas are getting stretched to their functioning limits. The right approach to development in Nepal is to take capital to the rural and poorer areas where resources essential for economic growth like land and labor are cheap and abundant.