Strengthening infrastructure governance in Nepal

The need for huge investment to reduce the infrastructure deficit in Nepal is well-known. ‘Infrastructure financing’ has become a dominant narrative in country’s development agenda as the country is takes a gamut of initiatives to mobilise scarce domestic and international resources. However, discussions around the potential savings that could arise from more efficient practices in infrastructure project building and delivery are almost non-existent. This article aims at kick-starting a debate by arguing that improving operational efficiencies in the project selection and management alone can save millions of dollars while improving the quality of infrastructure and shortening project timelines.

The World Bank (2014) estimates that Nepal needs to invest as much as 12 percent of GDP in infrastructure, just to maintain the current rate of GDP growth. This level of investment, which is highest in the South Asian region, shows the massive infrastructure gap. To its credit, the Government of Nepal is taking multifaceted approaches to fulfil the demand. The most prominent among these are formulating the Public Private Partnership (PPP) Policy in 2015 as well as drafting of PPP Act, reforming tax laws, and more recently co-organising theNepal Infrastructure summit, and Nepal Investment Summitsimultaneously in 2017. These measures are imperative to bring foreign and domestic infrastructure investment into the country.

However, much of the development narrative focuses on the financing aspect infrastructure building. The amount of investment has become the sole metric to evaluate the infrastructure development while public discussion on the quality of such development is very limited. In fact, the governance of infrastructure development is largely overlooked. Questions around infrastructure selection and prioritisation criterion, evidence-based project planning, and streamlining project building and operations etc. are not explored.  As a result, we are missing opportunities to make most out of our limited resources.

We need a holistic infrastructure governance framework. In this regards, the recently published report on ‘Infrastructure Finance Strategies for Sustainable Development in Nepal’ (available in the National Planning Commission website), an in-depth study of infrastructure financing strategies for sustainable development, authored by Ashutosh M Dixith as identified three potential sources of public expenditure efficiencies. They highlight robust ways to reduce the cost involved in infrastructure projects and improve overall infrastructure governance. The report draws insights from a study published by McKinsey and Company, which reveals globally successful practices of increasing infrastructure productivity.

The first stepping stone of sound infrastructure governance is to improve project prioritisation in order to optimise the infrastructure portfolio. Reports have shown that eliminating poor performing contracts and selection of improved alternatives could save up to 15-35 per cent of new capital spending. In Nepal’s case, even if the country saves 10 percent of capital expenditure, which amounts to NRS 8 billion, the amount would provide sufficient cushioning to finance large scale infrastructure projects.

Achieving these efficient outcomes demands three key components: 1) identify projects with clear purpose, 2) evaluate projects using improved cost-benefit analysis, and 3) prioritise projects at portfolio level.The government must select projects with clear purpose based on socio-economic priorities. Also, while evaluating the projects, metrics must consider long-term economic, social and environmental effects. It is better to select and prioritise the projects by conducting a cost-benefit analysis which includes social factors such as time saved by commuters, or reducing mortalities, injuries, and noise. The results should then be validated by cross referencing with similar past projects. The infrastructure prioritisation framework recently developed by the World Bank can help improve the infrastructure planning and decision-making process by incorporating financial, economic, social and political factors into project prioritisation. Finally, there should be a system to check project performance relative to predictions. The report also advises there should be a strong database to aid decision making, for which the study recommends maintenance of infrastructure balance sheet

In Nepal, important infrastructure projects have been suffering from implementation delays. For instance, 13 years after the government agreed to the construction, the Melamchi Drinking Project is still work in progress. Upon completion it will supposedly distribute 400 million litres of water daily – a figure which is often questioned. The project started with public private and donor partnership has suffered significant delays and escalating administrative and operational costs. The McKinsey and Company study highlights that to save government has to adopt sophisticated procurement, and streamline permit approvals and land acquisition to reduce bottlenecks.

