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NEPAL: Implication of Resource Curse ideology in potential Hydro-power based economy

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In particular, my inspiration in forging analysis in this matter came along the strange but complex blend of optimistic and pessimistic psychology that hit my head at least for the moment that I could think enough for this paper. Probably, the major assumption for this paper makes a utopian (optimistic) remark as I talk about the situation whereby, our country is in verge to become a Hydro-power based economy, while in the other hand I talk about the implications of resource curse (pessimistic) that may follow such utopian situation. Likewise, I shall also talk about the measures that can be taken to neutralize the side-effects of resource curse (solution to pessimism).

Civil war over resource

In general, the ideology behind the concept of resource curse may contradict with the superficial understanding about economics. After all, resource curse talks about the socio-economic disadvantage in having too much natural resource in a nation. Simply put, it talks about the acute negative effects that generally influence the resource dependent nations (esp. Oil Exporting Countries). Since Nepal also retains a huge hydro-power potentiality, it should be worthwhile to discuss the relevancy of resource curse ideology for our nation in case it chooses to become a hydro-based economy. The relevancy of this ideology of resource curse can be bolstered by the evidence that this particular concept has gained enough attention in international agencies like World Bank, International Monetary Fund (IMF) and United Nations (UN). This just adds the important in discussing this matter, at least in this paper!

As a caveat, the ideologies behind resource curse is not specific or confined but wide and varying. In fact, any disadvantage that a country faces in being resource dependent is a part of this ideology. However, I shall mention some of the most popular facets of this ideology that are highly mentioned in international discussions,

  1. Implication of the Dutch disease:

The Dutch disease is a part of ideology of resource curse that infers the side-effect of having other export potential as uncompetitive due to currency appreciation caused by unilaterally exporting too much resource based product. Technically, resource export increases currency value and it can falter the comparative advantage of other potential export due to its dwindling price competitiveness. (Collier, P., 2007) In fact, the problem of being locked in unilateral natural resource export is not felt until it is realized that natural resource retains comparatively more price volatility in compared to other processed exports. (Collier, P., 2007) This sort of price volatility or shocks can arouse high fluctuation in national revenue, thus, causing high amount of socio-economic crisis, public debt defaults and unhealthy fluctuation of economic activity. One can pretty imagine the situation of a nation whose national revenue is uncertain as the price of the oil in the international market.

Factually, this issue is also applicable in Hydro-power sector in the sense that international community (e.g. Canada) prefers to peg hydro-electricity price over oil prices. Sensibly, Nepal has to follow this particular pricing strategy in order to meet the international standard, as it becomes a prominent hydro-power exporter. (Shakya. S, 2007) Therefore, this kind of price shocks shall contain higher ripple effects in the socio-economy of our country, of which governance is left with low expertise in fiscal technique and manipulation,

However at the other side of the story, the state of currency pegging of NRs with IRs would at least enable our economy to delay the implementation of the export diversification interest. Since the foreign exchange of NRs with the third country is totally dependent on IRs or Reserve Bank of India (RBI), there is virtually no correlation between increased export and NRs appreciation. However, it doesn’t release the economy from its duty of export diversification because price volatility is here to stay.

  1. Increased Motivation to Corrupt Resource revenue:

Resource revenue dependent government has major control over the national revenue in compared to the tax-dependent government. Since natural resources are under sovereign rights, the revenue obtained from such resource is often contributed to the national government. The ability to control major share of the GDP and national revenue would surely motivate the politicians to take a crooked way up to the power in order to pocket huge amount of government revenue. (Hoeffler, A. & Collier, P., 2007) Besides, the flexibility of hoarding public revenue and expenditure information due to less dependency on public tax would make corruption easier.

Unfortunately, this issue is truer for our nation in which, the government controls the overall hydro-electricity revenue and selling authority through the government monopoly via Nepal Electricity Authority (NEA). Besides, the full control of government over NEA shall miserably enable it to be nontransparent about its annual reports which, vitally accounts the major portion of the national revenue if our nation becomes a Hydro-power driven economy.

However, the effects of this issue is more applicable in oil exporting countries in North Africa and Middle-East that are solely dependent on oil revenue and government for public expenditure in infrastructural and socio-economic development. Instead, Nepal is not totally dependent on Hydro-power and there are already plenty of private involvement potentialities in other economic activities. However, efficient allocation of resource revenue in nation building would at least accelerate the national growth in unprecedented speed and prevent the crook leaders from pocketing huge amount of corrupted resource rents. And for that, privatization and deregulation of the hydro-electricity authority and revenue should be the most promising solution. (McPherson, C., 2003) The paper shall talk about it in brief in later paragraphs.

  1. Internal greed and arms struggle:

Generation in huge amount of revenue through extraction or utilization of natural resource has high tendency to breed greed among local mafias to capture the jurisdiction containing such potentiality. This issue has been very true for plenty of oil exporting countries of North Africa (esp. in Nigeria in which the oil exploration field of Niger Delta region faced constant attacks from NDPVF army) and, it can be equally true for developing countries like Nepal with weak military ability and high unemployment rate. Internal arms struggle, civil wars and coups are often the result of revenue boom through resource exports in developing countries. According to Collier and Hoeffler (2002), 23 percent of states dependent on oil exports have experienced civil war in any 5-year period, a figure that dwarfs the 0.55 for countries without natural resources.

Besides, local interest over revenue gained through resource belonging in their regional jurisdiction can eventually disturb the relationship between the locals and the government along with private investors. At least, it is something that is already being sparsely seen in locales under hydro-power exploitation, whereby local demonstration has caused to even halt operation in few of the hydro-power plants. It takes a very participative and effective revenue sharing scheme in order to neutralize the later problem while a strong military concentration to duck the former one.

