(Courtesy: Ratna Sansar Shrestha)
For this scribe “People’s Movement II” is “Rhododendron Revolution” of 2006 which not only paved path for the abolition of much maligned monarchy, subsequent to Royal Palace massacre – reportedly committed by the then Crown Prince who is alleged to have committed suicide after committing heinous crime of regicide (also patricide), matricide, fratricide (both bother and sister) and also killing off an uncle and couple of aunts (however, most of the people still do not believe this “yarn” – which denigrated royalties (mainly the last “monarch” of Nepal and his son) in the eyes of the “loyal subjects” of Nepal, in 2001 June, but also afforded an opportunity for the people of Nepal to write a constitution of their own – through the elected Constituent Assembly. The assembly is supposed to decide the form and content of the constitution and also the structure of the state as to whether federal or unitary. However, the overzealous people in the commission writing Interim Constitution went out of way to declare that Nepal will be a federal state; preempting the people’s representatives in the assembly from deliberating about it and arriving at a well thought through decision. Now it has become a contentious issue as to whether spinning off of Nepal into an indeterminate number of provinces under federal structure is really a good idea. Here an attempt is being made to analyze how will federalism affect optimal exploitation of water resources.
Water Resource – Unique Natural Resource
Optimal exploitation of most of the natural resources can be done locally. They can benefit by cultivating land, harvesting it, collecting herbs, living off forest or extracting minerals. But water resource is a different kind of natural resource and things are not that simple with its exploitation. Local inhabitants can benefit, for example, by building micro hydropower project (less than 100 kW) or from water based tourism like rafting. But exploitation at a larger scale to benefit from scale economy results in different set of additionalities and externalities.
Construction of a run-of-the-river (RoR) hydropower at a specific site deprives upper riparian populace from using the river water for consumptive uses (i.e. irrigation) as any reduction in the quantum of water will result in decrease in electricity generation and in turn downsizing the revenue stream. Similarly, a patch of the river will become dewatered as water will be diverted from the river into powerhouse through a network of canal/tunnel and eventually penstock pipe by building intake. The people dependent on this patch of river will face severe water scarcity – amply demonstrated by the dewatered area in Marshyangdi River by the highway to Pokahra. If the users of electricity come from a different province, the people adversely impacted as such will never agree to construction of implementation of hydropower plant in their province resulting in failure to generate electricity at optimum level.
Reservoir Project
Contrasted with RoR project, a storage project will entail building a reservoir resulting in inundation/submergence of large tracts of fertile agricultural land, forest and even extant infrastructure and will also displace the inhabitants. Daily pondage project also causes similar adverse impact, by a lesser magnitude, though. In this scenario, people of the province set to lose their land and to get displaced will not be too eager to build a project if the electricity is to be used in another province. Moreover, storage project also generates downstream benefit in terms of augmented flow which benefits the lower riparian people by making water available for water supply, irrigation, industrial use, improvement of watershed and they can also use the same for water sports based tourism and navigation. In this backdrop people in upper riparian province will have no reason to agree to build such a project, thus scuttling the prospect of implementation of a multipurpose project, but for federal structure.
Resettlement of people displaced by a multipurpose project will also become problematic as there is scarcity of good land in the hills where such projects could be sited while the resettlement in the area where necessary land is available will not be allowed for reasons of disturbing ethnic balance. Tharus in western Terai are already objecting to the resettlement plan for people to be displaced by West Seti project. After formation of separate provinces, the ensuing tussle will take the form of agitation as to why should upper riparian province lose land and its people to electricity for some far off city.
Irrigation and Flood Control
Nepal has 3.97 million hectares of cultivated land (mostly in Terai) and only 0.5 million hectares (only 12.6%) has some irrigation (mostly during rainy season). Cultivation of multiple crops in a year – imperative to ensure food security in the country (including high value cash crop that will make the farmers there prosperous) – requires massive irrigation during dry season which is possible only by building a reservoir in the hills that will store water during the rainy season (about 4 months in year) for irrigation during other 8 months. Building reservoirs as such will also control flood in the river’s flood plain in the Terai. But such a scheme will be precluded after splitting the country into federal structure for reasons explained above, especially if Terai is to become a separate province.
