Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Final report on
A Study on
Trade and Poverty Linkages
in Nepal
Submitted to:
Government of Nepal
Ministry of Industry, Commerce, and Supply
Submitted by:
Kathmandu, Nepal
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A Study on Trade and Poverty Linkages in Nepal
Table of Content
Table of Content i
List of Tables iii
Acronyms v
Executive Summary vii-ivx
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A Study on Trade and Poverty Linkages in Nepal
4.1 Background 45
4.2 Trends of Trade Growth 45
4.3 Import and Export Composition 50
4.4 Assessment of Trade Growth 53
4.5 Prospects of Export 54
4.6 Fiscal and Monetary Policy and Trade 57
4.7 Trade and International Support 59
4.8 Trade Policy and Regulations 64
4.9 Conclusion and Suggestion 65
References 121-127
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A Study on Trade and Poverty Linkages in Nepal
List of Tables
Table Page
Table 4.2 Growth of Export and Import and its Relation with 47
GDP
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A Study on Trade and Poverty Linkages in Nepal
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A Study on Trade and Poverty Linkages in Nepal
Acronyms
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A Study on Trade and Poverty Linkages in Nepal
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A Study on Trade and Poverty Linkages in Nepal
Executive Summary
Introduction
1. The overall objective of the study is to identify the trade and poverty
linkages and assess the impacts of trade policies in poverty in Nepal
and suggest measures to make trade related institutions proactive,
business environment conducive, and trade policies pro-poor.
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6. The question of liberalization and its im pact on the benefit to the poor
is also debatable. The literatures support that trade liberalization
improves growth prospects by enhancing productivity temporarily
through m ore efficient resource allocation and permanently through
the import of modern technologies and effects on competition.
7. The East Asian countries were successful in overall developm ent and
poverty reduction because they featured the institutional
characteristics of the developm ental state, where as most of the African
countries failed to harness such features. State capacity to deliver good
quality interventions in the econom y has been central to Asia’s success
and to Africa’s problems.
10. Trade has becom e m ore significant during the years of liberalization.
The share of total trade to GDP has rem ained to som e extent constant
ranging from a minim um of 35 percent to a m aximum of 43 percent in
the last decade under review. Till 20 0 0 , the effect of trade on the
econom ic growth as represented by growing GDP could be clearly
visualized; however, the pace got deteriorated when the export growth
decreased sharply in the beginning of this decade.
11. The growth in export after the adoption of liberal economic policies has
highly contributed in econom ic growth. Such growth in export was due
to the growth of labor-intensive industries like carpets and garm ents
which later on seized to grow because of structural problem and non-
tariff restrictions.
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A Study on Trade and Poverty Linkages in Nepal
13. The ratio of export to GDP is 9.67 percent in 20 0 5/ 0 6 while the ratio of
import to GDP is 27.89 percent in the sam e period. The share of im port
to GDP is greater than that of export in all the years. The share of trade
in GDP has thus increased significantly during the post liberalization
period. Though the competitiveness of the export sector had increased
in earlier economic reforms and liberalization period, the policies had
not been effective in the conflict period and post conflict transition.
14. The Three-Year Interim Plan, 20 0 7-10 (Approach Paper) has adopted
the policy of developing industrial and business infrastructure,
catalyzing the private sector and im proving trade, and fostering
innovative measures to promote the export sector.
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A Study on Trade and Poverty Linkages in Nepal
the Himalayan Region, 47.1 percent in the Hill Region and 45.4 percent
in the terai Region.
17. Substantial disparities exist in the poverty incidence across the three
m ajor agro-ecological zones. Rural poverty incidence is highest in the
hills (42 percent) followed by the m ountains (33 percent) and the Terai
(29 percent).
19. In recent years, poverty reduction has been the overriding concern of
the planned efforts for developm ent. The first attem pt to formulate a
separate plan with long-term perspective for poverty alleviation was
m ade during the Eighth (1992-97) Plan. The Ninth Plan (1997-2002)
had adopted poverty reduction as the main objective. However, the set
targets of the Plans were not achieved due to various reasons, such as,
low economic growth, low agriculture productivity, high population
growth, and exclusion of the majority of population in the mainstream
of development process.
20. The Tenth Plan (20 0 2-0 7), also known as Nepal's Poverty Reduction
Strategy Paper (PRSP), had recognized the role of local bodies,
com munity organizations, and NGOs in developm ent and reflects the
governm ent's com m itm ent to decentralization and functional
devolution. It had clearly defined priorities: P1, P2 and P3 projects and
clear-cut allocation/ disbursem ent com m itments, addressing poverty
issues of Nepal.
22. The MDGs set quantitative poverty reduction targets and specific goals
in health, education, gender equality, environm ent and other aspects of
hum an developm ent. Some of the indicators and targets of the MDGs
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A Study on Trade and Poverty Linkages in Nepal
23. The decline in transport costs, increasing yields of cash crops and
transform ation of agriculture, and increase non-farm employm ent
contribute im mensely in poverty reduction in Nepal. Nepali producers
need to minim ize cost of production prim arily of exportable goods so
that the goods can gain access to the international markets. .
24. Nepal has a daunting challenge to reduce poverty. Attem pts to increase
its trade will help meet this challenge, but these will have to be
complemented by efforts to increase food production by facilitating and
increasing the supply of agricultural inputs and em ployment should be
increased substantially through public works program s. Furtherm ore
? ? cash crop production should be further increased, ? ? tradable
goods production should be diversified, ??large-scale temporary
em ployment through public works program s should be created, and
? ? transport costs should be reduced. All these should be done all
together and concomitantly.
25. The tea sector of Nepal consists of small landholders and large-scale tea
estates – both known as private producers. In 1995/ 96, the total tea
cultivated was 3,30 0 ha which increased to 18,726 ha by the end of
20 0 5/ 0 6 at an annual growth rate of 19.0 percent in last ten-year
period. In 1995/ 96, the total tea production was 2,10 0 M Tons which
increased to 14,60 0 ha by the end of 20 0 5/ 0 6 at an annual growth rate
of 21.4 percent in last ten-year period. At present there are 157 tea
estates and 27,494 farm ers involved in tea production. The share of
total tea production between the tea estates and the sm all
farm ers/ holders is alm ost equal. The estates and the tea factories
provided employment to almost 120,000 workers.
26. From the perspective of poverty reduction, this sector has great im pact
in the rural econom y. Although, the tea plantation takes five to seven
years to give full output, the small and m arginalized farmers have also
been attracted as the rate of return is five tim es higher than the cereal
crops. So the sm all and m arginalized farm ers have been able to gain
substantive incom e from the tea plantation and alleviate their poverty
level. Irrespective of other factors, the incom e earned by these farmers
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A Study on Trade and Poverty Linkages in Nepal
27. With the assumption that one worker’s incom e is sufficient to meet the
poverty alleviation level incom e; the workers fam ilies are found living
above the poverty level. In this context, with the assum ption of a family
of 5.5 mem bers, it is assum ed that it has directly benefited about
660 ,0 0 0 population of workers family. Sim ilarly, a total of 151,271
population of sm all and marginalized farm ers have received
substantive benefit from tea plantation.
30. In case of Nepal, the relationship between trade and poverty appears to
be m ore contentious, though there is broad agreem ent that in the long
run liberalization can help reduce poverty levels. Nepal’s accession to
WTO is both challenge and opportunity to link trade with poverty. The
com petitive environm ent in world m arket is intense that Nepal has to
face at present and in the future. Therefore, Nepal has to search and
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A Study on Trade and Poverty Linkages in Nepal
32. Over the years, Nepal’s success in the expansion of export is principally
due to the growth of labor-intensive industries. This is important as it
provides em ploym ent to the poor and helps reduce poverty and achieve
human development as specified in the MDGs.
36. Considering negative effects of trade openness on the fam ilies relying
on subsistence agriculture, the governm ent support in the form of
subsidy on infrastructure like irrigation, power and road should be
guaranteed to safeguard the livelihood of the farmers.
37. Government revenue should be prim arily allocated for im plem enting
poverty reduction and hum an developm ent program s. It should address
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A Study on Trade and Poverty Linkages in Nepal
40. To prom ote exports, potential export sectors should be targeted and
appropriate economic and financial incentives should be provided to the
private entrepreneurs.
41. National level development strategy and the plans such as PRSP should
clearly specify how the economic activities influence trade and the trade
would directly benefit the poor. In this context, restructuring of trade
sector is needed to make it work for meaningful poverty reduction.
42. Trade sector requires financial and technical support to enhance the
capacity. In this context, m easures such as targeting potential export
sectors, preferential credit and tax incentives needs to be devised. Hong
Kong initiation for ‘Aid for trade’ has to be categorically m obilized for
building trade infrastructure in Nepal.
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Chapter I
Introduction: Trade and Poverty Linkages
During the last one and half decade, the econom ic activities in Nepal are
influenced by the changes in the international and regional situation and by
the changes occurring in the domestic socio-political situation. The liberal
econom ic ideas in the form of globalization have influenced the Nepalese
policy makers to adopt the liberal economic policy.
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A Study on Trade and Poverty Linkages in Nepal
Due to the open boarder and free m ovements of goods and services between
Nepal and India, econom ic changes in India exert significant influence on the
economy of Nepal. As the country’s boundary also touches Tibet (an
autonomous region of China) in the north, the economic changes in China also
influence the Nepalese economy to a certain extent. Since the beginning of the
last decade of 20 th. century (1990-20 0 0 ), India has not only begun to
im plement the process of economic reform s but has also changed its policy
from the government regulated mixed economy to the liberal and open market
economy giving greater em phasis on privatization and foreign investm ent.
Sim ilarly, its other neighboring country China has also changed her policy
from a fully controlled com mand of econom y to open m arket economy from
early 80 s. These policy changes have increased foreign investment in China
and improved both the quality and quantity of its industrial products. This has
caused a satisfactory growth in Nepal-China Trade. Due to the cheap and
qualitative industrial products of China, her export to Nepal mainly from Tibet
via road ways, has been increasing every year leading to increase trade deficit
of Nepal with China. Therefore policy changes in India and China are exerting
an increased pressure on Nepalese economy.
In 1990 , Nepal entered into a new political system with the adoption of Multi-
Party Democracy. A new Constitution was promulgated in Novem ber 1990 ,
ending direct rule by the King. A new elected governm ent cam e in power after
a general election in May 1991. The new Government abandoned the form er
inward looking and state interventionist approach and adopted market-
oriented, outward looking policies with the aim of achieving higher
sustainable growth and poverty reduction. In 1992, the Governm ent
negotiated a new Enhanced Structural Adjustment Facility (ESAF)
arrangem ent with the IMF. Thereafter, Nepal initiated sweeping econom ic
reform programs in alm ost all sectors of the econom y, including fiscal and
m onetary policies, trade and investm ent, financial and capital markets, and
other social and economic sectors.
The role of the government in economic activities is made limited. In the fiscal
policy, front m acroeconom ic stability was given top priority. To this end,
government em phasized upon cut in unproductive expenditures. The tax
system was drastically reformed. Top tax rates were reduced and the tax base
was broadened. Im port duty rate was reduced from the highest 300 percent
to 110 percent . The im port duty rates were reduced to six percent. The reform
also reduced the average as well as the dispersion of tariff rates to m inim um
and quantitative restrictions on the exports of food items were abolished.
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A Study on Trade and Poverty Linkages in Nepal
Corporate tax rate was reduced and the m axim um incom e tax rate for
corporate and partnership business was reduced to 25 percent from 33
percent . Self-assessm ent tax paym ent system was given prominence. A
number of measures were introduced in order to im prove fiscal position of the
government. The Value Added Tax (VAT) system was introduced in 1997.
Single rate of 10 percent was fixed for VAT, which later on increased to a
single rate of 13 percent . Excisable items were reduced drastically from 30
item s to 5 items and rates were converted from specific to advalerom . The
rates were also rationalized. New m easures were introduced to m obilize
additional tax revenues to the level of 0 .5 percent of the GDP each year.
Dom estic borrowing was to be kept below 1 percent of the GDP. The size of
the bureaucracy was reduced to contain the administrative expenses.
In the foreign trade, front alm ost all im port restrictions were withdrawn. All
item s, except a few contrabands were put under the Open General License
System (OGL). Import duties (tariffs) were reduced, restructured, and
rationalized and other taxes were reduced, and structure was sim plified.
Moreover, quantitative restrictions and im port licensing were eliminated and
full convertibility for all current account transactions was introduced.
The trade policies were dram atically changed in 1992. Earlier, there was
regulated trade scenario. Licensing mechanism since 1985 had regulated the
trade in Nepal. Little improvement was made by the adoption of Open General
License System in 1987. But the major breakthrough happened with the
adoption of new trade policy in 1992. Under the system, im ports of raw
m aterials, consum er goods, industrial m achinery, and services did not require
government permission. Adoption of open current account system helped to
facilitate specially the import trade. The export sector is supported by allowing
maintaining foreign currency account and foreign currency loan facilities.
Market rate determination of the exchange rate of national currency helped
the exporter to be more competitive in the international market.
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A Study on Trade and Poverty Linkages in Nepal
The trade is still not com pletely free. There are restrictions to trade by Letter
of Credit mechanism . In the case of export, there is no allowance for credit
shipm ent as practiced in India and China. This restriction is creating hurdles
for the expansion of export.
In the foreign exchange front, foreign exchange rate system has been made
flexible to be determ ined by free m arket forces, except for Indian currency.
Commercial banks were allowed to provide loans in foreign currency to import
raw materials for industries involved in exports. Individuals were permitted to
open personal accounts and foreign exchange accounts in local com m ercial
banks on the earnings from exports of goods and services. Additional
m easures taken to increase exports were the introduction of bonded-ware
house, duty draw back schem e and the initiation of the m ulti-m odal facility
and dry port.
Dom estic as well as foreign private sector was allowed to invest in hydro-
electricity generation. Foreign investors were allowed to remit their dividend
and com mitment was explicitly m ade not to nationalize any industry. Private
sector was allowed to operate airline services and open sky policy was adopted.
The process of privatization was accelerated. Private sector is also being
encouraged in the developm ent of infrastructures like roads, transport
facilities, and electricity on BOT principles. It was accepted to lim it the rate of
the governm ent in providing social services, maintaining law and order and
providing infrastructure facilities.
The m onetary policy was shifted to indirect instrum ent like open m arket
operations (OMOs). The governm ent treasury bills and the Central Bank
bonds were begun to sell through auctions. The statutory liquid ratio was
abolished and cash reserve ratio was reduced. The government has provided
more autonomy to the Central Bank in the form ulation and im plem entation of
m onetary policy by enacting new Central Bank Act. Reform s on the following
were also made:
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A Study on Trade and Poverty Linkages in Nepal
Interest Deregulation
Foreign exchange rate fixation m echanism abolished and the exchange rate
determ ined on the basis of the market dem and and supply. Liberal policies
adopted to allow the operation of financial institutions such as com m ercial
banks, finance com panies, cooperative and NGO based financial organizations,
insurance companies, and development banks in private sector.
The government owned financial institutions, such as, Nepal Bank Lim ited
(NBL), Rastriya Banijya Bank (RBB), Nepal Industrial Developm ent
Corporation (NIDC), and Agricultural Development Bank, Nepal (ADB/ N) are
not functioning satisfactorily. Because of the high political influence, high
proportion of non-perform ing assets, over staffing and weak monitoring and
supervision, these financial institutions have become the burden for the
Government. Therefore the Government has started to focus on restructuring
financial institution. Both NBL and RBB management has been contracted out
to the foreign com panies. This m easure is expected to improve the financial
position of these two banks. Sim ilarly, the governm ent has initiated to
restructure and divest the NIDC and ADB/N.
All these factors have dem anded for drastic reforms in the rural areas. It is
thought that the land reform is an essential instrum ent that would help to
bring such reform s in the rural areas. In Nepal, there is political consensus on
the need for land reform program. A high-level land reform com m ission was
form ed in 1995 and it had prepared a com prehensive program of land reform
and subm itted to the government. However, the report has not yet been made
public. Despite the realization of the importance of the need of land reform
program, the decision m akers are reluctant to initiate it. It is being felt that
Nepal is not in a position to acquire m ore land clearing the forest. It is needed
to utilize effectively the existing land to bring changes in the rural areas of
Nepal. Interest in increasing the productivity and to be m arket responsiveness
needs to be developed am ong the Nepalese land owners rather than holding
land for social prestige and security. This is possible with the adoption of
appropriate land reform policy.
Analysis of the GDP growth trend during 1980 s and 1990 s indicates that real
GDP growth during 1990 s was little bit higher than during 1980 s. After
liberalization, the GDP growth rate has averaged around 4.4 percent per
annum as com pared to 4.2 percent per annum before liberalization. The GDP
growth in the pre-liberalization period was erratic. The GDP growth in the
first half of the post liberalization period was m uch higher at around 4.86
percent . The agriculture sector recorded negative growth in 1991/ 92, 1992/ 93
and 1994/ 95 but the overall growth remained positive due to high growth in
the non-agriculture sector. Am ong the non-agriculture sector, im provem ents
were observed in trade and services sector but the initial increase in
m anufacturing sector growth could not be sustained due to the political
instability, lack of com petitiveness of the dom estic industrial sector and the
external factor.
