Top of the World

Nepal

Isolated and undeveloped, Nepal relies heavily on the tourist appeal of its Buddhist heritage and stunning views of the Himalayas. (Photo credit: keso)

While India’s economy falters amid staggering blackouts, its neighbor to the north offers a potential godsend—provided it can turn years of false starts into solid development.

Landlocked atop the Himalayas and bordered by two of the most rapidly developing economies in the world, Nepal’s rather precarious situation should be obvious enough. Without the capital to industrialize and thus the industry to modernize, the country remains a backwater. Survival against encroaching powers meant the Nepali were forced to play one side against another, shirking the control of China and India, and later Britain, in an attempt to retain some measure of independence.

While the strategy was effective to a certain extent, it made for poor economic policy; Nepal emerged from the colonial era free but impoverished, its ability to compete with the industrialized world virtually nonexistent. Little has changed since, and newer wounds are largely self-inflicted.

Though the country has sizable natural reserves — largely of quartz, timber, and various metals — political instability has made it impossible to attract the foreign investment necessary to carry them to market. Simmering tension between traditional royalists and pro-China Maoists erupted into civil war in 1996, shuttering Nepal’s vital tourist industry and stalling its economy.

The conflict raged for ten years, ending only with the abolition of the monarchy in 2006, but foreigners have been slow to return. What infrastructure wasn’t destroyed in the fighting is collapsing and centered on Kathmandu, rarely extending into the resource-laden mountains. Any multinational looking to turn a profit in Nepal would first need to sink the significant infrastructure costs themselves.

Crippling as the civil war’s physical damage is, its more nuanced fallout may be of greater consequence. The country has long relied on trade routes through the Himalayas to the Indian coast for its connection to world markets. The Chinese absorption of Tibet has moved the battle for influence to Nepal, and the current Maoist leadership installed there has shifted increasingly away from New Delhi toward Beijing. Spurning a centuries-old alliance for ideology, however, could prove disastrous. India is by far Nepal’s largest trading partner, accounting for over half its import/export share to China’s scant 27%.  What’s more, the two nations may prove capable of resuscitating their shared (and faltering) economic outlook.

Growth in India has declined sharply of late, and the global recession is not entirely to blame. Unlike neighboring China (and arguably due to its democratic rather than authoritarian regime), India has been unable to acquire and allocate vital resources to feed its surging business sector. Summer electric demand has resulted in several crippling blackouts, darkening skyscrapers, stalling trains, and closing mines from New Delhi to Kolkata.

For reference,  Tuesdays blackout covered 20 of India’s 28 states and plunged 620 million — twice the population of the United States — into darkness during the middle of the workday. There are other serious troubles, of course, but the Indian electricity problem is systemic, with yearly shortages reaching 10% of demand. That number will only climb as new factories and research laboratories are brought online.

A developed Nepal may provide the answer. Conservative estimates put its hydroelectric potential at over 43,000 megawatts of which only 1-2% is currently tapped, offering a godsend to the south and an economic boom in the north. Such a scheme would require significant structural adjustment in Kathmandu, however. Strangling and competing regulatory bodies would need to be dismantled or reorganized and the sprawling agricultural sector, employing roughly 3/4 of the national workforce, would need to be reigned in and retooled. Most importantly, royalist holdouts and overzealous Maoists would both need to temper their ambitions to assuage the fears of foreign investors and placate a wary India.

So far, things seem to be on the right track. Mount Everest and other Himalayan peaks are again drawing tourists to Nepal and the country showed consistent growth (3-5% between 2009 and 2011) while the West languished in recession. The new regime, despite its communist aspirations, has acted responsibly enough. A crushing debt burden remains problematic, a consequence of yearly autocratic spending sprees by populist monarchs, but increased development assistance from its neighbors helps to offset it. And since 2004, membership in the World Trade Organization has bolstered fledgling Nepali industries.

Things are looking up in Kathmandu, their resurgent (though relatively minor) political issues aside. China this year concluded a $1.2 billion deal to construct a new 750-megawatt hydroelectric dam in the country’s northwest. The People’s Republic will maintain a 75% stake in the new facility to Nepal’s 25%, but it sends a vital message that foreign investment in the nation’s energy sector is a safe bet.

Leveraging its already-favorable water treaties, India will likely pursue a deal for a dam on its own border in short order. Having suffered two nationwide blackouts in less than a week, they can’t wait much longer. For Nepal, that demand can’t come soon enough. There’s been trouble at the top of the world for some time, but with any luck, soaring new heights are on the horizon.

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