A declaration of principles

TKP 4/5/2009

The policy papers prepared for the NDF, though unrealistic, envisage nothing less than a complete overhaul in the way foreign aid is used and perceived

Along with the decade-long conflict, the level and nature of Nepal's economy has been a major cause underlying the demoralization of the Nepali psyche. The population has through education and travel become aware of the possibilities the wider world offers. But because of a lack of a productive base within the nation, it is confronted with the stark choice of either continuing at its current low level of subsistence or travelling to richer lands -- east and west -- to eke out a more productive living. The national economy, in its turn, is heavily dependent on remittances sent back by its citizens working abroad and on the charity that its neighbours and the rich countries of the West offer.

The Maoists are acutely aware of the toll dependency has taken on the national consciousness. In addition to their visions of rapid and prolonged economic growth, they wish to see both the remittance and foreign-aid economies become extinct. Although these factors do not figure in orthodox Marxist doctrine, some basic tinkering with theory enables one to fit remittances and foreign aid into the larger structure of what the Maoists consider to be a “semi-colonial” and “semi-feudal” economy. After entering government, they have had occasion to translate their beliefs into policy prescriptions into a language comprehensible to mainstream economists and development practitioners. The four draft papers prepared by the Finance Ministry and National Planning Commission for the National Development Forum (NDF), scheduled for May 12-14, are the most comprehensive attempt to translate their ideology into action.

It is not necessary to be a Maoist believer to understand the dislocation and trauma that economic migration causes. The terrible conditions that poor migrants are forced to live and work in, the suffering caused to families split apart are well known. As are the effects that excessive dependence on remittances has on the national economy. Scholars have documented how remittances are mostly used on consumer spending, how it tends to accumulate in towns, how it pulls resources from surrounding villages and gradually causes their depletion. Further, remittances, instead of being put to productive use, are heavily used towards buying imports. And this leads to a further erosion of the already meager domestic manufacturing base.

The government's policy makers understand all this. One of the draft papers produced for discussion at the NDF states: “Remittance flow has enhanced growth in real estate transactions and personal consumption -- together with trade sector activities. The declining manufacturing share (from 9 to 7 percent) may be an indication of Nepal's shifting comparative advantages as high remittances inflows are exerting upwards pressure on real wages. The external competitiveness of manufacturing may be eroded while incentives to invest in the service sector may be on the rise.” But it is also clear that the country's finances are heavily dependent on remittances, and that any fluctuation here could lead to significant negative effects on the economy. There are no immediate plans, then, to discourage economic migration.

Instead, a major change in policy is envisaged towards the other great source of external funds: foreign aid. That foreign aid, instead of providing Nepal with a short-term boost that has put it on the path of capital formation and growth, has further entrenched the culture of dependency is well known. Accustomed as they are to equating foreign aid with imperialism, the Maoists view this tendency with greater unease than any of the other political parties. There is also concern that aid is uncontrolled, unmonitored, dispersed and, as a consequence, leads to a squandering of resources; that it is used more according to the priorities of the donors than to those of the government; and that this has undermined the government's abilities to deliver.

So the draft of the new Foreign Aid Policy envisages a dramatic change in regulations that ensure how foreign aid is received and spent. Loans are to be discouraged and grants below USD 5 million disallowed. Technical assistance that relies on expatriate expertise is to be limited, the finances of INGOs to come under total surveillance of state authorities.

The broad philosophical underpinnings of these measures are nothing less than a complete overhaul of the way in which foreign aid is used and perceived. Instead of handouts provided by the rich to relieve the ills of a struggling, poverty stricken nation, aid is to act as a supplement to the efforts of a dynamic nation making great strides to emerge out of poverty. It is to be “demand driven rather than imposed at the will of the donor.” Priority is to be allotted to private and foreign investment; aid is to occupy a secondary position as handmaiden to this.

What is happening here is that the government is, through the means of policy alone, attempting to change the position of Nepal in the international order. Nepal is now perceived as a country at the bottom of the economic ladder, completely dependent on external largesse. The new policy envisions a jump several rungs higher, to the position of a country which, while still poor, has already embarked on the path of internal capital accumulation and growth, and thus has the confidence to be selective about the aid it receives. But it is clear to all that there is no corresponding increase in the country's productive base or institutional capacities commensurate with the government's apparent confidence.

The Finance Ministry has sought to project self-confidence by promising a sudden and dramatic improvement in the performance of state bodies and the investment climate. It maintains that it will achieve an annual growth rate of 8.5 percent for the next few years and that all aid will be phased out by 2025. But these projections seem to have little connection with currently prevailing realities, leading experienced, world-weary economists and development practitioners to shak e their heads and question the competence of a Finance Minister otherwise respected for his probity and exertions.
The government's grandiose plans may be a mirage. In fact, with the Maoist withdrawal from government, it is even unclear whether the NDF will be held as scheduled. But the envisioned economic and foreign aid policy are attractive if read more as a declaration of principles rather than a concrete plan, and they lay out the general direction that subsequent governments ought to follow.