Economic Nationalism Revisited-Part 2

Professor Madan Kumar Dahal (Late)

Senior economist and former Chairman Mega Bank, Nepal

The fundamental problem facing Nepal in the context of industrialization is the acute shortage of electricity that has not only discouraged foreign direct investments and portfolio inflows but also distorted the investment climate. The commitments shown in the investment forum by a large number of bilateral and multilateral joint investors have remained shelved due to poor infrastructure available for industries. A majority of the joint ventures have recently come to the assembling sector that has some attraction but with insignificant value added.

Nepal’s industrial sector also suffers from the absence of right policies in prioritization as to which specific industry should come first and on what scale. The issues of large vs. small and cottage vs. other industries, inward looking vs outward-oriented, export-oriented vs. import substituting, and labor-intensive vs. capital-intensive technology have remained undecided in the context of pursuing a market-oriented, investment-friendly, and transparent policies to attract foreign capital and technology.

Further, it is also speculated that a substantial amount of foreign exchange is misused, especially in importing raw materials from third countries which is attributable to inappropriate industrial policies in the past. Another important problem facing the industrial sector is that state-owned enterprises have been economically a big burden to the economy and, for that matter, also to the future generations. Although these enterprises have suffered from political encroachment, corruption, and over manning, the process of privatization of such enterprises has been highly objectionable, subject to litigation.

The privatization of three Chinese-aided industries generated a hot national debate over the issue whether the government had the authority to privatize the said enterprises in a manner contrary to the spirit of the constitution. Finally, industrial policy lacks a clear vision on industrial location. As a result, the excessive concentration of carpet industries in Kathmandu has created a serious problem that might lead to environmental degradation and perilous future of tourism. In the absence of a clear policy on industrial location, the hills and the mountain region have failed to develop industrially, smacking of an implicit discrimination against the development of the hill economy.

Nepal’s industrial future is conditioned by four major factors: (a) development of infrastructure, especially in the power sector; (b) a permanent transit treaty with India independent of trade treaty but compatible with the spirit of liberalization; (c) a suitable trade agreement with India, mutually accepted by both sides to boost up Nepal’s export potential to India; and (d) a review of the 1950 treaty to deal with the problems of open border.

Trade liberalization in Nepal has in essence been merely import liberalization. Nepal’s trade sector exhibits huge trade deficits. Of the total Rs.21.1 billion trade deficit incurred during 1992/93, deficit with India alone was estimated to be 53 percent. Data on the direction of foreign trade reflect that CIF import from India and other countries accounts for Rs.38.6 billion against a relatively small size of FOB exports equal to Rs. 17:5 billion. The share of Nepal’s trade with India is approximately 26 percent while with other countries it is around 74 percent.

It is apparent that India’s total trade has declined over the years, but it is also true that Nepal’s trade deficit with India has been widening due to Nepal’s dependence on India’s supply of essential commodities and its persisting inability to expand exports to India. While Nepal’s prospects for exports to India are limited, India has tremendous prospects to increase its exports to Nepal. India has the potential to export goods which Nepal is presently importing from other countries. Engineering goods, drugs, and pharmaceuticals from India have a high demand in the Nepalese market.

Since India has liberalized its economy, the commodities and services provided by India could be more competitive in the Nepalese market compared with other countries’ goods in terms of price, quality, and accessibility.

Unfortunately, Nepal’s traditional exportable items have come down to a zero level. The future of carpet and garment types of industries is likely to remain uncertain and, for that matter, fragile. Recent trade statistics offer an insight into Nepal’s overseas trade with China which accounted for Rs. 692.8 million against zero export in 1991/92. The imports from China comprised 76 items of daily consumption goods, construction materials, and industrial raw materials. Nepal’s overland trade with Tibet, an autonomous region of China, is a mere 1.5 percent of its total trade.

OUTWARD-ORIENTED ECONOMIC NATIONALISM FOR NEPAL:

My earlier paper on the “Future of Nepalese Economy: Economic Nationalism Reconsidered” identified five pillars of economic nationalism as the preconditions for sustainable economic development in a vulnerable economy like Nepal. These five pillars of economic nationalism are: 1) evolution of national consensus on the major economic issues at both the local and national levels, 2) application of independent domestic economy, 3) economic integration within and across the national boundaries, 4) self-reliance, and 5) innovative resource planning.
Economic nationalism is essentially a doctrine that assumes and advocates the safeguarding of the nation’s own economic interests as the anchor line of its economic policy.

