study on trade and poverty linkages in nepal

A Study on Trade and Poverty Linkages in Nepal

i

Final report on

A Study on Trade and Poverty Linkages

in Nepal

Submitted to:

Enhancing Nepal’s Trade-Related Capacity (ENTReC) (Nep/05/06)

GGoovveerrnnmmeenntt ooff NNeeppaall MMiinniissttrryy ooff IInndduussttrryy,, CCoommmmeerrccee,, aanndd SSuuppppllyy

Submitted by:

Dr. Pradip P. Upadhyay e-mail: [email protected]

Kathmandu, Nepal

DISCLAIMER: This research report represents the opinions of individual members/authors, and is not meant to represent the position or opinion of the Enhancing Nepal's Trade Related Capacity (ENTReC) project, the government or UNDP.


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Table of Content

Table of Content i

List of Tables iii

Acronyms v

Executive Summary vii-ivx

Chapter I Introduction: Trade and Poverty Linkages 1-17

1.1 Structure of the Economy 1

1.2 Macroeconomic Overview 2

1.3 Economic Growth 6

1.4 Sectoral Patterns of Activities 8

1.5 Agriculture and Rural Economy 11

1.6 Industrial Development 15

1.7 Macroeconomic Policy Adopted in the Plans 16

Chapter II Research Design 18-21

2.1 General 18

2.2 Theoretical Background 18

2.3 Objectives and Scope of the Study 19

2.4 Methodology of the Study 20

2.5 Organization of the Study 21

Chapter III Review if Literature 22-44

3.1 Emerging Concerns 22

3.2 Economic growth and productivity 24

3.3 Liberalization and Benefit to the Poor 25

3.4 Asian and African Growth Pattern 27

3.5 Trade policies in PRSPs 30

3.6 The Institutional Concern 32

3.7 Trade Integration in Economic Growth 35

3.8 Labor, Wages, and Employment 37

3.9 Study on Nepal 38

3.10 Conclusion 44


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Chapter IV Nepal’s International Trade 45-80

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

Chapter V Poverty Reduction, Human Development and Trade

81-100

5.1 Introduction 81

5.2 Poverty Profile 83

5.3 Chronic vs. Transient Poverty 86

5.4 Other Aspects of Poverty 91

5.5 Poverty Reduction Strategy Paper (PRSP) 92

5.6 PRSP and Millennium Development Goals (MDGs) 95

5.7 Impact of Trade Policy on Poverty 97

5.8 Conclusion 100

Chapter VI A Case of Tea Production and Its Impact on Poverty

101-100

6.1 Introduction 101

6.2 Status of Tea Exports in Nepal 102

6.3 Some Issues on Tea Production 105

6.4 New Initiations in Tea Sector 106

6.5 SWOT Analysis for the Tea Industry 107

6.6 Poverty Analysis 109

6.7 Summary 110

Chapter VII Summary, Conclusion, and Policy Recommendations

111-120

7.1

Summary 111

7.2

Conclusion 117

7.3

Recommendation 119

References 121-127


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List of Tables

Table Page

Table 1.1 Nepal: GDP by Origin at Constant Market Prices 10

Table 1.2 Size Distribution of Agricultural Land Ownership by HH and Region

11

Table 1.3 Size Distribution of Agricultural Land Ownership by HHs and Region

13

Table 1.4 Distribution of HHs by Land Entitlement Status and Region

13

Table 1.5 Land Holding Pattern of the Households 14

Table 4.1 Growth of Trade and its Relation with GDP at Current Price

46

Table 4.2 Growth of Export and Import and its Relation with GDP

47

Table 4.3 Export of Major Commodities to India 48

Table 4.4 Export of Major Commodities to Other Countries 49

Table 4.5 Import of Selected Commodities from India 50

Table 4.6 Import of Selected Commodities from Other Countries

51

Table 4.7 Share of Exports of Major Buying Countries from Nepal

52

Table 4.8 Share of Imports from Major Countries 52

Table 4.9 Direction of International Trade 71


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Table 4.10 Commodity Trade by SITC Group 72

Table 4.11 Export of Major Commodities to India 73

Table 4.12 Export of Major Commodities to Other Countries 75

Table 4.13 Import of Selected Commodities from India 76

Table 4.14 Import of Selected Commodities from Other Countries

77

Table 4.15 Income and Expenditure of Convertible Foreign Exchange

78

Table 4.16 Balance of Payments Summary 79

Table 5.1 Poverty Situation in Nepal 85

Table 5.2 Poverty Profile: NLSS I and NLSS II 86

Table 5.3 Poverty Measures for Nepal based on Nepal Living Standards Survey (NLSS): 1995/96 and 2003/04

90

Table 5. 4 Incidence of Poverty Among Rural Household Groups

92

Table 6.1 Status Tea Production in Nepal (2005/06) 102

Table 6. 2 Export of Nepal’s Tea in Selected Countries 104


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Acronyms

ADB : Asian Development Bank

ADB/N : Agricultural Development Bank, Nepal

AfT : Aid for Trade

AGDP : Agricultural Gross Domestic Product

AIC : Agricultural Inputs Corporation

APP : Agriculture Perspective Plan

ASD : Agricultural Statistics Division

CBD : Convention on Biological Diversity

CBS : Central Bureau of Statistics

CPRC : Chronic Poverty Research Centre

DDA : Doha Development Agenda

DFID : Department for International Development

DOA : Department of Agriculture

DTIS : Diagnostic Trade Integration Studies

EAD : Economic Analysis Division

FDI : Foreign Direct Investment

GATT : General Agreement on Trade and Transit

GDP : Gross Domestic Product

GSPs : generalized system of preferences

GTZ : German Development Agency

Ha : Hectare

HDI : Human Development Index

IFAD : International Fund for Agricultural Development

IMF : International Monetary Fund

MDGs : Millennium Development Goals

MOAC : Ministry of Agriculture and Cooperatives

MOF : Ministry of Finance

MOLD : Ministry of Local Development


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MTEF : Medium Term Expenditure Framework

NAMA : non-agricultural markets access

NBL : Nepal Bank Limited

NFC : Nepal Food Corporation

NHDR : Nepal Human Development Report

NIDC : Nepal Industrial Development Corporation

NLSS : Nepal Living Standards Survey

NPC : National Planning Commission

NPC : National Planning Commission

NRB : Nepal Rastra Bank

NTDC : National Tea Development Corporation

OGL : Open General License System

PAF : Poverty Alleviation Fund

PMAS : Poverty Monitoring and Analysis System

PMD : Poverty Monitoring Division

PRGF : Poverty Reduction and Growth Facility

PRSP

: Poverty Reduction Strategy Paper

PSIAs : Poverty and Social Impact Assessments

R & D : Research and Development

RBB : Rastriya Banijya Bank

RBB : Rrastriya Banijya Bank

SFDP : Small Farmer Development Programme

TYIP : Three Year Interim Plan

UNCTAD : United Nations Conference on Trade and Development

UR : Uruguay Round

VAT : Value Added Tax

WTO : World Trade Organization


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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.

2. Besides having a long experience of planned development and several initiations to promote economic growth and industrial development, the economy is still traditional. Over the years, the per capita income of the people of Nepal has gradually increased, and has changed the consumption pattern. The demand for import-goods has increased and has caused increase in trade imbalances.

3. Rural agricultural production system is characterized as subsistence farming. Due to land distribution pattern and the structure of land ownership, most of the rural people are small and marginal farmers. Majority of the population have limited land to cultivate due to skewed land distribution pattern. Six percent of the population occupies 33 percent of the agriculture land while 40 percent operate only 9 percent. About 78.1 percent of the working population of Nepal is engaged in agriculture. They are mostly poor. Traditional and primitive agricultural base has not allowed them to rise from the extreme poverty level.

4. NLSS II shows that there is still 30 .8 percent of the population living below the poverty line. Of the total rural population, 34.6 percent live below the poverty line and suffer from abject poverty. A large number of the people of these areas are poor and illiterate and have poor human development level.

5. Several research works have strengthened the foundation of literature on poverty, and trade poverty linkages. The relationship between trade and poverty varies with a country’s level of development as well as the


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structure of its economy. Sustained poverty reduction occurs through the efficient development and utilization of productive capacities.

6. The question of liberalization and its impact on the benefit to the poor is also debatable. The literatures support that trade liberalization improves growth prospects by enhancing productivity temporarily through more efficient resource allocation and permanently through the import of modern technologies and effects on competition.

7. The East Asian countries were successful in overall development and poverty reduction because they featured the institutional characteristics of the developmental state, where as most of the African countries failed to harness such features. State capacity to deliver good quality interventions in the economy has been central to Asia’s success and to Africa’s problems.

8. In recent years, pro-poor trade policies were adopted in PRSPs. However, many developing countries could not give priority to export promotion through labor-intensive production and value addition. The redistributive effect of trade reform is a major factor impeding its launch in poor countries. Successful poverty reduction requires outward-looking development policies that put constant attention to trade.

9. In case of Nepal, the relationship between trade and poverty appears to be more contentious, though there is broad agreement that in the long run liberalization can help reduce poverty levels.

Nepal’s International Trade

10. Trade has become more significant during the years of liberalization. The share of total trade to GDP has remained to some extent constant ranging from a minimum of 35 percent to a maximum of 43 percent in the last decade under review. Till 2000 , 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.

11. The growth in export after the adoption of liberal economic policies has highly contributed in economic growth. Such growth in export was due to the growth of labor-intensive industries like carpets and garments which later on seized to grow because of structural problem and non-tariff restrictions.


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12. There is positive growth in export during these years, except in 2001/ 02. Maximum annual change of export is noted in 1999/ 2000 when export has increased by about 39.65 percent. There is also similar trend in import during these years, but the values are less erratic. The maximum value of import is also seen during 1996/ 97, with 34.7 percent change. The ratio of export to GDP as well as ratio of import to GDP is seen increasing, indicating the growth of trade than GDP itself during this period.

13. The ratio of export to GDP is 9.67 percent in 2005/ 06 while the ratio of import to GDP is 27.89 percent in the same period. The share of import 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, 2007-10 (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.

15. Nepal’s landlocked position and heavy dependence on a single market for its trade has also been a cause of trade barrier. 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 movements. From the perspectives of Nepal’s participation in the multilateral trading system, Nepal needs to diversify its trading partners mainly to reduce the negative implications of dependence on a single large country. Further trading alliance with other LDCs will be beneficial for Nepal.

Poverty Reduction, Human Development, and Trade

16. Poverty in Nepal is deep-rooted and persistent. According to the NLSS 2003/04, 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 34.6 percent and urban poverty is at the level of 9.6 percent. By Development Region, the incidence of poverty is lowest in the Central Region (27 percent) and highest in the Mid-Western Region (45 percent). From the regional perspective, it is estimated that 7.5 percent out of the total poor dwell in


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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 major agro-ecological zones. Rural poverty incidence is highest in the hills (42 percent) followed by the mountains (33 percent) and the Terai (29 percent).

18. Land-ownership is the crucial factor determining poverty as 39 percent of the people having less than 0 .2 hectares of land are poor while only 24 percent of those are poor who own more than 0 .2 hectares of land. The data also substantiate the significance of literacy/ education in reducing poverty. A slower poverty reduction rate among households with greater number of children has caused much hardship to women.

19. In recent years, poverty reduction has been the overriding concern of the planned efforts for development. The first attempt to formulate a separate plan with long-term perspective for poverty alleviation was made 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 (2002-07), also known as Nepal's Poverty Reduction Strategy Paper (PRSP), had recognized the role of local bodies, community organizations, and NGOs in development and reflects the government's commitment 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.

21. PRSP of Nepal emphasized in maintaining macroeconomic stability and implementation of structural and policy reform in key areas. Annual monitoring of the status of poverty and other targets are set to ensure effective implementation of programs, and process monitoring has been given due importance. It is well linked with annual budget through the Medium Term Expenditure Framework (MTEF).

22. The MDGs set quantitative poverty reduction targets and specific goals in health, education, gender equality, environment and other aspects of human development. Some of the indicators and targets of the MDGs


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are difficult to achieve by 2015. The second MDG progress report of 2005 emphasizes on setting and implementing future national development strategies to this direction.

23. The decline in transport costs, increasing yields of cash crops and transformation of agriculture, and increase non-farm employment contribute immensely in poverty reduction in Nepal. Nepali producers need to minimize cost of production primarily of exportable goods so that the goods can gain access to the international markets. .

24. Nepal has a daunting challenge to reduce poverty. Attempts 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 employment should be increased substantially through public works programs. Furthermore ? ? cash crop production should be further increased, ? ? tradable goods production should be diversified, ??large-scale temporary employment through public works programs should be created, and ? ? transport costs should be reduced. All these should be done all together and concomitantly.

A Case of Tea Production and Its Impact on Poverty

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 3,300 ha which increased to 18,726 ha by the end of 2005/ 06 at an annual growth rate of 19.0 percent in last ten-year period. In 1995/ 96, the total tea production was 2,100 M Tons which increased to 14,600 ha by the end of 2005/ 06 at an annual growth rate of 21.4 percent in last ten-year period. At present there are 157 tea estates and 27,494 farmers involved in tea production. The share of total tea production between the tea estates and the small farmers/ holders is almost 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 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 times higher than the cereal crops. So the small and marginalized farmers have been able to gain substantive income from the tea plantation and alleviate their poverty level. Irrespective of other factors, the income earned by these farmers


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has been helpful to gain a minimum level of human development as spelled in the MDGs.

27. With the assumption that one worker’s income is sufficient to meet the poverty alleviation level income; the workers families are found living above the poverty level. In this context, with the assumption of a family of 5.5 members, it is assumed that it has directly benefited about 660,000 population of workers family. Similarly, a total of 151,271 population of small and marginalized farmers have received substantive benefit from tea plantation.

28. Consequently, many new entrant-farmers are found attracted in this cash crop and given up traditional farming. The farmers are now growing tea and utilize their income from tea for purchasing essential food grains. The adequate knowledge of technology, and marketing 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. Smallholders’ tea has the potential to deliver poverty reduction benefits. As a crop, tea has the attraction of a regular income and being relatively easy to grow, once established. There is high potential to impact on a significantly greater number of households.

Findings and Suggestions

29. In the past decade, Nepal has broadly maintained macroeconomic stability; however, attaining sustained, high, and sufficiently broad-based economic growth has not been achieved. The private sector investment has not been high to enhance production of agriculture and industrial goods. As a consequence the export volume has not increased. The decline in poverty observed in the recent years is more attributed to agriculture, micro finance activities, and remittances.

30. In case of Nepal, the relationship between trade and poverty appears to be more contentious, though there is broad agreement 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 competitive environment in world market is intense that Nepal has to face at present and in the future. Therefore, Nepal has to search and


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develop those few specific products that could secure international market.

31. Opportunity for Nepal is broad and extensive based on the topographical and climatic features of the country. The agro-forestry products available in Nepal can secure world market. However, the economy 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 comparative advantage in competing with industrial products of two neighboring giant economies: India and China.

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 employment to the poor and helps reduce poverty and achieve human development as specified in the MDGs.

33. As an example of labor-intensive industry, tea sector of Nepal may provide a great prospect to the Nepali entrepreneurs to penetrate in the world market. High rate of return may further attract many new entrant-farmers. The experience of Ilam district in tea production may be applied in coffee and herbs plantations which will have long-term impact on reducing poverty establishing trade linkages.

34. Attention should be given on maintaining macroeconomic stability for sustained economic growth and pro-poor economic activities. Policies for agriculture infrastructure should be developed to promote export of agro-forestry based raw products as well as processed goods.

35. Production of labor-intensive agro-forestry farming and manufactured goods should be prioritized to attain higher poverty reduction through social inclusion of disadvantaged and marginalized groups of people. Government supports such as extension services, and irrigation and fertilizer subsidies should be increased.

36. Considering negative effects of trade openness on the families relying on subsistence agriculture, the government 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 primarily allocated for implementing poverty reduction and human development programs. It should address


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economic services such as agriculture and rural infrastructure. In this context, foreign aid and donors’ supports should be enhanced.

38. To establish sustained industry and trade linkages, a long-term comprehensive industrial plan should be formulated and strategy should be set to invest in the industries producing goods for international market. Expansion of manufacturing will thus lead employment and poverty alleviation through backward and forward linkages. This would further enhance international trade competitiveness through increased level of supply capacity.

39. Government programs should be designed to promoting small and medium enterprises in the rural as well as urban areas so that the produces could access international market and enhance the level of exports.

40. To promote 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, measures 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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1

Chapter I

Introduction: Trade and Poverty Linkages

1.1 Structure of the Economy

Nepalese economy has traditional as well as modern modes of economic activities. It is featured as having dualistic characteristics: on the one hand it has monetized modern economy and on the other non-monetized traditional economy. Comparatively, urban areas have physical facilities like roads, electricity, health and educational institutions, means of modern communication and other infrastructure necessary for the development of industry, trade, transportation etc. The urbanized economy is monetized and relatively modern. On the other hand, there are vast rural areas where 84 percent of the total population of the country lives. The development of infrastructure like road, communication, electricity etc. is negligible in these areas, where people are largely dependent on agriculture. The technology used is traditional and the investment is very low. Large number of the people of these areas is poor and illiterate. The economy of this rural sector is, therefore, less-monetized and traditional.

The influence of macro-economic instruments like money, foreign exchange, capital market, government finance etc. lies mostly upon the monetized modern economy, and less upon the less-monetized traditional economy of the rural areas. With the adoption of open policy for grain trade, the cheap import of rice from India, has pressurized the farmers to sell their products at lower price. In the same way the farmers have to pay high price for the imported fertilizer, which is no more subsidized by the government. In this way, the rural areas are affected. The rural areas, where roads are constructed, are influenced with the supply of manufactured products from the urban areas. No attempt has been made in the area of investment for the improvement of the agriculture of hills and mountains. If something is done, it is not sufficient for the development of the rural areas. The macro economic policy measures could not bring substantial improvement in the socio-economic life of the people of such areas. The rural sector is still having more closed economy.

During the last one and half decade, the economic 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 economic ideas in the form of globalization have influenced the Nepalese policy makers to adopt the liberal economic policy.


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Due to the open boarder and free movements of goods and services between Nepal and India, economic 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 20th. century (1990-2000), India has not only begun to implement the process of economic reforms but has also changed its policy from the government regulated mixed economy to the liberal and open market economy giving greater emphasis on privatization and foreign investment. Similarly, its other neighboring country China has also changed her policy from a fully controlled command of economy to open market economy from early 80s. 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.

