The subsidy trap: an unfathomable economic curse – myRepublica
The debt trap is a concern in Nepal, as a large share (about one-tenth) of total income must be allocated each year to pay interest and principal to foreign lenders.
In the realm of economics, foreign aid is often ridiculed as the activity of snatching hard-earned money from the poor in rich countries and giving it to the rich in poor countries. Looking through the history of aid and diplomacy, one would be amazed at the plethora of examples where this kind of disturbing distribution of wealth has occurred between rich and poor. The “self-proclaimed” rich countries of the global north have flooded funds to the “so-called” poor countries full of rent-seeking political sharks, though former citizens have been and continue to suffer from the three great curses; inequality, poverty and unemployment. Yet sand castles are built and collapsed time and time again.
There has been a wide debate about the pros and cons of foreign aid and subsidies. Scholars have a divided opinion on this question. For example, Jeffry Sachs, in his book “The End of Poverty” (2005), mentions that poor countries need a big push from rich nations to climb out of the abyss of poverty. But, notable scholars like Isabelle Rothstein (2014) of Lund University suggest a grant could be a trap, after extensive study of foreign aid in post-conflict Cambodia. His study shows that foreign aid in developing countries with weak governance often has negative impacts on the development of the recipient country. Furthermore, examples of Zairian disease are widely cited in the literature, as decades of large-scale foreign aid left no trace of progress and enabled incompetence, corruption and misguided policies in many countries. .
Nepal announced acceptance of foreign aid on January 23, 1951, receiving aid from the United States in the name of the Point Four program. After opening this mystical Shangrila to the world, the country urgently needed money to fund its ambitions to establish itself as an emerging economy. Thus, it suffered collection grants from the then benevolent countries such as the United States, Japan, Russia, China, India, United Kingdom, etc. The amount and number of grants was enormous in the decades of the 1960s and 1970s, soon to change to aid in the form of loans. But, after the bitter experience of subsidies from underdeveloped countries in Africa and Asia, Caucasians realized the real problem of subsidies such as ownership among citizens, rent-seeking among politicians and hesitation among donors, and continued the paradigm shift from grants to loans after the 1980s. And this has played a role in the accumulation of foreign loans from Nepal, an expensive source of finance.
Recently, the debt trap has been a concern in Nepal, as a large share (about one-tenth) of total revenue has to be allocated each year to pay interest and principal to foreign lenders. Conscious of this obligation, some parliamentarians and economists today boast of the need to ask for the abundant amount of grants (free money), unlike loans, to finance capital expenditure. At first glance, this seems like a good proposition to a layman, but our experience with subsidies leaves us with huge costs rather than economic growth.
Grant reduces the cost of doing nothing
We citizens are in a social contract with government leaders on a clause that they must work in accordance with the commitments in their manifestos. It is therefore incumbent on them to seek out abundant resources, to allocate scarce resources correctly and to increase social welfare. And, if they do not fulfill this mandate, they must bear the cost, the cost of being ousted from the throne by election. Each time, they have proven themselves to be the worst in this mission to lead the nation to prosperity. But the irony is that the same numbers are the ones that have guided us so far, as their mismanagement and misuse of resources have been disguised as grants and loans. For example, Nepal has taken a step forward in gender equality, increasing average life expectancy, happiness index, peace index, etc. with the help of international partners and these achievements are the only “face-saving shields” for politicians to beg for votes. Subsidies from international agencies served as a cushion to hide corruption and underperformance in revenue collection. If more funds flow freely, the country may continue with high levels of tax evasion, corruption, vehemently informal economy and yet show some signs of development. Thus, subsidies are the best way to reduce the cost of bad governance for politicians in power.
Aid fungibility harms the education and research sector
Aid fungibility refers to the possibility for aid-recipient countries to reduce the investment of their own resources in the sector receiving the aid and to transfer them to other sectors of the budget. Two particular sectors, namely education and research and development, are hard hit by this situation. As donors were primarily interested in improving the reach of education in the most remote part of the country, they worked vigorously on this. But this has crowded out government attention and funds in education and R&D. Today, this is reflected in the quality of education that students receive here in Nepal. There are no large private R&D companies, and the government does not take any initiative to support research activities. Our administrators and politicians have forgotten their responsibility to invest more in education, research and skills development, which are one of the main pillars of long-term growth and sustainable development.
Loss of human capital to aid agencies
A few years ago, one of the most senior bureaucrats was skinned in parliament by opposition lawmakers for stepping down as “chief secretary” and joining a supranational institution. However, the truth is that many government job holders are concurrently engaged with international agencies, although this is de jure illegal. The cream of the intellectuals, on whom the government invests so much, are ultimately lost to these agencies and this has been a curse for every emerging country that receives heavy aid. In a country where the most educated work for aid agencies, there will be a natural tendency for people to depend on donor-led actors, just as any worker depends on their source of income. The author also fears that a high proportion of educated people have an interest in keeping Nepal dependent on aid!
Fostering Institutional Failure
Mahendra P Lama (2021), an Indian author and professor of economics, in an interview forcefully asserts that the biggest problem in contemporary Nepal is “institutional failure”. As Lama rightly noted, not only government offices lack institutional resilience, but also private institutions run with a debilitating state of governance in Nepal. One of the plausible reasons for this is that we have always depended on foreign actors for our greater quest for development and we have never practiced some essentials necessary for development such as ‘coordination between agencies’, ‘ citizen ownership”, “research and development”. ‘, ‘Brainstorming Practice’ etc. Our partners have always performed these crucial actions on our behalf, making us dependent on them forever. The flagrant failure of coordination between Nepse and Sebon; NEA and Road Department are known to all of us. The World Bank recently pulled out of a transmission line project due to lack of citizen ownership. And, as Nepal is vulnerable to climate change, there is still not a single institution carrying out research and campaigning to work on this issue. The elements mentioned above are a few corners that we miss.
However, it would be too early to floccinaucinihilipilify (*consider something as worthless) the subsidies at this time of slow growth and high inflation, succumbed to the depletion of foreign exchange reserves. But Nepal does not always have to beg the way to prosperity. For now, the current crisis of credibility, weak accountability, populist politics, jingoist decision-making, blind eyes to corruption and poor governance must be checked and balanced by citizens through their right to vote. Otherwise, the abyss and chasm of “The Grant Trap” is inevitable.