SJPG

VOLUME 35
NUMBER 2
DECEMBER 2014

Economic Diplomacy: A New Dimension

of Nepalese Foreign Policy
Shatrudhwan P S Pokharel

Abstract
Contemporaneous with the end of the Cold War and the collapse of the Panchayat regime in the
1990s, policy makers in Nepal faced a sudden existential crisis in the foreign policy front. In the
early 1990s, therefore, the discourse on economic diplomacy attained greater prominence in the
domain of foreign policy. After two and half decades of its adoption as a component of our foreign
policy, it’s the time to judge its role in fostering economic development. It may be argued that the
objective of economic diplomacy has not been met owing to various factors. While it is obvious
that the inordinate expectations on the ability of economic diplomacy to make contributions to
economic development is probably misplaced, it is nonetheless true that, shorn of much strategic
and political role in either the region or the world stage, Nepal's economic diplomacy is more
relevant today than in than past. The way to do this is to set clear institutional guidelines and
goals, improve the Foreign Ministry's co-ordination not only with its missions abroad but also
with the line ministries, private stakeholders, and enhance the interface between the human re-
sources and modern technology backed by sound political environment at home.

Key Words:
Foreign policy, Economic diplomacy, globalization, paradigm shift, national interest

1 Background
The framework of international relations has undergone substantial changes in
the past two decades. The period did not only witness the end of ideological rival-
ry but also paved the way for the onset of liberalization and the diffusion of tech-
nology across the globe. Economic diplomacy has gained in importance in the
modern world for both the developed and developing countries. Globalization of

Corresponding Author
Shatrudhwan P S Pokharel, Email: shatrumitru@gmail.com
42 Economic diplomacy – a new dimension of Nepalese foreign Policy
economies including markets further bolstered by the end of cold war and the
establishment of World Trade Organization (WTO) has provided greater empha-
sis on and support to Economic Diplomacy.
Today there are increasing calls for a new international order that can effectively
promote the interests of all countries around the world. Similarly, there is also a
demand for a new financial architecture that can effectively deal with interna-
tional crises and be more responsive to the needs and aspirations of the develop-
ing countries. These developments give sustenance to the fact that the developing
countries have to make vigorous efforts to promote their interests in the interna-
tional arena. Considering our land-locked position, underdeveloped status, low
level of economic activities and the incidence of poverty, the enhancement of
national economic interest abroad is a fundamental pre-requisite ensuring long
term peace progress and prosperity of the nation (Acharya, 2000). Economic
diplomacy is therefore a response to the current trends in international relations.
The first priority of our foreign policy is to building our economic strength by
socio-economic development (Acharya, 2009). Adjusting itself to the changing
times and requirements, Nepal has therefore made economic diplomacy as one of
the priorities of her foreign policy.

After the political change in Nepal in 1990 and the subsequent election of the
new democratic government, Nepal’s foreign policy had incorporated two new
components - human rights and economic diplomacy (Lohani, 2009). The pace
of globalization with a paradigm shift in international relations from political to
economic had also played vital role in adopting the economic diplomacy as an
important component of our foreign policy (Acharya, 2000). Even though the
concept and pursuit of economic diplomacy have roots in Nepal's diplomatic
history, the emphasis is therefore quite recent.
Different countries may have different components of economic diplomacy de-
pending upon their areas of competence as well as on the basis of their potentiali-
ty in terms of competitive and comparative advantage. In Nepal's context, For-
eign Direct Investment (FDI), Promotion of Tourism, Promotion of Export
Trade, Development Cooperation (Foreign Aid) and Promotion of Foreign Em-
ployment have been identified as the main components of economic diplomacy
(www.mofa.gov.np). Quite recently, cultural diplomacy has been accepted as a
component of economic diplomacy. Hence, the context of economic diplomacy
in the case of Nepal consists of directing diplomatic activities in order to promote
economic interests mentioned above.

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 South Asian Journal of Policy and Governance 43
2 Concept of Economic Diplomacy
The objectives of foreign policies are achieved through different means and one
of the most important means is diplomacy (Leguey and Jean, 2010). From a state
perspective, diplomacy is concerned with advising, shaping and implementing
foreign policy (Barston, 2007). Diplomacy is the technique by which the objec-
tives of foreign policy are accomplished. Diplomacy is one of the means or meth-
ods of conducting foreign policy of a nation (Rathod, 2004). Diplomacy involves
diverse area and issues ranges from political to military to economic handled by
different actors in different forms ranges from bilateral to multilateral to confer-
ence to shuttle (Barston, 2007), among others. One of the most significant forms
of contemporary diplomacy is economic diplomacy.
Smith Simpson describes diplomacy as ‘the means by which governments seek to
achieve their objectives and the principles they seek to advance in international
affairs. It is the process by which policies are converted from rhetoric to realities,
from strategic generalities to the detailed actions or inactions of other govern-
ments (Rana, 2000). Melissen observes diplomacy as the mechanism of represen-
tation, communication and negotiation through which states and other interna-
tional actors conduct their business (Mellissen, 1999). For an underdeveloped
country like ours, diplomacy is one of the most important instruments to achieve
socio-economic development. In the past, it has proved to be an effective instru-
ment to achieve foreign policy goals defined in terms of national interests.

