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Economic Diplomacy and Changing Scenario of Intentional Economy
Madhu Raman Acharya
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Concept of Economic Diplomacy
Two sides of economic diplomacy Use of economic policies to achieve a foreign policy objective (e.g. aid diplomacy) Use of diplomacy to achieve country’s economic objectives/ Inclusion of economic elements into foreign policy and diplomacy Preference to economics over politics in diplomacy and foreign policy Economic interests have started to become political interests When economic interests converge- political interests converge as well
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Concept of economic diplomacy
Theory of comparative advantage - pursuing those advantages abroad Export of labour-intensive and resource-intensive products Adventure and eco-tourism Foreign Investment in Hydropower Bio-diversity, herbs etc. Broadened concept “development diplomacy” e.g. LDCs, MDGs, Post-2015 Development Agenda Opening of a Policy Planning and Development Diplomacy Division in the Ministry of Foreign Affairs (2015)
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Historical antecedents (global)
Trade/commercial diplomacy was always there Colonialism/ East India Company- came on trade interests Marshall Plan- rebuilding of post-war Europe through US aid European Union -was an economic cooperation project Bretton Woods -World Bank, IMF, IDA- tackling economic issues GATT to WTO- (1994)- rule-based trading framework G20/ World Economic Forum SAARC, BIMSTEC -regional blocs
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Historical antecedents (Nepal)
Economic protection (Prithvi Narayan Shah) War with Tibet on clash of trade interests, currency war Opening of trans-Himalayan routes/ Vakil in Lhasha (1856)/ Elaichi Kothi/ Calcutta customs Liaison Office- all were economic posts Opening of Nepal for tourism (1950s) Start of aid diplomacy (1950s) Trade and Commerce Treaties with India impasse- failure of economic diplomacy 1990s- First wave economic liberalization/ privatization High-Level Task Force, coined “economic diplomacy”
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Factors behind prominence of Economic Diplomacy
Shrinking political differences among nations- priority to economic issues Wave of liberalization, deregulation, globalization and economic interdependence and integration Increasing economic competition Global economic and financial crises Emergence of new international financial architecture Search for new paradigms in foreign policy and diplomacy
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Why “Economic Diplomacy” in Nepal
Low economic development/ development imperative Continued dependence upon foreign aid Low share of export in trade/ trade deficit/weak trade diversification Poor employment opportunities (labour migration) Comparative advantage in tourism, hydropower Need for new slogans in foreign policy and diplomacy Shift from aid to trade and investment/ remittances
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Facets of Economic Diplomacy in Nepal
Trade (WTO, SAFTA, bilateral)/export promotion Investment- FDI Tourism Foreign Employment Foreign Aid (“Development Cooperation”) LDCs- Graduation from LDC Nepal as a “transit economy” NRN Post-earthquake reconstruction
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Levels of Economic Diplomacy
All four levels are important National Bilateral Regional Multilateral
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Trade Huge trade deficit, India-centric trade, weak diversification of products and countries Inability to gain from benefits-SAFTA, WTO, EBA, GSP Poor market research (embassies alone cannot do) Restrictive trade polices of destination countries/ new of protectionism (environmental and labour standards) Problem of branding Nepalese products abroad
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Investment Inability to highlight stable macro-economic fundamentals and Nepal’s importance in investment for Cheap labour Good policy framework Location between two big framework Inability to address negative factors - power shortage, labour relations, political interference, strikes etc. Slow decision-making at the Investment Board / Turf wars Poor Doing Business ranking- 108th Unclear strategy in big PPP projects (e.g. Fast Track Road) Weak focus on investment from India and China- China biggest investor since 2015
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Foreign employment Remittance-dependent economy (29% of GDP)
The Dutch Disease (consumption-imports-revenue complacency) Still labour “on the cheap”/ 3D jobs/ unskilled (96%) Well-developed institutional and legal arrangements/ but weak enforcement Inability to address new issues Feminization /domestic workers (age limit) Non-involvement of embassies in demand attestation Proliferation of agencies( 759 -Association list)- poorly regulated
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Foreign Employment …. Opening countries without homework (110 countries, including Iraq, Afghanistan, Libya, Somalia) Corruption/ cheating and manipulations/ exploitation every step of the way Weak focus on return migrants Use of remittance for “investment” instead of consumption Insufficient and weak bilateral agreements (e.g. RoK, UAE, Qatar, Bahrain) Poor application of instruments of rights of migrant workers/ UN Convention on the Rights of Migrant Workers ILO Conventions
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NRN Recognition of NRN as a “niche” in economic diplomacy
Economic Diplomacy and NRN Division -changed to Policy Planning and Development Diplomacy Division (2015) Annual conferences- Grand bargain /NRN Act Liberal property, visa and other provisions Focus on privileges (e.g. Dual Citizenship) Need a shift from “charity” to “investment” Outsourcing economic diplomacy jobs to NRNs- tourism, business promotion etc.