The third is better utilisation of existing infrastructure assets. This is important given Nepal’s limited ability to mobilise domestic resources for infrastructure. Adding more roads, constructing hydropower dams and fitting pipelines will not resolve problems if the existing infrastructure is not properly maintained. Nepal should move away from the build, neglect, and rebuild mentality and implement adequate an infrastructure management system together with appropriate financing framework. We should take smart infrastructure utilisation management approach. Take the elimination of power cuts for example a recent success in this area. Nepal used to experience up to 11 hours of load shedding, but now the country enjoys almost 24 hours’ electricity supply which in the real sense is the result of better utilisation and demand management of existing infrastructure. On contrary, the valley road expansion project has proved poor value for money as traffic congestion has not reduced. Instead, the deployment of information technology in establishing intelligent transport system (ITS) for roads would enable the utilisation of the existing road capacity to double or even triple.

Moreover, the opportunity by making most of the infrastructure assets like power and water systems lies in reducing non-technical losses such as electricity leakage and distribution losses. In Nepal, electricity leakage was 25 percent in 2016, the 4thhighest leakage rate in the world. On the other side, in water supply system, non-revenue water, unmetered supplies, stands at 18 percent. This avenue is worth taking seriously as reducing the losses can cost significantly less than what it cost to build a utility infrastructure project.

The above discussion amply suggests an urgent need to have a national level infrastructure governance framework. Such framework would not only help in effective utilisation of the already constraint resources, but also create conducive environment for private investment in infrastructure both domestic and foreign. The efficiency would not only generate much needed saving, and ensure the timely completion of the project, but also send positive message to the investors.

( This article was co-written with Ashutosh Mani Dixit and first published in LSE South Asia Blog here. Image credit: Axel Drainville CC BY-NC 2.0) 

No turning back: why Nepal’s upcoming local elections matters more than ever?

On 14 May, Nepalis will go to elections for newly-delineated local (village and municipal) governments. These comprise one of three constitutionally-mandated elections to be completed by January 2018. At the time they were announced, the news of elections at the local level brought mixed reactions from those who wish for some sign of progress in a country mired in protracted political conflict, to those who want their needs and interests addressed before elections can take place.

The local elections will be a significant step towards implementation of a new constitution that mandates a restructured nation-state reflecting for the first time in Nepal’s history a federal, secular republic with a plural political order and inclusive social character. If successfully concluded, the elections will instill confidence and ownership of the constitution in the general public and rebuild trust in the country’s choice of system of political representation. Additionally, successful local elections would ease the path for the two following elections to provincial and national government. Thus, local elections are closely linked with institutionalisation of the new constitution.

The election will also fill a longstanding political void at the local level. Local elections are being held after a long gap of 19 yearsand for only the third time since the advent of multiparty democracy in 1990. For almost two decades there has been an absence of elected officials at the village level and a palpable lack of local representation of concerns, interests, and needs in the country’s public policy and administration.

In the 1990s, the government tried to bridge the ever-widening gap between the state and citizens by promulgating the Local Self-Governance Act which attempted to give more autonomy to local governments. However, resource and capacity constraints at the local level combined with the decade-long conflict significantly limited positive effects of the well-intended Act. Most tragically during this period, elected local governments were dismissed and civil servants authorised to assume administrative as well as developmental functions. Combined with a provision of the interim constitution that required political consensus in government, these civil servants worked on behalf of all-party mechanisms that fuelled syndicate-like behaviour at the local level. The experiment was a governance disaster: the collusive tendencies among political parties, with no oppositions and the lack of accountability checks and balances, had a detrimental effect on local-level democracy and state efficiency. Such arrangements not only formalised local corruption in Nepal but also undermined the formal procedures of governance and institutionalised nepotism, lack of transparency, and informal decision making.

By returning to participatory governance next month’s local elections could halt and possibly reverse the downward spiral in local government mismanagement, culture of impunity, organised corruption, and citizen exclusion from decision making process that we have witnessed in the past 15 years.

Local elections would be a crucial step in addressing political marginalisation and point the way to truly participatory democracy and inclusive development. For example, the constitution mandates each political party to nominate at least one woman for head or deputy head position in the election. This should promote women’s participation in public life from the grassroots upwards – even though the most recent constitution amendment proposal to remove local elected representatives from the national electoral college significantly jeopardises that outcome.

