Strategy for FDI Mobilization Into Nepal

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Strategy for FDI Mobilization Into Nepal


The buzz word these days is “double digit growth”. This is more abuzz now than ever before simply because the Maoist leader Dr. Baburam Bhattarai underscored it as being achievable. We are, in the 2000’s, growing at an average rate of around 2.3-2.5 % per annum. As we have already achieved an average of5.0 %, give or take, in the 1990’s, doubling current GDP growth rate should not be unmanageable provided there is political will and commitment to use the available productive capacity to the hilt. This can be done by emphasizing, basically, better utilization of the available resources through good governance; reforms in public management and the development of very cordial politico-bureaucratic partnerships with the private sector at the national, municipal and district levels.

To proceed beyond a 5.0 % GDP growth would necessitate forceful implementation of existing fiscal laws to mobilize the necessary internal revenue. If revenue leakages could be plugged and if more scientific and simple fiscal policies are put in vogue then another 2% incremental GDP growth could ensue provided that much is mobilized as additional internal investment. Serious thought must be given to how we can muster our tax base to 20% of GDP from current 14%. It is possible and highly desirable in order to fund compulsory primary education or a new job-oriented vocational and technical education or to increase the flow of credit to the rural sector.

Then there is the vast potential for new sources of revenue from the forestry sector which remains untapped. Even the agriculture sector can contribute to GDP growth substantially if measures are taken to prevent post-harvest losses, which is estimated to be in the region of 2-3% of GDP. The international food crisis and food security issues should alarm us all to the need for some action-planning in this domain.

Just examine the Transparency International Corruption Index (TI-Cl) for South Asia to get an illustration of one important such precondition. Also, we could look into the Economic Freedom Index (EFI) developed by the Heritage Foundation to see another precondition that needs to be met. All of the above self-help action should possibly yield a maximum of7.0%—7.5% annual GDP growth. To go beyond this level of self-reliant growth path to double digits would require foreign direct investments (FDI).

The Preconditions
It needs to be underlined that just having attractive foreign investment policies, priorities and strategies will not attract offshore investment – some other pre-conditions must be satisfied. This is especially important for Nepal where the rule of law has been more breached than nurtured and obeyed.

Just examine the Transparency International Corruption Index (TI-Cl) for South Asia to get an illustration of one important such precondition. Also, we could look into the Economic Freedom Index (EFI) developed by the Heritage Foundation to sec another precondition that needs to be met.

In other words, mobilizing foreign investments, and for that matter domestic investments, requires that the state create an ‘enabling environment’. This is more vital than paying attention to any other policy parameter. Without a climate of minimal uncertainties, businesses can hardly take calculated risks and make sound investment decisions with long-term profitable prospects.

The importance of macro-economic stability in respect of variables such as price level stability, foreign exchange rate stability and budgetary-deficit stability is well understood. Other stability factors are the degree of harmonization of FDI policies with overall development goals and coordination with short-term and mid-term fiscal, monetary and foreign exchange policies. Moreover, certain financial indicators should be incorporated as stability indicators -such as the degree of public debt, indebtedness of private firms, banking sector's non-performing loans as percentage of total loans, credit deficit of the informal sector and crowding out of the private sector by government in taking loans from the banking sector.

Administrative stability is felt to exist when due recourse to administrative tribunals and courts are available and they are expedited as quickly and as cost-effectively as possible to redress grievances and remove constraints that are beyond the business’ control or, indeed, to obtain justice from illegal actions of the state. Administrative stability exists when policy regimes are stable despite changes in bureaucratic personnel.

Administrative stability is also assessed by the availability or non-availability of the application of WTO provisions over trade, investment and intellectual property rights and the degree of transparency in the application of the investment laws, intellectual property laws and income tax and VAT laws.

As we seek a new Nepal through the Constituent Assembly process, the strategic issues that must be addressed are those related to dealing with constitutional and political stability in an environment of a constitutional and political paradigm shift from unitary to federal state and from a winner-take-all electoral democracy to a mixed proportional system. And who knows, there may even be constitutional provisions for self-determination and referendums. This is not going to be an easy politico-constitutional transformation as it requires a culture of consensus, the ability to express dissent based on rationality and a culture of open debate and dialogue. It also requires a culture of intra-party democracy.

Political parties are far removed from the economic realities facing the nation as they are irrationally engaged in competitive populist declarations to create vote banks. This way a national consensus has well neigh been impossible to garner about the role of the state in economic management, the importance of FDI for economic growth and employment, and the nature and scope of economic freedom to be guaranteed to the citizens.

Genuine businesses wish to gauge the political Ieadership’s collective vision for the next five, ten or fifteen years before taking risks. From a place where they locate only conflict, conundrum and doubts, they are bound to go elsewhere with their FDI.

