Views of a Nepali Economist

The following op-ed piece was published in Republica on February 12, 2018. The direct link is here. 

Are we prepared for federalism?

By: Mukesh Khanal

There is a war brewing in Canada that has lessons for federal Nepal.

The war is between two Canadian provinces: Alberta and British Columbia. Alberta is one of the world’s largest producers of petroleum. Alberta is also landlocked, which means it needs access to British Columbia’s Pacific Ocean shore to ship its petroleum products to Asia and beyond. There are two ways to send Alberta’s petroleum to British Columbia: by train or through a pipeline. Pipeline is the easiest, quickest, and safest way to transport all that petroleum. The federal government approved that pipeline, and investors were ready to build it. However, the province of British Columbia decided last week to stall the pipeline from being built, and made Albertans angry in the process.

Like Nepal, Canada is also a federal republic, and significant powers are decentralized to the provinces and municipalities. This decentralization of power allowed British Columbia to throw a wrench on the pipeline project, a project of national importance. Although the federal government has the final say and authority over projects of national interest, British Columbia was still able to maneuver a tactic to stall the construction of this pipeline for years, as the battle drags in the courts.

British Columbia knows it will lose the case in the courts, but court cases drag on for years. During that period, British Columbia is hoping that investors will be frustrated and pull out from funding the pipeline project. It does not seem to care that this action hurts thousands of Albertans—fellow Canadians—who rely on the petroleum industry for jobs and livelihood. In response, Alberta decided to hurt the jobs and livelihood of thousands of British Columbians by banning the import of wines from British Columbia. In response to that response, British Columbia has vouched to respond in kind. So, there is now a full-on trade war between provinces within the same country.

So, what does this have to do with Nepal? The lesson here is that, as a federal republic, just like Canada, Nepal should prepare for such outcomes in the near future.

Policy makers in Nepal anticipated such incidents when they were designing the map of our federal provinces. They were very explicit in their demand that Province 3 be extended all the way to the Indian border to touch India. They argued that a single Madhes province with all 22 Tarai districts would be too powerful, and would take other provinces hostage in exchange for access to India. This is why Chitwan ended up in Province 3. This is also why the demand for One Madhes, One Pradesh, comprising all 22 Tarai districts, was not met.

Our new Constitution has provisions for the establishment of a National Natural Resources and Fiscal Commission to deal with potential inter-provincial disputes regarding natural resources distribution and environmental impacts as a result of natural resources development. There are several ongoing hydropower and community forestry related conflicts in Nepal. The Commission supposedly is responsible for handling these conflicts. However, if a 150-years old matured federal republic like Canada still experiences inter-provincial trade war due to natural resource issues, can we be confident we will not experience the same?

Kathmandu avoided its India-access confrontation with Madhes by incorporating Chitwan into Province 3. However, Provinces 4 and 6 have no access to India in the south. There are several other issues on which our new Constitution is not very clear. What happens if we decide to develop a national railway line from East to West? Will that require the approval of every province? What happens if a province bans beetle nuts from Province 1 for “health reasons”?

More importantly: What happens if a province pulls a “Catalonia”?

Catalonia region recently declared its independence from Spain, which was an unconstitutional act. Like the Spanish Constitution, the new Nepali Constitution also clearly says that the President shall dissolve a provincial Council of Minister and the Provincial Assembly if the provincial government engages in an act that is seen as having a serious effect on Nepal’s sovereignty and territorial integrity. Fresh provincial elections will then be held within six months.

However, what happens if the same party that led such an act while in government wins the next election and forms the provincial government again? This is what happened in Catalonia, where the party leading the dissolved government won the elections again and will be governing again. What if this new government engages in the same act? Do we keep dissolving and then re-electing the same government again and again? Our constitution is not clear on this matter.

The Canadian example shows that in a federation, a project of utmost importance to one province could be stalled by legal but selfish maneuvers of another province. The federal government will then have no option but to take the province to court. However, court battles could last for years, while investors could flee the project and kill it. The Catalonia example shows that the federal government and the federal Constitution can only go so far to keep a renegade province in check.

So, the question is: How prepared are we?

Intra-regional Trade in South Asia: We Can Do Better

Let me start this article with information that probably only a handful of South Asians know. Before the Second World War, the volume of trade between South Asian countries accounted for 20 percent of world trade. In 1950, that fell to 4 percent. By 1967, it fell further to 2 percent. By 2010, there was a slight improvement—a rise to 5 percent.