During the post liberalization period, som e progress was observed in savings
and investm ent. Average savings rate increased from 10 .6 percent in 198 5/ 86
to 15.0 percent in 1999/ 0 0 . During the pre-liberalization period, savings to
GDP ratio was found between 7.9 percent to 11.4 percent . In the post
liberalization period, saving ratio was relatively higher except in 1997/ 98.
Liberalization policies, especially financial and capital m arket liberalization,
acted as an im petus for the growth of savings. Moreover, higher growth rates
in the non-agriculture sector contributed to improve the savings rate.
However, the savings rate is still low, and im provem ent is needed to reduce
the saving-investment gap, which was widening slightly during this period.
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A Study on Trade and Poverty Linkages in Nepal
Money Supply
Money supply has grown at an average rate of about 19 percent per annum
over the period. However, over this period the growth has been erratic with
very low growth in 1995 and 20 0 6 — mainly due to the slow increase in net
foreign assets. The major source of m onetary growth over the decade has been
an increase in lending to the private sector, which grew at an average annual
rate of about 25 percent per annum over this period. Whereas net foreign
asset has been a major source of m onetary growth in m any of the years, its
contribution to money supply has been slow.
Inflation
Inflation in Nepal is m ore a structural phenom enon than a monetary one. The
supply side constraints are more pronounced than the dem and side variables
in affecting the rate of inflation. The role of m onetary policy is very lim ited in
controlling inflation when production and supply shocks, and high prices of
goods across the boarder exist. Fiscal and pricing policies are also partially
responsible for inflationary tendencies. On the whole, the supply side
variables are stronger than the dem and side ones in influencing the rate of
inflation in Nepal.
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A Study on Trade and Poverty Linkages in Nepal
Sectoral growth rate of GDP reveals that the growth of agriculture during
1995-2006 was about 2.5 percent on an average, alm ost equal to the
population growth rate. The growth rate of non-agricultural sector rem ained
higher at 5 percent on an average during that period. The major contributions
to higher growth in non-agricultural GDP were electricity and construction
sectors, which grew very fast at about 10.7 percent per annum . In 1990 s, the
growth of electricity sector was highest as m anufacturing sector recorded the
highest growth in the first half of 1990s. The growth rate of transportation and
comm unication services was also observed high during that period. During
the second half of 1990 s, almost all the sectors witnessed a slow growth. The
enthusiasm brought about by rapid econom ic liberalization in early 1990 s
could not be sustained. One of the main reasons for this was that liberalization
was not backed by the creation of market institutions, capacity building, and
efficiency enhancement.
There has been a slow change in the structure of the econom y over the years.
The share of agriculture in GDP has been declining by about 1 percent
annually since 1975 in favor of the non-agriculture sector. This is a kind of
change both in volum e as well as in relative prices. The term s of trade have
also gone in favor of the non-agricultural sector during 1990 s. All sectors,
except agriculture, have increased their share in GDP. The share of the
m anufacturing sector has grown fast, particularly during 90 s. This is
attributed to the expansion of export-oriented industries in 1990 s, following
widened export opportunities and liberalization of the economy. Low
productivity in the agriculture, along with expanding industrial activities, led
to the structural shift in GDP. The share of agriculture in GDP had declined
from 40.5 percent in 1995/96 to about 39 percent in 1999/ 20 0 0 . The share
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A Study on Trade and Poverty Linkages in Nepal
The share of the trade, restaurant, and hotel sector rem ained more or less
sam e. The share of transportation and comm unication did not follow a
definite pattern, whereas the share of finance and real estate grew rather
slowly. Over the years, there has been a rapid investment in electricity sector
during last two and half decades. This is followed by transportation and
m anufacturing including m ining. Transport and trade sectors witnessed a
consistently high growth rate during 1995-20 0 6 though suffered to som e
extent in the beginning of present decade. The construction turned to be the
sector of the highest growth rate during 1990 s. The slower growth in labor
force participation in manufacturing in relation to investment indicates high
capital intensity of investment in this sector.
However, the change is not very fast during 20 0 0 to 20 0 6 period. The details
are presented in Table 1.1.
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A Study on Trade and Poverty Linkages in Nepal
Rs in Million
Annual
2000/0 2001/0 2002/0 2003/0 2004/0 2005/0 2006/0 Growth
Sector 1 2 3 4 5 6 7 in %
GDP at factor cost 425454 427402 442126 464827 478633 494484 506755 2.96
Agricultural GDP 155625 160422 165761 173734 179811 181911 183001 2.74
Non-agricultural GDP 269829 266980 276365 291093 298822 312573 323754 3.08
Manufacturing 38409 36364 36380 37163 38136 38898 39737 0.57
Services 196268 192783 199873 213505 218897 229236 238608 3.31
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A Study on Trade and Poverty Linkages in Nepal
The above table shows a very sluggish growth in all three conventional sectors:
agriculture, industry, and services. The annual growth of services sector was
comparatively higher at 3. 31 percent where as agricultural sector grew at 2.74
percent. The industrial sector was lowest with 2.47 percent. Thus, GDP at
constant prices grew at the rate of 2.96 percent contributing a marginal
increase in the growth of per capita GDP.
In Nepal, agriculture has been the main source of livelihood for m ajority of
people and is the backbone of the econom y. However, Nepal’s agriculture is
still heavily depended on rain fed condition as the developm ent of irrigation
facilities is lim ited. Only 70 percent of agricultural land has irrigation facility
in sum mer, of which 38 percent land has year-around irrigation facility.
Lim ited irrigation and unreliability of rainfall have resulted in the fluctuating
production trend in the last decades.
Cereals (paddy, m aize, wheat, millet, and barley) play determ ining role in the
growth of AGDP as cereals cover 80 percent of the total cultivated area.
Output growth of cereals at the rate of around 2 to 3 percent could not
contribute to rapid agricultural growth. Annual growth of cash crops
consisting oilseeds, potato, tobacco, sugarcane and jute remained 5 percent
over the last decade. Agriculture sector had occupied 65.0 3 percent share of
GDP of Nepal in 1974/ 75, while the contribution was gradually decreasing in
80s and 90s and went decrease to 36 percent in 2006/07.
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A Study on Trade and Poverty Linkages in Nepal
NLSS (CBS 1997) indicates 40 percent of the agricultural holdings own less
than 0 .5 ha of land; 13 percent more than 2 ha. The proportion of HH with
less than 0 .5 ha is as high as 46 percent in the Hills, 42 percent of the HH in
m ountains and 33 percent in the Terai. 20 percent of households in the Terai
have a holding of m ore than 2 ha as com pared to only 6.6 percent in the Hills
and 14 percent in m ountains. This points out the relatively sm all size of
landholding in the Hills, as com pared to the average size of the landholding in
the mountains and terai. The smaller size of landholdings in the Hills is also
manifested in the higher incidence of poverty in this region.
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A Study on Trade and Poverty Linkages in Nepal
(In Percent)
Region/holding % of total operated land % of total owned land
Owner Rented Owner Rented
Operated Operated
Mountains 89.4 10.6 97.0 3.0
Hills 89.1 10.9 95.9 4.1
Terai 80.1 19.9 90.0 10.1
Nepal 84.7 15.3 93.2 6.8
Source: CBS 1997
(In Percent)
Region/holding Self owned Rented out Rented in land Rented in
land land only
Mountains 97.4 6.2 26.5 2.6
Hills 97.5 6.2 22.6 2.5
Terai 92.2 6.6 36.3 7.9
Nepal 95.2 6.4 28.7 4.8
Source: CBS 1997
Only about 17 percent of the total land area of the country is com prised of the
agricultural land. The per capita landholding is 0 .14 ha. Land ownership is
highly fragm ented. About 69 percent of landholding is less than 1 ha in size
and about 89 percent are less than 2 ha. The average size of landholding is
only 0 .24 ha., with an average of m ore than four land parcels per holdings
(CBS:1997).
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A Study on Trade and Poverty Linkages in Nepal
The current scenario of agriculture sector has distinctly influenced the poverty
level in Nepal. The three im portant trends and their effects are exhibited
below:
Trend Effect
These three factors have cum ulative effects on creating hindrances for
agriculture development and poverty is rampant in Nepal.
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A Study on Trade and Poverty Linkages in Nepal
Since 1956 all the plans have provided priority to industrial developm ent.
Establishm ent of Industrial Developm ent Centre, formulation and
am endments of Industrial Policy, Enactm ent of Factory and Factory Workers
Act, Establishm ent and operation of Industrial Estates, priority to the private
sector for industrial developm ent, regional balance policy, export prom otion
and im port substitution policy, generating incom e and employment are the
prioritized issues for the industrial development in Nepal.
The industrial pattern shows that there are very few large scale industry
establishm ents in Nepal. It is 2 percent of the total industry, when cottage
and sm all scale industries are excluded from the statistics. Even m any “large”
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industries in this category are, in fact, only of medium scale when com pared
with the standard of other countries. Many reasons could be assum ed for such
lim ited number of the large scaled industries. Weak dem and of industrial
products due to the low income of the population can be one obvious reason.
The supply side is also affected due to the geographical factors like rugged
hills and mountains covering 87 percent of the total land of Nepal, landlocked
geophysical situation, poor physical infrastructure power, and poor
connectivity roads, etc. There is 1 km road for 6666 people and only 40
percent of the population has access to the electricity.
The challenges faced by the Nepalese Economy are addressed through the
form ulation of periodic Plans. These Plans have taken into account the
development approaches of the governm ent, the developm ent priorities,
sectoral programs, the regional and the district development plan and
specialized program s to address the cross cutting issues, such as, poverty,
environm ental degradation, gender im balance, poor governance and
inadequate decentralization. During the decade of 1990 s, when the
liberalization process was at the full swing in the world, Nepal also adopted
liberalization policies in all the plans.
The Ninth and the Tenth Plan adopted poverty reduction strategies. The
policy of Tenth Plan focused on efficient mobilization of resources with
econom ic opportunities and employment expansion, joint participation of the
government, local bodies, private sector and civil society. Four-pillar
strategies were focused: high and broad-based econom ic growth, social and
physical infrastructure, targeted programs for the socially excluded people,
and good governance.
The Tenth Plan was also emphasized for good governance to achieve m ore
effective and result oriented m anagement and reduce the drawbacks of Plan
im plementation. It has given more em phasis on the infrastructure
development. The Plan aim ed for coordinated developm ent for the m aximum
utilization of all kinds of sources for the infrastructure, such as, highway, air
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A Study on Trade and Poverty Linkages in Nepal
The policies of the Plans were helpful for maintaining macroeconomic stability
as well as for creating positive im pacts in non-agricultural sectors. But,
dependency on m onsoon for agricultural production had highly affected in
this sector. Although there was a positive progress in price, revenue etc. in the
Plan period, development expenditure targets could not be achieved due to the
low m obilization of foreign aid. No substantial changes in the living standard
of rural people were observed due to the low growth in agriculture. In addition,
due to the political instability, financial management rem ained weak towards
the end of the Tenth Plan.
17
A Study on Trade and Poverty Linkages in Nepal
Chapter II
Research Design
2.1 General
The present study is carried on the basis of the term s of reference provided by
the UNDP supported project “Enhancing Nepal’s Trade-Related Capacity
(ENTReC) (NEP/ 0 5/ 0 0 6).” The study was initiated in August 20 0 7 and
completed by October 2007.
The problem is made even m ore complex by the fact that countries that
undergo trade reforms typically tend to do so as part of an overall growth
enhancing policy package that includes many structural reform s implemented
sequentially or in tandem.
However there is much less clarity on how freer trade affects poverty as the
theoretical linkages between trade and poverty are far more complex and
multi-directional. Some studies show that trade can have both negative and
positive im pacts on poverty depending on how the im pacts are channeled
18
A Study on Trade and Poverty Linkages in Nepal
Whether a particular trade reform policy is pro or not depends on its effect on
changes in the prices. It can be observed the prices of consum er goods,
prim arily the prices of food item s have positive im pacts if the trade reform
policies im pel to com e down. In such case households from lower income
strata gain from their disposable incom e on foodstuffs than higher incom e
strata. Therefore, the im pact of trade reforms on the prices of foodstuffs is
vital to the relationship between trade reforms and poverty. Market
distortions and the disappearance of a m arket may cause negative im pact
when the economies largely depend on import goods.
Trade reform can also affect government revenue, which may increase welfare
through the governm ent spending on pro-poor activities. Sometim es
reductions in tariffs lead to lower collection of trade revenue and thus its
im pacts on poverty reduction, but lowering the trade tax can also increase the
volum e of im port goods and thus the total tax revenue. However, openness
and complete liberalization may often result in decrease in trade tax revenues
and thus may cause decrease in pro-poor initiations and activities from the
government program . In these context a great endeavor is required to adopt
appropriate political decision.
The overall objective of the study is to identify the trade poverty links and
assess the im pacts of trade policies in poverty in Nepal. The scope of the study
will be as follows:
19
A Study on Trade and Poverty Linkages in Nepal
Review Nepalese trade policies from poverty and hum an developm ent
perspective;
Identify the main channels through which trade policy may affect
poverty situation in Nepal;
In order to translate the design into reality, the research m ade individual
interactive with key inform ants concerned with this sector in Kathm andu.
The study analysis macroeconom ic situation, trade employm ent, incom e
distribution, and poverty. In order to assess the linkages between trade and
poverty a deeper way, two specific areas were taken.
Although various past references are taken in the study, prim ary focus has
been given on m acroeconom ic, trade, and poverty data beginning of the
FY1995/96 to FY2005/06. Thus information covering the period from 1995 to
20 0 6 is taken for analysis. In addition, the available data and inform ation
have been used to approach correctly to the issues of poverty. In som e cases,
20
A Study on Trade and Poverty Linkages in Nepal
where the quantitative inform ation is not available, qualitative analysis has
been m ade, based primarily on the experience of the researcher. However,
efforts are made to substantiate the findings with the studies m ade by other
institutions and individuals.
Based on the terms of reference of the study, the report of the study is
organized in seven chapters. consisting as follows:
21
A Study on Trade and Poverty Linkages in Nepal
Chapter III
Review of Literature
The issue of trade and poverty cannot be reduced to the issue of trade
liberalization and poverty.
The relationship between trade and poverty varies with a country’s level
of development as well as the structure of its economy.
1
UNCTAD (2004). Trade and Poverty: A Developmental Perspective Issues, Note by the UNCTAD
secretariat, United Nations Conference on Trade and Development São Paulo, 13–18 June 2004.
22
A Study on Trade and Poverty Linkages in Nepal
Sustained developm ent and poverty reduction are m ajor motors for
expanding international trade.
23
A Study on Trade and Poverty Linkages in Nepal
Berg and Krueger (20 0 3) examine how openness affects poverty reduction
and conclude that although the evidence is m ixed it leans strongly towards the
conclusion that there is no system atic relationship between openness and the
incom es of the poorest beyond the effect of openness on overall growth.
Arguments are also available on either side on whether trade liberalization
results in increasing inequality. Authors such as Dollar and Kray (20 0 1) argue
that that within countries there is no system atic tendency for trade to be
associated with rising inequality that undermines poverty reduction efforts.
Many empirical studies show that trade liberalization have som e positive
im pact on poverty reduction depending on production, trade, and
consum ption patterns. The em erging consensus is that trade liberalizations in
m ajority of cases worsened inequality (Cornia 20 0 4; Gunter and van der
Hoeven, 20 0 4). Cornia (20 0 4) and Gunter and van der Hoeven (20 0 4)
conclude that globalization has worsened socio-econom ic inequalities, both
within and between countries.
24
A Study on Trade and Poverty Linkages in Nepal
were getting advantages due to increases in rice producer prices after lifting of
export restrictions over the 1990 s and Vietnam transform ed itself from a net
importer into a significant exporter. However in Zambia, after the government
abolished the official monopoly in m aize, cut throat com petition am ongst the
firm s resulted in low prices and no purchase by the firm s from the rem ote
areas of the country.
Very poor who are net consumers of purchased food items suffer most from
the price rises, whereas farm ers (net produces) just below the standard
poverty line benefit and have the chances of escaping from poverty. Changes
in input and output prices would have adverse effect on self employed farmers.
In Pakistan a reduction in the effective domestic subsidies to rice and wheat
(due, in the case of rice, to export taxes) were efficiency enhancing, but in both
cases the burden were shifted heavily to the poor, who has high and relatively
inflexible expenditure share on these items. De J anvry, Fafcham ps and
Sadoulet (1991) shows that m issing m arkets for, wage employm ent seriously
disturbs households’ responses to commodity price shocks.
