Economic Diplomacy Boosts Development

Diplomacy is an act of pursuing national interest through well-accepted means of tact and intelligence. Economic diplomacy (ED) has become an important component of foreign policy of any nation to promote economic interest vis-a-vis other states and international organisations. International relations today are largely shaped by trade, investment, tourism, technology transfer and so on. Following the economic liberalisation in the 1990s, Nepal adopted economic diplomacy as a major instrument of global engagement by mainstreaming it into foreign policy domain.

Importance of economic diplomacy has increased incredibly faster than before. This can be validated by India's increasing trade worth USD 118.4 billion with China, replacing the USA as the largest trade partner in 2023-24. Similar is the case between China and the USA despite hiccups in trade and technology matters between them. It shows that economic interests are non-negotiable before political ideology for countries – small and big. However, there are some pertinent issues concerning the fate of economic diplomacy and globalisation. The continuous war between Russia and Ukraine has posed as a stumbling block for the economic integration among the countries. 

Protectionism 

Increasingly tense relations between the USA and the People's Republic of China relating to trade and technology is another worrisome scenario causing disruption in global supply chain and decoupling of the larger economies. Recently the US imposed duties on Chinese electronic Vehicles (EVs) and Apple's production in India, which can bring a shift in their trading pattern. Apple alone produced $14 billion worth iPhones in India in the last fiscal year after it relocated from China, according to a report by Bloomberg. The rise of nationalism in different countries has resulted in protectionism and closure of borders for immigrants. This is antithetical to globalisation and global production and distribution network. 

Change in global economic order has direct bearing on the countries like Nepal that is trying to integrate its economy into the global one. Annette Baker Fox, an analyst of small state diplomacy says, "Power of big states comes from the military strength whereas diplomacy is the means of statecraft of small states." This applies to economic diplomacy as well. This claim can be further substantiated by the choice made by Singapore which focused on robust economic diplomacy and promoted relations with states including China and the USA. 

Nepal government introduced economic diplomacy as a policy framework since 1996. Several institutional reforms within Foreign Ministry took place. Multilateral Economic Affairs Division and High Level Consultation Mechanism were created. Economic diplomacy was incorporated in the periodic plan. Sectors such as foreign direct investment (FDI), foreign trade, tourism and foreign employment, among others, were identified as potential areas for economic diplomacy. Economic counselor and labour attaché have been appointed at the Nepali embassies abroad. The ambassadors have to sign performance contract that is related to economic diplomacy. However, Nepal is yet to realise robust economic diplomacy by taking the advantage of free trade area and preferential trade arrangement. As a result, FDI inflows and its share to GDP is quite low. Between 1995-96, since the start of ED and 2021-22, the total actual net FDI inflow stood at around 36.2 percent.

International trade seems to be at the downward trend with gross deficit worth 929.7 USD million in April 2024 compared to the gross deficit of 892.2 USD million in the previous month.  Tourism and foreign employment appear promising areas but aren't reliable due to external risks. There has been some efforts in boosting connectivity with India in terms of rail, road, petroleum pipeline and energy trade but the outcomes are not satisfactory. Connectivity projects between Nepal and China is still in initial phase. 

In view of the changed global and regional context, pursuing robust economic diplomacy should be a deliberate choice of Nepal. Political stability and policy consistency are crucial for attracting foreign investment and increasing international trade. Ministry of Finance should equip itself with negotiation and communication skills. Institutions built to promote ED need to be strengthened with necessary manpower and resources. In the meantime, ambassadors and diplomats with economic backgrounds and knowledge play vital role in promoting ED.  Nepal's economic interest and development aspiration can be met by fostering trustworthy and transparent economic relations with both neighbours and development partners. Nepal is poised to benefit from Belt and Road Initiative (BRI). It signed BRI framework agreement in 2017 but project selection and funding mechanism should be worked out for the mutual benefits.

Export potential 

The World Bank states that Nepal has export potential worth USD 9.2 billion However, it is tapping only 1/4th of the potential. This gap could be met with production in the sectors that are advantageous to Nepal and by linking them with international supply chain. Located between two giants of Asia - China and India - Nepal has to play a balancing role. Its strategic location should be a source of economic opportunities, not a liability. Conducive investment climate should be created to increase economic growth, jobs, income of the citizens and GNI per capita of the country. Such investment could be promoted in agriculture, tourism, energy, mining industry, IT-related sectors and many others. National economic wellbeing needs to be given priority by keeping partisan interest aside. Pragmatic economic policy at home and robust economic diplomacy abroad could be stepping stone towards realising the goals of national development.

(Bhandari is an official at the Ministry of Foreign Affairs, Nepal.)