If the precondition for an enabling environment for FDI as outlined above are not in order then (a) the incentives for FDI need to be excessively liberal and therefore socially costly, or (b)regional countries compete unnecessarily with each other providing tax concessions to attract FDI and thereby weakening themselves jointly and severally to regulate TNCs, or (c) the incentives attract the wrong kinds of FDI that are not given to long-term profits and corporate social responsibility or (d) all of the above scenarios are likely.

Necessary Economic Conditions
Embracing economic globalization through a process of liberalization, privatization and accession to WTO seems to be a vitally necessary condition for attracting FDI. Liberalization involves not just reduction of tariffs, removal of the permits and quota raj, promulgation of laws to safeguard competition for case of entry, exit and expansion of businesses, promoting institutions to regulate monopolies and protect consumer sovereignty but, indeed, also taking radical measures to reform the financial and banking sectors to rid the economic system from the unhealthy links between the political, business and banking sectors resulting in the cartelization of the economy with its growing mafia-like businesses given the aftermath of the insurgency and breakdown of law and order. Liberalization also requires radical changes to the labour laws that restrict effective operation of the labour market.

Finally, another vital condition for rapid mobilization of FDI is the integration of FDI policies with the overall development goals as well as grounding investments in general, and FDI in particular, on the genuine comparative advantages of the economy.

The Strategy
Nepal lacks a strategy for FDI mobilization. It is not enough to have policies, acts, rules and regulations. The result is the very, very low level of FDI stock that is in Nepal, as all can witness. It cannot be the sole domain of a ministry but of all economic ministries, including forestry and agriculture, who should put in their concerted, continuous efforts. It must adopt the target approach and not be general-purpose hoping and wishing for an external response. We must reach out to the targeted FDI markets proactively and in a prioritized manner.

The strategy should be an integral component of Nepal’s economic diplomacy policy. It should be a sophisticated strategy that targets global, regional and bilateral markets with clarity and care so that implementation action by the various actors is easy and smooth. Following paragraphs illustrate the needed strategy:

(a) Global strategy: Garments, Pashmina, carpets, tea, sericulture, floriculture, vegetables, cardamom, ginger, paper and traditional handicrafts are niche products for Nepal globally. The challenge is to invite TNCs for the production, distribution, marketing, financing and development of these products. As transportation will need to be airborne for competitiveness, civil aviation development will be crucial both nationally and internationally. The real estate sector should be completely opened to FDI, especially to develop new townships, mass housing colonies and tourism resorts. It will help ameliorate the investment climate by leaps and bounds as this sector will create dynamic multiplier effects throughout the economy while upgrading technology, managerial know-how, absorbing the surplus funds with our banks and helping to export skilled Nepali manpower overseas for work in construction with overseas conglomerates.

(b) Regional strategy: This should be based on investment in infrastructure development for the creation of production-complementarities through FDI investments in energy-grids; transportation-grids (sea ports, dry ports and airports, high speed road and rail transportation, airlines); tourist resorts; trans-border ecological parks; specialized institutes for vocational, technical and engineering skills to manage the industries in the SAARC growth quadrangle, and R&D centers for technology development and standardization. It should also seek trade-complementarities through regional specialization for targeting global markets and regional imports substitution for both good and services (banking, insurance, health care, higher   S&T education like IT, medicine, biotechnology, computer engineering, hospitality services etc). The regional strategy should be to create regional TNCs that can eventually become global TNCs.

(c) Bilateral strategy: With India the guiding framework should be the Indo-Nepal Treaty of Trade seeking free trade in primary products and non-reciprocal preferential treatment for manufactured products, especially in the area of agro-industries, information technology and manufacturing of components for the Indian automobile and electronics industries; further seeking ‘national treatment’ to Indian FDI at par with investment incentives given to say Uttarkhand, Sikkim and other backward regions of India. FTAs may also be negotiated with Bangladesh and China and bilateral strategy formulated accordingly.

The challenge to policy makers is how to link trade and investment, production and distribution, and marketing and finance. The short answer is to recognize the all-important and vital role that MNCs/TNCs can play and to target their entry into Nepal. The benefits from the entry of the likes of British American Tobacco, Unilever, Dabur, Tata and Oberoi, to mention a few prominent FDIs, are there for all to see. Theoretically, the empirical evidence (based on UNCTAD studies) is that more than the supply side it is the demand side that is crucial for mobilizing foreign direct investment (FDI) by having in place: (a) satisfactory preconditions and (b) well-conceived sect of FDI policies and a sound strategy that targets selected given countries under the banner of economic diplomacy. It should be underlined that both these parameters are well within the control and jurisdiction of each country. To really take control we need a targeted 3-prongstrategy to be formulated by a new Board of Investment with full responsibility to the private sector as partners in FDI mobilization.  

Late Mr. Rana was Minister of State for Finance.

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