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Multilateral Trading System and Nepal’s Development
Presentation by
D. R. Khanal
Two Day Seminar on Mainstreaming Trade Agreements into Development
Organized by Pro Public, SAWTEE and SEJON
13, January
Introduction
• WTO is a negotiating forum for promoting global trade
• In the forum governments make trade policy commitments:– To improve access to each other’s market on
a MFN basis – To establish rules governing world trade
Contd.
• Hence, despite itself not being a comprehensive development institution, its role is considered vital in promoting trade and thereby economic development. This is regarded to be true, among others, on the assumptions that:– Rule based multilateral trading system protects small
players that have little ability to influence the policies of developed (large) countries
• Rules, in turn, reduce uncertainty by placing mutually agreed limits on the policies that governments may adopt –potentially helping to increase investment and lower risks
• Trade openness, growth and poverty reduction are mutually reinforcing
Contd.
• This again would occur through comparative advantages as a result of: – Factor productivity gains through higher specialization– Scale of economies and expansion in markets for domestic firms– Stronger interaction with foreign firms and markets with
technological innovations and improved managerial practices– Lessening of anti-competitive practices and rent-seeking
activities leading to reallocation of resources away from protected unproductive firms/sectors to more efficient activities
– Ultimately spill over effect on both factor and product markets and creation of income and employment opportunities leading to welfare gains and poverty reduction.
Contd.
• All these are expected on the assumptions that multilateral trading system is fair and safeguards the interest of poor countries
• However, it is irony that many rules adopted at the time of WTO establishment were guided by protecting the interest of the developed countries in general and TNCs in particular– Examples are: agriculture subsidy, discriminatory tariff rules,
protection of intellectual property rights requiring changes in the developing country rules keeping old rules of developed countries in tact. The lists are too long.
– Details are in OXFAM study ( 2002) and many others and they reveal that even the discriminatory rules and provisions are distorted and rigged by the developed countries.
Contd.• Host of factors/developments amidst increased pressures from
developing countries including movements by many civil society organizations led to the adoption of Doha development Round. Which recognized the role of
i) enhanced market access, ii) balanced trade rules, and iii) technical assistance
• Further a framework was agreed on 1st August 2004 called July Package. It identified five priority areas;
– Agriculture,– NAMA,– Services, – Trade Facilitation, and– Development Dimensions
• But the stalemate is continuing. The point to be made is that the international rules and their treatments are crucial for enhancing development in countries like Nepal through multilateral trading system
Nepal’s WTO Obligations/Fulfillments
Commitments/Obligations• Nepal’ commitments/obligations in the time of
accession to WTO include:– In the agriculture binding rate of tariff 51 percent for
the transition and 42 percent thereafter 42 percent.– In the non-agriculture manufactured products average
binding rate 39 percent in the transition to 24 percent thereafter.
– Removal of all additional import duty like special duty and local development tax within 10 years.
– Tariffs on ITC products to be completely eliminated within 5 to 7 years from 5 percent at the time of accession.
Contd.– More open up of services sector allowing up to 80 percent
foreign equity participation – Formulation, Revision and Implementation of Acts including
Dozens of new laws or revision in old ones required. Among them, New Industrial Property Act by 1 Jan 2006, Implementation of TRIPS by Jan 2007, Anti-dumping, Countervailing and Safeguard Law within one year of accession, Implementation of the Agreement on Sanitary and Phytosanitary Measures by 1 Jan 2007, Legislation on the Valuation of Imports for Customs and Taxation by 1 Jan 2004 and Full Implementation from 1 Jan 2007. Similarly, new laws in the areas like competition, bankruptcy, cyber, access to genetic resources, bank and finance institution, plant resources, and health institution operation. In addition, custom, industrial enterprises, labor, company, security exchange, foreign investment and technology transfer, plant protection, pharmaceutical laws be revised and enacted.
Contd.
• Upon the date of accession establishment or designation of tribunal for the prompt review of actions to the implementation of laws, regulations, judicial decisions and administrative rulings required.
• Elimination or non-applicability of quantitative restrictions on imports or other non-tariff measures including licensing, quotas, bans, permits, prior authorization requirements, and other restrictions.
• From the date of accession execution of domestic taxes like value added and excise duties in a non-discriminatory manner.
