The stagnation, grinding poverty, income inequalities and exodus of youth that characterize Nepal today are the direct outcomes of a myriad of policy mistakes ranging from economic, political and social in the past. To name a few, support of unequal ownership structure, concentration of power and resources in Kathmandu and a few urban enclaves, dominance of single language, neglect of public education, existence of social oppression, regressive fiscal policies (with minimum direct and property tax) and lack of merit and objective criteria for governance, were such policies.

Lack of endowment coupled with lack of education and equal opportunity made economic mobility—children of the lower income group moving to the higher income group—almost nonexistent. The power, wealth, and prestige—which coalesced together—of parents were the only determining factors of how children faired. The polarization—rich getting richer and ordinary people getting poorer—widened.

The county is witnessing shameful social structure and caste-ridden inequalities. Moreover, for Dalits, the rampant social injustices are overlapped with economic deprivation. Addressing this social divide using economic, social (especially education) policies is long overdue.

Improper policies perpetuated economic stagnation. Nepal, China and India were not very different in per capita income in the early 1980s. Today, even if income were equally distributed in Nepal, it takes income of three Nepalese to make that of one Indian and income of 10 Nepalese to make that of one Chinese. Nepal’s growth rate is so abysmal that it will take 35 years for Nepal to double its per capita income, whereas it will take only 7.6 years for China, and 12 years for India. Another polarization is on action—as its neighbours accelerate, Nepal decelerates.

These outcomes were unsustainable; armed struggle ensued, and the feudal system orchestrated by the corrupt institute, the monarchy, had to go. Now we are searching for another equilibrium by restructuring Nepal from a unitary state to a federal one. Whether Nepal can correct the past mistakes—come out of the elite entitlement-centric economic, unleash the forces of prosperity and charter an equitable society—depends on: at what bases the federation will be formed. The right choice of these bases, though not sufficient, is a necessary condition for generating economic growth and social advancement.

Asking the right questions

Unfortunately, the ongoing debate in Nepal in this regard is missing the point. The debate has been mainly confined on whether federalism should be based on ethnic-community divide. The choice of the bases of federation is a mean to achieve ends, not a goal itself. The discussion of a mean as if it is an end not only generates extreme views on both sides but also misses the whole point of what the goal is. Instead, the debate should revolve around federalism based on what bases (ethnicity, language, geography, distribution of natural resources, market accessibility, and services delivery) would help achieve the desired goal of accelerating economic development, ensuring inclusive democracy and obtaining social equity for all citizens.

In the debate, there is mention of “capabilities” and “identities” as criteria for choosing the basis of federation but there is no explanation of which capabilities suggest which way and the multi-dimensional “identity” that every individual possesses is reduced to a single dimension of ‘ethnicity”. Listening to the politicians, it seems that what they mean by “capability” is the cost of running the government. No doubt, smart and efficient government should be the norm but the use of “capability” as a criterion should mean finding the bases of federation that provide maximum social welfare to the society given the endowment—land, human capital, physical capital and natural resources. In any case, we cannot choose one or the other; “capability” and “identity” are intertwined. We would be making the best and optimal use of both, capabilities” and “identities” only if Nepal becomes a prosperous state where hitherto disadvantaged or disenfranchised groups can be equal participants on nation building.

Focusing on economic agenda

This intended outcome, in turn, very much dictates using economic rationale while forming sub-national units (call, province) of federation for two reasons. First, looking at the precarious level of per capita income, the other two components of agenda—developing inclusive democracy and creating opportunity—depend exclusively on economic one. Without economic prosperity, we cannot eliminate poverty and provide decent public education—two fundamental pillars of inclusive democracy and grass-root political participation. Second, given the prosperity, there are other instruments which can be used to strengthen inclusiveness in social and political fronts. Let me elaborate them further.

Nepal is one of the poorest countries in the world with per capita GDP of US$ 447 (in 2010), one-third of India’s per capita GDP and one-tenth of China’s. Considering that China and India are still poorer countries compared to advanced nations, Nepal’s situation is quite alarming. In the last 30 years (1980-2010), the per capita real income grew by only 2.2% annually in Nepal, compared to 4.4% in India and 9% in China (Figure 1).  In the last decade, the growth rate gap was even more alarming. Nepal is a laggard not only compared to India and China, but also compared to many countries in the world.

Therefore, the challenge for Nepal is how to accelerate economic growth (increase the size of the pie). Even though I agree that the government in Nepal should impose a lot higher income and property tax rates, and that most of the wealth is transferred as rents (from government coffer or other sources using power) rather than created, but as we saw, the base is really narrow to have sustainable revenue for social agenda.

