Multilateral Trading System and Nepal’s Development Presentation by D. R. Khanal Two Day Seminar on Mainstreaming Trade Agreements into Development Organized.

Multilateral Trading System and Nepal’s Development

Presentation by

D. R. Khanal

Two Day Seminar on Mainstreaming Trade Agreements into Development

Organized by Pro Public, SAWTEE and SEJON

13, January

Introduction

• WTO is a negotiating forum for promoting global trade

• In the forum governments make trade policy commitments:– To improve access to each other’s market on

a MFN basis – To establish rules governing world trade

Contd.

• Hence, despite itself not being a comprehensive development institution, its role is considered vital in promoting trade and thereby economic development. This is regarded to be true, among others, on the assumptions that:– Rule based multilateral trading system protects small

players that have little ability to influence the policies of developed (large) countries

• Rules, in turn, reduce uncertainty by placing mutually agreed limits on the policies that governments may adopt –potentially helping to increase investment and lower risks

• Trade openness, growth and poverty reduction are mutually reinforcing

Contd.

• This again would occur through comparative advantages as a result of: – Factor productivity gains through higher specialization– Scale of economies and expansion in markets for domestic firms– Stronger interaction with foreign firms and markets with

technological innovations and improved managerial practices– Lessening of anti-competitive practices and rent-seeking

activities leading to reallocation of resources away from protected unproductive firms/sectors to more efficient activities

– Ultimately spill over effect on both factor and product markets and creation of income and employment opportunities leading to welfare gains and poverty reduction.

Contd.

• All these are expected on the assumptions that multilateral trading system is fair and safeguards the interest of poor countries

• However, it is irony that many rules adopted at the time of WTO establishment were guided by protecting the interest of the developed countries in general and TNCs in particular– Examples are: agriculture subsidy, discriminatory tariff rules,

protection of intellectual property rights requiring changes in the developing country rules keeping old rules of developed countries in tact. The lists are too long.

– Details are in OXFAM study ( 2002) and many others and they reveal that even the discriminatory rules and provisions are distorted and rigged by the developed countries.

Contd.• Host of factors/developments amidst increased pressures from

developing countries including movements by many civil society organizations led to the adoption of Doha development Round. Which recognized the role of

i) enhanced market access, ii) balanced trade rules, and iii) technical assistance

• Further a framework was agreed on 1st August 2004 called July Package. It identified five priority areas;

– Agriculture,– NAMA,– Services, – Trade Facilitation, and– Development Dimensions

• But the stalemate is continuing. The point to be made is that the international rules and their treatments are crucial for enhancing development in countries like Nepal through multilateral trading system

Nepal’s WTO Obligations/Fulfillments

Commitments/Obligations• Nepal’ commitments/obligations in the time of

accession to WTO include:– In the agriculture binding rate of tariff 51 percent for

the transition and 42 percent thereafter 42 percent.– In the non-agriculture manufactured products average

binding rate 39 percent in the transition to 24 percent thereafter.

– Removal of all additional import duty like special duty and local development tax within 10 years.

– Tariffs on ITC products to be completely eliminated within 5 to 7 years from 5 percent at the time of accession.

Contd.– More open up of services sector allowing up to 80 percent

foreign equity participation – Formulation, Revision and Implementation of Acts including

Dozens of new laws or revision in old ones required. Among them, New Industrial Property Act by 1 Jan 2006, Implementation of TRIPS by Jan 2007, Anti-dumping, Countervailing and Safeguard Law within one year of accession, Implementation of the Agreement on Sanitary and Phytosanitary Measures by 1 Jan 2007, Legislation on the Valuation of Imports for Customs and Taxation by 1 Jan 2004 and Full Implementation from 1 Jan 2007. Similarly, new laws in the areas like competition, bankruptcy, cyber, access to genetic resources, bank and finance institution, plant resources, and health institution operation. In addition, custom, industrial enterprises, labor, company, security exchange, foreign investment and technology transfer, plant protection, pharmaceutical laws be revised and enacted.

Contd.

• Upon the date of accession establishment or designation of tribunal for the prompt review of actions to the implementation of laws, regulations, judicial decisions and administrative rulings required.

• Elimination or non-applicability of quantitative restrictions on imports or other non-tariff measures including licensing, quotas, bans, permits, prior authorization requirements, and other restrictions.

• From the date of accession execution of domestic taxes like value added and excise duties in a non-discriminatory manner.

