Sunday, November 29, 2009

Evolution of various proposals under the Doha Round

Antoine Bouet and David Laborde, in a short IFPRI short brief, discuss tariffs rate in five different proposals that have evolved since 2001 under the Doha Round. Here are some of the points:

  • In 2001 the WTO launched a highly ambitious program of multilateral liberalization. Eight years later, concluding the negotiations remains uncertain, though an opportunity still exists.
  • From the onset, the negotiations were complicated due to the high number of participants (now 153 countries) and trade regimes.
  • Since 2001, many proposals have been brought to the negotiating table by the EU, the US, and the G-20. Because it is politically and economically acceptable to many parties, the final December 2008 package could be the basis of an agreement.
  • An evaluation of these various proposals shows that trade negotiations have been following country-strategic interests. For instance, in eight years, the agricultural market access tariff-reduction formula has grown more ambitious, but additional flexibilities have offset delivered market access.
  • The December 2008 package would reduce average tariffs by 27 percent. This has to be compared to the 29 percent reduction involved by the Harbinson and Girard proposals of 2003 and the 49 percent reduction in world protection of a very ambitious 2005 US proposal. Both the G-20 and the EU proposals from 2005 were intermediate, with a cut in average applied tariffs of around 36 percent.
  • The December 2008 proposal implies a reduction of agricultural protection by 6 percentage points in high-income countries and 0.5 percentage points in middle-income countries. Had the US proposal been applied, these figures would have been 12.4 and 4.7, respectively; had the G-20 proposal been applied, the figures would have been 8.9 and 1.2, respectively.
  • Different scenarios imply losses for LDCs, reflecting eroded preferences and rising terms of trade for imported commodities (including food products).
  • Under the December 2008 proposal, the protection faced by the agricultural exports of LDCs declines by 2.3 percentage points, while it falls by 4.6 percentage points for high-income countries. These figures are respectively 2.9 and 10.2 under the US proposal, and 2.7 and 5.7 under the EU proposal.
  • Duty-free, quota-free market access given by rich countries to poor ones could boost the benefits of trade liberalization for the poorest, especially if it does not include product exemption and if the number of preference-giving countries is increase.
  • South-South trade improvements will be limited in the Doha Agreement due to generous flexibilities, which allow developing countries to maintain high levels of protection.
  • A very positive impact of the Doha Development Agenda is that it would reinforce binding commitments and reduce existing bound duties while also consolidating the unilateral preferences granted to least-developed countries into the multilateral framework.
  • Trade negotiations have been been constrained by defensive interests.

Based on the most recent modalities package, the Doha agreement has an ambivalent impact on developing countries and does not offer enough to the poorest countries. It has to offer more in terms of market access and reduced trade costs. International cooperation needs to be extended further to other challenging areas for least-developed countries.

Saturday, November 28, 2009

FDI policy and investment climate in Nepal

Ramesh Chitrakar evaluates FDI policy and investment environment in Nepal in a new ADB report (see chapter 7). The report is about intra-regional trade and investment in South Asia. Sadly, most of the chapters include South Asia as India, Pakistan, Sri Lanka, and Bangladesh (where did Nepal, Bhutan, Maldives and Afghanistan go?). It would have been really helpful if Nepal was also included in the chapter on textiles and clothing, which was Nepal's top export before 2005. The chapter dealing with Nepal has nothing new in terms of information but it is a nice aggregation of all the stuff that has been said about investment climate in Nepal in the past three years.

Here are some points from the report:

-Nepal's landlocked location, technological backwardness, and internal political conflicts have prevented it from fully developing its economy.

-To increase FDI, the government has introduced a "one-window" policy but it has not worked as there are too many procedures.

-Reducing savings-investment gap is one of the challenges of the government in terms of maintaining sound fiscal health.

Trade profile:

-Nepal's major trading partner is India (around 62% of total trade took place with India)

-Nepal's export to SAARC as a share of its total exports ranged from 53.9% in FY2003 to 72.5% in FY2007, and of this India's share ranged from 97.5% to 98.4%.

-After India, Nepal's largest export partners during FY2003-FY2007 were the US, Germany, UK, France, Italy, Canada, Japan, Bangladesh, and Spain.

-Imports from SAARC ranged from 53.9% to 67% as a share of total imports during FY2003-FY2007.

-Major countries from where Nepal imports are India, PRC, Indonesia, Singapore, US, UAE, Thailand, Japan, Malaysia, and Saudi Arabia.

-Nepal needs to diversify trade inside and outside SAARC, which is clearly its main market.

