The Third War in Nepal

We are all aware that there are at least two wars being fought in Nepal. One pits the Maoist rebels against the government. The second is between the main political parties and the King. In fact, Nepal is fighting a third war. This is a war against poor governance, exclusionary and feudal social structures, and ultimately poverty itself. It is being fought mostly by less-than-fearsome-looking technocratic reform leaders and an enlightened breed of politicians who have transcended the day-to-day business of politics. On the flanks are change advocates all across civil society. Some of the local level political leaders have been the important "field commanders" of reforms. Unlike in the other two wars, no bullets are being fired and no mass demonstrations have been held. Yet, the consequence of defeat is no less serious than in the other two wars. Together, they could lead to nothing short of a failed state.

Despite the many positive changes that Nepal has seen since the advent of multiparty democracy in 1990 and the first wave of economic liberalization measures in the early-1990s, stark and worsening inequities persist, not only in terms of incomes, but also of the fundamental ability of the Nepali citizen to participate in social and political decision-making processes. The Maoist insurgency is a particularly acute expression of the disillusionment over these adverse developments. After the Maoists escalated violence in November 2001, the economy went into a tailspin and the Government's fiscal position weakened sharply. When this crisis did not seem to prompt the political leadership into serious corrective action, the frustration of many turned into utter alarm that the nation was heading for a catastrophe.

It is from this profound sense of crisis that a new wave of reforms was born. The deepening political turmoil contributed to this crisis, but it also produced the space and creative stress for technocrats to begin implementing some important reforms. As it was, many of policy changes underlying these reform measures had been widely debated and agreed on at the political level. Nepal's reform leaders already knew that unless decent public services begin to reach the poor masses quickly and their trust in the state is restored, Nepal would not have the foundation for either sustainable peace or meaningful economic development. Now was the time to run with the reforms. Serious reform efforts have thus emerged in a range of areas.

Public expenditure management: Nepal's budget system had been plagued by waste, corruption, and political interference. In FY02/03, Nepal introduced a "medium-term expenditure framework." Simply put, the Government is trying to impose a realistic spending ceiling on itself, prioritize spending through a transparent evaluation process, and hold line ministries accountable for effective implementation of the agreed work plan. In the first year, Nepal eliminated 160 low priority projects (out of a total of 625 projects) and introduced a system of releasing budget based on implementation performance. Nepal's expenditure reform efforts are beginning to draw attention internationally as a little-known success story.

Public service delivery: For the last 30 years, Nepal's centrally managed primary education system has performed poorly. Last year, Nepal started the process of handing over primary schools to community management. Other countries (e.g., Guatemala and El Salvador) have done something similar, but on small scales. What Nepal has done is breathtaking in its scope. The Government has told all communities that they have the option of taking over the management of public schools. The Government will continue to fund the schools through block grants, but the locally elected school management committees will oversee the running of the schools and teacher performance. During FY02/03, 150 communities took over school management. In many of them, remarkable improvements have been seen already. In FY03/04, the Government expects that another 1,000 communities would sign on (out of about 20,000 public primary schools). In health, a similar change is underway, with 460 sub-health posts (out of about 4,000) already handed over to community management.

Fighting corruption: People had come to see corruption as the norm in politics and public administration in Nepal. Even when the legal power of the Commission for Investigation of Abuse of Authority (CIAA) was strengthened in 2002, many expected little change. Since its creation under the 1990 Constitution, it had won but one conviction. During the last fiscal year, however, the CIAA won over 40 convictions and has changed the basic equation for the corrupt. To be sure, most of the cases involving the "big fish" are still pending, but they are in considerable fear now.

Financial sector reform: The two largest and ailing commercial banks had accumulated estimated losses of about $450 million, nearly 8% of GDP. No doubt much of these losses arose because the politically well-connected elite has abused these two banks. The reformers became convinced that left alone, these banks would eventually bring down the whole financial system and wreck the economy and government finances. In 2002, they took the first bold step of handing over these two banks to external management teams that were free from the web of social and business relations of Nepal. The reform is already showing some encouraging results in stemming financial hemorrhaging and improving loan recovery. The Deputy Governor of the central bank of Bangladesh has come to Nepal recently to learn how Nepal has done what his country had not been able to do.

Greater role of the private sector: Like many developing countries, Nepal's public sector tended to be involved in too many things. This has been changing rapidly. For instance, to expand telephone services in the rural areas, the Government has just selected a private operator to cover 538 VDCs in the Eastern Region. Such a venture is not viable on a strictly commercial basis. Nevertheless, instead of relying on the public monopoly, the Government has opted to harness private sector efficiency by offering a one-time, capital subsidy to attract a competitive private bidder for this service. Once the contract is signed, the service is expected to be rolled out in no more than 18 months.

These are only part of a much longer catalogue of reforms underway. To be fair, the impact of many of these reforms have not been felt widely yet at the grassroots levels. After all, only about 1.5% of the public primary schools have been transferred to community management to date, for instance. Only when many of the poor come to see the change firsthand and regain confidence in their own government, will there be a foundation for sustained peace and development.

Impressive and sustained reform efforts in many other countries have emerged, often after catastrophic events. Only such events seem capable of breaking down the entrenched social and political norms and opening up the space for a new vision and leadership. But what a costly way to do what is clearly right for the nation. Interestingly, Nepal's reformers refused to accept this historical "rule" and started a bold attempt to avert catastrophe in the first place. While the original impetus for change came more from technocratic leaders, many more in the political leadership now appear to be taking notice. A far deeper appreciation of the centrality of reforms to peace building is beginning to emerge. Take for example either the change agenda forwarded by HMG at the last round of peace talks with the Maoists or the 18-point program of the agitating five-party coalition. Polemics aside, the bulk of either composition is about social and economic reforms.

Nepal's donors can only hope that Nepalis themselves will find the courage to set aside political differences in the pursuit of peace through their first two wars. Accustomed to inaction and corruption, donors have been somewhat cautious in the past to acknowledge the progress made in reforms. Now, however, many donors appear willing to give Nepali reform leaders the benefit of the doubt and provide stronger support to their efforts at winning Nepal's third war. As Nicholas Stern, who was the Chief Economist of the World Bank until recently, said: this is indeed a special moment for Nepal.