– This article was originally published by Ankshita Chaudhary in the Himalayan Times on the April 28, 2019.
For over six decades, foreign aid and Official Development Assistance (ODA) have been an important source of development finance in Nepal. The aid industry in Nepal has seen a rapid expansion characterized by an escalating number of donor organizations with ample funding. The volume of foreign aid disbursement in FY 2017/18 reached US$ 1,733.1 million, of which the Official Development Assistance (ODA) amounted to US$ 1,622.8 million (94%) and the amount disbursed through INGOs totaled US$ 110.3 million (7%). This has indeed yielded notable improvements in the socio-economic conditions of Nepal particularly considering the low spending capacity of our government. But we would be looking through rose-tinted glasses if we were to become too complacent. Despite all great intentions and noteworthy results behind aid financing, there are severe limitation to this model of development ranging from over-dependence on outside intervention to market distortion to large-scale corruption.
The problem with Aid
There exists an inherent tension between the indispensable accountability of the donor agency towards its country’s taxpayers and the desirable accountability towards the beneficiaries in the recipient country. Even though the donor agencies understand the importance of promoting the recipient country ownership, their priorities are driven by the pressure imposed upon by their governments. Hence, too often, the aid financed projects and programs are designed to suit the donor priorities or are drawn from some abstract notion of recognized international best practices, with little or no attention to the local needs and priorities of Nepal.
Similarly, the donor agency’s agenda rests upon the context in which the program is meant to work and to achieve impact. This results in the prioritizing of short and immediate results instead of building sustainable institutional capacity for long-term development efforts. As the projects fail to institutionalize sustainable approaches, in absence of donor support or in case of the project phase out, the disadvantaged Nepalese masses are back to square one.
Moreover, the Government of Nepal has mandated the development partners to work closely and exclusively through the partnership with local NGOs and Civil Society Organizations (CSOs) that are operating at the ground level. This partnership approach to development implies that a significant portion of the aid money has to be spent on maintaining these layers (their staffers, their administration, monitoring and evaluation, etc.), and therefore, only of a fraction of the pledged support actually reaches the targeted beneficiaries.
In other words, aid is a costly way of doing development. Moreover, the reliance on development aid perpetuates a dependency syndrome amongst the masses in the country whilst intensifying the ‘need’ for more aid – a vicious cycle.
Doing Development Right
We need to recognize that no single country has achieved long term economic growth through aid assistance. Hence, we must strive for reforms that build and strengthen the necessary institutions for economic development. A policy action is necessary to open avenues for all Nepalese and put them at an equal footing. The government needs to eliminate barriers to exercising economic freedom which disproportionately burden the poor. The ease to start, grow and close a business; the ease to realize the rewards of productive behavior through simple taxes, freedom of contract, efficient rule of law and increased property rights; the ability to curb rent-seeking through implementation of streamlined bureaucracy and transparency mechanism are the necessary reform agendas that will lift Nepalese out of both poverty and aid dependency.
Besides, removing protectionist barriers and dismantling discriminatory tariffs would allow the Nepalese private sector to widen the scope of domestic markets, thus giving businesses the benefit of competition. Adoption of FDI friendly policies—flexible entry and exit to investors, simplification of administrative process through the materialization of one-window policy, limitation of the negative list—would help Nepal increase its desired economic growth. Even though the abundance of investment opportunities makes the country an excellent choice for investors, the extensive bureaucratic and regulatory restraints outweigh the benefits of doing business in Nepal. Therefore, the Nepalese government should build a regulatory structure and reduce legal as well as financial compliance cost, supporting both domestic and foreign businesses. These changes will allow Nepalese to empower themselves and pursue their own facilities rather than being dependent on aid.
There exists a clear need for Nepal to attempt to integrate more deeply into the global economy and adopt development strategies that use trade as a mainspring for growth, improve its investment climate, and strengthen its economic institutions. Economic freedom not only lies at the heart of development but also ascertains as a proven escape from an otherwise never-ending loop of intergenerational poverty. Thus, in order to achieve sustainable economic growth, Nepal must start doing development differently!