KEEPING WATCH ON THE ECONOMIC PULSE DR. RAM SHARAN MAHAT

Text by Ujeena Rana

Dr. Ram Sharan Mahat was active in politics since early student days. In 1971, he was elected General Secretary of the Nepal Students Union, the largest student organisation affiliated to Nepali Congress. He is recognised as a senior leader of Nepali Congress who has contributed much to the party’s establishment and growth; even during the Panchayat days when political parties were outlawed.

In no easy feat, Dr. Mahat served as the country’s Finance Minister for six times. He is credited with significant improvements in Nepal’s economy during his tenure as Vice Chairman of the National Planning Commission and Finance Minister in the 90s which was marked by introduction of several reforms that established Nepal as a liberal economy with greater role of the private sector in economic activities. He was awarded the Finance Minister of the Year 2016 Global and Asia Pacific by The Bankers magazine of the Financial Times Group London for his contribution in economic reforms and mobilisation of resources for post-earthquake reconstruction in Nepal.

Not many people know but Mahat also served as the Headmaster of a remote school in Lamjung at the mere age of 19. He recalls, “I graduated when I was 17 years old. I went to Lamjung district where I started teaching and later became the Headmaster of a high school when I was 19 years old. A Peace Corps volunteer had visited the school and had taken a picture of me which I was not aware of. I was shown that picture a few years ago in a photo exhibition hosted by the US Embassy on the Peace Corps Day. The US Ambassador gifted me that picture in the program and now I have that picture in my living room.”

Dr. Mahat was also a lecturer in the Economics Department of Tribhuvan University. He joined the UN service in 1980, and served in Kathmandu, New York and Pakistan. After the restoration of democratic politics in Nepal 1990, he left the UNDP to join electoral politics. He is also the first Chairman of Nepal’s University Grants Commission (UGC).

A gold medalist in his college and university life, he did his Masters in Economics from Tribhuvan University in 1972, and received his Ph. D. from Gokhale Institute of Economics and Politics in Pune, India in 1979. Dr. Mahat was also a recipient of US Government's Hubert Humphrey Fellowship 1987/88 and was associated with the School of International Studies of the American University, Washington DC, USA.
He has several publications to his credit including a widely acclaimed book In Defence of Democracy (2005). He writes frequently on contemporary issues of political economy and development. Recently, he has authored and published Trials, Tremors and Hope: The Political Economy of Contemporary Nepal –a chronicle of Nepal’s tumultuous economic journey post 1990s.

Excerpts of an interview with Business 360°:

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You say that Trials, Tremors and Hope is an updated version of your earlier book, In Defense of Democracy published in 2005. What is new?

It is not exactly an updated version but a continuation of the same; in continuum of my previous publication. In Defense of Democracy deals with the past until 2002. The latest book is about the events post-90s. The focus is on new developments; those especially after 1990s. Categorically, the emphasis is on the constitution writing, regime changes, armed insurgency, the peace process, the 2015-earthquake and other trials and tribulations in various fronts of the country’s political economy.

A few takeaways from the book…

The underlying elements of the book are — the developments the country has witnessed after 1990s i.e. post Panchayat era. The reforms of the 90s era and the new millennium especially the cost of the Maoist insurgency, implication of the Maoist insurgency, the peace process and the constitution writing, the earthquake of 2015 and its implications, and other aspects of the economy like the growth of remittance. Likewise, hydropower development, the overall macro economy and sectoral developments are covered in the book.

Besides these, the book also highlights our strategic location between the two major economic powers—a yam between two boulders—as the founder of this country, Prithvi Narayan Shah, mentioned. So, one entire chapter is dedicated to our foreign policy, particularly, with respect to the two emerging economic powerhouses.

You have been Nepal’s Finance Minister six times. How do you perceive the present economic state of the country led by the Nepal Communist Party (NCP)?

In the past, we have made some good achievements because of the economic reforms introduced in the early 90s. The growth rate improved in the 90s. But it got a setback after the onset of Maoist insurgency followed by the political transition and then the earthquake. Particularly, the economic growth rate of the country became laggard. Despite that, the progress we made in the social sector, like in health and poverty alleviation, is very impressive.