-It needs to sort out differences in trade agreements with India-- problems in sanitary and phytosanitary requirements; complex quarantine rules on agricultural products; uneven implementation and interpretation of trade treaty's measures by state governments in India; disagreements on customs clearance procedures for cross-border rail operations (Banlabandh Marg is of little use) [some of these issues have been addressed in a recently signed trade treaty between India and Nepal but some issues on CVD remain)

-To integrate fully in the WTO system, Nepal has to address its domestic and border regulatory constraints (red tape, public service delays, labor laws, and industrial relations)

-Textile and carpet sector has been hit hard by the end of MFA.

-Nepal's proximity to the PRC and India offers opportunities for trade.

Lack of competitiveness arises from geography, policy, and institutions; low productivity and poor business climate due to government instability, inefficient government bureaucracy, corruption, and inadequate supply of infrastructure; high transportation and energy costs, rigid and formal labor market, poor work ethic of the labor force, poor industrial relations, domestic conflict...

-limited backward linkages and unable to keep up with technological developments

Infrastructure: by mid-March 2007, total road length reached 17609 kms, of which 5222 kms were metaled, 4738 kms graveled, and 7649 kms fair-weather roads; 47 airports, with four under construction; costly and unreliable infrastructure, high transportation and transaction costs

Resource endowments: water and hydropower high potential; forest covers 42.4% of landmass and provides 79% of total energy consumption and more than 90% rural household energy needs; labor force is about 1.1 million but skilled labor force lacking with serious brain drain problem, low labor costs...

RTAs: SAFTA is expected to be beneficial as it offers a huge market access; it covers more than 4000 items, most of which are nontradable; need to bring services under SAFTA; Nepal has a special agreement with the PRC for reduced tariffs no trade with Tibet; member of BIMSTEC, which is expected to be finalized by 2017; has preferential access to the EU under the Everything But Arms initiative; not much hope from the WTO…

FDI: first concerted effort to attract FDI came in 1987 with the passage of the Industrial Policy and Industrial Enterprise Act; joint ventures but telecommunications, hydropower, and air transportation were not opened up; in 1992 it introduced the Foreign Investment and Technology Transfer Act and established Investment Promotion Board; then came the one-window policy act; double taxation agreements were signed with India, PRC, Austria, Korea, Mauritius, Pakistan, Sri Lanka, Norway and Thailand with more coming; investment protection agreements with France, Germany, and the UK.

-the flow of FDI has been pretty dismal; flowed mainly in tourism sector and manufacturing

-57 countries had made investments in Nepal by mid-November 2007, of which 39.3% of investments in terms of project costs, 36.4% in terms of total fixed costs, and 44.5% in terms of total FDI were made by SAARC countries (mainly from India).

-some firms closed due to hostile labor relations and unstable political environment with poor regulatory structure

-lately the government has opened up all sectors to FDI except for defense, cigarettes, bidi (a small hand-rolled, often flavored, cigarette), and alcohol

-100% repatriation of equity invested, dividends obtained from foreign investments, and amount received as payment are allowed

-No legal impediments in registering mortgages or repossessions... but, some of the incentives offered in 1992 are being rolled back like reinvestment allowance in the form of deductions from taxable income of up to 40% of investment in expansion or modernization (withdrawn in 2002) and corporate tax rebate of 10% for high local content was removed.

-Priority sectors include services, medicinal herbs, vegetable and flowering seeds production, honey production, hydropower, petroleum exploration, and natural gas exploration

-Business unfriendly legislations: the Labor and Trade Union Act enacted recently permits strikes and requires unions to be affiliated with political parties [it was a disaster decision!]; Bonus Act requires that workers get 10% of yearly profits as bonus regardless of improvements in productivity; Electricity Act has limited bonuses of workers to 2% of yearly profits in the hydropower sector; industrial strikes by labor unions are a major constraint; 50% of the manufacturing workforce is composed of casual workers, who earn the same wage as permanent workers, but who have less job security and fewer fringe benefits.

-Customs and transshipment delays can account for as much as 55% of the logistics costs of sending certain types of goods from Kathmandu to Kolkata, instead of 25% on average for other international routes; it also delays travel time by about 3 to 8 days

-SEZs projects were initiated in 2003 to attract FDI and achieve high economic growth; SEZs at various stages-- Bhairahawa EPZ (under construction); Birgunj, Panchkhal, and Nuwakot SEZs (pre-feasibility studies carried out); clothing processing zone to be established in Simara; studies for more SEZs in Nepalgunj, Kailali, and Kanchanpur.