Mellor and Gavian (1999) argue that one of the m ain advantages of
stimulating agriculture is that it strongly increases the dem and for goods and
services produced by the poor (multiplier effect). In general, surveys show that
large shares of rural households’ incom es and consum ption are related to
locally produce non tradable, such as services, bulky traditional starch items,
perishable foods, and locally processed foods. This m eans that expenditure
linkages are particularly important for the rural poor (Delgado 1995)
The effectiveness of linkages in raising the incomes of the poor also depends
upon local businesses being able to respond to increased dem and. If
institutional or other rigidities prevent this then the benefits may be
dissipated in higher inflation. Delgado et al (1998) warn that rising food staple
prices have the potential to choke off growth form dem and side linkages if the
conditions for a high supply response to prices are not in place
25
A Study on Trade and Poverty Linkages in Nepal
literature include the relationship between trade liberalization and growth and
whether trade liberalization im pacts on poverty through general growth
impacts alone, or through impacts on inequality as well.
They m ay have becom e more com plicated by the treatm ent of “openness” and
“trade liberalization” as a single concept. Velde et al (20 0 4) m ake the point
that the controversy surrounding the link between openness and growth
should not be equated with a critique of trade liberalization as such. Trade
liberalization, like capital and investm ent flows is only one type of policy
measure that results in openness.
According to Chang (20 0 2) present day industrial econom ies have benefited
from interventionist trade policies in the past rather than wholesale trade
liberalization. The studies have also been criticized on their use of
m ethodology including the selection of indicators for trade policy. Rodriguez
and Rodrik (1999) for instance find that such selection is systemically selected
to bias results in favor of finding a robust link between trade liberalization and
growth. Rodrik (20 0 0 ) concludes that trade is not bad for growth but
countries that do well due to increased trade/ GDP ratios do so as a by product
of correct sequence of policies.
Berg and Krueger (20 0 3) examine how openness affects poverty reduction
and conclude that although the evidence is m ixed it leans strongly towards the
conclusion that there is no system atic relationship between openness and the
incom es of the poorest beyond the effect of openness on overall growth. Views
are also available on either side on whether trade liberalization results in
increasing inequality. Authors such as Dollar and Kray (20 0 1) argue that that
within countries there is no system atic tendency for trade to be associated
with rising inequality that undermines poverty reduction efforts.
Trade liberalization will typically affect both the m eans and variances of a
household’s sources of income, and could in four ways affect household
26
A Study on Trade and Poverty Linkages in Nepal
Lockwood (20 0 6) argues that Africa’s poor growth record vis-à-vis East Asia
cannot be attributed to aid levels, trade perform ance, initial conditions, and
factor endowments, or to market access and the international environm ent.
East Asian tiger countries were successful because they featured the
institutional characteristics of the developmental state, including:
Economic development rather than welfare as a top priority for the state;
The state is com m itted to private property and the market, but guides the
market with instruments formulated by a bureaucratic elite;
The state consults with and coordinates the private sector through
numerous institutions as an essential part of the policy process;
State bureaucrats rule, politicians reign, so the latter provide space for the
former to act but also require bureaucrats to respond to groups on which
the stability of the system depends;
27
A Study on Trade and Poverty Linkages in Nepal
Studies also point to the institutional com plexities of designing and delivering
reforms to growth and trade, as opposed to health and education policies.
Foster et al (20 0 1) suggests that success in the productive sectors m ay depend
on effective joint working across a range of governm ent and private sector
institutions, rather than a single package delivered vertically across one sector.
In some instances, form al PRS mechanism s involving policym akers, private
sector, civil society representatives, and stakeholders have not functioned
properly due to breakdowns in com munication between officials in Ministries
of Trade and Finance and those in particular governm ent agencies driving the
PRS process (World Bank and IMF, 20 0 5). Singh (20 0 5) em phasizes that
developing international trade policy involves coordinating several ministries
and a high degree of expertise. General weaknesses in governm ent monitoring
systems (Lucas et al, 2004) have particularly acute implications for productive
sectors due to the complexities of data collection (Cabral, 2005).
The literature also highlights the change m anagem ent challenge inherent in
the switch from interventionist policies of the past to the enabling role
advocated for government in relation to growth and trade today. The most
useful ministry activity may be to reduce its role in the productive sectors, but
there are few incentives for staff to do so (Brown et al, 20 0 1). Trade reform s
focused on improving custom s clearance m ay also be resisted because they
jeopardize opportunities for rent seeking and corruption by officials
(Hoekman et al, 2002).
28
A Study on Trade and Poverty Linkages in Nepal
trade partners also has to take place to ensure that they ‘pay’ for the rights that
they will get as WTO partners. Controversial dem ands from existing mem bers
that new mem bers achieve greater openness than what is presently required
also complicate trade policy (WTO, 2005).
Two criticism s of the Integrated Fram ework and other form s of technical
assistance from donors for growth and trade are particularly prevalent in the
literature. The first centers on the weak integration of poverty concerns into
the advice. Tan depicts a narrow focus on tariff reduction in Diagnostic Trade
Integration Studies (DTIS) with less em phasis on supply side m easures which
relate to diversification and protection of new industries (Tan, 20 0 2). A DFID
evaluation conducted before 20 0 2 found that Poverty and Social Im pact
Assessm ents (PSIAs) have the potential to identify likely livelihood groups
that would be adversely affected by reform m easures and could help in
identifying balancing policy interventions that were needed to minim ize anti-
poor im pacts (Hamner and Hendrie, 20 0 2). The World Bank launched a
series of PSIAs between 20 0 0 and 20 0 2 with the objective of analyzing the
distributional effects of policy reforms on the welfare of different stakeholders
especially the more poor and vulnerable. Additional reviews of PSIAs highlight
ways in which they have been utilized effectively to influence policy decisions.
In DRC for example, in 20 0 5 a PSIA conducted in the m ining sector helped to
identify contingency measures for groups which would be disproportionately
affected by m ining closures. Other positive examples include PSIAs
influencing PRSP content on fuel tax reforms in Mozam bique and water
reforms in Armenia (World Bank and IMF, 2005).
However, the overall consensus seems to point at the weak integration of PSIA
analysis within PRSPs and the Integrated Fram ework. In the opinion of an
Oxfam study PRSPs continue to reflect uniform prescriptions without an
analysis of their impact on the poor (Oxfam , 20 0 4). A review by Nordic
governments of seven PRSPs found that PSIAs were not being utilized as an ex
ante m echanism to spell out policy im plications (Nordic Governm ents (20 0 3)
cited in CIDSE/ Caritas, 20 0 4). A World Bank review of PRSPs in 20 0 3 also
highlighted that the use of PSIA to inform policy design has been lim ited and
done in an indicative rather than specific way (World Bank and IMF, 20 0 3).
29
A Study on Trade and Poverty Linkages in Nepal
PSIA in areas such as macroeconom ic policy has also not been reflected in the
strategic priorities of PRSPs (OED, 2004).
The second com m on criticism concerns weak national ownership of the advice
given. Evaluations of the Integrated Fram ework indicate that country
engagem ent is largely confined to Ministries of Trade (World Bank, 20 0 4;
CAPRA 20 0 3; Liebrechts and Wijmenga, 20 0 4). Hewitt and Gilson’s (20 0 3)
study of 17 PRSPs and related donor docum ents found that only 4 out the
countries’ trade policies deviated from the policies outlined in the WB
sourcebook on PRSP development and that 12 of the countries replicated
PRGF and PRSC trade discussions within their PRSPs. Oxfam (20 0 4) points
out that the macroeconom ic fram eworks in PRSPs were often determ ined by
pre-existing PRGF agreements with the IMF that were not form ulated with
poverty reduction in m ind. Successive reviews of the PRS experience
conducted by the WB and IMF also note their influence on PRSP content and
perceptions that they have prescribed policies or signed off on content (World
Bank and IMF, 20 0 2; 20 0 4). Hewitt and Gilson (20 0 3) point out that this is
due not only to the debtor-creditor relationship, but also to “winning
arguments upstream through national and global level studies.”
In contrast to growth, the literature on the trade content of PRSPs does not
suggest a trajectory of im proving quality over time. A review of the trade
content of all PRSPs produced before J une 20 0 5 indicates continuing failure
to integrate trade adequately (World Bank and IMF, 20 0 5). Recent IMF
analysis of the trade content in PRSPs finds it lacking in coherence, with
m ention of both export prom otion and im port substitution m easures in the
sam e docum ent (IMF, 20 0 5). Operational m easures for a substantial number
of trade priorities listed are not included except in the case of issues related to
30
A Study on Trade and Poverty Linkages in Nepal
WTO accession where specific reform s were related to tariff and non-tariff
barriers. The m acro linkages of trade reform have also been analyzed weakly
with little consideration of trade related opportunities and vulnerabilities
(World Bank and IMF, 2005).
31
A Study on Trade and Poverty Linkages in Nepal
WTO points out that producers whose interests are comprom ised by a
particular accession-related policy reform are proving highly likely to lobby for
government consideration and support, though not norm ally through the PRS
process (WTO, 2005).
Barriers to trade often benefit powerful interest groups, not the poor. This is
particularly the case for non-tariff barriers, which result in transfers from
consumers to license holders. Tariff barriers allow the government to collect
the revenue that results from a difference between the world price and the
tariff-inclusive dom estic price, but non-tariff barriers result in com panies and
individuals receiving these rents through holding a license to im port. Im port
license holders are often am ongst the wealthiest in the population and in
developing countries they seek to obtain licenses and to influence policy in
their favor (Krueger, 1974).
The politically powerful also tend to use price stabilizing policies to shift the
long-term price in their favor. Comm odity marketing boards and parastatal
m onopolies have often stabilized prices at lower levels relative to world prices,
im plying the heavy taxation of small farm ers and the transfer of resources to
governments and local processing interests, with adverse repercussions for
rural poverty. (Hoekman et al , 2002).
Newbery and Stiglitz’s (1984) argued long back on the danger of ‘Pareto
worsening trade’ effect of liberalization. As they argue if two econom ics are
integrated through international trade and if their shocks are perfectly
negatively correlated, then trade stabilized the price and destabilizes revenue.
In this case, if the poor are producers rather than consumers, they will become
more vulnerable.
Comparing Asian and African Growth, Lockwood (20 0 6) argues that Africa’s
poor growth record vis-à-vis East Asia cannot be attributed to aid levels, trade
perform ance, initial conditions, and factor endowm ents, or to m arket access
and the international environm ent. East Asian tiger countries were successful
because they featured the institutional characteristics of the developm ental
state, including:
32
A Study on Trade and Poverty Linkages in Nepal
The state is com mitted to private property and the market, but guides
the market with instruments formulated by a bureaucratic elite;
The state consults with and coordinates the private sector through
numerous institutions as an essential part of the policy process;
State bureaucrats rule, politicians reign, so the latter provide space for
the former to act but also require bureaucrats to respond to groups on
which the stability of the system depends;
Studies also point to the institutional com plexities of designing and delivering
reforms to growth and trade, as opposed to health and education policies.
Foster et al (20 0 1) suggests that success in the productive sectors m ay depend
on effective joint working across a range of governm ent and private sector
institutions, rather than a single package delivered vertically across one sector.
In some instances, form al PRS mechanism s involving policym akers, private
sector, civil society representatives, and stakeholders have not functioned
properly due to breakdowns in com munication between officials in Ministries
of Trade and Finance and those in particular governm ent agencies driving the
PRS process (World Bank and IMF, 20 0 5). Singh (20 0 5) em phasizes that
developing international trade policy involves coordinating several ministries
and a high degree of expertise. General weaknesses in governm ent monitoring
systems (Lucas et al, 2004) have particularly acute implications for productive
sectors due to the complexities of data collection (Cabral, 2005).
The literature also highlights the change m anagem ent challenge inherent in
the switch from interventionist policies of the past to the enabling role
advocated for government in relation to growth and trade today. The most
useful ministry activity may be to reduce its role in the productive sectors, but
33
A Study on Trade and Poverty Linkages in Nepal
there are few incentives for staff to do so (Brown et al, 20 0 1). Trade reform s
focused on improving custom s clearance m ay also be resisted because they
jeopardize opportunities for rent seeking and corruption by officials
(Hoekman et al, 2002).
Greater openness can result in a wider variety of com m odities being available,
or create new opportunities for production (e.g. by allowing im ported inputs)
Gisselquist and Harun-ar-Rashid (1998) report significant direct benefits to
agricultural producers in Bangladesh as liberalization increased the
availability of inputs. But there is also a danger of m arket destruction due to
the effects of increased import com petition on a local market. Rom er (1994)
argues that the most substantial welfare costs of trade restrictions com e from
the goods and services that they exclude from the m arket and the loss of
productive activities those results from that exclusion. Winters(20 0 2) also
points out that if trade liberalization, or accompanying changes in dom estic
m arketing arrangements destroy m arkets, households can becom e com pletely
isolated from the market and suffer substantial income losses.
34
A Study on Trade and Poverty Linkages in Nepal
35
A Study on Trade and Poverty Linkages in Nepal
international poverty trap in which low and unstable com m odity prices
interact with unsustainable external debts and an aid/ debt service system
(UNCTAD, 2002).
According to Chang (20 0 2) present day industrial econom ies have benefited
from interventionist trade policies in the past rather than wholesale trade
liberalization. The studies have also been criticized on their use of
methodology including the selection of indicators for trade policy. Rodriguez
and Rodrik (1999) for instance find that such selection is systemically selected
to bias results in favor of finding a robust link between trade liberalization and
growth. Rodrik (20 0 0 ) concludes that trade is not bad for growth but
countries that do well due to increased trade/ GDP ratios do so as a by product
of correct sequence of policies.
36
A Study on Trade and Poverty Linkages in Nepal
An optim izing household will choose a portfolio which maxim izes its utility
taking into account its degree of risk aversion (Ellis, 1993, Kuotibm 1968), and
clearly trade liberalization could alter the optim al portfolio. Generally trade
liberalization would encourage farm ers to switch from subsistence to cash
crops with higher returns but at the sam e tim e with higher variance.
Fafcham ps and Pender (20 0 0 ) show that credit constraints faced by poor
farmers in India m ake them unwilling to sin non-divisible and irreversible
investm ents in risky tubewells despite the substantially higher returns. The
existence of undiversifiable risk could underm ine the potential gains from
trade liberalization among the poor and result in poverty traps. Poor m ay also
lack inform ation about the risks associated with new activities leading to sub-
optimal choices.
2
See, the Least Developed Countries Report 2004
37
A Study on Trade and Poverty Linkages in Nepal
that the employm ent effects of liberal trade policies were generally rather
m uted. Rama (1994) found a significant positive relationship between
protection and employment in m anufacturing, but no significant effect on real
wages Currie and Harrison (1997) find in case of that where profit margins
were slim initially, the liberalization of m anufacturing led to job loss, but in
m ost firm s it led to lower m argins and alm ost no change in output or falls
resulting into decline in real wages. Winters (20 0 0 b) suggests similarly that
the real exchange rate depreciation could explain the sim ultaneous increase in
form al and decrease in informal m anufacturing em ployment in India in the
1990s, the non-traded sector being “informal intensive.”
The study done by Prenushi for the World Bank (1998) has shown that
significant gains in poverty reduction by 20 percent of poor people over the
next ten years are achievable, but require growth rates of output which are
higher than those experienced over the last couple of years, and which are
closer to those of the first half of 1990 s. For achieving such a reduction, it
38
A Study on Trade and Poverty Linkages in Nepal
Acharya (1999) has viewed that the globalization in Nepal has disrupted
traditional livelihood patterns of rural poor in Nepal. She em phasized that
“the globalization process in Nepal is rather a process of deeper and still
deeper penetration of the Nepalese m arket by the Indian capital and labor
with very little gains for the m ass of the population. A m inority has benefited
and incom e inequalities have increased, tearing the existing social fabric,
which may lead to explosive political situation. One indicator of such ferm ent
is the Maoist problem spiraling into higher and higher levels of violence, both
from the government and insurgents’ sides.”
39
A Study on Trade and Poverty Linkages in Nepal
am ong the lowest in the neighboring and the com petitor countries. It was
observed that three key factors were responsible for the poor competitiveness
and productivity in the economy:
40
A Study on Trade and Poverty Linkages in Nepal
the lowest level of FDI among sim ilar landlocked countries. Regional
comparisons of concessions and facilities show that Nepal is prim a-facie less
generous to the export-oriented industries compared to m ost of its neighbors,
according to the Report. Despite possessing a num ber of advantages
including the relatively low labor costs which should enable local firm s to
exploit available and em erging opportunities in external m arkets, a series of
dom estic barriers and constraints that raise costs, dam pen productivity
growth, and hamper the ability of the firms to com pete in the overseas
m arkets have constrained this potential. Am ong the m ain barriers
characterizing all these sectors is the inadequate marketing which is
preventing adjustm ent to new m arket conditions and depriving the firm s the
advantages of new markets. The other barriers are the high transaction costs
reflecting cumbersome, long, and expensive customs procedures and excessive
red tape, restrictive labor regulations constraining productivity growth, and
inadequate infrastructure especially in the transportation hurting trade
growth and its efficiency.
Even after the removal of the quota in the RMG, well-placed and efficient
suppliers should be able to exploit opportunities em erging from increased
competition in the m ajor overseas m arkets while less efficient suppliers would
face greater difficulties. While producers in Nepal possess advantages like the
low labor costs, they also face problems like poor transit facilities, inadequate
m arketing networks, constraints in large-scale operations, and the excessive
red tape. The competitive conditions for Nepal's RMG exporters were also
affected with the coming into effect two legislations in the USA in 20 0 1,
namely, African Growth and Opportunity Act and Caribbean Basin Trade
Partnership Act, granting producers in the Sub-Saharan Africa and the
Caribbean preferential access to the US market.
