Missing links in Nepal’s MCC debate

The Millennium Challenge Corporation (MCC) Compact was signed in September 2017 between the US aid agency and the government of Nepal promising $500 million worth of funding, with Nepal matching another $130 million.

Its stated objective is to ‘increase the availability of electricity and lower transportation costs —helping to spur investments, accelerate economic growth, and reduce poverty’. Over the last four years of contentious debate and polarising ideological arguments, it continues to await endorsement by Parliament.

If endorsed, it will be the biggest grant aid Nepal has ever received and the MCC’s first such ‘compact’ in South Asia. MCC vice-president Fatema Z Sumar and deputy vice-president Johnathon Brooks made a much photographed visit to Kathmandu, meeting senior political leaders from both ruling and opposition parties.

What are the two sides to the debate?

As in earlier debates on foreign aid, political and public arguments for and against the MCC have been polarised between those who see it as a valuable investment in Nepal’s development, and those who view it as an expression of US geopolitical interest in the region.

It is difficult to ignore the fact that the MCC Compact coincides with China’s global rise, and its own massive programme for infrastructural investment through the Belt and Road Initiative (BRI).

In Nepal, some view the MCC as a magic bullet to reduce poverty through economic growth and investment in infrastructural development. This view, whilst largely held by Nepal’s notable economists and policy advisors, ignores the wider political-economic context of the MCC.

It also overlooks the fact that investments like MCC often produce unequal benefits and contribute to growing inequality. It tends to ignore the seven decade long history of foreign aid funded development in Nepal, which has not only failed to reduce inequality, but has further widened it — arguably contributing to increased corruption, as aid is often implicated in political patronage, benefitting some while excluding others.

On the other hand, there are those who oppose the MCC as an expression of US hegemony and imperialism, and as effectively undermining Nepal’s sovereignty. In a country once described by Prithivi Narayan Shah as ‘a yam between two boulders’ (India and China), nationalistic sentiment and appeals to the need to defend sovereignty often triumph.

This view considers the dangers of accepting this Compact as self-evident, and fails to even consider any possibility of positive change through aid funded development.

Given the impasse, the Nepal government sent a letter signed by Finance Minister Janardan Sharma to the MCC on 3 September 2021 that contained 17 clarificatory questions.

Within five days, the MCC’s Vice President Sumar sent a reply just before her arrival in Nepal. A few issues stand out: Nepal seems to seek assurance that MCC is ‘selfless’ and has no hidden objective, whether and how it is based on Nepal’s priorities, whether it contracts Nepal’s law and constitution, whether it undermines Nepal’s sovereignty, and assurance that it is not a part of the Indo-Pacific Strategy.

There is a question on tax exemption, international remuneration and benefits, intellectual property, terms of withdrawal, audit, and whether and how it might impact Nepal’s relationship with other countries.

To an observer, Nepal’s direct questions are more telling than the diplomatically toned answers offered by MCC. Yet, it is disappointing to see that this Q/A and the wider debate on MCC fail to engage with some of the most pertinent questions.

What is missing?

Very few of those involved in the debate over the MCC look at the political-economic context of Nepal in the contemporary world, or at the political economy of aid and development.

Firstly, it would be naïve to think that MCC is a selfless investment by the United States. It is very much part of the developing contest between the US (possibly ‘the West’) and China. But this is an inevitable component of the dynamic of global capitalism, and not specific to the MCC. Nepal cannot avoid this.

While the instrumental use of foreign assistance in the service of political, economic or military agenda is nothing new, it is increasingly met with domestic resistance in the form of nationalistic and sovereignty based discourses in countries like Sudan, Sri Lanka, Burma — even in Nepal that has been relying heavily on foreign aid since the United States made its debut in 1951.

‘Donors’ have not only been criticised for promoting their interests, but also for undermining state sovereignty. One particular implication of such discourse, however limited it may be, is that although the aid is generally welcomed, ‘donors’ can no longer work without considering how their work is perceived locally.

The declaration ‘we are here to help’ is no longer enough, as donor activities have important political consequences as well as a political rationale. Given the history of foreign aid and an overwhelming presence of donors as well as emerging systematic criticisms against donors, Nepal offers some insights on how aid is perceived locally and resisted on sovereignty grounds.

Secondly, Nepal’s history of foreign aid shows that aid funded development has tended to benefit a minority of people in Nepal and has failed to reduce inequalities – arguably it has deepened them.

The implied linear relationship between investment in infrastructural development on the one hand, and economic growth and poverty alleviation on the other, is misleading. Infrastructure is not neutral, it does not benefit all equally.

Ever since the 1970s, studies made it clear that roads were not enough to promote development, and that transport infrastructure brought change that was more beneficial to some than others, deepened inequality and even disadvantaged some directly.

The debate and critical scrutiny of the MCC should focus on who will benefit in Nepal and, more specifically, whether investment in the proposed infrastructure will benefit the poor. This is a fundamental question given that both vertical and horizontal inequalities have been key concerns in Nepal, and the questions of equality, dignity and rights have been central to the country’s progressive socio-political movements and transition since the 1990s.

It is positive that the implications of agreeing to accept the MCC has been so widely debated. But the existing public debate has been largely misplaced, and misses the critical questions. While one side appears adamant to resist it on sovereignty grounds, the other seems complicit in ignoring the most important aspects of any development investment.

Dr Jeevan R Sharma is at the University of Edinburgh, and is author of many publications on migration, development and social change in Nepal.

Dr David Seddon is Director of Critical Faculty, author and co-author of many publications on Nepal. Both are currently working on a book on the political economy of aid and intervention in Nepal.