-Bilateral investment treaties agreements with France (1983), Germany (1986), the UK (1993), Mauritius (1999); no such agreements with India, the US, and PRC; investment agreements in the pipeline with India, Belarus, Qatar, Russia, Sri Lanka, and Thailand; SAFTA and BIMSTEC offer opportunities; double taxation agreements and prevention of fiscal evasion with several countries

-In 2007, total employment provided by approved FDI projects exceeded 180,000 with manufacturing other than textile and clothing accounting for around 35% of this total, followed by T&C with around 20%, and tourism with 9%; No domestic firms have been displaced by foreign manufacturing, tourism, or financial firms.

Constraints: small domestic market and infrastructural problems due to geography (landlocked and mountainous); low labor productivity leading to higher production costs; delays at customs and transshipment to India's Kolkota port; high costs of transport and power; a rigid and formal labor market; lack of labor-employer cooperation; weak policy and institutions in the areas of taxation, investment, and trade promotion; conflict; poor work ethic of the labor force, corruption; weak trade facilitation

FDI potential: access to markets in India and China, India has guaranteed duty-free access to most Nepalese manufactures and an agreement is due with China to designate Nepal as a tourist destination; abundance of natural resources (agriculture sector has high potential; has five climate zones); low tariff rates and a liberal foreign exchange regime and accessibility of the bureaucracy; potential sub-sectors: agriculture, and agro-based industries, flowers and flowering plants, Pashmina (third-largest export item with a share of 10.4% of overseas exports in FY2007), tourism, health and health education, IT, freight forwarding, nursing homes, construction; could piggyback on $10 billion software export industry of India.

Friday, November 27, 2009

The quest for education: Exam on a playground!

What happens when the demand for education outstrips supply for education? Well, there won’t be enough teachers and rooms to fit them all! In the picture above, more than 1000 students from grade one to nine are giving mid-term exams out on the playground because of short supply of enough rooms for them to sit for exam. The students are from a high school in Gularia, Nepal.

The quest for education continues despite logistic hurdles!

Wednesday, November 25, 2009

Development impact of the Doha Round

There has been a lot of debate about the gains from the Doha Round. It was initially estimated that the developing countries would gain tremendously and would help them not only achieve development goals (especially poverty reduction) but also bridge the income gap with the developed world. However, the exact benefit of Doha Round is still debatable. Generally, analysts use models (like CGE) and simulate the likely Doha scenarios (the likely framework that would be agreed upon) to estimate the impact of policy changes in the future as against the situation in the base year. Integrating the service sector in the modeling is a daunting task and is highly speculative as there are not convincing models to move in that direction yet.

In 2005, a World Bank study put a bombshell on the overly optimistic estimations from gains from trade. The study showed that under the "likely Doha scenario", the global gains in the year 2015 would be just $96 billion, with only $16 billion going to the developing world. This means the developing countries would see a one-time increase in income of just 0.16 percent of GDP. Also, it showed that only 6.2 million people would be lifted above the $2 per day poverty line (it represents just 0.3 percent of those living in poverty worldwide). Worse, most of these gains would go to the developed world and those that goes to the developing world is largely distributed among few countries. Half of all the benefits are expected to flow to just eight countries: Argentina, Brazil, China, India, Mexico, Thailand, Turkey, and Vietnam. Furthermore, this study by Carnegie Endowment shows that total gains from trade to be between $32-55 billion, with rich nations getting $30 billion; middle income countries like China, Brazil and SA getting $20 billion; and poor countries getting $5 billion (about $2 per head).

Amidst the increasing momentum on resuming Doha trade talks, a study by the Peterson Institute for International Economics (PIIE) has shown that the Doha deal could deliver $300-700 billion in global welfare gains, with the benefits 'well-balanced' between the developing countries. In a new policy brief, Kevin Gallagher and Tim Wise argue that these assertions rest on "shaky assumptions, controversial economic modeling, misleading representations of the benefits, and disregard for the high costs of Doha-style liberalization for many developing countries." They wonder how the economists found another  $150-$350 billion in benefits for developing countries that the World Bank missed in 2005.

The gains in the new study from agriculture and non-agricultural market access (NAMA) are of the same order of magnitude as previous studies, about $100 billion, with the vast majority going to rich countries.

The new estimates for services, sectorals, and trade facilitation are highly speculative, use methodologies that are unproven, and assume far more ambitious outcomes than seem at all likely at this point.

Peterson finds high gains in services and sectorals because they assume that developing countries will make big concessions and that those same countries are big winners (from lower prices) even if they lose significant parts of those sectors to imports.

The estimates of $365 billion in gains from trade facilitation are particularly exaggerated, because they assume not only agreement on reforms but resources for the vast investments in infrastructure and human capital needed to make them happen.