The international community has recognised the good progress made by Nepal in the social sector, chiefly, in the field of poverty alleviation and in making progress in social indicators. In fact, the World Bank report of 2017 said that Nepal is the leader in poverty alleviation despite demonstrating sluggishness in growth. Nepal’s growth was less than other neighbouring countries but progress made in poverty alleviation and social indicators were very impressive compared to many other developing countries.

At the moment, the country is in a new political phase under this new Constitution. The political transition is over. The country has entered into a new era of new Constitution which is federal with highly decentralised power at local level. We have multiple governments and huge political superstructures. This poses challenges, problems as well as prospects for us. To take advantage of the country’s resource potential under the new constitution, we have to work hard and make tremendous reforms. We have made some progress in the past years, the growth rate has improved but the growth rate is largely based on the progress made in the services sector which is largely driven by the remittance income and also post-earthquake reconstruction and the rising consumption expenditure.
The wholesale and retail trade has expanded and contributed to economic growth to some extent. But the setback is in the productive sector.

Manufacturing sector’s contribution in the GDP has been very low in recent years compared to what we achieved in the 90s. Earlier, the manufacturing sector was contributing 10% to our GDP. Now, it has come down to 6-7%. At the end of 90s, our export earnings covered about 50% of the import bill. Export import ratio was high. But now it has come down to around 7-8%.

So, the main challenge of the country at the moment is to raise growth rate by accelerated progress in the productive sector for which we have to make the country investment friendly. We should attract more and more private investment. At the same time, the poor efficiency in the public sector investment must be improved. The returns from public sector investment is very low. Incremental capital output ratio in Nepal is very high so the challenge is to raise public sector investment and its efficiency to make it more productive and at the same time, inviting and attracting more and more private investment including FDI which will be a game changer. That is one challenge. The other is because of the huge administrative political superstructure we have with three layers of government; you have to devote more attention in building up institutions at different levels so that they are able to perform their functions entrusted by the constitution.

Currently, the capacity of all layers of the government, in executing the responsibilities mandate entrusted by our constitution, is very low. Under the new political setup, you have to work very hard in improving the implementation capacity for economic growth. Concurrently, it is important to make the new structure functional and sustainable and to contribute to ushering economic growth of the country.

You were a political activist since early student days and have a long history with the Nepali Congress, now as its senior leader. What’s your reading of the current Nepali Congress party?

Right now, there is a general impression that the opposition has not played a substantial role. Despite the very poor performance by the ruling party and various scandals that have been reported, the Nepali Congress has not put on a strong united face to address these issues. In fact, the civil society is seen to be more on the forefront than the opposition party in opposing the wrong actions of the government and the ruling party.

I am not in the parliament. But it’s not that we have kept silent. The reality is that Nepali Congress also has raised issues. But it has to be more effective. It depends largely on the leadership approach and actions. The problem is that the leadership is trying to strengthen its own faction in the party rather than being an effective opposition party. It is the responsibility of the party President in particular and leaders to rise above factional interests. Factionalism and poor management is the main constraint of the Nepali Congress at the moment.

We are trying to stress more on the reforms in the party; to unite the party, rising above factional politics and to be more effective in the parliament and also in public.

What are the key issues as an opposition party that Nepali Congress does not agree with the incumbent government?

The various measures the government is undertaking to curtail democratic rights like the press freedom. Similarly, reducing the authority of the human rights commission, poor performance with regard to transitional justice; these are setback for human rights. The present government is in the middle of multiple scandals, excessive corruption, promoting cronyism and nepotism, and centralising power at the Prime Minister’s office. There are so many scandals that have been reported in the press and at the same time poor governance, political appointments, over-politicised bureaucracy and other organs of government that suffer from the lack of meritocracy. Rather than meritocracy, they appoint people with partisan and personal affiliation in key positions which is not merit based. That is discussed in the last chapter of my book.

