Competitiveness of Nepal’s services sector

People usually focus on merchandise trade while analyzing trade performance because it is easier to access data at the most disaggregated level. But, what about the services sector of Nepal? There are many studies that have superficially looked  at services trade potential. But, the dynamism of this sector and its potential to ensure structural transformation are studied less than it is for merchandise trade (two recent studies that look at India’s services sector are here and here). Here is last year’s blog post about the relative competitiveness of services trade in comparison to merchandise trade.

Nepal is bearing negative trade balance in services trade since 2005 (see figure below). The total services trade deficit in 2010 was around US$199 million, up from US$137 million in 2009. Out of the six services sub-sectors that Nepal exports and imports, there was positive trade balance in communication services, government services, and other business services only in 2009 and 2010. Even among these three, notice that trade surplus in two sub-sectors is decreasing, but it is increasing in other business services (see table below). Surprisingly, in travel sub-sector, the trade deficit was US$58 million (US$344 million export and US$402 million import). I think due to the Nepal Tourism Year 2011 campaign and record number of visitors, trade balance in travel sub-sector might be better in 2011.

Now, how competitive is Nepal’s services sector? Let us look at the relative comparative advantage (RCA) index, which is simply the ratio of the share of a country’s total exports of a particular product of interest in its total exports to the share of world exports of the same product in total world exports. A country is said to have revealed comparative advantage if the RCA index is greater than unity. It is calculated as RCA_ij=(x_ij/X_it)/(x_wj/X_wt), where x_ij and x_wj are the values of country i’s exports of product j and world exports of product j, and X_it and X_wt refer to the country’s total exports and world total exports. Computing RCA index for Nepal’s exports of each services sector category reveals that Nepal actually enjoys comparative advantage in all of them (this despite the fact that there is trade deficit in three of the six sub-sectors).

	2008	2009	2010	2008	2009	2010
Product name	RCA index			Trade balance (US$ million)
Total services	1.52	1.47	2.23	-128.09	-136.86	-199.07
Transportation	0.37	0.59	0.63	-304.62	-233.07	-241.42
Travel	4.23	5.00	4.55	-45.93	-20.56	-58.09
Communications services	5.59	4.54	8.62	40.91	16.11	3.13
Insurance services	0.10	0.19	0.06	-29.79	-25.41	-29.59
Other business services	1.11	1.31	1.87	-6.41	35.79	63.25
Government services, n.i.e.	26.73	11.46	10.63	217.75	90.28	63.65

Source: Author’s computation based on ITC’s Trade Map database

Clearly, Nepal is unable to exploit the services sector market potential despite having comparative advantage in its trade. The problems faced by exports sector in general are:

• Inadequate supply of infrastructure, including power outages
• Political instability
• Labor militancy and rising cost of production
• Lack of innovation, R&D and overdependence on market concessions
• Inadequate supply of required human capital
• Policy implementation paralysis

In terms of employment, 65.7 percent of total employed are in agriculture sector, 13.4 percent in industrial sector, and 20.1 percent in services sector (data as of 2001). The value addition of agricultural sector, as percent of GDP, was 33.8 percent in 2009, with annual value added growth of 2.2 percent. The industrial sector value added ( percent of GDP) was 15.9 percent with annual value added growth of 1.78 percent. The manufacturing sector value added ( percent of GDP) was 7 percent with annual value added growth of –0.5 percent in 2009 (it was 2.6 percent in 2007). The services sector value added was 50.2 percent with annual value addition growth of 5.9 percent in 2009. Now, look at the employment being generated. Though the services sector contributes more than 50 percent of our GDP, it employs only 20 percent of the total employed.

Water and energy consumption in Nepal

The information is derived from from a recent report on green growth in Asia and the Pacific. The domestic water use per capita (471 cubic meters per capita in 2000) in Nepal is below the estimated minimum requirement. Leakage, inadequate water quality, inefficient domestic water use, and underinvestment in providing access to basic services are common features in countries with low water use per capita. No surprise that people in major urban centers can run their taps just for few hours each week. The work to channel water supply from Melamchi is yet to be realized ever after so many years of commencement of its construction.

Domestic material (including energy) consumption is pretty low (fifth lowest—2.64 tons per capita in 2005) compared to other countries in the continent. It signals potential for future growth by exploiting the available materials for consumption and production. Furthermore, per capita energy use is the third lowest (14.36 gigajoules per capita), followed by Myanmar and Bangladesh, in Asia and the Pacific. Note that countries with high energy use per capita tend to have high HDI value.

Recommendations for green growth and resource sustainability:

• Infrastructure investments should be guided by the principles of sustainability, accessibility, and social inclusiveness.
• “Natural infrastructure” provides valuable but undervalued economic inputs. Natural capital investments will help to secure critical ecosystem services (such as water regulation and flood control), achieve cost savings on infrastructure development, improve human and environmental security and can strengthen climate adaptation efforts through ecosystem-based adaptation approaches. Sustainable management of natural capital also enhances the potential for ecosystem services for economic transformation—for example where eco-tourism potential is developed as an economic development strategy. Investments should be targeted at key ecosystem services that hold particular value for their economies and societies.
• Sustainable agriculture is a critical aspect of maintaining and building natural capital.
• Greening of growth requires integrated strategies that support systemic change in integrated, complementary and mutually reinforcing ways. The complexity of challenges faced means that a clear vision, targets and monitoring approach are required. Also needed are targets and indicators that give policy-relevant information on the extent to which the economy is “growing green.”
• To ensure greater resilience, domestic policies should also encourage diversification in key sectors, such as industry, agriculture and energy.
• Approaches that enhance the capacity of communities and economies to resist initial shocks and to self-organize and adapt to changing conditions will be increasingly important.
• A transition to a green economy requires governance that is effective, fair and
  inclusive.