The claims of “balance” are unfounded, as developing countries receive less than one-third of the projected income gains. Previous modeling has shown that many poorer regions, such as Sub-Saharan Africa, are projected to be worse off after an agreement.

As with most such projections, researchers disregard the costs of liberalization for developing countries. Tariff losses just from NAMA reforms are estimated at $64 billion, far more than the estimated gains to developing countries. As countries struggle to recover from the financial crisis, this is not the time to cut needed government revenues. Terms of trade for developing countries are projected to decline significantly, as they shift back toward primary production rather than forward toward industrial or knowledge-based development.


Their recommendations:

  • The US and the EU should agree to honor WTO rulings that have found their subsidies for cotton and sugar to be in violation of existing trade rules that forbid exporting products at subsidized prices.
  • The WTO should take positively "special safeguard mechanism" provision, especially granting poor countries some policy space on maneuvering tariffs in staple food items like rice, corn, and wheat. This was the main reason why the negotiations in 2008 failed.
  • For manufacturing sector, "special and differentiated treatment" should be re-enshrined for developing nations.
  • Real gains from trade facilitation can only be captured through significant investment in infrastructure and human capital. The existing "aid-for-trade" proposals are inadequate.
  • There should be a moratorium on North-South preferential trade agreements because these deals exploit the asymmetric nature of bargaining power between developed and developing nations.

Monday, November 23, 2009

Elections and economy policy

We explore the impact of elections on the quality of economic policy and governance in developing countries. We argue that not only do elections likely have a positive structural effect on economic policy, but they may also have a disruptive cyclical effect. Elections introduce frictions; they are periodic events, the timing of which may affect politicians’ incentives to reform. We also argue that achieving accountability in developing countries requires more than elections. When the quality of the electoral process is poor, elections simply do not create the structural effect we would expect.

We introduce into our estimations proxies for the structural effect of elections (the frequency of elections) and for their cyclical effect (the number of years that separate each year from the nearest election). We find that elections in developing countries have both a cyclical and a structural effect on policy.

An election that is not “free and fair” is a broken technology; it cannot be expected to hold governments accountable to citizens. Hence, the overall conclusion from our analysis is that the frequency and conduct of elections matter. Our results suggest that elections are a key instrument in achieving accountability. But elections fail to achieve accountability if they are infrequent or uncompetitive.

That’s from Chauvet L. and P. Collier, 2009. More here.

Fig: Democracy, elections, and economic policy (82 developing countries, 1978-2004)

Friday, November 20, 2009

Links of Interest (11/20/2009)

China will become of the world’s largest economy in 2032 (but not in terms of income per capita!)

Forecasting macroeconomic developments (Also, see top-down versus bottom-up macroeconomics)

An interesting Turkish blog

Gambling on a sinking nation (remember a Cabinet meeting underwater in Maldives)

The effectiveness of fiscal and monetary stimulus in depression (In short, analysis of budgets and central bank policy rates for 27 countries covering the period 1925-39 shows that where fiscal policy was tried, it was effective.)

Chavez slams GDP methodology after his economy contracted in 3Q

The impact of the Doha Round on Kenya (Kenya’s GDP will boost by a 0.2 percent; it will see losses in the manufacturing and mining sectors but gain in agricultural and processed food sectors)

Zedillo Commission Report on reforming the World Bank

WDI now in Google search (try the new stuff; its cool; see a sample below)… also, try WB Data Visualizer (you can do similar stuff in Google Spreadsheet plus copy the code and use it elsewhere!)

Not satisfied playing with data? Try WB Data Finder (a sample below):

GDP growth (annual %) - 2008
Source: World Bank Data - Annual GDP Growth Rate

The lessons on reducing poverty from the BRICs

John Perkins on stopping terrorism (trade fairly!)

Thursday, November 19, 2009

Global economic crisis and South Asia

Dipak Dasgupta, Lead Economist for South Asia at the World Bank lists four reasons that have helped South Asia's growth rate from plunging down drastically as a result of the global economic crisis, which took South Asia’s growth down by about 3 percentage points (from 8.6% in 2007 to 5.6% in 2009). The World Bank expects GDP growth to recover to nearly 7 percent per annum on average in 2010-2011.

1. Remittances held up much stronger in South Asia than in other regions. In Nepal, the reliance on remittances is the highest, and without these flows, growth in consumption would have collapsed.

2. The resilience of some key export-oriented sectors also helped. Garments in Bangladesh and IT software exports from India, for instance, have held up relatively well.

3. FDI inflows to South Asia suffered a decline during the peak crisis period but have since picked-up sharply in India, Pakistan and Sri Lanka.