On the second point, no matter what bases of federation are chosen, the political inclusiveness of different ethnic, language and caste (ELC) groups, can be achieved using electoral system at the lower house and including all major ELC groups based on identity on the upper house of the bicameral parliament. (for detail on this see, Acharya 2007).  Furthermore, the social inclusiveness can be achieved by providing opportunities to get education in one of the two/three major languages spoken in the province and also in English from Grade 1 in public schools. Of course to implement these agenda require substantially more resources in the hands of the government.

Tying the knot

It will be easier to accomplish all the three above-mentioned agenda—economic, political and social—if the provinces are formed on geo-economic basis that are stretched north-south than on ethnicities and other identities. Let me discuss why this would be a smart framework for economic agenda.

First, take psychological factor. If provinces are made on ethnicity, this will be the predominant line of thinking; the economic and political lines of argument will be superseded by identity argument. In country like Nepal where the ethnicities is really mosaic, this will not be conducive for developing democratic institutions and economic growth.

Second, Nepal’s varied topology (natural beauties in diversities), rivers and other natural resources extend north-south. These resources will be managed more efficiently if they fall in one (or fewer) province, which is possible only if the provinces are north-south. It would allow provinces to develop hydro power, tourism and other programs more efficiently. This set up will also create healthy economic competition among provinces on managing their resources, whereas tension might ensue if provinces become upstream and downstream riparian clients.

Third, one way to accelerate growth is by taking advantage of emerging China and India through trade. Provinces extending north-south are better placed for such opportunities. The burgeoning China and India, which represent about 15% of world output, with US$ 2 trillion imports (10% of world imports), are opportunities for Nepal right at the doorsteps. If Nepal—whose GDP is 0.25% (a quarter of a percent) of combined GDP of China and India—can take 0.5% (half of one percent) of their import markets, Nepal’s exports to them would be equal to 75% of Nepal’s GDP, a phenomenon job creation for Nepal.

These two countries are unique and each province should strive to take advantage of both. Hoping that there will be no provincial barriers—free movement of people, goods and services, —provinces, no matter how they are formed, should be able to trade with both countries. However, Nepal is already a high-cost landlocked economy compared to China and India. Our export sector is sagging (Figure 2). We are losing competitive edge; export intensity (share of export to GDP) is falling. From 2000 to 2010, it fell from 23% to 10%. However in case of China it increased from 23% to 30% and in case of India it increased from 13% to 22%. We should not impose further cost by making provinces even more landlocked or by bordering them with only one country. In case of provincial barriers, the argument of bordering each province with both countries is even stronger. As the competitive edge of countries is time variant, each province is better situated to take dynamic advantage of any changes if it is bordered with both countries.

Fourth, foreign investment not only provides much needed capital in the country, it also helps Nepali companies to learn from and adapt to new foreign technology. Attracting foreign direct investment in Nepal will be an uphill battle if we create ethnic provinces. The only hope of attracting investors is by linking each province with both China and India so that they can take advantage of both markets.

Fifth, the major problem of Nepal’s past polity was not unitary system per se; it was the absence of devolution of power from the center to the regions. Nepal’s prosperity and regional balance requires massive power transfer from the center to the province and just being a federal state does not guarantee that. If federation are based on ethnicity, there is a rational of making the center stronger for reasons such as management and dispute settlements on natural resources, protection of minority or “non-ethnic” population, correction of wide margin of “have” and “have not” provinces and address cascading demand of identity-based new province. North-south provinces do not face these constraints, and are conducive for more devolution of power.

Sixth, the real building blocks of a country are its local units: the villages and municipalities. Unless people at the local level live in harmony and can participate in policy debates that matter for their livelihood in free and frank manner, we cannot make local units stronger, and by extension, an inclusive democracy is an illusion. Federalism is not about preferring sub-national or local elites to central authority, but it is about making governance at the local level more resourceful and participatory to local needs. This requires developing institutions that target common enemy “poverty and illiteracy” and aim for common identity “citizens of prosperous and equitable nation”. That can be achieved by not going for the smallest set of identity (ethnicity, caste and languages)—a risk that could happen in ethnic federalism—but by invoking broader commonness, fight against economic deprivation, political exclusion and social injustice.

Seventh, the poverty alleviation and inequality reduction require policies that are basically endowment (class) based, making ethnicity based policies less relevant, and by extension the ethnicity-based provinces based less justifiable. Data from Nepal Living Standard Survey II show that though ethnicity, language and caste have sharpened economic inequalities in Nepal, the major force of economic deprivation has been endowment related common all ELC groups.

No doubt, the shares of poorest—those below poverty line—vary a lot by groups: the lowest being in Newar (14%), Gurung (18%) and BC (19%) to highest being in Awadhi speaking  (70%), Tamang (61%) and Dalit (46%). But the income of people at the poorest 30% is not that different among different groups. And, the largest number of these poorest are BC (Figure 3). Out of total population of 7.3 million below poverty line, the largest 1.2 million were in BC (16%), followed by Tamang about 0.86 million (12%). What all these mean is that poverty has no race, no religion and no language. Data also show that the richest group in Nepal is not Brahman and Chhetri (BC). They are the third richest group after Newar and Gurung (for detail see Acharya and Sangraula 2009).

