The diminished and still diminishing garment industry of Nepal

Bhuwan Sharma, Op-Ed editor of Republica, has an excellent article on the IPS on the demise of the garment industry. It is a refresher on how Nepal lost the glory of its garment industry after the end of MFA in 2005.

The tiny Himalayan nation’s garment industry in its heydays earned the highest foreign exchange for Nepal and was the biggest export-oriented manufacturing industry of the country.
Export of readymade garments (RMGs) that in 2002/2003 registered over 11.5 billion Nepalese rupees (165 million U.S. dollars) plummeted to about 4.5 billion rupees (65 million dollars) in 2008/2009. An industry that once provided direct employment to approximately 50,000 people, including a significant number of women, now just employs a few thousand people.

The phasing out of the quota system carried out in tune with the 1990 World Trade Organization (WTO) Agreement on Textiles and Clothing (ATC) (also known as Multi-Fibre Agreement), Nepal’s inability to restructure the sector, political instability and the rise of unionism dealt a near-lethal blow to the industry.

The quota reduction was implemented in four phases: 16 percent in 1995; 17 percent in 1998; 18 percent in 2002; and finally 49 percent in 2005, thus ending 40 years of quota-based trading on textiles and clothing.

"The quota phaseout under ATC began in 1995, but its impact on the Nepalese economy was not immediate. This was due to the fact that the RMGs were concentrated on a few products (mainly cotton casual wear), and these products were not under quota restrictions until the last phase of the Agreement," says a report published by South Asia Watch for Trade, Economics and Environment (SAWTEE) and ActionAid Nepal.

Chandan Sapkota, a regular newspaper commentator on trade and economic issues, says: "It was known two decades ago that all quotas in this sector would be abolished. There was ample time to invest and restructure the Nepali garment industry. However, both investors and policymakers turned a blind eye to the necessity for the reorganisation of this industry."

The phasing out of quotas and the country’s inability to prepare itself for a level-playing field has been devastating. While there were 212 manufacturing units in 2000/2001 manufacturing RMG for markets primarily in the United States, EU, Japan and Canada, now only a handful of units remain.

Questioning the estimates of Nepal’s three year investment plan (2010-2013)

Last month, I wrote about the three-year investment plan of the Nepalese government and raised some questions. I was unsure about the estimates because I had not read (and still have not) the original document. Dilli Raj Khanal, former member of National Planning Commission, touches this issue. He is skeptical of the estimates. Turns out the elasticities used in projections are outdated.

In the goal, by emphasizing on dignified and gainful employment, reduction of economic disparity and abolition of social deprivation aims at reducing poverty to 21 percent by the end of TYP from present level of 25.4 percent. It adds that by means of improved living conditions through sustainable growth, this will be possible.

To begin with, the targets of 21 percent based on new poverty estimates of 25.4 percent are highly questionable, which are simply based on income poverty elasticity that comes out at 0.25 based on a historical data.

If this could have been the case, during 1985-90 and 1992-97, poverty would have reduced drastically as the growth rate was above 4.8 percent at that time. But 1996 and 2004 survey data show that poverty remained at 42 percent throughout this period.

Despite so much propaganda on dignified or gainful employment in the approach paper, employment calculation is also simply based on historical employment elasticity of 0.60.

The method to calculate the investment requirement and techniques used to fix sectoral resource allocation pattern, including bifurcation between the government and private sector, are highly questionable. The fixation of plan outlay technique is the same as the first plan. Given the fixed sectoral target and calculated incremental capital output ratio again based on questionable investment and accumulated capital data, the investment requirement has been derived. It, as obvious, cannot address distributional and sustainable growth issues.