Contd.Fulfillments and Beyond

– Nepal’s trade liberalization has been more faster in many areas than WTO commitments and now Nepal is one of the most liberalized countries in South Asia

– Trade is completely deregulated and no trade and non-trade barriers including no support measures are there in exports contradicting WTO rules

– Expect transportation and fertilizer subsidy in remote areas (now limited irrigation subsidy also), no subsidy is there

– In large and medium industries up to 100 percent foreign equity participation is allowed with repatriation facilities

– In banking three fourth and in insurance 100 percent foreign equity participation has been already allowed even if in a selected basis

– Now the average tariff rate is in the neighborhood of 7.11 percent and estimates reveal that the actual rate has reduced to 5.13 percent in 2007 from 6.1 percent in 2003. Likewise, the imports tariff rate has gone down to 6.23 percent from 7.72 percent during the same period.

– Many laws have been already enacted and many are in the process of enactment

Development Performances in the Post WTO Era (Is trade liberalization a yard stick of development?)

Overall and Sectoral Growth

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2004/05 2005/06 2006/07 2007/08

AgricultureNon-agricultureGDP Producer Price

Sectoral Growth Rate

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2004/05 2005/06 2006/07 2007/08

Agriculture

Manufacturing

Wholesale and retail trade

Hotels and restaurants

Financial intermediation

Real estate, renting andbusiness activities

Public administration anddefence

Others

Gross value added

Sectorwise Contribution in Total GDP

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2004/05 2005/06 2006/07 2007/08

Fiscal Year

Share

in Pe

rcent

age

Agriculture, forestry andfishing

Non-agriculture

Manufacturing

Wholesale and retail trade

Hotels and restaurants

Financial intermediation

Real estate, renting andbusiness activities

Public administration anddefence

Others

Share in Total Trade

0.000

5.000

10.000

15.000

20.000

25.000

30.000

2004 2005 2006 2007 2008

Years

Export Eport India Export Other Countries

Share of Trade in GDP

0.0

10.0

20.0

30.0

40.0

2004 2005 2006 2007 2008

Years

Export Import Trade

Share of India and Other Countries in Total Export

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

Years

Shar

e in

%

India Other Countries

Exports of Major Commodities to India

0.0

5000.0

10000.0

15000.0

20000.0

25000.0

30000.0

35000.0

40000.0

45000.0

2003/04 2004/05 2005/06 2006/07 2007/08

Years

Rs in m

illio

ns

Total India Export Cardamom Chemicals Ghee (Vegetable) Juice

Jute Goods Polyster Yarn Readymade garment Textiles* Thread

Wire Zinc sheet Others

Exports of Major Commodities to Other Countries

0.0

5000.0

10000.0

15000.0

20000.0

25000.0

2003/04 2004/05 2005/06 2006/07 2007/08

Years

Rs

in m

illi

ons

Others Handicraft ( Metal and Wooden ) Nepalese Paper & Paper Products Pashmina.*

Pulses Readymade Garments Silverware and Jewelleries Tanned Skin

Woolen Carpet Totals

Share of Domestic Saving and Total Investment in GDP

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2003 2004 2005 2006 2007 2008

Years

Shar

e in

Perc

enta

ge

Domestic Saving Total Investment (Capital Formation) Resource Gap

Some Spill Over Effects?Remittances Inflows

0

20000

40000

60000

80000

100000

120000

140000

160000

2003 2004 2005 2006 2007 2008

Fiscal Year

NR

s in

mil

lin

s

Remittances (RRTN)

Share of Remittance Inflows in GDP

0.0

5.0

10.0

15.0

20.0

2003 2004 2005 2006 2007 2008

Share

Share of Total Deposits and Loans and Advances in GDP

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2003 2004 2005 2006 2007 2008

Fiscal Year

Rs

is in

mil

lion

Total Deposits Loans and Advances

Foreign Direct Investment

• Some studies indicate that only 40 percent of approved FDI projects come into operations.

Trends of Approved FDI

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

2003 2004 2005 2006 2007 2008

Years

Rs

in m

lns

Total

India

China

Others

Contd.

• Despite stagnating domestic saving trends, the national saving has surpassed total investment in recent years markedly ( except in 2006/07) as the current account surplus exhibits indicating at the same time low investment capacity

Employment, Poverty, Income Distribution and Livelihood

Employment ( Manufacturing)

• NLSS data show a declining trend of real wages of unskilled in urban areas and stagnating total wage income share of entire workers

0 100000 200000 300000

Number

1992

2002

2007

Yea

r

Comparison of Inter Census Persons Engaged and Employees

Total number ofemployeesTotal number ofperson engaged

• Although poverty data are not available for the post WTO accession period, trade liberalization partly may be indicative.– Poverty reduced from 42 in 1996 to 31

percent in 2004– At the same time, income distribution

worsened markedly. Gini rose to 41.4 in 2004 from 34.2 in 1996.

