April 07, 2006

It may be somewhat untimely to talk about developing Nepal as a transit bridge between China and India at a time when the country is reeling under unprecedented wave of political instability and violence that threatens to rip apart even the Nepali nationhood. However, the prospects of Nepal acting as a transit bridge are too good and too real to be overlooked even during these testing times. Situated between two fastest growing giant economies of the world, Nepal does have excellent prospects in acting as a corridor economy. Once things settle, and hopefully they settle soon, in the country, there will be little time for our policy makers to rush headlong in the quest for prosperity. In order for them to hit the ground running, they need to do their homework even during the conflict period. And identification of essential infrastructure and their construction is the first thing that they must concentrate upon

By SANJAYA DHAKAL

In recent weeks, two important events have taken place that will have a far-reaching impact on Nepal ’s economic development in the years to come. The Chinese government signed an MoU agreeing to provide zero custom entry for 1550 Nepalese products. The Indian government renewed the transit treaty with Nepal for next seven years with minimum changes in the earlier treaty.

Timure village in Rasuwa: Transit realization could usher in an era of prosperity

These two agreements with two most important economies of the world herald a prosperous future for this land-locked nation gripped in violence and instability. The government has shown willingness to develop Nepal as a transit corridor to link the two Asian giants. It has formed a high-level steering committee to facilitate the realization of this desire.

“In the first phase of government initiative to make Nepal a transit bridge between the two, the committee has decided to develop and open up custom point at Tatopani. Subsequently, the government has decided to repair and upgrade the Arniko Highway ,” said Dr. Shankar Sharma, vice chairman of National Planning Commission (NPC) and convener of the steering committee.

Dr. Sharma believes that since both the countries have viewed the transit proposal positively, it would materialize in near future. The committee has further identified that although Arniko highway will serve the purpose at present, the main transit route linking the two countries would be the under-construction Galchhi-Nuwakot-Rasuwagadhi-Syaphrubesi highway.

Nestled between two Asian giants China and India , Nepal is one of the poorest countries in the world with 31 percent of its 24 million population living in absolute poverty. The per capita income of Nepalese is US$ 300 on average and the Gross Domestic Product (GDP) of Nepal is just over $ 8 billion.

Tourists: Tourism can also benefit by implementation of transit bridge

For decades since this Himalayan Kingdom opened up to outside world in 1950, the land-lockedness has been considered as its major handicap in enhancing its trade. Nepal has over 1800 kms of open border with India , which encircles it from east, south and west. It has around 1400 kms of border with China on its north. Since the Great Himalayan range on its northern frontier had acted as natural barrier, during this period, Nepal ’s trade and economic interaction with the outside world was mainly through India . In fact, eight of the ten highest mountains of the world including Mount Everest lie on this Himalayan range straddling the border between Nepal and Tibet of China.

However, despite the difficult terrain, Nepal-China border consists of more than 34 important passes through which trade and cultural interactions have taken place in ancient period. In fact, before the entry of British Empire into Indian sub-continent, traders used the route through Nepal to conduct trade with Tibet - with Nepal acting as an entrepot. Subsequently, in the past two-three centuries before Nepal formally opened up to the outside world in 1950, Nepal ’s trade interactions were limited with Tibet .

In the last five decades, Nepal has made progress in health, education and infrastructure development. It came out from self-imposed isolation and joined the comity of nations becoming a UN member in 1955.

With the winds of globalization and liberalization wafting across the world, Nepal ’s trade relations also diversified. In the fiscal year 2003/04, Nepal ’s total international trade (including exports and imports) stood at US$ 2.3 billion – 57% of its total trade were conducted with India ; 37% with the overseas countries and the rest with China . It has trade deficits with both China and India . Due to growing uncertainties and instability, Nepal ’s ambition to diversify its international trade has received a jolt. In 2005, 64% of its total trade were with India alone.

In recent years, whereas China and India have been growing impressively at nearly 10 percent and 7 percent annually, Nepal – sandwiched between the two – has suffered from internal conflict, which has dragged its growth down to around 2 percent.