1.2 Macroeconomic Overview

Recent Macroeconomic Policy Reforms

In 1990, Nepal entered into a new political system with the adoption of Multi-Party Democracy. A new Constitution was promulgated in November 1990 , ending direct rule by the King. A new elected government came in power after a general election in May 1991. The new Government abandoned the former 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 Government negotiated a new Enhanced Structural Adjustment Facility (ESAF) arrangement with the IMF. Thereafter, Nepal initiated sweeping economic reform programs in almost all sectors of the economy, including fiscal and monetary policies, trade and investment, financial and capital markets, and other social and economic sectors.

Fiscal Policy Reforms

The role of the government in economic activities is made limited. In the fiscal policy, front macroeconomic stability was given top priority. To this end, government emphasized upon cut in unproductive expenditures. The tax system was drastically reformed. Top tax rates were reduced and the tax base was broadened. Import duty rate was reduced from the highest 300 percent to 110 percent . The import duty rates were reduced to six percent. The reform also reduced the average as well as the dispersion of tariff rates to minimum and quantitative restrictions on the exports of food items were abolished.


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Corporate tax rate was reduced and the maximum income tax rate for corporate and partnership business was reduced to 25 percent from 33 percent . Self-assessment tax payment system was given prominence. A number of measures were introduced in order to improve 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 items to 5 items and rates were converted from specific to advalerom. The rates were also rationalized. New measures were introduced to mobilize additional tax revenues to the level of 0 .5 percent of the GDP each year. Domestic borrowing was to be kept below 1 percent of the GDP. The size of the bureaucracy was reduced to contain the administrative expenses.

Foreign Trade and Foreign Exchange Policy Reforms

In the foreign trade, front almost all import restrictions were withdrawn. All items, 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 simplified. Moreover, quantitative restrictions and import licensing were eliminated and full convertibility for all current account transactions was introduced.

The trade policies were dramatically 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, imports of raw materials, consumer goods, industrial machinery, 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.

The trade policy of 1992 was implemented. Necessary institutional changes were carried out to deregulate the control. Banking and other commercial sectors adopted the changes and grew accordingly. Making necessary changes in the tariff rate, the government further supported the process. The invoice valuation process was abandoned, and recognition was made to the invoice submitted by traders. These steps supported the growth of trade.

The reform policies as declared by the government in 1992 are yet to be completed. The government’s objectives for granting full convertibility to Nepalese currency in current as well as capital account have not yet been realized. The adoption of full convertibility to Nepalese currency in capital account has been deferred.


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The trade is still not completely free. There are restrictions to trade by Letter of Credit mechanism. In the case of export, there is no allowance for credit shipment 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 determined by free market 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 commercial banks on the earnings from exports of goods and services. Additional measures taken to increase exports were the introduction of bonded-ware house, duty draw back scheme and the initiation of the multi-modal facility and dry port.

Foreign Investment, Industrial Policy Reform and Privatization

One window system was introduced to facilitate industrial entrepreneurs. The Industrial Enterprise Act (1992), and the Foreign Investment Act and Technology Transfer Act (1992) were enacted in line with the open, liberal and market oriented policy. Foreign investment was permitted in all industries except in the case of some specific industries, such as, defense, cigarette, tobacco and alcohol related industries. Technology transfer was allowed even in cottage and small industries.

Domestic as well as foreign private sector was allowed to invest in hydro-electricity generation. Foreign investors were allowed to remit their dividend and commitment was explicitly made 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 development of infrastructures like roads, transport facilities, and electricity on BOT principles. It was accepted to limit the rate of the government in providing social services, maintaining law and order and providing infrastructure facilities.

Monetary Policy Reforms

The monetary policy was shifted to indirect instrument like open market operations (OMOs). The government 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 formulation and implementation of monetary policy by enacting new Central Bank Act. Reforms on the following were also made:


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Interest Deregulation

Foreign exchange rate fixation mechanism abolished and the exchange rate determined on the basis of the market demand and supply. Liberal policies adopted to allow the operation of financial institutions such as commercial banks, finance companies, cooperative and NGO based financial organizations, insurance companies, and development banks in private sector.

Financial Policy Reforms

The government owned financial institutions, such as, Nepal Bank Limited (NBL), Rastriya Banijya Bank (RBB), Nepal Industrial Development Corporation (NIDC), and Agricultural Development Bank, Nepal (ADB/ N) are not functioning satisfactorily. Because of the high political influence, high proportion of non-performing 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 companies. This measure is expected to improve the financial position of these two banks. Similarly, the government has initiated to restructure and divest the NIDC and ADB/N.

Economic Sector Policy Reforms

The adoption of multiparty-based liberal political system in 1990 has provided an open environment for the promotion of economic activities. This has led to the development of liberal economic policy of the government. The government has initiated the process of privatization of public enterprises. Various types of policy reforms have been made in the economy. Basically two approaches have been taken to have sectoral policy reforms. First, it has been endeavored to reduce the regulatory mechanism and secondly, the promotional activities are initiated. The following are the core areas of reform adopted in Nepal:

New reforms in Industrial Policy and changes in the regulation of industries and foreign investment

More facilities for FDI

Withdrawal of governmental subsidy for inputs in agriculture sector

No market intervention in agricultural products

Agriculture and Land Reform

Nepal has adopted a 20 year Agriculture Perspective Plan (APP) in FY 1997/ 98 as a long-term approach to accelerate agricultural growth and to reduce poverty. APP has given higher priority to invest in irrigation, rural electrification, rural roads, increased supply of fertilizers and strengthened agricultural research geared to generate appropriate technologies, promotion of high value crops, livestock development, improvement of agro-business and


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forestry. The government has removed subsidy in fertilizers, and private sector has been given permission to import and distribute fertilizer.

All these factors have demanded for drastic reforms in the rural areas. It is thought that the land reform is an essential instrument that would help to bring such reforms in the rural areas. In Nepal, there is political consensus on the need for land reform program. A high-level land reform commission was formed in 1995 and it had prepared a comprehensive program of land reform and submitted 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 makers are reluctant to initiate it. It is being felt that Nepal is not in a position to acquire more 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 market responsiveness needs to be developed among the Nepalese land owners rather than holding land for social prestige and security. This is possible with the adoption of appropriate land reform policy.

1.3 Economic Growth

Analysis of the GDP growth trend during 1980s and 1990s indicates that real GDP growth during 1990s was little bit higher than during 1980s. After liberalization, the GDP growth rate has averaged around 4.4 percent per annum as compared 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 much 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. Among the non-agriculture sector, improvements were observed in trade and services sector but the initial increase in manufacturing sector growth could not be sustained due to the political instability, lack of competitiveness of the domestic industrial sector and the external factor.

During the post liberalization period, some progress was observed in savings and investment. Average savings rate increased from 10 .6 percent in 1985/ 86 to 15.0 percent in 1999/ 00 . 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 market liberalization, acted as an impetus 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 improvement is needed to reduce the saving-investment gap, which was widening slightly during this period.


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During the post-liberalization period, the average investment increased by 23.6 percent per annum as compared to 19.1 percent in the pre-liberalization period. Investment as a percentage of GDP increased up to 27.3 percent in 1995/ 96. But during this period, there was increasing gap between savings and investment due to the higher reliance on external finance.

The rise in investment during the post-liberalization period can be observed as a positive impact. Nepalese economy dominated by the agriculture sector has been a trend of maintaining agriculture activity with limited investment. High dependency of population in agriculture, land distribution pattern, and dual ownership land system has created such an economic environment, which is not favorable for investment. When the country is exposed to the process of liberalization and globalization, economic sectors other than agriculture are found to be attractive. So far as other economic sectors like industry, trade and services are concerned, they have not any “inherent weakness” for low investment, as overall investment might have grown during the post liberalization period. It is apparent in the first half of 1990s. However, in the second half of 1990s, there is relatively slow growth in investment in most of the sectors.

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 2006 — mainly due to the slow increase in net foreign assets. The major source of monetary 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 monetary growth in many of the years, its contribution to money supply has been slow.

Inflation

Inflation in Nepal is more a structural phenomenon than a monetary one. The supply side constraints are more pronounced than the demand side variables in affecting the rate of inflation. The role of monetary policy is very limited 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 demand side ones in influencing the rate of inflation in Nepal.

In regard to the public expenditure, the regular expenditure growth was higher than that of development expenditure. The regular expenditure grew at 20.9 percent in the liberalization period as compared to 17.2 percent during the pre-liberalization period. However, this growth in the regular expenditure


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could be attributed to the change made in the structure of public expenditure. The government grouped some items of the development expenditure into the regular expenditure category. However, in 1998/ 99, there has been negative growth in development expenditure. There is a decline in the development expenditure of the government during the post liberalization period, which is more influenced from growing Maoist problem than any other factors. Apart from the Maoist problem, political instability with frequent changes in the government during the period has influenced the development expenditure.

In the post-liberalization period, the government revenue grew by an average annual rate of 27.6 percent during 1991-95 and slowed down in late 90s. The major reason for this decline was political instability and the introduction of the VAT that had created an impasse between the government and business people. Definite declines were noticed in non-tax revenue in the post-liberalization period due to the utmost emphasis on tax revenue rather than on non-tax revenue.

1.4 Sectoral Patterns of Activities

Sectoral growth rate of GDP reveals that the growth of agriculture during 1995-2006 was about 2.5 percent on an average, almost equal to the population growth rate. The growth rate of non-agricultural sector remained 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 1990s, the growth of electricity sector was highest as manufacturing sector recorded the highest growth in the first half of 1990s. The growth rate of transportation and communication services was also observed high during that period. During the second half of 1990s, almost all the sectors witnessed a slow growth. The enthusiasm brought about by rapid economic liberalization in early 1990s 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 economy 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 volume as well as in relative prices. The terms of trade have also gone in favor of the non-agricultural sector during 1990s. All sectors, except agriculture, have increased their share in GDP. The share of the manufacturing sector has grown fast, particularly during 90s. This is attributed to the expansion of export-oriented industries in 1990s, 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/ 2000. The share


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of manufacturing in GDP had increased by 6 percent in an average in mid 1995/96 to 10 percent in 1999/2000.

The share of the trade, restaurant, and hotel sector remained more or less same. The share of transportation and communication 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 manufacturing including mining. Transport and trade sectors witnessed a consistently high growth rate during 1995-2006 though suffered to some extent in the beginning of present decade. The construction turned to be the sector of the highest growth rate during 1990s. 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 2000 to 2006 period. The details are presented in Table 1.1.


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Table 1.1: Nepal: GDP by Origin at Constant Market Prices

Rs in Million

Sector 2000/0

1 2001/0

2 2002/0

3 2003/0

4 2004/0

5 2005/0

6 2006/0

7

Annual Growth

in %

Agriculture 155625 160422 165761 173734 179811 181811 183001 2.74 Agriculture and forestry 153781 158417 163676 171394 177304 179056 180163 2.67

Fishing

1844 2005 2085 2340 2507 2755 2838 7.45

Industry 73561 74197 76492 77588 79925 83337 85146 2.47 Mining and quarrying 1817 1977 2040 2031 2169 2334 2474 5.28

Manufacturing 38409

36364

36380

37163

38136

38898

39737

0.57 Electricity, gas and water 7750 8631 10274 10693 11117 11522 11893 7.40

Construction 25585 27225 27798 27701 28503 30583 31042 3.27

Services 196268 192783 199873 213505 218897 229236 238608 3.31 Wholesale and retail trade 69928 61837 63233 70066 65694 68099 66326 -0.88

Hotels and restaurants 8459 6917 7056 7955 7525 7976 8200 -0.52 Transport, storage and

communications 31425 34055 35825 38509 39272 40982 44305 5.89

Financial intermediation 11455 11892 12090 12838 15957 18594 20186 9.90 Real estate, rending, and

business activities 35267 33543 32212 31538 34700 35071 38104 1.30

Public administration and defense 5288 7237 8070 8019 8551 9140 9469

10.20

Education 17372 21030 23913 25138 27606 28345 29929 9.49 Health and social work 4178 4487 5171 5487 6109 6539 6876 8.66 Community, social and

personal service

12896 11785 12303 13955 13483 14490 15213 2.79

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

Value of imputed banking services 12026 13309 12428 16173 17180 18431 19912

8.77

Indirect taxes less subsidies 28090 27957 29789 32350 35574 33958 35824 4.14 Nominal GDP at market price 441518 442050 459487 481004 496027 509911 522667 2.85

Contrib’n to Total GDP in % Agriculture

36.58 37.53 37.49 37.38 37.57 36.77 36.11 Industry 17.29 17.36 17.30 16.69 16.70 16.85 16.80 Services 46.13 45.11 45.21 45.93 45.73 46.36 47.09

Source : Economic Survey(s), Ministry of Finance.


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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.

1.5 Agriculture and Rural Economy

In Nepal, agriculture has been the main source of livelihood for majority of people and is the backbone of the economy. However, Nepal’s agriculture is still heavily depended on rain fed condition as the development of irrigation facilities is limited. Only 70 percent of agricultural land has irrigation facility in summer, of which 38 percent land has year-around irrigation facility. Limited irrigation and unreliability of rainfall have resulted in the fluctuating production trend in the last decades.

Cereals (paddy, maize, wheat, millet, and barley) play determining 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 65.03 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.

Existing Pattern of Land Distribution

The bottom 40 percent of the agriculture HH operate only 9 percent of the agricultural land area, while the top 6 percent occupy more than 33 percent . The concentration index for agricultural land is 0 .54 reflecting a highly uneven distribution of the most dominant productive resource of the country (CBS 1997).

Table 1.2: Size Distribution of Agricultural Land Ownership by HH and Region

(In Percent) Region/holding < 0.5 Ha 0.5-2.0 Ha > 2.0 Ha

Mountains 41.6 44.3 14.1 Hills 45.8 47.6 6.6 Terai 33.2 47.1 19.7 Nepal 40.1 47.0 12.8

Source: CBS 1997


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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 mountains and 33 percent in the Terai. 20 percent of households in the Terai have a holding of more than 2 ha as compared to only 6.6 percent in the Hills and 14 percent in mountains. This points out the relatively small size of landholding in the Hills, as compared 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.

Land Tenure and Tenancy

The dominant type of land entitlement in Nepal is owner-tiller. About 85 percent of the operated land is owner-operated and the remaining 15 percent is rented (Table 1.3). Amongst the agricultural HHs, 95 percent operate their own, whereas 6.4 percent also rent out part of their land. About 29 percent of the HHs work on rented land along with their own land, about 5 percent of the HHs works on rented land only (Table 1.4).

Land system in Nepal is besieged by multifarious problems despite many attempts for reform. First, there is the problem of land tenure, which embodies dual ownership between the landowners and tenants, with neither party motivated to invest on land nor benefit from the resulting gains. The Rural Credit Survey (NRB 1994) reports that investment in the land improvement is less than 3 percent of HH income. The unequal distribution of land together with the very low size of holdings of the majority of the HHs is another problem. In addition, studies indicate deterioration in land fragmentation accompanied by a further fall in the average size of holdings. As a part of this vicious cycle, the incidence of landlessness has been increasing rapidly, and the small holders are being marginalized and converted into the landless workers relying on scare wage employment. This tendency is adding to the number of the rural poor, as real wages and the number of working days are not rising. In addition, technical changes are also limited by the size of holdings, in addition to other institutional obstacles, viz., inadequate credit facility, low literacy rate, low expenditure on education and unfocused government policies.


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Table 1.3: Size Distribution of Agricultural Land Ownership by HHs and Region

(In Percent) Region/holding % of total operated land % of total owned land

Owner Operated

Rented Owner Operated

Rented

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

Table 1.4: Distribution of HHs by Land Entitlement Status and Region

(In Percent) Region/holding Self owned

land Rented out

land Rented in land

Rented in 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

Land Ownership Pattern

Only about 17 percent of the total land area of the country is comprised of the agricultural land. The per capita landholding is 0 .14 ha. Land ownership is highly fragmented. 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 more than four land parcels per holdings (CBS:1997).

Regional variation in the distribution of agricultural land is substantial. The Terai covering only 17 percent of the total land area comprises of 49 percent of the total agricultural land. The Hills and Mountains cover 68 percent and 15 percent of the total land area, and account for 40 percent and 1 percent of the agricultural land respectively.

The owner apparently cultivates most of the agricultural land in Nepal by himself. It accounts for nearly 93 percent of the total landholdings. The proportion of rented out land is thus only 6.4 percent (Table 1.5). The larger the size of landholdings, the higher the proportion of land rented out. The proportion of land rented out is less than 5 percent for landholding of less than 1 ha, 11 percent for holding of 3 to 4 ha and about 40 percent for holding of more than 5 ha (Table 1.5).


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Table 1.5: Land Holding Pattern of the Households

Size of holdings Total Rented out Non-rented

% % %

Under 1 ha 1877.7 69.4 88.7 4.7 1789.0 95.3 1 ha and under 2 ha 529.5 19.6 32.2 6.1 497.3 93.9 2 ha and under 3 ha 168.5 16.2 15.0 8.9 153.5 91.1 3 ha and under 4 ha 59.6 2.2 6.4 10.7 53.2 89.3 4 ha and under 5 ha 28.6 1.1 3.8 13.6 24.7 86.4 5 ha and under 10 ha 31.9 1.2 6.2 19.4 25.7 80.6 10 ha and over 8.2 0.3 1.6 19.5 6.6 80.5 Total holding with land 27.4.0 100 153.9 5.7 2550.1 94.3 Holding without land 31.1 0.9 312.0 Total area of holding 2736.1 154.8 2581.3

Source : National Sample Census of Agriculture, 1991

The current scenario of agriculture sector has distinctly influenced the poverty level in Nepal. The three important trends and their effects are exhibited below:

Trend Effect

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.

The land distribution is very skewed with 6 percent if the population occupying 33 percent of the land and 40 percent of the agriculture household operate only 9 percent of the agriculture land.

Majority of the population have limited land to cultivate and they have to carry on agriculture activity for survival.

There is arrangement of tenant in the land, thus establishing dual ownership of landowner and tenant.

Such system is prohibiting investment 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.

These three factors have cumulative effects on creating hindrances for agriculture development and poverty is rampant in Nepal.


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1.6 Industrial Development

Since 1956 all the plans have provided priority to industrial development. Establishment of Industrial Development Centre, formulation and amendments of Industrial Policy, Enactment of Factory and Factory Workers Act, Establishment and operation of Industrial Estates, priority to the private sector for industrial development, regional balance policy, export promotion and import substitution policy, generating income and employment are the prioritized issues for the industrial development in Nepal.

The industrial classification in Nepal for the purpose of information is categorized in two groups – manufacturing establishments and cottage and small-scale industries. This division is simply based on the number of employment generated by the establishment. The first is employing 10 persons or more labor in a unit, where the later is employing less than 10 persons. To measure the growth of industrialization is difficult because of its change in the definition and concepts over the years.