Sweeping changes are probably coming to the country’s socio-political foundations that have survived for many years. The transition to a new structure will present opportunities and challenges at all levels of governance and society. At the national and regional level, there will inevitably be uncertainty and conflict between different levels of government as the transition takes place. At the local level, the transition will present opportunities to engage local communities in governance, but will also suffer from uncertainties that might cause confusion, conflict, and unrest at the local level. The resolution of conflict at these various levels will be important for the success of the transition in leading to improved governance at the sub-national level.

Rising dissent and grievances related to state restructuring in Nepal reflect both popular anxiety with the political process as well as the lack of facilitated dialogue to discuss and resolve emergent issues. Rather than descending into easy condemnation of transitional politics thus far and adopting tired positions staked by the venal political elite, the Nepali public have a real chance to take back the body politic and exercise their citizenship.

Whether from the hills or the plains, from the east or west, Nepalis can and should seek leadership of their own neighbourhoods and communities. That is a position of strength that matters most in a democracy. And they will be on the right side of history.

( This article was co-authored with George Varughese, the Country Director of the Asia Foundation and first published in 14-10 April, 2017 issue of NepaliTimes here.)

If India wants a meaningful place in the Asian Century it must act big and act now

The twenty-first century is widely referred to as ’the Asian Century’. Less obvious, however, is the place for India in the economically resurgent Asia. Can India be harness its demographic and democratic dividends to drive the growth and rise to the prominence? Or will it be mired in mercantilist protectionism, poor infrastructure and low human capital and thus, lurk in the ‘middle’?

The developments in India in the first fifteen years of the new millennia fail to offer a convincing answer.

India’s miraculous growth began in early 1990s after the sweeping economic reforms transformed the Soviet-style central planning economy into a market based liberal economy. The reform, led by economist-turned-politician, Dr. Manmohan Singh, then finance minister, entailed floating the currency, eliminating production and import controls and opening up the country to foreign investments among others. The result was immediate and phenomenal.

For the next two decades, the Indian economy grew at 7-8 percent on average and quadrupled per-capita income from US $262 in 1990 to more than US $1180 in 2010. Subsequently, India became a third largest economy in Asia and tenth largest in the world. However, the growth rate has slowed in recent years.

While some believe that the slow growth is due to the bleak global demand after global financial crisis and that India would regain the momentum, others (see here and here) flag policy gridlock as major barrier to the economic growth and doubt India can grow at pre-crisis pace. The skeptics are even pointing to the risk that the country may face ‘middle-income trap’.

India graduated to a lower middle-income country in 2010 and it may be too early to presume that the country would fall into the trap but there are some plausible issues to be concerned about.

As Arvind Panagariya, current chief economic advisor to the Indian government, notes, reform in the 1990s was an important milestone but was it was insufficient as a policy measure to turn Indian economy into a modern globalised economy.

Unlike in China, the reform didn’t focus on creating large manufacturing base and on formalising the country’s vast informal service sector. While a few more educated people were working in mushrooming IT firms and service industries, the majority were stuck in less productive agriculture fields and traditional factories.

Moreover, India kept many tariff and non-tariff barriers intact and prevented foreign investment in many key sectors like telecommunication, retail and aviation for long. The reform fell short of ameliorating the notorious labour and the land-acquisition laws. As a result, the country couldn’t fully obtain the benefits of integration into the global value chain.

Although the long stint of growth concealed the problem, rampant corruption, suboptimal infrastructure and bureaucratic red tape worsened over the years. On the top, complacent Indian policymakers not only failed to make any notable reform during those years, they aggravated the situation with contradictory and inimical policy measures. Its tax row with some multinational companies (here and here) is just one example.

Taking all together, structural bottlenecks explain half of the India’s growth misery.

To get back on track, India needs another wave of holistic reforms that would redress the structural cracks in the economy. Specifically, it should embrace deeper trade integration so that it can acquire much needed capital and catch-up with technology frontier. Moreover, the country should cleanup bureaucracy, strengthen inclusive institutions, and loosen the rule for input consumption.

With these policy reforms, coupled with young and low-cost labour force, India can even replace China as the world’s manufacturing centre and clear the path for continuing growth.

But the story doesn’t end here.

The growth generated through structural transformation would merely bring ‘episodic growth’ that would last for a short to medium term. It may take the country from lower-end of middle income to the higher-end. But for a sustained long-term growth, a prerequisite to become a high-income economy, the country needs to operate closer to the global technological frontier.

