Striking a balance to boost economic diplomacy

Economic diplomacy is a part of foreign policy and a core instrument for achieving our national interest. The perception of national interests provides the overall frame for the functioning of different parts of the state. Only in this context can we think of balance in our foreign policy. Economic diplomacy can be effective when the political interests of the ruling class and the national interest, as defined in the Constitution, are in sync. However, in the course of political evolution, when the financial and power interest of the ruling elite takes precedence over national interest, economic diplomacy loses its link with the interests of the ordinary people. It becomes one more instrument of serving the needs of the rich and the mighty. We have seen this in many developing nations where the ruling elites have used the state’s legitimacy to enrich themselves and their cronies, all in the name of the downtrodden and the poor. In many cases, donor nations have kept quiet or even encouraged this trend as long as their national interests are served.

During the last sixty years, diplomacy in Nepal, including economic diplomacy, has constantly struggled to maintain a balanced relationship between our powerful neighbors in the south and the north, characterized by both occasional defiance and adjustment depending upon internal politics and developments in the broader international environment. Foreign policy as an instrument of promoting national interests has had some remarkable success in the first two decades after the first democratic movement in the country. In the 1950s, Nepal was able to gradually assert its identity as an independent nation in world polity despite political instability. During the first decade after 1951, the country’s leadership disagreed on power sharing and the mechanism to run the state. However, a general consensus to assert Nepal’s identity as an independent nation capable of handling its own affairs was quite apparent. It was visible in the mission of PM Tanka Prasad to China with the blessings of the king and the bold rebuttal of Nehru’s statement by BP Koirala. The then Prime Minister  Koirala and King Mahendra may have disagreed on power-sharing. However, both leaders were consistently determined to restore the balance in our relationship with our big neighbors, which was missing during a  whole century of family rule.

Once Mahendra assumed power, he acted determinedly to use diplomacy to project Nepal into the international scene. He successfully assured our immediate neighbors that Nepal’s active participation in international forums was not detrimental to their national interests. The king used development as a new tool to gain legitimacy for his regime. He used this theme to bring all the Cold War warriors like the USSR, USA, Western European nations, China, and India in a rush to help Nepal build vital infrastructure and a whole host of import substitution industries. It was a remarkable display of the then-ruling elite’s ability to build a coalition to help Nepal’s quest for development. Hundreds of young Nepalis went to the USSR for technical education during those times.

Similarly, technical education programs were launched under the Colombo Plan, and the Fulbright program provided new opportunities to study in the USA. Major projects like the East-West Highway, numerous import substitution industries, and other educational and health infrastructure were launched with bilateral and multilateral aid. The USA and other Western countries, including Japan, supported this framework. The regime then restored the balance in foreign policy while enhancing the trust and confidence in Nepal as a reliable partner in the Himalayas. The contribution of professionals in the then administration like Yadu Nath Khanal, Bhekh Bahadur Thapa,  Kul Sekhar Sharma, Padyumna Lal Rajbhandari, Harka Gurung, and many others in creating this atmosphere for successful economic diplomacy both in form and substance needs to be appreciated. A measure of political stability, the adoption of economic development as a source of legitimacy of the king's rule, and the motivation of top-level bureaucrats played a significant role in incorporating economic diplomacy as an effective foreign policy tool.

After the success of the people's movement in 1990, Nepal entered the new democratic era with the king as the constitutional head of the state. The competitive democratic party system created great hope for a new framework of inclusive economic development and a better use of resources for rapid economic growth. The transition from a system under the king's leadership to a democratic party system was not smooth, leading to political instability and numerous difficulties in strengthening the guardrails against corruption and anti-democratic behavior. This trend gained momentum after the Second People’s Movement (1963), the induction of the Maoists in the government, and the adaptation of the new Constitution. It has led to increasing corruption, mismanagement of resources, and the inability of the system to impose economic discipline and an objective-oriented focus in public policy making. In the meantime, the possibility of exporting a cheap Nepali workforce to work in the Gulf has provided remittance income to avoid hard economic decisions and a commitment to project implementation.