The European Union has exempted the Nepalese RMG from the rules of origin
condition since 1997. This facility has been extended till Decem ber 31, 20 0 8.
Failure of Nepal's RMG exporters to penetrate the European Union m arket,
despite available preferences, suggests that marketing and m arket awareness
are the glaring problem s affecting them . Reducing costs, m eeting shortened
delivery tim es, and responding to design preferences are crucial for success in
this industry. The carpet industry has stagnated in the face of static global
dem and, international com petition from the machine-m ade carpets, and a
range of internal constraints, including restrictions on product variety, lack of
FDI, and inadequate m arketing networks and design capabilities. There is
need to respond to em erging patterns of demand in the m ajor carpet m arkets
as there have been concerns that the Nepalese producers are not responsive to
changes in consumer fashions and designs.
41
A Study on Trade and Poverty Linkages in Nepal
According to the Report, the higher transportation cost and the delivery time
associated with the inadequate infrastructure and the geographical constraints
needs to be reduced through prioritizing the im provem ents in the transit and
other logistic facilities. It is estim ated that the goods transited through India
by rail or truck without having to be unloaded on the Indian side of the border
could cut transportation costs by as much as 40 percent.
42
A Study on Trade and Poverty Linkages in Nepal
The Critics view that it will lim it the possibilities for the weaker section of the
society. The factors are:
In Nepal, this is m ore prominent. Women are in jobs which are m ore likely to
be subcontracted, relocated abroad, or elim inated by labor-saving
technologies. The traditional gender disparities in wages appear to be
widening. The cum ulative effects of persistent discrim inatory practices m ay
explain this, a deepening polarization of skilled and unskilled labor with
women being caught in a “low-skilled/low-paid job trap.”
The policy makers in Nepal that the globalization is in the panacea to solve all
the problem s. Because of the inefficiency of public enterprises due to the
leakages, corruption etc, the privatization process is adopted in Nepal. It is
conceived that the privatization will solve the problem s of inefficiency because
it is expected that the private sector will handle the resources more efficiently.
3.10 Conclusion
43
A Study on Trade and Poverty Linkages in Nepal
Policy approaches to growth and trade for poverty reduction have undergone
significant shifts over the last half a century. In the 1950 s and 1960 s ‘big push’
industrialization, planning and im port-substitution policies were advocated.
In the 1970 s, these were replaced by policies centered on the price system and
outward orientation while the 1980 s saw the emergence of the Washington
consensus with its emphasis on m acroeconom ic belt-tightening and trade
liberalization. The current approach retains elements of the Washington
consensus but augm ents them with elem ents drawn from the PRS approach.
These include an emphasis on country-specific policies, good governance, and
poverty reduction. Along with expansion of foreign trade.
44
A Study on Trade and Poverty Linkages in Nepal
Chapter IV
Nepal’s International Trade
4.1 Background
The difficult topography, lim ited developm ent of the physical infrastructure
and the landlocked position has raised the relative cost of business and output.
Theses have restricted the expansion of production and the increase in
productivity levels of the country. Slower and lower output growth has
resulted in one of the lowest per capita incomes of around US$ 30 0 . Past
attempts at socioeconom ic developm ent have not only remained m odest but
the socio-political disturbances in the recent years have also taken a heavy toll
of the econom y. At present, the task of putting the econom ic agenda at the
centre-stage of Nepal has been long overdue. While being effortful to utilize its
export potential, Nepal has been offering people the choices created by the
international trade by adopting relatively liberal trade regim e. In the early
phase of the trade and paym ents regime, Nepal placed its im ports under the
Open General Licensing (OGL) since 1992-93, replacing the then prevailing
im port licensing regim e, the change being termed as the introduction of the
convertibility of the Nepalese currency in the external current account
transactions3 .
In 1990 s, the trade volume of Nepal increased along with the positive change
in macroeconom ic indicators of the Nepalese econom y. During the 1995 –
3
Accordingly, Nepal was upgraded by the International Monetary Fund (IMF) to its Article VIII status
in May 1994, categorizing Nepal in the list of countries that no longer imposed restrictions on the
current account transactions.
45
A Study on Trade and Poverty Linkages in Nepal
20 0 5 period, the trade sector has been found im proved relatively better than
GDP of Nepal. However the share of trade to GDP did not respond positively.
In 1995/ 96 it was 39.41 percent which rem ained 37.56 percent in 20 0 5/ 0 6 in
20 0 5/ 0 6. Although the share of trade volum e has decreased, there has been
continuous growth in the volum e of trade and has exceeded the growth rate of
GDP indicating that trade of goods has enlarged more in size than GDP in
Nepal during these periods.
Table 4.1. Growth of Trade and its Relation with GDP at Current Price
Description 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
/96 /97 /98 /99 /00 /01 /02 /03 /04 /05 /06
Annual 12.61 7.50 13.86 10.76 16.41 4.37 6.64 9.39 9.38 9.97
growth of
GDP in %
Annual 23.17 0.28 5.74 28.51 8.22 -9.93 12.93 9.13 9.46 12.41
growth of
total trade
Ratio of 39.41 43.10 40.21 37.34 43.32 40.27 34.76 36.80 36.72 36.74 37.56
Total
Trade/GDP
46
A Study on Trade and Poverty Linkages in Nepal
Table 4. 2: Growth of Export and Import and its Relation with GDP
Description 1995/ 1996/ 1997/ 1998/ 1999/ 2000/ 2001/ 2002/ 2003/ 2004/ 2005/
96 97 98 99 00 01 02 03 04 05 06
Annual - 13.86 21.54 29.67 39.65 11.70 - 6.36 7.97 8.89 2.60
change in 15.65
Export (%)
Export/GDP 8.30 8.40 9.49 10.81 13.63 13.08 10.57 10.54 10.41 10.36 9.67
(%)
Annual - - 5.11 1.69 - -6.21 7.73 - -8.75 -8.83 -
change in 20.41 19.34 13.64 13.99
Import (%)
Import/GDP 31.10 34.70 30.71 26.53 29.69 27.19 24.18 26.26 26.31 26.38 27.89
(%)
Export/Import 26.70 24.20 30.91 40.76 45.92 48.11 43.71 40.15 39.56 39.27 34.66
(%)
Due to these changes in export/ im port ratio, there is an impact on the current
account balance as well. The current account is found positive in these years.
The influence of services, rem ittances, and grants are equally influential to
overcome the negative current account situation in these years of analysis.
Trade has becom e m ore significant during the years of liberalization. The
share of total trade to GDP has rem ained to som e extent constant ranging
from a minim um of 35 percent to a m axim um of 43 percent in the last decade
under review. Till 20 0 0 , the effect of trade on the economic growth as
represented by growing GDP could be clearly visualized, however, the pace got
deteriorated when the export growth decreased sharply in the beginning of
this decade. The growth in export after the adoption of liberal econom y
policies has highly contributed in econom ic growth. Such growth in export
was due to the growth of labor-intensive industries like carpets and garm ents
which seized to grow because structural problem and non-tariff restrictions.
47
A Study on Trade and Poverty Linkages in Nepal
48
A Study on Trade and Poverty Linkages in Nepal
Export of Nepal has grown fast during 1990 s showing positive impact of
liberal environment in Nepalese economy. However, it has turned be stagnant.
Another feature of Nepalese export is its limited item s of export. About half of
the exportable item s are represented by three products, nam ely carpet,
garments, and vegetable ghee. These three item s are dom inating throughout
these years. Other few item s like jute, toothpaste; handicrafts etc are major
exportable items. The lim ited exportable products indicate the vulnerability of
Nepalese econom y. Any changes in the export of these products would benefit
the economy.
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A Study on Trade and Poverty Linkages in Nepal
Import of primary products like rice and vegetables from India had declined.
The share of manufacturing sector had increased. The im port of transport,
vehicle, spare parts, medicine, and cotton textile had also increased during
that period.
Rs. in Million
Particulars 2001/02 2005/06 Annual Growth
Rate in %
Electrical Goods 800.6 1561.3 18.17
Threads 757.0 2166.9 30.07
Tobacco 597.2 599.6 0.10
Transport Equipments 4259. 1 5213.7 71.89
Medicine 2980.4 4389.0 10.16
Chemical Fertilizer 92.4 1052.3 83.70
Cloths (cotton and others) 3232.7 2051.7 -10.74
Vegetable 685.2 1139.6 13.56
Cement 2749.8 1933.6 -8.43
Paper 469.0 603.2 6.49
Horlicks & other milk products 399.2 571.9 9.40
Chemical liquids 1041.6 3281.4 33.23
Agricultural tools & spare parts 350.8 671.6 17.63
M.S. Ware Rod 834.1 1065.2 6.30
M.S. bellet 3177.2 3883.4 5.15
Steel Plate 10.7 20.2 17.22
Aluminum Ingut 261.7 259.9 -0.17
Hot Roll sheet (in quail) 928.4 1144.8 5.38
Clod Roll sheet (in quail) 1148.7 797.7 -8.71
Other machinery spare parts 1773.4 3883.4 21.65
Petroleum Products 13906.1 33657.2 24.73
Other 16166.8 37195.5 23.16
Total 56622.10 107143.10 17.29
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A Study on Trade and Poverty Linkages in Nepal
It is not only that exportable products are lim ited in number, but the num ber
of countries buying Nepalese products is also lim ited. India is m ajor trading
partner in terms of both export and import of goods. The share of Indian
m arket for our export has reached to 42.6 percent , in 1999/ 20 0 0 (Table 4.6).
USA and Germany are other m ajor buyers from Nepal, and these three
countries im port about 85 percent of the total export of Nepal. Other
importing countries like China, UK, and Japan have very limited shares.
Another m ajor feature of export of Nepal is that the industries are seen
producing exclusively for export market. The m ajor products like carpet,
51
A Study on Trade and Poverty Linkages in Nepal
garment, pashmina, vegetable ghee, and handicraft items are mainly produced
for export m arket. The share of export of total output of these products
indicates above 90 percent coverage by export sector. The 10 percent
products of carpets and handicrafts items are sold to tourists visiting Nepal,
thus eventually exporting to other countries. In the case of garm ent, only
rejected pieces are brought into local market.
Source: Computed from Various Issues of Nepal and the World: A Statistical Profile,
FNCCI
In the case of im port also, there are not m any trading partners (Table 4.9).
Nepal imports m ore than one third from India. The second major exporter to
Nepal is People’s Republic of China, which sells about 12 percent of the total
purchase of Nepal. Singapore is another im portant exporter, but its export is
less than 10 percent of the total trade. Rest of the twelve countries is
exporting about 2 percent of the total im port from their countries. Thus there
are only about 15 major trading partners of Nepal.
Source: Computed from Various Issues of Nepal and the World: A Statistical Profile,
FNCCI
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A Study on Trade and Poverty Linkages in Nepal
There are very lim ited data available to analyze the impact of trade on
employm ent. As m ajor export item s like carpet, garm ents, and pashm ina and
handicrafts items are produced m ainly in labor-intensive industries, the
impact of trade on employment is considered significant.
Besides this problem , there is also another issue. The number of countries
buying from Nepal is also very lim ited. Only 80 percent of the products are
exported to three countries- India, Germ any, and USA. It shows another
dim ension of challenges faced by Nepal. High dependency on these lim ited
numbers of countries raises a doubt on the sustainability of export market.
Total trade is also very dependent on India. India buys from Nepal about 42.6
percent of the total products, whereas it im ports 36.5 percent of the total
goods to Nepal. There is urgent need to address the problem of lim ited export
and limited trade patterns.
A rapid rise in the export was observed in 1990 s am idst unfavorable domestic
and international factors. The trade statistics show that between FY 1991/ 92
and FY 20 0 0 / 0 1 and between FY 20 0 1/ 0 2 and FY 20 0 6/ 0 7 the export
increased to Rs. 55.7 billion in FY 2000/01 from Rs. 13.7 billion in FY 1991/ 92
with an annual average growth rate of 16.8 percent. The export am ounted to
Rs. 60 .8 billion in FY 20 0 6/ 0 7, at an annual average growth rate of 1.5
percent from the FY 20 0 0 / 0 1 level, reflecting a poor perform ance of the
export in the latter period. Export to India decreased due to the quantitative
restrictions im posed on some prom inent items through the trade treaty of
2002. Export of the vegetable ghee to India decreased due to the quota system .
The exports of carpets, RMG, and vegetable ghee suffered due to concentrated
and limited market destinations.
However, the im port in the two periods increased significantly after the
adoption of liberal trading regim e. Total im port increased to Rs. 115.7 billion
in FY 20 0 0 / 0 1 from Rs. 31.9 billion in FY 1991/ 92 at 15.4 percent per annum .
53
A Study on Trade and Poverty Linkages in Nepal
The export/ GDP ratios also decreased in the four consecutive years by 10.1,
10.0, 9.3, and 8.4 percent respectively. In contrast, the import/ GDP ratios
increased at 25.4, 25.4, 26.9, and 26.6 percent respectively. Similarly, the
trade deficit/ GDP ratios reflected an upward trend at 15.3, 15.4, 17.6, and 18.2
percent respectively. The export/ im port ratios came down from 39.6 percent
in FY 20 0 3/ 0 4 to 39.3 percent in FY 20 0 4/ 0 5, and then to 34.7 percent in FY
20 0 5/ 0 6 and 31.7 percent in FY 20 0 6/ 0 7. The decrease in export showed
twofold im pact – widening trade deficit and the loss of jobs in industries and
trading sectors.
The development plans and econom ic policy statem ents of the governm ent
have envisaged tapping and developing the export potential of the country.
However, the progress in export has been slow due to a number of national
and international phenom ena and circum stances. The Tenth Plan em phasized
to identifying new exportable products of comparative advantage and
im proving their quality and export volume. The Plan visualized increasing the
number and volum e of the exportable goods by prom oting the
interrelationship am ong the agro-forestry and other service-oriented
industries. Em phasis was also laid on the quality production of agro-based
industrial goods for their use at the local level as well as taps their export
potential besides generating em ploym ent in the rural areas. According to the
Plan, com petitiveness of the exportable item s would be enhanced by
promoting foreign investment and technology in the areas having comparative
advantage, based on an assessm ent of the demand and supply in the
international markets.
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A Study on Trade and Poverty Linkages in Nepal
During the Plan period, attem pts have been made toward the developm ent of
the policy-level and legal foundation in the trade-related m atters. Legislations
like the Com petition Act, Insolvency Act, Com pany Act, Cyber Act, etc., have
been implemented with the purpose of developing healthy and competitive
market and promoting corporate governance. Dry ports have been constructed
at Birgunj, Bhairahawa, and Biratnagar for the fast m ovement of the goods
and for the procedural simplification to reducing the cost incurred in the
foreign trade. Three institutions established for the export promotion, namely,
Trade Prom otion Center, Export Prom otion Com m ittee, and Wool
Development Comm ittee, have been integrated into the Trade and Export
Promotion Committee.
Nepal becam e the 147th m em ber of the World Trade Organization (WTO) on
55
A Study on Trade and Poverty Linkages in Nepal
April 23, 2004, the first LDC member since the formation of the WTO in 1995.
Nepal has been a party to the South Asia Free Trade Area (SAFTA) and the
BIMSTEC (Bay of Bengal Initiative for Multi-sectoral Scientific, Technical and
Econom ic Cooperation). In line with the international and regional
comm itm ents as well as the national requirem ents, the trade and tariff system
has accordingly been substantially rationalized. Despite a huge deficit in the
m erchandise trade, Nepal currently holds a satisfactory forex reserve level,
m ainly attributed to the balance of payments (BOP) surpluses resulting from
the rem ittance and other transfer flows along with the foreign assistance
receipts. However, for a sustainable developm ent of the external sector, the
competitiveness of the econom y as reflected in the strengthened export needs
to be raised. New challenges and opportunities have also emerged with the
entry of Nepal into the WTO and the participation in the regional
arrangem ents like the SAFTA and the BIMSTEC. India's declaration to reduce
to zero the customs on the im ports from the four SAARC LDCs (Bangladesh,
Bhutan, Maldives, and Nepal) from 20 0 8 could negatively affect Nepal's
exports that have enjoyed the duty-free access in India.
India has also declared to reduce the list of the sensitive goods for export to
India from these countries. The duty-free access of the exports from these
countries could put Nepal's existing exports to India like the vegetable ghee,
jute goods, polyester yarn, and RMG at risk. Because of the specialization
m aintained by Bangladesh in the RMG, Nepal's RMG export to India could be
particularly affected. So, there is an urgent need to reduce the costs of these
products in Nepal and m ake them competitive. The process of industrial
development in Nepal has also suffered due to the unfavorable law and order
situation m ainly related with the conflicts. Besides, the inadequate and weak
physical infrastructure, lower utilization of the capacity, lack of favorable
business environment, problem s in technology transfers, etc., resulted in
unfavorable developments like the reduced industrial production and
weakened competitiveness.