Contd.Fulfillments and Beyond
– Nepal’s trade liberalization has been more faster in many areas than WTO commitments and now Nepal is one of the most liberalized countries in South Asia
– Trade is completely deregulated and no trade and non-trade barriers including no support measures are there in exports contradicting WTO rules
– Expect transportation and fertilizer subsidy in remote areas (now limited irrigation subsidy also), no subsidy is there
– In large and medium industries up to 100 percent foreign equity participation is allowed with repatriation facilities
– In banking three fourth and in insurance 100 percent foreign equity participation has been already allowed even if in a selected basis
– Now the average tariff rate is in the neighborhood of 7.11 percent and estimates reveal that the actual rate has reduced to 5.13 percent in 2007 from 6.1 percent in 2003. Likewise, the imports tariff rate has gone down to 6.23 percent from 7.72 percent during the same period.
– Many laws have been already enacted and many are in the process of enactment
Development Performances in the Post WTO Era (Is trade liberalization a yard stick of development?)
Overall and Sectoral Growth
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2004/05 2005/06 2006/07 2007/08
AgricultureNon-agricultureGDP Producer Price
Sectoral Growth Rate
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2004/05 2005/06 2006/07 2007/08
Agriculture
Manufacturing
Wholesale and retail trade
Hotels and restaurants
Financial intermediation
Real estate, renting andbusiness activities
Public administration anddefence
Others
Gross value added
Sectorwise Contribution in Total GDP
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2004/05 2005/06 2006/07 2007/08
Fiscal Year
Share
in Pe
rcent
age
Agriculture, forestry andfishing
Non-agriculture
Manufacturing
Wholesale and retail trade
Hotels and restaurants
Financial intermediation
Real estate, renting andbusiness activities
Public administration anddefence
Others
Share in Total Trade
0.000
5.000
10.000
15.000
20.000
25.000
30.000
2004 2005 2006 2007 2008
Years
Export Eport India Export Other Countries
Share of India and Other Countries in Total Export
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Years
Shar
e in
%
India Other Countries
Exports of Major Commodities to India
0.0
5000.0
10000.0
15000.0
20000.0
25000.0
30000.0
35000.0
40000.0
45000.0
2003/04 2004/05 2005/06 2006/07 2007/08
Years
Rs in m
illio
ns
Total India Export Cardamom Chemicals Ghee (Vegetable) Juice
Jute Goods Polyster Yarn Readymade garment Textiles* Thread
Wire Zinc sheet Others
Exports of Major Commodities to Other Countries
0.0
5000.0
10000.0
15000.0
20000.0
25000.0
2003/04 2004/05 2005/06 2006/07 2007/08
Years
Rs
in m
illi
ons
Others Handicraft ( Metal and Wooden ) Nepalese Paper & Paper Products Pashmina.*
Pulses Readymade Garments Silverware and Jewelleries Tanned Skin
Woolen Carpet Totals
Share of Domestic Saving and Total Investment in GDP
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2003 2004 2005 2006 2007 2008
Years
Shar
e in
Perc
enta
ge
Domestic Saving Total Investment (Capital Formation) Resource Gap
Some Spill Over Effects?Remittances Inflows
0
20000
40000
60000
80000
100000
120000
140000
160000
2003 2004 2005 2006 2007 2008
Fiscal Year
NR
s in
mil
lin
s
Remittances (RRTN)
Share of Total Deposits and Loans and Advances in GDP
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2003 2004 2005 2006 2007 2008
Fiscal Year
Rs
is in
mil
lion
Total Deposits Loans and Advances
Foreign Direct Investment
• Some studies indicate that only 40 percent of approved FDI projects come into operations.
Trends of Approved FDI
0.0
2000.0
4000.0
6000.0
8000.0
10000.0
12000.0
2003 2004 2005 2006 2007 2008
Years
Rs
in m
lns
Total
India
China
Others
Contd.
• Despite stagnating domestic saving trends, the national saving has surpassed total investment in recent years markedly ( except in 2006/07) as the current account surplus exhibits indicating at the same time low investment capacity
Employment, Poverty, Income Distribution and Livelihood
Employment ( Manufacturing)
• NLSS data show a declining trend of real wages of unskilled in urban areas and stagnating total wage income share of entire workers
0 100000 200000 300000
Number
1992
2002
2007
Yea
r
Comparison of Inter Census Persons Engaged and Employees
Total number ofemployeesTotal number ofperson engaged
• Although poverty data are not available for the post WTO accession period, trade liberalization partly may be indicative.– Poverty reduced from 42 in 1996 to 31
percent in 2004– At the same time, income distribution
worsened markedly. Gini rose to 41.4 in 2004 from 34.2 in 1996.
