Global Policy Forum

Mohan G Francis

Nepal's biggest Hindu festival Dasain was preceded by the first post-1990 constitutional dismissal of the sitting elected Prime Minister and his government. The Prime Minister's supposed failure was his acceptance of his government's inability to hold the scheduled elections under peaceful conditions due to the threat of the Maoist insurgency. The persisting inequality, particularly between the urban and the rural areas, has caused the insurgency to grow in terms of geographical spread, ferocity of attacks and rural hold in spite of a year of emergency that allowed for the Royal Nepal Army to take them on. As if to add salt to the bleeding political wounds, the 'homogeneous' economic prescriptions of the Bretton Woods institutions for the Nepalese economy overlook the economic basis for insurgency- inequality and poverty. Instability, inequality, insurgency and the IMF-WB form a cobweb in which the concerns of the ordinary Nepali citizens are tied down and lost.

For a country that has moved from one political confrontation to another since 1990, political uncertainty in Nepal today is a result of the struggle for power between the mainstream political parties, within political parties, between the mainstream political parties and the Maoists, and now between the multi-party political system and the monarchy.

The 1990's saw all main political parties unite to start a 'People's Movement' to agitate successfully to replace King Birendra's Panchayat system with the multi-party political system. The functioning of the democratic system has so far resulted in 3 general elections, 7 governments and 6 Prime Ministers, with a scheduled general election this November. This uncertainty of the political system was worsened by the continuous infighting and feuds within both the ruling and opposition parties. The Nepali Congress had the long running feud between its two main rivals, Girija Prasad Koirala and Sher Bahadur Deuba result in the latter being dismissed from the party when he was the Prime Minister. He in turn refused to quit the Prime Minister's post with a majority of the cabinet and formed an interim government. The communist opposition (a coalition) was not too far behind in their ideological and personal feuds, which was further complicated with the confusion within their leadership to respond to the growing popularity of the Maoists that was eroding their traditional vote banks.

The confused strategies of the government, ranging from force to peace talks, to tackle the increasing presence of Maoists all over the country has resulted in divisions both within and between parties and an increased instability in the political atmosphere. Adding to this instability was the fourth of October dismissal of Prime Minister Sher Bahadur Deuba and his government for the first time in the 12 years of Nepal's multi-party political system. In a week's time, contrary to the promise of the King to consult all political parties, a loyal monarchist was appointed as Prime Minister without any consultation with any political party. The continuing instability in the political system has by now become the norm rather than the exception in Nepal.

Political instability has an adverse impact on the economic development prospects of any country and its citizens whose economic policy making and planning are central government based. This is the same with Nepal. Centralised policy making and planning, frequent changes in governments and leaders at the central government has created non-continuity in developmental programmes and policies with adverse effects on poverty and inequality, particularly in the distant regions of the country. The recent instability in government and frequent changes of principal personnel in central organisations such as the National Planning Commission added to the problem of confusion in priority and choice of projects. Further, weak infrastructure resulted in cutting of large parts of the country and with it large sections of the heterogeneous Nepali population from the small developmental efforts attempted.

Disaggregated at the regional and the sub-regional level, the HDI values in the Nepal Human Development Report (NHDR) 2001 highlight significant differences in welfare and human capabilities. The HDI for the urban areas (0.616) far outstrips that for rural areas (0.446), where more than 80% of the population lives, because of far better access to services, resources, and opportunities. Clearly, Nepal's development is urban biased and this bias explains the persistence of poverty in rural areas. The report also evaluates development in terms of ecological divisions and development regions. The human development in the hills is far higher than the mountain and the Tarai regions, in part because many large prosperous cities and towns are located in the hills. Among the development regions, the highest HDI (0.493) is found in the central region, followed closely by the central (0.484) and the western regions (0.479). This is mainly because the most of Nepal's trading centers and productive economic services are concentrated here.

In terms of Income Poverty (calculated by the Nepal Living Standards Survey as a head count index of poverty), 44 per cent of the country's rural households-88 per cent of Nepal's total population- and 23 per cent of its urban households appear to fall below the poverty line. According to NHDR, the incidence of poverty might have increased from 33 per cent in 1977 to 42 per cent in 1995/96. Over these two decades, poverty incidences held steady in urban areas, suggesting that it's worsening took place largely in the rural areas. Moreover, the NHDR shows that a comparison of the 1984/85 and 1995/96 data indicates that nationwide poverty rose slightly from 41.4 per cent to 44.6 per cent in 1995/96, rural poverty increased while urban poverty diminished.