4. Policy responded early in the crisis, helped by domestic factors such as the pre-election fiscal spending in India. The size of fiscal stimulus announced was over 3 percentage points of GDP in India and significant also in Bangladesh. Interest rates were lowered sharply in most South Asian countries.

Gupta argues that the region faces two big challenges: food price inflation and fiscal deficits.

Rather than lumping all South Asian countries in the same basket (because high growth from three countries among eight in South Asia jacks up the regional average), there is a need to differentiate the countries into two blocs: high growth countries (India, Bangladesh and Bhutan) and low growth countries that suffer from instability (Pakistan, Nepal, Sri Lanka, and Afghanistan). This way it is easier and accurate to get a clear picture of each country’s constraints on growth, business environment, macroeconomic stability, institutions, governance structure, and bureaucracy . This WB blog post does take a differential look as required, which is not common among South Asian analysts (who actually exclusively look at India and Pakistan and refer it as South Asia; there are six other countries that are member of SAARC!)

Anyway, below are trend of some economic indicators for Nepal (compared with South Asian average).

Institutions, Incentives, Poverty and Inequality

Daron Acemoglu explains why and how there is persistent inequality and what can be done about it (fix incentives and governments):

The question social scientists have unsuccessfully wrestled with for centuries is, Why? But the question they should have been asking is, How? Because inequality is not predetermined. Nations are not like children — they are not born rich or poor. Their governments make them that way.

Economist Jeffrey Sachs, director of Columbia University's Earth Institute, attributes the relative success of nations to geography and weather: In the poorest parts of the world, he argues, nutrient-starved tropical soil makes agriculture a challenge, and tropical climates foment disease, particularly malaria. Perhaps if we were to fix these problems, teach the citizens of these nations better farming techniques, eliminate malaria, or at the very least equip them with artemisinin to fight this deadly disease, we could eliminate poverty. Or better yet, perhaps we just move these people and abandon their inhospitable land altogether.

Jared Diamond, the famous ecologist and best-selling author, has a different theory: The origin of world inequality stems from the historical endowment of plant and animal species and the advancement of technology. In Diamond's telling, the cultures that first learned to plant crops were the first to learn how to use a plow, and thus were first to adopt other technologies, the engine of every successful economy. Perhaps then the solution to world inequality rests in technology — wiring the developing world with Internet and cell phones.

And yet while Sachs and Diamond offer good insight into certain aspects of poverty, they share something in common with Montesquieu and others who followed: They ignore incentives. People need incentives to invest and prosper; they need to know that if they work hard, they can make money and actually keep that money. And the key to ensuring those incentives is sound institutions — the rule of law and security and a governing system that offers opportunities to achieve and innovate. That's what determines the haves from the have-nots — not geography or weather or technology or disease or ethnicity.

Put simply: Fix incentives and you will fix poverty. And if you wish to fix institutions, you have to fix governments.

Monday, November 16, 2009

Unemployment numbers for Nepal

It has been reckoned that around 350,000 new work forces enter into the job market each year and around 200,000 of them are finding jobs in foreign countries. Finding jobs for fresh 150,000 youths that enter the employment market is one of the major problems…

The Labor Survey conducted last year had showed 49 percent of urban and 26.9 percent of rural population was underutilized, which means they are not getting sufficient works. It also showed that unemployment has gone up to 2.1 percent of the total population from 1.8 percent in 1998/99.

Source here

Don’t believe that there are just 0.588 million people unemployed (out of about 28 million) in Nepal. The real number is much more higher. It has to do with how we calculate unemployment rate (=percentage of total labor force who are unemployed but are actively seeking and willing to do a job). Students, military personnel, retired people, parents staying at home, prisoners, people working in places that do not report income, and discouraged workers are not included. This means a whole lot of people are not included. A lot of the people in Nepal are discouraged workers, who gave up searching for jobs, thus excluding them from the labor force (which is the sum of employed and unemployed people).

Moreover, millions of workers in the agricultural sector (such as ‘hidden’ unemployed, non-wage workers, in-kind contract workers, etc) are not counted because their status does not fit within the definition of unemployed people. There are many of them because over 70 percent of the population depend on agriculture for living. Otherwise, won’t you be surprised to hear that unemployment rate in the US is 10.2% and in Nepal it is only 2.2%!

Saturday, November 14, 2009

Trade distortions, the Doha Round, and food price volatility

Kym Anderson has an interesting piece about the relationship between trade distortions and food prices. He argues that sudden rise in global food prices are driven by major policy shifts like tariffs and subsidies, leading to a tit-for-tat behavior by countries that produce them.

