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CIAO DATE: 2/00
Nepal: Stability at Last?
The South Asia Monitor
Number 10
June 1, 1999
Following the elections completed on May 17, K. P. Bhattarai has been named Nepal’s prime minister with a clear Nepali Congress majority. This may presage a more stable environment for tackling the country’s problems. After centuries of real isolation, protected and secluded by the Himalayas, Nepal has made a difficult transition to democratic government, with broad participation in elections but highly confrontational politics and frequent changes of government. Its link to the outside is chiefly through India, its exposure to the industrialized world primarily through tourism. The real determinants of Nepal’s future, however, remain much more fundamental: educating its isolated and extremely poor villagers, providing decent governance, mobilizing the country’s energy resources, and overcoming the tremendous natural barriers to transportation and communication.
A secluded past:
Nepal, as we now know it, was formed from the union of a number of local hill states in the mid-eighteenth century. Over the next two centuries, it was ruled by an absolute monarch and, after the mid-nineteenth century, by a “dynasty” of hereditary prime ministers, the Ranas. Unlike the rest of the Indian subcontinent, Nepal was never under British colonial rule. The end of the Ranas’ government in 1950 is usually looked on as the start of the modern Nepali state. The king ruled, working through a prime minister and a hierarchy of councils (panchayats) elected in partyless elections at the village and national levels.
Political disturbances in 1990 forced the king to lift the ban on political parties, dissolve the panchayat system, and accept a constitution imposing substantial limitations on his powers. In several successive elections since that time, two parties emerged as the principal factors in the country’s organized politics. The Nepali Congress, with a historical tie to the Indian National Congress, is considered the more centrist of the two. The United Marxist Leninist Party (UML) comes from a leftist tradition but has moderated its views on economic policy over the years. The two have alternated in power through seven changes of government.
Confrontational democracy:
Nepal’s elected legislators under this new dispensation had been completely outside the governmental process when they first took office. The transition to the new system was greeted with enthusiasm but suffered, perhaps inevitably, from the complete inexperience of its leaders. By now there are few real policy differences bewtween the two majo
inexperience of its leaders. By now there are few real policy differences between the two major parties. In particular, the limited economic reforms implemented to date are broadly accepted. Relations among the political parties, however, both in parliament and on the campaign trail, are highly confrontational and acrimonious. The larger parties are also divided by factional and personality conflicts. In particular, the two Congress leaders, K. P. Bhattarai and G.P. Koirala, have had a highly competitive relationship.
This year’s parliamentary elections, conducted on May 3 and May 17 1999, have brought in a Congress majority of 110, the first time in years that a single party has had a majority. The UML emerged as the largest opposition party, with 68 seats. (Both totals may go up slightly as the contested elections in a small number of seats are factored in.) The harder-line leftist Communist Party (ML), which broke away from the UML, got no seats, and the parties representing the panchayat-era elites returned only a handful of members. The popular totals, while much closer (36 percent for the Congress, 31 percent for UML), confirmed the trend toward greater Congress support.
Outgoing Prime Minister Koirala had announced before the election that his traditional rival, Bhattarai, would become prime minister if the Congress won, a gesture that helped them at the polls and improves the chances for coherent government thereafter. The Congress has traditionally been somewhat more favorable to economic reforms and to good relations with India, long the dominant foreign presence in Nepal.
The domestic scene has been troubled since early 1996 by a “Maoist People’s War” launched by two leaders of a leftist party that had been marginalized by election defeats. Some 700 people have been killed in the past three years in Maoist attacks and the police response to them. This group, which draws its small but determined supporters chiefly from among discontented rural youth in the mid-western hills, had vowed to disrupt the elections. This they failed to do: while the polls were marred by violence, it was chiefly the result of inter-party quarrels. Some 65 percent of the voters participated in the election. But the spread of Maoist violence to Kathmandu and the Maoists’ decision to target senior government security officials and some foreign NGOs will further complicate Nepal’s fragile efforts to expand and internationalize the economy.
