That Nepal can and should benefit from its two neighbours, China and India, is an opinion that is echoed across almost all platforms these days. China and India are both on their way to becoming leading economies with lucrative markets and a rising middle class. Nepal shares a 1,400km open border with India, allowing free flow of people and goods. Nepal and China, however, are separated by mountains, and the challenging terrain makes direct interaction between people and flow of goods troublesome. 

But China is a source of finance for thousands of mega projects across the globe. So, it would not be a big stretch to say that Nepal stands to benefit from its proximity with China. But for that to happen, Nepal should first build a foundation for foreign investment. The question is: what qualifies Nepal to become a good destination for foreign direct investment, particularly from China and India? 

Locational advantage

Strategic location alone is not sufficient for a country to prosper. Nepal has not been able to properly utilise its locational advantage due to a constantly evolving economic, political and social history. Of course, like Nepal, China and India also have their own history and internal problems. While China cannot fully embrace the world due to ideological differences, India suffers from a colonial mindset and extreme poverty in a huge swathe of the country. Yet, despite challenges, both the countries are striving for regional leadership.

China has launched the Belt and Road Initiative (BRI) with the objective of connecting the entire Eurasia landmass via land and sea. While Nepal is a signatory of this project, India has withheld its support. Hawkish Indian nationalists see this project as a strategy to encircle India and establish a singular Chinese leadership in the region and eventually in the world. But India’s competition with China is futile for at least the next couple of decades. India cannot afford to get into any conflicts if it is serious about improving the living standards of its citizens. 

India’s ambitions are clear. Indian Prime Minister Narendra Modi concluded his speech at the 18th SAARC Summit in Kathmandu in December 2014 saying that India’s vision of South Asia rests on five pillars: trade, investment, assistance, cooperation and people-to-people connections. India, being the biggest country in the regional bloc, explicitly highlights in all forums that it would lead the sub-continent to shared peace and prosperity. But the claim Modi made in 2014 has not materialised even to the slightest degree. Thus far, India has not taken any initiatives to push the region forward. Against this backdrop, India is now trying to block the BRI with its lack of cooperation and by discouraging neighbouring countries from being a part of it.

Mutually beneficial strategy

Even though India detests the idea of China taking the lead in connectivity in the region, Nepal is officially a part of the BRI. But Nepal has not yet assessed how to leverage optimal benefits from the Chinese initiative. First and foremost, Nepal is in need of infrastructure to advance the economy. 

Nepal government has identified major economic centres in its National Urban Development Strategy, 2017 (NUDS-2017): i) Kathmandu ii) Pokhara iii) Dhangadi iv) Nepalgunj v) Butwal vi) Siddharthanagar vii) Bharatpur viii) Hetauda ix) Janakpur x) Dharan and xi) Biratnagar. These economic centres were identified on the basis of their locational advantage, economic base and regional potential. To advance the economy and raise people’s living standards, Nepal has to build infrastructure for three purposes: i) connecting these economic centres with each other ii) connecting these centres with the hinterlands surrounding them and iii) connecting them with the border points with both neighbours. 

The process of building connectivity infrastructure within the country should be synced with the implementation of the BRI in the region. The NUDS-2017 has come at an opportune time; it can be synchronised with the broader goal of connectivity envisaged by the BRI. 

Nepal may be a signatory of the BRI, but the connectivity line proposed and endorsed by the Chinese government does not include Nepali territory. The belt and road, however, crosses through many countries in Eurasia. This leaves room to question the benefits Nepal will derive from the initiative. But instead of being cynical, Nepal should work with the Chinese government to make optimal use of the latter’s ambition. 

For China, the best way to take Nepal under its arm and gain access to South Asia is to establish the headquarters of the Asian Infrastructure Investment Bank (AIIB) in Lumbini. Lumbini will be a strategic place for AIIB, as it will allow China to be right next to India. Establishing AIIB’s headquarters in Lumbini will have two major benefits for China: the bank’s headquarters will be in a least developed country, and China can show that it is working towards complementing worldwide development efforts through the bank. This will also help China refute the claim that the AIIB is merely China’s challenge to the existing structure and operation of the World Bank and the Asian Development Bank. China will also have a strategic presence in South Asia, an important step to balance India’s power and help this region progress.

Nepal has to find ways to advance its pace of development by synchronising national priorities with regional initiatives. Nepal also has to make a convincing case to China and other members of the AIIB to establish its headquarters in Lumbini. By doing so, Nepal can make optimum use of new initiatives and can urge China and India to work together for the region’s development.

Poudel works as a consultant economist for the Asian Development Bank, Nepal Resident Mission; views expressed here are personal