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Tourism Low ranking in “Tourism Competitive Index” (102nd -2015)
Susceptible to internal and external shocks/ economic downturn/ terrorism/ disasters/ political instability Proliferation of hospitality industry- unhealthy competition and degradation of services poor connectivity/ air safety- blacklisting by EU Weak monitoring of “travel advisory” Weak focus on China, big source Neglected Buddhist circuit/ Lumbini Insufficient promotional campaigns (weak branding of campaigns)
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Foreign Aid “Development cooperation” one of identified areas of economic diplomacy, but outside the role of Ministry of Foreign Affairs Development Cooperation Policy good intentions, but cannot be applied Weak enforcement of Paris Principles on “aid effectiveness” Donor conditionality / donor-driven, donors defining development agenda (not accepting “one-door policy”) Extra-budgetary foreign aid- still a major problem Low absorption capacity- low expenditure on capital side Focus on rebuilding after the earthquake- international conference
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Institutional set up for Economic Diplomacy in Nepal
Need to activate the high level Economic Diplomacy Implementation and Monitoring Committee- Focal points in sectoral ministries Activation of Consulates, Economic Counsellors. Honorary Consul Generals/ Consuls/Labour Attachés Policy Planning and Development Diplomacy Division Promotional agencies (NTB, TPC etc.) NTB at trouble
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Challenges of economic diplomacy
Shelving of important reports: HLTF, 1996 Report of the Economic Diplomacy Policy Study 2002 Task Force on Foreign Policy 2006 Parliamentary report on foreign policy- 2011 Lack of linkage between economic and foreign policy/ (e.g. Singapore)- Ministry of Foreign Affairs and Trade (New Zealand , South Korea) Ambitious goals (e.g. “double digit economic growth”, “transit economy” without home work) Weak programmatic backing/ less than 2% of Embassies’ expenses
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Challenges of Economic Diplomacy..
Politicization of economic issues (e.g. BIPPA, PTA, water agreements)/ lack of consensus on economic issues Ambassadors without economic and diplomatic backgrounds Terms of reference for ambassadors- to new ones only Under utilization of facilities LDCs , GSP, EBA, SAFTA etc. Weak private sector leadership “diplomatic” mindset/ favours to private business considered unethical- but changing Economic diplomacy regarded lower order diplomacy
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Challenges of Economic Diplomacy …
Leadership deficit/ turf wars/ e.g. Investment Board Proliferation of agencies/ lack of coordination Economic diplomacy considered a foreign ministry job (wrongly) Poor monitoring and evaluation of embassies/opening without accountability “Diplomatic deficit” Foreign service- 278 Other services -154 Contract -346 (including 235 local staff)
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Challenges of Economic Diplomacy …
Poorly staffed embassies/ mostly without economic staff Under-equipped economic cells in embassies (only a few) New missions without “mission”/ resources/ strategic guidance/ accountability/ Absence of rewards and punishment based on performance Lack of conducive political environment at home/ economic diplomacy begins at home
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Challenges of Economic Diplomacy …
Low ranking on international indices Corruption Perception Index : 116th among 177 countries in 2013 (improved from 139th last year) Doing Business Index : 108th among 189 countries (2014) Global Competitiveness Index : 117th in 2013/14 (up from 125th previous year, still low) World Tourism Competitiveness Index : 102nd (2015)
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Opportunities India China market- transit economy
India’s renewed focus in the region-Modi factor Chinese tourists- big numbers to handle Resilience of remittances Growing outside interest in Nepal Growing NRN interest Foreign investors interest in big hydro projects Nepal’s chair of SAARC and BIMSTEC Reconstruction as an opportunity
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Way forward Strategize economic diplomacy
Focus on sector in which Nepal has comparative advantage Focus on India and China – how to benefit economically Revamp the institutional machinery Strengthen partnership with the private sector Introduce annual plan on economic diplomacy Activate diplomatic missions Improve inter-ministerial coordination Human resources development for economic diplomacy
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Way forward.. Better utilization of the Honorary Consuls
Increase the confidence of investors Fix the faulty foreign employment system Encourage NRN as niche for investment Bring a strong tourism promotion strategy Make aid more effective Make more effective use of available facilities Formulate country-wise strategies Sign performance contract with ambassadors
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Conclusion Never too late Need better strategic thinking
Focus on implementation Importance of all three levels- bilateral, regional and multilateral Collective responsibility-clear roles required Needs proper domestic policies- begins at home Need review of foreign policy- integration of foreign and economic policies
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Break ! Q & A
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Changing international economic scenario
Experience of Global Financial and Economic Crisis , Eurozone Crisis (e.g. Greece) Failure of existing intentional financial architecture to address the aspirations of developing countries Weak role for developing countries in the INM, World Bank etc. Shift of balance of power to developing countries and to Asia (India and China) Emergence of alternative financial architecture BRICS Bank Asian Infrastructure and Investment Bank (AIIB)
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Changing international economic scenario
Global economic slowdown - spreading to developing countries Rise of inequality – income and asset inequality- concentrated to a richer few Wealthy 1% possess more than half of world’s wealth Bottom half of world’s population owns less than 1% (wealthy 1% will soon (by 2035) control 99% of world’s wealth-Oxfam report 2013) Can have pervasive social, economic and political consequences
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Changing international economic scenario
Emergence of “knowledge economy” based on intellectual capital, intellectual property rights Information/knowledge intensive Importance of “blue economy” (SAARC declaration) Ocean-based economic growth- transport, tourism, fisheries, etc. Need for “inclusive economic growth” Link between social exclusion and economic growth Inclusion of informal, subsistence and household sectors Providing access to markets, credit etc. Disaggregation on poverty, HDI – lower among Dalits, janjatis, marginalized regions etc. Nepal Living Standard Survey also shows poverty higher among excluded groups Economic opportunities for all sections of society
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Changing international economic scenario
Green economy Environment and climate-friendly production and consumption Vulnerability of economies- to disasters, climate change, global and regional financial crises, Uncertainties in global economic environment India-dependent economy (currency, trade etc.) Potential for regional economic integration Effects of economic cycle periods of expansion and contraction)- counter-cyclical measures-reducing anti-social effects of economic cycles Focus on economic integration – those in the margins (LDCs, LLDCs) should be brought to the economic mainstream
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Q & A Thank You
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