The spread of democracy and globalization has nudged political diplomacy towards economic diplomacy. Before the late 1970s, South Asia was one of the most highly regulated economies outside the communist bloc.
Sri Lanka was the first to liberalize its economy (1977), followed by Bangladesh (1980), Nepal (1986), Pakistan (1989) and India (1991). Roughly, diplomacy that pursues national economic interests in other countries is defined as economic diplomacy. It is associated with trade, business, market and investment promoted through political diplomacy. [break]
Economic diplomacy highlights how states conduct economic relations with other countries by using their political influence and promoting trade and investment to find a foreign market for its products and services.
There is growing realization that economic relationships have a strong impact on political diplomacy. The end of Cold War, democracy and development are products of economic diplomacy. For instance, many Eastern European states joined the European Union in 1990s to fulfill the larger economic interest of Europe.
Economic diplomacy functions at three levels: i) Bilateral, ii) Regional and iii) Multilateral.
Bilateral economic diplomacy concerns economic relations between two countries. It includes bilateral trade and treaties, agreements on investment and employment, avoidance of double taxation and range of formal and informal economic issues between any two countries. Bilateral Free Trade Agreements (FTA) have been the order of the day, being pursued by many countries in the world.
A land-locked country, Nepal’s bilateral trade agreements with India and China are of paramount importance. Of course, while talking about bilateral relations, Nepal should always be aware of its geographic reality, national interest, socio-cultural settings and economic dimension.
Regional cooperation is of growing importance in economic diplomacy. National interest and economic liberalization is more easily accepted when pursued within a particular region. Also, opening of borders and markets is easier within a regional framework. For example, ASEAN, South Asian Free Trade Agreement (SAFTA), European Commission, Canada-USA-Mexico have crafted business models at the regional level, based on their economic requirements and geographic set-up.
Multilateral economic diplomacy takes place within the framework of World Trade Organization (WTO), World Bank, International Monetary Fund (IMF), UN agencies, et al. With the establishment of WTO, there has been a policy shift in global trading system towards economic activities. However, there is the challenge of sustaining competitiveness at multilateral and bilateral trade agreements. Nepal, so far, has not been influential on issues of aid, trade and FDI in multilateral forums, such as the World Bank, IMF, WTO and UN agencies due to its poor negotiation capacity.
For Nepal, economic diplomacy is not a new phenomenon. In 18th and 19th centuries, Nepal had already established business ties and effective trade systems with Tibet and British India. This was a part of strategic alliance and based on economic interest rather than political calculations. With the advent of democracy, however, political agenda took the center stage, and economic affairs didn’t get the needed priority in government plans.
Foreign policy needs a strong and broad national consensus, as it pertains to national interest and sovereignty. Nepal’s foreign policy is guided by the Charter of the United Nations, the principles of Panchasheel based on co-existence, non-interference, respect for sovereignty of its neighbors and solidarity with other small, least developed and land-locked developing countries.
The success of political diplomacy is a reflection of economic dimension. Today, Nepal does not pursue coherent economic diplomacy and economic affairs are handled on an ad hoc basis. This has to change.
In the year 2000, the first consultation meeting was organized by the Ministry of Commerce and Industry to emphasize the need of economic diplomacy. The purpose of this consultation was to provide an economic hat to political diplomats and to work for broader economic interest by increasing trade and attracting foreign investment. It was attended by Nepali Ambassadors, Honorary Consul-Generals/Consuls from 35 countries, government officials and business community. It resulted in increased foreign investment for a few years, but the initiative couldn’t be sustained due to lack of interest from successive governments.
In 2008, there was another attempt to leverage political diplomacy towards economic goals by attracting foreign investment and expanding foreign employment. Again, due to the global economic crisis Nepal could not gain much from this consultation. There was, however, growing interest to manage foreign employment better and look for new destination countries. Officially, foreign remittance now contributes more than 24 percent to Nepal’s gross domestic product (GDP). This figure might go up to 33 percent if remittance coming from India and informal channels are factored in.
The focus of Nepali diplomacy has to shift from mere political relations and foreign aid to increasing trade, tourism, investment, joint ventures and foreign employment generation. The income through the UN Peace Keeping missions is significant and it needs to be registered in government records. The role of the private sector could be significant if it could be made a part of decision-making and negotiations at global, regional and bilateral levels.
Though Nepal’s economic growth increased in the aftermath of the first Janaandolan (1990), it went down precipitously during the decade-long civil conflict and the subsequent transition. Political affairs were given high priority by the government as well as political leaders and economic issues were overshadowed.
The good news is that the current election government has adopted economic diplomacy as its primary foreign relation focus. The government has doubled the amount of budget for economic diplomacy. Unfortunately, the environment is not conducive to attract FDI, as the country continues to reel under prolonged transition and pervasive political uncertainty. Bilateral and multilateral development partners as well as foreign investors will not come up with big assistance package until the election of the second Constituent Assembly is completed and a stable political government formed.
In the present context, Nepal should consider implementing economic diplomacy in the following manner:
1. At the national level, the government should continue to engage Nepal Economic Forum (NEF) to coordinate and attract FDI and to increase bilateral and multilateral development assistance. This Forum could be co-chaired by Minister for Finance and Minister for Foreign Affairs with participation of concerned ministries, semi-government agencies, bilateral and multilateral development partners and representative private sector organizations.
2. At the diplomatic level, the government should establish a Department of Economic Affairs within the Ministry of Foreign Affairs to coordinate business and economic activities in foreign countries. The vital role of private sector in promoting economic activities abroad should be recognized, while MoFA and Nepali Embassies act as ‘Facilitators’.
3. Economic diplomacy is best carried out through public-private partnership forum. Economic issues should come in the forefront of people’s daily affairs, rather than politics. Business leaders must advocate for Nepal’s long-term economic interest before looking to secure short-term vested interest of political parties and leaders.
4. According to the World Bank, foreign remittance is better than FDI if it is used in productive activities. Foreign remittance has so far helped the government improve its foreign currency reserve and balance of payment, reduce poverty level, increase domestic consumption and investment, to some extent, in education and health. It is high time to use foreign remittance for saving and productive development projects. The collective investment funds, initiated by NRNs, can improve the country’s economy by pumping money into productive and development activities.
5. The government does not have enough resources to deploy Economic Counselors in Nepali missions abroad. This is where NRNs can support Nepali Missions by offering their expertise, knowledge, local contacts and language skills.
6. NRNs can also work together with Nepali Business Associations to explore markets for Nepali products abroad and to organize ‘Trade Fairs’ in foreign countries. The collaboration between NTB and NRNs to campaign for Nepal Tourism Year-2011 was a good example of this.
Economic diplomacy of Nepal should go beyond political relations in order to pave the way for a prosperous and developed Nepal in the next 10-15 years.
The author is the Founder of the NRN Movement
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