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

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Question of policy space
Published: The Kathmandu Post, 7 January 2005
By: Ratnakar Adhikari

It is generally understood that government represents the people of the country. It is also universally assumed that government would ‘consult’ the major stakeholders before signing any international economic agreement that could affect the lives and livelihoods of those stakeholders. Failing this, government could be voted out of power. These assumptions are not only valid but are also the hallmark of representative democracy, which unfortunately is not the case with Nepal at present. When the government does consult with the majority of the stakeholders, which are going to be affected by an economic agreement, the outcome is generally positive. But when the government bypasses the majority and start claiming monopoly over wisdom, it is bound to get a raw deal. For example, when Nepal acceded to the WTO, the government was more open, transparent, forthcoming and was found willing to take on board the suggestions of stakeholders. Though the WTO membership is notoriously acrimonious and conditions imposed by members are patently unjustified, Nepal’s membership package was hailed even by United Nations Conference on Trade and Development (UNCTAD) as a "well balanced package". The criterion against which the package was judged was nothing but the degree of policy space Nepal was able to retain during the process of accession.It is true that various WTO rules restrict the policy space of the members to achieve their development objectives. The issue of policy space become even more important in the context of WTO accession, because what is provided by the WTO agreements in the form of policy space (such as special and differential treatment provisions) is taken away at the time of accession due to faulty and lopsided accession negotiation process.

The need to bind tariff itself restricts the policy space of the government to protect certain sectors of the economy. However, by being able to bind tariff at a comfortable level, in particular for the sensitive agricultural products, Nepal has retained the policy space not only to be able to protect its poor, marginalised and vulnerable farmers, but also to enhance the competitiveness of the domestic agricultural sector by providing temporary protection against foreign competition, if required.

Likewise, the Agreement on Agriculture (AoA) restricts policy space of the members to provide subsidies to their farmers. However, Nepal is not only allowed to provide unlimited subsidies under what are classified by WTO as permissible (green box) ones; but also non-permissible or actionable subsidies (amber box) to the tune of 10 percent of its agricultural gross domestic product (AGDP). Similarly, Agreement on Subsidies and Countervailing Measures prohibits certain types of subsidies, which are required for the industrial growth of the country. However, Nepal was able to negotiate that it be given the right to provide export subsidies to its industries, if required.

Similarly, Agreement on Trade Related Investment Measures (TRIMs) severely restricts a much-needed policy space to strengthen the linkage between investment and domestic economy, which would otherwise facilitate increased employment and income. However, at the time of Nepal’s accession to the WTO, it was not able to report any such measures, which required a ‘phasing out’ commitment.

Therefore, Nepal will not have a chance to introduce any such measures in the future. Agreement on TRIMs is considered a major encroachment on the policy space of the WTO members, especially because some of the developing countries including Korea, Malaysia, Indonesia, China, Pakistan, Argentina and India had made use of and are still making use of these measures for achieving their industrial development objective. Within the WTO, there are some other agreements, which provide greater policy space to the governments to pursue their development objectives. General Agreement on Trade in Services (GATS) is one of them. By allowing members to make selective liberalization commitment and maintain certain conditions on both market access and national treatment, it respects the rights of members to orient their multilateral obligations towards their development imperatives. However, at the time of accession, every country needs to be extremely cautious in order to ensure that they do not trade away these flexibilities. The example of policy space Nepal has been able to maintain is quite instructive.

The schedule of specific commitments submitted by Nepal at the time of accession reveals that it has liberalized 11 services sectors and 70 sub-sectors, which, on the face of it, is very high for an LDC. However, a thorough study of the limitations entered in horizontal commitments as well as market access and national treatment columns tells us a different story. A few cautious approaches taken by Nepal include: a) capping foreign investment in most sectors at 51 percent; while in some others at 66-67 percent and only in two sectors at 80 percent; b) the requirement that a majority of the board members of basic telecom providers be Nepali nationals; and in the case of financial institutions, composition of the board be proportionate to the shareholding pattern; c) allowing foreign banks, with minimum ‘B’ rating by credit rating agency to establish branch in Nepal for wholesale banking (not retail banking); d) incentives and subsidies be available only to enterprises wholly owned by Nepali nationals; e) not allowing foreigners to purchase or own land in Nepal; and f) movement of natural person be limited to intra-corporate transferee at the executive, manager or specialist levels with a provision that number of such transferee shall not exceed 15 percent of the number of local employees in the firm.However, what Nepal was able to achieve, through a consultative process, during WTO accession did not open the eyes of other negotiators. Two major economic agreements in which Nepal received a raw deal, because of absolute lack of domestic preparation, are South Asian Free Trade Agreement (SAFTA) and Bay of Bengal Initiative on Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) FTA. Since Nepal is poised to become a member of Bangkok Agreement by following similar footprints, it is bound to be a net loser.

At the same time it has come to the notice of many economic observers through print media that Nepal is shortly going to sign what is called SAARC Investment Treaty. It is also learnt that the technical paper on this agreement has already been agreed by the respective governments during their meeting in Islamabad held in the second week of December. If the Ministry of Law and Justice and the Cabinet Committee do not raise any objection, the document will be signed by our Minister of State for Foreign Affairs during the postponed SAARC Summit to be held in Dhaka next month. The Treaty in all probability will become binding to all the stakeholders – including the private sector, which is oblivious to this development. Government officials claim that the Treaty is being signed for the greater good of the Nepali private sector. If that is the case, why has the government not shown the Treaty document to the private sector?An investment agreement is likely to be more intrusive than trade agreement because of shrinkage in policy space it is likely to cause. This is one of the reasons why WTO members have decided to drop investment issue from Doha Round of trade negotiations and this was the reason why multilateral agreement on investment (MAI) died its natural death in 1998. Yet the investment issue is being brought within the SAARC, not through the normal SAFTA route, but through the back door. And the Nepali government is going to sign this agreement without understanding its fallouts, that too without consulting the stakeholders!

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