Electricity
Suppose it is decided to have 5 provinces in the lines of current development regions, then western development region will be generating most of hydropower (over 329 MW), using only about half of its generation capacity, while eastern region will be consuming a lot more than what it generates (under 14 MW). Central development region will consume a little more than it generates (275 MW). Under federal structure this type of happy sharing will not be possible. Simple issue like pricing can spin out of control and provinces with more generation capacity can shut off power if the price is not right.
Dispute over water resource
What is happening in India should be an eye opener for us in Nepal about to cross the threshold into federalism. There is dispute between Punjab and Haryana over Yamuna Sutlej Link canal. A clutch of states are fighting over Narmada and Tamil Nadu and Karnataka do not see eye to eye on Cauvery. All this is impeding optimal exploitation of water resource in India, although she has adopted federal structure due to her huge land mass.
Negotiating power
From Koshi through Gandaki, Tanakpur and Mahakali treaties Nepal has ended up getting raw deals. These things took place before Nepal went federal. After implementing federalism, each province will be squabbling with other province/s and Nepal’s negotiation capacity will be further weakened vis-à-vis India and the nightmare of a “monkey” from abroad settling dispute between two “cats” over sharing of a bread of loaf (water resource) and monkey ending up eating the bread bite by bite will become a reality. Merely this should persuade patriotic Nepali people from breaking up Nepal into several provinces real.
Conclusion
Implementing water resource projects in a federal structure will become difficult/daunting task due to competing demands over water and clashing aspirations of each province and several provinces. The complications will get compounded due to the convention of demarcating provinces by using rivers as the boundary. This will result in diametrically opposite aspiration of one province with that of the province on the other side of the river.
In view of this, and also due to the fact that Nepal is as small or smaller than a reasonable sized province of India and most federal nations, we need to tread cautiously before going for federal structure. As far as water resource is concerned, splitting the country in haste will provide us ample opportunity to repent at leisure.
(A shorter version of this writing was published in the Nepali Times # 449 (1-7 May 2009).
Showing posts with label Economic Policy. Show all posts
Showing posts with label Economic Policy. Show all posts
Friday, May 01, 2009
Monday, December 29, 2008
The Global Recession and Consequences of Inaction for Nepal
(Courtesy: Dr. Dolittle)
“The bullet that kills you never takes you between the eyes. It always hits you in the temple.” - Jeff Wacker, EDS Futurist.
Metaphorically speaking, the “bullet” aimed at Nepal’s “temple” is economic in nature whereas the “bullet” that has Nepalis enthralled, is political. Unless Nepal’s Maoist-led government veers away from its populist economic policies and takes concrete measures to hedge against global economic realities, the Nepali nation-sate (its current government, the constitution making process, and the few gains that have been consolidated from the on-going peace process), are at immediate risk.
The highly interconnected nature of the global economy implies that the effect of global trends (both positive and negative) have global implications. The degree of such implications vary in terms of location, timing, duration and intensity, but any suggestion that Nepal is insulated because of its lack of global connectivity is naive and without analytical foundation.
The obvious impact of a global economic slowdown for Nepal will be noticeable reductions in annual remittances. Employees of Nepal’s financial services sector often refer to remittances as the very “lifeblood of the Nepali economy.” Evidence that corroborates such suggestions are well documented and beyond refutation. When mixed with the unregulated growth in Maoist-backed market interventions (specifically through Maoist labor unions), the net result is bound to be amplified negative distortions on the Nepalese economy.
More succinctly, the systematic closure of private Nepali enterprises are eroding the little shielding the Nepali economy has against the global recession. Nepal produces unskilled labor and that’s about it. Nepal’s net exports are negative - the country imports nearly all essential commodities (raw materials, fuels, agricultural goods, etc.). This requires constant access to foreign currency which Nepal had little to begin with and will have even less as foreign discretionary spend goes down and increasingly populist policies crowd out international private investment.
Assuming that Nepal’s Maoist government continues down its populist path, the country is left with two sources of foreign currency (over the short-to-medium-term): that which is generated by Nepali laborers abroad and that which is generated via loans and grants from the international Donor Community. The latter comes at incremental cost to future Nepali generations and the former, is shirking as the lagging effects of the global recession hit Nepal.