The decline in the industrial establishment and employment could be related to open policy adopted by the government that encouraged the imports of cheap products from neighboring India and China.

The 1991/ 92 Censuses of Cottage and Small-scale industries have reported 46,410 establishments providing employment to 86,140 persons. Some of the large and medium industrial establishments are based on the joint venture and foreign investment, but it is not at satisfactory level despite the continuous efforts of the government. To attract foreign investment for the industrialization of the country, the government had enacted Foreign Investment and Technology Transfer Act 1992, and Industrial Enterprises Act 1992, which laid due emphasis on import of capital, modern technology, management, technical skills, access to international markets, development of cooperative attitude and awareness about increasing productivity. Foreign investment at current time is open to all type of industries except those relating to defense, cigarette, bidi and alcohol (excluding 100 percent export oriented). Technology transfer is allowed to the cottage and small-scale industries. Nepalese government has ensured various facilities and commitments to attract the foreign investment. Despite these various efforts, the growth of industrial sector, particularly the manufacturing sector, has to face a set back after the adoption of liberal economic policy.

The industrial pattern shows that there are very few large scale industry establishments in Nepal. It is 2 percent of the total industry, when cottage and small scale industries are excluded from the statistics. Even many “large”


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industries in this category are, in fact, only of medium scale when compared with the standard of other countries. Many reasons could be assumed for such limited number of the large scaled industries. Weak demand 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.

1.7 Macroeconomic Policy Adopted in the Plans

The challenges faced by the Nepalese Economy are addressed through the formulation of periodic Plans. These Plans have taken into account the development approaches of the government, the development priorities, sectoral programs, the regional and the district development plan and specialized programs to address the cross cutting issues, such as, poverty, environmental degradation, gender imbalance, poor governance and inadequate decentralization. During the decade of 1990s, when the liberalization process was at the full swing in the world, Nepal also adopted liberalization policies in all the plans.

These Plans aimed at achieving sustainable economic growth, poverty alleviation, and reduction of regional imbalances. To achieve these objectives, policies have been envisaged to create environment favorable to open and competitive growth of industries. Legal and policy frameworks were developed for the encouragement of private as well as foreign sector for the investment in industrial sector. Initiation was taken for appropriate change in laws and policies for effective participation of private and foreign sector.

The Ninth and the Tenth Plan adopted poverty reduction strategies. The policy of Tenth Plan focused on efficient mobilization of resources with economic 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 economic 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 more effective and result oriented management and reduce the drawbacks of Plan implementation. It has given more emphasis on the infrastructure development. The Plan aimed for coordinated development for the maximum utilization of all kinds of sources for the infrastructure, such as, highway, air


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transport, communication and information system, hydropower generation, electricity distribution system and development centers, for achieving sustainable and broad economic growth. Government investment was considered as an important investment on the highway, electricity distribution system, airport and development centers, and besides this, the concept is made to invite private sector with an appropriate policy.

The policies of the Plans were helpful for maintaining macroeconomic stability as well as for creating positive impacts in non-agricultural sectors. But, dependency on monsoon 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 mobilization 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 remained weak towards the end of the Tenth Plan.


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Chapter II

Research Design

2.1 General

The present study is carried on the basis of the terms of reference provided by the UNDP supported project “Enhancing Nepal’s Trade-Related Capacity (ENTReC) (NEP/ 05/ 006).” The study was initiated in August 2007 and completed by October 2007.

2.2 Theoretical Background

The linkage to establish the interrelationship between trade, growth, and poverty generally concerns the relationship between trade and growth and the relationship between growth and poverty. While many studies have concluded that there is a positive association between trade and growth, most are unable to identify causality. Does trade openness lead to growth or does growth lead to trade openness? For instance, the richer a country gets the more inclined it might be to open up to the outside world. An alternative explanation might also be that both are caused by a third factor such as the quality of institutions in a country that impacts positively on both the prospects for enhanced growth as well as the effectiveness of trade policy.

The problem is made even more 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 reforms implemented sequentially or in tandem.

However, the majority of studies do conclude that trade liberalization is good for growth and that increased opportunities for private enterprise to operate within and across borders provides a positive stimulus to growth. This relationship is usually explained by the positive impact trade openness has on efficiency through improving price signals, promoting specialization, reducing opportunities for rent seeking and opening opportunities for the import technology.

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 impacts on poverty depending on how the impacts are channeled


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down. In economic terms the impacts on poverty are observed through: profits and wages gained in the enterprise; the prices and availability of goods; and government revenues and spending. Trade reforms are likely to have a major effect on the prices of factors of production – where wages of the unskilled are the most important factor viewed from a poverty perspective. If reform boosts the demand for labor intensive products, then there is a likelihood of an increase in wages and employment. However, this reduces poverty depends on whether the poor are strongly represented in the type of labor for which demand has risen. If the poor are mostly unskilled, while trade reforms boost demand for semi-skilled labor, poverty will be unaffected – or it could even worsen as wages of unskilled workers fall.

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 consumer goods, primarily the prices of food items have positive impacts if the trade reform policies impel to come down. In such case households from lower income strata gain from their disposable income on foodstuffs than higher income strata. Therefore, the impact 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 market may cause negative impact when the economies largely depend on import goods.

Trade reform can also affect government revenue, which may increase welfare through the government spending on pro-poor activities. Sometimes reductions in tariffs lead to lower collection of trade revenue and thus its impacts on poverty reduction, but lowering the trade tax can also increase the volume of import 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.

In case of developing countries, production of tradable goods through labor intensive industries generates increased level of employment and income and thus helps reduce poverty level of the country. In this fundamental perspective this research has been attempted to show the link between trade and poverty.

2 .3 Objectives and Scope of the Study

The overall objective of the study is to identify the trade poverty links and assess the impacts of trade policies in poverty in Nepal. The scope of the study will be as follows:


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Review available literature on trade poverty linkages in Nepalese context;

Review Nepalese trade policies from poverty and human development perspective;

Identify the main channels through which trade policy may affect poverty situation in Nepal;

Assess poverty and human development impacts of Nepalese trade policies;

Identify the bottlenecks confronting trade policy implementation in reducing poverty;

Compare other LDC experiences to make Nepal’s trade policies effective for poverty reduction;

Review/ assess sector specific policies and problems and suggest measures to capitalize their potentials;

Suggest measures to make trade related institutions proactive, business environment conducive and (trade) policies pro-poor.

2 .4 Methodology of the Study

This research study is based on the methodology developed by the ENTReC expert team. The information and data collected regularly through survey and sample studies carried at different periods are used to conduct the study. The information collected from some micro studies is also used to substantiate the facts. In addition, some qualitative analysis has also been made to substantiate the impact of trade policies.

In order to translate the design into reality, the research made individual interactive with key informants concerned with this sector in Kathmandu. The study analysis macroeconomic situation, trade employment, income 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, primary focus has been given on macroeconomic, trade, and poverty data beginning of the FY1995/96 to FY2005/06. Thus information covering the period from 1995 to 2006 is taken for analysis. In addition, the available data and information have been used to approach correctly to the issues of poverty. In some cases,


21

where the quantitative information is not available, qualitative analysis has been made, based primarily on the experience of the researcher. However, efforts are made to substantiate the findings with the studies made by other institutions and individuals.

2.5 Organization of the Study

Based on the terms of reference of the study, the report of the study is organized in seven chapters. consisting as follows:

The Chapters are presented as follows:

Chapter I Introduction: Trade and Poverty Linkages

Chapter II Research Design

Chapter III Review of Literature

Chapter IV Nepal’s International Trade

Chapter V Poverty Reduction, Human Development and Trade

Chapter VI A Case of Tea Production and Its Impact on Poverty

Chapter VII Summary, Conclusion and Recommendation


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Chapter III

Review of Literature

3.1 Emerging Concerns

There is a wide debate on the effects of trade on poverty reduction. UNCTAD put two points issues, such as, is it right to limit the analysis of trade and poverty to analysis of the effects of trade liberalization on poverty?; and will it be possible to identify the most effective policies for linking international trade with poverty reduction if the analysis is limited in this way? The most important effects of trade on poverty are likely to occur through indirect impacts and through long-term effects of sustained economic growth and development. UNCTAD 1suggests seven basic elements that constitute the development approach to trade and poverty as follows:

The issue of trade and poverty cannot be reduced to the issue of trade liberalization and poverty.

Differences in growth rates play an important role in explaining disparities in poverty reduction across regions and across countries. The effects of trade policy on growth proceed through links between trade and the accumulation of physical, human, and organizational capital, as well as innovation. Thus, sustained poverty reduction occurs through the efficient development and utilization of productive capacities such that the working-age population becomes more fully and productively employed.

International trade can facilitate, hinder, or modify this process.

The relationship between trade and poverty varies with the composition of a country’s international trade.

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.


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The relationship between trade and poverty is affected by the interdependence between trades on the one hand and international financial and investment flows, debt, and technology transfer on the other.

Sustained development and poverty reduction are major motors for expanding international trade.

The poverty is defined in a multidimensional way to include low income and consumption, lack of human development, vulnerabilities such as food insecurity, and insufficient availability of remunerative employment and social services. This framework includes direct and indirect links between trade and poverty. Trade affects poverty directly through its impact on the cost of living, jobs and wages, as well as government revenue, and indirectly through its effects on the development and utilization of productive capacities. While the direct links contribute to short-term poverty alleviation, the indirect links are crucial for sustained poverty reduction in most developing countries.

The relationship between trade and poverty reduction is more debatable, though there is broad agreement that in the long run liberalization is likely to have a positive impact on poverty levels. Key points of disagreement in the literature include the relationship between trade liberalization and growth and whether trade liberalization impacts on poverty through general growth impacts alone, or through impacts on inequality as well. These debates have spanned several decades and not reached definitive conclusions. They may have become more complicated by the treatment of “openness” and “trade liberalization” as a single concept. Velde et al (2004) make 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 investment flows is only one type of policy measure that results in openness.

The assumption is that trade liberalization improves growth prospects by enhancing productivity temporarily through more efficient resource allocation and permanently through the import of modern technologies and effects on competition. Trade protection is therefore identified as a key factor behind low economic performance by a country or region. Collier and Gunning (1999), for example, identify trade protection as a factor behind Africa’s weak growth performance. Sachs and Warner (1997) make the strongest claim of this type. In their paper they find that restrictive trade policy, along with geographical factors and Dutch disease together accounts for 1.2 percent per annum growth shortfall.


24

Berg and Krueger (2003) examine how openness affects poverty reduction and conclude that although the evidence is mixed it leans strongly towards the conclusion that there is no systematic relationship between openness and the incomes 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 (2001) argue that that within countries there is no systematic tendency for trade to be associated with rising inequality that undermines poverty reduction efforts.

3.2 Economic Growth and Productivity

Many empirical studies show that trade liberalization have some positive impact on poverty reduction depending on production, trade, and consumption patterns. The emerging consensus is that trade liberalizations in majority of cases worsened inequality (Cornia 2004; Gunter and van der Hoeven, 2004). Cornia (2004) and Gunter and van der Hoeven (2004) conclude that globalization has worsened socio-economic inequalities, both within and between countries.

A recent World Bank study (2005) on Latin American by reviewing the evidence on the effects of trade reform episodes on income inequality, wage inequality, skill premiums and demand for skills shows that in the late eighties and early nineties there were clear cut evidence of big increase in wage inequality followed by moderate increase in the income inequality. This means, if effective redistributive policies are not in place either due to structural factor such as administrative, political, and economic constraints and other factors trade liberalization would have adverse effect on economic welfare.

Poverty effect on trade demands assessment of price changes impinging on poor households. Barrett and Dorsoh (1996) in case of Madagascar found that one third of poor rice farmers were in net losses from higher prices or price variability. Levinsohn, Berry and Friedman’s (1999) find in the case of Indonesia poor suffered more from price increases in 1997 than the non-poor. Border price shocks, market creation or destruction and household response determine the extent of positive and negative effect.

The effectiveness of transmission on the agriculture is by and large negative. Many export crops especially of the small farmers are sold through public or private marketing agencies, whose prices are less than the f.o.b. export price (Mundlak and Larson, 1992; Lloyd et al, 1999). Price is likely to be particularly ineffective for poor people living in remote rural areas. Producers or consumers could be completely insulated from changes taking place at the border – i.e. goods cease to be tradable. Only a few countries like Vietnam


25

were getting advantages due to increases in rice producer prices after lifting of export restrictions over the 1990s and Vietnam transformed itself from a net importer into a significant exporter. However in Zambia, after the government abolished the official monopoly in maize, cut throat competition amongst the firms resulted in low prices and no purchase by the firms from the remote areas of the country.

Very poor who are net consumers of purchased food items suffer most from the price rises, whereas farmers (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, Fafchamps and Sadoulet (1991) shows that missing markets for, wage employment seriously disturbs households’ responses to commodity price shocks.

3.3 Liberalization and Benefit to the Poor

Mellor and Gavian (1999) argue that one of the main advantages of stimulating agriculture is that it strongly increases the demand for goods and services produced by the poor (multiplier effect). In general, surveys show that large shares of rural households’ incomes and consumption are related to locally produce non tradable, such as services, bulky traditional starch items, perishable foods, and locally processed foods. This means that expenditure linkages are particularly important for the rural poor (Delgado 1995)

Impacts on different groups have been found to be quite diverse. Logfren (1999) shows that reduced agricultural, protection in Morocco yielded substantial welfare gains in aggregate, but that producers and workers in rain fed agriculture mainly livestock farmers were significantly disadvantages.

The effectiveness of linkages in raising the incomes of the poor also depends upon local businesses being able to respond to increased demand. 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 demand side linkages if the conditions for a high supply response to prices are not in place

The relationship between trade and poverty reduction is more contentious, though there is broad agreement that in the long run liberalization is likely to have a positive impact on poverty levels. Key points of disagreement in the


26

literature include the relationship between trade liberalization and growth and whether trade liberalization impacts on poverty through general growth impacts alone, or through impacts on inequality as well.

They may have become more complicated by the treatment of “openness” and “trade liberalization” as a single concept. Velde et al (2004) make 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 investment flows is only one type of policy measure that results in openness.

The assumption is that trade liberalization improves growth prospects by enhancing productivity temporarily through more efficient resource allocation and permanently through the import of modern technologies and effects on competition. Trade protection is therefore identified as a key factor behind low economic performance by a country or region. Collier and Gunning (1999), for example, identify trade protection as a factor behind Africa’s weak growth performance. Sachs and Warner (1997) make the strongest claim of this type. In their paper they find that restrictive trade policy, along with geographical factors and Dutch disease together accounts for 1.2 percent per annum growth shortfall.

According to Chang (2002) present day industrial economies 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 (2000) 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 (2003) examine how openness affects poverty reduction and conclude that although the evidence is mixed it leans strongly towards the conclusion that there is no systematic relationship between openness and the incomes 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 (2001) argue that that within countries there is no systematic tendency for trade to be associated with rising inequality that undermines poverty reduction efforts.

Trade liberalization will typically affect both the means and variances of a household’s sources of income, and could in four ways affect household


27

vulnerability: change in mean d income; change in the portfolio of activities undertaken by household; changes in the variability of existing income sources (and/or the correlation between them); and poverty traps.

Shocks, including those induced by trade liberalization, may give rise to poverty traps; that is, actual realizations of bad outcomes may of themselves change the inter-temporal distribution of income. Morduch (1994) shows how credit constraints on the poor can result in them preferring low-return low-risk activities to potentially highly profitable but risky activities. Since credit constraints are related to income or wealth this can create a poverty trap (Galor and Zeira, 1993). Alternatively, if households are forced to deplete productive assets in order to maintain consumption, this can reduce their permanent income and create a cycle of expected poverty. Similarly there can be inter-generational transmission of poverty effects if the response to a trade shock is to reduce expenditure on education as Thomas et al (191) identified for rural families following the Indonesian crisis of 1997 or on child nutrition or health.

3.4 Asian and African Growth Pattern

Lockwood (2006) argues that Africa’s poor growth record vis-à-vis East Asia cannot be attributed to aid levels, trade performance, initial conditions, and factor endowments, or to market access and the international environment. 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 committed 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;

Heavy and consistent investment in education.

By contrast, he argues that Africa has anti-developmental states characterized by ‘abysmal’ policy interventions that actively discourage private investment, such as the overtaxing of agriculture by parastatals, industrial policies centered on protectionism not offset with export promotion or incentives for


28

improvement in technology or learning, excessive political intervention and a lack of bureaucratic and political commitment. He argues that state capacity to deliver good quality interventions in the economy has been central to Asia’s success and to Africa’s problems.

Studies also point to the institutional complexities of designing and delivering reforms to growth and trade, as opposed to health and education policies. Foster et al (2001) suggests that success in the productive sectors may depend on effective joint working across a range of government and private sector institutions, rather than a single package delivered vertically across one sector. In some instances, formal PRS mechanisms involving policymakers, private sector, civil society representatives, and stakeholders have not functioned properly due to breakdowns in communication between officials in Ministries of Trade and Finance and those in particular government agencies driving the PRS process (World Bank and IMF, 2005). Singh (2005) emphasizes that developing international trade policy involves coordinating several ministries and a high degree of expertise. General weaknesses in government 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 management 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, 2001). Trade reforms focused on improving customs clearance may also be resisted because they jeopardize opportunities for rent seeking and corruption by officials (Hoekman et al, 2002).

Weak capacity inside government is a problem highlighted by successive reviews of PRS experiences, and one which is more acute for productive sector line ministries as they are less likely to receive the additional support from donors associated with sector-wide approaches (all World Bank and IMF reviews; Driscoll with Evans, 2005). Capacity weaknesses inside government agencies dealing with trade appear be further compromised by accession requirements to the WTO. This has proved to be a major challenge to government administration as well as to the content of their trade policies. Such procedures require preparation of detailed memoranda on foreign trade policies and practices and showing commitment to implement the WTO Agreements. For new members this is without the benefit of long implementation lags that were available to members of the WTO when the agreements were first negotiated. Bilateral trade bargaining with important


29

trade partners also has to take place to ensure that they ‘pay’ for the rights that they will get as WTO partners. Controversial demands from existing members that new members achieve greater openness than what is presently required also complicate trade policy (WTO, 2005).

There are particular challenges in designing policies around trade in services which now account for a quarter of total trade. Trade is traditionally viewed as involving “commodities” rather than services and the task of making numerous domestic producers realize that they are exporting services can be very challenging.