The Three-Year Interim Plan has adopted the policy of developing industrial
and business infrastructure, catalyzing the private sector and improving trade,
and fostering innovative m easures to prom ote the export sector. Foreign
diplomatic m issions of Nepal will be involved, through econom ic diplomacy,
in the promotion of foreign trade including development assistance, labor
m anagem ent, and tourism. The Plan would adopt m easures for prom oting
export trade and market access besides creating a suitable com mercial and
industrial environm ent for the export sector developm ent through utilizing
the import policy for making available the required goods and services.
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A Study on Trade and Poverty Linkages in Nepal
The other policy is the identification, developm ent, and m arket diversification
of the exportable items possessing comparative and com petitive advantages.
Backward and forward linkages of the export sector would be expanded.
Existing policy, legal, procedural and institutional environment with respect
to the industrial prom otion will be refined and im proved as per the need.
Development and expansion of the industrial and business infrastructure
including fostering the industrial peace will encourage the existing industrial
units to make full utilization of their output capacity. Efforts will be m ade for
reorienting the subsistent agriculture toward the com m ercial agriculture so as
to m ake this sector com petitive in line with the dem ands of the dom estic and
international markets. In addition, physical infrastructure relating to trade
will be developed. Work on policy reforms like formulating and implementing
of new com mercial, industrial, and foreign investm ent policies will be
continued.
Both the fiscal and m onetary policies are crucial to enhance trade regim e and
support the growth of both the export and the im port sectors. Based on the
provisions of the Budget of FY 20 0 7/ 0 8 the fiscal and the monetary policies,
some important measures are analyzed as follows:
57
A Study on Trade and Poverty Linkages in Nepal
The budget has identified the im portance of making the industrial sector free
from the disturbances like the closures, strikes and lockouts, and proposed to
delve into building consensus between the management and the labor. It has
proposed to arrange a separate industrial security force to ensure security in
the industrial highways.
The budget has also incorporated a number of provisions to assist the export
sector of the country. The legislation relating to the Special Econom ic Zone
will be introduced for the development and management of the industrial
zone, export processing zone, tourist and entertainment zone, and special
comm ercial zones in Rajbiraj, Simara, Nepalgunj, and Dhangadhi or
Mahendranagar. Sim ilarly, a powerful investment board will be established to
prom ote industrial investment. It will have a separate office and all the
facilities to the investors will be provided through this board. Due to the
competition that the products typically representing the Nepalese art and
enterprise like the carpets and Pashmina have been facing with the duplicate
products in the international m arket, even the reputation of the Nepalese
products has been undermined, resulting in the adverse effects on the
Nepalese export sector.
To further encourage the export sector, high priority has been laid on the need
to recovering the export besides im proving the environm ent for investm ent
and prom oting dom estic value-added industries. Considering the adverse
situation facing the export sector, the budget has abolished the export duty on
the corrugated sheets, synthetic yarn, plastic goods, G. I. pipe, rice bran, and
m olasses. The export duty on the vegetable ghee has been reduced by half.
Even if sold to the approved export house, it will be deemed as exports and the
concerned industry will be refunded tax as per the law. Customs facility will be
provided at the site of the export house itself and no further check-ups of the
goods will be done if the goods are consigned to the custom s point from the
export house in the sealed container. Industry exporting more than 60 percent
of the production within the last 12 years will be availed im port facility by
placing all the taxes on the im ports of the raw m aterials under the bank
guarantee. Similarly, for the export-oriented industries, tax refunds at par
rates from the custom s point at the tim e of the export will be arranged. To
expand the multi-modal system at the Mechi customs in the current fiscal year
for facilitating the trade, construction work will be continued. Considering the
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A Study on Trade and Poverty Linkages in Nepal
current weak physical infrastructure at the points for trade with China,
feasibility study for the construction of the dry ports in the Kavre-
Sindhupalchowk and Rasuwa-Nuwakot regions will be executed.
Considering the problems being faced by the exporters, the monetary policy
has reduced by 1 percentage point, from 3.5 percent to 2.5 percent, the
refinance rate for the export credit in the Rupees. The comm ercial banks are
allowed to charge the borrower of such export credit a maximum of 5.5
percent interest. To respond with the poor performance of both the
m anufacturing and tourism industries, the Nepal Rastra Bank (NRB) has
allocated Rs. 2 billion annually to refinance the sick industries. With the
provision m ade in the current Budget, the sick industry refinance facility will
be disbursed as per the previously-determ ined criteria. Arrangem ent is made
to disburse the am ount allocated for the sick industry refinance through the
proposed Industrial Revival Fund, which aim s at rehabilitating the industries
being sick due to the internal conflict. The work procedures for this Fund have
already been approved. The government has allocated Rs. 50 0 m illion for the
Fund, with the provision of contributions from the NRB and the com m ercial
banks.
To address the difficult situations of the industrial sector, the refinance rate
for the sick-industry loan has been continued at 1.5 percent. The com m ercial
or developm ent bank availing this refinance facility will not charge the
concerned borrower m ore than 4.5 percent interest. Looking at the
troublesom e situation that the small and cottage industries have been
encountering, the Nepal Rastra Bank will extend refinance to the com m ercial
or developm ent bank at 2.5 percent against the collateral of the loan extended
to these industries. The com m ercial or developm ent bank could charge the
borrower of such export credit a maximum of 5.5 percent interest.
Trade and development discourse is the realization that trade is not an end in
itself; it is rather a m eans to alleviate poverty and ensure that countries attain
sustained econom ic growth. Although trade can be a powerful instrum ent of
poverty reduction and its virtues have been well docum ented, prospects of its
benefits have been often oversold.4 Trade negotiators of countries, which are
4
See Stiglitz (2003); Rodrik (2002); and Adhikari (2005)
59
A Study on Trade and Poverty Linkages in Nepal
When trade agreem ents are negotiated – at the m ultilateral, regional and
bilateral levels – the question of ‘policy space’ is bound to arise, because m ost
of these agreem ents tend to restrict the ‘policy flexibility’ available for
governments to pursue their development objectives. Developing countries
are right in demanding that they be allowed to retain such flexibilities, which
developed countries had extensively utilized during the process of their
economic transformation.
Subsidies: LDCs and countries with GNP per capita below $ 1,0 0 0 are exem pt
from the prohibition on export subsidies. Developing countries that have
becom e competitive in a product—defined as having a global m arket share of
3.25 percent—must phase out any export subsidies over a two-year period.
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A Study on Trade and Poverty Linkages in Nepal
culm inated in the form ation of the World Trade Organization (WTO)
weakened the special and differential provisions by incorporating the
principle of ‘single undertaking’ the m em ber countries should follow. The
Geneva Ministerial Conference of 1998 and the Seattle Ministerial Conference
of 1999 could address the issues of the developing countries. However, the
Doha Ministerial Conference of 20 0 1 focused m uch attention to the free trade
in favor of developed countries without addressing the problem s of the
developing countries. Doha Developm ent Agenda (DDA) addressed the issues
in favor of developing countries:
“duty free and quota free” access for products originating from LDCs;
call for addressing the problem s of conflict between TRIPS Agreem ent
and UN Convention on Biological Diversity (CBD);
Above-mentioned issues are relevant to Nepal too. However, Nepal also faces
all the disadvantages faced by m ost of the developing countries and has
foregone most of its rights during the process of its accession to WTO.
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A Study on Trade and Poverty Linkages in Nepal
The provisions of TRIPS and TRIMS made in the Hong Kong Ministerial
Conference could be beneficial to Nepal. “The extension of transitional period
up to 1 J uly 20 13 provided for the implementation of TRIPS will provide
opportunity for the country to calibrate its intellectual property reform agenda
to its local needs and available resources. Similarly, extension of tim e fram e
for TRIMS will provide an opportunity for Nepal to im pose perform ance
requirem ents on foreign investors so as to create better linkages of foreign
investment with rest of the economy.”5
Mobilizing aid for trade has been a new effort in prom oting trade in the
developing countries. A Conference on Mobilizing Aid for Trade organized by
the ADB/ Manila in Manila in September, 20 0 7 highlighted the need for
prioritizing the trade as “the export shares as percent of GDP of South Asian
econom ies still fall below world average, and are com paratively low when
m easured by its South-East Asian neighbors. It is also appearing that, after
20 0 1, the curves of the export shares have been flat; in the case of Nepal, the
curve declines. This again highlights the issue of uneven regional distribution
of export growth." In Nepal the exports during 20 0 0 (US$ 676 million) and
20 0 6 (US$ 70 4 million) reflected the lowest growth rate (0 .7 percent per
annum) among the 22 LDCs and Small States of Asia and the Pacific, 8 newly-
industrialized Asian econom ies including Peoples' Republic of China and
India, and 15 other developing Asian countries. In the total exports of LDCs
and Sm all States of Asia and the Pacific (US$ 151,0 58 m illion in 20 0 0 and
US$ 30 1,364 million in 20 0 6), Nepal's share cam e down to 0 .23 percent in
20 0 6 from 0 .45 percent in 20 0 0 . These figures indicate that Nepal's export
position in comparison to that of the Asian LDCs has become the dismal.
In most of the Developing countries of Asia, large gaps exist in trade efficiency
5
Adhikari, R. (2007)
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A Study on Trade and Poverty Linkages in Nepal
based on the indicators such as the cost incurred for the trade, number of days
taken for the trade, infrastructure like roads, ports, inform ation technology
and com m unications network and other logistics, production technology,
liberalization of trade and investm ent, general business environm ent,
m arketing and m arket access, transit facilities, cross-border connectivity,
custom s m odernization, capacities for trade strategies and negotiations, trade
and investm ent finance, and other capabilities related to the export. The
trade-related institutional, human resource, and supply-side capacity needs in
these countries constrain them from taking advantage of gains from trade by
m eaningfully participating in the m ultilateral and regional trading systems.
Considering the problem s, the new initiatives on Aid for Trade (AfT) could
help overcome the problem s and open up new trade opportunities for these
countries. Nepal may also have breakthrough from these new initiatives.
The sixth WTO Ministerial Conference of Decem ber 20 0 5 held in Hong Kong,
had also envisaged to support the developing countries to build the
infrastructure and capacity required to gain the benefits of expanding world
trade through the AfT. It was viewed that ''AfT will help the least developed
and sm allest countries benefit from new trading opportunities by building the
necessary capacity to trade effectively and efficiently—with donor support
coordinated through m ultilateral partnerships with institutions like the WTO,
the World Bank and regional development banks. Each sm all and weak
economy has its own specific needs. Some are isolated and landlocked, others
are in a post-conflict environm ent, and still others enjoy lim ited raw materials
or resource endowments. AfT will help these econom ies build the
infrastructure needed to transport goods and to create new, viable and cost-
effective tradable products. It will provide assistance for export promotion and
trade finance, and fund training for custom s officials to help ease the flow of
goods across borders and for trade negotiators to take advantage of free trade
agreem ents. And it will also offer help in implem enting the required market-
oriented reform s and, yes, building the social safety nets needed for people to
adjust to the changing econom ic environm ent." (Lamy and Kuroda,
September, 2007)
In the Conference, the donors have pledged funds for the im plem entation of
the AfT. J apan announced developm ent assistance spending on trade,
production and distribution infrastructure of US$ 10 billion over three years,
the US announced Aid for Trade grants of US$ 2.7 billion a year by 20 10 , and
the EU and its m em ber States announced trade-related developm ent
assistance spending of 2 billion Euro per year by 2010, totaling around US$ 15
billion. The AfT com plem ents but is not technically a part of the Doha Round
of WTO negotiations. The comm itm ent of governments to fully mainstream
63
A Study on Trade and Poverty Linkages in Nepal
trade into their national developm ent strategies and mobilize, through donor
support, and earmark adequate resources to enhance trade and
competitiveness so as to meet the poverty reduction and social objectives in an
environm ent of sustainable growth have been considered as central to the
effectiveness of the AfT. Nepal also deserves for the AfT support and therefore
requires detail works for the form ulation of trade-related infrastructure and
capacity development plan.
The trade policies were dram atically changed in 1992. Earlier, there was
regulated trade scenario, and licensing m echanism since 198 5 had regulated
the trade in Nepal. Little improvement was made by the adoption of Open
General License System in 1987. But the m ajor breakthrough happened with
the adoption of new trade policy in 1992. Under the system , im ports of raw
m aterials, consumer goods, industrial machinery, and services were made free.
Adoption of open current account system helped to facilitate specially im port
trade, allowing and m aintaining foreign currency account, foreign currency
loan facilities, and supporting the export sector. Market rate determ ination of
the exchange rate of national currency helped the exporter to be m ore
competitive in the international market.
Nepal’s trade is directly linked with the m acroeconom ic perform ance and the
m acroeconom ic policy variables. The external im balances of the econom y
depend on the current account deficits, capital flight, and rapidly expanding
external debts, however, internal im balances take the form of high real
interest rates, falling private investment, and rising general price levels. The
present macroeconomic performance of the Nepalese economy reflects the
reduced fiscal deficit, reduced investm ent, and slower output growth. So,
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A Study on Trade and Poverty Linkages in Nepal
reducing absorption would not be the correcting m echanism for the trade
im balance. In contrast, expenditure-switching policies, which increase the
dom estic prices of the internationally traded goods, will stim ulate exports and
curtail im ports so that the econom y could achieve trade balance and positive
effects on the economic growth could also be realized. However, the price
increases of export goods may lead to dem and for wage increases, especially
given the m ilitancy of the labor unions these days. Such increased wage
dem and m ay lead to further inflationary expectation, which m ay m ake
im porting goods again attractive and production of export goods less
profitable, so that the effects of the policy change will be negated. Therefore,
any such policy adjustment introduced before im plem enting the labor m arket
reform would not help correct the trade im balance. In this perspective, the
suggestions have to address the m acroeconom ic policy areas such as fiscal,
m onetary and the exchange rate, and have to concentrate on the structural
areas of the export sector. (Basyal, 2007)
Nepal further needs to diversify its markets through entering into the new
countries and expanding the coverage in the present trading countries. The
government needs to initiate program s with the private sector to increase the
efficiency of delivery system s with a view to com peting in overseas markets,
supplying to big enterprises, m odifying products to meet the standards or
tastes of consum ers, reducing the num ber of transactions associated with the
supply chains to reduce delivery cost, and developing supply chains that
65
A Study on Trade and Poverty Linkages in Nepal
Making necessary changes in the tariff rate further supports the process. The
basic tariff rate was reduced to only 8 basic rates in 1992. The invoice
valuation process was abandoned and recognition was given to invoice
submitted by the traders. Such steps supported the growth of trade.
The reform policies, as declared by the government in 1992, had not been
effective. The governm ent’s objectives for granting full convertibility to
Nepalese currency in current as well as capital account did not function well.
The adoption of full convertibility to Nepalese currency in capital account was
then postponed.
The trade is still not com pletely free. There are restrictions to trade by Letter
of Credit mechanism only. Full paym ent by telex transfer is allowed for the
am ount below US$ 30 0 0 only. In the case of export, there is no allowance for
credit shipm ent as practiced in India and China. This restriction is creating
hurdles for the expansion of export.
Strengthening policy and regulatory fram ework along with its effective
im plementation for prom oting com petitive trade built on the national
advantages, endowments, priorities, and interests becom es very important.
Structural reforms and infrastructure investm ents to reduce transportation
and transactions costs are the key to im proving the external com petitiveness
of the economy (IMF, 2007).