This apathy towards intra-regional trade in South Asia has resulted in our region growing at a slower rate than Sub-Saharan Africa. A decade ago, if anyone had told us that Sub-Saharan Africa would outpace our region in economic growth in 2012, we would have laughed. Yet, that is precisely what has happened. According to The Economist, in the ten years between 2002 and 2012, Sub-Saharan Africa grew faster than South Asia in “all” of those years, and grew faster than Asia in eight of those years.

When compared to regional trading blocs like the EU, North America and MERCOSUR, the SAARC region is inept in facilitating trade among its members. Even the African trading bloc COMESA (Common Market for Eastern and Southern Africa) has made more progress than our SAFTA has ever made, and has lifted many out of poverty through trade. So, what happened to us in the last sixty years? How did we go from a “global force” in trade to become a mere footnote?

There are many bottlenecks in facilitating trade in our region. A dominant political inertia has meant that our regional politicians are vehemently protective of their domestic industries. This has bought them short-term political popularity, but has hurt the economic growth of the region. The leaders in European countries realized a need for a unified market where labor and capital moved freely so that significant gains could be made from deregulation of trade barriers. However, our leaders clearly have no intention of proposing and negotiating such arrangements in our region.

Even after reading about the harmful effects of import substitution in our economics textbooks, our leaders revel in participating in such practices. All South Asian countries maintain sensitive lists of products on which there are either tariffs or import restrictions. To garner votes, our politicians provide subsidies to the labor-populated economic sectors like agriculture. These discrepancies, that our governments in the region have been creating, are the main reason why illegal cross-border trade and informal (underground) markets are flourishing in South Asia.

The members of SAARC, despite what the name suggests, are anything but cooperative when it comes to removing the trade barriers. An import quota system imposed by India since 2006 has all but destroyed the Sri Lankan vanaspati ghee industry. The irony is that the very reason why Sri Lankan vanaspati ghee industry grew was because of initial heavy capital investments by Indian investors. And, now, all that investment, cooperation and goodwill has been endangered due to India’s insistence on the quota on the product. 

There are many non-tariff barriers (NTBs) that hinder our regional trade. The highways linking South Asian markets are poor, to say the least. Letter of Credit (LoC) issued by Indian banks is not accepted in Pakistan, and vice versa. And, then there’s the vigilante factor. Indian custom law states that tea shipments from Nepal need to be tested only once every six months. Yet, last year, an Indian border agent refused to let Nepali tea shipments to pass through the Kakarbhitta checkpoint in Eastern Nepal because he insisted on testing those shipments “himself”. The insistence continued even after Nepali exporters showed him the test “certificate” given by the Indian government.

In light of all these problems, our region cannot accrue any gains from trade if we do not work towards addressing and solving these problems. In this regard, the media can play a significant role. The media should highlight significant trade agreements made by, and between, the member states of this region. For example, the BIPPA that Nepal and India recently signed. Our media should portray such regional dialogues and facilitations in a positive light. Yes, the details of the agreements could be debatable, but the importance should be given to the fact that the “dialogues” and “agreements” are happening in the region. The debatable details can always be fine-tuned, changed, or ironed out.

Also, the markets in our region should be interconnected. Transport infrastructure such as roads, highways and ports should be accessible to one another, should be well maintained, and safeguarded by mutual cooperation. SAARC regional trade will receive a boost if India allows Nepal and Bangladesh to use the Indian roads for a direct trade, without having to load and unload goods in the Nepal—India and India—Bangladesh border points.

Like the developed world, we should integrate our equity markets, too. The bond markets in South Asia are very poorly developed, and they are not integrated. We should make efforts towards such integration because it would help the member states gain valuable access to capital. For example: if we had a regional bond market today, an entrepreneur or a business in Bangladesh, Sri Lanka or Pakistan could borrow and use the excess liquidity from the Nepali financial market. In today’s business climate, such initiatives are not only desirable, but also necessary.

Our region should also learn from the “China syndrome”. Essentially, it means that salary, income and standard of living also grow when an economy grows. Increasingly, the Chinese workers are seeking better and high-paying opportunities than that offered by manufacturing and agriculture. To counter such problems from ever occurring in our region, we should have a regional cooperation where labor flows freely between our countries in the same manner as goods and services. A smooth flow of intra-regional labor ensures that no industry in any of the member countries will suffer from shortage of labor—quantity or quality wise.