A common denominator among today’s developed countries is that they invariably facilitate innovation and offer knowledge-based produce. They have been able to determine the global technology frontier. Advanced countries design and deliver most of the new product and services that world today consumes from new gadgets to financial services to agricultural technology. For that, the countries invest heavily in human capital—on providing quality education to people and in keeping them healthy.

India, on the other hand, fails measurably in those respects. The country lags far behind average middle-income countries in creating human capital thanks to the poor education and healthcare provisions. The eminent economist and Nobel laureate, Amartya Sen, views India as ‘the only country trying to become a global economic power with an uneducated and unhealthy labour force’.

The basic tenet here is, the underdeveloped human capital will cripple Indian economy in form of low productivity and inability to innovate, both so vital for a country’s economic growth in modern times. Highly educated people with the ability to create high-value technology-driven products that match with the sophisticated consumer demand are the fundamental determinants of the economic growth.

The recent attempt by the new government to revamp the outmoded economic policies is welcoming news. If successfully implemented, these reforms will restart the high-growth momentum. However, India should be mindful of longer-term prospects for the economy, which again requires improving the country’s healthcare system and enhancing the quality of education at all level. Undoubtedly, it is an enormous challenge for the country of 1.3 billion populace and should be supported by other institutional reforms. However, if India wants to ensure a meaningful place in the Asian Century, it must act big, and act now.

( This article was first published on South Asia @ LSE Blog here. The feature picture credit Flickr/Michael Foley/CC BY-NC-ND 2.0)

Community participation should be at the heart of Nepal’s post-earthquake reconstruction

It has been one year since twin earthquakes measuring 7.8 and 7.3 in Richter scale hit Nepal and took nearly 9000 lives. In the aftermath, 21,000 people were injured and more than 200,000 houses were destroyed. Millions of others were forced to live under open sky amidst regular aftershocks for weeks. It was a worst natural disaster in Nepal in eighty years.

Despite the paucity of disaster preparedness, Nepal’s immediate rescue and relief effort was laudable. The government was quick to mobilise all public service personnel and security forces. Logistical support provided by neighbouring countries and international agencies expedited the process.

Another highlight of the rescue and relief operations was the voluntary participation of the community to help other affected members. With their help, thousands of temporary shelters sprang up, and medical assistance was able to reach large numbers of the injured. Dead bodies were recovered efficiently, allowing for families to cremate those they had lost in line with their religious beliefs. The efficiency of the initial clean up prevented the spread of disease despite the fact that large numbers of people in affected districts were homeless and had no access to proper sanitation.

However, when it came to post-earthquake reconstruction, the early success story crumbled. To date, there has been little effort towards rebuilding damaged properties, beyond clearing rubble and providing petty contracts to renovate a handful of heritage sites in Kathmandu. The government promised affected families cash to rebuild their houses but it took them nine months to actually hand over the $150 USD. Overall, the government has disbursed less than126 million which constitute mere two percent of estimated reconstruction budget of 6.7 billion.

Aside from political disruption that the country experienced after the earthquake as a result of the promulgation of the new constitution, a major reason for lacklustre performance has been the exclusion of the affected communities from the reconstruction and rebuilding process. The vision of the reconstruction (if any) has been a government-led top-down approach with no space for community participation at any stage in the process.

The Post-Disaster Need Assessment (PDNA) that the government carried out immediately after the earthquakes acknowledged the potential role of the community on the post-disaster reconstruction and recovery, the hastily prepared document did not elaborate the framework within which those affected could voice their concerns. It is surprising to see the absence of community involvement in a country where social engagement is so deeply rooted and have produced some exemplary results in e.g. environmental management.

But why is the participatory approach in post-disaster reconstruction so important, especially in developing countries?

First and foremost, the affected communities have a better understanding of their own needs and can provide valuable insight into the local conditions. Such knowledge is crucial in collecting data and setting priorities in rebuilding process. This is particularly important in dealing with the vulnerable groups like women, children, disabled etc. The inclusion of these groups in design and implementation process is necessary to ensure the plan meets the targeted needs as effectively as possible.