Two criticisms of the Integrated Framework and other forms 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 emphasis on supply side measures which relate to diversification and protection of new industries (Tan, 2002). A DFID evaluation conducted before 2002 found that Poverty and Social Impact Assessments (PSIAs) have the potential to identify likely livelihood groups that would be adversely affected by reform measures and could help in identifying balancing policy interventions that were needed to minimize anti-poor impacts (Hamner and Hendrie, 2002). The World Bank launched a series of PSIAs between 2000 and 2002 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 2005 a PSIA conducted in the mining sector helped to identify contingency measures for groups which would be disproportionately affected by mining closures. Other positive examples include PSIAs influencing PRSP content on fuel tax reforms in Mozambique 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 Framework. In the opinion of an Oxfam study PRSPs continue to reflect uniform prescriptions without an analysis of their impact on the poor (Oxfam, 2004). A review by Nordic governments of seven PRSPs found that PSIAs were not being utilized as an ex ante mechanism to spell out policy implications (Nordic Governments (2003) cited in CIDSE/ Caritas, 2004). A World Bank review of PRSPs in 2003 also highlighted that the use of PSIA to inform policy design has been limited and done in an indicative rather than specific way (World Bank and IMF, 2003).


30

PSIA in areas such as macroeconomic policy has also not been reflected in the strategic priorities of PRSPs (OED, 2004).

The second common criticism concerns weak national ownership of the advice given. Evaluations of the Integrated Framework indicate that country engagement is largely confined to Ministries of Trade (World Bank, 2004; CAPRA 2003; Liebrechts and Wijmenga, 2004). Hewitt and Gilson’s (2003) study of 17 PRSPs and related donor documents 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 (2004) points out that the macroeconomic frameworks in PRSPs were often determined by pre-existing PRGF agreements with the IMF that were not formulated with poverty reduction in mind. 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, 2002; 2004). Hewitt and Gilson (2003) 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.”

3.5 Trade Policies in PRSPs

Hewitt and Gilson’s (2003) study of 17 PRSPs produced before J une 2003 reveals that trade was not generally treated as an autonomous section in these documents. The PRSPs did not include a broad discussion of policy options on trade, but instead focused on a standard package of export promotion measures. Only 8 out of the 17 PRSPs acknowledged that trade policy options differ from sector to sector while 2 differentiated between producers and consumers in urban and rural environments. 5 out of 17 PRSPs discussed demand side constraints such as market access to regional and international markets and just 5 analyzed WTO discussions. Within the latter, none of the PRSPs analyzed the tension between sensitivity of trade policy to poverty and ongoing WTO negotiations.

In contrast to growth, the literature on the trade content of PRSPs does not suggest a trajectory of improving quality over time. A review of the trade content of all PRSPs produced before J une 2005 indicates continuing failure to integrate trade adequately (World Bank and IMF, 2005). Recent IMF analysis of the trade content in PRSPs finds it lacking in coherence, with mention of both export promotion and import substitution measures in the same document (IMF, 2005). Operational measures for a substantial number of trade priorities listed are not included except in the case of issues related to


31

WTO accession where specific reforms were related to tariff and non-tariff barriers. The macro linkages of trade reform have also been analyzed weakly with little consideration of trade related opportunities and vulnerabilities (World Bank and IMF, 2005).

Particular weaknesses exist around policy content on trade in services in PRSPs. Discussion on trade in services is missing despite the fact that since the 1990s it has increasingly become the subject of multilateral and regional trade negotiations. The IMF has noted this absence and recommended that trade strategies integrated into PRSPs should reflect reform of services trade just as much as merchandise trade (IMF, 2005).

Inadequate links between trade policies contained in PRSPs and poverty reduction attract particular attention in the literature. Hewitt and Gilson found similar omissions in their review of trade content in PRSPs completed before and during 2003. Their study found that PRSP content was silent on both income and non-income aspects of poverty including the links between trade policy and access to basic services. They found it surprising that international trade related conditions such as fiscal reform or tariff reductions were not grounded in ex-ante analysis of the probable impact on poverty (Hewitt and Gilson, 2003).

For growth and trade, the literature on neo-patrimonial politics in PRS countries is especially significant, because pro-poor reform is presented as politically more difficult for growth and trade as in relation to the social sectors. Reform of the social sectors in favor of poor people generally involves some reallocation of public expenditure but this does not have to be highly visible and was arguably made easier by the availability of additional donor funds during early PRS processes (c.f. Canagarajah & Diesen, 2006, on the Uganda experience). By contrast, reforms to growth and trade in favor of poor people can directly threaten the vested interests of national elites. Politics based on class or vertical patronage politics features considerably in the productive sectors and can explain delays in legislative progress of key PRS reforms (Cabral, 2005).

Trade liberalization is depicted as especially contentious in the literature. The sectors that receive the greatest protection under the existing system will be aware of the benefits they enjoy and oppose reform. The gains from liberalization are likely to be economy-wide and diffused, making it difficult to identify clear winners who can make a supporting case through political lobbying. The redistributive effects of trade reform can be a major factor impeding its launch in poor countries (Rodrik, 1998). Recent work by the


32

WTO points out that producers whose interests are compromised by a particular accession-related policy reform are proving highly likely to lobby for government consideration and support, though not normally 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 domestic price, but non-tariff barriers result in companies and individuals receiving these rents through holding a license to import. Import license holders are often amongst 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. Commodity marketing boards and parastatal monopolies have often stabilized prices at lower levels relative to world prices, implying the heavy taxation of small farmers 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 economics 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.

Liberalization may also reduce price volatility if it allows households to import goods that would otherwise have been subject to large price swings due to the limited size of the local market. Del Ninno and Dorosh (2001) show how trade liberalization helped to mitigate Bangladesh’s post-flood food crisis in 1998, with private imports stabilizing prices and increasing supplies.

3.6 Institutional Concerns

Comparing Asian and African Growth, Lockwood (2006) argues that Africa’s poor growth record vis-à-vis East Asia cannot be attributed to aid levels, trade performance, initial conditions, and factor endowments, or to market access and the international environment. East Asian tiger countries were successful because they featured the institutional characteristics of the developmental state, including:


33

Economic development rather than welfare as a top priority for the state;

The state is committed 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;

Heavy and consistent investment in education.

By contrast, he argues that Africa has anti-developmental states characterized by ‘abysmal’ policy interventions that actively discourage private investment, such as the overtaxing of agriculture by parastatals, industrial policies centered on protectionism not offset with export promotion or incentives for improvement in technology or learning, excessive political intervention and a lack of bureaucratic and political commitment. He argues that state capacity to deliver good quality interventions in the economy has been central to Asia’s success and to Africa’s problems.

Studies also point to the institutional complexities of designing and delivering reforms to growth and trade, as opposed to health and education policies. Foster et al (2001) suggests that success in the productive sectors may depend on effective joint working across a range of government and private sector institutions, rather than a single package delivered vertically across one sector. In some instances, formal PRS mechanisms involving policymakers, private sector, civil society representatives, and stakeholders have not functioned properly due to breakdowns in communication between officials in Ministries of Trade and Finance and those in particular government agencies driving the PRS process (World Bank and IMF, 2005). Singh (2005) emphasizes that developing international trade policy involves coordinating several ministries and a high degree of expertise. General weaknesses in government 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 management 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


34

there are few incentives for staff to do so (Brown et al, 2001). Trade reforms focused on improving customs clearance may also be resisted because they jeopardize opportunities for rent seeking and corruption by officials (Hoekman et al, 2002).

Weak capacity inside government is a problem highlighted by successive reviews of PRS experiences, and one which is more acute for productive sector line ministries as they are less likely to receive the additional support from donors associated with sector-wide approaches (all World Bank and IMF reviews; Driscoll with Evans, 2005). Capacity weaknesses inside government agencies dealing with trade appear be further compromised by accession requirements to the WTO. This has proved to be a major challenge to government administration as well as to the content of their trade policies. Such procedures require preparation of detailed memoranda on foreign trade policies and practices and showing commitment to implement the WTO Agreements. For new members this is without the benefit of long implementation lags that were available to members of the WTO when the agreements were first negotiated. Bilateral trade bargaining with important trade partners also has to take place to ensure that they ‘pay’ for the rights that they will get as WTO partners. Controversial demands from existing members that new members achieve greater openness than what is presently required also complicate trade policy (WTO, 2005).

There are particular challenges in designing policies around trade in services which now account for a quarter of total trade. Trade is traditionally viewed as involving “commodities” rather than services and the task of making numerous domestic producers realize that they are exporting services can be very challenging. (Singh, 2005).

Greater openness can result in a wider variety of commodities being available, or create new opportunities for production (e.g. by allowing imported 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 market destruction due to the effects of increased import competition on a local market. Romer (1994) argues that the most substantial welfare costs of trade restrictions come from the goods and services that they exclude from the market and the loss of productive activities those results from that exclusion. Winters(2002) also points out that if trade liberalization, or accompanying changes in domestic marketing arrangements destroy markets, households can become completely isolated from the market and suffer substantial income losses.


35

3.7 Trade Integration in Economic Growth

The role of trade integration in economic growth is particularly strong in the context of obtaining export revenue required to finance imports that in turn are required for industrial take-off, while gains related to improved efficiency, economies of scale from enlarged market size, or productivity-enhancing spillovers may represent additional gains. Trade can enable more efficient use of a country’s resources by enabling imports of goods and services that, if produced domestically, would be more costly. It can lift a balance-of-payments constraint on sustained economic growth. It can improve returns on investment by reducing production costs or enabling economies of scale. Exposure to international trade competition can act as a spur to greater efficiency through acquisition of technology.

There is great diversity among developing countries in the interrelationships between international trade, productive capacities, and poverty. International trade can facilitate or hinder the process of productive development and also modify the relationship between productive development and poverty reduction. Three dimensions of this variation are the following: the composition of the trade; the level of development and production structure; and the interdependence between trade and other international economic relations..

Usually it is believed that labor-intensive products allow developing countries to export to developed countries at cheaper prices. However, this phenomenon is not always correct. A rapid increase in exports of labor-intensive products involves a potential risk that the terms of trade will decline to such an extent that the benefits of increased exports may offset the benefits due to lower export prices. Potential oversupply in markets for manufactured exports from developing countries and ensuing policy responses have become important concerns in the design of export-oriented development policies that are coherent in terms of the global trading environment.

Regarding imports, ensuring sustained economic growth will imply increasing dependence on imports of capital and intermediate goods. This, in turn, will require a rapid growth of export earnings and a steady expansion of export capacities. Export diversification may be particularly difficult for least developed countries (LDCs). Indeed, in very low-income economies that depend on a narrow range of low-value-added primary commodities and have deep mass poverty, there is a strong tendency for the domestic vicious circles of economic stagnation and persistent poverty to be reinforced by external trade and financial relationships. In this situation, trade can be part of an


36

international poverty trap in which low and unstable commodity prices interact with unsustainable external debts and an aid/ debt service system (UNCTAD, 2002).

According to Chang (2002) present day industrial economies 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 (2000) 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.

Most of the developing countries are facing challenges to promote development and poverty reduction in a newly liberalized market economy. There may be alternative development strategies that induce trade for growth. This is possible through an open-economy trade regime where both the agriculture and manufacturing sectors are developed together without putting any bias.

Studies on agriculture (Schiff and Montenegro 1997) suggest that agricultural producers are responsive to price incentives only when they have access to the necessary complementary inputs such as inputs or credit (McKay et al., Morrisey and Vaaillant 1997), as well as complementary policies related to information and extension services. However, in many Asian countries the deregulation and market oriented liberalization policies have failed to generated supply response either due to very low price elasticity or due to predominant role of on price factors (Desai and Nombodiri 1997, 2002).

The weakening of production base, weaker linkage between agriculture and non agriculture growth, growing incongruence between the agrarian structure and the supply systems and weak research base are found to be working adversely to make the new market oriented policies effective in reducing poverty (Vyas 2002). Watkins (1997) shows the prospective consumer gains from corn liberalization lower consumer prices failed to materialize in many countries.

In Malawi, however, trade liberalization encouraged the emergence of traders to buy food commodities from farmers and sell in urban areas or export (Parris, 1999). Most smallholders who are unable to store their output and sell in the immediate post harvest are found to be most sufferers. In Nepal’s


37

context also some studies (UNDP 2004, IPRAD 2005) reveal little price responsiveness and adverse terms of trade in agriculture.

An optimizing household will choose a portfolio which maximizes its utility taking into account its degree of risk aversion (Ellis, 1993, Kuotibm 1968), and clearly trade liberalization could alter the optimal portfolio. Generally trade liberalization would encourage farmers to switch from subsistence to cash crops with higher returns but at the same time with higher variance. Fafchamps and Pender (2000) show that credit constraints faced by poor farmers in India make them unwilling to sin non-divisible and irreversible investments in risky tubewells despite the substantially higher returns. The existence of undiversifiable risk could undermine the potential gains from trade liberalization among the poor and result in poverty traps. Poor may also lack information about the risks associated with new activities leading to sub-optimal choices.

Linking international trade to poverty reduction is best achieved through national development policies that are pragmatic, inclusive, and outward-looking. This can be achieved by creating a dynamic process of capital accumulation, structural change and technical progress in order to develop productive capacities; managing integration with the global economy, including both external finance and external trade, and technology acquisition; and incorporating marginal groups, paying attention to gender equity, and ensuring the achievement of certain minimum standards of human wellbeing.

Successful poverty reduction requires outward-looking development policies that put constant attention to trade, technological and investment opportunities. In the case of LDCs, it is unlikely that an export-led growth strategy will of itself lead to a virtuous trade– poverty relationship. Export-led growth is generally synonymous with an exclusionary growth trajectory, with benefits concentrated in an enclave.2

3.8 Labor, Wages, and Employment

Unlike traditional international trade theory labor supply in developing countries is perfectly elastic. In this case the wage will be fixed exogenously and moving workers into the formal sector will alleviate poverty only if the loss of labor in subsistence agriculture is so large that the workers remaining in that sector increase their ‘wage’. Krueger (1983) study showed that developing countries manufactured exports were, indeed, labor-intensive, but

2 See, the Least Developed Countries Report 2004


38

that the employment effects of liberal trade policies were generally rather muted. Rama (1994) found a significant positive relationship between protection and employment in manufacturing, 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 manufacturing led to job loss, but in most firms it led to lower margins and almost no change in output or falls resulting into decline in real wages. Winters (2000b) suggests similarly that the real exchange rate depreciation could explain the simultaneous increase in formal and decrease in informal manufacturing employment in India in the 1990s, the non-traded sector being “informal intensive.”

Recently debate is on relative wages between skilled and unskilled labor-the skills gap. Wood (1997) in case of Latin America finds increasing skills gap contrasts with the earlier experience of East Asia, where liberalization was accompanied by a narrowing of the gap. Robbins and Grindling (1999) adduce a similar bias towards skilled workers in Costa Rica’s liberalization. Although liberalization would generally raise the demand for relatively unskilled workers in many developing countries and so, on average, be poverty alleviating, there are bound to be exceptions e.g. possibly where natural resources dominate exports and where out-sourcing is important as well as cases where segmented import competing sectors suffer adverse shocks. A recent study shows that despite skill intensity gains being apparent in developing countries, gains have been outstripped by welfare loses owing to unskilled job losses and wage vulnerability (Epitaru, 2003)

3.9 Study on Nepal

One study is the Impact of Liberalization, carried by Shanker Sharma and Pushker Bajracharya in 1996 (IIDS 1996). Since the study was made in the very early period of liberalization, the economic situation of that time was relatively better, and the findings of the study are relatively optimistic. The study shows that the average annual growth in exports almost doubled after the liberalization as compared to the pre-liberalization period. Similarly, it also shows that the share of trade in GDP increased by more than 40 percent during this period. On the other hand, import growth rates were smaller than the export growth rates for two years after liberalization.

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 1990s. For achieving such a reduction, it


39

would also require significant changes in the distribution of income and pattern of growth. It also shows that the growth is not centered to agriculture and does not bring significant benefits to rural areas, which are bound to face growing inequality.

The report has suggested focusing of the poverty alleviation strategy to be broad growth- based, equitable and sustainable. With a low per capita income and almost no surplus to redistribute, there is little scope for targeted poverty alleviation efforts on any scale large enough to make difference at the national level; therefore, poverty alleviation will require faster per capita income growth and, in turn, faster output growth and slower population growth.

Acharya (1999) has viewed that the globalization in Nepal has disrupted traditional livelihood patterns of rural poor in Nepal. She emphasized that “the globalization process in Nepal is rather a process of deeper and still deeper penetration of the Nepalese market by the Indian capital and labor with very little gains for the mass of the population. A minority has benefited and income inequalities have increased, tearing the existing social fabric, which may lead to explosive political situation. One indicator of such ferment is the Maoist problem spiraling into higher and higher levels of violence, both from the government and insurgents’ sides.”

Sapkota (2002) in his study on Trade Liberalization and Poverty in Nepal: An Applied General Equilibrium Analysis has used the computable general equilibrium modeling system to understand functioning of market economy in a deep manner and present the facts of the policy outcome. The findings show that urban households have more benefited from the liberal market economy than the rural one. The poverty impact assessment of this study shows that poverty increases up to the average minimum and decreases thereafter. The impacts of trade liberalization according to this study decrease household welfare and increase poverty at the lower income level and increase welfare and reduce poverty at the higher income level. Thus the study suggests for remolding taxation system to address the problems of poverty and inequality.

Trade and Competitiveness Study undertaken in 2003 identified key policy measures and technical assistance requirements for improving the trade competitiveness of Nepal. To implement the policy measures, the government would utilize investment and technical assistance from the development partners. It identified the critical need of improving the trade competitiveness through trade facilitation and through removing other constraints. Regardless of the economic liberalization and the growth of trade observed in the 1990s, the competitiveness of the economy remained very low and labor productivity


40

among the lowest in the neighboring and the competitor countries. It was observed that three key factors were responsible for the poor competitiveness and productivity in the economy:

inadequate mechanisms and incentives for firms to acquire new technology,

poor infrastructure, and

an unfriendly investment climate.

Weak infrastructure, transport bottlenecks and transactions delays, and an unpredictable regulatory framework further lowered the price competitiveness. Rigid labor markets in the formal sector and inadequate bankruptcy and foreclosure provisions raised the costs of reallocation of factors of production to more productive uses. Removing these constraining factors would enable Nepal to raise its competitiveness. Improving Nepal's trade competitiveness requires faster and more efficient movement of goods into, out of, and throughout the country. Streamlined cargo-customs procedures, including transit, are important in reducing the delivery time and the transaction costs.