It supports the notion of minimum essential requirements for a nation’s survival and security, although economic nationalism pursued and policies advocated have differed in different times and places. Expressed in simple terms, economic nationalism is the conduct and management of the welfare of a nation. It is untrue to say that its day ended with the rise of the market economy. Economic nationalism is not just a reaction to the market and price mechanism, nor is it a revolt against non-interventionism. It is, in fact, an appropriate foundation for economic statecraft in a market economy that has to be tested in a vulnerable economic situation on the ground that economic liberalism does contain unrealistic assumptions about the existence of national economic actors and competitive market.

The concept of the outward-oriented economic nationalism would take care of the issue of global compatibility on the basis of comparative cost advantage and vulnerabilities facing Nepalese economy. This includes joint ventures, especially for export promotion, corporatization and privatization of state trading agencies, tax reform with reduced tariff rates including the introduction of value added tax, abolition of import licensing, infrastructural reforms, etc. However, these reforms must not threaten the very foundation of economic activities that are essentially required for sustainable ‘development. If the public sector offers a good deal of profit, efficiency, and competition, privatization can become obsolete.

However, state-owned commercial and trading enterprises such as Rashtriya Banijya Bank, National Trading Ltd., and Nepal Oil Corporation are three parasites that have exerted a great pressure on the exchequer resulting in huge fiscal and budget deficits each year. Surprisingly, successive governments that came into existence in Nepal after 1990 were more interested in providing subsidies to these white elephants, and less concerned to privatize. These enterprises have been a perennial source of kickbacks that government authorities are enjoying for a long time.

On the other hand, if the cost of domestic production is comparatively high inducing imports of inferior quality, then it must be favored by lowering down tax rates. Outward-Globalization and the Future of Nepalese Economy: Madan K. Dahal 77 oriented economic nationalism stands for increasing joint ventures especially meant for export promotion to be initiated by the private sector.

OUTLINING A NEW POLICY FRAMEWORK:

# it would be imperative to develop a consensus on the critical national issues, especially in the field of water resources, joint ventures, trade and transit agreements, abolition of dual ownership on land, etc.

# there is a need to initiate joint ventures with the guarantee of market in India.

# Investment priorities in the context of development activities supported by external assistance need to be reordered. For example, Chinese aid to Nepal needs reordering of priority from infrastructure to harnessing water resources and developing hydroelectricity, especially for farm irrigation and rural electrification both in Nepal and Tibet which suffer from power shortages. A large part of Tibet is underdeveloped and so are Nepal’s northern hills and mountains. There is a standing need to develop a joint proposal exploring the possibility for joint ventures in areas of common interest where benefits could be shared mutually from either side to fight against under-development.

# harnessing of water resources should not be viewed only as an issue on the sales agenda, rather it should be linked with the theory of development. An appropriate human resource development policy can help develop quality manpower to match both national and international demand for manpower.

# it is also necessary to increase the magnitude of expenditure on human resource development. Since the demand for skilled manpower is considerably higher in the developed countries, increasing expenditure on human resource development could offset the loss that occurs due to high absorption of migrant labor into the national economy.

Efforts should be made to empower the poor to have access to resources.

CONCLUSION:

Nepal is largely facing the crisis of development of underdevelopment which calls for immediate reappraisal of the past development strategies to move from economic subordination to interdependence. Nepal’s economic growth is still characterized by subsistence agriculture that could be lessened by diversifying the economy toward developing the services and light industries. Liberalization of the economy so far has not been able to neutralize the economic vulnerabilities facing Nepal, especially with respect to attracting FDI and private portfolio inflows by improving the investment climate generated by reforms.

The 21st Century is going to be more challenging for Nepal from the economic development point of view. A concrete model of national growth and economic development will certainly necessitate economic nationalism and preservation of the national interest and development in such a context requires globalization of the national economy effectively and cautiously. In this sense, an appropriate admixture of economic nationalism and globalization, the essence of outward-oriented economic nationalism, is what we need today.

This is the time to provide conducive environment to our industries to make a take-off from protection to competition by increasing efficiency and derive the benefits of globalization but without compromising our paramount national interest in perennial survival and growth.

Concluded.

Text courtesy: The Political Economy of Small States published by Nepal Foundation of Advanced Studies (NEFAS) Edited by Professor Ananda Aditya.

# this article is being published in the memory of distinguished author Late Professor Madan Kumar Dahal who was a very intimate friend of this news online portal. Rest in peace Professor Dahal: Ed. Upadhyaya.

# Photo source: from Nepal’s online portals: Ed.