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A Study on Trade and Poverty Linkages in Nepal
67
A Study on Trade and Poverty Linkages in Nepal
Other -33857.4 - 51289.8 -42951.9 -32260.0 -40242.8 -40852.3 -31778.3 -29927.3 -34404.0 -41009.3 -47117.80
Countries
Total Volume 94335.6 116189.9 116515.5 123201.6 158327.6 171341.3 154333.8 174282.7 190187.8 208179.3 234014.40
of Trade 12.68 6.43 9.51
India 28081.2 30079.5 36125.4 44650.4 60880.8 71241.2 84578.3 97354.2 109516.6 127592.4 147857.80 20.47 15.72 18.07
Other 66254.4 86110.4 80390.1 78551.2 97446.8 100100.1 69755.5 76928.5 80671.2 80586.9 86156.60
Countries 8.60 -2.96 2.66
% Share in 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.00
Total Trade 0.00 0.00 0.00
India 29.8 25.9 31.0 36.2 38.5 41.6 54.8 55.9 57.6 61.3 63.18 6.90 8.72 7.80
Other 70.2 74.1 69.0 63.8 61.5 58.4 45.2 44.1 42.4 38.7 36.82
Countries -3.61 -8.81 -6.25
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A Study on Trade and Poverty Linkages in Nepal
Description
Annual Growth Rate in %
SITC Group 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 1995- 2001- 1995-
2001 2006 2006
Export 19881.1 22636.5 27513.5 35676.3 49822.7 55654.1 46944.8 49930.6 53910.7 58705.7 60234.1 22.86 1.59 11.72
Food & Live Animals 1946.6 2661.7 3123.2 3724.5 4240.4 4776.6 5094.2 6100.9 6276.9 6993.5 7192.0 19.67 8.53 13.96
Tobacco & Beverage 9.7 14.9 22.8 50.0 117.2 75.6 145.7 138.7 55.2 31.6 25.0 50.78 -19.85 9.93
Crude Materials & Inedibles 768.7 663.5 487.1 469.9 561.3 751.1 624.5 800.1 714.3 881.6 1223.4 -0.46 10.25 4.76
Mineral Fuels & Lubricants 1.3 1.4 20.9 0.5 2.2 1.3 1.6 5.5 14.5 4.2 3.2 0.00 19.74 9.43
Animal & Veg. Oil & Fats 251.3 312.6 2136.3 3597.2 3229.7 4104.0 7421.4 4278.7 3375.7 5070.3 4284.6 74.82 0.87 32.79
Chemicals & Drugs 640.4 1353.4 1968.5 2804.0 3933.2 4041.7 3308.3 3279.0 3865.9 3677.6 3686.9 44.55 -1.82 19.13
Classified by Materials 10455.7 11028.6 11637.1 13539.6 15838.7 18909.3 17394.9 17794.7 23601.7 28590.6 28533.0 12.58 8.58 10.56
Mach’y & Transport Equip’t 35.2 59.6 58.0 97.8 390.8 343.6 364.9 208.2 619.5 207.6 1201.9 57.73 28.46 42.34
Misc. Manufactured Articles 5772.2 6540.3 8059.6 11392.8 21509.2 22650.9 12589.3 17281.5 15380.1 13239.6 14081.6 31.45 -9.07 9.33
Not Classified - 0.5 0.0 0.0 0.0 0.0 0.0 43.3 6.9 9.1 2.5
Import 74454.5 93553.4 89002.0 87525.3 108494.9 115687.2 107389.0 124352.1 136277.1 149473.6 173780.3 9.21 8.48 8.85
Food & Live Animals 4785.8 5400.5 4929.0 7619.5 10839.0 5994.4 6333.2 9370.5 8554.0 9820.7 13298.7 4.61 17.28 10.76
Tobacco & Beverage 508.6 590.7 799.5 846.1 906.5 906.1 717.1 792.2 1026.8 1015.6 1161.8 12.24 5.10 8.61
Crude Materials & Inedibles 4865.9 5487.1 6976.2 6246.7 7012.4 7559.6 6732.7 8479.3 10550.6 11207.0 10562.3 9.21 6.92 8.06
Mineral Fuels & Lubricants 5549.3 7160.3 9537.3 8737.5 9097.9 11269.2 15200.8 19944.1 21904.1 29927.3 36447.0 15.22 26.46 20.71
Animal & Veg. Oil & Fats 2830.9 2327.6 2025.8 3329.0 4446.0 5589.2 7887.5 7750.5 8634.4 6016.3 10196.6 14.57 12.78 13.67
Chemical & Drugs 8686.8 8504.2 11077.3 12476.4 14474.2 12941.9 12380.9 14319.5 16544.9 19179.7 24750.2 8.30 13.85 11.04
Classified by Materials 28129.7 44741.9 32601.6 25638.0 34420.0 41188.0 32889.1 34888.2 36510.5 37047.4 40600.5 7.92 -0.29 3.74
Mach’y & Transport Equip. 15301.1 13794.9 16734.7 18063.7 20547.9 23027.8 19513.8 20702.1 25694.2 26262.1 26194.6 8.52 2.61 5.52
Misc Manufactured Articles 3794.6 4016.4 3974.0 4302.4 6682.8 7210.2 5670.3 6582.7 5103.8 7551.8 10417.8 13.70 7.64 10.63
Not Classified 1.8 1529.8 346.6 266.0 68.2 0.8 62.1 1523.0 1753.8 1445.7 150.8 -14.97 185.14 55.71
Source : Economic Survey, FY 2006/2007
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A Study on Trade and Poverty Linkages in Nepal
70
A Study on Trade and Poverty Linkages in Nepal
Juice 0.0 0.0 0.0 156.9 242.8 303.5 540.2 748.6 1396.8 2498.8 2197.10 48.57
Total 2391.0 3024.9 5926.0 8834.7 17344.3 20651.1 20998.1 17815.7 21227.4 28545.7 25656.50 53.91 4.44 26.78
Others 1291.6 2201.3 2868.4 3696.0 3876.4 5379.1 6958.1 8614.3 9549.7 10371.2 21585.03 33.02 32.03 32.53
Grand Total 3682.6 5226.2 8794.4 12530.7 21220.7 26030.2 27956.2 26430.0 30777.1 38916.9 4071.47 47.86 -31.00 1.01
Source : Economic Survey, FY 2006/2007
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A Study on Trade and Poverty Linkages in Nepal
Rs. in Million
Annual Growth Rate in %
SITC Group 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2050/06 1995- 2001- 1995-
2001 2006 2006
Pulses 348.7 528.3 858.3 915.7 87.1 501.1 216.0 214.9 280.7 106.5 191.7 7.52 -26.64 -11.18
Cardamon (Large) - - - 5.4 - 21.8 71.5 125.4 231.4 205.3 109.2 56.60
Medicinal Herbs 8.1 18.0 14.3 9.6 15.1 25.9 25.4 33.3 48.3 54.7 19.00 26.17 16.13 21.05
Catechu - - - - - 0.0 0.0 0.0 0.0 0.0 0.00
Wollen Goods - - - - - 0.0 0.0 0.0 0.0 0.0 0.00
Nepalese Paper & Paper Products 66.4 82.7 121.5 168.4 196.7 200.5 262.0 279.6 239.8 257.00 4.04
Hides & Skins 387.6 288.5 417.3 270.5 181.9 658.4 464.7 227.3 309.0 235.8 310.4 11.18 -18.57 -4.85
Carpets (Hand Knotted Wollen) 8163.9 8880.0 8485.3 9802.0 9842.1 8592.3 6212.5 5320.0 5677.5 5868.7 58.36.7 1.03 -7.34 -3.25
Readymade Garments 5374.8 5955.0 7015.4 9701.9 13942.4 13124.7 7833.0 11890.1 9550.0 6124.6 6204.1 19.55 -14.14 1.31
Handicrafts 81.8 142.1 135.0 173.5 218.1 233.9 233.8 352.1 626.4 644.2 430.0 23.38 22.46 22.92
Ornaments 138.3 168.7 196.2 223.5 232.6 211.5 274.1 347.7 368.7 363.2 282.4 8.87 11.42 10.14
Pasmina - - - - 2665.0 4121.2 1245.0 1157.6 1064.1 1049.8 1577.8 -23.93
Total 14550.5 16047.0 17204.5 21223.6 27352.7 27687.5 16776.5 19930.4 18435.7 14892.6 15221.2 13.73 -11.66 0.23
Others 1648.0 1363.3 1514.6 1922.0 1249.3 1936.4 2212.1 3570.2 4697.9 4896.2 -
13269.26 3.28 20.39 11.50
Grand Total 16198.5 17410.3 18719.1 23145.6 28602.0 29623.9 18988.6 23500.6 23133.6 19788.8 1951.9 12.83 -7.75 2.02
72
A Study on Trade and Poverty Linkages in Nepal
73
A Study on Trade and Poverty Linkages in Nepal
74
A Study on Trade and Poverty Linkages in Nepal
Tourist's Expenditure 6605.9 6158.8 7850.9 11584.2 11691.0 11969.2 7798.4 10369.4 12337.4 11814.8 11710.90 12.62 -0.44 5.89
Intrest on Investment Abroad 1204.5 1320.5 1680.4 2014.6 2857.3 2993.8 1990.1 2674.1 2245.3 3284.2 4815.00 19.97 9.97 14.86
- Merchandise Export 14719.4 15603.9 16355.3 18766.6 23724.4 29789.7 18311.0 22578.9 22489.6 20851.9 21738.50 15.14 -6.11 3.98
- Diplomatic Mission 2989.0 2362.9 4374.4 8327.3 6247.7 7254.4 9663.9 4661.9 4241.8 3505.2 5281.60 19.40 -6.15 5.86
- Foreign Aid 7943.4 8921.5 9868.4 8518.4 11072.4 23459.0 18968.3 12988.2 19823.0 20397.5 16713.50 24.18 -6.56 7.72
- Miscellaneous 3281.6 2932.9 3568.6 7101.7 7369.0 10799.6 15087.5 41188.6 55041.2 58402.0 91806.90 26.90 53.42 39.53
Expenditures 33463.3 34821.5 39912.3 45164.3 53066.0 82560.3 71105.8 81420.1 98677.1 108655.7 135185.0 19.80 10.37 14.98
- Services 11336.0 10188.1 9820.0 8318.6 10636.5 13839.5 14643.4 16763.6 14837.5 19735.1 21788.90 4.07 9.50 6.75
Amortization 3772.2 3870.6 4496.4 5227.8 5776.3 6476.3 6915.3 7302.4 6847.3 7374.7 7124.30 11.42 1.93 6.57
Others 7563.8 6317.5 5323.6 3090.8 4860.2 7363.2 7728.1 9461.2 7990.2 12360.4 14664.60 -0.54 14.77 6.84
- Merchandise Import 21361.5 24099.7 29590.0 34185.9 41152.2 66569.0 52791.4 64296.7 71494.9 63086.7 67684.40 25.52 0.33 12.22
- Diplomatic Missions 478.4 298.1 361.1 1128.9 604.7 507.6 463.9 211.7 716.5 621.5 649.70 1.19 5.06 3.11
- Miscellaneous 287.4 235.6 141.2 1530.9 672.6 1644.2 3207.1 148.1 11628.2 25212.4 45062.04 41.74 93.90 65.78
Surplus or Deficit (-) 3996.5 3458.9 5071.6 12775.5 11184.0 7262.9 5047.6 17262.4 21965.9 14612.7 22112.5 12.69 24.94 18.66
75
A Study on Trade and Poverty Linkages in Nepal
contd.
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A Study on Trade and Poverty Linkages in Nepal
Table 4.16
contd.
Particulars 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06
C. Financial Account (exclu.group E) -28522.2 -37333.4 -17198.9 -21540.1 -25536.9 -1324.4
Direct investment in Nepal -33.0 -282.3 961.4 0.0 136.0 -469.70
Portfolio investment 0.0 0.0 0.0 0.0 0.0 0.00
Other investment : assets -30191.1 -35136.9 -34629.5 -32591.2 -21863.2 -14008.80
Trade credits 1108.2 -1294.5 1041.0 -2247.6 -323.8 -1629.50
Other -31299.3 -33842.4 -35670.5 -30343.6 -21539.4 -12379.30
Other investment : liabilities 1701.9 -1914.2 16469.2 11051.1 -3809.7 13154.10
Trade credits -9319.0 -5279.0 16899.3 3629.8 -4489.0 9232.50
Loans 6693.4 2899.6 -52.4 3325.2 744.4 526.90
General Government 6976.5 2963.5 -432.8 3479.1 1300.4 703.70
Drawings 11715.1 8040.3 5236.0 9244.7 7253.7 7691.00
Repayments -4738.6 -5076.8 -5668.8 -5765.6 -5953.3 -6987.30
Other Sectors -283.1 -63.9 380.4 -153.9 -556.0 -176.80
Currency and deposits 4327.5 465.2 -377.7 4096.1 -65.1 3394.700
Nepal Rastra Bank 138.4 -197.4 -23.4 -77.4 46.2 -116.50
Deposit Money Banks 4189.1 662.6 -354.3 4173.5 -111.3 3511.20
Other liabilities 0.0 0.0 0.0 0.0 0.0 0.00
Total (Group A through C) -2200.6 -13478.3 -190.3 -5489.9 -12418.7 16007.1
D. Net Errors and Omissions 11749.5 10600.6 4176.2 25587.2 18098.1 13086.20
Total (Group A through D) 9548.9 -2877.7 3985.9 20097.3 5679.4 29093.3
E. Reserves and related items -9548.9 2877.7 -3985.9 -20097.3 -5679.4 -29093.3
Reserve assets -9224. 1 3203.4 -3685.2 -20654.0 -6464.6 -29093.30
Nepal Rastra Bank -7445.1 -1712.7 -7809.9 -19503.8 -3253.7 -21398.10
Deposit Money Banks -1779.0 4916.1 4124.7 -1150.2 -3210.9 -7695.20
Use of Fund credit and loans -324.8 -325.7 -300.7 556.7 785.2 0.00
Change in Net Foreign Assets (-Deficit) 5221.4 -3342.9 4363.5 16001.2 -5744.5 25698.60
Source : Economic Survey, FY 2006/2007
77
A Study on Trade and Poverty Linkages in Nepal
Chapter V
Poverty Reduction, Human Development
and Trade
5.1 Introduction
Trade and poverty have been inextricably linked in Nepal in the second half of
the twentieth century. Historically, trade has been based on agricultural
production. The structure of agriculture around a small number of big farm s
and the focus on trade in cash crops such as tea and coffee did not benefit
large number of Nepali people at large, especially in rural areas. As a result,
Nepal is today one of the poorest countries in the world, with per capita GDP
of about US$ 330 , and with 31 percent of people living below the poverty line.
Recent econom ic reforms, especially in the early-1990 s, have counted on
structural changes in agriculture to stimulate trade in m ajor crops such as tea,
vegetables, coffee and other few agriculture products. While these have
initially succeeded and produced substantial surpluses, they have
subsequently failed when a m ore com prehensive reform package could not be
im plemented well, leaving poverty as extrem e as before. Attem pts to increase
its trade will help m eet this challenge, but these will have to be complemented
by efforts to ensure food security, nutrition and other basic requirem ents such
as education, health services and awareness to the m ajority of the people,
especially in the rural sector, to produce enough for subsistence and
eventually provide tradable surpluses.
The Nepal’s Tenth Plan also known as Poverty Reduction Strategy Paper
(PRSP) (20 0 2-20 0 7) envisages the early introduction of a series of social
safety net m easures im pacting households through the support of agricultural
inputs, public works program s and nutrition assistance, and health services.
These can provide the basis for survival and over tim e allow the possibility for
im provem ents in tradable surpluses among the more vulnerable. Currently,
those working in the production of tradable goods fare better; and improving
their perform ance will bring pro-poor benefits to the econom y. Households
that grow cash crops and have better market access have higher incomes and
are significantly less likely to fall into poverty. Improvements in trade can play
a m ore im portant and direct role in poverty alleviation. For this end following
conditionality need to be fulfilled:
81
A Study on Trade and Poverty Linkages in Nepal
Examining the interrelation between poverty and trade in Nepal with a focus
on the role of rural and traditional trade patterns in the past and their im pact
on the current situation, and examining the potential for using internal and
external trade as m echanism s for poverty alleviation in the future, it can be
related with the key elements of the PRSP, including those pertaining to trade,
to the overall poverty reduction effort. The literature on trade and poverty7
identifies five m ajor mechanism s through which increased trade openness
affects the poor:
Im pacting the prices of goods and services the poor consum e and
6
Three Year Interim Plan (2007-2010) envisages achieving this target by the end of 2017.
7 Some notable references include Nicita et al. (2002), Reimer (2002), World Bank (2001), WTO
(2001), Cagatay (2001), Dollar and Kraay (2001) and Winters (2000).
82
A Study on Trade and Poverty Linkages in Nepal
produce8;
Affecting the demand for and returns to factors of production that the
poor have to offer, such as unskilled labor;
This chapter will focus on the social protection m echanism s outlined in the
PRSP. Household profiles have been used to assess the im pacts of proposed
policy changes on poverty alleviation. These profiles help in predicting the
potential im pacts of various reform s on affected groups. This assessm ent is
judged by using the household survey known as Nepal Living Standard Survey
(NLSS) conducted in 2003/04.
8 Changes in policy where the products become cheaper will make the net consumers of that product
better off while policies leading to an increase in the prices of a good will benefit the net producers.
83
A Study on Trade and Poverty Linkages in Nepal
The Nepal Living Standard Survey (NLSS) was conducted in 1996 by the
Central Bureau of Statistics across the country to m easure the extent of
poverty. It had reported a poverty incidence (head count estim ate) of 42
percent. The Survey showed poverty in Nepal m ore a rural phenom enon and
concentrated m ostly in the rural areas. It was as high as 72 percent in the Far-
western Hill and Mountain regions. The survey estimated the poverty rates at
43.3 percent in rural areas compared to 21.6 percent in the urban areas.
The second NLSS (20 0 4) is the analysis of poverty based on the household
statistics collected during the fiscal year 20 0 3/ 0 4. The Central Bureau of
Statistics conducted this NLSS II as per the fram ework and procedures
followed by the World Bank in conducting such Survey in m any countries of
the world. The report of NLSS II shows som e im provem ents in the living
standard of the people in spite of a heightened conflict situation in the country.