From among the several facets of diplomacy, economic diplomacy, which is the
practice of diplomacy in the pursuit of economic objectives, is of vital significance.
In essence, economic diplomacy is essentially a process of mainstreaming eco-
nomic dimension into our foreign policy perspective with the objective of further
promoting our interest with the cooperation of the outside world through well
informed negotiation (IFA, 2002).

Economic diplomacy employs economic resources, either as rewards or sanctions,

in pursuit of a particular foreign policy objective. This is sometimes called ‘eco-
nomic statecraft’. Economic Diplomacy may have two-way meaning--diplomacy
backed by economic strength or diplomacy being used to achieve economic de-
velopment. To put another way it might mean either as economy for diplomacy
or diplomacy for economy (Adhikari, 1996). Diplomacy by economic clout is
mostly used by developed countries in order to exert influence on relatively un-
derdeveloped countries to achieve their national interest whereas diplomacy for
economic development is pursued by underdeveloped countries in order to
achieve socio-economic development of the country by getting their support in

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44 Economic diplomacy – a new dimension of Nepalese foreign Policy
terms of aid and expansion of trade as a way to fulfill the resource gap. Therefore,
economic diplomacy means to use the available diplomatic apparatus of countries
in order to promote its socio-economic development and interest.
Economic diplomacy uses a full range of instruments ranging from negotiation,
regulation and rules that are binding. But economic diplomacy is best defined not
by its instruments but by the economic issues that provide its content. A distinct
feature of economic diplomacy is that it is also sensitive to market developments
and makes adjustments accordingly. Hence economic diplomacy has primacy for
all countries, big or small, advanced or developing or for countries in transition
(Rana, 2008). However, the priorities, issues, apparatus and mechanisms for the
conduct of economic diplomacy may vary from one country to another depend-
ing on their interests, comparative and competitive advantages, and capability to
undertake action, among others. Thus, economic diplomacy seeks to advance the
economic interests of a country in international affairs through its diplomatic
apparatus.

3 Theoretical Perspectives
Economic diplomacy is the blend of both economics and diplomacy; therefore, its
foundation is based both in economic theories and diplomatic/political theories.
The issues are more influenced by economic concept whereas the execution as-
pect is influenced by diplomatic foundation. Economic diplomacy involves multi-
ple issues, and engages various actors at different levels. Therefore, it is important
to make it clear at the outset that there is no single theory of economic diplomacy
that can provide answers on how states under given circumstances will conduct
their policies. International relations theories, strictly speaking, are concerned
with the prediction of outcomes and with states as unitary actors with clearly de-
fined and stable policy preferences. Hence the different theories may need to
analyze the very nature of economic diplomacy and its successful conduct (Bayne
and Woolcock, 2011).
There are various theories that underpin the concept of economic diplomacy
such as Realist Theory, which highlights the importance of political factor in
economic diplomacy; Regime Theory which discusses the multiple actors and
institutions in economic diplomacy; Two Level Game Theory or Rationalist
Theory which explains the involvement of various issues and factors in economic
diplomacy etc. However, the concept of globalization and how it has direct im-
pact on diplomacy thereby making it economic in nature and the different levels
where economic diplomacy is practiced are being discussed hereunder.

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 South Asian Journal of Policy and Governance 45
3.1 The Globalization and Economic Diplomacy
After the end of cold war, interdependence mutated into a worldwide trend, was
renamed ‘globalization’ and became a dominant economic current of the age.
Globalization is the process of increasing interconnectedness between societies
(Baylis and Smith, 2005). It heralded the reorientation of international relations
from political to economic issues. Globalization is mainly associated with eco-
nomic aspects though it has many forms. Economic globalization constitutes inte-
gration of national economies into the international economy through trade, FDI,
short-term capital flows, international flows of workers and technology (Bhaga-
wati, 2007). Therefore, the notion of and practice of economic diplomacy has
gained in prominence over the past two decades due to new challenging econom-
ic issues, the global interdependence of states and the proliferation of regional
trade initiatives within and across the continents (Soobramanien, 2011).

Never before has improvement of commercial and economic mutual relations

between the countries been at the very center of diplomatic actions as recently.
The principal causes of interest of diplomacy to its historical economic back-
ground are based on the following elements (Gostisan 2012):

• In the most of developed countries, the share of foreign trade and in-
vestments in GDP (Gross Domestic Product) is constantly growing in
comparison with local manufacture;
• Implementation of economic reforms in processes of orientation to mar-
ket economy of the developed countries, as well as the strategy of devel-
opment which is based on strengthening of export, promotes faster inte-
gration of the country into the global economy;
• Globalization of trade and business means production escalating and ser-
vices sector expansion, also creates necessity to activate multilateral regu-
lar communications between the countries;
• Expansion of regional trade agreements for elimination of barriers for in-
ternational trade and investment processes.