Second, communities are more likely to develop a sense of ownership over the outcome of the process if they are involved. They can bring indigenous ideas and solutions which are sensitive towards local traditions and customs as well as are more likely to suit the local context. Their participation, therefore, not only raises the probability of immediate success but also ensures sustainability.

Last but not the least, community participation opens another avenue for government-community partnership which strengthens the credibility towards the government’s current and future actions. Moreover, the community can keep an eye on the working of government authorities to make sure their actions match their promise. This significantly enhances accountability and reduces potential fraud and corruption.

Having said that, community participation in post-disaster reconstruction is not always straightforward despite its merits. The conflict among different community interest groups can potentially hamper a cohesive designing and planning process. Similarly, confusion about the roles and responsibilities among government bodies and community groups may complicate communication and coordination when it comes to implementing the plan. Such cases could lead to uncertainty and delay in decision-making and, at worse, derail the whole reconstruction process.

These problems are likely to be more severe in case of Nepal which doesn’t currently have elected representatives at local level. In the absence of accountable local government, any effort to decentralise the reconstruction would be vulnerable to hijacking by local elites who affiliate themselves with political parties or local businessmen. In such scenario, attempts at community inclusion can be counterproductive and actually make things worse by excluding the real victims from the process.

Fortunately, there are a number case studies from around the world – both good and bad – which offer a range participatory approaches to reconstruction that Nepal can take inspiration from. In Indonesia, after the December 2004 tsunami, “community-led approaches created better housing construction compare to contractor based approach in terms of quality, accountability and beneficiaries satisfaction”. In contrast, the lack of community consultation in Pakistan following the 2005 earthquake resulted in conflicts based on local land-traditions which has gridlocked the reconstruction of city of Balakot.

Hence, it should be clear to Nepal’s PDR planners that meaningful community participation (beyond using locals as mere construction labour) is essential for smooth and swift reconstruction of public and private properties regardless of the location. It would be incredibly disingenuous for Nepal Reconstruction Authority (NRA), a newly created government body to lead the reconstruction, not to acknowledge the vitality of inclusion of affected community into process.

The NRA can start with setting-up a two-way communication platform where affected people across different communities can share their needs and provide feedback on the plans and policies. It should also identify community leaders or groups which have wider support and can represent voice of all vulnerable groups in the absence of locally elected government. These leaders or groups can work as primary touchpoints for government for further consultation and communication. For earthquake-prone Nepal, such participatory model can work as a useful template to use in future disasters as well.

( This article forms part of LSE South Asia Blog’s Nepal Earthquake Anniversary series,  first published here.)

Sunny days ahead for blossoming China–Nepal ties

One concerning aspect of China’s rising prominence is its troublesome relations with its neighbours. It has fought both real and legal battles on territorial and ideological grounds on several fronts including in India, Vietnam and on the Korean peninsula in the past, and currently is causing controversy with its maritime expansion. But one break in this pattern is the country’s long-standing relationship with Nepal.

Although the two countries share pre-historic ties that date back to the seventh century, modern-day Sino–Nepal relations began with an exchange of diplomatic missions in 1955 and the signing of the treaty of peace and friendship in 1960.

China prioritises relations with Nepal due to its geo-strategic location, lying between India and China’s autonomous region of Tibet. Chinese interest in Nepal has been stoked by national security concerns related to the free Tibet movements. The two countries share 1400 kilometres of remote and relatively unguarded borders. This has provided a safe passage for refugees fleeing Tibet to go to India or Nepal since China’s reclamation of the territory in 1959.

Nepal hosts around 20,000 Tibetan refugees in different camps around the country. The most concerning issue for China is the continuing anti-Chinese protests by Tibetan refugees in Kathmandu, who are joined by free Tibet activists from Dharamsala in India — home to the majority of the exiled Tibetan population. The porous border between India and Nepal has placed Kathmandu as a vantage point for the free-Tibet movement to conduct their operations with relative ease.

Thanks to successful Chinese diplomacy, Nepal steadfastly maintains a ‘One China’ policy by curbing all kinds of anti-China protest. Nepal maintains vigilance over the Tibetan community as exemplified by the ultra-high security arrangement in Kathmandu at the outset of the Beijing Olympics Games in 2008.

