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Will a Federal Form of Government Succeed in South Asia’s Newest Democracy?

Posted on the 22 November 2017 by Center For International Private Enterprise @CIPEglobal

This is a critical moment in Nepal's democratic consolidation. More than a decade ago, Nepal's political parties agreed to change the country's unitary system of government to a federal system. After years of political discord and bureaucratic stasis, Nepal's Constituent Assembly successfully passed its new constitution in September 2015, mandating a federal form of governance. Now, the country must follow through on establishing three tiers of government: federal, provincial, and local. To that end, Nepal held landmark local elections for the first time in two decades, and it will hold its first-ever provincial elections on November 26, 2017. The return of elected government is significant in that it promises to bridge the historical gap between the Nepali state and its citizens. This progress towards state restructuring and improving representative governance is promising.

However, for democracy to succeed, the country's leaders must deliver on the provisions of the Constitution, including federalization. The demand for federalism was initially inspired by popular objections to the undue concentration of economic and political power among a small group of high-caste political elites in Kathmandu, the capital. Moreover, in-fighting among these centralized elites stunted economic reform efforts and fed a corrupt patronage network. Since democracy's reinstatement in 2008, Nepal has rotated through a merry-go-round of 10 prime ministers and remained trapped in a low-growth, high-migration scenario. Many Nepalis-including historically marginalized communities like the Dalits, Madhesis, and Janajatis-hope federalism will give them a greater voice in policymaking and public governance. The remaking of Nepal into a functioning federal country that meets diverse sets of needs will prove to its citizens that democracy delivers.

Broadly, the case for federalism is clear. Local government is the level at which the democratic system most intimately interacts with citizens. As decision-making devolves, regional and local governments become more accessible and geographically closer to the people. This provides a window of opportunity to ensure effective democratic governance and higher accountability for successes and failures in the provision of basic services, the maintenance of order, and the fair resolution of local issues and disputes. Decentralization is also a healthy check against the abuse of power. From the perspective of the business community, the case for federalism is also compelling. For one, decentralization facilitates entrepreneurship. If regulatory offices open at the subnational level, entrepreneurs can avoid burdensome travel to Kathmandu to register their businesses or file for permits. Improvements in the ease of doing business can in turn spur local-level job growth. Federalism also fosters competition among provinces, which will recognize the importance of passing business-friendly policies to encourage growth and provide quality public services, such as steady electricity supply, in order to attract investment. Fundamentally, federalism expands the choices of the private sector. By democratizing economic opportunity across all provinces and for all Nepalis-irrespective of geography, gender, ethnicity, or caste-federalism has the potential to reverse trends that privilege certain groups and geographies.

There are, however, challenges to implementing federalism in Nepal, as well as risks of failure. Ensuring full implementation will require nearly 150 new laws to delineate the powers of each tier of government, as well as the relationships among the three tiers, according to Nepal's Ministry of Law, Justice, and Parliamentary Affairs. Approximately 300 existing laws need to be amended. Challenged with how to operationalize federalism, Nepal faces particularly intense controversy about how the national and subnational governments should collect and share revenue. The Constitution lacks a clear distinction between the regulatory powers of the federal government and the provincial governments and it poorly spells out the powers of the provinces alone. Moreover, the economic aspects of federalism have largely been ignored. Conflicts among the tiers of government look inevitable unless changes are adopted. In this context, civil society and the business community must play a role in informing decentralization, ensuring that the process strengthens-rather than undermines-the country's fragile democracy, and boosts economic freedom through improved governance, efficiency, and accountability.

To help safeguard Nepal's transition towards a decentralized, market-based democracy, CIPE and its long-time partner Samriddhi, the Prosperity Foundation-a well-respected economic policy think tank in Kathmandu-launched a new program in early 2016. This program aims to strengthen economic governance and economic freedom at the federal, provincial, and local levels as Nepal transitions from a unitary to a decentralized, federal state. Given the country's turbulent past, not succeeding with federalism in Nepal-where regional economic imbalances and caste and ethnic tensions persist-also risks the resurgence of conflict. As South Asia's newest democracy, Nepal's failure to institute federalism could not only return the country to violence but also hasten the retreat of democratic governance in the region.

Jennifer Anderson is Senior Program Officer for South Asia at the Center for International Private Enterprise. Related Content:

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