Serious financial crises propel nations to make difficult economic decisions that would have been avoided if possible. The case of India after the severe foreign exchange crisis in 1990 and a radical shift in the Chinese development paradigm after  the Cultural Revolution are examples of crisis-led  transformations. Nepal has never faced this kind of crisis moment;  the possibility of finding a job in the Gulf region precluded this scenario. As outlined in planning documents, the exodus of Nepali labor to the Gulf region eliminated the urgency of industrial and agricultural development. Remittances-induced imports of consumer goods became the new source of revenue and allowed politicians to pursue their political games and aspirations of power and affluence for the few. Rising corruption went hand in hand with an economic structure focused more on import-based consumption than industrial growth for production, exports, and employment. In the last two decades, Nepal has established an economy moving towards increasing dependence instead of self-reliance or interdependence with the outside world. Economic diplomacy has become irrelevant for all practical purposes since the focus on exports and FDI has been discussed in formal official documents but not at the execution level. Political instability, increasing corruption, and the neglect of economic discipline have severely eroded the potential of economic diplomacy to play its role in the nation’s development.

A fragile and dependent economy will be quickly cornered by its more giant neighbors to toe the line they prescribe in inter-state relations. As a buffer state between two powerful neighbors–one already a superpower and another that wants to be a superpower—an internally feeble Nepal will find it challenging to maintain the balance in foreign relations. Powerful states naturally tend to view adjoining smaller states as being under their umbrella, another name for a client state. The magnitude of ‘clientelism’ depends upon the economic and political strength of the perceived client state. Alternatively, when a small state becomes increasingly dependent on a large state for economic survival and political stability, clientelism or near-client-state syndrome gains momentum. Similarly, the interest of the more powerful  state is to keep the near-client state in a state of economic dependency so that the umbrella doctrine is functional despite occasional grievances and dissatisfaction. The family rule in Nepal during the British Raj in India was a glaring example of the near-client-state syndrome where British military victory far away from Nepal was often viewed as a cause of celebration.

The client-state syndrome has plagued Nepal’s relations with India because of its incompetence in achieving economic strength and political stability. There seems to be an unwritten understanding in the Indian bureaucracy that the security umbrella doctrine of the old days has relevance in the present era. But Nepali leaders from Tanka Prasad Acharya to BP Koirala, King Mahendra, King Birendra, and King Gyanendra have tried to resist this doctrine in their own manner. Similarly, politicians after the Second People’s Movement have been vocal against clientelism, but the actual practice differs. The client syndrome is alive and kicking both economically and politically.

China's interest in Nepal has gained momentum with its emergence as a world power. Some analysts have labeled the new assertiveness of China in international affairs as ‘wolf warrior diplomacy’.  It is a diplomatic form that is assertive and willing to project power if necessary to protect what it defines as its national interests in nearby regions and beyond. In the case of the USA, the focus under the Biden administration is on building alliances with other nations to position itself as an offshore balancer or a military deterrent to China, the new superpower. In this rush for collaborations, democratic values seen as a crucial soft power of the USA  have been quietly ignored when necessary.

Nepal’s relationship with China and India is becoming more complex and unbalanced. Nevertheless, Nepal has consistently refused to be the client state of any nation. The sense of nationhood in Nepal has solid roots and will gain strength in the future. Politicians who refuse this logic will face an uphill battle for political survival. The geographic position of Nepal within the context of China–India competition and confrontation with all its international implications has changed the global perception of the Nepali state; it is now viewed more as a strategic state in this part of the world than a mere near client state. The emerging dynamics of the US-China relationship in different parts of the world have changed the nature of Nepal from a near-client state of India to a strategic state between the two Asian giants. The political class in Nepal must remain cognizant of this emerging reality and learn to act accordingly.

Excerpts from Dr Lohani’s speech on IIDS event ‘The Past and Future of Economic Diplomacy for Nepal’

The author is former foreign minister