Globalization is intimately connected with international affairs, because it accen-

tuates the interconnections between countries and leads to increasing mutual
interdependence (Rana, 2007). The process of globalization has changed the form
and nature of international relations, foreign policy and diplomacy. The growing
complexity of specialized economic issues and their increasing importance in a
globalized world profoundly affect the way states conduct their relations nowa-
days. This means that there is not only the increasing of importance of economic
diplomacy but also it is becoming more and more complex and crucial. As a

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46 Economic diplomacy – a new dimension of Nepalese foreign Policy
result, there are increasing numbers of issues to address, a multitude of states to
interact with, and variety of regional and multilateral forums to be represented
(Soobramanien, 2011).
In the globalized world, the methods and parameters of diplomacy have also
witnessed radical transformation. States will find it necessary to interact even
more vigorously among themselves than before (Lamsal, 2009). They need to
create new institutions, adopt various policy measures, establish new mechanisms
to face the challenges posed by the globalization and minimize its impact. The
advance of globalization thus made heavy demands on governments in economic
diplomacy (Bayne, 2011):

• The range and variety of economic diplomacy greatly increased

• Economic diplomacy penetrated deep into domestic policies and was no
longer limited to measures applies at the border. It involved many more
actors inside and outside governments
• The range of countries active in economic diplomacy spread across the
entire globe.
On the one hand, globalization affected cutting costs, improving qualities, devel-
oping new technologies, bringing new investments, developing new markets and
creating new jobs thereby transforming many societies into prosperous one but on
the other it contributed in increased gap between rich and poor, haves and have
nots especially small and poor countries affected most negatively by this global
phenomena (Stiglitz, 2002). One of the darkest aspects of globalization is that it
appeared good for the rich but bad for the poor, unless active measures were
taken to help those left behind (Collier, 2007). Therefore, economic diplomacy
has a herculean task to deal with this difficult situation too. In such a way, the
advancement and results of globalization both contributed further to the im-
portance of economic diplomacy.

After the paradigm shift in international relation in 1990s the diplomacy also
witnessed changes within its various forms and activities which can be illustrated
by following matrix (Rana, 2011).

Globalization, not only contributed in the changing nature of diplomacy, but also
because of globalization diplomatic activities are interlinked with each other mak-
ing it more complex and difficult; the same is the case with economic diplomacy
which now covers all those areas covered by commercial diplomacy in the past
and present which can be illustrated through the following figure. The figure, on
the one hand, illustrates the existence of special features of different types of di-

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 South Asian Journal of Policy and Governance 47
plomacy and need to have special skills and capability to deal with and on the
other hand, the overlapping of the issues with one another and relatedness of
each other making it more delicate, complex and difficult to manage.
SN Issues Classic Diplomacy Globalized Diplomacy
1 The home part- Major line ministries active in Virtually all official agencies, plus non-
ners external issues, office of the head state partners from business, the media,
of Government, parliament. academia, think tanks, S&T, civil society,
Minimal contact with the media NGOs. Fairly open communication.
and business.
2 The external The foreign ministry, the offices All the above, with a special focus on the
partners of the heads of government and non-state actors, and the sub-state agen-
state, the parliament, regional cies like provincial governments, city and
governments, the ministries of local administrations; plus ethnic diaspo-
direct concern in dialogue plus ras communities, students and others
contact with the media and from home based in the assignment
business. country.
3 Subjects in Main focus on “high diploma- Huge diversity; MFA cannot master all
international cy,” i.e. issues of peace, security, dossiers, leaves technical subjects to
dialogue cooperation. functional ministries, while playing coor-
dination role.
4 Style of external MFA-centric, limited role of Each agency has external role; MFA is
affairs govern- other agencies the coordinator and networker; “Whole
ance of government” approach.
5 Role of head of Sporadic; infrequent summit No other ministry is supervised as closely
government in meetings by the Head and his Office as the MFA;
normal times MFA works closely with the Head, and
his Office, as no other ministry; frequent
bilateral, regional and global summits.
6 Typical diplo- Highly professional, career Blend of professional career track and
matic stability, limited interchange lateral entry, frequent churning; increas-
service with other government branch- ing “in” and “out” placements; publics
es; respected public image. High question relevance. Morale level variable
morale. Routine methods of HR depends partly on quality of HR man-
management. agement.
7 Role of embassies To advise home government, Blurring of role distinction between the
abroad implement policy, promote MFA and embassy, embassy may act as
relationships. Set pattern of co-manager of relationships. Continual
embassy-MFA dialogue. dialogue with MFA.

3.2 Five levels of Economic Diplomacy

Modern diplomacy encompasses several cross-cutting issues. In much the same
spirit, economic diplomacy involves various issues handled by several actors and
is practiced at various levels – unilateral, bilateral regional, plurilateral and multi-
lateral (Bayne and Woolcock, 2011). Economic diplomacy is multi-layered in
scope and involves the art and science of negotiations ranging from bilateralism
to sub-regionalism, regionalism as well as internationalism to multilateralism and
plurilateralism (Rana, 2009). Nepal’s present engagement and involvement in

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48 Economic diplomacy – a new dimension of Nepalese foreign Policy
various regional and global organizations and orientation of our overall foreign
policy also signifies this fact of contemporary diplomacy.

Source: Rana: New Economic Diplomacy, 2011

The best example of unilateralism is liberalization of domestic policies and open-

ing up of country’s market in order to boost trade. It is done either as the initia-
tion from the country concerned or as a reaction to other countries’ action. At
the bilateral level, development cooperation, FDI, trade and foreign employment
issues are handled with different mechanisms like joint forums, agreements on
trade, investment or avoidance of double taxation. Nepal has bilateral trade
agreements with seventeen countries. Activities such as high level, official and
business level visits, bilateral agreements, establishing joint mechanisms etc. at the
bilateral level provide resonance foundation for the promotion of economic inter-
ests between the countries.