It is no coincidence that Chinese aid, including in the security sector, is flowing into Nepal at a rapid rate. China is constructing a training centre for Nepal’s Armed Police Force, a paramilitary force created to combat Maoist rebellions 15 years ago. It also invites high-ranking members of the Nepalese army to do various courses in its military academy. Keeping anti-Chinese activism in check has thus remained the focal point of Chinese foreign policy in Nepal.

Recently, other aspects of the relationship are also burgeoning. On the economic front, the two countries are making strides. Trade is rising and China is now the second largest trading partner of Nepal after India. The number of Chinese tourists visiting Nepal has increased 15 fold since 2003, giving a much needed impetus to the sluggish Nepalese economy.

China recently became the largest foreign investor in Nepal, a position long held by regional rival India. China is investing heavily in infrastructure projects, including in the two largest hydropower projects in Nepal. The two countries have agreed to develop a cross-border transmission line, the construction of an international airport in Nepal’s second largest city of Pokhara, and the extension of the Qinghai–Tibet rail network through the Himalayas to the border town of Lasha and on to the capital Kathmandu.

These infrastructure projects are part of China’s long-term plan to connect to broader South Asia as a part of its Silk Road Economic Belt policy. The projects, if successful, would have huge strategic and economic implications for Chinese relations with Nepal as well as its other South Asian neighbours. And they would provide land-locked Nepal with an alternative route to connect to the outer world without having to rely solely on India.

In return, Nepal played a catalytic role in giving China observatory status in the South Asian Association for Regional Cooperation (SAARC), an apex body of eight South Asian countries including India and Pakistan. Nepal also strongly advocated for granting China full membership of the association given its repeated and explicit desire to play a more influential role in the region through SAARC.

The weakest link in China–Nepal relations has been a minimal connection among the general public in the two countries, with bilateral exchanges largely limited to the official level. Not only are the people on either side of the Himalayas largely oblivious about each other’s language and culture, they often stumble over the geographic location.

Still, both governments have been making attempts to change that scenario in recent years. A branch of the Confucius Institute, a not-for-profit organisation under China’s Ministry of Education, has been set-up in Kathmandu to promote Chinese language and culture. The institute runs regular language classes teaching Mandarin and also organises cultural events across the country.

Increasingly large numbers of students from both countries are travelling under various cultural and educational exchange programs. Many Nepalese students head to Chinese universities on their own for higher education in medicine and engineering.

The Nepalese public are generally positive about their country’s relationship with China. This is due in part to China’s impressive economic success and modernisation in recent decades, and more importantly, the perception that China employs a ‘cooperation without intervention’ policy. This policy in particular has enabled China to accumulate considerable soft power in Nepal.

Considering the often-tense relations China shares with most of the neighbours, having at least one trouble-free relationship in its backyard must be a gratifying success for Chinese diplomacy.

AIIB to unlock South Asia economic potential

South Asia’s economic potential has long been constrained by low levels of economic integration. Despite being closely linked geographically, culturally and historically, intra-regional trade is very low. A major problem has, of course, been political difficulties within and between South Asian countries. But an important, and overlooked, barrier to greater economic integration is the poor quality and inadequate investment in infrastructure in the region. The newly established Asian Infrastructure Investment Bank (AIIB) can play a pivotal role in fixing this problem.

For a long time, infrastructure bottlenecks have been recognised as a barrier to regional trade and economic integration. Access to infrastructure in South Asian countries is limited and the quality of available infrastructure is also poor. In Bangladesh, for example, only 39 per cent of the rural population has access to road transportation. India has the second largest road and rail network in the world, but half of these roads are not paved and cannot be used in all seasons. Despite huge potential in electricity generation, people in the region consume less than 655 kilowatts per capita in intermittent electricity supply in 2012, which is less than one fifth of that in East Asia.

The situation for cross-border infrastructure is even less encouraging. A telephone call from Nepal to India is more expensive than calling to the United States or Europe. Cargo trucks waiting 3–5 days at the border for clearance from customs is normal. Despite sharing a nearly 3000 kilometre-long land border, shipping between India and Pakistan has to go via Dubai. As a result, the cost of trading across borders in South Asia is prohibitively high.