The present government has started many projects without proper preparation. Thousands of projects are in disarray. They had been studied well and started in the past but their future is in jeopardy. The new government has stopped implementing them. And they allocate huge amounts of money in projects not well studied and without any preparation. Huge amount of money has been squandered in unproductive sectors; more on consumption, on personal perks and privileges rather than in capital investment. Capital investment by the government is very poor. The efficiency of the capital investment is also very poor and they are spending more money in the recurrent expenditure of unproductive and consumptive sectors.

We hear a lot about private investments and FDI but has that been translated into reality?

They say that this year there is more private investment commitment. But we have to see the actual action. Development of just a few months is no indication. It must go in a sustainable way. Last two years, FDI had been very low. This year, they say there has been some improvements. If this goes in a sustained way, that will be welcome.

How do you see socialism being played out in the present context?

Since socialism is interpreted in different ways by different people; they say it is a maelstrom. From communist rulers to Western thinkers, military dictators and third country leaders, they all talk about socialism and define it in different ways. But the essence of socialism is social justice, upgradation of the living condition of the poor people, reducing poverty, upgrading the living condition of the underclass, eliminating exploitation and reducing disparity. These are the essential aspects of socialist thinking.

Generally, there are two versions of socialism: 1. The communist version of socialism based on class struggle. Marx interpreted socialism as the outcome of class struggle. 2. The democrats say socialist goal can be achieved through constitutional means, through democratic means.

When there are democratic institutions, universal franchise, then naturally any government elected by the people in general will have to work for the people. So, you achieve socialist goals through democratic means; not through class struggle. Our Constitution also has socialist goals but it will be met through periodic election, plural and competitive politics, independent judiciary, fundamental rights, and press freedom. These are all democratic means. The country has accepted democratic socialism to achieve socialist goals through democratic means. Even the communists in Nepal whose philosophy was class struggle as propounded by Karl Marx, have now accepted democratic means to achieve socialist goals.

But what is the ground reality?

Since 1990s when Nepali Congress was in power, whatever socialist measures we undertook in reducing poverty in rural areas were through democratic means. Democratic path means through policy and legislative measures of democratically elected government. Also by promoting economic freedom, opening up the economy for private investment as the reality of the present world is that socialism in the classical form has lost its hold. Similarly, there is no capitalism of the classical sense in the modern world. Capitalism which had a dirty and exploitative face in the past has undergone much transformation under democratic institutions. Even capitalistic economies are now giving emphasis on social justice, welfare society, development of the underclass. This has been the emphasis in the Western countries also. Even in a capitalist country like the US, there are leaders who call themselves social democrats like Bernie Sanders and Elizabeth Warren.

The state-controlled socialism and socialisation of the means of production as defined by classical Marxist theory is outdated. State-centric economic policy is outdated. To raise income, to promote economic growth, you have to encourage entrepreneurship, creativity and for that you have to have liberal policy, opening up the economy to attract private investment which will contribute to economic growth that will promote economic opportunities and contribute to the government’s revenue. When the latter happens that can be spent on the welfare of the poor people, for the development of the backward areas, and on socialist goals. Therefore modern day socialism is through fiscal redistribution and not through class struggle.

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According to a report released by World Bank, Nepali migrants sent home $8.1 billion in 2018 making it the 19th biggest beneficiary of funds sent by migrants around the world. What are your thoughts on the growing dependency on remittance?

You have to create conditions in the country, attract investments so that people get employment opportunities. At the same time, you have to improve the country’s work culture and work discipline. Nepali youth often prefer working in other countries rather than working in Nepal because manual work is often neglected and does not get much social respect in our country. Manual work and labour class need to be honoured. We have to improve our value system. People prefer to go to many Middle East countries and Malaysia for working hard. If they spend the same amount of labour in Nepal, they can earn even more. Many Nepalis who have spent years abroad, after coming back started their own entrepreneurial ventures and are reportedly earning much more.

So work culture needs to be improved, creativity needs to be promoted. Entrepreneurship, hard work and innovation needs to be recognised. We need to create appropriate atmosphere in the country to encourage hard work, creativity, entrepreneurship and innovation to promote economic and employment opportunities in the country reducing dependence on migrant manpower and remittance inflow.