As per the report there is a decline in poverty incidence by 11 percentage
points from 42 to 31 percent. However, the rural-urban disparities are still
alarming. Rural poverty is at the level of 35 percent and urban poverty is at the
level of 10 percent. By Developm ent Region, the incidence of poverty is lowest
in the Central Development Region (27 percent ) and highest in the Mid-
Western Developm ent Region (45 percent ). From the regional perspective, it
is estim ated that 7.5 percent out of the total poor dwell in the Him alayan
Region, 47.1 percent in the Hilly Region and 45.4 percent in the terai
Region.( Table 5.1 )
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A Study on Trade and Poverty Linkages in Nepal
Development
Region
Eastern 38.9 29.3 21.0 23.4 22.5 24.7
Central 32.5 27.1 26.9 32.2 34.6 36.6
West 38.6 27.1 18.7 16.7 20.3 18.9
Mid-west 59.9 44.8 18.5 17.7 12.9 12.2
Far-west 63.9 41.0 14.8 9.9 9.7 7.5
Geographical
Region
Mountain 57.0 32.6 10.7 7.5 7.9 7.1
Hill 40.7 34.5 41.9 47.1 43.0 42.1
terai 40.0 27.6 47.4 45.4 49.4 50.8
85
A Study on Trade and Poverty Linkages in Nepal
Nepal's poverty is explained by many factors – high illiteracy, poor health and
low sanitation, low food grain productivity, high child malnutrition, poor
access to basic services and inequities resulting from a tradition-driven social
structure. Among the population groups, poverty is highest am ong people of
the so called “lower castes and indigenous groups.”
Chronic vs. transient poverty is also a very critical issue in Nepal’s poverty
reduction strategy. The defining feature of ‘chronic poverty’ is its extended
duration. Poverty that is both severe and m ulti-dim ensional but does not last
NHDR, 2001 has made a detailed assessment of how and why poverty has persisted in Nepal in spite
of five decades of planned development.
86
A Study on Trade and Poverty Linkages in Nepal
It should, however, be noted that these relationships are em pirical, and need
to be discovered; it is likely that the degree of chronic poverty varies
substantially from one society to another as well as over time. It will also vary
depending on the m easures used such that the longer the interval between
studies the less likely that some people will still be poor (or not poor).
people who are chronically poor in terms of both duration and severity
– i.e., whose average incomes are well below the poverty line for an
extended period; and
There are five-tier category system for its work based on which poor can be
classified into the following (CPRC 2005):
Always Poor: This category includes those poor whose expenditure or incom es
or consumption levels in each period fall below a poverty line.
Usually poor: This type includes those poor whose m ean expenditures over all
periods are less than the poverty line but not poor in every period.
Churning poor: Churning poor are those with mean expenditures over all
periods close to the poverty line but are sometim es classified as poor and
sometimes non-poor in different periods.
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A Study on Trade and Poverty Linkages in Nepal
Furtherm ore, the above categories can be aggregated into the ‘Chronic Poor’
(always poor and usually poor), the ‘Transient Poor’ (churning poor and
occasionally poor) and the ‘Non-Poor’ (the ‘never poor’, continuing through to
the ‘always wealthy’). However, in order to understand the processes that
create and maintain chronic poverty categorization of poverty would not be
enough and need to be supplem ented by examinations of the factors that are
associated with transitions between those categories (Hulme, Moore and
Shepherd, 2001).
In 1995/ 96, the Nepal Living Standards Survey (NLSS) provided the poverty
estim ates based on which the head-count poverty incidence in Nepal was 42
percent (43 percent in rural areas and 22 percent in urban areas). Wide
variations in poverty levels were reported based on rural-urban divide,
geography, gender, ethnic groups and occupational castes. Overall, poverty in
Nepal for the m ost part appeared to be a rural phenom enon. Further, at the
national level, the intensity of poverty was estim ated to be 0 .12 and severity
0 .0 5. Based on an exercise undertaken within the NPC in 20 0 0 , the poverty
incidence for Nepal was estim ated to be 38 percent (which was calculated on
the basis of the economic growth rate prevailing at that time relative to the
1996 NLSS survey data) (NPC 2003).
Table 5.3: Poverty Measures for Nepal based on Nepal Living Standards
Survey (NLSS): 1995/96 and 2003/04
Poverty in 2003/04
The NPC has recently m ade available the poverty figures based on the NLSS
88
A Study on Trade and Poverty Linkages in Nepal
Furtherm ore, during this period, the poverty gap ratio has declined thereby
indicating that on average poor people have moved closer to the poverty line
(the exact figure of Poverty Gap is reported as 7.55 percent. As for rural-urban
divide of poverty incidence, urban areas recorded a higher rate of decline in
poverty by 12 percentage points (from 22 percent to 10 percent) while the
rural areas experienced a decline in poverty by 8 percentage points (from 43
percent to 35 percent). During the period 1995/96 – 2003/04, real private per
capita consumption increased by 42 percent, thereby indicating a high
increm ent in income. As for regional increment, the western terai recorded
the highest increase of 45 percent in per capita expenditure while the eastern
Hilly areas recorded the lowest increment of 5 percent. Moreover, substantial
disparities exist in the poverty incidence across the three m ajor agro-
ecological zones. For exam ple, rural poverty incidence is highest in the hills
(42 percent) followed by the m ountains (33 percent) and the Terai (29
percent) (NPC/UN 2005).
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A Study on Trade and Poverty Linkages in Nepal
Overall, during 1995/ 96-20 0 3/ 0 4, poverty seem s to have declined am ong all
rural household groups except for the Sm all and Medium farm ers in the
Eastern Hills. During the sam e period, the share of Small Farm ers among the
rural poor increased from 45 to 54 percent, the share of m edium and large
farmers decreased from 26 percent to 18 percent and the share of non-farm
households among the rural poor increased from 13 to 16 percent.
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A Study on Trade and Poverty Linkages in Nepal
Nepal is currently ranked 140 in the HDI ladder just below Bangladesh. Even
though noteworthy im provem ents in some of the social indicators have been
achieved over the years, their levels are still low as the country started with
very low values for those indicators. For instance, the HDI value for Nepal for
20 0 4 (based on 20 0 2 data) is 0 .50 4. Com pared to the previous years, Nepal
has now m oved from the group of Low Hum an Development countries to the
group of Medium level Hum an Developm ent countries (UNDP,, 20 0 4). All
countries in South Asia are better placed than Nepal in term s of the HDI value,
except for Pakistan.
Feminization of Poverty
Despite lack of inform ation on econom ic indicators (m ainly consum ption and
incom e) at the individual level, it is still possible to analyze two measures of
poverty, nam ely, the size distribution of male and fem ale in poor households
and the poverty incidence of fem ale-headed households. NLSS data for
1995/ 96 did not indicate that there were m ore fem ales than males in the poor
households. However, som e sort of fem inization of poverty was still evident
through the second indicator pointed out above since the NLSS 1995/ 96
indicated that female-headed households in general, and widow-headed
households in particular, were much m ore likely to be poor if there was no
adult male present (World Bank 1999).
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A Study on Trade and Poverty Linkages in Nepal
In recent years, poverty reduction has been the overriding concern of the
planned efforts for development. The first attem pt to formulate a separate
plan with long-term perspective for poverty alleviation was made during the
Eighth (1992-97) Plan. The Ninth Plan (1997-20 0 2) had adopted poverty
reduction as the m ain objective. However, the set targets of the Plans were not
achieved due to various reasons, such as, low econom ic growth, low
agriculture productivity, high population growth, and exclusion of the
majority of population in the mainstream of development process.
The Tenth Plan (20 0 2-0 7), also known as Nepal's Poverty Reduction Strategy
Paper (PRSP), had recognized the role of local bodies, comm unity
organizations and NGOs in developm ent and reflects the government's
comm itm ent to decentralization and functional devolution. It had clearly
defined priorities: P1, P2 and P3 projects and clear-cut allocation/
disbursement commitments, addressing poverty issues of Nepal.
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The PRSP/ Tenth Plan had a target of reducing poverty of the population from
38 percent at the beginning of the Plan (20 0 1/ 0 2) to 30 percent by 20 0 6/ 0 7.
For this, PRSP had form ulated a closely inter-related four-pillar strategies
such as (a) high, sustainable and broad-based econom ic growth; (b)
im provem ent in access and quality of infrastructure, social and econom ic
services in the rural areas; (c) targeted program s for social and econom ic
inclusion of the poor and marginalized communities; and (d) good governance
to improve service delivery, efficiency, transparency and accountability.
During the five-year period, the Plan had envisaged to raise the literacy level
to 63 percent; reduction of infant m ortality rate to 45; reduction of m aternal
mortality rate to 300, increase of life expectancy to 65 years; increase of access
to drinking water to 8 5 percent of the population and electricity to 55 percent;
and increase in school enrolm ent rate to 90 percent. This would result in the
improvement of HDI by 0.517.
Given the nature of Nepal's poverty problem and the social/ political context,
the Tenth Plan's poverty reduction strategy had focused as follows:
Third, the Plan has given a strong strategic focus and concentrated on a
few im portant approaches and interventions, which would deliver
quick results to the rural poor.
Fourth, the Plan has focus on the interventions and policies to reassess
tim e to time and revised if necessary in order to achieve the poverty
reduction goals.
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prim ary objective of the PMAS is to coordinate, consolidate, harm onize, and
analyze data from the existing m onitoring system and to comm unicate results
in ways, which provide effective feedback to the policy change. It seeks to
accom plish through: (i) im plem entation m onitoring; (ii) outcom e monitoring;
(iii) impact analysis; (iv) poverty management inform ation system ; and (v)
communication and advocacy.
Impact analysis establishes linkages between outcom es/ im pacts and the
programs being m onitored. It has two main objectives: (a) to assess the effect
of a specific policy, program/ project on poverty or som e other well-being
outcom e, and (b) to assess the efficiency of different policies/ program s in
achieving a given well-being outcom e, i.e. could other policies or program s
have improved well-being at lower cost ?
The PMAS is to grow into a central repository of all data on poverty in Nepal.
The data on PMAS would be accessible through the Poverty Managem ent
Information System (PMIS), which would link all major data bases relevant to
poverty m onitoring. The main objective of PMIS is to assist decision-making
by: (i) providing instant access to relevant, correct inform ation on poverty, (ii)
making existing inform ation coherent, com patible and consistent, (iii) serving
as a flexible and evolving m echanism for data storage and analysis, and (iv)
ensuring data access while continuously generating inform ation through
greater control and monitoring function.
Nepal Info has been developed as a database software tool that features a
comprehensive set of social developm ent indicators selected to monitor the
PRSP, MDGs and other key development param eters. Nepal Info provides
inform ation for poverty m onitoring and thus helps in operationalizing and
institutionalizing the PMAS for effective m onitoring of PRSP and MDGs for
global as well as local level monitoring systems.
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Monitoring progress towards PRSP including MDGs rem ains the mandate of
the National Planning Com m ission (NPC). A Poverty Monitoring Division
(PMD) has been established in the NPC, with the mandate of m onitoring and
analyzing poverty trends; tracking progress towards key human developm ent
and MDG indicators and the im plem entation of m easures to ensure social
inclusion; and undertaking periodic reviews. The PMD prepares an annual
poverty progress report, which tracks the indicators outlined in the PMAS,
which incorporates data from different surveys and monitoring system and
continuously refines the monitoring indicators, using inputs from different
ministries.
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Achievements
The concept of MTEF was introduced in 20 0 2. The fram ework was used as an
effective public expenditure planning and programming instrument with basic
objectives as – making development budget m ore realistic, reducing num ber
of priority projects/ programs, linking projects/ program s close to PRSP
priorities and providing adequate funding to high priority projects. As a
significant step towards institutionalization of MTEF, it has been extended to
all ministries now. Perform ance-based budget release system has also been
internalized from 2003 onwards.
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Political instability and conflict have affected service delivery and ham pered
the efforts towards building the social capital. To explore a new m echanism
has been a great challenge for the successful im plementation of the PRSP. The
existing government mechanism and people's participation for service delivery
should be further strengthened. It would help achieve sustained
im plementation and m anagem ent of service delivery system s. To build the
macro-econom ic framework m ore sensitive to poor and to allocate m ore
resources to anti-poverty programs and projects have become very com plex
due to shortage of internal resources. Reduction in foreign aid has further
aggravated the resource scarcity problem in the present conflict situation in
the country.
The PRSP lays the basis for providing both short-term m itigation and long-
term solutions to poverty within a comprehensive fram ework of policy reform ,
structural changes, and program im plementation. This com prehensive
approach is necessary if trade is to have an im portant role, as it should, in
poverty reduction. This is because m any of the problems are deep-rooted,
especially areas as diverse as education and health status, the lack of physical
infrastructure, gender inequality, the natural importance given to food
security over tradable com modities, etc. It is also evident that program s such
as those dealing with various social safety net activities are necessary
conditions for any im provem ent in trade opportunities. The poverty problem s
of Nepal are so broad and deep that m any factors have to be addressed
sim ultaneously and no single policy change is sufficient of itself. And because
of the structure of household incom e, and the clearly felt need for food
security, a series of overall policy changes are needed and im provem ents in
trade – may be just as effective in a num ber of areas through sm all, targeted
programs.
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ownership etc. A num ber of policy changes and specific actions are needed to
inject cash into the economy and to m odify the vicious circle of poverty. The
lim itations in baseline data do not allow the direct and satisfactory testing of
these, but provide sufficient evidence to suggest that robust and sim ultaneous
actions can free Nepalese people from this poverty circle.
In case of Malawi9, an African landlocked country, reveals the fact that som e
factors have positive impact on the reduction of poverty through increased
level of trade. These are:
an increase in soil quality and thus im provem ents in yields through the
provision of fertilizer;
These factors are quite sim ilar to Nepal. The sim ulations m ade on the factor
reveals that decrease in the transportation cost by 25 percent can have positive
im pact on increasing the trade volume, prim arily the export volum e could be
increased and could befit both the producers and consum ers. Households in
the lower and m iddle expenditure deciles capture a greater percentage of
incom e gains when transport m argins for purchase of consum ption items,
inputs for crops and for the marketing of their produce is reduced. In addition,
there m ay be additional benefits such as the greater use of m arkets by
households which, in turn, will encourage the use of m ore efficient production
techniques and also induce farmers to break out of the cycle of subsistence
farming if their risk adversity decreases.
The decline in transport costs will also enhance the com petitiveness of Nepal’s
exports m ore generally. The recent access of road network to the apple
producers of J umla and Kalikot districts will have sim ilar im pact on
increasing the apple export to other countries of SAARC region and beyond.
9
Trade and Poverty: Diagnostic Trade Integration Study, Malawi, March, 2003
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10
Cockburn, John, Trade Liberalization and Poverty in Nepal: A Computable General Equilibrium
Micro Simulation Analysis, CREFA, Université Laval, 2002.
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5.8 Conclusion
The problems are so broad and deep that m any factors have to be addressed
sim ultaneously to achieve results. Conversely, implementing a single policy
has only a marginal im pact on the econom y. The measures based on actions
listed below have visibly pro-poor and pro-rural impacts; some also produce
positive im pacts on households headed by women. If these actions are not
jointly im plem ented the returns to individual interventions will be m odest.
For instance, if public works program s create no new jobs, all other m easures
would all together produce less than 9 percent improvement in the household
sector. The key m echanism s of the much needed changes require political will
as well as well coordinated donor support to protect the poorest.
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Chapter VI
A Case of Tea Production and Its Impact
on Poverty
6.1 Introduction
This chapter deals with the present situation of tea sector of Nepal and tries to
establish linkages of tea exports with the poverty reduction strategy of the
economy. Tea has been grown com mercially in Nepal since the 1863 with the
influence of East India Com pany. A num ber of tea plantations are found in
Ilam, Taplejung, Panchthar, and Dhankuta districts of the country. While
Darjeeling tea flourished in India and could gain international fam e, Ilam tea
although having a good orthodox variety of production could not gain
adequate international market. The production even could not m eet the
national demand of the country basically due to high price.
In Nepal, there are orthodox and CTC types of tea produced in hilly areas of
the country. Orthodox tea is prim arily produced in Ilam district, which now
has been proliferated in other districts, such as Panchthar, Dhankuta,
Terathum, Sindhupalchowk, and Kaski. The clim ate of the eastern part of
Nepal is quite suitable for orthodox tea. As the Darjeeling tea estates are quite
old, new grown tea farms of Nepal provide high quality of tea leaves, thus
attract Indian markets for the raw leaves.
Of the total tea production, the volum e of orthodox tea is about 15 percent. In
the FY 20 0 5/ 0 6, it was cultivated in about 9775 ha and produced 160 0 metric
ton. The large Tea Estates use the raw leaves to their own factories, but the
small farmers either they sell to the local factories or sell to India buyers.
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A Study on Trade and Poverty Linkages in Nepal
Most of the tea production com es from the sm all holders, though there have
been numbers of tea estates. This sector involves 18 750 small farmers and
thus has given opportunity to em ployment and income generation. Average
size of the tea farms is about 0 .5 ha and for small farmers is about 0 .25 ha. As
the produce is worth for com plete export, the earnings of the sm all farm ers
are quite high.
As com pared to orthodox tea, ctc tea is prim arily produced in the terai region
of the country. At present, Jhapa district is well known for such production. In
international tea standard, ctc tea of J hapa is ranked as average or below
average in its quality. It is estim ated that it meets an annual dem and of about
90 percent of the domestic tea demand.
