The anti-federalist and pseudo-federalist camps have made many arguments against ethnic federalism. The one that has got the widest applause is the following: If we carve out states according to ethnicity, some of the newly formed states will not have enough resources to sustain themselves. This argument is bogus, and the applause in unworthy. Let me explain why.
The implicit assumption in this argument is that we can predict the economic value of resources with reasonable accuracy; which we can’t. Anyone who tries to make a prediction implicitly assumes that we can measure the economic value of these resources with reasonable accuracy, and that all states are going to use these resources equally well. Both of these assumptions are misplaced.
First, no one knows what we will discover in the future or the new technology that will come in. Technological developments can alter the projection of prosperity vastly. Take for example, the case of Texas. New developments in extraction of oil and gas technology now allow horizontal drilling and 3-D seismic imaging (a technology that uses sound waves to form sharp three dimensional images of what is underground). This has led to the exploration of natural gas and oil in regions that one would have never imagined 30 years ago. The same logic can be applied to Nepal. It could be that in just a decade or so, we may discover some new resources in a region we had never thought of. We could also see developments in technology that vastly alters the economic value of these resources.
Second, a large part of wealth is not due to physical resources, but due to human resources and the utilization of resources. It is hard to predict which states will get their acts together and create an environment conducive to the generation of wealth. For a lawless country like Nepal, any state that improves the law and order situation and reduces corruption will reap huge benefits of federalism. Nepal has a big domestic market (26 million), but the country’s business environment scares corporations and enterprising individuals. Any state that creates a good business climate will see a spike in new business, lower unemployment, and increase in property prices.
ECONOMICS OF ETHNIC FEDERALISM
To understand the value of focusing on resource utilization rather than resource division, it is important to look at the case of Jharkhand and Bihar. When Jharkhand separated from Bihar in 2000, the Biharis worried that their resource-rich region was lost. Many thought 10 years down the road, Bihar would decline and Jharkhand would prosper. But the present tells us that Bihar has done spectacularly well compared to Jharkhand since 2005, once Nitish Kumar rallied Biharis to create a business friendly environment.
It could still be argued that it does not hurt to have states that have similar types of resources. Why does it have to be ethnic federalism? Why not something similar to the five regions with north-South demarcation that the Panchas envisioned? That way, all states will have a similar set of resources. There are two answers to that: one is to do with economics, and another to do with politics.
From the economics point of view, if we divide the country in the Panchayati style, it is true that each state will look similar in terms of physical resources. But that is not really a wise move from an investment perspective. It is like putting all your eggs in the same basket. To offer an analogy with stock investment, it’s like investing in stocks, all from the same industry. Under such an investment strategy, the ratio of return to risk will be lower. If we have wildly different states in terms of geography, culture and values, it is like investing in stocks of different sorts. In this case, the ratio of return to risk is higher. Because the second option offers higher return for the same level of risk, the second option is better.
The political reason to avoid a north-south demarcation is that Madhesis and Janjatis feel they will continue to get oppressed because such demarcation will always give an upper hand to the existing hill elite. They are perfectly rational in harboring such feelings. The past record of the Nepali state in treating them equally has been dismal, and now it’s too late to appease them with promises and nationalistic sermons. Together, the Madhesis and Janjatis represent more than 50 percent and a formidable force in the future of Nepali politics. If ethnic federalism is what they want, that’s how it should be. Denying what they consider as their only way to become equal citizens is inviting political trouble for the next 50 years.