But, at a broader level, this points to a stifling constraint on economic policymaking that Nepal faces courtesy of another policy: Maintaining an open border with a country 41 times bigger than itself. One cannot ascribe the smuggling out of goods paid for by hard-earned hard currency solely to the simple economics of demand and supply, or corruption. People can freely cross the border with gold bars in their pockets. There aren’t many places in the world where you can do that. The open border policy sanctions smuggling and, worse, erodes the state’s power to govern.
FALLOUT
The actual magnitude of waste of precious convertible currency may be more than what gold, silver or betel nut imports suggest, if policymakers were only to condescend to tally other burgeoning imports with domestic demand and compare our relevant tariff rates with those of India.
There have been suggestions that aligning our tariffs with India’s would be the end of the problem. That means saying sayonara to tariff policy independence as a matter of policy. The commodity in question may not always be items that deserve to be taxed at the higher rate prevailing across the border. What if the product is something the domestic economy needs at as low a price as possible? The tariff parity suggestion also wrongly assumes that the structure and needs of Nepal’s economy are the same as those of India.
Subsidy policy is no exception to open border-induced policy frustration. Consider the case of the pricing of petroleum products. Petrol and kerosene prices have been decontrolled since the last few years, enabling the state-owned monopolist Nepal Oil Corporation to earn a profit on both. Meanwhile, India continues to subsidize kerosene, the poor man’s fuel, by as much as 60 percent. While the cash-strapped exchequer is the primary reason the subsidy on kerosene could not be sustained, the open border that facilitates outward smuggling of subsidized fuel in the presence of price differential crucially sets a ceiling on the extent to which the Nepali state can subsidize fuel for its poor citizens.
Rampant smuggling of goods into Nepal through the open border likewise hurts the nation in multiple ways. Not only does the state lose its revenue from its most important source, domestic producers and industry suffer too. Consumers theoretically stand to benefit from lower prices, but with the dangerous flipside of increased possibility of being supplied with substandard products (e.g., fertilizer). Coping with a health emergency like a bird flu outbreak becomes a nightmare as illegal imports of fowls frustrate the state’s response measures.
Monetary policy is also pushed into impotency. Open-economy macroeconomics considers it impossible to simultaneously maintain a fixed exchange rate, allow complete capital mobility and have monetary policy independence—the so-called unholy trinity. If you want a fixed exchange rate (which Nepal has with the Indian currency and few have suggested going for full flexibility), you have to sacrifice either one of the latter two. Nepal Rastra Bank mandarins do not pretend that their monetary policy is lame; they ritually target inflation in the annual monetary policy. So it follows that capital mobility has to be reined in. Officially, we do not have capital account convertibility and Nepali citizens are prohibited from investing abroad. But then the open border gives a tinker’s darn to the official and the legal. It abets capital flight.
SECURITY COST
All this pales into insignificance when one considers the security cost of having an open border. Marauding bands of dacoits have long excelled in slipping into and out of the country with ease, looting and murdering villagers with impunity. Crime rate has increased dramatically in the Tarai in the last several years. The proliferation of armed groups in the Tarai would not have been possible without the open border. It is the ordinary Tarai folks whose cultural affinity with people on the other side is speciously invoked to defend the open border—recall the “roti-beti-relationship” one-liner—that are bearing the painful consequences day in and day out, not the well-heeled pontificating from the relative security of Kathmandu. That the perpetrators of not a single high-profile killing has been nabbed is telling as much about the security cost of an open border as about the (in)capability of our law enforcement agencies.
The cost of an open border has been multiplicative: Open border, backed by the 1950 treaty, aiding inward migration from the other side; political expediency causing relaxation of citizenship rules in favor of foreigners; and criminals from south of the border acquiring citizenship and further exploiting the open border to unleash a reign of terror in the Tarai. The distinction between internal and external security is rendered irrelevant. What do you call a seemingly “domestic” insurgency or political movement that exploits the open border as a matter of operational policy, with support from assorted elements on the other side? Just an internal security threat?
Some extol the vast employment opportunities in Muglan for Nepali youths escaping hunger and deprivation. Benefits, whatever they are worth, flow both ways.
While almost every worthy making that argument seems to have a ready “conservative” estimate of the number of Nepalis working in Muglan, few talk about the number of Indians, from construction workers to carpenters and tailors to top business executives, who flood the Nepali market. Granted, without a study one cannot estimate the net benefits accruing to Nepal. But that only stresses the pressing need for a credible survey to estimate the size of the alien population and its employment activities. And that is bound to raise hackles in some quarters—ironically, more on this side of the border than over there. If history is any guide, it is wishful thinking for such a study to be carried out today. One has to only recall the panic triggered by the 1983 Harka Gurung Migration Report on the other side, as well as the sharp reaction, including from domestic actors, drawn by the attempt to introduce a work permit system in Kathmandu valley in 1987. Does all this smack of “ultra-nationalism” (whatever that means)? Well, in that case, almost all countries in the world seem to be afflicted with it. Even putative paragons of democracy and ardent advocates of free trade are extremely wary of throwing open their borders to foreign workers on a variety of grounds, economic and non-economic.
CRUSHING TRANSIT
There is some strength in a geography-based argument as to why the border remains unregulated despite the cost. Under international convention, a landlocked country has the right of transit passage to the sea through its coastal neighbor. At the operational level, much hinges on the discretion of the neighbor. Resource constraint and real politik often render fighting out a protracted legal battle in an ambiguous legal regime impractical. Nepal’s history of never being colonized and its people’s congenital aversion to being a protectorate imply a permanent, political price (read open border) for a necessity (read transit) born of its truncated geography.
In another era, the few leaders who firmly imprinted Nepal’s identity as an independent nation state in the global arena must have toyed with the idea of fencing and regulating the border, only to be hit by the crushing reality of landlockedness. The message that there is no free ride, that the price of transit has to be paid, must have been driven home from time to time, sometimes dramatically, in the form of a blockade. Perhaps there was an undeclared modus vivendi: Conceding some policy space through an open border, yet preserving overall policy independence, including in the all-important foreign affairs, critical for a nation state.
Still, Indian media reports and analyses now and then feature complaints about elements bent on hurting India abusing the open border that represents the “age-old, historic, unique…” relationship between the two countries. If the security concern is genuine, why not fence and regulate the border with identity cards to begin with? Good fences make good neighbors.
kharelparas@yahoo.com
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