Cover - Feature (Business Age)

Cover - Feature

Economic Diplomacy Junkets

There is a great need for restructuring of foreign office to cope with the new challenges that are emerging in the world, specially in fast changing economic equations. At present, there is no coherent high level decision-making body in Nepal that can bring about national consensus on vital foreign policy issues. Instead of serving national interests, there is a tendency to muddle around in foreign policy without fully understanding its nuances. The foreign office is paralyzed and not knowing its parameters vis-a-vis foreign policy, has become reactive and patchwork rather than something with direction. The officials are by large demoralized and the foreign office is largely reduced to a diplomatic post office. Even high level trips abroad tend to be junketing that do not achieve any national policy goals. The lack of experience and proper briefing has also led to a series of diplomatic faux pas.

In pre-democratic Nepal, foreign policy was a close preserve of a privileged few and the rest were excluded from it. It was a sacred cow. But now, the formulation of foreign policy by amateurs has a devastating effect – true national policy goals and national interests remaining largely undefined and unclear. A high policy planning body must be formed, consisting of persons with expertise on foreign policy issues opine experts. In an age of globalization, foreign policy making has become very intricate and complex, requiring deftness and greater fineness. To meet the demands of the millennium, a new corp of diplomats should be recruited on the basis of pure merit and on their excellent academic background. Knowledge of foreign languages should be emphasized. Currently, as Foreign Service is not attractive enough to lure the talented persons who tend to go to greener pastures, a need is seen to overhaul the whole system. The diplomats should be thoroughly trained, especially on subjects like conference diplomacy for, Nepal is involved in multilateral forum like World Trade Organization, the UN and the SAARC. At one time, the British foreign office used to dispatch agents to Oxford and Cambridge to lure talented young men to join foreign office by providing them with a list of advantages one can get. This Oxbridge syndrome is the legacy of the past. But now there is a universal tendency of creating an elite of talents – not of breeding, which means more democratization of foreign service than in earlier times.

Politico – Economic Connection

Undoubtedly the promotion of economic interest is an important part of foreign policy. It was during the 15th and 16th century that economy diplomacy came into prominence in Italian states like Venice and Florence – Florence being the state that is credited with the system of exchanging resident diplomats. The dispatch of Abdul Kadir mission to Nepal by British India with bundles of broad cloths was partly to find a market for the coarse cloths and partly to meet the expenses of the mission out of the proceeds from the sale is an example of the promotion of political as well as economic interests. Similarly, the Macartney mission to Manchu court, which was yet another frantic effort of England to establish direct trade links with China failed in the absence of normal political relations. Douglas Busk, a diplomat of international fame has stated that politicians cannot think economically, or economists politically. It is imperative, therefore, that the members of the diplomatic service should be capable of both these kinds of thought, bearing in mind that in diplomacy, politics will hold the primacy over economics. He further stated that the connection between economic and political policy is "intricate but integral." If political relation is bedeviled, there can not be any kind of economic relations. Economic diplomacy is likely to succeed if a country has adequate infrastructure facilities, a big market, and prospect for high profit and good political relations with investing countries. Only countries like the USA, UK, Japan, etc., can gain a lot from economic diplomacy backed by political diplomacy. This is clearly evident in the case of Sino-American relations. Despite occasional pinpricks, Sino-American relations have remained stable and American investment went on increasing by leaps and bounds. Therefore, the cardinal principle of Nepalese foreign policy should be survival. Once this goal is achieved, everything shall be added onto it. In other words, economic diplomacy should be wedded to political diplomacy. Instead of lopsided emphasis on economic diplomacy alone, there is a need for an overall focus on foreign policy.

History of Economic Diplomacy

For the last two centuries, trade has always been a key agenda in Nepal’s foreign policy. Nepal’s "economic diplomacy" was directed toward India and Tibet in particular. That explains the setting up of the Lhasa Vakil’s office, in accordance to Nepal Tibet Treaty of 1856. Likewise, the Alaichi Kothi, established in Patna during Bhimsen Thapa’s premiership helped to implement this policy. Economic diplomacy then was mainly geared towards achieving and safeguarding Nepal’s position for facilitating trade through the trans Himalayan trade routes. But this position did not last for long.

The opening up of the Darjeeling route ended Nepal’s monopoly in the trans Himalayan trade. Furthermore, the conclusion of a trade treaty with British India in 1923 opened the floodgates for the entry of low cost, mass produced British Indian goods, which adversely affected Nepal’s economic vitality. The number of Nepalese merchants in Lhasa dropped from 2,000 to 500 in 1907 and further to 42 in 1923. The primitive Nepali economy became more and more dependent on the relatively developed economy of British India. The trend has had a negative impact on Nepal. Its total dependence on India constricted its options, further undermined her functional independence and eventually led to the signing of the 1950 Treaty. Nepal ended up conducting most of her foreign trade with one economically powerful state namely Intia.