You talk about Nepal’s geopolitics in the book. How can Nepal play out its geographical situatedness with all the changes in the political climate in the world and with our neighboring countries?

We have to take advantage of the two emerging superpowers. They are big markets. We have to develop our competitiveness; we have to be more competitive so that we can produce goods which can go in the markets of the two big economies. That is a big opportunity for us but to capitalise on that opportunity, we have to improve our competitive advantage by improving productivity. In fact, the productivity of Nepal is the lowest in South Asia. It has to be improved.

The main challenge is to create an appropriate, conducive, attractive investment climate by focusing more on infrastructure improvement which is the biggest constraint to attracting investment in Nepal right now.
Infrastructure, construction management in Nepal is very poor—particularly in public investment. There is a huge cost overrun, time overrun and quality of infrastructure is very poor. There should be improvement in governance to make the nation more investment friendly. While choosing infrastructure projects, there must be proper prioritation and sequencing.

Presently, the focus of the government is more on high flying transport projects like train connection with China and India. These are long term propositions. The immediate need is to improve the road and airport infrastructure. Railway connection is a long term proposition. The basic thing is you have to have road connection throughout the country and improve the highways. Immediate priority should be the highway projects. If road and highways are not sufficient to meet the market demands, then you need to look into railways also with proper techno-economic appraisal with long-term sustainability.

The main problem that you state you see in the present federal set-up is the quality of governance. Can you elaborate?

The main problem in the governance is to do with institutional building under the present Constitution. We have an ambitious political structure but to make that functional and efficient, to manage that properly is a big challenge for which you need to work very hard, you have to create institutions, build-up their capacity, to empower them with not just the authority but also the capacity to enforce the constitutional provisions and perform their role.

Your comments on the intermittent problem of Liquidity Crunch faced by the banking sector.

The government is borrowing heavily from the banking sector and the public at present, but not expending in proper uses. The surplus fund is largely deposited in the Central Bank. that is also one reason why there will be liquidity crisis in Nepal. Furthermore, liquidity in the banking system also depends on demand and supply factors.

The country is divided in its views of MCC. What are our views?

The opposition to MCC seems to be driven by political prejudice and misinterpretation of the whole project. MCC grant in Nepal is planned for very constructive projects for Nepal’s development. There is no reason to oppose it. It is for Nepal’s benefit. It is a liberal grant of half a billion dollars by the US government for projects chosen by us.

Based on the universally accepted criteria, the MCC is a global scheme started by the US in 2004 in response to the UN Office for Millennium Development Goals. Towards achieving Millennium Development Goals, United States created MCC to help low-income countries which meet the criteria. The criteria include democratically elected government and institutions, human and civil rights favorable investment climate, anti-corruption policy and measures and at the same time, investing more on people, social sector with right economic policy with democratic institutions.

There are about 20 criteria for which Nepal was also clarified. Based on the competitive selection, Nepal is one of around 50 countries eligible for MCC benefitting from it. It was, in fact, during my time as a Finance Minister that Nepal became eligible for COMPACT agreement and we created MCC office in Nepal to select projects and to study projects by Nepalis themselves. The energy and road projects under the scheme were chosen, selected and developed by our expert team for which the US government is committed to a huge amount of grant money without particular US interest under favorable conditions. But some people are misinterpreting it as part of US military alliance which is totally baseless.

Some people are confusing it with Indo-Pacific Strategy of USA. Even if some people say so, the strategy has many components. The economic component of Indo-Pacific Strategy is the upliftment of the people, peace, prosperity and safety of independent and sovereign nations in Asia and Pacific. If that is so, then there is nothing to be opposed. And at the same time, what we are committed to is what we have signed in MCC and there is nothing in the MCC agreement which is related to defense, military alliance or anything like that. Therefore, it is partly confusion and partly ignorance that has led to hard criticism on this assistance. Apparently, lack of knowledge and political prejudice is responsible for some opposition that we hear from some politicians.