Opening up an isolated economy:
Nepal’s geographic isolation, limited resource base, and political instability have held back growth and development. The economy has remained frozen in a time warp, with extremely limited investment or trade ties with the rest of the world. The economy is dominated by agriculture and forestry, which account for over 40 percent of GDP and 80 percent of employment, and by the tourism sector, which accounts for 11 percent of GDP. The manufacturing sector is extremely small and accounts for less than 10 percent of GDP; the main manufacturing industries are carpets, garments, and handicrafts. The country’s main sources of foreign exchange are from exports of carpets, garments, and agricultural goods, and from tourism.
Prospects for growth appear limited by the inability of the economy to generate the required investment and foreign exchange resources. The country is highly dependent on foreign concessional loans and grants to meet its development needs. International aid funds 30 percent of total budgetary expenditures. Economic reforms that began in 1991 have been stalled as a result of political instability; GDP growth rates have slowed from an annual average of 4.5 percent during 1993–1998, to less than 3 percent in 1998–1999. At this rate, GDP growth barely keeps up with the rapid population growth (2.5 percent per year).
Environmental degradation, resulting from population pressure on the country’s limited and geographically concentrated agricultural base, threatens the main source of livelihood for a majority of the population. Agricultural productivity is low, owing to a lack of irrigation and inputs such as fertilizer and credit. Average growth in the sector over the past decade has been a modest 2 percent; growth in 1998–1999 is projected between 1.5 and 2.5 percent. As a result of these problems, since the 1980s Nepal has needed to import food grains.
On the industrial side, the garment and carpet sectors, which form the core of Nepal’s manufacturing base and account for 80 percent of its exports, employ little Nepalese capital and labor and are essentially extensions of the corresponding Indian industries. The manufacturing sector’s reliance on the garment industry is risky, as the industry is likely to suffer from the phasing out of the Multi-Fiber Arrangement in 2005, which will leave Indian industrialists no incentive to continue their investment in the more complicated environment of Nepal. Over the medium-term, the country will need to widen its export and manufacturing base and diversify into higher value-added exports.
The lack of infrastructure is a formidable obstacle to growth in a country with a topography like Nepal’s, where half the population lives in remote mountain villages. Since 1991, successive governments have initiated some privatization in the airline and telecommunications sectors. Privatization has, however, occurred in a haphazard manner and the economy remains highly regulated.
Future potential:
Nepal’s problems of poverty pose the most fundamental challenge to its future development. Of a population of 23 million, 42 percent live under the poverty line. At U.S.$230, its GDP per capita is one of the lowest in the world. Only 37 percent of the adult population is literate. Nepal’s international aid donors are working to bring development to its remote mountain villages, but ultimately a sustainable effort is possible only if the country broadens its economic base.
The sector with the greatest potential to generate new resources or attract investment is hydropower. Nepal’s rivers have the potential to generate 83,000 MW of electricity a year, which could be used to supply power to the small domestic market and to export power to India. Obstacles to the development of the sector are the politically charged issues of exports to India, the environmental damage posed by damming Nepal’s rivers, and the large capital expenditures involved for the major projects. In addition, various governments have so far failed to exploit foreign investor interest in the resource because of poor governance and political instability.
A recent favorable signal to foreign investors, however, has been the government’s decision to privatize the Butwal Power Company. Ultimately, exploiting the resource’s potential will require a policy environment in which modern commercial relations can run smoothly, and a government that can tackle the considerable technical and financial challenges involved.
Besides electric power, the main area for international investment thus far has been the tourism industry. Development of the industry, however, has suffered from political instability and the “crony capitalism” that characterizes the small modern sector of the Nepalese economy. Further foreign investment in tourism will crucially depend on the availability of modern telecommunications and air transport systems.
What lies ahead:
The new government has a challenge and an opportunity. Nepalese observers are rightly pleased that their electoral system has thus far avoided caste and class antagonism and that so many people come out to vote under difficult circumstances. The acid test of the new government will be whether it is able to begin surmounting the problems of nature, poverty, and a still-fractious political system to encourage growth and distribute more of its benefits throughout the country.
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