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Economic Diplomacy of Nepal

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Economic Diplomacy of Nepal

As economic diplomacy (ED) involved commercial activities, and foreign policy was categorically a political task, the high-flying diplomats considered ED as a secondary career track. In Nepal, economic diplomacy became the buzzword largely after the reinstatement of democracy in the early 1990s. The structural changes in global trading system after the establishment of World Trade Organization (WTO) demand a new policy orientation in maintaining international relations to promote economic activities. The challenge lies in sustaining competitiveness in both the multilateral and bilateral trading arrangements. Nepal is behind South Asian partners in three key cost competitiveness indicators – labour cost per worker; value added per worker; and unit labour cost. In other words, compared to the cost per worker, there is no value addition per unit of worker and sadly labour cost per unit of output has not reduced.

Politics is the ultimate determinant of developmental outcomes. If this is the case, economic diplomacy can’t yield any result or may become ineffective when political diplomacy fails. The fluctuations in Nepal-India bilateral relations can offer some policy guidelines for orchestrating Nepal’s future policy for economic diplomacy. The result of Nepal-India trade stalemate in 1989 and huge trade deficit was because of the political misunderstanding between the Panchayat regime and Government of India led by late Rajiv Gandhi. Relaxation in trade restrictions immediately after new democratic government in early 1990, followed by historic Nepal-India Bilateral Trade Agreement in 1996, which offered unrestricted access to India’s market, was again the result of normalcy in political relationship between Nepal and India.

Even if resources are effectively mobilized and directed to productive sectors, the inability to achieve required level of development makes foreign aid compelling. Such dependency strengthens the case for pushing economic diplomacy as Nepal’s top priority agenda.

There is no single definition for the term ‘economic diplomacy’. Traditionally ED was concerned around borders to influence domestic policy. Today, global integration has extended the scope of ED beyond country’s borders, and therefore, influenced by non-governmental organizations, civil society and private sector organizations, among others. For simplicity, economic diplomacy can be taken as the importance of economics in diplomacy.

During 1950s and 60s, there was a wave of nationalization of industries. As persuasion and negotiation skills of the diplomats were desired to sell products of the nationalized industries, economic diplomacy was termed as “trade diplomacy”, which integrates foreign affairs and commerce. Considering the history of the diplomats getting involved in trade diplomacy, international economic relations should not be regarded as a highly specialized job, which is assigned to specialists. Unless we get out of this mindset, and prepare a lead role to be played by the diplomats themselves, it will be difficult to make economic diplomacy as an effective and sustainable tool for administering foreign policy.

Given high fiscal deficits, high saving-investment gap and low share of domestic borrowing on meeting its expenditure, the role of foreign aid has been crucial in Nepal’s case. Even if resources are effectively mobilized and directed to productive sectors, the inability to achieve required level of development makes foreign aid compelling. Such dependency strengthens the case for pushing economic diplomacy as Nepal’s top priority agenda.

The foreign policy of Nepal should be guided by our geographical reality, socio-cultural settings and economic strength. Nepal’s geo-physical setting and time zone location assume strategic significance in South Asia. Nepal is surrounded by rapidly growing two neighborhood economic giants, India and China, the Elephant and Dragon economies. Maintaining economic interests with these countries should be country’s priority in economic diplomacy.

For a long time, China was pictured as a country whose decisions most of the times were made unilaterally. After entering into WTO and agreeing to open up key sectors of the economy, China also realized key challenges to its economic diplomacy. The benefits of being one of the major actors in international stage was possible when China expanded bilateral agreements, initiated foreign aid and investment projects in Africa and participated in global financial regulations and climate change meetings by contributing to the global interest. China’s involvement in a wide range of these activities was based on economic diplomacy in China’s foreign policy regime.

After Mao Zedong, China’s trade and investment policy, which also offers considerable incentive packages to the former adversaries like United States, Japan, South Korea and others, is an ideal example to show how economic relations influence political relations by even neutralizing deep-rooted ideological differences. The reason India has been successful to exercise economic diplomacy in her foreign policy is largely because of the successes of diplomatic missions abroad and relevant ministries to reach out foreign partners to market products, projects and services and their capability to mobilize Foreign Direct Investment.

Harnessing diplomacy to serve national economic interests remains woefully inadequate in Nepal. This necessitates consensus with regards to country’s top foreign policy priority that complements to economic goals. The weakening of macroeconomic stability and prolonged political instability also compels to design a foreign policy that helps in creating congenial environment for international support. Nepal’s foreign policy should be especially constructed in harnessing huge hydropower potential and creating a regional hub for power generation, developing information technology because of country’s favorable climate, and cultural, nature, religious and environmental tourism. Although building relationships around the world and sustain a higher rate of economic growth in such a difficult moment is really a big challenge, fruitful efforts are possible through sound policy in economic diplomacy.

China and India have been overwhelmingly assisting Nepal through economic and technical assistance in strategic projects. Their interest in Nepal’s development is not of temporary nature. Maintaining a long-term sustainable growth and a balanced political relation with India and China, Nepal needs to handle economic diplomacy rather cautiously and delicately. Information available indicates China’s desire to increase trade to Nepal amounting to $30 billion by 2025. The planned highway to connect Nepal to Tibet and near completion of Kathmandu-Rasuwagadhi road is expected to enhance Nepal-China trade relations. China is looking forward to assist Nepal to connect China from eastern part of Nepal. The repair and widening of Kathmandu-Syabrubeshi road can also promote religious tourism by encouraging Nepali and Indian pilgrim tourists to go to Mansarovar and Kailash in a day or two. These opportunities will have significant meaning to country’s development only when economic diplomacy is made a part and parcel of Nepal’s foreign policy.

Global economic crisis has shifted foreign policy orientation from restrictive trading regime to maintaining stability for sustaining growth process. The case for US-China relationship is important in this regard. The two adversaries have become closer to address global economic crisis than ever before. China has used economic crisis to increase its global influence without injuring US economy and, therefore, it can safely be said that George W Bush-Condoleeza Rice doctrine of containing China is being replaced by the Barack Obama-Hillary Clinton doctrine of co-opting China to deal with the economic crisis.

Literature shows China wants to test itself how it can be a new international power center by extending development assistance to Asia and Africa. Many think Africa can be taken as a test case for China to experience its own potential role in the world. In recent years, as communist parties combined together are larger than non-communists block, China’s advantage in Nepal to neutralize political risks can be higher compared to others. Public debate may be necessary to further elaborate this issue. The bottom-line is that when economic interest converges, political mistrust is normalized and when political interest converges, economic diplomacy works.

References and Works Cited

  1. UN Charter
  2. Charter of the SAARC
  3. Panchasheel
  4. International Treaties to which Nepal is a party.

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