Further in terms in of human poverty, as defined in the NHDR 2001, the Human Poverty Index (HPI) is twice in the rural areas (41.4) than in the urban areas (23.9). The HPI according to ecological and developmental regions show a divergence but not large enough as one shown by the urban-rural divide. Evaluating the data on HDI, Income Poverty and HPI, for the ecological and developmental regions, one finds the inequality expressing itself as a case of urban-rural inequality than any other possible divides.

The six-year old Maoist insurgency has emerged and grown on the backs of pervasive poverty and increasing inequality. As mentioned above, most of the poor live in rural areas- many based on subsistence agriculture- and the income disparities between them and those in the Katmandu valley are large and widening. The mid- and far-western hills and mountain regions show a poverty incidence of 72 per cent, as compared with Katmandu Valley's 4 per cent. These are the same regions where the Maoist influence is the strongest.

Close to 90 per cent of the 20 million people of Nepal are peasants. They suffer from semi-feudal oppression resulting in lack of land to work on and extreme poverty and hunger. The conditions force them to travel outside the country for jobs in order to survive. Besides the landlords, the Nepalese ruling class consists of bureaucratic capitalists closely linked and subservient to the international capitalist system, with no concern whatsoever of the resulting stagnant Nepalese economy. In other words, the structural realities within the Nepalese economy were the main reason for persistent poverty till the 1980's. But with overall poverty getting worse in the 1980's, with poverty levels remaining more or less constant in the urban areas, there must certainly have been another dynamic characteristic in the economy other than the already prevalent structural rigidities of the economy and society. This dynamic was the economic reform package adopted in the 1980's under the supervision of the Bretton Woods institutions. The negative impact of the reform package on poverty and development is explained later in the analysis.

The Nepalese economy has a per capita income of around US $210, with most of the national income being accounted for by consumption (the total consumption to GDP ratio is 86) allowing for a dismissal savings rate of 14 per cent. But by IMF standards, it is a stable economy!! Exports grew at an average annual rate of 22.3 per cent in the last three years whereas imports registered a negative growth of 2.9 per cent. Foreign loans grew at a low average annual rate of 1.3 per cent. Further, debt servicing (at less than 5 per cent of current deposits) is not a burden and inflation is not an issue at 4 per cent.

But the economic basis of the 1996 Maoist insurgency was founded not just on the pattern of unequal and exploitative ownership of land and capital but also on the economic reforms initiated in the 1980's and 1990's that worsened the economic conditions for a majority of the Nepalese population. The economic reforms involved de-licensing, increased privatization and foreign participation. Fiscal expenditures were geared towards enhancing the role of the private sector and the free market forces.

More elaborately, as in several developing countries, the planning process of the country became inextricably linked to the logic of the Bretton Woods institutions (which are identical to all countries irrespective of their individual particularities)- Stabilization and Structural adjustment. The economic reforms and structural adjustment policies did not recogonise the agricultural sector's structural realities. In an economy, which has large non-monetised segments and where subsistence agriculture is the norm rather than the exception, the removal of fertilizer subsidy and privatization was hardly the most appropriate policies for stimulating growth. Trade liberalization along with low agricultural growth and productivity, resulted in Nepal being reduced to the status of a food importer from one that who had its food demands domestically met.

Given, the mountainous and hilly terrain, improvement of the transport network was indeed essential for both stimulating manufacturing and for improving the marketability of agricultural produce. The obvious solution was a vigorous state-led infrastructure development, which was curtailed by the need to maintain a low fiscal deficit to satisfy the demands of economic reforms. It is ironic in the context of Nepal's stable economic conditions, that the logic of 'Bretton Woods' prevented the state from playing a more active economic role. Removal of fertilizer subsidy, privatization of agricultural markets, lowering the fiscal deficit, expansion of exports and trade liberalization, all in the form of economic reforms initiated by the Bretton Woods institutions, worsened the economic situation in Nepal and further worsened the urban-rural divide.

Pre-1990 Nepal too was poor and characterised by a large and worsening poverty and inequality of substantial proportion, due to both the structural rigidities as well as the economic reforms. In 1976/77, the poverty incidence in terms of subsistence consumption and subsistence income was 60 per cent and 119 per cent higher in rural areas than in urban areas respectively. Yet the 'People's War' had to wait till 13 February 1996.Why? The pre-1990 single party Panchayat system that worked on the nomination by the monarchy, denied the common people of Nepal a political system of democratic representation. Their demands were stifled and their lives had to be led in subservience to the monarchy.