• Share of poorest in consumption decreased amidst stagnation in income share during the period 1996 to 2004

Share in per capita consumption

Share in per capita income

1996 2004 1996 2004

Poorest 20 percent population 7.6 6.2 5.3 5.3

Richest 20 percent population 44.9 53.3 50.3 53.4

• Informal sector employment is as high as 94 percent• Labor productivity in manufacturing and services is

declining• Food security and people’s livelihood is now a major

problem-35 districts in acute food deficit • More than 1 million households are landless, comprising

more than 23 percent of total households• Gender based exclusion is high in terms of access to

economic (low income, absence of opportunity), human (education, health) and physical assets (land, livestock etc). Same is true in case of poor and disadvantaged.

• Highly uneven development in rural/urban/remote and relatively accessible areas is manifesting overtime.

Major Issues (Domestic)• Urban centered consumption induced economic activities

and hence no productive investment enhancing sustainable/equitable growth

• Widening income disparity in an unprecedented way amidst deepening structural and institutional impediments

• Job loss among unskilled workers, growing informalisation of the labor market and reduction in labor productivity

• Gradual collapsing of cottage and small scale industries • Too much dependency on trade based revenue and

accompanying policy distortions • Cascading tariff structure discouraging high value added

and resource based industries • Problem of market and trade enhancing institutions

• Absence of country and commodity diversification amidst low backward and forward linkages

• Serious food security and people’s livelihood problem • Serious supply bottlenecks and absence of enabling

environment to the investors• Absence of institutionalizing wider consultation and

policy coordination led policy formulation and execution taking political economy into special consideration

• Above all encouragement to defective economic policy regime dictated by liberalization, deregulation and open up centered policies and even the absence of comprehensiveness amidst captured policies/trade/resources etc

International

• Failures to implement Doha Development Agenda in all three-fronts – i) enhance market access, ii) balance trade rules and iii) well targeted technical assistance and other components under July Packages

• Discriminatory/ineffective global financial architecture and ill suited global policy regime to the countries like Nepal

• Increased vulnerability in the economy due to global uncertainty and big unanticipated shocks-based example today’s global financial crisis and its contagion

• Ignorance to Food security and farmer’s livelihood issues ignored

Required Initiatives/ MeasuresDomestic

– Re-structuring and rationalization of tariff structure – Special incentive to small enterprises with focus on domestic

resource based and labor incentive industries through wider policy consultation processes

– Strengthening of market institutions and dismantling of syndicate and cartelling practices

– A comprehensive approach in reforms with focus on removing structural and institutional impediments for ensuring better access to financial and physical resources of the small enterprises

– Special treatment to food security and livelihood issues– Strengthening of trade capacity and trade related institutions– Stabilization Fund – Macro policy synchronization– Massive skill development program for raising productivity of

workers

Contd.

– Development paradigm shift for equity led development with accompanying policy changes by giving equal priority on import competing and export promoting industrialization. This will require:

• Massive investment in infrastructure and other related activities for expanding internal market

• Priority on easing supply bottlenecks and encouraging production through small producers

• High priority on cooperative modules of production, distribution and exchange

• Emphasis on developing production clusters and export processing zone in viable rural and semi-urban areas

• Massive investment in health and education • Poverty reduction and rural development programs at the

grass roots for raising purchasing capacity of the people

Contd.

International • Implementation of Doha Commitments in all three-fronts – i) enhance

market access, ii) balanced trade rules and iii) well targeted technical assistances and other components under July Packages

– From LDC perspectives:-Duty Free and Quota Free Market Access-the Hong Kong Ministerial Declaration vague despite commitment of facility to 97 percent products -Address other problems simultaneously

-rules of origin-Non-tariff barriers ( UNTAD estimates show 40 percent of LDCexports are affected by non-tariff barrier such as technical standards,sanitary and phytosanitary measures, custom rules and procedures,competition related restrictions etc.)-TRIPS-Preference erosion

Contd.

-Aid for trade with focus on technical capacity enhancing and removing supply bottlenecks etc -Improved and real market access with certain degree of flexibilities to pursues appropriate domestic policies especially in the areas of food security, farmer’s livelihood and safeguarding of small enterprises-Strong debt relief measures and stabilization fund for addressing unanticipated trade shocks of the LDCs-Removal of increased ambiguity between the multilateral and regional trading arrangements-New agenda: new global financial architecture and development paradigm shift at the global level for making international trade as a vehicle of development

Thank You