In the Sixties, in an attempt to increase its options, Nepal initiated the policy of trade diversification, which has proved to be an effective strategy. India’s share of Nepal’s foreign trade dropped from 90 percent in the mid 1960 to 40 percent in the 1980s. By 1987 Nepal’s exports to industrial countries increased to almost 60 percent. Although Nepal did manage to reorient trade to an extent, India has remained an important trade partner, especially for essential goods. Given the geo-economic reality, this is only natural.

After a period of drift and ad hoc policy formulations, Nepal has attempted to adjust its post Cold War economic diplomacy to the global economic changes. The current thrust of Nepali economic diplomacy focuses on expanding exports, attracting foreign direct investment in industries and water resources and promoting tourism. It seeks to give priorities to foreign direct investment as means to generate economic growth.

Direct Foreign Investment

Foreign investment scenario in Nepal has been dismal. Despite its free market reforms and incentives, Nepal has attracted only a small portion of Foreign Direct Investment (FDI) flowing to South Asia.

It was naive to expect foreign investment to flood into Nepal once the economy has been liberalised. The main drawback is that the country has very few areas of comparative advantage. The small size of the market, the limited resource base and its landlocked reality do not make Nepal an ideal destination for foreign investment, especially export oriented foreign investment. Economic diplomacy can be effective only when it becomes an integral component of a comprehensive and integrated long term strategy to build a viable national economy.

Policies to develop competitiveness must be, therefore, formulated and implemented. As part of this policy the educational system should be upgraded and workers should be provided training, so as to produce quality workforce. In addition, Nepal needs to encourage the private sector to concentrate on building a competitive export sector centered on knowledge based industries that can also produce high value, small bulk goods. Such strategies can help Nepal emerge as manufacturing base and take advantage of the huge and expanding Indian market.

Policies will, however, take time to produce results. In the meantime, Nepal needs to concentrate on promoting and nurturing other sectors of the economy, in which it has the inherent competitive advantage. The tourism industry ranks among the country’s major foreign currency earners. Still, there is a need to consolidate market shares in traditional tourism markets. New tourism products are also needed to increase earnings. This can be possible through a close partnership between the government and the private sector.

Nepal’s tourism promotion budget is about one million dollars per year. Instead of using this limited budget to achieve many objectives at once, the focus should be on publicising the recent findings in Lumbini and on marketing and promoting Lumbini as an important religious and tourism spot. If Lumbini succeeds in attracting even a small number of the 300 million adherents of Buddhism, especially from East and Southeast Asia, Nepal can hold its own in the competitive tourism market.

Foreign employment

Nepal’s economic diplomacy also has set itself the goal of providing foreign employment for Nepalis. This is not easy as most Nepali job seekers do not possess skills valued in the international labour market. The demand for low skilled workers is decreasing in the Middle east because of severe economic cutbacks. Furthermore, in Southeast Asia and East Asia, the immigration-control laws have been tightened to discourage illegal immigrants. Nepal should start producing an educated and trained workforce to compete for international employment. Economic diplomacy must identify potentially profitable niches. The implication of the growth of China’s economy for Nepal’s geo economic environment has yet not been given adequate consideration. China has realised that the increasing growth differential and the rising disparity in living standards between the coastal provinces and the interior regions could fuel social and political tension. To address these concerns, China has now shifted policy and is trying to draw joint ventures into less developed region and further promote border trade. The Indian border towns lying on the Sikkim route are expectantly waiting for the opening of this route to re-emerge as important trading centres. Nepal should capitalise on her location and encourage the private sector to exploit the emerging business opportunities in Tibet. The Kodari highway, which provides on such opportunity, should be upgraded. Bangladesh and Burma are currently exploring the possibilities of purchasing power from India.

Many countries in South Asia are members of more than one regional and sub regional groupings. Nepal should explore the feasibility of setting up a trans national growth corridor linking South Asia with central Asia within the framework of the Asian Development Bank promoted Ganges Meghna Brahmaputra basin sub region. The involvement of multilateral agencies will enable Nepal to avoid excessive reliance on either of her two powerful neighbours. If such a scheme takes off, the Lhasa Kodari Dhulikhel Bardibas Kakarvitta Phulbari Banglaband route could then emerge as the new trans Himalayan trade route. This can provide Nepal an opportunity to eventually re establish herself as a conduit for trade between South Asia and Central east Asia and benefit from the economic dynamism of these two regions.

