Reagan-Fascell Fellow Speaks at NED on Economic Reform in Nepal
By Jane Clark
February 1, 2008 | Printer Friendly

Prem Khanal, a Reagan-Fascell Democracy Fellow at the National Endowment for Democracy, gave a presentation on February 1, 2008 titled “Political Resistance to Economic Reform in Nepal: Conflict and Consequences for Democracy.”  Khanal is an economist by training and is chief of the business bureau at the Kathmandu Post.  He has written over 250 articles on politics, business, corruption, and economic reform in Nepal.

In recent years, the government in Nepal has been trying to strengthen their struggling economy through a number of reforms.  Despite their efforts, there has been significant resistance to these reforms, which has serious implications for democracy in the country.  Khanal identified four factors contributing to the resistance: the financial sector, labor law, governance reform, and public expenditures.  The financial sector poses the most significant threat.  For years the government has been struggling with business owners who are willfully defaulting on their bank loans and amassing a great deal of wealth.  The government has not held them accountable, because the defaulters bribe politicians, bureaucrats, and even civil servants in order to protect themselves.  Because of the huge outstanding debt within the country, the government is heavily reliant on the support of international financial organizations like the World Bank and International Monetary Fund (IMF) to loan them money to save the banks.  Additionally, the poor citizens of the country have been left with the burden of paying the cost of outstanding loans.

Strict labor laws in Nepal are also problematic.  The regulations that the government has passed to protect workers ultimately have caused huge problems.  One law states that after nine months, any employee in a business that has at least ten workers is entitled to a permanent position.  Additionally, unions have become the arm of political parties, so the parties have to be involved in any attempts to resolve internal disputes.  Because of these policies, businesses look for ways around them in order to remain competitive.  They do not provide contracts, they hire foreign workers, they fire employees before they reach the nine month mark, and they are unwilling to expand production. 

Government reform has been difficult to achieve because of financial and political barriers and the Maoist insurgency.  Limited resources have prevented local governments from launching their own development activities.  There has also been an absence of political will, commitment, and real support for decentralization, even though everyone agrees that it is a step that must be taken to maintain a strong democracy.  The central government still sees local bodies as subordinates instead of independent bodies.  Because of the Maoist insurgency, local bodies have been prevented from electing representatives.  Since local bodies tend to drive the idea of decentralization, with their absence, there is no one to talk about the issue.  Since these local bodies have failed to bring about change, many citizens have lost their faith in government.

Finally, public expenditures have been highly ineffective.  Investments have not had significant returns; the government still spends a huge amount of money on security, despite the restoration of peace; and there has not been enough spending on health care and education, which has caused a huge increase in the dependence of foreign aid.

The consequence of all these failures is that the citizens have developed a deep seated anger towards the democratic system.  They see the democratic government as having failed to deliver what it promised.  The Maoist’s have capitalized on this anger and distrust, and they have inspired youth from the country to take up arms to topple the democratic system and form a communist state.

Khanal believes that the way to overcome the resistance to change in the country is to educate people, so they will know what is lost without the reforms.  He argues that civil society and the citizens in the country must become involved in the process in order to create grassroots pressure on the government and businesses.  He also believes that the media can be used as a very effective tool, since Nepal has a strong independent news source that broadcasts in local languages and involves local people in its programs.  One final thing he noted was that many people in Nepal are questioning why the government is taking so much money from international financial organizations, like the World Bank and IMF, in order to cover up the problems caused by the faulty loan system within the country.  It is important for these international institutions to involve the people in the conversation and ask them questions about their demands, because reforms will never be sustainable without participation and support from the people.   

For more information on Nepal:

CIA World Fact Book: Nepal

World Bank Country Brief: Nepal

State Department: Nepal