To put matters in perspective, less money from abroad means less money in Nepali families’ pockets, less consumption, more unemployment and all the cascading socio-political consequences that follow. The Nepalese economy may not be prone to mortgage-backed securities or complex collateralized debt obligations but fundamentally, the country’s only lucrative enterprise - the financial services sector - runs on variations of collateral backed loans. Examined from this viewpoint, when the means to service existing loans are jeopardized by the unavailability of sustained cash flows, there will be resounding impacts on the country’s only profitable sector - financial services - with networked consequences for every other sector across the Nepalese economy.
As an example, the supply of land in Nepal’s urban centers is limited but this should not fool anyone into thinking that the demand for property is unlimited (or that prices will continue to rise irrespective of the external environment). The Nepali banking sector’s practice of extending loans is based on personal affiliations - credit terms are offered based on who one knows as opposed to any reliable mechanism that reflects creditworthiness. Lending terms often include collateralized assets which in theory can be repossessed by the lending institution. In practice however, re-possession of collateralized assets entails additional costs to the lending institution in terms of contractual enforceability and legal complications over extended time periods. Such complications render the cost of repossession unduly high which ultimately, encourages moral hazard.
So when emerging middle-class families that rely on remittances to service some portion of their mortgages find their cash-flows reduced, Nepal’s financial services sector will be forced to reduce its margins. This means re-forecasted revenue streams, reduced profitability and damper future prospects with feed-back effects on the broader Nepalese economy. Under such circumstances, housing projects, land prices and those who derive sustenance from related sectors will all be negatively impacted.
Nepal’s unregulated stock market is likely to be another victim of the global recession. The story here would be a variation of the same theme - less capital inflow means less discretionary spend for Nepali consumers which in the case of the stock market, means less capital chasing after the same (or more) assets and eventually, deflated or collapsed asset prices. Most private and institutional investors abroad have some capacity (with their respective governments as lenders of the last resort) to absorb and eventually recover from near-collapsed markets. A similar destruction of wealth (although it impacts a miniscule part of the Nepali population directly) would have dire consequences beyond Nepal’s market alone - the very core of the open market system and the applicability of democracy would come into question.
The example of Nepal’s stock market is further complicated by the manner in which insider trading is so engrained within the system. In Nepal, a handful of individuals essentially collude to drive stock prices in a certain direction after which the “herd mentality” takes over. There is hardly any regulation, oversight, or governance over securities fraud so the average middle class Nepali investor is exposed to a lot more risk and a lot less legal recourse, should asset prices rapidly deteriorate.
Given the susceptibilities the Nepali economy is exposed to, the current government must do more to hedge against multiple worst-case scenarios such as the ones described above. Although it is standard practice for low probability, high impact risks to receive reduced priority during decision making processes, according similarly reduced priorities to elevated risks in plain sight is inadvisable.
Nepal’s fragile coalition government and its actors may want to take a step back from dodging the perennial “political bullet” (aimed between its eyes) and allocate slightly more resources to figuring out how to sidestep the imminent “economic bullet” (aimed at its temple). Politics for once should take a backseat to more urgent matters because for the common Nepali, it matters less who is in power and more whether his/her economic future is secure.
“The bullet that kills you never takes you between the eyes. It always hits you in the temple.” - Jeff Wacker, EDS Futurist.
Metaphorically speaking, the “bullet” aimed at Nepal’s “temple” is economic in nature whereas the “bullet” that has Nepalis enthralled, is political. Unless Nepal’s Maoist-led government veers away from its populist economic policies and takes concrete measures to hedge against global economic realities, the Nepali nation-sate (its current government, the constitution making process, and the few gains that have been consolidated from the on-going peace process), are at immediate risk.
The highly interconnected nature of the global economy implies that the effect of global trends (both positive and negative) have global implications. The degree of such implications vary in terms of location, timing, duration and intensity, but any suggestion that Nepal is insulated because of its lack of global connectivity is naive and without analytical foundation.
