A federal structure with central, provincial, and local governments was to be the core basis of a new Nepal. But although it was meant to devolve decision-making to the local level, federalism has been one of the most disappointing and unrealized aspect of Nepal’s political transition. Instead of genuine devolution, federalism is emerging as a top-down conduit for managing disbursements to the local level.
Authority remains vested in the center. The constitution does devolve authority and responsibility to provinces and local entities. In practice, however, they are being structured to manage government disbursements and expenditures. Without meaningful emphasis on building revenue sources for local governments, federalism in Nepal will remain an empty promise.
Several promising new acts, such as the Local Government Operations Act 2074, delegate spheres of authority but do little to fiscally empower provinces and local entities to deliver on their responsibilities. Local governments remain entirely dependent on the center’s generosity.
Federalism in Nepal was a direct result of the Maoist movement. During constitution-making, the Maoist leadership strategically protected the space for federalism. Recognizing that federalism would be a contested issue, they drew the debate towards provinces—how many should there be, their names and geography.
While that debate on provinces raged, Nepal’s constitution quietly established 753 highly empowered local entities. These local entities, more than provincial authorities, represent the genuine basis for federalism in Nepal. The constitution combined federalism with decentralization, returning Nepal to its original state with many diverse and different entities before a king had unified them under one central authority.
Why is that Nepal’s vision of federalism and decentralization confined to paper, lacking the thrust to translate its principles into practice? Because the Maoist uprising only provided the political movement to establish a federal decentralized structure. An economic revolution is needed to realize it.
The fight for genuine federalism represents the next phase in Nepal’s political transition—an economic revolution that will dismantle the concentration of wealth at the center, paving the way for genuine fiscal federalism and decentralization. Whether the Maoists will reinvent themselves to lead this charge, or a new alignment of forces will emerge, is hard to say.
Kathmandu, where the wealth and authority are most concentrated, is the battle ground. Much like the capture of Kathmandu was the final piece in the unification of Nepal centuries ago, the dismantling of Kathmandu’s economic stranglehold is now the final piece in the genuine decentralization of Nepal.
For evidence, start by looking at land prices in Kathmandu. Fuelled by access to cash, debt financing, lack of alternative investments, and short-term speculative transactions, Kathmandu’s economy sits on a giant asset bubble. Return on housing or commercial assets are a miniscule fraction of the underlying land value.
To visualize Kathmandu’s asset bubble, contrast the hustle and bustle of everyday life in the city with the quietness that prevails during Dashain and Tihar. Kathmandu is deserted then not because everyone is quietly celebrating at home. It is because most have left Kathmandu to celebrate the holidays with their families in other cities, towns, and villages around Nepal.
What would Kathmandu’s land and real estate asset prices be if the situation during Dashain and Tihar were normal everyday life? This is what genuine federalism would do to Kathmandu—suck out the pressure on land and burst its asset bubble.
The federal capital’s economy thrives by sucking in remittances, export earnings and foreign aid, before turning them around to fuel consumption across Nepal. As a trading, financial and administrative hub, it has very little productive capacity of its own—unlike other towns and cities in Nepal that draw in resources from surrounding areas and add some value.
Unlike other towns and cities, Kathmandu’s value comes entirely from its administrative positioning as the central hub through which everything must pass. That value is now under threat. Genuine federalism will erode Kathmandu’s unchallenged administrative position as the hub through which all earnings and consumption must pass.
Why does genuine federalism in Nepal require an economic revolution? Because genuine federalism will burst Kathmandu’s asset bubble. The impact will be felt largely by Kathmandu’s wealthy asset owners, though the economic fallout may be broader. At the same time, wealthy asset owners have too much at stake to let the asset bubble burst.
The parties to the conflict have now taken their positions. Nepal’s economic revolution is brewing.