But the post-1990 successful replacement of the single party Panchayat system with the multi-party democracy through an all-party 'People's movement', firmly established the expectations of a better life and equal opportunities in the minds and hearts of the common citizens as their right, in both the rural and urban areas. This was reflected by the incorporation of these aspirations as the Directive Principles of State policy in the new 1990 constitution. But the instability at the center, the resulting lack of continuity, direction and uniformity in developmental programmes, a lack of political will to undo the grip of the feudalism, comprador and bureaucratic capitalism on the Nepalese economy, economic reforms based on the homogeneous prescriptions of the IMF-WB combine and an inadequate infrastructure to link large parts of Nepal created a worsening developmental divide between the rural and the urban areas.

The Post-1990 revamped political system failed to fulfill the aspirations of a more widespread and increased economic growth and prosperity. The establishment of the '1990' multi-party democracy created aspirations of true democracy, greater economic development and equal opportunities. The failure to meet the same created a political-economic situation where the extreme policy of capturing state power by force, and thereby usher in economic development for all sections, of the Communist Party of Nepal (Maoists) found a strong following, particularly in the rural areas. The inability of the multi-party political system to sustain high growth and productivity in general and, in agriculture in particular, to bring down poverty and inequality, combined with the inflated expectations of better life, saw the emergence of the extreme left as well as their rapid acceptance over rural Nepal and among the poor in urban Nepal in the mid-1990's.

On the launch of the 'People's War', within 3 weeks 5000 actions had been taken in 65 districts out of a total of 75 districts of the country. The major actions were that of painting slogans, distribution of leaflets, torch light processions with a few chosen sabotage and punitive actions destroying and seizing the properties of 'the capatalist-bourgeoise-feudal' forces. The IMF staff report for the 2002 Article IV consultation, says that 'as of November 2001, the Maoists had a presence in 60 out of 75 districts and in many places were the only form of government'. In many districts of Nepal, particularly in the extreme eastern districts, the far- and the mid-west districts, the Maoists are the only form of government with the army/police restricted to the regional head quarters. In February 2002, after the Royal Nepal Army took over the fight with the rebels, one of the bloodiest attacks was launched in Achham district. From April 2002 to today Katmandu has been continuously rocked by bombs, though with minimal casualty for civilian life. The attacks across districts on the army garrisons and police posts have continued unabated.

Economically it has resulted in a catch-22 situation for Nepal's poor. While the Maoist insurgency has certainly emphasized the plight of the poor of the far-flung areas of Nepal to the ruling elites in Katmandu, the latter are in a situation where they can do very little as the control lies very much in the hands of the Maoists. Further either side is not willing to work together. In areas of no complete control, the commoner gets caught in the crossfire between the government and the rebels with detrimental effects on his already adverse economic situation. Further, in areas where the Maoists have a presence, it accelerates an out flow of resources and rural elites with their assets. The Maoist's demands for donations from those making profits have reduced the incentive to produce for profits. This further reduces the economic opportunities for the poor who remain in the area. Implementation of development projects and service delivery have also suffered in these areas as numerous donors have closed down or moved projects to district centers due to increased security risks and Maoist's demand for closure or forced donations.

Though the Maoists have set up a process for development with local involvement in each region under their control, which is indeed a process of development in sharp contrast to the centralized development plans and policy of the Nepalese government, the inadequate capital available due to reasons mentioned in the above paragraph, makes it a development process on a scale that is not large enough to eliminate poverty and usher in substantial development.

Though the IMF and the World Bank are not to be solely blamed for the poverty and inequality that existed or exists, they are to be squarely blamed for the negative impacts of their homogeneous economic 'prescriptions' on poverty and development. The economic prescriptions considered insurgency, inequality and instability as mere irritants, that happened to be there unrelated and by chance. Political-economic relations between inequality, insurgency, instability and economic growth have to be understood before any policy package is prescribed or implemented in Nepal.

Peace in Nepal would require economic growth at a very fast pace with a broad spread of its benefits. At the same time, peace is required for a faster economic growth. Steps towards peace and economic growth, development and welfare for the common Nepalese would depend very much on the unfolding political situation in Nepal. The present offer from the rebels for a ceasefire is a positive step towards peace. But the dismissal of the Prime Minister by the King is a step into the unknown. The common Nepalese has to wait yet again for the recurring political uncertainty to die down before their genuine economic concerns can be taken up.

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