Trading upIntegration into the South Asian economy is a golden opportunity for Nepal
After years of conflict and political transition, Nepal now has a golden opportunity to reap the impact that a more inclusive and equitable environment offers. Now is the time for Nepal’s leaders to focus on economic growth, not just “hard politics.” It is also clear that now, 25 years after the last series of economic reforms, a new round of policy reforms are needed for Nepal to become competitive in an increasingly globalised world in order to attract investment, fuel job creation, and improve livelihoods. Nepal’s ministries and Parliament seem to be taking this seriously, passing several new laws focused on the economy, including the Industrial Enterprise Act and Special Economic Zone Act. Officials at the Ministry of Commerce and the Ministry of Industry have told me that they and their counterparts at other ministries are working on additional economic legislation, including the Foreign Investment bill, a new Labour Law, an amended Companies Act, and the Agribusiness Promotion Bill. We applaud this momentum.
As Parliament reviews and approves new economic legislation, Nepal has the chance to create a strong framework to guide economic growth for decades and help further integrate the country into the global economy. If Nepal wants to meet the ambitious targets it has set for itself—such as graduating from Least Developed Country status by 2022—it needs a dramatic increase in economic growth and investment. But laws and policies alone are not enough. In an increasingly interconnected world, Nepal also needs to strengthen its economic connections with its regional neighbours to spur growth and development at home.
I just came back from the Indo-Asia Connectivity for Shared Prosperity Conference, jointly organised by the US Consulate Kolkata, CUTS International, and the East-West Center. This conference brought together business and government delegations from India, Bangladesh, Sri Lanka, Bhutan, and Nepal. I was honored to lead a delegation of Nepali business leaders and government officials who met their counterparts to discuss regional economic connectivity. One of Nepal’s great strategic economic advantages is its close proximity to some of the largest and fastest growing economies of the world—Bangladesh had 7.1 percent GDP growth in 2015-16, India 7.5 percent, Sri Lanka 5 percent, China 6.9 percent and even Myanmar had a growth of 8.4 percent. Not only are these economies growing quickly, but they offer large markets. Three Indian states that border Nepal (Uttar Pradesh, Bihar, and West Bengal) have a combined population—and potential market—of more than 400 million.
Despite its proximity to these large markets, Nepal has not been able to take advantage of this economic opportunity. In fact, the lack of economic integration within South Asia—what one conference participant deemed “partition syndrome”—has kept the region from maximising its economic potential.
Let’s look at the trade picture. In South Asia, intraregional trade—about $2 billion in total—equals just five percent of the region’s total trade volume. That means 95 percent of South Asian trade is with countries outside the region, making South Asia one of the least economically integrated regions in the world. Compare that to the nations of Southeast Asia, where intraregional trade accounts for 25 percent of total trade, or the Common Market for Eastern and Southern Africa, where intraregional trade has tripled in 10 years and is now valued at $22 billion. A recent report by the Asian Development Bank found that increased economic integration in South Asia, and between South Asia and Southeast Asia, could result in more than $500 billion in economic gain for all countries across both regions.
Export goods and services, not people
For landlocked countries like Nepal, cross-border trade is especially important. By trading with its neighbours and beyond, Nepal can get the inputs needed for its industries and sell “made in Nepal” products to the region and the world. While most Nepali exports are bound for India, I believe there is potential for Nepal to export much more to India and other South Asian countries. For example, in 2014, Nepal exported nearly as much to Pakistan as it did to Finland and three times as much to Iceland as it did to Myanmar. This suggests that Nepal is not maximising its economic connections with its neighbours. By harmonising trade policies with its neighbours, improving physical and systems infrastructure at the border, and creating a strong framework for economic growth, the government of Nepal could help dramatically increase Nepali exports, creating jobs and more economic opportunity for the people of Nepal in the process.
As legislators consider the many economic bills currently in the legislative pipeline, I hope they will also consider what Nepal’s economy could look like and how it can be better integrated into the region. A modern economy requires companies and workers to be agile, flexible, and dynamic. Policies can provide the platform for firms and investors—both domestic and international—to respond to the emerging business opportunities in Nepal and South Asia. Businesses need to be able to respond quickly to new innovations and ideas, and should have the freedom to move capital, invest freely, and pursue new opportunities as soon as they emerge.
Getting the policies, laws, and regulations right means that the private sector is empowered to develop, adjust, and create opportunities that result in new jobs and help Nepal take advantage of its location in a rapidly growing and dynamic region. Strong policies that bring in foreign investment to start businesses and employ Nepalis will help spur economic growth, reduce the trade imbalance, and shift Nepal away from an economy that is dependent on remittances. Ultimately, Nepal should be exporting goods and services, not people.
Robust, flexible, agile economy
Nepal can benefit greatly from increased regional integration, but so can the United States. I certainly would like to see more American products sold here and more American companies investing in Nepal. Such business linkages benefit both countries. We often hear from American businesses that want to invest in Nepal and create jobs for Nepalis, but the country’s investment climate and the inherent risk of doing business here often dissuade these firms from coming to Nepal. Building economic bridges between Nepal and its neighbours can help mitigate those risks.
Ensuring that new business climate reforms are evidence-based and broadly-consulted before adoption is also vital. With the right economic policy environment, American companies doing business in India or Bangladesh might take a second look at opportunities in Nepal. The draft Foreign Investment bill and updated Labour Law, currently being reviewed by Parliament, provide an opportunity to further address the concerns of the business community, by helping to create an environment where firms can feel confident about investing in Nepal. Job creation and economic growth in the near term depends on getting the provisions of these reforms right before they are passed.
Nepal has an opportunity that it cannot afford to miss. I hope legislators make a strong commitment to open-market policies that encourage investment and trade within the region. This will help create a modern Nepali economy that provides opportunity to all of its citizens—an economy that is robust, flexible, agile, energetic, and ready to take advantage of the dynamic and growing South Asian region.
Teplitz is US Ambassador to Nepal