Nepal\'s Greatest Challenge

Today Nepal celebrates the 50th anniversary of Edmund Hillary and Tenzing Norgay's historic ascent of Mt. Everest. Sadly, poverty and politics in Nepal almost overshadow this impressive achievement. While the world marvels at Everest, many Nepalese wonder why they can't scale the heights of economic growth and development.

Nepal is richly endowed with forests, ravines, waterfalls and wildlife, all set in the picturesque Himalayas. It could be a top tourist destination. However, poor public policy and terrorism have prevented this from happening. In 1999, over half a million tourists visited Nepal. That's not an insignificant number, but still fewer tourists than visit the arid desert of Las Vegas on an average weekend. And that was Nepal's best performance in recent years. Last year, the number dropped to 215,922.

Why hasn't Nepal been able to translate its natural resources into a larger tourist draw? Government failure lies at the heart of the problem, having increased the poverty and disillusionment that gave rise to armed insurgents. In the 1980s, those who wished to open hotels had to navigate a labyrinth of rules and regulations, often discouraging even the most persistent entrepreneur. For example, the government required businesses to seek permission to import wine, air-conditioning spare parts, laundry chemicals and bathroom fittings. Moreover, the approval process required the permission of multiple ministries -- the tourism ministry had to approve the imports and send its recommendation to the finance ministry, which in turn had to approve it and then send it for final approval by the central bank.

Each ministry might require as many as seven officials to clear the file, demanding a "tip" at each stage. Items that could be easily purchased off-the-shelf in any Western country -- and indeed in practically every Asian nation too -- required several weeks of approval processing. Payments for marketing and advertising abroad were subjected to similar stringent checks by bureaucrats.

In the 1990s Nepal liberalized, reducing tariffs, improving import procedures by eliminating many cumbersome licensing requirements, and signing bilateral agreements with the U.S. and EU that allowed them to export key products more easily. However, the beneficial reforms of the 1990s could not completely undo the damage done by years of import substitution industrialization and tight government controls. Unemployment remained high, with many harmful policies still in place.

Impoverishment and frustration gave rise in 1996 to a Maoist insurgency, which advocated overthrowing the monarchy and the establishment of a communist republic. The Maoists easily captured the imagination of bitterly disillusioned youth and also recruited heavily from the vast ranks of the unemployed. In a few short years, the Maoists quickly became a force that neither the police nor the army was capable of defeating, their terror campaign claiming nearly 8,000 lives. The Maoists gained control of almost a third of the country by launching brazen attacks on army outposts and stealing arms. In some places, they have replaced the government and control virtually all spheres of public life. They have assassinated the inspector general of the Armed Police and have also terrorized the civilian population, which is often caught in the crossfire. While Maoists have not attacked tourists, there have been reports of robbery and intimidation. Police and army checkpoints, previously unheard of, now greet tourists everywhere. Several Western governments, including the U.S., issued travel warnings advising their citizens to stay away from Nepal at the height of fighting.

Currently, the Maoists and the government are engaged in peace talks and a cease-fire has temporarily halted hostilities. If talks succeed, the Maoists may walk away with a significant share of power.

Yet, despite their rhetoric, there is little evidence to suggest that the Maoists' "socialist utopia" would improve Nepal's fortunes. Maoism, discredited even in China, would not help reduce poverty. Rather, Nepal's potential can only be achieved through policies that improve economic freedom.

That means the government must abolish tariffs and controls on foreign exchange, eliminate visa fees, reduce income tax and end needless controls on investment and industries. This would help Nepal become a regional center for shopping and sightseeing. With India, China, Pakistan and Bangladesh as its neighbors, it could become the destination of choice for 43% of the world's population.

Additionally, the Maoists also gain credibility because no parliament presently exists (it was dissolved by the King late last year). Consequently, a credible democratic government would reduce the appeal that the Maoists might have for many disenfranchised groups and ensure that Nepal's people have a voice in their country.

When Peru eliminated the threat posed by the Shining Path guerrillas, it was able to transform the ancient Inca ruins of Macchu Picchu into a safe and popular destination. Increased tourism improved the local economy of Cuzco and also promoted Peru. Resolving the Maoist situation and providing fertile ground for entrepreneurship would allow the Nepalese to take similar advantage of the natural resources they have been blessed with.

Mr. Wadhwa is an economist, writer and casino owner living in Nepal. Ms. Edelman is media director of the International Policy Network, London.