Roads of Nepal : Needupgrading

In an apparent shifting of center of gravity of international trade relations, the bilateral trade volume between India and China is growing astronomically. In 1990, it stood at US$ 260 million, which increased to US$ 7.6 billion in 2003 (compare this to total trade of Nepal , which stands at meager US$ 2.3 billion) and US$ 13.6 billion in 2004. In 2008, this figure is expected to touch US$ 20 billion and to US$ 30 billion in 2010. Clearly, the breeze is gathering strength and it will not be long before it becomes a strong gale transforming the existing international economic equations. Those economies that can sense the direction of this wind can expect to benefit from the windfall that is certain to come in the years ahead.

Proposal Of Transit Corridor

Even as decades-old political animosity between China and India kept Nepal from exploiting its geo-strategic location, recent moves by both the countries towards normalization of their relations – which is evident by their growing trade and economic relations - have unleashed greater possibilities for Nepal to become ‘cream of the sandwich.’

The enormous increase in trade relations between India and China have opened up a distinct possibility of Nepal acting as a transit corridor between the two Asian giants. King Gyanendra of Nepal formally proposed Nepal ’s desire to act as transit-bridge between the two countries during his recent separate summit meetings with Chinese President Hu Jintao and Indian Prime Minister Dr. Manmohan Singh (the meetings were held on the sidelines of Afro Asian summit in Jakarta in April 2005).

The proposal of Nepal acting as transit corridor was, in fact, first made by Indian government. In early 2004, India requested Nepal to provide transit route to China during Inter Governmental Committee (IGC) meeting.

Experts and economists in Nepal have said that developing Nepal as a transit point will benefit all three countries. “ China can easily get access to food stuffs and raw materials and can get access to India and South Asian market through Nepal . On the other hand, India can export its steel, and other raw material to China and import necessary equipment from China . Both China and India can make use of Nepal ’s water resources at a time when using fossil fuel is becoming increasingly problematic,” said a former Finance Minister Madhukar SJB Rana.

India has also announced to open its own transit point from Nathula ( Sikkim ) in 2003 to have direct link with China . But security considerations, difficult terrain (Nathula lies 4500 m above sea level) and harsh climate might have hampered in the utilization of this route as of yet.

Trade : Huge spillover benefits likely

China has also viewed positively towards Nepal ’s transit proposal. “ China attaches importance to developing trade and economic cooperation with Nepal , India and other South Asian countries on the basis of mutual benefit and equality. As for Nepal ’s desire of developing a transit economy between China and India , the Chinese side took a positive attitude towards convenient and rationale arrangements of transit trade between China , Nepal and other South Asian countries,” Sun Heping, Chinese Ambassador to Nepal , (in People’s Review weekly August 4-10, 2005 ). As both countries have indicated their willingness to harness opportunities of Nepal acting as transit corridor to facilitate their trade, the possibility is now clear.

On both sides of Nepalese border, infrastructures like road are already in place. There is a need only to develop north-south corridor across Nepalese territory to link the two countries. Besides, by 2007, China will have implemented its ambitious plan to link Lhasa – the capital of Tibet region – with railway network. This project will substantially increase the opportunities for furthering trade ties with the mainland China through Tibet .

From Land-locked To Land-Linked

Located in an economically strategic point between two of the world’s largest and fastest growing economies, Nepal has enormous opportunities for facilitating trade between the two.

Based on several projections by economists around the world, India and China are both growing at enormous speed and spreading wealth across each of their billion-plus population.

As such, Nepal is appropriately placed to make a leap forward from a land-locked to a land-linked country. Nepal might not have access to the world via sea but it can have access to two billion populations in its immediate neighborhood. Therefore, Nepal would not have to miss its lack of access to sea if it can ensure access to its two neighbors.

These facts make it attractive for Nepal to provide transit point facilities for Indo-China trade through its territory. For the last five decades, Nepal has experimented with centralized economy; mixed economic policies; and liberalized regime at different points of time. But these policies have not borne fruits as desired. Nepal is still one of the poorest countries in the world.

