The MCC Debate and the Heat of Indo-Pacific Geopolitics

Ashmita Rana
14th October 2021

Picture Courtesy: MMC.GOV

Over the past few weeks, the Millennium Challenge Corporation (MCC) compact has churned the domestic politics of Nepal to a great extent. From anti-MCC protests to severe allegations, Nepal’s domestic political circles have seen it all. However, Nepal’s hesitance, China’s apprehensions and America’s clarifications on the MCC Nepal Compact signify that it has a meaning beyond Nepal’s domestic politics. What does this MCC debate mean for the dynamic politics of the Indo-Pacific?

The MCC was created by the Congress of the United States of America in 2004 as an “innovative and independent” agency to administer foreign assistance in the fight against global poverty. In 2017, Nepal became the first country in South Asia to qualify for an MCC compact. Now, during the final stages for the rollout of the MCC Nepal Compact, it is facing stiff opposition domestically. The primary concerns of those opposing the MCC compact in Nepal are that its provisions, whereby the US has greater authority over the implementation or termination of the project and the compact’s guidelines have precedence over Nepali laws in case of conflicts, amount to erosion of the sovereignty of their country. This has created hurdles for the ratification of MCC Nepal Compact in the federal parliament, although Prime Minister Sher Bahadur Deuba continues to appear keen on winning the parliament’s nod for approving the compact. Meanwhile, anti-MCC protests have become common daily headlines in Nepal.

There is another side to the MCC Nepal Compact debate- one that is beyond the domestic circles of Nepal. Many from the section of people who are opposing the MCC compact also fear that ratifying it would antagonise China. These fears are triggered by speculations that the MCC compact is a part of the US’s Indo-Pacific Strategy. Earlier in 2019, the Department of State of the US had released a report on its Indo-Pacific vision and this report had certain mentions of the MCC compacts. Though the MCC has released a clarification letter stating that the MCC Nepal Compact is not a part of the Indo-Pacific Strategy, not all apprehensions have been eliminated. This is mainly because even if the US is able to fully convince the protestors that the MCC compact is not a defence strategy or a military alliance with any “hidden agenda”, Nepal is still likely to fear risking its friendship with its powerful neighbour- China.

With the ever increasing heat in the Indo-Pacific, China is not likely to see the MCC as a benign agreement. In the past, China had openly welcomed the MCC as a foreign assistance to Nepal for its economic upliftment. However, this does not put a full-stop on the Chinese position. Recent analysis by the Nepali security agencies have allegedly found China’s hands in fanning the fire of anti-MCC protests in a bid to “discredit the United States.” Moreover, some Chinese scholars view the MCC as a sugar-coating on the American bullet of Indo-Pacific Strategy, aimed at containing China. It is interesting to note that just last year, the intense Sino-American competition in the Indo-Pacific had significantly played a role in the discontinuation of the MCC compact in Sri Lanka. Similar to Nepal’s case, Sri Lanka appeared to be caught between the US and Sri Lanka. Apart from worries regarding ‘threat to national sovereignty’, Sri Lanka feared a detachment from China by being associated with the US’s Indo-Pacific Strategy.

The MCC compact in Nepal, if ratified, will provide a grant of USD 500 million to Nepal in support of a USD 630 million project (Nepal will bear the remaining cost of USD 130 million) in the energy and roadways sectors. This support will go towards the construction of about 300 km of 400 KV transmission lines along the Lapsiphedi-Galchhi-Damauli-Sunawal corridor and three substations. Also, the funds will be utilised for the maintenance of roads in various alignment of Mechi, Koshi, Sagarmatha, Tribhuvan Rajpath and East-West Highway, totalling to about 300 km. Beijing is known to be sceptical of the MCC in Nepal as it suspects the MCC to be one of Washington’s countermeasures against the BRI (Belt and Road Initiative). This can be an important concern for China especially because its BRI has not yet had success in Nepal. Though Nepal had signed up for the BRI in 2017, not a single project has had any significant progress till date.

Meanwhile, the US is facing a challenge which does have significant geopolitical implications for it as well. After the discontinuation of MCC in Sri Lanka last year, if not ratified, the MCC compact in Nepal could meet the same fate. If this does happen, it will reveal a lot about the extent of China’s strategic stronghold in South Asia. It has also been argued that the backlash that MCC is receiving shows that the US has not exactly been successful in convincing others that it is a “benign alternative to China.” Some proponents of American engagement also believe that the US must treat this as symptomatic of a bigger problem, mainly that the rise of China poses challenges for US development institutions like MCC that were established before there was any great power competition like the one seen today. Undoubtedly, Nepal’s strategic location “on the rim of the Bay of Bengal, a north eastern corner of the Indian Ocean, which connects South Asia with Southeast Asia by land”, is important in the US’s Indo-Pacific vision. The Nepal MCC Compact is a golden opportunity for the US to bolster its bilateral relationship with Nepal, which is growing closer to China.

The ongoing MCC debate in Nepal definitely has some significant implications for its domestic politics. While allegations and counter-allegations continue, one cannot entirely dismiss the genuine concerns of the common public of Nepal. However, keeping the contested provisions of the MCC aside and looking beyond the domestic landscape is also important as it unravels a lot of meanings for the Indo-Pacific region. The key takeaway from the Sri Lankan and now the Nepalese case is that development in the region is increasingly getting influenced by geopolitics. As China and the US continue to compete in the Indo-Pacific region, many aspects including economic development of small states is likely to be shaped by the trajectory of this competition. It remains to be seen how small states in the Indo-Pacific are able to safeguard their development while distancing themselves from the heat of the geopolitics of this region.

*The Author is a Research Intern at the Kalinga Institute of Indo-Pacific Studies.

Disclaimer: The Views expressed in the Article are of the Author

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