According to the Report, improvements in Nepal's customs procedures, including governance and customs infrastructure, will not produce the full range of intended benefits unless corresponding improvements in the transport and logistics are made. Both of these are concerned with facilitating the movement of goods, with the principal objective of reducing the high transaction costs of the business. This can rarely be accomplished if each component is viewed in isolation, since more effective movement of goods via any one component must be matched by the equivalent improvements in the capacity throughout the system. Nepal's labor productivity is the lowest in South Asia on account of one of the most rigid regulatory frameworks for labor markets in the developing world, thereby discouraging investment and growth of firms and undermining the process of operational efficiency and competitiveness. Anti-dismissal restrictions of the Labor Act have made it difficult for closing the large falling ventures, resulting in the prolonged disputes and losses for the business. Potential investors, large or small, are disadvantaged by unsatisfactory specification of property rights that deter lenders from providing capital because of an inability to access collateral when businesses fail. In the context of the present labor law, to exit the industry at minimal cost and relocate capital elsewhere where returns are high becomes extremely difficult in Nepal.

Nepal's investment climate remains fundamentally unfriendly, as reflected in


41

the lowest level of FDI among similar landlocked countries. Regional comparisons of concessions and facilities show that Nepal is prima-facie less generous to the export-oriented industries compared to most of its neighbors, according to the Report. Despite possessing a number of advantages including the relatively low labor costs which should enable local firms to exploit available and emerging opportunities in external markets, a series of domestic barriers and constraints that raise costs, dampen productivity growth, and hamper the ability of the firms to compete in the overseas markets have constrained this potential. Among the main barriers characterizing all these sectors is the inadequate marketing which is preventing adjustment to new market conditions and depriving the firms 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 emerging from increased competition in the major overseas markets 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 marketing 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 2001, 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 December 31, 2008. Failure of Nepal's RMG exporters to penetrate the European Union market, despite available preferences, suggests that marketing and market awareness are the glaring problems affecting them. Reducing costs, meeting shortened delivery times, and responding to design preferences are crucial for success in this industry. The carpet industry has stagnated in the face of static global demand, international competition from the machine-made carpets, and a range of internal constraints, including restrictions on product variety, lack of FDI, and inadequate marketing networks and design capabilities. There is need to respond to emerging patterns of demand in the major carpet markets as there have been concerns that the Nepalese producers are not responsive to changes in consumer fashions and designs.


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Productivity improvements should not be constrained by labor legislation and industrial relations environment. In the RMG sector, as a measure of flexibility in overcoming many burdensome implications of the rigid labor rules pertaining to the permanent workers, many firms hire contract workers. Such a practice could affect long-term competitiveness since employers are less likely to invest in upgrading skills of contract workers who are also normally characterized by higher turnover and absenteeism rates. In addition, less flexible labor laws and their effects on productivity deter investors.

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 improvements in the transit and other logistic facilities. It is estimated 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.

In Nepal, it is understood that the globalization brings changes in the national economic activities through the adoption of liberal economic policy. Globalization is the process through which national economies in different part of the world are integrated. In fact, the globalization process was initiated by the developed world with the support of multinational organizations. The multinational organizations are motivated to promote the globalization process because of technological developments, wider trade and investment, and the changing production, organizational and marketing strategies promoted by them. The pace and depth of globalization differ across countries and regions, but the main economic aspects of the process are essentially the same. It takes into account the following elements:

Free movements of goods and services

Free movement of capital

Subcontracting of activities by companies, greater specialization, and new forms of work organization.

Supporters advocate that openness will create opportunities for jobs. J obs are being created as business opportunity increases with the reduction of trade barriers and the decentralization of production to take advantage of benefits specific to the location of their facilities.

Promotes efficient allocation of resources


43

Promotes equitable distribution of income

Promotes macroeconomic stability in the developing countries

The Critics view that it will limit the possibilities for the weaker section of the society. The factors are:

Large scale business houses influence the use of resources

Inequality in the distribution of income and wealth; rich getting richer and the poor not improving themselves

On the whole, job opportunities for women in high-growth sectors remain limited, mainly because of the lack of their required skills.

Greater specialization and widespread application of advanced technologies have stimulated a rise in demand for skilled labor in fields, like information technology (IT), specialized financial and other business services etc.

Technological change and specialized production strategies tend to favor skilled and well-educated workers – a category in which women are severely under-represented.

In Nepal, this is more prominent. Women are in jobs which are more likely to be subcontracted, relocated abroad, or eliminated by labor-saving technologies. The traditional gender disparities in wages appear to be widening. The cumulative effects of persistent discriminatory practices may 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 problems. 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 problems of inefficiency because it is expected that the private sector will handle the resources more efficiently.

3.10 Conclusion

The relationship between trade and poverty appears to be more contentious, though there is broad agreement that in the long run liberalization can help reduce poverty levels. Key points of disagreement include the relationship between trade liberalization and growth and whether trade liberalization


44

impacts on poverty through general growth impacts alone, or through impacts on inequality as well.

Policy approaches to growth and trade for poverty reduction have undergone significant shifts over the last half a century. In the 1950s and 1960s ‘big push’ industrialization, planning and import-substitution policies were advocated. In the 1970s, these were replaced by policies centered on the price system and outward orientation while the 1980s saw the emergence of the Washington consensus with its emphasis on macroeconomic belt-tightening and trade liberalization. The current approach retains elements of the Washington consensus but augments them with elements drawn from the PRS approach. These include an emphasis on country-specific policies, good governance, and poverty reduction. Along with expansion of foreign trade.


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Chapter IV


4.1 Background

Nepal is still at its preliminary stages of economic progress and transformation. The agriculture has remained under-developed, with a very low productivity level. The industrial sector is shy and suffers from a number of uncertainties. The inefficient structures of these important sectors of the economy have not only reduced the competitiveness of the economy but also resulted in a limited production base, far below the consumption needs of the people and the investment requirements of the economy. As a consequence, Nepal has been heavily dependent on the import trade for meeting its large and varied needs.

The difficult topography, limited development 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$ 300 . Past attempts at socioeconomic development have not only remained modest but the socio-political disturbances in the recent years have also taken a heavy toll of the economy. At present, the task of putting the economic 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 regime. In the early phase of the trade and payments regime, Nepal placed its imports under the Open General Licensing (OGL) since 1992-93, replacing the then prevailing import licensing regime, the change being termed as the introduction of the convertibility of the Nepalese currency in the external current account transactions3.

4.2 Trends of Trade Growth

In 1990s, the trade volume of Nepal increased along with the positive change in macroeconomic indicators of the Nepalese economy. 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.


46

2005 period, the trade sector has been found improved 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 remained 37.56 percent in 2005/ 06 in 2005/ 06. Although the share of trade volume has decreased, there has been continuous growth in the volume 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 1995/96

1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

Annual growth of GDP in %

12.61 7.50 13.86 10.76 16.41 4.37 6.64 9.39 9.38 9.97

Annual growth of total trade

23.17 0.28 5.74 28.51 8.22 -9.93 12.93 9.13 9.46 12.41

Ratio of Total Trade/GDP

39.41 43.10 40.21 37.34 43.32 40.27 34.76 36.80 36.72 36.74 37.56

Source: Calculated from Various Issues of Economic Survey

There is positive growth in export during these years, except in 2001/ 02. Maximum annual change of export is noted in 1999/ 2000 when export has increased by about 39.65 percent (Table 4.2). There is also similar trend in import during these years, but the values are less erratic. The maximum value of import is also seen during 1996/ 97, with 34.7 percent change. The ratio of export to GDP as well as ratio of import to GDP is seen increasing, indicating the growth of trade than GDP itself during this period. The ratio of export to GDP is 9.67 percent in 2005/ 06 while the ratio of import to GDP is 27.89 percent in the same period. The share of import 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. In the second half of 1990s, the growth of export was higher than the growth of import reflecting a positive impact of the adoption of liberal economic policies. However, such trend did not continue and is attributed to the impact of the one decade long conflict. Thus it is observed that 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.


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Table 4. 2: Growth of Export and Import and its Relation with GDP

Description 1995/96

1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

Annual change in Export (%)

- 13.86 21.54 29.67 39.65 11.70 -15.65

6.36 7.97 8.89 2.60

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 change in Import (%)

- -20.41

5.11 1.69 -19.34

-6.21 7.73 -13.64

-8.75 -8.83 -13.99

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

Source: Calculated from Various Issues of Economic Survey

Due to these changes in export/ import 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, remittances, and grants are equally influential to overcome the negative current account situation in these years of analysis.

Trade has become more significant during the years of liberalization. The share of total trade to GDP has remained to some extent constant ranging from a minimum of 35 percent to a maximum of 43 percent in the last decade under review. Till 2000 , 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 economy policies has highly contributed in economic growth. Such growth in export was due to the growth of labor-intensive industries like carpets and garments which seized to grow because structural problem and non-tariff restrictions.


48

Table 4..3 Export of Major Commodities to India

Annual Growth Rate in % Description 1995/96 2000/01 2005/06 1995-01 2001-06 1995-06 Rice (Husked) -

16.6 0.00

Maize - 0.0

0.00

Mustard & Linseeds 48.0

37.9

47.50

-4.62 4.62 -0.10

Herbs 40.5

71.5 133.50

12.04 13.30 12.67 Ghee 35.4

470.7

103.00

67.78 -26.21 11.27 Dried Ginger 47.2

61.0

62.20

5.26 0.39 2.80 Pulses 314.7

713.5

643.20

17.79 -2.05 7.41 Kutch 4.2

12.6

42.10

24.57 27.29 25.92 Live Animals 176.3

45.8

58.00

-23.63 4.84 -10.52 Flour 0.3

60.8

0.00

189.31 Ginger 137.3

161.8

275.20

3.34 11.21 7.20 Oil Cake 103.4

212.8

291.60

15.53 6.50 10.92 Catechu

27.1

150.0

382.40

40.81

20.58

30.30

Rice Bran Oil 129.3

124.7

112.60

-0.72 -2.02 -1.37 Salseed Oil 0.1

0.0

0.00

Raw Jute 33.0

113.6

0.50

28.05 -66.22 -34.23 Jute Cutting 2.8

1.1

48.20

-17.04 112.98 32.92 Jute Goods 453.2

1294.2

2636.80 23.35 15.30 19.26 a) Hessian

76.1

50.5

464.50

-7.87

55.86

19.83

b) Sacking 28.4

540.4

1265.40

80.25 18.55 46.18 c) Twines 348.7

703.3

906.90

15.06 5.22 10.03 Cardamom 195.4

298.2 608.10

8.82 15.32 12.02 Noodles 64.6

136.0

414.70

16.05 24.98 20.43 Cattlefeed 31.0

195.5

454.60

44.53 18.38 30.81 Tooth Paste

309.2

2033.4

730.80

45.75

-18.51

8.98

Polyster Yarn 238.0

773.6

3476.30

26.59 35.06 30.75 Medicine (Ayurvedic) 487.4

301.10

-9.18 Soap 950.6

363.60

-17.49 Veg. Ghee 3560.3 3861.70

1.64 Pashmina 2728.5 210.70

-40.08 Thread

1656.9

1898.30

2.76

Copper wire Rod 2081.6 305.80

-31.86 M.S. Pipe 353.1

105.70

-21.43 Plastic Utensils 693.9

808.30

3.10 Zinc Sheet 72.0

2409.00

101.79 G.I. Pipe 328.7 519.30

9.58 Textiles 449.3 2154.60

36.83 Juice 303.5 2197.10

48.57 Total 2391.0

20651.1

25656.50

53.91 4.44 26.78 Others 1291.6

5379.1

21585.03

33.02 32.03 32.53 Grand Total

3682.6

26030.2

4071.47

47.86

-31.00

1.01

Source : Economic Survey, FY 2006/2007


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Export of Nepal has grown fast during 1990s showing positive impact of liberal environment in Nepalese economy. However, it has turned be stagnant. Another feature of Nepalese export is its limited items of export. About half of the exportable items are represented by three products, namely carpet, garments, and vegetable ghee. These three items are dominating throughout these years. Other few items like jute, toothpaste; handicrafts etc are major exportable items. The limited exportable products indicate the vulnerability of Nepalese economy. Any changes in the export of these products would benefit the economy.

Table 4.4 : Export of Major Commodities to Other Countries Rs. in Million

Annual Growth Rate in % SITC Group 1995/96 2000/01 2050/06 1995-

2001 2001-2006

1995-2006

Pulses 348.7

501.1

191.7 7.52 -26.64 -11.18 Cardamon (Large) -

21.8

109.2 56.60 Medicinal Herbs 8.1

25.9

19.00 26.17 16.13 21.05 Catechu -

0.0

0.00 Wollen Goods -

0.0

0.00 Nepalese Paper & Paper Products

196.7

257.00 4.04

Hides & Skins 387.6

658.4

310.4 11.18 -18.57 -4.85 Carpets (Hand Knotted Wollen)

8163.9

8592.3

58.36.7 1.03 -7.34 -3.25

Readymade Garments 5374.8

13124.7

6204.1 19.55 -14.14 1.31 Handicrafts 81.8

233.9

430.0 23.38 22.46 22.92 Ornaments 138.3

211.5

282.4 8.87 11.42 10.14 Pasmina -

4121.2

1577.8 -23.93 Total 14550.5

27687.5

15221.2 13.73 -11.66 0.23 Others 1648.0

1936.4

-13269.2

6 3.28 20.39 11.50 Grand Total 16198.5

29623.9

1951.9 12.83 -7.75 2.02



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4.3 Import and Export Composition

Import of primary products like rice and vegetables from India had declined. The share of manufacturing sector had increased. The import of transport, vehicle, spare parts, medicine, and cotton textile had also increased during that period.

Table 4.5: Import of Selected Commodities from India

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


Electrical goods, raw wool, medicine, paper, telecommunication accessories, cloths (cotton & others), polythene granules, etc. are the major items imported from India. In 1990s, the some items like gold, vehicles and its parts, medicines etc used to be imported as the major items. Specially, in the import of gold has decreased as India has also opened up its import with highly reduced import tariffs.


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Table 4.6 : Import of Selected Commodities from Other Countries

Particulars 2001/02 2005/06 Annual Growth Rate in %

Gold 618.70

2.90

-73.83

Silver 393.60

53.10

-39.39 Petroleum products 402.20

548.80

8.08 Other Machinery & Parts 2176.10

2830.70

6.80 Electrical goods 1572.10

2872.70

16.27 Threads 1871.30

1610.80

-3.68 Raw Wool 1010.90

1511.10

10.57 Transportation equipments 1813.70

2155.70

4.41 Medicine 680.90

1108.10

12.95 Chemical Fertilizer 2559.60

389.10

-37.56 Paper 443.00

832.00

17.07 Computer parts 1770.60

1353.80

-6.49 Aero plane spare parts 986.70

1071.30

2.08 Telecommunication accessories 1065.70

1720.50

12.72 Cloths (cotton & others) 1816.10

2854.30

11.97 Polythene granules 2025.40

3696.70

16.23 Crude Palm Oil 5821.20

4051.10

-8.66 Crude Soybean Oil 1229.00

1572.90

6.36 Copper Wire Rod, Scrapes & Sheets

2095.20

2089.10

-0.07 Raw Silk

125.00

107.60

-3.68

Others

20289.90

34204.90

13.95

Total 50766.90

66637.20

7.04


Medicine import shows significant growth, indicating growing health awareness in the Nepalese society. Share of some raw materials like raw wool has increasing trend during 2000 / 01-2005/ 06. On the other hand, increasing import of vehicles and petrol shows the growing disparity in income, with limited people taking major share of the income and enjoying high standard of living.

It is not only that exportable products are limited in number, but the number of countries buying Nepalese products is also limited. India is major trading partner in terms of both export and import of goods. The share of Indian market for our export has reached to 42.6 percent , in 1999/ 2000 (Table 4.6). USA and Germany are other major buyers from Nepal, and these three countries import about 85 percent of the total export of Nepal. Other importing countries like China, UK, and Japan have very limited shares.

Another major feature of export of Nepal is that the industries are seen producing exclusively for export market. The major products like carpet,


52

garment, pashmina, vegetable ghee, and handicraft items are mainly produced for export market. 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 garment, only rejected pieces are brought into local market.

Table 4.7: Share of Exports of Major Buying Countries from Nepal

Country 1995/96 1996/97 1997/98 1998/99 1999/2000 India 18.52% 23.09% 31.96% 36.03% 42.59% USA 28.53% 26.20% 25.83% 26.21% 27.45% Germany 33.96% 33.80% 24.76% 21.53% 15.07% China 2.91% 2.85% 2.32% 1.62% 1.03% UK 1.46% 1.32% 1.16% 1.44% 2.39% Japan 0.40% 0.44% 0.65% 0.64% 1.42%

Source: Computed from Various Issues of Nepal and the World: A Statistical Profile, FNCCI

In the case of import also, there are not many trading partners (Table 4.9). Nepal imports more 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 important 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 import from their countries. Thus there are only about 15 major trading partners of Nepal.

Table 4.8: Share of Imports from Major Countries

Country 1995/96 1996/97 1997/98 1998/99 1999/2000

India 32.77% 26.57% 30.71% 37.13% 36.55% USA 1.03% 0.92% 1.53% 1.51% 1.58% Germany 3.30% 1.23% 1.68% 1.68% 1.38% China 21.19% 26.27% 16.35% 11.68% 11.55% Singapore 14.19% 10.63% 14.20% 11.08% 7.39% Switzerland 0.16% 2.48% 2.12% 8.64% 9.39% UAE 1.24% 5.96% 4.86% 3.16% 1.84% UK 1.38% 3.36% 1.47% 1.88% 1.35% Japan 6.11% 4.23% 3.09% 2.58% 2.67% Newsland 3.17% 2.36% 1.70% 2.04% 1.35% Korea 1.48% 1.06% 2.09% 2.24% 2.58% Malaysia 0.82% 0.87% 1.31% 2.04% 2.03% Thailand 1.38% 1.74% 1.95% 1.79% 2.04%

Source: Computed from Various Issues of Nepal and the World: A Statistical Profile, FNCCI


53

There are very limited data available to analyze the impact of trade on employment. As major export items like carpet, garments, and pashmina and handicrafts items are produced mainly in labor-intensive industries, the impact of trade on employment is considered significant.

Analysis of export indicates positive growth, but it also exhibits significant weakness, as it raises a doubt about the sustainability of export of Nepal. The products of Nepal are very limited. There are basically four goods namely carpet, garments, vegetable ghee and pashmina goods, which contribute more than 60 percent of the total export. This indicates high dependency of export on very few products. Moreover, the list of other exportable items is also not very long. It is essential to identify other suitable products that can be exported.