At the regional level, the economic issues are discussed and mechanisms are de-
veloped for the interest of all the member countries. There are several issues and
problems which can be dealt effectively in the interest of a country in particular
and region in general with clearly defined economic diplomacy in terms of re-
gional cooperation. Nepal has joined the regional trading blocs to promote re-

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 South Asian Journal of Policy and Governance 49
gional trade by using complementarities within the region. Nepal is a party to two
regional agreements – Agreement on South Asian Free Trade Area (SAFTA) and
Framework Agreement on the Bay of Bengal’s Initiative for Multi-Sectoral,
Technical and Economic Cooperation (BIMSTEC) Free Trade Area in 2004.
There is the need to be transformed into zones of economic cooperation among
regions that once were part of the same culture and political space (Raja Mohan,
2003). In this way, regionalism can be a viable forum to promote economic inter-
est irrespective of political complication.

At the plurilateral level Nepal deals with plurilateral bodies like Organization for
Economic Cooperation and Development (OECD), G8, G20 etc. Nepal’s devel-
opmental activities are heavily dependent on Official Development Assistance
(ODA) and there are numbers of international declarations and agreements on
aid effectiveness such as Paris Declaration, Accra Agenda for Action, Bussan Dec-
laration etc. At multilateral level, Nepal is deeply engaged at international forums
both at the UN and World Trade Organization (WTO) systems including
UNCTAD, World Intellectual Property Organization (WIPO), International
Labour Organization (ILO), World Health Organization (WHO), International
Organization of Migration (IOM), International Trade Center (ITC) and other
relevant institutions.
Nepal became a member of the WTO in April 2004 and became the first LDC
member to accede to WTO through the accession process. Organizations like
WTO, BIMSTEC, and SAFTA etc. are economic in nature and hence, deal with
economic issues. As an LDC, Nepal can benefit from these global and regional
bodies from the provisions such as financial and technical support aimed to pro-
mote LDCs’ concerns. Therefore, our efforts should be geared to reap maximum
benefits from these mechanisms by means of our effective economic diplomacy at
all levels.

4. Nepal’s Economic Diplomacy

Economic diplomacy in different incarnations has remained a part of the conduct
of Nepal’s foreign relations and diplomacy. During the eighteenth and nineteenth
centuries, Nepal pursued an activist trade policy and her foreign policy was most-
ly focused on her trading interests. The thrust of Nepal’s economic diplomacy
was then directed primarily towards achieving, consolidating and safeguarding
her position as the only entrepot in the trans-Himalayan trade routes (Subba,
1999). The concept of development assistance came to be introduced in the for-
eign policy particularly after the popular revolution of 1950 as Nepal started re-

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50 Economic diplomacy – a new dimension of Nepalese foreign Policy
ceiving economic assistance. This led to formulating policies for effective utiliza-
tion of foreign assistance and promoting trade and commerce (Bhattarai, 2012).

After the political change in 1990 and the subsequent election of a democratic
government, Nepal’s foreign policy incorporated two new components in it: hu-
man rights and economic diplomacy (Lohani, 2009). The government elected
under the 1990 constitution gave a new dimension of the country’s foreign policy
by laying emphasis on human rights, freedom of press and economic diplomacy
(Pokharel, 2009). In the changed political context, economic diplomacy, which
was first mooted by the country’s policy makers in the early 1990s, has continued
to receive priority and focused attention as a new dimension of Nepal’s Foreign
Policy. The rationale behind the adoption of economic diplomacy as the new
component of our foreign policy is due to the least developed status of the country
and need to achieve socio-economic development on a priority basis in order to
meet the rising expectations of the people in a changed political environment.
The directive principles of the Constitution of 1991 gave emphasis to the socio-
economic development of the country and in raising the living standards of the
people. The Interim Constitution promulgated after the successful Jana Andolan
(People's Movement) and following the end of over a decade long armed conflict,
included a provision for priority to national development by pursuing 'a policy of
attracting foreign capital and technology, giving priority to national investment'.
The State Policies in the present Constitution recognize the labor force as the
major socio-economic force in the country. The present constitution has clearly
mentioned “Nepalese diplomatic missions abroad will be made to perform works
on foreign trade, development cooperation, labor management, and tourism
promotion with priority, as one of its state policies (Law Book Management
Committee, 2007).
The goal of our economic diplomacy has been to help enhance Nepal’s compara-
tive and competitive advantages in the global economy and maximize the benefits
from globalization ensuring rapid economic development (IFA, 2008). Here,
comparative advantage refers to the ability of a country to produce a particular
good or service at a lower marginal and opportunity cost over another country.
Even if one country is more efficient in the production of all goods than the other,
both countries will still gain by trading with each other, as long as they have dif-
ferent relative efficiencies in different items. On the other hand, competitive ad-
vantage is the ability to stay ahead of the present or potential competition, thus
superior performance reached through competitive advantage will ensure market

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 South Asian Journal of Policy and Governance 51
leadership. It gives emphasis for enhanced development of human resources, skill
and new technology and thereby being competitive than others in the market.

