By Lila Dhar Adhikari, Student of Graduate School of International Studies

Many developing countries have dramatically improved their economic status through exports: Nepal has the same dream to do so. Nepal has the lowest per capita income in South Asia and her GDP growth has also stagnated over the years. We can see how the East Asian countries achieved ‘miracle’ growth in their economies and how they transferred the growth in an overall development. There is no doubt that the export is an engine of growth in any economies around the globe. Nepal has enormous hydroelectricity possibility which we could use not only for the necessary domestic consumption but also as an exporting item to India and Bangladesh. However, electricity export has been remained a dream to Nepal for a long time. Today our government is forced to purchase electricity from India to get some relief from the day to day hardship of load shedding. Does Nepal have still rays of hope for economic growth through exports?

Nepal has been exporting woolen carpets, pashmina and apparels product to the EU market under preferential scheme EBA (Everything but Arms). It exports agricultural products mainly vegetable ghee, coffee, tea, spices, pulses and others. It has been exporting vegetable ghee, acrylic yarn, copper and zinc oxide to India under TRQ (Tariff Rate Quota) system. Such products would enter duty-free up to the level of assigned quota, but subsequent exports would attract MFA (Most Favor Nation) rates. It seems that whether it is EU market or an Indian market; Nepalese export is mostly relying on preferences provided by the importing countries. Most of developed countries have opened their 97 percent tariff lines for the Duty Free Quota Free market access for Least Developed Countries (LDCs) export. Nepal, however, has not been able to develop more products for export to get the benefits opened by the WTO. Moreover, rules of origin and other non-tariff barriers such as Sanitary and Phytosanitary (SPS) and Technical Barrier to Trade (TBT) have adversely affected the Nepalese export. For example, honey in the EU has almost lost its market due to the weaknesses in fulfilling the SPS standard.

Our landlocked situation poses a serious challenge in competing with other developing countries. Early signs of declining exports make us worry whether our major products would survive long in the EU market, particularly woolen carpets and textile items. The erosion in preferences through the continuing tariff cuts in the developed countries market and excessive cost of shipping are further challenges. After the Quota phased out, the US market is becoming more difficult for Nepalese exports, particularly textile and clothing sector. Nepal has also experienced high trade deficits with India over the years and even the growth in exports to India is lopsided. Nepal’s trade share with India is quite significant and important. Almost two-third of Nepal’s trade takes place with India but the Intra Industry Trade with India is just about 20 percent. Nepal has been actively participating in the regional trade liberalization and cooperation through SAFTA and BIMSTEC. However, the intra-regional trade is quite low. There is no substantial hope for Nepal even from the Doha Round which promises to generate significant welfare benefits for all countries, particularly LDCs. Nevertheless, there are more challenges than opportunities.

Nepal could boost her economy through a new export movement. Nepal does not have to go far to access markets. Its domestic market is not so small. The 28 million population of Nepal is quite a good market for industries. The Nepalese market is now open to the world and domestic industries have to come up with new ideas and new products. It seems hard but appropriate government policies to create brand loyalty to domestic products could help to use the domestic market. We can see even today most people in India want to wear Khadi; the share of foreign cars in South Korea is less than five percent even though the market is open and many South Korean could afford luxurious foreign cars. Moreover, two large neighboring economies, India and China, could be the target market as they witnessed impressive growth over the years. These economies grew by 9.2 percent and 11.4 percent respectively in 2007. The projection for these economies for 2008, however, is at the lower side at 7.9 percent and 9.3 percent respectively. Nepal needs to make the best use of the available opportunities through learning lessons from the amazing performance of her neighboring economies. We have comparative advantage in cheap labor than China and India, and if we create a favorable environment for FDI in the manufacturing sector, we could use this advantage. Thus, Nepal has no alternative to developing an investment friendly environment and tapping the advantage of globalization that has eased the transfer of capital, technology, and know-how. The current poor industrial relation, low investment security could not attract a significant amount of FDI which is now a basic for economic development.

The Service sector is now growing worldwide, and it is a beacon of hope for LDCs like Nepal. The negotiation at the WTO would bring special priorities for the service export of LDCs through waiver. But as each country has the right to regulate their service market through qualification requirement and other instruments, developed countries will regulate their market. Now, India has been taking advantage of service worldwide because of its well-educated human resources; software engineers in particular. If our education is not oriented towards the global needs our remittance sector would also decline in coming years. Thus, Nepal has to put more emphasis on vocational training and quality education in order to develop its human capital to get benefits from the special priority. There is no doubt we have to have consistence provision with the international trade laws and practices.

Nevertheless, the energy trade in South Asia is still viable. We have seen how Bhutan is taking advantage from the Chukha Project. This 330 MW project has changed the economy of Bhutan and boosted the per-capita income of Bhutan dramatically. Our government initiated some work on mega projects like Karnali, West Seti but we do not have clear hope about the successful completion of these projects on time. We have a bitter experience of Middle Marsyangdi in making the project economically sound. Yes, there were so many mistakes and weaknesses in our projects elsewhere, either from government agencies or from the political parties. Now, we do not have time to play the blame game but there must be general consensus among the key political players in producing such hydropower. As India and Bangladesh are markets for electricity exports, we now have to talk with India and Bangladesh in an innovative way. Nepal has to draw attention of bilateral and multilateral donors, as well as with other investors in order to reap the benefits of energy trade. The more the delay in power use the more poverty there will be.

Finally, Nepal has to use its comparative advantage of hydropower, tourism, agro processing industry and herbal industry. Government now has to ensure the good and investment friendly environment to attract FDI; and it has to focus on R&D activities and human resource development. As we know for a fact, export is highly commensurate with import for many countries, thus import substitution policy would be a wrong choice for Nepal. Moreover, productive capacity development, supply side strength, new product development, trade facilitation, and entrepreneurship development through vocational education could be major policy objectives for Nepalese exports. Thus, we can conclude that Nepal still has hopes ahead but appropriate policies through good governance are a must.

* The original article is on NepalNews.Com