Another fact that is not well known is that the intra-group (among people within the same group) inequalities are wider than inter-group (among people of different groups) inequalities. For example, the income gap of a typical poor Newar and a rich Newar is 20% more than the income gap of a typical poor Nepali with rich Nepali. Same is true with Gurungs. Out of the total inequality in Nepal, almost 80% is intra—across people within the same ELC group, and only remaining 20% was inter—across people in different groups. Therefore, we cannot say that a poor person belonging to a particular ELC group is better off in terms of economic plight.

So, the policy target should be to uplift the downtrodden (member of any ELC group) and enable them to be a part of the prosperity rather than focusing on caste, ethnicity and language groups. If economic policies are ELC based, there is a possibility of friendly fire (terminology used by Sen (2005) for India's situation)—whereby an army is hit by its own firing rather than by enemy shelling—and the affirmative action that was supposed to help the downtrodden helps the affluent rather. The policies based on ethnicity may actually aggravate the already wide intra-group disparities.

Eight, the life blood of federalism is fiscal equalization—the redistribution of revenues from better-off to less-well provinces to enable all provinces to provide standard (or national minimum) public services. In Nepal, where 81% of tax revenue is raised only in four districts (Kathmandu 33%, Parsa 30%, Morang 10%, Rupandehi 8%) the design of a fiscal equalization mechanism is going to be a challenge (Acharya, 2012). It is more so if provinces are formed based on ethnicity. In difficult time, fiscal equalization for provinces based on identity may be interpreted as subsidization of one “identity” by another “identity”.

To sum up, certainly, some ethnicities, castes and linguistic groups have been through extreme exclusion, social injustice and deprivation. We should deplore of these unjust practices and develop a framework using social, political and welfare programs to make sure that they do not happen in the future. For that, the federation based on ethnicity is neither necessary nor sufficient. Indeed, the implementation of such programs is easier under north-south framework.

Raising the hope

The above discussion leads me to conclude that forming north-south provinces is the best way for Nepal to come out of poverty and sustain inclusive democracy. In my earlier paper, I have recommended of having six provinces (Acharya, 2007). However, the emotion is so high and a rigorous analysis so dearth that the proposal of forming north-south provinces meets with one of the three responses: (1) not desirable (2) not possible (3) not worth repeating. But lets raise our hope that when time comes to decide the provincial boundary reasoning, passion and vision, not emotion, grievances and revenge, will prevail.

If political parties and other stake holders think coolly where they want provinces and Nepal to be in the next 50 years, then the answer they get will not be very different from what I have outlined. There is an illusion shared by some that by making federation based on ethnicity in mountain and hilly regions and by region in Terai, the residents would be rich and have full democracy by default. Unfortunately, things are not that easy and simple. By ignoring the agenda of economic prosperity and equity—two most vesting problems and creator of all the past upheavals—on the debate of choosing state restructuring framework, we are postponing the problem for the future. The political parties should not answer the easy question of their own imagination; they should answer the question that is difficult but real.

With the recent political changes, some of the political and social injustices have been substantially diminished. The policy of one language, one religion is also gone for good. However, what is not changed at all is the economic marginalization. And, if we cannot remove the forces behind economic marginalization, our goal is defeated. The difference is that in the fights for political, linguistic and religious rights of the marginalized group, both elites and the grass-root mass were together, whereas in the fight for economic justice, the elites might be a barrier within the same group, as they lose their perks and privileges.

Conclusion

Nepal is poor; it is stagnated; it has disparities; it has politicians with irresponsible optimisms and inactions. We are restructuring the country; we should get it right so that everybody feels welcome. Past has taught us enough; let’s not overshoot. Think through with clear mind and vision. We cannot race to the smallest trait of our identity (in a set of identities). To be a resident of a province, to be Nepali, to be prosperous, to have compatriots who are all educated, to have no social stigma, and to have strong harmony among ourselves are the greatest identities we could have. Say it loud and clear: “as a province, I want to own Himalaya, Mountain and Tarai as is it replicates my country, Nepal. I have my own language to be educated and my culture to celebrate, but we are working together to be prosperous.”

It is certain that if Nepal cannot achieve economic prosperity and bring its fruits to all citizens, no matter how democratic, inclusive and just constitutions we bring this time, we should be ready to rewrite another one within a decade. It is frustrating that in the whole process of state restructuring debate that is going on for the last four/five years, no political party has been discussing this key issue.

(The writer can be reached at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

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