In order to achieve our economic interest through our diplomatic efforts the fol-
lowing strategies are being employed in case of economic diplomacy (IFA, 2008):

• Consolidating Nepal’s foreign economic relations with friendly countries

• Exploring the economic opportunities for Nepal,
• Focus on Mission’s economic diplomacy
• Coordination with the stakeholders on economic activities
• Implementation of program-based activities by the mission
Economic diplomacy is therefore a response to the current trends in international
relations. After all, it is in the promotion of overall national interests such as terri-
torial integrity, sovereignty, national pride, standing in the comity of the nations
and economic development and social progress that a nation can boast of its
comprehensive development. Adjusting itself to the changing times and require-
ments, Nepal has therefore made economic diplomacy as one of the priorities of
its foreign policy (Acharya, 2000).

4.1 Government Initiatives

After incorporating economic diplomacy as one of her important components of
foreign policy, the government has consistently been making efforts for its effec-
tive implementation. In this connection, it has, for the first time explicitly dis-
cussed in the Three Years Interim Plan (TYIP) of 2064/65-2066/67, though
Nepal started the concept of development plan from 2013 BS (1956 A D). The
plan, realizing the importance of Economic Diplomacy, incorporated it under the
heading ‘International Relations and Economic Development’. It clearly men-
tioned the problem and challenges as well as opportunities related with economic
diplomacy while setting long term vision, objectives, and policies. Another Three
Year Plan (TYP) (2010/11-2012/13) also mentions economic diplomacy under
the title ‘International Relations and Economic Development’. It discusses the
initiatives made in the past for improving economic diplomacy and in addressing
the challenges ahead (NPC, 2010).
A High Level Task Force (HLTF) was commissioned under the convenorship of a
sitting Member of Parliament in 1996 with the objective of strengthening the
institutional role of the Foreign Ministry, and developing professionalism within
the Foreign Ministry to enhance Nepal's position in international negotiations. It
also aimed in devising a diplomatic mechanism for effectively executing Nepal’s
economic interest so that Nepal may benefit from the new opportunities offered

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52 Economic diplomacy – a new dimension of Nepalese foreign Policy
by international environment (MOFA, 1996). The terms of reference of HTLF
included, inter alia, to examine the organizational structure of the Ministry of
Foreign Affairs and propose necessary reforms to it, to suggest the appropriate
guidelines for the role to be played by the Ministry in the changed context, for
coordination, communication and contacts of the Foreign Ministry with other
line ministries, and recommend necessary changes and reforms in the functioning
of Nepali missions abroad (MOFA, 1996).
The HLTF was largely focused on making economic diplomacy functional within
the MOFA's institutional framework, and to strengthen Nepalese missions for the
conduct of economic diplomacy. It suggested measures for both briefing and de-
briefing ambassadors and economic counselors and suggested the creation of
country specific business plans to be formulated in consultation with the private
sector. It also made it clear that without proper training on various theoretical
aspects of diplomacy, officials would not be able to conduct economic diplomacy
with proper inter-ministerial coordination. The absence of separate Foreign Ser-
vice was cited as an obstacle to the effectiveness of the performance. The Task
Force envisaged an efficient and effective role to support the diplomatic machin-
ery of the Ministry. It laid special emphasis on economic diplomacy for the Gov-
ernment in view of the changed context of international relations and national
priorities..
In 2002, the Institute of Foreign Affairs (IFA) was assigned to look at Nepal’s
economic diplomacy as a follow up to the recommendations made by the HLTF
and prescribe viable mechanisms that are needed to achieve the objectives of
further promotion of Nepal’s economic interests. The IFA formed the Policy
Study Group (PSG) on Nepal’s Economic Diplomacy composed of eminent Ne-
pali personalities from various fields to recommend to the government what prac-
tical measures were needed to make economic diplomacy more effective. It fo-
cused on how to evolve a mechanism for forging a workable and meaningful
partnership with the private sector for the promotion of trade, tourism, employ-
ment generation, water resources, technical and economic cooperation and pri-
vate sector investment in the country. The PSG concluded that economic diplo-
macy cannot be conducted without properly qualified manpower to execute its
objectives effectively and efficiently. It recommended the need for reorientation
and reformulation of Nepalese foreign policy so as to make economic diplomacy
effective and meaningful.
The High Level Foreign Policy Task Force that was constituted following the
successful peaceful People’s Movement of April 2006 with a view to ‘recast its