The obvious impact of a global economic slowdown for Nepal will be noticeable reductions in annual remittances. Employees of Nepal’s financial services sector often refer to remittances as the very “lifeblood of the Nepali economy.” Evidence that corroborates such suggestions are well documented and beyond refutation. When mixed with the unregulated growth in Maoist-backed market interventions (specifically through Maoist labor unions), the net result is bound to be amplified negative distortions on the Nepalese economy.
More succinctly, the systematic closure of private Nepali enterprises are eroding the little shielding the Nepali economy has against the global recession. Nepal produces unskilled labor and that’s about it. Nepal’s net exports are negative - the country imports nearly all essential commodities (raw materials, fuels, agricultural goods, etc.). This requires constant access to foreign currency which Nepal had little to begin with and will have even less as foreign discretionary spend goes down and increasingly populist policies crowd out international private investment.
Assuming that Nepal’s Maoist government continues down its populist path, the country is left with two sources of foreign currency (over the short-to-medium-term): that which is generated by Nepali laborers abroad and that which is generated via loans and grants from the international Donor Community. The latter comes at incremental cost to future Nepali generations and the former, is shirking as the lagging effects of the global recession hit Nepal.
To put matters in perspective, less money from abroad means less money in Nepali families’ pockets, less consumption, more unemployment and all the cascading socio-political consequences that follow. The Nepalese economy may not be prone to mortgage-backed securities or complex collateralized debt obligations but fundamentally, the country’s only lucrative enterprise - the financial services sector - runs on variations of collateral backed loans. Examined from this viewpoint, when the means to service existing loans are jeopardized by the unavailability of sustained cash flows, there will be resounding impacts on the country’s only profitable sector - financial services - with networked consequences for every other sector across the Nepalese economy.
As an example, the supply of land in Nepal’s urban centers is limited but this should not fool anyone into thinking that the demand for property is unlimited (or that prices will continue to rise irrespective of the external environment). The Nepali banking sector’s practice of extending loans is based on personal affiliations - credit terms are offered based on who one knows as opposed to any reliable mechanism that reflects creditworthiness. Lending terms often include collateralized assets which in theory can be repossessed by the lending institution. In practice however, re-possession of collateralized assets entails additional costs to the lending institution in terms of contractual enforceability and legal complications over extended time periods. Such complications render the cost of repossession unduly high which ultimately, encourages moral hazard.
So when emerging middle-class families that rely on remittances to service some portion of their mortgages find their cash-flows reduced, Nepal’s financial services sector will be forced to reduce its margins. This means re-forecasted revenue streams, reduced profitability and damper future prospects with feed-back effects on the broader Nepalese economy. Under such circumstances, housing projects, land prices and those who derive sustenance from related sectors will all be negatively impacted.
Nepal’s unregulated stock market is likely to be another victim of the global recession. The story here would be a variation of the same theme - less capital inflow means less discretionary spend for Nepali consumers which in the case of the stock market, means less capital chasing after the same (or more) assets and eventually, deflated or collapsed asset prices. Most private and institutional investors abroad have some capacity (with their respective governments as lenders of the last resort) to absorb and eventually recover from near-collapsed markets. A similar destruction of wealth (although it impacts a miniscule part of the Nepali population directly) would have dire consequences beyond Nepal’s market alone - the very core of the open market system and the applicability of democracy would come into question.
The example of Nepal’s stock market is further complicated by the manner in which insider trading is so engrained within the system. In Nepal, a handful of individuals essentially collude to drive stock prices in a certain direction after which the “herd mentality” takes over. There is hardly any regulation, oversight, or governance over securities fraud so the average middle class Nepali investor is exposed to a lot more risk and a lot less legal recourse, should asset prices rapidly deteriorate.
Given the susceptibilities the Nepali economy is exposed to, the current government must do more to hedge against multiple worst-case scenarios such as the ones described above. Although it is standard practice for low probability, high impact risks to receive reduced priority during decision making processes, according similarly reduced priorities to elevated risks in plain sight is inadvisable.
Nepal’s fragile coalition government and its actors may want to take a step back from dodging the perennial “political bullet” (aimed between its eyes) and allocate slightly more resources to figuring out how to sidestep the imminent “economic bullet” (aimed at its temple). Politics for once should take a backseat to more urgent matters because for the common Nepali, it matters less who is in power and more whether his/her economic future is secure.
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