South Asia Watch on Trade, Economics & Environment (SAWTEE)

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Can Nepal benefit ?
Published: The Rising Nepal, 10 January 2004
By: Kamalesh Adhikari

On 11 September, the World Trade Organisation (WTO)'s fifth Ministerial Conference in Cancun, Mexico approved Nepal's accession to the rules-based world trading system. Hence, the ball is in Nepal's court now. Whether or not to become a member of the global trade body solely depends on the country. If Nepal ratifies the Accession Treaty within six months from the date of approval for accession and notifies to the WTO well in time, the country shall become the 148th member of the WTO. Encouragingly, there seems no serious dispute at the national level regarding WTO membership. And at the worst also, hopefully, the country does not go to opposite direction, even on the face of the present crisis at the political level.

Yet, even if Nepal becomes a WTO member, the trial phase for integration into the multilateral trading system does not end. WTO membership is not an end. It is a beginning, a beginning of a new tale of Nepal's effort to integrate its economy into the paradoxical multilateral trading system. Nepal needs to amend or design its national development policies in line with the commitments that it has made with the WTO. The question is how Nepal reaps the benefits from the world trading system, which is already the most controversial and complex trading regime. The challenge is how Nepal interfaces national interests with WTO commitments. But, still the concern is how Nepal works out and implements its policies in the context of the WTO given its internal constraints.

In this article, we will discuss the internal constraints that Nepal faces in implementing its development policies in light of WTO membership. The past and the existing national development policies are, in most cases, criticised for ignoring the national interests, as they were or are donor driven, development unfriendly and anti-poor. In this regard, in the process of integration into the multilateral trading system, the government has a greater responsibility. There are many factors that hinder Nepal's integration efforts. Such factors are multifaceted and in many cases interrelated. If Nepal intends to make a successful integration, the way out to tackle such constraints must be identified.

Constraints

Defined by its small economic size, economic dependence (heavily indebted and often reliant on development assistance for a significant part of its budget, i.e., 26 percent), and relative poverty, Nepal is a least developed country (LDC). Sluggish economic growth, low level of industrialisation, underdeveloped production structure with limited commodities to export, unbridled population growth rate, high concentration of population and labour force on agriculture etc. are some of the specific characteristics that indicate Nepal's underdeveloped economic structure. Agriculture is the mainstay of the economy, providing livelihood for about 80 percent of the population and accounting for about 39 percent of gross domestic product. However, due to its relatively poor performance in the past few decades, a majority of Nepalis today are destined to face the hardships of poverty, food insecurity and malnutrition. The growth in non-agricultural sector is also very much centered on the urban sector. Hence, with these constraints, it is always a challenge for Nepal to expand its economic activities at the international arena.

This is also problematic because Nepal lacks competitiveness in its agricultural as well as industrial produce. Due to globalisation, the world economy is becoming more and more competitive. But the industrial companies and agricultural enterprises in Nepal are not self-sufficient to be globally competitive and lack competitive advantage, economies of scale, cutting edge technology, marketing caliber and efficient production and distribution set up. The comparative advantage in labour has also not been fully utilised, due to its low productivity resulting mainly from lack of education and skill, poor health etc.

Several supply side constraints such as lack of linkages within and between productive services and infrastructural sectors, underdeveloped human resources, shortcomings in production technologies, deficiencies in physical infrastructure, and inability to generate adequate resources to address its problems shall also overwhelmingly undermine the country's capability to capitalise the economic opportunities of the world trading system. Other bottlenecks include transport and communication problems, lack of requisite credit facilities, cumbersome bureaucratic procedures, lack of data on exportable items, and lack of awareness among the business and private sector.

Since 1992, the government has been moving forward with different economic reform programmes, particularly those that encourage trade and foreign investment. But these measures have not brought promising results, mainly due to lack of political commitment, other governance related problems, among others. In addition, for the past few years, civil strife and war have afflicted the country with devastating effects on its economy and on the health and living standards of its populations. Destruction of infrastructure leading to severe problems for transport, communications and utility supplies has not only affected the economic programmes but has also caused other social, cultural and more importantly political problems. Furthermore, agricultural production has been largely affected since a large number of rural population has left the war-afflicted areas.

Nepal has considerable scope for accelerating economic growth by exploiting its potential in hydropower but this has just remained a political slogan and nothing concrete has been done. Security concerns in the wake of Maoist activity and the massacre of many members of the royal family have led to a decrease in tourism, which is a key source of foreign exchange. Prospects for foreign trade or investment in other sectors have also remained poor because of the small size of the economy, its technological backwardness, its remoteness, its landlocked geographic location, and its susceptibility to natural disaster. Textile and carpet production, accounting for about 80 percent of foreign exchange earnings in the past, has declined significantly in recent years.

Moreover, while countries in other regions are fully reaping the economic benefits from also many regional alliances and bilateral trade treaties, Nepal is not in a position to move in that direction, particularly because of the inactiveness of the South Asian Association for Regional Cooperation (SAARC) and skirmishes with India, its major neighbouring trading partner. The country is facing many bilateral problems with India under the 1996 Trade Treaty and open border with it is accentuating other economic problems creating many hurdles in one or the other way.

Conclusion

Integration of Nepal into the multilateral trading system is a must but this demands a concerted and comprehensive effort, primarily from the Nepalese government itself. The government must make every possible effort to ‘put its own house in order'. Yet, crucial to it would be the 'assistance and facilitation' by the WTO, especially the developed member countries. The experience indicates that the approaches being followed within the WTO trading regime are not best designed to facilitate the LDCs' integration. The developed member countries should ensure that their trade rules do not obstruct Nepal's efforts towards integration. Assisting and facilitating the country with market access opportunities, full operationalisation of special and differential treatment provisions and the integrated framework can play a vital role here. Finally, the WTO should also be able to work as an effective, transparent, and non-discriminatory international trade system.

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