According to the World Bank, South Asia has nearly US$2.6 trillion in shared GDP. While overall trade flows are growing, intra-regional trade among countries is still less than 5 per cent of total trade. This is far less than that within ASEAN (25 per cent) or NAFTA (58 per cent).

Despite this, investment in in-country and cross-border infrastructure has been inadequate over the years. This has created a huge infrastructure investment gap in the region with supply trailing far below demand.

It is estimated that South Asian countries need to invest around 7.6 per cent of GDP in infrastructure per year if they are to achieve economic growth of 7.5 per cent. This amounts to an annual capital investment of US$88 billion in new investment and in maintaining existing capital stock. Currently, actual average investment in infrastructure is around US$28 billion per annum — the lowest in the world, excepting sub-Saharan Africa.

The South Asian Association for Regional Cooperation (SAARC) — which is comprised of Afghanistan, Bhutan, Bangladesh, India, Pakistan, Maldives, Nepal and Sri Lanka — made an attempt to narrow the investment gap recently. For a decade, SAARC negotiated a free-trade agreement called the South Asian Free Trade Agreement (SAFTA). Coming into effect in 2006, SAFTA aims to facilitate the ‘development of communication systems and transport infrastructure’ to facilitate intra-regional trade. Still, the pace of infrastructural reform envisioned by the agreement has been slow.

Other similar initiatives include the establishment of the South Asian Development Fund (SADF) in 1996. Later reworked as the SAARC Development Fund (SDF), its aim is to act as an umbrella funding mechanism for all regional development projects, including infrastructure. But with capital of only US$300 million, the SDF has been unable to go beyond funding some social projects. The idea of setting-up a South Asian Development Bank (SDB), led by India, has also been proposed to provide low-cost funding to member countries for infrastructure projects. But this idea has never taken-off.

There have been some unilateral efforts to improve infrastructure. India, for example, has pledged to invest US$138 billion in railways alone in the next five years. It has also been experimenting with the creation of a ‘National Investment in Infrastructure Fund’.

On the bilateral front, projects like the Central Asia–South Asia Electricity Transmission Project, the Nepal–India Regional Trade and Transport Project, and the Bangladesh–Bhutan–India–Nepal (BBIN) initiatives are currently underway with support from multilateral organisations like the World Bank and the Asian Development Bank (ADB). Still, there are no major cross-country highway or railway projects currently underway.

With this backdrop, the creation of the AIIB has come at the right time. The bank was established with an explicit objective to provide financing for developmental infrastructure like roads, railways, sea and airports, and power generation plants to facilitate greater economic integration in the Asia Pacific.

Although US$100 billion in paid-up capital may not look like much in comparison to the investment demand, the AIIB can play a key role in complementing the work of traditional multilateral lenders like the ADB and the International Finance Corporation.

The AIIB is also expected to have a longer term investment horizon, recognising the fact that returns to infrastructure spending in developing countries can be slow and sometimes low. If the AIIB can also shorten the loan assessment and approval procedures, South Asia could see an investment boom.

The involvement of the AIIB in South Asia will be welcome news for the region. Six out of the eight countries in South Asia (the exceptions are Afghanistan and Bhutan) are founding members of the Bank. India, which was recently elected as a member of the board of the bank, is also likely to prefer the AIIB — with its multi-nation oversight — rather than a situation where China acts alone in what India considers its backyard. With mutual trust and support, the AIIB can help South Asia realise its shared dream of greater economic prosperity.

( This article was first published on East Asia Forum here.)

Can Thailand Avoid the Middle-Income Trap?

The term “middle-income trap” has gained prominence among academics and policymakers in recent years. The term refers to the phenomenon in which economies stop growing before they become rich. The heightened interest in the issue is understandable, given half of the countries in the world are middle-income countries and the majority of them are likely to be stuck there for a long time, if not forever.

Many countries in Asia are invariably facing the risk of falling into the trap; Thailand is one of them.