Fighting Resource cruse:

The most promising measure to tackle Dutch disease is to deploy export diversification as soon as possible. There remains a caveat that, resource rents or revenues are just the initiator that brings momentum in the economic growth of the country and if anything more. It is the responsible of the rent seekers to leverage such revenue for infrastructural and socio-economic development of the country in order to promote export diversification. Export diversification towards non-resource products is important because it promises revenue consistency and increasing return to scale which in fact is not possible otherwise. (Matsuyama, 1992) Specifically, Nepal can diversify its export base in Tourism & Hospitality, agriculture, Information Technology (IT) and lots of other service based industry by utilizing the revenue gained from Hydro-electricity exports. As far as it is acknowledged, Tourism, IT and agriculture are three of the most promising competitive advantage for Nepal as per its socio-economic and geographical consideration (Shakya, S., 2010). Certainly, it takes a considerable private involvement or privatization of the electricity distribution authority in order to effectively route such huge amount of resource rents in the concerned sector through private decisions. After all, market decision of resource utilization if often effective in compared to central planning (Mankiw, G., 2010).

In midst of this, financial institutions and capital markets have a greater role to play as a mediator in order to succeed in this quest of export diversification. Probably, both the sectors need enhancement in order to complement the size and complexity of capital movement that we are talking about.

Besides, privatization also plays an important in order to prevent corruption in resource rents and promote revenue and expenditure transparency in public. Though it might sound impractical for the current state of our government to sacrifice such authority, it is at least to be recognized that privatization in hydro-power is relatively more easier in compared to the Oil resource which is explained as “commanding heights” by Lenin and understood as commodity of strategic importance by realist world (Yergin and Stanislaw, 1998).

Privatization in hydro-power sector in the upstream process of production has been satisfyingly done till now. There are various hydro-power plants that are effectively owned and ran by private investor. Out of all, Bhotekoshi power plant must be the most exemplary one (Shakya, S., 2010).  However, the vital downstream phase of distribution is still totally under the monopoly control of government through the public enterprise called NEA. As far it is understood, NEA is one of the most inefficient public enterprises (possibly through lack of competition and responsibility towards shareholders) that have miserably hindered the development of the hydro-power sector of Nepal in large. Certainly, the privatization of NEA through private equity participation can effectively make this enterprise more transparent in its management. Besides, enhancement of private participation by enabling the establishment of private electricity distribution companies can make the overall revenue utilization program more effective.

Likewise, hedging could have been one of the foremost options to insulate from electricity price fluctuation in order prevent its spill-over effect in national revenue. However, hydro-electricity has not effectively identified itself in the international future market enough to practice it in the volume that we are currently talking about, i.e. 23,000MW (approx.). In fact, Oil resource has successfully participated in international future market and lots of OECs are practicing it in order minimize their fiscal volatility. Seems like Hydro-power is more vulnerable to resource curse in compared to Oil resource! Therefore, export diversification is a must and urgent.

Importantly, the most visible issue regarding local and regional interest in resource revenue needs to be duly satisfied through effective revenue assignment decisions. Enough remuneration to cover for regional cost (in terms of environment degradation, infrastructure deterioration and lifestyle adjustment) due to resource exploration should be provided to the local or regional body. (McClure, E. C., 2003) However, revenue assignment should also be enough to account for socio-economic development of the region like road and bridge improvement, school and hospital construction etc. Besides, local equity participation in the power plant as a part of remuneration has been successfully implemented in couple of hydro-power plants (e.g. Chileme Hydropower plant).  And for tackling the military interest of illegal armed force to seize the resource power, probably the deployment of national security (army) in any other issue wouldn’t be so much contributing to national economic benefit as in this. At least, it is proved by the positive results in deployment of peace-keeping soldiers in African territories containing oil resource.

Furthermore, Individuals and institutions (belonging to both private and government) should effectively welcome international support and consultation in order take assistance in implementing key elements of the program like Capital market development, Procedure for Privatization of electricity distribution authority, Policy development for revenue utilization & assignment and lot other fiscal measures and policy. For instance, Consultation from countries like Canada and Bolivia that have been successful in Hydro-power sector can be effectively received in order to generate smoothness in the overall process. Besides, Budget support aids and other financial aids are virtually ineffective, if not harmful for resource-rich countries. Instead, technical assistance and aids for capacity building should be more sensible. (Collier, P.)

Since Hydro-power is the most promising option/catalyst to initiate the momentum of national growth, it would be reasonable to be serious about generation of such revenue in a careful manner for the socio-economic development of the country. It is understood that Nepal retains 55,000+MW of hydro-power potentiality of which 43,000MW is economically feasible (Shrestha,M.R., 2008) . Probably, these numbers effectively weigh the value of this kind of discussions!

References:

  • Collier, P. (2007). Bottom Billion: Why the Poorest country are failing at what can be done about it? Oxford University Press
  • Davis, J.M. (2003). Fiscal policy formulation and implementation in Oil producing countries.
  • Torodo. S (2007). Fiscal system for hydrocarbons: Designing Issues. Washington DC: World Bank Publications. DOI: 10.1596/978-0-8213-7266-1
  • Oyefusi, A. (2007). Oil Dependence and Civil Conflict in Nigeria,
  • Shakya. S. (2010). Unleashing Nepal. Patna: Penguin Publication.
  • McPherson. C. National Oil Companies: Evolution, Issues, Outlook       
  • McLure, C. E. the Assignment of Oil Tax Revenue

 



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