Although it has joined World Trade Organization (WTO) in 2004, the country is still suffering from lack of trade competitiveness, due mainly to, its lack of easy access to sea. This is where Nepal needs to re-orient its policies and perspectives. Instead of clinging on to decades-old vision, the time is ripe for exploring new opportunities. Therefore, the proposal of transit corridor has come as a promising venture that could transform Nepal freeing it of physical, geographical and psychological shackles.

Possible Spillover Benefits

The proposal of transit corridor, if it comes to fruition, is likely to trigger a number of spillover benefits to Nepal . The first and foremost is the likelihood of expanding and developing infrastructure like roads and communication services.

For Nepal to become transit corridor, it would require good road infrastructure linking north to south. At present, there is only one highway – Kodari highway – that is acting as a North-South Corridor. But it is in a poor shape and is not capable of catering to transit traffic without upgrading and improvement.

The development of transit corridor would also lead to enhancing of trade and investment opportunities within the country, say economists. The transport, trade, domestic manufacturing and foreign investment could increase. The growth in overland trade via Nepal would attract Chinese and Indian investors in developing potential export sectors as Nepal ’s geographical proximity provides them with benefits of transport cost savings. In fact, even the investors from third countries may be interested in bringing their capital and new technologies for utilizing the market potentialities of China and India .

The service sectors like hotels and lodges, banks and insurance companies, workshops, gasoline stations etc would also expand in order to facilitate the movement of vehicles and cargoes. Tens of thousands would get employment and trigger a multiplier effect pulling out millions of people from the morass of abject poverty.

Tourism is another area, which can develop. In fact, Nepal is one of the first countries to have been designated as Approved Outbound Destination by the Chinese government in 2001. But due to various reasons, the arrival of Chinese tourists has been minimal. While the number of Chinese outbound tourists reached 28.85 million in 2004, only 5799 of them came to Nepal . And this despite the fact that Nepal boasts of 10 World Natural and Cultural Heritage Sites including the Mount Everest and the birthplace of Lord Buddha in Lumbini.

These apart, the country would also witness modernization of its custom procedures and documentations at Nepal ’s south and north border points. Harmonization of custom procedures and documentation is essential to achieve fast turnaround time of freight vehicles moving between south and north borders of Nepal .

In the long run, the transit corridor could lead to a free trade area or preferential trading arrangement at trilateral level covering all aspects of trade, transit and investments if China and India are interested in this arrangement.

But these spillover benefits are not going to be automatic. Nepal would need to tread carefully and in a planned manner to convince its two neighbors; build infrastructure; formulate attractive policies and enact investment friendly laws. If these can be done, then, there is no reason why Nepal cannot realize its full potentials.

Challenges

There are quite a few challenges facing Nepal in its endeavor towards achieving the role of successful transit country. Firstly, it would need to have a trilateral understanding with both China and India .

According to Rajeshwore Acharya, a former Nepalese envoy to China , since Nepal already has a transit treaty with India , it would now require a separate transit treaty with China . “And such transit agreement with China should be based on a long-term vision. From western region of Nepal and through China , Nepal can also have access to Central Asian Republics – which are going to become strategically important places due to their proven oil/gas reserves in future. These considerations must not be missed while reaching into transit arrangements with China ,” he said.

Nepal would need to have institutional arrangements – in cooperation with China and India - in place to deal with any issue or irritant likely to crop up in course of transit trade in future, believe economists. Such arrangement would also facilitate regular consultations among the three partners.

The immediate challenge facing Nepal is its poor infrastructure. It currently has only one highway linking north and south. This Kodari/Arniko highway must be upgraded immediately as it is prone to frequent disturbance due to landslides and traffic congestion. Alternative highways – seven of which have been identified till now – would need to be constructed. Since Nepal lacks adequate resources, it needs to request both the neighboring countries for their financial assistance or for cost-sharing arrangements to improve and develop north-south roads, create ICD/CFS (Inland Clearance Depot/Container Freight Station), transshipment facilities, storage facilities at border and interface points and so on.

Besides, Nepal would need to have friendly and open policies to facilitate the transit trade and attract investments.

But before everything else can materialize, Nepal would need to put its house in order first. The restoration of civil liberties, peace and security is of paramount importance before this country can expect to chart a new course and become a respectful and prosperous member of the modern world community.