Water Diplomacy

Apart from its continuing strategic importance, water resource is one of the few assets Nepal possesses at present. Hydroelectric power generation is one sector of economy that has generated investor interest and has the potential to emerge as the country’s economic backbone. The small size of the domestic energy market makes it essential for Nepal to export power and this can help bridge the alarming trade gap with India. Hence, Nepal’s economic diplomacy will need to increasingly focus on this sector.

Water resource development must not be the basis of Nepal’s post Cold War economic diplomacy. To view this matter only from the economic perspective would be naive for foreign direct investment where markets are not politically neutral. The Karnali project alone would require a capital input several times higher than the country’s GNP. There is bound to be a political dimension to large investments. Therefore, Nepal needs to proceed sensitively and the main focus must not be on short term gains, but on the avoidance of future constraints on policy options.

To prevent any particular country from monopolizing access to its water resource and thereby gaining undue leverage over her affairs, Nepal must try to avoid exclusive relationships as far as possible. The country must find a way of benefiting from this resource without limiting her freedom of action. This is not easy since the rise of the global economy has further intensified the centralising tendencies of the market forces and constricted the options of countries with weak market power. Only one percent of direct foreign investment has gone to 48 least developed countries. Furthermore, extra regional investors are also likely to be partial to the interest of regionally dominant economies. Their relationship with the larger economies will always be more important than that with Nepal.

Nepal is not entirely powerless. The importance of its water resources is bound to grow in the next century as the Asian demand for energy surges. An ESCAP estimate puts India’s additional power requirement during the decade of 2000 at up to 61,000 megawatts and China’s at 190,000 megawatts. Bangladesh and Burma are currently exploring the possibilities of purchasing power from India. If power generation does not keep pace with the economic growth, the accelerating industrial growth of the region will be seriously hampered.

The construction of power projects will require huge financial resources, which are beyond the capacity of the countries of the region to meet. Nepal should accept investment from all feasible sources and pursue an omni directional power export policy. It should strive to develop water resources through regional and sub regional co operation and with carefully balanced investments from a diverse group of multinational power conglomerates. This will not only give Nepal a wider market for surplus power, but also will lead to the creation of a complex web of interdependent relationships and ensure it the space to sustain political autonomy.

Fortunately for Nepal, influential multilateral donors and powerful multinationals have adopted an agenda that is conducive to its interests.

Nepal must attempt to maximise gains from the few assets it has. Unfortunately events in the recent past have raised some disconcerting questions. It is no coincidence that water and power sharing agreements have been finalised at a time when successive governments in power in Nepal had strong reasons to show their obligation to India for support. The rush to sign such agreements without rigorous long term planning will result not only result in throwing away Nepal’s best cards but also compromise the welfare of future generations.

There is a pressing need to develop a comprehensive strategy on water resource development. Nepal needs to study the costs and benefits of its water resources potentials. This would require it to go slow on proceeding with mega projects and concentrate on developing small and medium sized schemes.

Nepal also needs to further develop internal means for energy absorption and not become too dependent on power exports. Hydroelectricity power generation can have a long term impact on the rate of growth. Nearly 13 percent of the population is currently facing unemployment problems. Nepal’s development strategy needs to seek to promote both economic growth and employment simultaneously. Priority, therefore, must be given to attract foreign investment, technology and energy intensive industrial projects capable of creating jobs. This can lead to the creation of a larger domestic market for power, help Nepal address its growing unemployment and enable its export sector to climb up the value added ladder.

The establishment of multi faced relationships will also make it easier to develop a new equilibrium in case the asymmetry in economic power between China and other regional heavyweights widens.

Conclusion

Nepal’s economic diplomacy has passed through different phases. The desire to promote the nation’s economic interests and to ward off economic threats to its political autonomy has almost always been the policy’s overriding concern. The rapid political and economic changes that the world is now undergoing have eroded old certainties and weakened Nepal’s leverage. For instance, after instituting a yearlong blockade of Nepal in 1989, India again attempted to plug all the loopholes of the previous agreements and sought to integrate Nepal’s defensive and economic structure. After a period of adjustment, there are indications that Nepal’s traditional national interests have begun to reassert themselves. Fortunately for Nepal, influential multilateral donors and powerful multinationals have adopted an agenda that is conducive to its interests. The establishment of multi faced relationships will also make it easier to develop a new equilibrium in case the asymmetry in economic power between China and other regional heavyweights widens. The success of Nepal’s economic diplomacy will be evaluated on the basis of whether its ability to create more economic options without compromising its core values. These goals are not mutually exclusive. The challenge for economic diplomacy is to accommodate these goals in an original way so that the country can survive and prosper at the same time. The challenges to Nepal’s autonomy have become more subtle and complex now and the response has to be equally sophisticated. Farsighted leadership and entrepreneurial skills are needed to steer the state through the uncharted waters. Only time will show if the political establishment and the mandarins in Shital Niwas are up to the task.