• Share of poorest in consumption decreased amidst stagnation in income share during the period 1996 to 2004
Share in per capita consumption
Share in per capita income
1996 2004 1996 2004
Poorest 20 percent population 7.6 6.2 5.3 5.3
Richest 20 percent population 44.9 53.3 50.3 53.4
• Informal sector employment is as high as 94 percent• Labor productivity in manufacturing and services is
declining• Food security and people’s livelihood is now a major
problem-35 districts in acute food deficit • More than 1 million households are landless, comprising
more than 23 percent of total households• Gender based exclusion is high in terms of access to
economic (low income, absence of opportunity), human (education, health) and physical assets (land, livestock etc). Same is true in case of poor and disadvantaged.
• Highly uneven development in rural/urban/remote and relatively accessible areas is manifesting overtime.
Major Issues (Domestic)• Urban centered consumption induced economic activities
and hence no productive investment enhancing sustainable/equitable growth
• Widening income disparity in an unprecedented way amidst deepening structural and institutional impediments
• Job loss among unskilled workers, growing informalisation of the labor market and reduction in labor productivity
• Gradual collapsing of cottage and small scale industries • Too much dependency on trade based revenue and
accompanying policy distortions • Cascading tariff structure discouraging high value added
and resource based industries • Problem of market and trade enhancing institutions
• Absence of country and commodity diversification amidst low backward and forward linkages
• Serious food security and people’s livelihood problem • Serious supply bottlenecks and absence of enabling
environment to the investors• Absence of institutionalizing wider consultation and
policy coordination led policy formulation and execution taking political economy into special consideration
• Above all encouragement to defective economic policy regime dictated by liberalization, deregulation and open up centered policies and even the absence of comprehensiveness amidst captured policies/trade/resources etc
International
• Failures to implement Doha Development Agenda in all three-fronts – i) enhance market access, ii) balance trade rules and iii) well targeted technical assistance and other components under July Packages
• Discriminatory/ineffective global financial architecture and ill suited global policy regime to the countries like Nepal
• Increased vulnerability in the economy due to global uncertainty and big unanticipated shocks-based example today’s global financial crisis and its contagion
• Ignorance to Food security and farmer’s livelihood issues ignored
Required Initiatives/ MeasuresDomestic
– Re-structuring and rationalization of tariff structure – Special incentive to small enterprises with focus on domestic
resource based and labor incentive industries through wider policy consultation processes
– Strengthening of market institutions and dismantling of syndicate and cartelling practices
– A comprehensive approach in reforms with focus on removing structural and institutional impediments for ensuring better access to financial and physical resources of the small enterprises
– Special treatment to food security and livelihood issues– Strengthening of trade capacity and trade related institutions– Stabilization Fund – Macro policy synchronization– Massive skill development program for raising productivity of
workers
Contd.
– Development paradigm shift for equity led development with accompanying policy changes by giving equal priority on import competing and export promoting industrialization. This will require:
• Massive investment in infrastructure and other related activities for expanding internal market
• Priority on easing supply bottlenecks and encouraging production through small producers
• High priority on cooperative modules of production, distribution and exchange
• Emphasis on developing production clusters and export processing zone in viable rural and semi-urban areas
• Massive investment in health and education • Poverty reduction and rural development programs at the
grass roots for raising purchasing capacity of the people
Contd.
International • Implementation of Doha Commitments in all three-fronts – i) enhance
market access, ii) balanced trade rules and iii) well targeted technical assistances and other components under July Packages
– From LDC perspectives:-Duty Free and Quota Free Market Access-the Hong Kong Ministerial Declaration vague despite commitment of facility to 97 percent products -Address other problems simultaneously
-rules of origin-Non-tariff barriers ( UNTAD estimates show 40 percent of LDCexports are affected by non-tariff barrier such as technical standards,sanitary and phytosanitary measures, custom rules and procedures,competition related restrictions etc.)-TRIPS-Preference erosion
Contd.
-Aid for trade with focus on technical capacity enhancing and removing supply bottlenecks etc -Improved and real market access with certain degree of flexibilities to pursues appropriate domestic policies especially in the areas of food security, farmer’s livelihood and safeguarding of small enterprises-Strong debt relief measures and stabilization fund for addressing unanticipated trade shocks of the LDCs-Removal of increased ambiguity between the multilateral and regional trading arrangements-New agenda: new global financial architecture and development paradigm shift at the global level for making international trade as a vehicle of development
Thank You