Trade-related policies contribute to agricultural market volatility and the volatility around the long-run-trend terms of trade slows national economic growth, he argues. The main point of the piece: continue with agriculture liberalization. Here is a similar argument. The disagreements on agriculture liberalization has been holding up Doha for eight years now. The author says that the more barriers in this sector, the more volatility. So, seeking a Special Safeguard Mechanism (SSM) is not good to reduce volatility. [But, how can the Doha Round pass without addressing these issues?]

The price hike of 2008 was also partly a consequence of policy changes in the US and EU, namely their decision to subsidise biofuels and set mandates/targets for their use domestically in response to rising fossil fuel prices. It led other governments to impose food export restrictions to insulate somewhat their consumers from the price rise, which pushed international food prices even higher and, domino-like, drove more exporting countries to follow suit. Some food-importing countries also lowered temporarily their import tariffs, to reduce the rise in their domestic food prices.

The parallel movement of food and energy prices is consistent only after the previous half-century. The author finds that the coefficient of correlation between 1960 and 1999 is -0.18, compared with 0.84 for 2000-07. The comparison may not be quite accurate because of the timeframes between these two periods but the high and positive R-squared value for 2000-07 gives us some information about the way food and energy prices move (in tandem). Note that agriculture constitutes around 3% of global GDP, 6% of global trade, and 8% of global exports (exports of non-farm primary products is 31% and all other merchandise exports is 25%).

Governments of many developing countries harmed their farmers directly by taxing their exports and indirectly by encouraging manufactures and overvaluing their currencies. This meant that price incentives facing farmers in many developing countries were depressed by both own-country policies and the protective policies of high-income countries.

The good news is that many developing countries have reduced hugely their anti-agricultural export policies, and even some high-income countries have lowered their trade-distorting assistance to their farmers – albeit replacing part of it with more-direct assistance to farmers that are only somewhat decoupled from production.

The argument against SSM and giving some policy space to deal with contingencies in the developing countries are not consistent with the evolving consensus among experts that such measures need to incorporated in the Doha Round. Without these measures it would be hard to deal with national crisis triggered by disruptions in agriculture production and trade. For instance, what happens if there is extended drought in a country and producers chase after higher priced markets abroad-- this will lead to starvation. To check the population from starving, some contingency measures are essential. Some hooks to full agriculture trade liberalization is required for the survival of the Doha Round.

Even a recent WTO World Trade Report emphasized for inclusion of “trade contingency measures”. The report argues for “trade contingency measures” that would give some policy maneuver for countries to deal with domestic pressure to prop up domestic markets affected by the crisis. The contingency measures discussed in the report include safeguards measures, anti-dumping and countervailing measures, the re-negotiation of tariff commitments, the raising of tariffs up to their legal maximum levels, and the use of export taxes. These are needed because too little flexibility in trade agreements may render trade rules unsustainable.

Also, note that the drastic rise in food prices was not necessarily triggered by protectionist measures, which was the resulting response to the food crisis (which was especially caused by demand factors).Trade distortion is one of the many causes of the drastic rise in food prices:

  • Rising incomes per head in the emerging economies
  • Changing pattern of food consumption (shift from food to meat reduces food supply as it is being used to rear animals)
  • Subsidised biofuels production in the West raise demand for maize
  • Aggregate maize, rice, and soybeans production stagnated in 2006 and 2007 (partly due to drought)
  • Increasing speculation because of declining stock

Martin Wolf dismisses the idea that liberalization is the only answer:

The political focus of the Doha round on lowering high levels of protection is largely irrelevant. The focus should, instead, be on shifting the farm sector towards the market, while cushioning the impact of high prices on the poor.

The move towards genetically modified food in developing countries is as inevitable as that of the high-income countries towards nuclear power. At least as important will be more efficient use of water, via pricing and additional investment. People will oppose some of these policies. But mass starvation is not a tolerable option.

Wednesday, November 11, 2009

Futile efforts to regain the lost glory of Nepalese garment industry

In my latest op-ed, I argue that exclusively chasing for duty-free access for Nepali garment and textile exports to the US markets is not a panacea for the problem associated with this dying industry. I think nothing is going to move forward even if Nepali exporters gets preferential treatment in the US market because after the end of MFA in 2005, the market is already flooded with similar exports from other countries that enjoy economies of scale in production and are more efficient and competitive (price and quality) than Nepali exporters. Last year, I wrote an op-ed (Times up for garment industry) arguing why the garment and textile industry cannot be depended upon for export-led growth.