A nation can preserve more of its independence by diversifying its foreign trade and the foreign investments it accepts rather than relying too heavily on a single partner.

Economic Diplomacy: Rhetoric Or Reality

By Prakash Dahal

The Filipino driver of the Berlin based Royal Nepalese Embassy has heard his boss using the term ‘economic diplomacy’ umpteen times. The business value of the diplomatic cliché has never gone down well in the driver’s mind. However, The young man put on the wheel of the diplomat’s limousine asks, ‘how many German entrepreneurs are commercially collaborating in Nepal?’

A question not easy to answer for an ordinary Nepali because he never knows what of those consumer commodities he uses every day are the proud products of our economic diplomacy.

In tipsy mood over a glass of beer around the corner of the Berlin pub, the Filipino recalls frequenting to the airport and picking Nepalese businessmen and politicians. On the way inside the cab he could make out nothing of the conversation taking place between the Embassy diplomats and the visiting Nepalese dignitaries except ‘economic diplomacy’ that figures in their talks off and on.

And, this man fears if they really mean anything by it. The cab driver supposes to have none of his business in exploring the business value of our external affairs. It may even tax his job. Yet, the seemingly cynical Filipino doesn’t refrain from talking about it if and when he comes across a Nepali other than the one from the Embassy.

This man knows how many Nepali businessmen and politicians fly in and wonders how many of their German counterparts do the same. He doesn’t bother what the visiting dignitaries gain in Germany, but is concerned himself with what the Himalayan country and its people make out of the running cliché ‘economic diplomacy’.

Nothing of what the muddle-headed Filipino tells may be true except his relevant but skeptic curiosity, "how many German entrepreneurs are commercially collaborating in Nepal?"

The question would have best suited if they hung by Nepalese tongues. And, this could have triggered an interesting intellectual debate aimed a assessing the real economic value of the economic diplomacy by means of some real economic indicators.

In fact, the inquisitiveness of the alien should have made a popular question in this country and the economic yields of the diplomacy debated not merely in the context of Germany but in the context of every country with whom Nepal enjoys diplomatic ties.

Austerity measures is another popular rhetoric routinely harped on in the country. Cutting down the government expenditures so as to facilitate the poverty smitten mass is equally spelled out every now and then.

One wise way may be that one needs to ascertain the productive value of a given role and machinery before applying austerity measures. The government perhaps needs to have a measuring rod to fathom the productive value of our embassies in terms of their role assigned.

Big nations have bigger interests and small ones have smaller. When it comes to defend our smaller interests, we have proven to be ineffective. The magnitude of our interests overseas should determine the shape and size of our expenditures. Pouring money in a non-productive trade and trimming the expenditure of yielding business may not be a wise initiative.

Nepal perhaps has no strategic interests nor military or security to defend. It has the economic interests and places its overseas missions to further it. Whether or not those foreign missions of ours are doing the job as effectively as they could should be a matter of grave concern both to the government and the people at large.

The government coverts the taxpayers’ money into dollars to keep them there. And, it falls to the responsibility of these Nepalese diplomats overseas to make economic gains in the interest of the country.

What the tax paying citizens of this country expect is that diplomacy should act as a vehicle to drive Nepal’s interests overseas. Have our diplomats been doing it? Do they really know the knack of the trade in the changed global context? Have they really been able to sell the country overseas?

And, much in the way the Filipino driver asked, both the government and the tax paying citizen of the country need to assess their overseas diplomats performances in terms of national gains and their impact on the lives of ordinary citizens.

The gains may need to be judged not in terms of how many politicians and businessmen enjoyed foreign trips and how wonderful hospitality our diplomats overseas extended to them but how much gains fell to the share of poverty smitten mass of the country.

The government may need to develop economic indicators and it should judge the gains vis-a-vis the investment made. And, if the gains fall short of expected returns, the government should think over it in a business like manner.

We surely don’t need to answer the Filipino man on the wheel but we may borrow his curiosity and ask a hundred million-dollar question for ourselves.