Tea production faces a num ber of problem s such low econom y of scale,
inadequate infrastructure, excess use of chemicals, and low-skilled labor,
Further it also lacks visionary plan and strategy to increase production in a
large scale as well as upgrading the production process as well as m arketing of
the finished products.
Although Nepal has a long history of export of orthodox tea, form al and
organized tea export has been found in past few decades. In 20 0 3 the export
volum e was less than 10 0 m etric ton, but after the increase in awareness and
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A Study on Trade and Poverty Linkages in Nepal
interests of the farmers in cash crops, tea production in the eastern part of the
country increased rapidly and, as a consequence, the export volum e also
increased rapidly. However it suffered from the sharp decline in the price level
of the tea. In 2002, the export price of tea was about US$ 4500 per metric ton,
which decreased by ore than one-fourth, US$ 120 0 per metric ton, just after
two years causing a decline in export earnings.
However, in import of tea, there has been sharp decline as the production of
ctc tea has increased dram atically within the span of 10 years. It is observed
that com pared to the value of exported tea the value of im ported tea has
decreased causing a trade balance in tea trade. The price fluctuation has also
bee a hindering factor in the growth of tea production. In 2001, price of ctc tea
per metric ton was US$ 220 0 , which decreased to US$ 120 0 in 20 0 3, and
again jum ped to US$ 240 0 in 20 0 4. Besides this uncertainty in the prices the
value of export is consistently high.
6,000
5,000
4,000
Import 1000$
3,000
Export 1000$
2,000
1,000
0
94
95
96
97
98
99
00
01
02
03
04
19
19
19
19
19
19
20
20
20
20
20
Ye ar
In com parison to the world trade of tea, it is observed that Nepal occupies
only 0 .2 percent of the total volum e of tea export. However, the export of
Nepal is gradually increasing besides there has been negative annual growth
of about - 0 .1 percent in international market in five year period from 1999 to
2003. The growth of tea export from Nepal is about 70 percent per annum.
Based on the data of the tea importing countries, it was found that Nepal had
exported 3481 m tons as follows:
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Table 6. 2
Export of Nepal’s Tea in Selected Countries
(FY 2004/05)
Description Export value Export Unit
(Importers of Nepal tea) in $ 1000 Quantity value in $/tons
in tons
Green Tea
(package not exceeding 3 kg)
India 118 100 1,180
Germany 110 9 12,222
USA 12 1 12,000
Total 240 110 2,182
Black Tea
(package not exceeding 3 kg)
India 2,005 1,769 1,133
Germany 289 41 7,049
Japan 23 2 11,500
Total 2,317 1,812 1,279
Black Tea
(package exceeding 3 kg)
India 1,556 1000 1,556
Pakistan 728 631 1,154
German 163 23 7,087
Netherlands 72 13 5,538
Japan 19 1 19,000
Total 2,548 1,668 1,527
Grand Total 5105 3590 1663
Although the export data do not show whether orthodox or ctc tea exported to
the different countries, it is observed that orthodox tea is exported to the
European countries and the USA. As data show the export prices are quite
high of the orthodox tea in com parison to the ctc tea. In the year 20 0 4/ 0 5, tea
was exported mostly to the following countries:
Nepal’s tea production basically suffers from the econ om y of scale. Although
there is a huge m arket of orthodox tea in Germ any, Russia, and the USA, the
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A Study on Trade and Poverty Linkages in Nepal
im porters are found interested only in the bulk and not in poor quantity.
Similarly, Nepal lacks to supply the ctc tea produced in Jhapa in a big quantity.
Specially the im porters from Russia demand ctc tea in bulk, which is not
possible to supply from the present production quantity and business scale of
the country.
Production costs in the estate sector are difficult to ascertain for reasons of
comm ercial confidentiality. Production costs will vary between estates
according to a range of local factors, including the scale of the operation
(yielding different economies of scale), whether there is local power
generation or bought in power, availability of water, distances for transporting,
treatment of overheads and investm ent etc. Based on anecdotal sources,
production costs, including overheads, but excluding investment costs are
currently in the range of Rs 50 to Rs 75 per kilo, suggesting that the industry is
barely profitable at current average prices. The industry consensus is that
m ost producers are struggling to m ake sufficient profits for adequate
reinvestment in factories, irrigation, and replanting. The lim ited investm ent
that is taking place at present supports this view.
Other issues
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The tea sector of Nepal consists of sm all landholders and large-scale tea
estates – both known as private producers. The Governm ent after privatizing
the Nepal Tea Developm ent Corporation has initiated policies to prom ote the
individual farm ers and entrepreneurs with a view to involve private
companies in production and m arketing of processed tea. The National Tea
Policy of 20 0 0 aim ed at providing financial incentives for encouraging
investm ent, facilitate in the access land required to plantations, develop
institutions to prom ote export, and m aintain quality of final product. In
building hum an resources, it aim ed at establishing training centers to enable
small farmers to participate in tea plantation.
With these initiations there have been substantive changes. At present there
are about 136 tea estates, which occupy about three-fourth of the total tea
plantation area. The rest is planted by the sm all holders. Additional efforts are
being m ade to expand in new districts, such as Solukhum bu, Dolakha,
Sindhupalchowk, Nuwakot, and Kaski districts. Except Kaski district, no much
effort could have been m ade in expanding its cultivation in western three
regions of the country.
In 1995/ 96, the total tea cultivated was 3,30 0 ha which increased to
18,726 ha by the end of 20 0 5/ 0 6 at an annual growth rate of 19.0
percent in last 10 year period.
In 1995/ 96, the total tea production was 2,10 0 M Tons which increased
to 14,60 0 ha by the end of 20 0 5/ 0 6 at an annual growth rate of 21.4
percent in last 10 year period.
At present there are 157 tea estates and 27,494 farm ers involved in tea
production.
The share of total tea production between the tea estates and the sm all
farmers/holders is almost equal.
The estates and the tea factories provided em ploym ent to as much as
120,000 workers.
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Strengths
Long established estate sector that is well organized and functions well
Weaknesses
Estate production costs are relatively high due to lim ited investment in
new processing plant.
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A Study on Trade and Poverty Linkages in Nepal
Continuing low profitability over the last four years has lim ited
reinvestment.
Som e factories very old processing equipm ent and has very lim ited
operating resources.
The factories are not successful in prom ptly collecting green leaves
supplied by the smallholders.
Opportunities
Threats
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A Study on Trade and Poverty Linkages in Nepal
sector may lead further inefficiency and poor return in the industry.
Continued weak or declining world prices for tea underm ines sector
profitability further.
From the perspective of poverty reduction, this sector has great impact in the
rural economy. Although, the tea plantation takes five to seven years to give
full output, the small and marginalized farmers have also been attracted as the
rate of return is five tim es higher than the cereal crops. So the m arginalized
sm all farm ers have been able to gain substantive incom e from the tea
plantation and alleviate their poverty level. Irrespective of other factors, the
human developm ent indicators, it is quite sure that the incom e earned by
these farmers is sufficient to meet the income requirement.
With the assumption that one worker’s incom e is sufficient to m eet the
poverty alleviation level incom e; the workers families are definitely found
living above the poverty level. In this context, with the assum ption of a fam ily
of 5.5 members, it is assumed that it has directly benefited about 660 ,0 0 0
population of workers family. Sim ilarly, a total of 151,271 populations of sm all
and m arginalized farm ers have received substantive benefit from tea
plantation.
Consequently, many new entrant-farmers are found attracted in this cash crop
and given up traditional farm ing. The farm ers are now growing tea and utilize
their income from tea for purchasing essential food grains.
The adequate knowledge of technology, and m arketing and trade, even the
small farmers have been involved in local tea trades and earned benefits.
With the hilly climate and terrain suitable for tea plantation in Nepal, there
has been a great potential to benefit large population of rural Nepal and help
alleviate poverty level. Ilam is the example in this context.
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6.6 Summary
there has been some investm ent in irrigation that would produce
significant increases in yields, especially of ctc tea;
m ore regular collection/ processing of their crop) from the estates that
they now sell directly to.
The m ain priorities for the estate sector seem to be investment in factory
renovation and replanting. Refurbishm ent should be made imm ediately to
increase the capacity of the factories and quality of the products. Usually the
replanting takes around 5-7 years to recover the costs and lost revenues from
taking land out of production. However, replanting is a necessary activity for
the long-term growth of the industry. The continued developm ent of the
relationships between estates and sm allholders has considerably more
potential for both parties so that sm allholders can get the return regularly
from their sell of green-raw leaves.
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A Study on Trade and Poverty Linkages in Nepal
Chapter VII
Summary, Conclusion, and Policy
Recommendations
7.1 Summary
NLSS II shows that there is still 31 percent of the population living below the
poverty line. Of the total rural population, 34 percent live below the poverty
line and suffer from abject poverty. A large num ber of the people of these
areas are poor and illiterate.
Land distribution and the structure of land ownership, m ost of the people
residing in the rural areas are sm all and marginal farmers and are basically
poor. Traditional and prim itive agricultural base has not allowed them to rise
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A Study on Trade and Poverty Linkages in Nepal
There is heavy dependency of rural population with about 78.1 percent of the
working population of Nepal are engaged in agriculture. The marginal product
of labor is very low. As a result, output and income of labor is very low.
There is arrangem ent of tenant in the land, thus establishing dual ownership
of landowner and tenant. Such system is prohibiting investm ent in agriculture
sector. Landowner is not investing because there is fixed amount of output to
be received from the field, whereas tenant will not invest because he does not
own the land.
Research Design
The overall objective of the study is to identify the trade poverty links and
assess the im pacts of trade policies in poverty in Nepal and suggest m easures
to make trade related institutions proactive, business environm ent conducive,
and (trade) policies pro-poor.
Review of Literature
The question of liberalization and its im pact on the benefit to the poor is also
debatable. The literatures support that trade liberalization improves growth
prospects by enhancing productivity tem porarily through m ore efficient
resource allocation and permanently through the im port of m odern
technologies and effects on competition.
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The East Asian countries were successful because they featured the
institutional characteristics of the developm ental state, where as m ost of the
African countries to harness such features. State capacity to deliver good
quality interventions in the econom y has been central to Asia’s success and to
Africa’s problems.
Trade has becom e m ore significant during the years of liberalization. The
share of total trade to GDP has rem ained to som e extent constant ranging
from a minim um of 35 percent to a m axim um of 43 percent in the last decade
under review. Till 20 0 0 , the effect of trade on the economic growth as
represented by growing GDP could be clearly visualized; however, the pace got
deteriorated when the export growth decreased sharply in the beginning of
this decade. The growth in export after the adoption of liberal econom y
policies has highly contributed in econom ic growth. Such growth in export
was due to the growth of labor-intensive industries like carpets and garm ents
which seized to grow because structural problem and non-tariff restrictions.
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and is attributed to the impact of the one decade long conflict. Thus it is
observed that though the com petitiveness of the export sector had increased
in earlier econom ic reform s and liberalization period, the policies had not
been effective in the conflict period and post conflict transition.
The Three-Year Interim Plan (Approach Paper) has adopted the policy of
developing industrial and business infrastructure, catalyzing the private sector
and improving trade, and fostering innovative measures to promote the export
sector.
Nepal’s landlockedness and heavy dependence on a single market for its trade.
The only direct access to sea is to Kolkata port, which is 660 miles away from
Nepal. Alternative routes to the sea through Bangladesh or the Tibet of China
do not appear feasible for large freight m ovements. Sim ilarly, another
problem associated with Nepal is high dependency on India for its foreign
trade. From the perspectives of Nepal’s participation in the m ultilateral
trading system , Nepal needs to diversify its trading partners mainly to reduce
the negative im plications of dependence on a single large country. Further
trading alliance with other LDCs will be beneficial for Nepal.
Substantial disparities exist in the poverty incidence across the three major
agro-ecological zones. For example, rural poverty incidence is highest in the
hills (42 percent) followed by the m ountains (33 percent) and the Terai (29
percent) (NPC/UN 2005).
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A Study on Trade and Poverty Linkages in Nepal
slower poverty reduction rate am ong households with greater num ber of
children has caused much hardship to women.
In recent years, poverty reduction has been the overriding concern of the
planned efforts for development. The first attem pt to formulate a separate
plan with long-term perspective for poverty alleviation was made during the
Eighth (1992-97) Plan. The Ninth Plan (1997-20 0 2) had adopted poverty
reduction as the m ain objective. However, the set targets of the Plans were not
achieved due to various reasons, such as, low econom ic growth, low
agriculture productivity, high population growth, and exclusion of the
majority of population in the mainstream of development process.
The Tenth Plan (20 0 2-0 7), also known as Nepal's Poverty Reduction Strategy
Paper (PRSP), had recognized the role of local bodies, comm unity
organizations, and NGOs in development and reflects the government's
comm itm ent to decentralization and functional devolution. It had clearly
defined priorities: P1, P2 and P3 projects and clear-cut allocation/
disbursement commitments, addressing poverty issues of Nepal.
Given the nature of Nepal's poverty problem and the social/ political context,
the Tenth Plan's poverty reduction strategy had focused as follows:
Third, the Plan has given a strong strategic focus and concentrated on a
few im portant approaches and interventions, which would deliver
quick results to the rural poor.
Fourth, the Plan has focus on the interventions and policies to reassess
tim e to time and revised if necessary in order to achieve the poverty
115
A Study on Trade and Poverty Linkages in Nepal
reduction goals.
The MDGs set quantitative poverty reduction targets and specific goals in
health, education, gender equality, environment and other aspects of hum an
development. Most of the indicators and targets of the MDGs are hard to
achieve by 20 15. H owever, the government has m ade consistent effort at
expenditure management and increased revenue mobilization.
The tea sector of Nepal consists of sm all landholders and large-scale tea
estates – both known as private producers.
In 1995/ 96, the total tea cultivated was 3,30 0 ha which increased to 18,726 ha
by the end of 20 0 5/ 0 6 at an annual growth rate of 19.0 percent in last 10 year
period.
In 1995/ 96, the total tea production was 2,10 0 M Tons which increased to
14,60 0 ha by the end of 20 0 5/ 0 6 at an annual growth rate of 21.4 percent in
last 10 year period.
At present there are 157 tea estates and 27,494 farm ers involved in tea
production.
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A Study on Trade and Poverty Linkages in Nepal
The share of total tea production between the tea estates and the sm all
farmers/holders is almost equal.
The estates and the tea factories provided em ploym ent to as much as 120 ,0 0 0
workers.
From the perspective of poverty reduction, this sector has great impact in the
rural economy. Although, the tea plantation takes five to seven years to give
full output, the small and marginalized farmers have also been attracted as the
rate of return is five tim es higher than the cereal crops. So the m arginalized
sm all farm ers have been able to gain substantive incom e from the tea
plantation and alleviate their poverty level. Irrespective of other factors, the
human developm ent indicators, it is quite sure that the incom e earned by
these farmers is sufficient to meet the income requirement.
With the assumption that one worker’s incom e is sufficient to m eet the
poverty alleviation level incom e; the workers families are definitely found
living above the poverty level. In this context, with the assum ption of a fam ily
of 5.5 members, it is assumed that it has directly benefited about 660 ,0 0 0
population of workers family. Sim ilarly, a total of 151,271 populations of sm all
and m arginalized farm ers have received substantive benefit from tea
plantation.
Consequently, many new entrant-farmers are found attracted in this cash crop
and given up traditional farm ing. The farm ers are now growing tea and utilize
their income from tea for purchasing essential food grains.
The adequate knowledge of technology, and m arketing and trade, even the
small farmers have been involved in local tea trades and earned benefits.
With the hilly climate and terrain suitable for tea plantation in Nepal, there
has been a great potential to benefit large population of rural Nepal and help
alleviate poverty level. Ilam is the example in this context.
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A Study on Trade and Poverty Linkages in Nepal
7.2 Conclusion
Opportunity for Nepal is broad and extensive based on the topographical and
clim atic features of the country. The agro-forestry products available in Nepal
can secure world m arket. However, the econom y of scale in production needs
to be extended. With the globalization effect, Nepal has to concentrate on the
production of agro-forestry products as Nepal will have less com parative
advantage in com peting with industrial products of two neighboring giant
economies: India and China.
Over the years, Nepal’s success in the expansion of export is principally due to
the growth of labor-intensive industries. This is im portant as it provides
employm ent to the poor and helps reduce poverty and achieve hum an
development as specified in the MDGs.
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7.3 Recommendation
Governm ent revenue should be prim arily allocated for im plementing poverty
reduction and hum an developm ent program s. It should address econom ic
services such as agriculture and rural infrastructure. In this context, foreign
aid and donors’ supports should be enhanced.
Governm ent program s should be designed to prom oting small and m edium
enterprises in the rural as well as urban areas so that the produces could
access international market and enhance the level of exports.
National level development strategy and the plans such as PRSP should clearly
specify how the econom ic activities influence trade and the trade would
directly benefit the poor. In this context, restructuring of trade sector is
needed to make it work for meaningful poverty reduction.
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Trade sector requires financial and technical support to enhance the capacity.
In this context, m easures such as targeting potential export sectors,
preferential credit and tax incentives needs to be devised. Hong Kong
initiation for ‘Aid for trade’ has to be categorically mobilized for building trade
infrastructure in Nepal.
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