The differing views on how to restructure Nepal from a unitary to a federal state are the most grueling issues in writing the new constitution. The crux of the matter is how the sub-national units of federation—call them provinces—should be formed; should they be along territorial lines, ethnic-language lines, or a combination thereof? However, the debate has been counter-productive, as it has focussed on the choice of the bases of federation, as if that is a goal in itself. Instead, the debate should revolve around what type of federation would help achieve equality of opportunity, rapid economic growth, inclusive democracy, and social harmony. The economic agenda that should have been front and centre in choosing the bases of federation is completely missing in the debate.

It is appreciable that the issue of inclusiveness—greater representation of Janajatis, Madhesis, Dalits and other groups that face exclusion in Nepal’s institutions—has gained prominence. The exclusion of these ethnic, caste and linguistic (ECL) groups and economic deprivation of all, including Brahmin and Chhetri (BC), should end. However, the solution given, ECL-based federation, is wrong because such federation has less possibility of adopting equity and growth-enhancing economic policies, mobilising resources efficiently, maintaining harmony among the population, and taking full advantage of international markets.

Dispelling myths

The debate is full of myths. The first one is that Nepal’s settlement warrants ECL-based federalism. On the contrary, Nepal’s population mosaic is such that it is hard to adhere to democratic principles and still support ECL provinces. According to the 2011 population census, except for BC, who are in the majority in 20 districts, there are only four other districts where four ethnic/caste groups (one in each district) are in majority. By language, except Nepali, which is the mother tongue of a majority in 39 districts, there are only eight districts where the majority has other (four) mother tongues. The most excluded, Dalits—13 percent of the population, the second largest after BC—are not a majority in any district. BC aside, except for Maithili (majority in four districts), no other ECL group will be in a majority even if we combine the best three ‘home’ districts to make a province. Furthermore, even with 10 ECL-provinces, not only the BC (31 percent of the population) may feel overlooked, but also 40 percent of the ECL population will fall into others’ ‘homelands’.

Second myth is that ECL-federalism solves the exclusion problem. The fact is that ECL-federalism is neither necessary nor sufficient for inclusiveness. There are multidimensional aspects of exclusion, but the major one is economic. Political inclusion—which seems to be the main concern in the debate—can be achieved through one policy strike, such as a proportional electoral system. But in the lack of economic opportunities, political inclusion turns into entitlement for elites in ECL groups. Real inclusion requires strengthening economic capabilities, nurturing political ambitions, and fostering social aspirations of all poor, which are unlikely to happen in ECL-federalism.

Third myth is that denying ethnic federalism equals denying identity. Ethnicity is just one of the multiple identities one could have. All identities matter and every group’s identities matter. To be prosperous, educated, innovative, and have strong harmony among compatriots are the greatest identities one could have. Identities of all groups are recognised best by making the country compassionate, strong, and prosperous, not by invoking a few identities in the constitution.

Fourth, the myth that ethnic federalism can lead to the country’s disintegration. This argument is unfair. Everyone loves the country and country belongs to everyone. To say that their approach will break up the country is like saying that only you own the country. Often, this argument is made to safeguard the power, prestige, and wealth of privileged ones.

Stating the taboo

For Nepal to correct its past mistakes, unleash the forces of prosperity, and charter a truly inclusive society, a smart framework that can galvanise drastic economic policy changes is required. For that, the best option is to have provinces built on a north-south axis.

First, Nepal’s natural diversities, rivers, and eco-systems that extend north-south will be managed more efficiently and cordially if they fall in fewer provinces, a possibility in the north-south axis. On the contrary, tensions might ensue if provinces become upstream and downstream riparian clients.  

Second, China and India are opportunities right at our doorstep. To fully harness benefits, provinces should be bordered with both countries. Nepal is already a high-cost landlocked economy and bordering provinces with only one or none of the countries will make it even more landlocked and costly.

Third, receiving foreign investment, which provides much needed advanced technology, can be a possibility if a province is adjoined with both China and India. Foreign companies can station in Nepal and still take advantage of markets in both countries. But attracting foreign investment will be an uphill battle if provinces are formed on ethnic lines.

Fourth, the building blocks of a country are its local units: the villages and cities. To make these pillars strong, people at the local level should live in harmony and participate in policy debates in a free and frank manner. This is possible only by invoking broader commonness among people, such as the fight against economic deprivation, but not by going for the smallest set of identity.

Fifth, economic deprivation has no race, religion, and language, requiring economic policies that are endowment (class) based. The incidence varies but economic deprivation is common across all population. Among ECL groups, intra-group inequalities are wider than inter-group inequalities. For example, the income gap of a typical poor Newar and a rich Newar is 20 percent wider than the income gap of a typical poor Nepali and a rich Nepali. These facts suggest that ethnicity-based policies aggravate intra-group disparities, strengthening the entitlement of elites in the group. Instead, the policy target should be to uplift any downtrodden Nepali, requiring a class-based, not ECL-based, institutional set up.

Sixth, the lifeblood of federalism is fiscal equalisation—the redistribution of revenues from ‘have’ to ‘have not’ provinces to enable all provinces to provide standard (or national minimum) public services. The design of a fiscal equalisation mechanism is going to be a challenge; more so if provinces are formed on ethnicity, in which case it can be interpreted as subsidisation of one ‘identity’ by another ‘identity’.  

The most pressing issue among all is that under ECL-federalism, there is a danger that economic and political reasoning will be triumphed by identity. This will be a hurdle in replacing growth-impeding, inequality-enhancing, and incentive-penalising existing institutions by democratic ones. For a country like Nepal, where nothing is more important than having these institutional changes, north-south federation, in which the voice for change from the grassroot level will be more powerful and effective, is desirable.

Raising hope

I recommend five provinces (each comprising three ECL groups) that border both China and India. This proposal is not a repetition of the five development regions of the Panchayat era when a unitary elite-entitlement-rentier state was serving a handful at the centre, without any devolution of power and resources. Now, the reference point has changed drastically: gone are the monarchy unitary system, single Parliament, one language, one religion. This is the time to link the Tarai, hill and mountain in a meaningful way within a province and build prosperous, caring and harmonious communities.

For majority of Nepalis, the economic hardship is unbearable and everyday 1,800 Nepalis are leaving for foreign labour. Any other changes without the economic one have almost no meaning for them. They may have been born into different ethnicities and may speak different languages, but they share common desires and common aspirations: to be capable citizens of Nepal. Therefore, a vision of economic prosperity and inclusive growth should be the guiding principle in forming a federation. It is certain that if Nepal cannot achieve economic prosperity and bring its fruits to all citizens, no matter what constitution it adopts now, it should be ready to write another one within decade.

Acharya is a Canada-based economist who has conducted policy research  for Nepal’s Rastra Bank and Ministry of Finance