Besides this problem, there is also another issue. The number of countries buying from Nepal is also very limited. Only 80 percent of the products are exported to three countries- India, Germany, and USA. It shows another dimension of challenges faced by Nepal. High dependency on these limited 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 imports 36.5 percent of the total goods to Nepal. There is urgent need to address the problem of limited export and limited trade patterns.

4.4 Assessment of Growth in Trade

A rapid rise in the export was observed in 1990s amidst unfavorable domestic and international factors. The trade statistics show that between FY 1991/ 92 and FY 2000/ 01 and between FY 2001/ 02 and FY 2006/ 07 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 amounted to Rs. 60 .8 billion in FY 2006/ 07, at an annual average growth rate of 1.5 percent from the FY 2000/ 01 level, reflecting a poor performance of the export in the latter period. Export to India decreased due to the quantitative restrictions imposed on some prominent 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 import in the two periods increased significantly after the adoption of liberal trading regime. Total import increased to Rs. 115.7 billion in FY 2000 / 01 from Rs. 31.9 billion in FY 1991/ 92 at 15.4 percent per annum.


54

The import amounted to Rs. 191.7 billion in FY 2006/ 07, at an annual average growth rate of 8.8 percent from the FY 2000/01 level. The import/export ratio, which was 42.9 percent in FY 1991/92, rose to 48.1 percent in FY 2000/01 and then started sloping downward and remained at 31.7 percent in FY 2006/ 07. As a consequence, a marginal rise in the export (1.5 percent) and a much higher growth of import (8.8 percent) between FY 2001/ 02 and FY 2006/ 07 caused 13.9 percent annual growth in trade deficit, and contributed to face adverse effect on the export/import ratio.

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/ import ratios came down from 39.6 percent in FY 2003/ 04 to 39.3 percent in FY 2004/ 05, and then to 34.7 percent in FY 2005/ 06 and 31.7 percent in FY 2006/ 07. The decrease in export showed twofold impact – widening trade deficit and the loss of jobs in industries and trading sectors.

4.5 Prospects of Export

The development plans and economic policy statements of the government 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 phenomena and circumstances. The Tenth Plan emphasized to identifying new exportable products of comparative advantage and improving their quality and export volume. The Plan visualized increasing the number and volume of the exportable goods by promoting the interrelationship among the agro-forestry and other service-oriented industries. Emphasis 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 employment in the rural areas. According to the Plan, competitiveness of the exportable items would be enhanced by promoting foreign investment and technology in the areas having comparative advantage, based on an assessment of the demand and supply in the international markets.

Similarly, the procedural hindrances to product-wise and country-wise diversification of foreign trade would be rectified. The opportunities that emerged in the areas of hydro-power, computer software and labor markets would be tapped in the national interest. Emphasis would be placed on the use of the dry ports. Export Promotion Zones nearby these dry ports would be


55

established with the participation of the private sector. Feasibility studies would be carried out to establish Special Economic Zones so as to support the industrial and trade sector. Besides the traditionally used ports, the potential of new ports would be explored. The competitiveness of the trade sector would be enhanced in harmony with the regional and multilateral agreements. The quality promotion of traditionally developed exportable items such as the woolen carpets, RMG, Pashmina, and handicrafts would be encouraged.

The Government planned to undertake various promotional programs and activities for the Tenth Plan period. The Plan envisaged to strengthen institutional capacity of the government, non-government and the private sector to enhance the collection, processing, and dissemination of information relating to the export promotion. Activities like the organization of trade fairs, participation in international trade fairs, and identification and promotion of exportable items of comparative advantage in association with the private sector would be encouraged. Agencies working in the area of trade would be restructured to provide service under one umbrella. The Plan also underscored the role of the institutional reforms. To make foreign trade simpler, more reliable and cost effective, reforms were envisaged in the areas of laws, regulations, and policy, procedure, and coordination matters. To create necessary environment for market development, integrated and participatory programs among various institutions would be implemented. For this, organizational and managerial efforts would be strengthened and export promotion prioritized in a coordinated manner. The economic diplomacy is weak. The policy to mobilize Nepalese foreign agencies (like embassies, consulates, etc.) in promoting foreign direct investment (FDI), export, and the economic interests of the nation would be adopted so as to accelerate the industrial development addressing the expansion of export.

During the Plan period, attempts have been made toward the development of the policy-level and legal foundation in the trade-related matters. Legislations like the Competition Act, Insolvency Act, Company 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 movement 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 Promotion Center, Export Promotion Committee, and Wool Development Committee, have been integrated into the Trade and Export Promotion Committee.

Nepal became the 147th member of the World Trade Organization (WTO) on


56

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 Economic Cooperation). In line with the international and regional commitments as well as the national requirements, the trade and tariff system has accordingly been substantially rationalized. Despite a huge deficit in the merchandise trade, Nepal currently holds a satisfactory forex reserve level, mainly attributed to the balance of payments (BOP) surpluses resulting from the remittance and other transfer flows along with the foreign assistance receipts. However, for a sustainable development of the external sector, the competitiveness of the economy 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 arrangements like the SAFTA and the BIMSTEC. India's declaration to reduce to zero the customs on the imports from the four SAARC LDCs (Bangladesh, Bhutan, Maldives, and Nepal) from 2008 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 maintained 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 make them competitive. The process of industrial development in Nepal has also suffered due to the unfavorable law and order situation mainly related with the conflicts. Besides, the inadequate and weak physical infrastructure, lower utilization of the capacity, lack of favorable business environment, problems 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 measures to promote the export sector. Foreign diplomatic missions of Nepal will be involved, through economic diplomacy, in the promotion of foreign trade including development assistance, labor management, and tourism. The Plan would adopt measures for promoting export trade and market access besides creating a suitable commercial and industrial environment for the export sector development through utilizing the import policy for making available the required goods and services.


57

The other policy is the identification, development, and market diversification of the exportable items possessing comparative and competitive advantages. Backward and forward linkages of the export sector would be expanded. Existing policy, legal, procedural and institutional environment with respect to the industrial promotion will be refined and improved 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 made for reorienting the subsistent agriculture toward the commercial agriculture so as to make this sector competitive in line with the demands of the domestic and international markets. In addition, physical infrastructure relating to trade will be developed. Work on policy reforms like formulating and implementing of new commercial, industrial, and foreign investment policies will be continued.

Work on trade facilitation like simplification of the customs procedures, criteria for procedures of the transit and standards verification, and homogenizing the policies and rules with those of the trade partners like India and China will be carried out. Institutional reforms including the capacity enhancement and development of capable manpower in the trade sector will be the other policy area. Improving production and productivity and strengthening the supply capacity will remain the basic considerations guiding the development of the commercial sector of the country. The real effective exchange rate will be maintained at such level that will contribute to increase the export trade, attract the foreign investment, make the import trade competitive, contain the current account deficit within a specified ratio of the GDP, and strengthen the economic fundamentals. This measure will be adopted to improve the forex and the balance of payments position in accordance with the conditions of the WTO, SAFTA, and BIMSTEC.

4.6 Fiscal and Monetary Policy and Trade

Both the fiscal and monetary policies are crucial to enhance trade regime and support the growth of both the export and the import sectors. Based on the provisions of the Budget of FY 2007/ 08 the fiscal and the monetary policies, some important measures are analyzed as follows:

Trade and Fiscal Policy

The budget for FY 2007/ 08 has underscored the significance of developing organized private sector, entrepreneurial and resilient to the emerging risks for rapid industrialization growth. It has focused on reviving the confidence of the private sector. It has proposed measures such as legal and institutional


58

reforms, simplification of the work procedures, rehabilitation of the sick industries, and offering of additional opportunities for the foreign investors, non-resident Nepalese, and the domestic private sector to improve the investment climate in the country including enforcement of law and order.

The budget has identified the importance 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 Economic Zone will be introduced for the development and management of the industrial zone, export processing zone, tourist and entertainment zone, and special commercial zones in Rajbiraj, Simara, Nepalgunj, and Dhangadhi or Mahendranagar. Similarly, a powerful investment board will be established to promote 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 market, 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 improving the environment for investment and promoting domestic 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 molasses. 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 customs 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 import facility by placing all the taxes on the imports of the raw materials under the bank guarantee. Similarly, for the export-oriented industries, tax refunds at par rates from the customs point at the time 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


59

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.

Trade and Monetary Policy

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 commercial 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 manufacturing and tourism industries, the Nepal Rastra Bank (NRB) has allocated Rs. 2 billion annually to refinance the sick industries. With the provision made in the current Budget, the sick industry refinance facility will be disbursed as per the previously-determined criteria. Arrangement is made to disburse the amount allocated for the sick industry refinance through the proposed Industrial Revival Fund, which aims 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. 500 million for the Fund, with the provision of contributions from the NRB and the commercial 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 commercial or development bank availing this refinance facility will not charge the concerned borrower more than 4.5 percent interest. Looking at the troublesome situation that the small and cottage industries have been encountering, the Nepal Rastra Bank will extend refinance to the commercial or development bank at 2.5 percent against the collateral of the loan extended to these industries. The commercial or development bank could charge the borrower of such export credit a maximum of 5.5 percent interest.

4.7 Trade and International Support

WTO and Nepal’s Foreign Trade

Trade and development discourse is the realization that trade is not an end in itself; it is rather a means to alleviate poverty and ensure that countries attain sustained economic growth. Although trade can be a powerful instrument of poverty reduction and its virtues have been well documented, prospects of its benefits have been often oversold.4 Trade negotiators of countries, which are

4 See Stiglitz (2003); Rodrik (2002); and Adhikari (2005)


60

‘convinced’ of the benefits of trade liberalization, tend to blindly follow idealized benefits of trade and fall into the trap of negotiating trade agreements without conducting adequate homework. This leaves them without much knowledge on the mechanism to derive the ‘promised’ benefits and measures to be put in place to mitigate the negative consequences.

When trade agreements are negotiated – at the multilateral, regional and bilateral levels – the question of ‘policy space’ is bound to arise, because most of these agreements 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.

Balance-of-payments protection: Article XVIII: b allows a nation to impose trade measures to safeguard its balance of payments. In contrast to Articles XVIII: a and c, surveillance and approval procedures are less burdensome, and compensation need not be offered to affected countries. In the Uruguay Round, Article XVIII: b was revised and surveillance procedures were tightened.

Subsidies: LDCs and countries with GNP per capita below $1,000 are exempt from the prohibition on export subsidies. Developing countries that have become competitive in a product—defined as having a global market share of 3.25 percent—must phase out any export subsidies over a two-year period.

United Nations Conference on Trade and Development (UNCTAD), established in 1964, envisaged to strengthen the link between trade and development which was further added in the GATT Treaty of 1965. These developments have contributed to the developing countries. in getting market access for products of export interest to developing countries on a non-reciprocal basis; elimination of restrictions between primary and processed products, taking account of trade policy instruments on developing countries; c) Article XXXVIII, concerning international agreement to improve market access for products of export interest to developing countries.

During 1968-71, GATT granted a waiver for generalized system of preferences (GSPs), which allowed developed countries to provide unilateral trade concessions to developing countries on a generalized and non-reciprocal basis. The Tokyo Round (1979) further allowed developed countries to provide trade preferences to developing countries and deeper preference to LDCs.

However, the Uruguay Round (UR) of multilateral trade negotiations that


61

culminated in the formation of the World Trade Organization (WTO) weakened the special and differential provisions by incorporating the principle of ‘single undertaking’ the member 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 2001 focused much attention to the free trade in favor of developed countries without addressing the problems of the developing countries. Doha Development Agenda (DDA) addressed the issues in favor of developing countries:

labor standard; clarifying the environmental issues as not to be taken as disguised protectionism;

“duty free and quota free” access for products originating from LDCs;

preventing the abuse of trade remedy measures for protectionist purposes;

patent protection on pharmaceutical products until 31 December 2016,

call for addressing the problems of conflict between TRIPS Agreement and UN Convention on Biological Diversity (CBD);

need to address the problem of the nature of S&DT;

concerns on trade, debt, finance, technology transfers, technical assistance, and capacity building.

The Cancun Ministerial Conference of 2003, although failed basically due to a lack of consensus on agriculture issues, succeeded to accept on “continue working on outstanding issues.” The Hong Kong Ministerial Conference of 2005 discussed on the issues of agriculture, non-agricultural markets access (NAMA), services, trade facilitation and development dimension.

Basically, the protectionist tendency prevalent in the importing country may hinder the developing countries to get full benefit from the trading. However, some works have been made in favor of the LDCs for enhancing the supply capacity and competitiveness. The Hong Kong Ministerial Conference brought the idea of “aid for trade.” It is observed that these developments within the framework of WTO would help LDCs including Nepal.

Above-mentioned issues are relevant to Nepal too. However, Nepal also faces all the disadvantages faced by most of the developing countries and has foregone most of its rights during the process of its accession to WTO.


62

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 2013 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 time frame for TRIMS will provide an opportunity for Nepal to impose performance requirements on foreign investors so as to create better linkages of foreign investment with rest of the economy.”5

Two other challenges of Nepal relate to 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 movements. Similarly, another problem associated with Nepal is high dependency on India for its foreign trade. From the perspectives of Nepal’s participation in the multilateral trading system, Nepal needs to diversify its trading partners mainly to reduce the negative implications of dependence on a single large country. Further trading alliance with other LDCs will be beneficial for Nepal.

International Support for Trade

Mobilizing aid for trade has been a new effort in promoting trade in the developing countries. A Conference on Mobilizing Aid for Trade organized by the ADB/ Manila in Manila in September, 2007 highlighted the need for prioritizing the trade as “the export shares as percent of GDP of South Asian economies still fall below world average, and are comparatively low when measured by its South-East Asian neighbors. It is also appearing that, after 2001, 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 2000 (US$ 676 million) and 2006 (US$ 704 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 economies including Peoples' Republic of China and India, and 15 other developing Asian countries. In the total exports of LDCs and Small States of Asia and the Pacific (US$ 151,058 million in 2000 and US$ 301,364 million in 2006), Nepal's share came down to 0 .23 percent in 2006 from 0 .45 percent in 2000 . 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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based on the indicators such as the cost incurred for the trade, number of days taken for the trade, infrastructure like roads, ports, information technology and communications network and other logistics, production technology, liberalization of trade and investment, general business environment, marketing and market access, transit facilities, cross-border connectivity, customs modernization, capacities for trade strategies and negotiations, trade and investment 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 meaningfully participating in the multilateral and regional trading systems. Considering the problems, the new initiatives on Aid for Trade (AfT) could help overcome the problems and open up new trade opportunities for these countries. Nepal may also have breakthrough from these new initiatives.

The sixth WTO Ministerial Conference of December 2005 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 smallest countries benefit from new trading opportunities by building the necessary capacity to trade effectively and efficiently—with donor support coordinated through multilateral partnerships with institutions like the WTO, the World Bank and regional development banks. Each small and weak economy has its own specific needs. Some are isolated and landlocked, others are in a post-conflict environment, and still others enjoy limited raw materials or resource endowments. AfT will help these economies 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 customs officials to help ease the flow of goods across borders and for trade negotiators to take advantage of free trade agreements. And it will also offer help in implementing the required market-oriented reforms and, yes, building the social safety nets needed for people to adjust to the changing economic environment." (Lamy and Kuroda, September, 2007)

In the Conference, the donors have pledged funds for the implementation of the AfT. J apan announced development 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 2010 , and the EU and its member States announced trade-related development assistance spending of 2 billion Euro per year by 2010, totaling around US$ 15 billion. The AfT complements but is not technically a part of the Doha Round of WTO negotiations. The commitment of governments to fully mainstream


64

trade into their national development 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 environment 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 formulation of trade-related infrastructure and capacity development plan.

For example, Nepal can attract support in enhancing the trade-related infrastructure as being the least developed countries in the region, and benefit greatly from better transport connections to its booming neighbors. The US$ 20 million project, approved in 2004, aims to reduce transportation costs associated with Nepal's imports and exports, and to improve the efficiency and organization of transit trade documentation and data exchange. It will also promote sub-regional economic cooperation through better trade facilities under the South Asia Sub-Regional Economic Cooperation (SASEC) Program. The project will, among other things, upgrade about 43-km of two-lane border access roads from Inland Clearance Depots on the southern border of Nepal at major gateways in Birgunj and in Bhairahawa to artery highways.

4.8 Trade Policy and Regulations

The trade policies were dramatically changed in 1992. Earlier, there was regulated trade scenario, and 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, imports of raw materials, consumer goods, industrial machinery, and services were made free. Adoption of open current account system helped to facilitate specially import trade, allowing and maintaining foreign currency account, foreign currency loan facilities, and supporting the export sector. Market rate determination of the exchange rate of national currency helped the exporter to be more competitive in the international market.

Nepal’s trade is directly linked with the macroeconomic performance and the macroeconomic policy variables. The external imbalances of the economy depend on the current account deficits, capital flight, and rapidly expanding external debts, however, internal imbalances 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 investment, and slower output growth. So,


65

reducing absorption would not be the correcting mechanism for the trade imbalance. In contrast, expenditure-switching policies, which increase the domestic prices of the internationally traded goods, will stimulate exports and curtail imports so that the economy 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 demand for wage increases, especially given the militancy of the labor unions these days. Such increased wage demand may lead to further inflationary expectation, which may make importing 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 implementing the labor market reform would not help correct the trade imbalance. In this perspective, the suggestions have to address the macroeconomic policy areas such as fiscal, monetary and the exchange rate, and have to concentrate on the structural areas of the export sector. (Basyal, 2007)

4.9 Conclusion and Suggestion

Nepal at this juncture of low growth scenario requires a very competitive export trade for enhancing the country's external sector strong along with promoting its participation in the multilateral and regional trading systems through tapping the opportunities and addressing the challenges. In this context, the tariff and the non-tariff barriers, constraining Nepal’s trade expansion, need to be relaxed. It requires enhanced negotiating skills of the State and the non-State sectors in order to secure the market access and improve the potential benefits of the liberal multilateral and regional trading regime.

It further requires exploring of potential products, encouraging entrepreneurship, improving the management and production systems, building better industrial relations, and strengthening the human resource capability. Furthermore, focus should be given to enhance the efficiency and capacity of the value chain management so as to increase the competitiveness of the trade including its comprehensive and broad-based development.

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 programs with the private sector to increase the efficiency of delivery systems with a view to competing in overseas markets, supplying to big enterprises, modifying products to meet the standards or tastes of consumers, reducing the number of transactions associated with the supply chains to reduce delivery cost, and developing supply chains that


66

conform to the regulatory requirements in different markets. These all require development of new and better supply chains supported by appropriate strategies.