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 South Asian Journal of Policy and Governance 53
foreign policy and make it consistent with the emerging political economic cli-
mate to achieve Nepal’s foreign policy objectives’ has identified training as a nec-
essary component to improve the overall performance. The Task Force also said
that the foreign policy establishment that worked as a tool to preserve the regime
of the day and to service the strong and powerful has to be geared to create a
positive image and promote national interests in a competitive realm of interna-
tional relations. It has recommended the creation of a ‘separate professional for-
eign service so that it could stipulate specific and relevant qualifications including
language skills and competencies, that would help improve the efficiency and
effectiveness of MOFA and the missions under it’.
The IFA constituted a group comprised of experts from different areas, in 2008,
to suggest measures to enhance the effectiveness of economic diplomacy. In its
report, the group highlighted the need for sufficient resources in the missions
abroad to conduct economic diplomacy and the activities missions can conduct to
promote the economic diplomacy, among others. It also discussed the programs
that could be conducted by diplomatic missions related to the different areas of
economic diplomacy in terms of regions.
In 2009, the Association of Former Career Ambassadors of Nepal (AFCAN) or-
ganized a comprehensive seminar and deliberation and came up with the compi-
lation of a report entitled 'Pursuit of Economic Diplomacy: Prospects and Prob-
lems'. This publication considered the trade, investments, tourism and foreign
employment as the core focus of economic diplomacy. It also emphasized the role
of the private sector in economic diplomacy.
In 2011, Parliamentary Committee on International Relations and Human
Rights Committee of the Legislative-Parliament produced a report ‘Nepal’s for-
eign policy in the changed context'. Part III of the Report is devoted to economic
diplomacy. The report identifies possible areas for conducting economic diplo-
macy that include foreign employment, trade, industry, investment, tourism, wa-
ter resources, services sector, and agriculture and forestry. It has also identified
some possible areas for foreign investment in construction, industry, and trade in
services sectors. It recommends, inter alia, appointment of attaches for promotion
of economic diplomacy, policy formulation, implementation and monitoring in
fields of finance, labor and tourism; Diplomatic Missions should mobilize man-
power, technical and financial resources for expanding economic diplomacy;
Consulates to move beyond traditional functions and focus on promoting eco-
nomic development; create an inter-ministerial mechanism at the secretary level

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54 Economic diplomacy – a new dimension of Nepalese foreign Policy
to be assisted by divisions and sections, and make this mechanism effective for
inter-ministerial coordination.

These aforementioned efforts and recommendations have clearly mentioned the

present mechanism, the reforms needed with regard to Nepal’s foreign policy,
economic diplomacy and the institutions involved in it especially MOFA and
missions abroad, new initiative that shall be taken in reference to the effective
conduct of foreign policy in general and economic diplomacy in particular.

Issues and Challenges

It has been almost two and half decades that Nepal officially adopted economic
diplomacy. It is time we analyzed it in terms of its effectiveness which could be
judged in terms of role played by Nepalese diplomatic missions abroad and other
various institutions involved with the conduct of economic diplomacy, among
others. Another aspect of analysis could be the indicators or status of the different
sectors especially officially identified components of our economic diplomacy.
The status and present scenario provide a picture on the effectiveness of Nepal’s
economic diplomacy. In terms of focused discussion on the effectiveness of eco-
nomic diplomacy based on the research conducted by the writer during his M.
Phil. Thesis, four factors could be identified namely political, institutional, re-
sources, and role of the private sector. These factors could be discussed in brief as
follows:

Political Factor
Major foreign policy decisions are the prerogatives of the political leadership.
They are to set vision and mission of the foreign policy. Diplomacy, conducted by
diplomats, is directed to achieve those objectives of foreign policies formulated by
the politicians. As the foreign policy is also the extension of domestic policy, the
ideology of the government of the day influences the conduct and the success of
the diplomacy. As economic diplomacy is influenced by economic issues mostly,
this concept is even more crucial. Aspects like political stability, leadership role in
MOFA and other related line ministries, the consistency in policies that are relat-
ed to economic diplomacy could be taken as the considering factors. The strategy
pursued in economic diplomacy matters, and finally appropriate instruments
economic diplomacy can only be effective if there is leadership and political will
at the top (Gostisan, 2012). Economic diplomacy cannot yield any result or may
become ineffective when political diplomacy fails (Pyakurel, 2010). The im-
portance of political leadership, their vision and sound political environment with
regard to foreign policy in general and economic diplomacy in particular can
easily be highlighted by Former Prime Minister of UK William E Gladstone who

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 South Asian Journal of Policy and Governance 55
once said ‘here is my first principle of foreign policy: good governance at home
(quoted by Shrestha, 2009). Diplomacy, of course, reflects the overall situation of
the country, and it is not easy to have an exceptionally well performing foreign
service, when the rest of the country is caught in the quagmire of political instabil-
ity and administrative inefficiency (Gautam, 2009).

The Institutional Factor

Another factor that is responsible in the effectiveness of economic diplomacy
could be described as the role of institutions responsible to its conduct. The major
institutions are the Ministry of Foreign Affairs (MOFA) and Nepalese Diplomatic
Missions abroad. Diplomacy is globalized. One consequence is that almost all
Foreign Ministries are reorganizing themselves, and fine tuning their domestic
machinery to deliver the improved performance. As a response to changed con-
text, a score of countries have combined foreign trade and external aid with the
traditional foreign ministry in order to make their effort effective (Rana, 2007).
But it is no wonder that the MOFA and its diplomatic apparatus that deals with
‘abroad’ and ‘external affairs’ has lost its monopoly; it is jostled by a multitude of
domestic actors (Rana, 2007). It is imperative to have better coordination and
cooperation apart from mutual trust among the institutions involved (Pokharel,
2009). Therefore, the MOFA has to integrate economic objectives into external
policy. It must treat economic objectives virtually on par with the political ones.
For this, MOFA needs ‘pragmatism, inventiveness, flexibility and preparedness’
(Rana, 2007). There must be well coordinated and concerted efforts from all the
actors involved at the national and international level in terms of both decision
making and execution level. Economic diplomacy covers a wide range of issues
thereby demanding the involvement of various actors and institutions. The areas
covered by economic diplomacy are distinct in nature, therefore, no one institu-
tion is fully capable of handling it perfectly.

