Sunday, July 4, 2010

NTIS 2010: A Strategy Without A Comparative Advantage

My latest op-ed is about the recently released Nepal Trade and Integration Strategy (NTIS) 2010. As I argue here, there is a good deal of workable ideas in the report, which identifies 19 products that have “export potentials”. Good. Nepal desperately needed a coherent analysis of the messy trade sector so that future policies are in line under one unified theme. My biggest concern with this report is that people are wrongly trying to take it as a “constitution” for exports and integration strategy.

The report does not say if the 19 products can be exported with comparative advantage. It only says that they have “export potential” based on the product’s revenue share in Nepal’s exports basket and their overall market size outside the country. For sustainability of our exports sector, we need products that are price and quality competitive. Just identifying markets and exportable goods is not the final point. Period. That being said the report is excellent. A good contribution to escorting the directionless exports sector in the right direction.

NTIS 2010: A Strategy Without A Comparative Advantage

Recently the Ministry of Commerce and Supplies released a report, Nepal Trade Integration Strategy (NTIS) 2010, which identified products with “export potential” and market destinations for them. Six years ago a similar report – Nepal Trade and Competitiveness Study (NTCS) 2004 – was released. It did not help much in uplifting exports and diversifying export basket. The new report has reignited the hope of reviving the lost glory of Nepal’s export industry, which has nosedived since 1997.

NTIS 2010 is probably one of the most clear-cut reports so far that delves into product level analysis to identify promising exportable products and market destinations for them. But, it does not say much about the potential to export the products with comparative advantage. Just identifying markets and products does not mean much if we cannot export them with comparative advantage.

The report identifies 19 key commodities and services with ‘export potentials’ that could potentially revitalize Nepal’s export sector. The identified products are cardamom, ginger, honey, lentils, tea, noodles, and medicinal herbs/essential oils in agro-product category; handmade paper, silver jewelry, iron and steel, pashmina, and wool products in craft and industrial goods category; and tourism, labor services, IT and BPO services, health services, education, engineering, and hydro-electricity in services category. Furthermore, five more potential export products/sectors pointed out in the report are transit trade services, sugar, cement, dairy products and transformers. There are numerous recommendations for the government to fine-tune and address non tariff barriers (NTB), and to take advantage of Aid for Trade (AfT) and Trade Related Technical Assistance (TRTA) facilities offered by various international agencies.

The objective of the report sounds like an effort to seek export-led ‘inclusive’ growth strategy with the identification of key products based on Nepal’s existing production capacity. The identification is based on the change in composition of Nepal’s export basket and the growth in exports of key products between 2004 and 2008. It does not say if we can export the key products with comparative advantage. Also, there is no explanation to how the growth in exports will make development inclusive. Just promoting a few agricultural products whose production structure and capacity is not yet fully known will not lead to an inclusive trade-led growth. Nepal has to consolidate and harmonize production structure and capacity in all sectors to exploit economic of scale and to make products competitive right from factor market to product market.

If our focus is to revive the exports sector, then we should be looking for products that could be exported with comparative advantage, be it small or niche or large markets. Products with high relative comparative advantage matters more than the mere identification of exportable goods and services. The growth of revenue generated from, say, iron and steel products by 52.6 percent between 2004 and 2008 does not mean that it will continue to grow linearly in the same fashion. The export value of iron and steel products was low in 2004. During the prosperous periods before the recent economic crisis in the overseas markets, exports of this item increased sharply, leading to a high growth rate of exports revenue. It does not mean that Nepal is enjoying comparative advantage in export of this product.

A ‘product space’ analysis, which is a network of relatedness between products, is necessary to figure out what products Nepal is exporting and can export with comparative advantage. It will show how Nepal can move up the value chain, and identify potential products to successfully upgrade production facilities and technologies so that transition from the production of one comparatively advantageous good to another (“nearby” goods) is easy.

A series of product space studies show that Nepal has very few agricultural goods that could be exported with comparative advantage (see “Is Nepali export passe?” Republica, March 14, 2010). There is more proximity (connectedness) between products in the non-agricultural sector, i.e. product upgrading is easier. In fact, Nepal’s product space of 1985, 2000, and 2007 shows that the agricultural sector did not contribute new exportable product with comparative advantage both in 2000 and 2007.

The report recommends the government to pay “instant attention” to four agricultural products namely tea, lentils, cardamom and ginger. These are agro-based products, whose prices are volatile in the international market. Putting down too much emphasis on agricultural products would invite increased volatility not only in the market of specific items but the whole economy as the value added contribution of the agriculture sector is around 34 percent of GDP and it employs around 66 percent of the population. The promotion of agricultural products should be based on domestic demand, which is higher than the supply as is indicated by food deficit of 316,465 tons in 2009/10.

Less volatile are the industrial and services sectors. Nepal should lay more emphasis on these two sectors than the agricultural sector, if the main objective is to boost exports sustainably and to narrow balance of trade deficit. The agricultural products are usually of low-value added ones when compared to industrial and service sector products.

A change in export composition, based on revenue fetched by individual products, does not mean that these products have more export potential. We really don’t know if they are comparatively price and quality competitive. The change in composition of products in the export basket has not made any noticeable difference in the aggregate export revenue. The growth rate of our total exports is still declining.

That said emphasis on regional integration is commendable. India is by far the most important export destination for Nepali goods and services. Around 60 percent of total trade happens with India. Similarly, China is also an important and expanding market, which has recently offered zero-tariff facility to 4,721 exportable goods. The SAARC and MENA regions could be attractive markets apart from the US and the EU. Around 64 percent of Nepal’s total merchandise trade happens within the SAARC nations. Promoting more regional integration could help the exports sector.

NTIS 2010 is an important contribution to steer the exports sector in the right direction. However, the job is not done yet. It has just begun.

[Published in Republica, July 3, 2010, pp.6]