The trade policies of 1992 were implemented effectively. Necessary institutional changes were made to deregulate the control. Banking and other commercial sectors adopted the changing policies and grew accordingly.

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 government’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 completely free. There are restrictions to trade by Letter of Credit mechanism only. Full payment by telex transfer is allowed for the amount below US$ 3000 only. In the case of export, there is no allowance for credit shipment as practiced in India and China. This restriction is creating hurdles for the expansion of export.

Improvement of the trade-related physical infrastructure such as transport, storage, transactions processing procedure and technology, and information networking is essential to increase international trade and promote and integrate the domestic markets. Standardization and quality enhancement are also helpful to improve the competitiveness of the products.

Strengthening policy and regulatory framework along with its effective implementation for promoting competitive trade built on the national advantages, endowments, priorities, and interests becomes very important. Structural reforms and infrastructure investments to reduce transportation and transactions costs are the key to improving the external competitiveness of the economy (IMF, 2007).

The deficiencies of the knowledge concerning markets, access to the distribution networks, use of the ICT, complicated regulatory procedures of shipments, weak transportation infrastructure and services, limited range of exportable products and their limited volumes, insufficient trade financing are also the constraining factors.


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To address these problems would involve financial resources, time, efforts, proper management, and technical expertise, where the government needs to manage financing through annual budget and through foreign aid. The new initiative of the Aid for Trade would be prime source of funding.


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Table 4.9 : Direction of International Trade Rs. in Million

Annual Growth Rate in % Description 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

1995-2001 2001-2006 1995-2006 Export F.O.B. 19881.1

22636.5

27513.5

35676.3

49822.7

55654.1

46944.8 49930.6 53910.7

58705.7

60234.10

22.86 1.59 11.72 India

3682.6

5226.2

8794.4 12530.7

21220.7

26030.2

27956.2 26430.0 30777.1 38916.9

40714.70

47.86 9.36 27.16 Other

Countries

16198.5

17410.3

18719.1

23145.6

28602.0

29623.9

18988.6 23500.6 23133.6 19788.8

19519.40

12.83 -8.00 1.88 Import C.I.F. 74454.5

93553.4

89002.0

87525.3

108504.9

115687.2

107389.0 124352.1 136277.1

149473.6

173780.30

9.21 8.48 8.85 India

24398.6 24853.3

27331.0

32119.7 39660.1

45211.0

56622.1

70924.2 78739.5

88675.5 107143.10

13.13 18.83 15.95 Other

Countries

50055.9

68700.1

61671.0 55405.6

68844.8

70476.2

50766.9 53427.9 57537.6 60798.1

66637.20

7.08 -1.11 2.90 Trade Balance -54573.4

-70916.9

-61488.5

-51849.0 -58682.2

-60033.1 -60444.2 -74421.5

-82366.4 -90767.9

-113546.20

India

-20716.0 -19627.1

-18536.6

-19589.0

-18439.4

-19180.8

-28665.9 -44494.2 -47962.4 -49758.6

-66428.40

Other Countries

-33857.4 - 51289.8

-42951.9 -32260.0 -40242.8

-40852.3

-31778.3 -29927.3 -34404.0 -41009.3

-47117.80

Total Volume of Trade

94335.6

116189.9

116515.5

123201.6

158327.6

171341.3

154333.8 174282.7

190187.8 208179.3

234014.40

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

Countries

66254.4

86110.4

80390.1

78551.2

97446.8

100100.1

69755.5 76928.5 80671.2 80586.9

86156.60

8.60

-2.96

2.66

% Share in Total Trade

100.0 100.0 100.0 100.0

100.0

100.0

100.0 100.0 100.0 100.0

100.00

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

Countries 70.2

74.1

69.0 63.8

61.5

58.4

45.2

44.1 42.4 38.7

36.82

-3.61 -8.81 -6.25



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Table .10 : Commodity Trade by SITC Group Rs. in Million

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 2001-2006

1995-2006

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



70

Table 4.11 Export of Major Commodities to India

Annual Growth Rate in % Description 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 1995-

2001

2001-2006

1995-2006

Mustard & Linseeds 48.0

35.2

9.5

19.2 29.3

37.9 10.2 46.7

37.6

44.3

47.50

-4.62 4.62 -0.10 Herbs 40.5

52.6

50.9

31.4 61.2

71.5 84.1 111.9

91.5

132.4

133.50

12.04 13.30 12.67 Ghee 35.4

90.0

167.0

39.2 -

470.7 60.0 54.6

76.5

83.1

103.00

67.78 -26.21 11.27 Dried Ginger 47.2

46.5

41.5

41.1

59.5

61.0 80.5 108.4

78.0

80.1

62.20

5.26 0.39 2.80 Pulses 314.7

510.7 198.8

281.2

969.7

713.5 1005.7 880.4

579.1

667.1

643.20

17.79 -2.05 7.41 Kutch 4.2

6.2

7.4

11.3 10.2

12.6 8.8 11.2

13.2

14.1

42.10

24.57 27.29 25.92 Live Animals 176.3

183.4 163.2

54.1 71.9

45.8 56.2 62.5

55.1

56.0

58.00

-23.63 4.84 -10.52 Ginger 137.3

140.7

167.2

151.7 161.5

161.8 207.9 315.4

287.1

161.0

275.20

3.34 11.21 7.20 Oil Cake 103.4

104.1

124.4

165.0 222.4

212.8 302.6 311.1

324.1

317.1

291.60

15.53 6.50 10.92 Catechu

27.1

55.4

69.7

117.3

199.3

150.0

180.4

145.4

162.5

438.7

382.40

40.81

20.58

30.30

Rice Bran Oil 129.3

106.2 95.4

106.7

45.0

124.7 90.6 210.0

194.7

199.0

112.60

-0.72 -2.02 -1.37 Raw Jute 33.0

3.2

5.0

0.1

0.0

113.6 8.3 0.0

0.9

0.0

0.50

28.05 -66.22 -34.23 Jute Cutting 2.8

3.3

1.4

-

0.1

1.1 0.0 0.0

0.0

1.3

48.20

-17.04 112.98 32.92 Jute Goods 453.2

565.1

720.2

871.7

1103.9

1294.2 1630.1 1899.0

1882.6

2693.5

2636.80 23.35 15.30 19.26 a) Hessian 76.1

69.2 155.5

153.2 103.9

50.5 44.7 44.2

143.5

186.1

464.50 -7.87 55.86 19.83 b) Sacking 28.4

74.9

267.3

298.4

403.2

540.4

609.2 855.9

1056.5

1456.2

1265.40

80.25 18.55 46.18 c) Twines 348.7

421.0

297.4

420.1

596.8

703.3

976.2 998.9

682.6

1051.2

906.90

15.06 5.22 10.03 Cardamom 195.4

208.6 227.7

233.4

223.0

298.2 359.9 469.6

451.0

607.0

608.10

8.82 15.32 12.02 Noodles 64.6

141.4 79.9

124.8

126.8

136.0

227.0 309.7

259.7

369.3

414.70

16.05 24.98 20.43 Cattlefeed

31.0

57.2

56.3

139.5

200.9

195.5

215.0

405.9

550.9

547.4

454.60

44.53

18.38

30.81

Tooth Paste 309.2

384.5

823.5

1291.4

2262.9

2033.4

1606.7 1002.8

1478.8

1283.0

730.80

45.75 -18.51 8.98 Polyster Yarn 238.0

326.3

549.5

370.8

630.3

773.6

56.5 59.6

109.0

1896.3

3476.30

26.59 35.06 30.75 Medicine (Ayurvedic) 0.0

0.0

197.9

348.6

511.3

487.4

583.4 743.1

289.9

197.5

301.10

-9.18 Soap 0.0

0.0

568.9

728.3

1083.5

950.6

528.9 469.2

539.6

368.0

363.60

-17.49 Veg. Ghee 0.0

0.0

1580.0

3146.4

2743.0

3560.3 7081.4 3812.3

2959.0

4635.9

3861.70

1.64 Pashmina 0.0

0.0

0.0

0.0

3544.2

2728.5 637.3 475.6

373.1

341.5

210.70

-40.08 Thread 0.0

0.0

0.0

0.0

1169.2

1656.9 846.9 1235.2

1637.4

2213.7

1898.30

2.76 Copper wire Rod 0.0

0.0

0.0

0.0

631.5

2081.6 2620.5 356.6

200.8

530.1

305.80

-31.86 M.S. Pipe 0.0

0.0 0.0

168.7

425.3

353.1

410.4 548.2

851.8

316.6

105.70

-21.43 Plastic Utensils 0.0

0.0 0.0

7.2

302.5

693.9

770.9 807.7

1192.4

1361.6

808.30

3.10 Zinc Sheet 0.0

0.0 0.0

0.2

58.0

72.0

13.3 970.6

2785.3

3070.3

2409.00

101.79 G.I. Pipe 0.0

0.0 0.0

21.3

65.1

328.7 165.9 357.2

556.3

424.0

519.30

9.58 Textiles

0.0

0.0

0.0

115.9

138.0

449.3

562.5

878.2

1780.5

2996.6

2154.60

36.83


71

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



72

Table 4.12 : Export of Major Commodities to Other Countries

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

2001-2006

1995-2006

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



73

Table 4.13 : Import of Selected Commodities from India Rs. in Million

Particulars 2001/02 2002/03 2003/04 2004/05 2005/06 Annual Growth Rate in %

Electrical Goods

800.6

997.5

1106.3

1129.5

1561.3

18.17

Threads 757.0 1105.8 1003.9 1106.3 2166.9 30.07 Tobacco 597.2 534.3 659.9 591.1 599.6 0.10 Transport Equipments 4259. 1 3857.8 4948.2 5133.1 5213.7 71.89 Medicine 2980.4 3225.7 3340.9 3691.6 4389.0 10.16 Chemical Fertilizer 92.4 183.5 563.0 389.2 1052.3 83.70 Cloths (cotton and others) 3232.7 4186.1 3275.6 2195.1 2051.7 -10.74 Vegetable 685.2 772.8 738.4 949.4 1139.6 13.56 Cement 2749.8 2934.7 2318.9 1410.2 1933.6 -8.43 Paper 469.0 431.2 410.1 406.8 603.2 6.49 Horlicks & other milk products

399.2

508.8

428.3

360.6

571.9

9.40

Chemical liquids 1041.6 1906.6 2563.6 3401.9 3281.4 33.23 Agricultural tools & spair parts 350.8 689.9 497.5 527.4 671.6 17.63 M.S. Ware Rod 834.1 939.3 1339.3 1480.0 1065.2 6.30 M.S. bellet 3177.2 3573.2 4201.5 3393.8 3883.4 5.15 Steel Plate 10.7 212.2 6.0 459.7 20.2 17.22 Aluminum Ingut 261.7 304.6 540.0 443.2 259.9 -0.17 Hot Rollsheet (in quail) 928.4 2639.2 2059.9 568.6 1144.8 5.38 Clod Rollsheet (in quail) 1148.7 1392.8 3332.9 4084.5 797.7 -8.71 Other mechinery spairparts 1773.4 2571.8 3295.3 3010.8 3883.4 21.65 Petroleum Products

13906.1

18811.6

20169.5

26653.6

33657.2

24.73

Other 16166.8 19144.8 21940.5 27289.1 37195.5 23.16 Total 56622.10 70924.20 78739.50 88675.50 107143.10 17.29



74

Table 4.14 : Import of Selected Commodities from Other Countries

Particulars 2001/02 2002/03 2003/04 2004/05 2005/06 Annual Growth Rate in %

Gold

618.70

75.0

50.10

4.90

2.90

-73.83

Silver 393.60 283.7 61.90 212.20 53.10 -39.39 Petroleum products 402.20 290.4 291.10 215.60 548.80 8.08 Other Machinery & Parts 2176.10 1936.3 2460.10 2695.90 2830.70 6.80 Electrical goods 1572.10 1443.8 1616.30 1326.40 2872.70 16.27 Threads 1871.30 1456.1 1977.50 998.30 1610.80 -3.68 Raw Wool 1010.90 1604.8 2017.80 2059.80 1511.10 10.57 Transportation equipments 1813.70 1684.5 1625.60 1751.50 2155.70 4.41 Medicine 680.90 619.3 583.10 701.20 1108.10 12.95 Chemical Fertilizer 2559.60 800.6 1281.90 170.50 389.10 -37.56 Paper

443.00

373.8

452.70

198.50

832.00

17.07

Computer parts 1770.60 1420.3 1274.10 1227.00 1353.80 -6.49 Aeroplane spare parts 986.70 996.2 2301.10 980.50 1071.30 2.08 Telecommunication accessories 1065.70 2358.8 2483.90 1860.70 1720.50 12.72 Cloths (cotton & others) 1816.10 2032.0 2752.10 1768.00 2854.30 11.97 Polithene granules 2025.40 2800.4 2834.30 1972.70 3696.70 16.23 Crude Palm Oil 5821.20 5055.6 5277.00 2085.50 4051.10 -8.66 Crude Soyabean Oil 1229.00 1614.2 2079.10 834.60 1572.90 6.36 Copper Wire Rod,Scrapes & Sheets 2095.20 873.7 968.80 1387.20 2089.10 -0.07 Raw Silk 125.00 55.9 50.70 57.30 107.60 -3.68 Others

20289.90

25652.5

25098.40

38289.80

34204.90

13.95

Total 50766.90 53427.90

57537.60

60798.10

66637.20

7.04



75

Table 4.15 : Income and Expenditure of Convertible Foreign Exchange

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

1995-2001

Income 37459.8

38280.4

44983.9

57939.8

64250.0

89823.2

76153.4

98682.5

120643.0

123268.4 157297.5

19.11 11.86 15.43 - Services 8526.4

8459.2

10817.2 15225.8

15836.5 18520.5

14122.7

17264.9

19047.4

20111.8

21757.00

16.78 3.27 9.82 Gorkha Remittances 716.0 979.9 1285.9

1627.0

1288.2

3557.5

4334.2

4221.4

40467.4

5012.8

5231.10

37.80 8.02 22.00

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



76

Table 4.16 : Balance of Payments Summary Rs in Million

Particulars 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 A. Current Account 20148. 5 18161.1

11614.7

14598.0

11544.6

14224.50

Goods : Exports F.O.B. 69788.5

57983.5

50760.7

55228.3

59956.1

61482.4

Oil 13837.0

10452.1

0.0

55228.3

0.0

0.00

Other 55951.5

47531.4

50760.7

0.0

59956.1

61482.40

Goods : Imports F.O.B. -126238.0

-111342.0

-121053.0

-132909.9

-145718.2

-171540.8

Oil -24940.7

-22136.5

-18811.6

-20167.3

-26653.6

-33657.20

Other -101297.3

-89205.5

-102241.4

-112742.6

-119064.6

-137883.60

Balance on Goods -56449.5

-53358.5

-70292.3

-77681.6

-85762.1

-110058.4

Services Net 9302.3

3938.4

7049.7

9074.9

-2034.2

-6818.3

Services : Credit 29821.7 23508.2

26518.9

34315.9

26001.9

26469.70

Travel 11717.0 8654.3

11747.7

18147.4

10463.8

9555.80

Government N.I.E. 7614.2

8894.5

6624.0

7143.9

6804.9

7441.50

Other 10490.5 5959.4

8147.2

9024.6

8733.2

9472.40

Services : Debit -20519.4 -19569.8

-19469.2

-25241.0

-28036.1

-33288.00

Transportation -9308.7 -8854.4

-8618.4

-9382.1

-10602.2

-12592.30 Government N.I.E. -5520.4 -5731.1

-6171.5

-10021.5

-9691.9

-11960.80

Other -5690.3

-4984.3

-4679.3

-5837.4

-7742.0

-8734.90

Balance on Goods and Services -47147.2

-49420.1

-63242.6

-68606.7

-87796.3

-116876.70

Income Net 1700.7

-604.9

-675.7

-1683.9

1636.5

4955.5 Income : Credit

5470.5

4297.0

4487.0

3841.5

7751.6

11432.30

Income : Debit -3769.8

-4901.9

-5162.7

-5525.4

-6115.1

-6476.80

Balance on Goods, Services and Income -45446.5

-50025.0

-63918.3

-70290.6

-86159.8

-111921.2 Current Transfer Net 65595.0

68186.1

75533.0

84888.6

97704.4

126145.70

Current Transfer : Credit 67027.7

70157.3

77765.1

89161.8

101310.1

130861.7

Grants 12046.4

12650.5

13842.2

19557.8

21071.9

18851.10

Workers' Remittances 47216.1

47536.3

54203.3

58587.6

65541.2

97688.50

Pensions 6309.1

8269.6

7327.3

7906.2

12502.2

12007.60

Other 1456.1

1700.9

2392.3

3110.2

2194.8

2314.50

Current Transfer : Debit -1432.7 -1971.2

-2232.1

-4273.2

-3605.7

-4716.00

B. Capital Account

6173.1

5694.0

5393.9

1452.2

1573.6

3107.0

Capital Transfers 6173.1

5694.0

5393.9

1452.2

1573.6

3107.00

Total (Group A plus B) 26321.6

23855.1

17008.6

16050.2

13118.2

17331.5

contd.


77

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



81

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 farms 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 economic reforms, especially in the early-1990s, have counted on structural changes in agriculture to stimulate trade in major 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 more comprehensive reform package could not be implemented well, leaving poverty as extreme as before. Attempts to increase its trade will help meet this challenge, but these will have to be complemented by efforts to ensure food security, nutrition and other basic requirements such as education, health services and awareness to the majority 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) (2002-2007) envisages the early introduction of a series of social safety net measures impacting households through the support of agricultural inputs, public works programs and nutrition assistance, and health services. These can provide the basis for survival and over time allow the possibility for improvements in tradable surpluses among the more vulnerable. Currently, those working in the production of tradable goods fare better; and improving their performance will bring pro-poor benefits to the economy. 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 more important and direct role in poverty alleviation. For this end following conditionality need to be fulfilled:


82

Trade is diversified and targeted at new markets such as fisheries, forestry, horticulture, and in areas which already show promise such as tea and coffee;

Manufacturing activity and the growth of urban centers is supported to generate employment and release pressure on rural land;

Regulatory and infrastructure related problems in transportation is alleviated hence leading to a substantially reduced transportation costs for consumers and producers;

Emigration to neighborhood countries for work is encouraged and remittances should be increased;

Risks are mitigated by enhancing trade in ways that are targeted to specific segments of the population; and

New attention is paid to micro, small and medium-sized enterprises (SMEs), especially in small scale handicrafts, animal husbandry, poultry farming, and other small rural businesses.