Resources
The resources needed for economic diplomacy could be identified as human,
financial, and information and communication technology, among others. The
volume of diplomatic works to be performed and the availability of human and
financial resources is said to not match in our context. On the contrary it adverse-
ly affects the efficiency of the Ministry and diplomatic missions (Suman, 2009).
Without adequate resources earmarked for this type of diplomatic activity, any
country’s effective participation in international level would be severely jeopard-
ized. Small countries suffer in comparison to larger and more advanced countries

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56 Economic diplomacy – a new dimension of Nepalese foreign Policy
which are able to mobilize and allocate more resources for this type of diplomacy
(Soobramanien, 2011).

One of the most important resources that is crucially responsible in the effective-
ness of economic diplomacy is human resources. These resources must be suffi-
cient in number, highly skilled, trained, motivated and having international expo-
sure and in-depth knowledge of the issues they are dealing with (Devkota and
Pokharel, 2012). It covers all human resources ranging from Chief of Mission to
diplomatic and administrative staff as well as local staff serving at the missions.
The availability of resources in terms of budget for all activities of missions in
general and the economic diplomacy related activities in particular is a very es-
sential aspect of economic diplomacy. The effectiveness of the role played by
mission heavily relies on sufficient budget. The extent of the use of information
and communication technology also plays a vital role in the successful conduct of
economic diplomacy. In the era marked by the development of science and tech-
nology, diplomatic activities could be successful, easy, effective and efficient with
the use of modern information and communication technology (Devkota and
Pokharel, 2012).

Hence, it is a herculean task for a small and low income country to define and
protect its interests at the multilateral or regional level. Therefore, the cost of
pursuing an active economic diplomacy is onerous for small and low income
countries. Notwithstanding this, adequate level of resource base must be ensured
for effective conduct of economic diplomacy as the successful economic diploma-
cy is instrumental in enhancing national interest especially protecting its econom-
ic interest in international relations.

Role of Private Sector

The present day world is characterized by the success of the market. Economic
diplomacy must be adjusted in tune with changes in the market. With changing
concept of governance, the other actors are also involving in it and the private
sector is one of these. The public-private partnership model will be suitable in
ensuring effective role of the private sector in appropriate areas of economic di-
plomacy for its effective implementation as both are equal stakeholders (Pokharel,
2009). To make economic diplomacy effective, both the public and private sectors
should go hand in hand.

There are bilateral chambers of commerce under FNCCI which can play a vital
role in promoting bilateral trade, investment and tourism. The private sector can
provide essential inputs to the policy makers. To make investments it is the pri-

56
 South Asian Journal of Policy and Governance 57
vate sector which has resources and efficiency. Even private sector and our dip-
lomatic mission can work together after making country specific action plans and
making a mechanism for funds needed for the activities (PSG Report-IFA, 2002).

The Way Forward

Effectiveness of our economic diplomacy depends on many variables, such as,
individual capacity, competency and professionalism of those involved in eco-
nomic diplomacy; training, orientation and development of the concerned per-
sonnel especially to diplomats; enhancement of institutional capability of the Mis-
sions abroad, MOFA and relevant Ministries and departments of the
Government; role, capacity, willingness and support of the private sector and
other institutions, availability of the resources; strength of the Missions both in
terms of human and other resources; local environment, policies and priorities of
the host Government and private sector there, support from Non-resident Nepa-
lese (NRN) etc.
When we view the economic diplomacy from the political front, there must be
clear policy guidelines, planning and programming with set objectives and desired
results, competent, visionary, committed leadership, political consensus on ED
related policies, measurable targets and priority, annual plan of actions. Apart
from these issues, there are other concerns as well such as political stability, peace
and security, resolution of chronic labor problems, improving the power supply,
infrastructure development, among others, which affect the business environment
at home.
From the institutional point of view, there must be a clear-cut mandate to all
whose involvement is with economic diplomacy. The first and foremost issue is
the coordination among these institutions for concerted effort to promote eco-
nomic diplomacy since no single institution is capable of handling the cross-
cutting issues of contemporary economic diplomacy at different levels. While lip
service is paid to MOFA’s co-coordinating role, in reality this role is increasingly
being assigned to other agencies. This practice must come to an end. MOFA has
to be recognized as the leading actor for economic diplomacy to make it an effec-
tive tool of Foreign Policy. MOFA has to play such a role that can ensure the
effective coordination with all other institutions both government and non gov-
ernment as the cardinal task of modern MOFA is the management of complex
and crisscrossing relationships, bilateral regional and international dialogue (Ra-
na, 2007).
In terms of resources, there are several issues to be addressed such as allocation of
budget on the basis of requirements of the missions in terms of annual plan of

57
58 Economic diplomacy – a new dimension of Nepalese foreign Policy
action and potentiality of promoting economic diplomacy. Timely disbursement
of budget for effective implementation of economic diplomacy related program is
necessary. There must be flexibility on the part of the mission to utilize the budg-
et as per their requirement and effectiveness. The budget shall be allocated and
utilized on priority basis. There shall be effective monitoring and evaluation sys-
tem to ascertain the effectiveness of the program and further improve the pro-
gram formulation processes. The budget allocation must be linked with reward
and incentives based on the outputs.

