Earthquake sets back Nepal's development goals

Analysis

While few buildings survived near the epicentre of the quake, modern constructions around its edges proved surprisingly resilient with older buildings the worst affected. Estimates of immediate costs of repairing damaged houses and offices, as well as roads and basic infrastructure, vary between 5-10 billion dollars.

For a country with GDP of 20 billion dollars, these represent huge sums -- especially as insurance markets are undeveloped and cover less than 100 million dollars of the total. Yet, given both the power of the earthquake (7.9 on the Richter scale) and the risk faced by nearby Kathmandu with its population of 1.75 million, the consequences could have been much worse.

Economic cost

Moreover, mechanisms are already in place to facilitate recovery once the short-term crisis is over. Nepal has long been a focus of foreign aid activity, which accounts for the equivalent of 6-7% of GDP. Well-established agencies can handle incoming flows of resources. Indeed, as is often the case after major disasters, reconstruction efforts are likely to boost GDP growth, which has lagged at 3-4% in recent years.

Nepal has also been dependent on remittance flows -- now involving 2.2 million overseas workers and accounting for 25-30% of total GDP. There is some concern that these may fall as migrants (mostly young males) return to help rebuild family homes -- but remittance flows have usually increased after calamities as more savings are released to combat adversities.

However, aspirations to turn Nepal from a 'least developed' into a 'developing' economy have been set back:

Tourism

The tourist industry is particularly at risk. Tourism, directly and indirectly, employs 1.1 million people and is responsible for 7% of GDP. However, five of Nepal's eight World Heritage sites were badly damaged by the earthquake, which took an especially heavy toll on older buildings. Avalanches on the slopes of Mount Everest have damaged mountaineering infrastructure. This means lasting damage given that Nepal's per capital income is just 700 dollars.

Hydro potential

Nepal's hydroelectric capacity may have been compromised.

The country's Himalayan situation gives it huge potential for generating hydroelectricity, variously estimated at 43,000-83,000 megawatts (MW), which could both support local industry and earn substantial export revenues. It currently produces only 700 MW through hydro sources.

Part of the constraint is endemic political instability. Yet part has also turned on ecological and environmental issues, where Nepal's high-risk earthquake status has added to concerns over deforestation, the displacement of indigenous peoples and the loss of farmland.

Kathmandu recently signed contracts for two projects worth 2.5 billion dollars with India's GMR engineering company, and one for 1.6 billion with China's Three Gorges Company. These contracts would exponentially increase foreign direct investment (FDI) flows, which, starting from a mere 6 million dollars in 2006 at the end of the civil war, reached nearly 300 million by 2013.

However, the earthquake has damaged two of Nepal's existing hydroelectric plants -- at Kaligandaki and Chilime. It has also obliged the Three Gorges Company to rescue 200 of its workers, trapped at the Rasuwagadhi plant. Moreover, there are fears that the quake will have triggered large mudslides in the mountains, altering hydrography.

In its wake, the country's hydroelectric programme is likely to face serious re-assessment with possible down-scaling of its potential -- and hence FDI.

Political stability?

Nepal has struggled to find political stability, ever since its ten-year civil war ended in 2006. The first Constituent Assembly, elected in 2008, failed to deliver a new constitution and dissolved itself in 2012. Its successor, elected in 2013, has fared no better (see NEPAL: New government confronts daunting agenda - November 29, 2013).

Since 2008, there have been seven changes in its interim governments. In the weeks leading up to the earthquake, one set of factions (representing Maoist opinion) had called for a three-day general strike against another set (representing liberal opinion) now backing the government of Prime Minister Sushil Koirala. Koirala himself had earlier turned down a power-sharing deal.

This has crippled governance, affecting not only post-civil war reconstruction but also responses to the present earthquake crisis. Low public sector morale is exemplified by the fact that 40% of government officials deserted their posts when the quake hit. Nepal's 100,000-strong army has had to step into the breach to supply civil rescue functions.

The depth of the humanitarian crisis and economic damage may create scope for political cooperation and finally, perhaps, a constitution.

Foreign policy

Meanwhile, deepening regional rivalry between Nepal's largest neighbours, India and China, could benefit Kathmandu.

The country has long been seen as being within India's sphere of influence. However, since 2006, China has strongly increased its economic presence:

• In 2014, its FDI commitments -- at 174 million dollars -- outstripped those from India for the first time.
• The Three Gorges Company's power contract forms only part of China's involvement in Nepal's infrastructure; Chinese companies are also building roads and a rail link connecting Nepal to China's rail system.

To counter Beijing's influence, Indian Prime Minister Narendra Modi made Kathmandu one of his first ports of call after his election, and pledged 1 billion dollars in export credits. He has also put his diplomatic weight behind finalisation of GMR's hydroelectric contracts.

On first news of the earthquake, Delhi launched a major rescue-and-relief mission, which some critics have compared favourably to the often lacklustre performance of such services inside India itself. Beijing has responded with emergency provision from Tibet.

If competition between the two rivals continues into reconstruction, Kathmandu could find itself a significant beneficiary (see INDIA/CHINA: Delhi offers new check on China's rise - April 1, 2015).