By and large, Thailand has had a successful economic history. It grew at a sustained annual rate of 7 percent for nearly 35 years starting in the early 1960s. As a result, per capita income increased 30-fold, from less than $100 in 1962 to over $3,000 in 1996. This growth steered the country into its current middle-income status. However, since the Asian financial crisis in 1997, Thailand has been struggling to maintain a decent economic performance. The growth rate has been highly volatile — swinging from 0.8 percent in 2011 to 7.3 percent in 2012 and back to 2.8 percent in 2013. GDP growth has averaged around 4 percent, which pales in comparison with other middle-income and East Asian countries.

At the heart of Thailand’s economic trouble lie perennial political and governance failures. Thailand is going through a turbulent political period. Political control has been constantly shifting hands between opposing powers supported by different interest groups in Thai society. The two military coups d’états in 2006 and 2014 have seriously undermined democratic institutions and practices.

In order to wither potential threats to their power, incumbent rulers on either side tend to implement policies that benefit their own support groups—businessmen and urban elites for the current military rulers and rural farmers and students for the ousted Pheu Thai Party. This myopic view toward governance has resulted in massively inefficient allocation of resources and has created distortions in the economy. Thailand has been unable to take a long-term view of the economy and to identify a future growth trajectory. As a consequence, the country is failing to keep up with the continuously expanding global technology frontier, which is the key to economic growth in modern times.

In the past, catch-up growth was the key to Thailand’s success. The country started far behind the global technology frontier and learnt from others to improve efficiency. Additionally, early economic reforms released a huge surplus of low-cost labor as the economy transited from labor-intensive agro-based primary industries to the capital-driven, export-oriented manufacturing sector. This helped Thailand to attract large amounts of FDI in sectors like electronics and automobiles, which not only boosted exports but also integrated Thailand into the global value chain.

However, over the years, the early benefits of high factor endowment and increased productivity have reached the natural limit. Wages are rising and the country is losing competitiveness to its low-cost Asian neighbors.

In the absence of advanced technological know-how, Thailand can neither compete with high-tech, high-value goods and service producers nor with the low-cost manufactures. Unlike the countries that managed to move on to high-income status, even in its heyday, Thailand didn’t invest in the R&D efforts necessary to foster domestic innovation. Its expenditure in R&D as a percentage of GDP stands very low — 0.39 as of 2011. Today, Thailand has the symptoms of the middle-income trap, including low growth and a middle per-capita income range.

So what can the Thai government do?

Given the difficult political scenario in the country, building an R&D ecosystem, which has been neglected for far too long, is the best way forward. Investing in R&D would help Thailand to operate closer to the global technological frontier and compete farther up the value chain. The model was successfully tried in South Korea, where a government-led innovation ecosystem spurred the type of growth that can sustain itself for a long period.

Creation of a national R&D ecosystem requires investment in improving the quality of tertiary education, creating specialized research centers and facilities, and linking research with businesses and industries. It also requires more scholarships and teaching facilities to train youths in subjects like mathematics, science, and engineering. Additionally, the government should initiate the founding of advanced research facilities along the model of the Korea Advanced Institute of Sciences (KAIST), which played a vital role in Korean industrialization in the 1970s and 1980s. Finally, business and industries should encouraged to commercialize research output.

More investment in education and R&D would create win-win benefits for both of the conflicting political powers and their support networks, and thus would most likely survive any future political change. On the one hand, students will have access to high-quality education, modern research facilities, and more importantly, opportunities for upward socio-economic mobility. On the other hand, businesses will have access to modern technology and know-how that enables them to offer new products and services and to enhance their competitiveness in global market.

However, investing in R&D to spur domestic innovation and technological advancement is a necessary but not sufficient condition for Thailand’s economy to grow in long run. Other complementary policy measures would include openness to further integration into the global value chain, fewer market distortionsfinancial developmenttackling corruption and inequality, and inclusive governance and institutions, among others.

Moreover, the reform process might be slow and some sections of the society may benefit later than others. Farmers, for example, might not see the immediate benefits in the reform and thus may not readily support it.

Thailand can avoid the middle-income trap by promoting a domestic R&D ecosystem. However, the success is contingent upon the political willingness to initiate the long-term structural changes necessary for creating a knowledge-based and modern economy.

(This article was first published on thediplomat.com here.) Continue reading “Can Thailand Avoid the Middle-Income Trap?”