Futile efforts


During her visit to the US late September, Deputy Prime Minister and Foreign Minister Sujata Koirala touted that her delegation lobbied hard with some US Congressmen to pass a bill that would treat Nepali garment and textile sector preferably in the US market. She boasted that there were “positive and promising” responses from the US regarding duty-free access, which could, in principle, resuscitate the dying export-based garment and textile industry.

Each time a high-level delegation visits the US, they implore for preferential treatment of Nepali garment and textile industries. This fruitless effort has been continuing since the end of Multi-Fiber Agreement (MFA)—which established a system of quotas to limit the quantity of imported textiles and apparel products from specific countries to the US, Canada, and the EU — in 2005, after which the Nepali garment and textile industry has seen drastic decline in exports and market share in the West.

The value of garment exports between January-April 2009 was less than 10 percent of what was exported in the same period in 2004. This sector has already shed over 90 percent of jobs and 98 percent of firms. In the first five months of 2009, the value of readymade garment exports was US$3.4 million, a 49 percent drop from the same period last year. Recall that the garment sector was once the highest foreign currency exchange earning sector. Now, its contribution is minimal and agricultural goods like pulses have more weight on the export basket.

In a way, the political and financial resources invested so far in securing preferential access to the US market sounds reasonable. However, after more than four years of lobbying, there is hardly any progress. The policymakers are bogged down into this issue as if this is the only sector that would help stimulate export-led growth and employment generation. Exploration of other comparatively advantageous sectors have been overshadowed by the obsessive focus on securing preferential access to a market that is already flooded with similar goods from countries which enjoy huge cost and competitive advantage over Nepali exporters.

At this juncture, we need to ask two questions: What is the chance of getting preferential access to the US markets under present circumstance? If it does, will Nepali garment and textile exporters then be able to regain the lost market share?


The illusionary notion that securing duty-free access to the US market would revive the garment and textiles sector is fundamentally flawed. Policymakers and investors should be a bit more realistic about our real manufacturing and export capacities.


Unfortunately, there is no positive answer to these questions. A senior diplomat, who is quite familiar with these issues, from the State Department opined that it is very “unlikely” that Nepal would get preferential access to the US market under the present circumstance. Unfortunate this might be but it is not surprising. By now the Nepali lobbying troupe has a fair idea of how hard it is to secure preferential treatment from the US Congress; despite over four years of lobbying, things have not moved a bit in the positive direction. It should have been a clear indication that the entire effort might be a lost cause, not because we don’t need to prop up this sector but because we can’t do it under present labor and economic conditions in particular and the incapacity to fulfill enhanced labor, quality and environmental requirements brought about by increasing globalization in general. The senior official advised Nepali leaders and lobbyists to be a bit more realistic and not chase for something that is not attainable. Now, revert back to what DPM Koirala touted while she was in DC in September? It seems like she has not fully fathomed this issue.

Now, let us assume that Nepali garment and textile exporters get preferential access to the US market. Will this help revive the lost glory of this industry? It seems unlikely because of five reasons. First, due to persistent labor problems ranging from bitter disputes on minimum wage to hiring and firing provisions, the firms are simply unable to supply pre-ordered goods on time.

Second, investors are discouraged to invest in this sector due to unmanageable red tapes and irresolvable industrial relations. Third, the problem is further compounded by frequent bandas and transport strikes. The cumulative effect is that delivery is costly and not possible within the stipulated timeframe, leading to loss of valuable customers like WalMart and Gap Inc. This is more of supply than demand issue.

Fourth, exporters from China and India, among others, are more competitive in terms of price and quality than Nepali exporters. They enjoy economies of scale and their governments have elaborate plans to prop up production and distribution efficiently. This is clearly lacking in Nepal because of the lackluster response from government and myopic business vision of investors. Until 2005, the government and exporters basked on preferential treatment and completely disregarded the need to upgrade the old production structure into a new, consolidated one so that it can compete with more efficient exporters from abroad. Fifth, Nepal cannot jump successfully into the highly-competitive US market because exporters from other countries have already eaten up the pre-2005 market pie of Nepali exporters.

This does not mean that we need to abandon the promotion of garment and textile industry abroad. It would be fruitful to look at regional markets, which has higher potential than markets abroad because of lower transportation and transaction costs. This sector could gain more if the same amount of political and financial capital is invested in lobbying to eliminate countervailing duty (CVD) of 4 percent in the recently signed Nepal-India trade treaty.

Expediting establishment of GPZs and giving tax credits and subsidy incentives to investors would also aid the process, though, to be frank, no one knows how much this will help the dying sector regain its past glory. To satisfy the never-ending fascination with Western markets, the government and the exporters need to look into niche markets rather than the entire garment and textile market, which, as argued before, are already conquered by competitive firms from other countries. Promoting selected products that reflect Nepali tradition and heritage would be one of the potential niche markets.