On human resources, much has to be done. There must be well tailored orienta-
tion programs for all those involved in economic diplomacy especially to those
who are to assume diplomatic assignments in diplomatic missions. Training pro-
grams at home and abroad would be beneficial for familiarization with the issues
related with economic diplomacy that would help ensure better deliberations at
the international level. In-house seminars and interaction programs within the
MOFA including other concerned line ministries as well as private sector and
other institutions in various issues related with economic diplomacy also enhances
the knowledge and sharing of information and ideas among the employees and
stakeholders.

The use of information and communication technology enhances the effective

access to the information to the public. Reliable dissemination of information
about the services that missions offer would make their service delivery more
effective and fast. The implementation of the concept of e-governance is also
possible with the utilization of well established ICT system. MOFA and missions
as well as line ministries must be well connected to share the information instant-
ly. It would be better if most of the official correspondence could be done through
ICT technology to minimize the administrative cost and for speedy service deliv-
ery. The ICT mechanism must be reliable and responsive.

The role of the private sector is indispensable to promote economic diplomacy.

The private sector must come forward and put their expectation as towhat they
want from the government and what they can do themselves and how they want
to forge a productive collaboration with MOFA, line ministries and missions.
Bilateral Chambers of Commerce (BCC) have to focus on their respective coun-
tries and make country specific programs with the help of Nepal’s diplomatic
missions stationed there and vice versa. Diplomatic missions should establish
good channel of communication with the private sector organizations and get the
required input from them.

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 South Asian Journal of Policy and Governance 59
In order to make Nepalese diplomatic missions role effective as regards economic
diplomacy, various measures shall be initiated. First and foremost they must be
provided adequate budget with timely earmarking based on the concrete plan of
action. Orientation and training programs to the human resources involved in
economic diplomacy at the missions are essential. MOFA must make country or
region specific programs for economic diplomacy such as programs related with
religious tourism for Myanmar, Sri Lanka, and Thailand etc. Missions shall be
equipped with full information on every aspect of economic diplomacy for which
well connected network between missions and MOFA, line ministries and other
relevant institutions should be established.
High level visits and other political visits must adopt economic agendas as priority
issues. Long-term perspective plans for economic diplomacy, the clear-cut role to
be performed by the government, private sector, civil society, NGOs/INGOs and
our strategy at bilateral, regional, plurilateral and multilateral forums in relation
to economic diplomacy are some issues among others for the effective implemen-
tation of economic diplomacy.

Conclusion
The need for placing greater emphasis on economic diplomacy is now universally
acknowledged. Economic considerations must remain in the forefront of efforts to
achieve foreign policy goals. Countries which have not recognized this fact in
time, they have been marginalized from the economic prosperity that some of the
countries have achieved tremendously in the same period of time. The processes
of globalization have almost completely obliterated the distinction between politi-
cal and economic diplomatic business. Even the so-called core bilateral political
negotiations and engagements are not free from the economic components.
There are very limited areas of work what we do in present days of diplomacy
where there is no strong economic undertone. Foreign relations can no longer be
divided between political and economic spheres.
For countries which are developed, economic diplomacy is the art of serving eco-
nomic interests and strategic interests of the country by the use of the economic
instrument in the conduct of state-to-state relations. For those countries which are
developing like ours, it is the mobilization of policy apparatus, especially foreign
policy through diplomatic channels to serve economic interest, particularly socio-
economic development of the country. In this context, contemporary economic
diplomacy is facing three types of tensions that need reconciliation. The first ten-
sion is between politics and economics. States are political entities rather than

59
60 Economic diplomacy – a new dimension of Nepalese foreign Policy
economic one so that politics constantly encroaches on economics in the pursuit
of international objective (Bayne and Woolcock, 2011). A good deal of balance
must be maintained between political issues and economic ones. These issues
must play a complementary role to each other in order to produce better out-
comes from economic diplomacy.

The second tension is between international and domestic forces. Due to the rap-
id growth of globalization the international penetration of domestic economics,
for example, by trade, foreign direct investment and financial flows, has been
giving steadily complicating domestic decision making with different actors in-
volved and ranges of issues to be dealt with (Bayne and Woolcock, 2011). Hence,
economic diplomacy is a complex process to deal with especially for the least
developed countries like ours.
The third major tension in economic diplomacy which has greatly advanced since
1990 is between the government and other forces. The penetration of interna-
tional factors into domestic economics is led not by the government but by the
private sector and NGOs etc. As globalization advances, other groups and social
movements become involved in economic diplomacy. With the changing concept
of governance and involvement of various actors, the economic diplomacy has to
strike a balance between government institutions and private sector and other
actors.

Having faced all the aforementioned challenges in general and those arising from
within its domestic setting in particular and taking note of its meager progress
towards achieving the economic development in the past especially through its
recognized components of economic diplomacy, Nepal needs to reorient its policy
of economic diplomacy learning from the past, based on the needs and challenges
of the present and lead the country to a prosperous and developed status in the
future.

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