The illusionary notion that securing duty-free access to the US market would revive the garment and textiles sector is fundamentally flawed. Policymakers and investors should be a bit more realistic about our real manufacturing and export capacities. A preferential treatment, which is very unlikely in the present context, will not be a panacea to the multiple, intricate problems of the garment and textiles sector.

[Published in Republica, November 10, 2009]

Thursday, November 5, 2009

Liquidation of Hetauda Textiles Factory

Finally, the Nepalese government has decided to liquidate a dead textile factory, which the Maoist government tried to revive believing that despite its utter lack of competitiveness, it could produce and supply textiles while creating artificial demand from the security agencies. It was populist and bad idea that only added deficits.

Reversing the Maoist government´s policy, the government has decided to send Hetauda Textiles Factory (HTF) into liquidation, citing that the revival of the dead industry was not possible.

The cabinet meeting held on Wednesday took the decision to this effect.

“We had to admit to the cabinet that past attempts to revive the failed and long-closed industry only added financial loss and burden to the government,” said a senior official at Ministry of Industry, disclosing the cabinet decision to

HTF was closed eight years ago after it posted a huge financial loss due to its failure to compete with imported textiles, mainly from India. Prior to the closure, the factory used to consume 1,200 tons of cotton and was employing about 1,200 people.

This is what I wrote when I reviewed the Maoist government's budget on 23 September, 2008:

Demonstrating a socialist manifestation and big planner attitude, the finance minister has adorned the budget with varied slogans and a resolution to revive moribund and sick firms. The promise to inject money and resuscitate state-owned enterprises like Hetauda Textile Mills, Gorakhkali Rubber Industry and Agricultural Tools Factory completely compromises efficiency and productivity in favour of a populist political agenda of creating employment. He has put an upper limit on demand by arguing that government agencies and security forces would consume production from these incompetent companies.

Again, he needs to be given a reminder of how the Soviet Union failed miserably when it embarked on grand and fruitless investment in railways and the manufacturing sector. Corruption and inefficiency thrived as the state-owned companies created illusionary demand, that is, they created their own demand and supply, and rotated the goods and services among themselves, leading to waste of resources in one sector and shortage in the other.

Monday, November 2, 2009

Will Nepal gain from the new India-Nepal trade treaty-II?

Paras Kharel looks beyond simple economic theoretical benefits from the revised trade treaty (2009) between Nepal and India. The devil in the trade deal is getting clear!

What has also been overlooked by Nepal is the non-binding nature of the provision for waiver of additional duties other than that counterbalancing an excise duty. That India “shall consider” waiver at Nepal’s request does not make it mandatory for India to remove it. Our negotiators have been caught napping. And there is more to it. The possible waiver of such additional duties being applicable only to products of “medium- and large-scale” manufacturing units leaves open the room for applying them on products of small-scale units. In addition, the Protocol to Article I says that the two sides “shall undertake measures” to “reduce or eliminate” non-tariff, para-tariff and other barriers that impede promotion of bilateral trade. This weak formulation does not entail a binding commitment to categorically eliminate such barriers.

The list of primary products qualifying for duty-free and quota-free access has been expanded to include floriculture, atta, bran, husk, bristles, herbs, essential oils, stone aggregate, boulder, sand and gravel. But it was unnecessary to list some of the products as they were already eligible for preferential treatment—for example, the existing list of eligible primary products included flour (atta is one type of flour) and forest produce (herbs come under non-timber forest products). There is a need to make the list clear and precise, based on standard international classification, to remove ambiguities and arbitrariness in interpretation. As things stand now, either country can impose customs duty on products not mentioned in the list, whereas the very first point on the list reads “agriculture, horticulture and forest produce and minerals which have not undergone any processing”—which is quite all-encompassing. Besides, Nepal’s strategy should be to add value to products such as herbs and essential oils through processing rather than exporting them in raw form.

It has been agreed to calculate value addition for Nepali manufactured products to get preferential access to India on a free-on-board, rather than ex-factory price, basis. This is of little help as stringent rules of origin—30 percent value addition and change-in-tariff heading at 4-digit level—that are beyond Nepal’s current level of industrialization and supply capacity have not been relaxed. The quantitative restrictions slapped since 2002 on four Nepali products—vegetable ghee, acrylic yarn, zinc oxide and copper wire rod—remain. Indian manufactured goods, meanwhile, will continue to get preferential treatment from Nepal without having to meet any rules of origin.

See this blog post for additional information.