Given the severity of the prevailing conditions, none of the individual measures will make a significant difference in welfare; thus, it is essential that Nepal act on all fronts simultaneously with well coordinated donor support. If this is done thoroughly, poverty and extreme poverty will decrease by 10 percent6 within a short period. The implementation of these programs should all include a process of permanent social impact monitoring to track the level of poverty in a periodic basis. This will ensure coordination with key macroeconomic and structural measures that are essential to trade development.

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 impact on the current situation, and examining the potential for using internal and external trade as mechanisms 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 major mechanisms through which increased trade openness affects the poor:

Impacting the prices of goods and services the poor consume 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).


83

produce8;

Affecting the demand for and returns to factors of production that the poor have to offer, such as unskilled labor;

Having an impact on government revenues and the resources available for anti-poverty programs;

Influencing the potential for economic growth, which in turns affects poverty; and

Through design of social protection mechanisms that cope with likely transition costs and the possible increased volatility of growth resulting from the opening up of markets.

This chapter will focus on the social protection mechanisms outlined in the PRSP. Household profiles have been used to assess the impacts of proposed policy changes on poverty alleviation. These profiles help in predicting the potential impacts of various reforms on affected groups. This assessment is judged by using the household survey known as Nepal Living Standard Survey (NLSS) conducted in 2003/04.

In general it is observed that despite extensive poverty manifested by the NLSS, and despite the fact that economic performance within the country, in terms of GDP growth, is not vibrant, the poverty situation is relatively improving. The main reasons include the income inflow in the rural areas through remittances earned by the laborers working in the Gulf countries and Malaysia.

5.2 Poverty Profile

Poverty in Nepal is pervasive and deep-rooted. Various factors have contributed to the prevalence of this state of affairs. The first pioneering attempt to define and quantify the level of poverty in Nepal was made by the National Planning Commission in the fiscal year 1976/ 77 through a survey on employment, income distribution and consumption patterns. Two criteria were envisaged for the delineation of the poverty line: the minimum subsistence level of income and the minimum subsistence level of expenditure. This criterion at that time resulted in a level of poverty of 40 .4 percent. Another significant effort on poverty measurement on a national scale was done by Nepal Rastra Bank, the central bank of Nepal, in 1984/ 85 in the form

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.


84

of a "Multipurpose Household Budget Survey.” This study resulted in the estimation of population below absolute poverty line to be 42 percent.

The Nepal Living Standard Survey (NLSS) was conducted in 1996 by the Central Bureau of Statistics across the country to measure the extent of poverty. It had reported a poverty incidence (head count estimate) of 42 percent. The Survey showed poverty in Nepal more a rural phenomenon and concentrated mostly 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 (2004) is the analysis of poverty based on the household statistics collected during the fiscal year 2003/ 04. The Central Bureau of Statistics conducted this NLSS II as per the framework and procedures followed by the World Bank in conducting such Survey in many countries of the world. The report of NLSS II shows some improvements 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 Development Region, the incidence of poverty is lowest in the Central Development Region (27 percent ) and highest in the Mid-Western Development Region (45 percent ). From the regional perspective, it is estimated that 7.5 percent out of the total poor dwell in the Himalayan Region, 47.1 percent in the Hilly Region and 45.4 percent in the terai Region.( Table 5.1 )


85

Table 5.1: Poverty Situation in Nepal

Area Number of Poor (Percent)

Depth of Poverty (Percent)

Severity of Poverty (Percent)

1995/96 2003/04 1995/96 2003/04 1995/96 2003/04

Nepal 41.8

30.8

100.0

100.0

100.0

100.0

Urban Area 21.6

9.6

3.6

4.7

6.9

15.0

Rural Area 43.3

34.6

96.4

95.3

93.1

85.0

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

Source: National Planning Commission, An assessment of the Implementation of the Tenth Plan (PRSP), Second Progress Report, 2005; NLSS 2003/04.

The practice of analyzing poverty with respect to the indicators of human development and overall social inclusion is increasing instead of looking merely on the income generation aspect. Such practice of incorporating social indicators including economic factors has begun in Nepal as well. Indicators related to human development is inclusive of the literacy rate, enrolment at the primary school level, infant mortality rate, maternal mortality rate, average life expectancy, access to safe drinking water, utilization of housing facilities, access to public services, etc.

The NLSS 2003/ 04 reported some major improvements in living standards and access to basic services as follows:


86

Table 5.2: Poverty profile: NLSS-I and NLSS-II

Description NLSS-I NLSS-II Households (%) with less than adequate Food Consumption 50.9 31.2 Housing 64.1 40.6 Clothing 57.6 35.6 Health care 58.7 28.3 Schooling 45.4 21.4 Total income 72.6 67.0 Adult Literacy (15+) 35.6 48.0 Female 19.4 33.8 Male

53.5

64.5

Net Enrolment Rate

57.0

72.4

Female 46.0 66.9 Male 67.0 77.9 Children fully immunized 36.0 59.4 Access to electricity 14.1 37.2 Access to piped water 32.8 43.9 Access to toilet facility

21.6

38.7

Household access to facility within 30 minutes Primary school 88.4 91.4 Health post/hospital 44.8 61.8 Agriculture center 24.5 31.9 Commercial banks 20.7 27.8 Paved roads 24.2 37.2 Motor roads 38.0 67.6

Source: National Planning Commission, An assessment of the Implementation of the Tenth Plan (PRSP), Second Progress Report, 2005; NLSS 2003/04.

The Nepal Human Development Report (NHDR)

highlights weak

governance as the major factor contributing such a poor status of Nepal and stresses it as missing link to reform the process.

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 among people of the so called “lower castes and indigenous groups.”

5.3. Chronic vs. Transient Poverty

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 multi-dimensional 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.


87

a long time is by its nature not chronic. However, it is hypothesized that duration, multi-dimensionality and severity of poverty build upon each other. Thus, while those in severe income poverty at any given time are not necessarily chronically poor, the chronically poor are likely to be experiencing severe and multi-dimensional poverty. Further, duration (as well as multi-dimensionality) can be considered as a specific type of poverty severity in itself (Hulme, Moore and Shepherd 2001).

It should, however, be noted that these relationships are empirical, 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 measures used such that the longer the interval between studies the less likely that some people will still be poor (or not poor).

The UK based Chronic Poverty Research Centre (CPRC), in its research on chronic poverty, concentrates mostly on the following two types of 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

people whose incomes (or capabilities or multiple dimension of deprivation) have been below a ‘poverty line’ over an extended period of time.

Empirical studies have shown that chronic poverty, in general, is caused by a number of factors, such as, economic, social, political and environmental.

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 incomes or consumption levels in each period fall below a poverty line.

Usually poor: This type includes those poor whose mean 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 sometimes classified as poor and sometimes non-poor in different periods.

Occasionally Poor: This category includes those individuals or households with mean expenditures over all periods above the poverty line but at least one period below the poverty line.


88

Never poor: This category includes those individuals or households whose mean expenditure in all periods is above the poverty line.

Furthermore, 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 supplemented by examinations of the factors that are associated with transitions between those categories (Hulme, Moore and Shepherd, 2001).

Nepal’s Transient Poverty: Situation and Trend

In 1995/ 96, the Nepal Living Standards Survey (NLSS) provided the poverty estimates 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 most part appeared to be a rural phenomenon. Further, at the national level, the intensity of poverty was estimated to be 0 .12 and severity 0 .05. Based on an exercise undertaken within the NPC in 2000 , the poverty incidence for Nepal was estimated 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

Region Head-count Index (proportion of population

below poverty line)

Poverty Gap Index

1995/1996 2003/04 1995/96 2003/04 Ecological Zone Mountain 57.0 32.6 18.5 Hills 40.7 34.5 13.6 terai 40.3 27.6 0.99 Sector: urban 21.6 9.6 6.54 2.18

Sector: rural 43.3 34.6 12.14 8.5 National Average 41.8 30.85 11.75 7.55

Source: NPC 1998; CBS/World Bank 2005

Poverty in 2003/04

The NPC has recently made available the poverty figures based on the NLSS


89

2003/ 04 according to which the poverty incidence for 2003/ 04 has been reduced to 30.85 percent. The predominance of rural poverty in Nepal has been further substantiated by the NLSS 2003/ 04 dataset based on which 95 percent of the poor people of Nepal live in rural areas. This suggests a decline of 11 percentage points in poverty incidence during an eight-year period (from 42 percent in 1995/ 96 to 31 percent in 2003/ 04). The probable reasons for this decline are: remittance-supported consumption, increased income of agricultural labor, massive increment in economically active population, rapid urbanization and increase in non-farm incomes (CBS/World Bank 2005).

Furthermore, 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 increment 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 major agro-ecological zones. For example, rural poverty incidence is highest in the hills (42 percent) followed by the mountains (33 percent) and the Terai (29 percent) (NPC/UN 2005).

In 2003/ 04, poverty also appears to vary based on land ownership and major sources of livelihoods (own-farm agriculture, agricultural wage labor and non-farm). For instance, Small Farmers, operating less than 1 hectare of land, represent the largest group of rural poor households, accounting for 53 percent of poor rural households. As shown in Table 5.4, poverty is also high among medium farmers of the Eastern Hills (36 percent) while poverty between other medium as well as large farmers varies only between 17 to 19 percent.


90

Table 5. 4: Incidence of Poverty Among Rural Household Groups

Household Types Poor household (%)

Poor HH as a % of total rural population

Per Capita Incomes (1995

NRs.) Small Farmers-Mountains 29.03 4.76 7,652 Small Farmers- Eastern-hills 42.56 16.88 6,881 Small Farmers – Western Hills 35.05 17.58 7,323 Small Farmers – Terai 25.10 14.47 8,832 Medium Farmers – Terai 17.35 4.91 8,670 Medium farmers –Eastern Hills and Mountains

35.98 6.19 7,737

Medium farmers –Western Hills and Mountains

18.31 2.26 9,365

Large Farmers 18.93 4.71 11,211 Agricultural Laborers

45.64

13.25

5,922

Non-farm – Terai 19.96 6.23 11,402 Non-farm -Other 31.61 9.43 10,493 Total 29.70 100.0 8,596 Source: CBS/World Bank 2005 (preliminary work in collaboration with the World Bank, based on NLSS 2003/04)

The NLSS 2003/ 04 further indicates that households headed by agricultural wage laborers are the poorest (with a 46 percent poverty incidence) while the second poorest group consists of those who live in households headed by self-employed in agriculture. Furthermore, household size of seven or more has the highest poverty incidence of 41.4 percent while it was only 20 percent for those households, which had only four members. Similarly, the 2003/ 04 data further substantiate that land-ownership is the crucial factor determining poverty as 39 percent of the people having less than 0 .2 hectares of land are poor while only 24 percent of those are poor who own more than two hectares of land. The data also substantiate the significance of literacy/ education in reducing poverty. The survey results have shown that illiterate households have the highest poverty rate of about 42 percent while poverty incidence of those households with over eleven years schooling is mere 1.6 percent.

Overall, during 1995/ 96-2003/ 04, poverty seems to have declined among all rural household groups except for the Small and Medium farmers in the Eastern Hills. During the same period, the share of Small Farmers among the rural poor increased from 45 to 54 percent, the share of medium 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.


91

5.4 Other Aspects of Poverty

Nepal is currently ranked 140 in the HDI ladder just below Bangladesh. Even though noteworthy improvements 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 2004 (based on 2002 data) is 0 .504. Compared to the previous years, Nepal has now moved from the group of Low Human Development countries to the group of Medium level Human Development countries (UNDP,, 2004). All countries in South Asia are better placed than Nepal in terms of the HDI value, except for Pakistan.

Moreover, the 2003/ 04 figures indicate that there are major differences by caste and ethnic group in the degree to which poverty has been reduced. For instance, poverty incidence among the Hill Dalits is 46 percent while it is 43 percent for Hill J anajati and 41 percent for Muslim. In particular, Dalits as a whole have a 15 percent higher incidence of poverty than the Nepal average. Interestingly, poverty incidence among Tamangs is 61 percent , which is nearly twice the national average and more than the poverty incidence among Dalit. Furthermore, the consumption levels among Dalit, Muslim and Hill Janajati are the lowest.

Furthermore, during 1995/ 96 – 2003/ 04, the real per capita expenditure (PCE) increased by 42 percent (42 percent in urban areas compared to 27 percent in rural areas). Overall, data indicate a remarkable growth in consumption for the wealthier population and, in turn, a sharp increase in inequality. Moreover, during the same period, inequality based on the real per capita expenditure in the urban areas is higher than the inequality in rural areas.

Feminization of Poverty

Despite lack of information on economic indicators (mainly consumption and income) at the individual level, it is still possible to analyze two measures of poverty, namely, the size distribution of male and female in poor households and the poverty incidence of female-headed households. NLSS data for 1995/ 96 did not indicate that there were more females than males in the poor households. However, some sort of feminization 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 more likely to be poor if there was no adult male present (World Bank 1999).


92

However, the above finding is not substantiated by the NLSS 2003/ 04. Analyses of this new dataset, interestingly, show that female-headed households exhibit a lower incidence of poverty of 23.8 percent as compared with male-headed households’ poverty of 32 percent. In 1995/ 96, 9 percent of the population was reported to have been living in female-headed households with a poverty incidence of 42 percent. In 2003/ 04, 14 percent of the population was in female-headed households and the poverty incidence among these households declined to 24 percent, which is lower than the national average of 31 percent. One possible explanation could be the inflow of remittance income among such households as the male member could have been working abroad. But the 2003/ 04 data further reveals that those households are poorer which have greater number of small children and/ or larger number of household members. Furthermore, the rate of poverty reduction among the households with 2 or more smaller children or 6 or more family members is slower than average (poverty reduction) rate. These suggest that there could be an adverse impact on women (suggesting a greater hardship) particularly because of a slower poverty reduction rate among households with greater number of children.

5.5 Poverty Reduction Strategy Paper (PRSP)

In recent years, poverty reduction has been the overriding concern of the planned efforts for development. The first attempt to formulate a separate plan with long-term perspective for poverty alleviation was made 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.

The Tenth Plan (2002-07), also known as Nepal's Poverty Reduction Strategy Paper (PRSP), had recognized the role of local bodies, community organizations and NGOs in development and reflects the government's commitment 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.

PRSP of Nepal emphasized in maintaining macroeconomic stability and implementation of structural and policy reform in key areas. Annual monitoring of the status of poverty and other targets have been made mandatory to ensure effective implementation of programs, and process monitoring has been given due importance. It is well linked with annual


93

budget through the Medium Term Expenditure Framework (MTEF).

Strategic Pillars and Targets of PRSP/Tenth Plan

The PRSP/ Tenth Plan had a target of reducing poverty of the population from 38 percent at the beginning of the Plan (2001/ 02) to 30 percent by 2006/ 07. For this, PRSP had formulated a closely inter-related four-pillar strategies such as (a) high, sustainable and broad-based economic growth; (b) improvement in access and quality of infrastructure, social and economic services in the rural areas; (c) targeted programs for social and economic 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 mortality rate to 45; reduction of maternal mortality rate to 300, increase of life expectancy to 65 years; increase of access to drinking water to 85 percent of the population and electricity to 55 percent; and increase in school enrolment 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:

First, the poverty reduction strategy is made rural-oriented and has focused the growth strategy to be broad-based and pro-poor, besides supporting overall income and employment growth,

Second, the priority is given to actions and interventions, which give quick results, as compared to investments that, usually take a long time. This requires a careful balancing to short-term as well as long-term needs.

Third, the Plan has given a strong strategic focus and concentrated on a few important approaches and interventions, which would deliver quick results to the rural poor.

Fourth, the Plan has focus on the interventions and policies to reassess time to time and revised if necessary in order to achieve the poverty reduction goals.

Poverty Monitoring Analysis System

The Government has emphasized on effective monitoring of the PRSP through institutionalizing the Poverty Monitoring and Analysis System (PMAS). The


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primary objective of the PMAS is to coordinate, consolidate, harmonize, and analyze data from the existing monitoring system and to communicate results in ways, which provide effective feedback to the policy change. It seeks to accomplish through: (i) implementation monitoring; (ii) outcome monitoring; (iii) impact analysis; (iv) poverty management information system; and (v) communication and advocacy.

Implementation monitoring relies primarily on input and output indicators and intermediate process indicators. The aim is to: (a) monitor budget allocation of all priority programs and policies; (b) monitor process/ activity indicators of the policies and programs; and , (c) monitoring the level of achievement of outputs of main PRS policies and programs.

Outcome monitoring tracks the changes in overall well-being of impacts over time. The goal is not to attribute outcomes to specific programs or policies but to focus on impact indicators, or a subset of closely related indicators. In order to generate survey data for this type of monitoring, the government has decided to streamline household surveys and rely primarily on the NLSS and NDHS conducted at the interval of five years.

Impact analysis establishes linkages between outcomes/ impacts and the programs being monitored. It has two main objectives: (a) to assess the effect of a specific policy, program/ project on poverty or some other well-being outcome, and (b) to assess the efficiency of different policies/ programs in achieving a given well-being outcome, i.e. could other policies or programs 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 Management Information System (PMIS), which would link all major data bases relevant to poverty monitoring. The main objective of PMIS is to assist decision-making by: (i) providing instant access to relevant, correct information on poverty, (ii) making existing information coherent, compatible and consistent, (iii) serving as a flexible and evolving mechanism for data storage and analysis, and (iv) ensuring data access while continuously generating information through greater control and monitoring function.

Nepal Info has been developed as a database software tool that features a comprehensive set of social development indicators selected to monitor the PRSP, MDGs and other key development parameters. Nepal Info provides information for poverty monitoring and thus helps in operationalizing and institutionalizing the PMAS for effective monitoring of PRSP and MDGs for global as well as local level monitoring systems.


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Monitoring progress towards PRSP including MDGs remains the mandate of the National Planning Commission (NPC). A Poverty Monitoring Division (PMD) has been established in the NPC, with the mandate of monitoring and analyzing poverty trends; tracking progress towards key human development and MDG indicators and the implementation of measures 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.

In this way, the information on implementation monitoring is mainly collected from routine data system and management information system such as the Health Management Information System and the Education Management Information System of the concerned ministries. The outcome indicators under the outcome-monitoring component of PMAS are monitored based on the information collected from national household surveys. In order to link the implementation and outcome monitoring, an impact assessment of relevant policies and programs are conducted annually. It is important that the information generated from the three major components of the monitoring and evaluation is stored in a management information system to promote easy access of data for different stakeholders and thus provide a basis for enhanced communication and advocacy

Result-based Management approach has been adopted for monitoring effectiveness of developmental activities. A participatory poverty monitoring mechanism has also been used to incorporate the voice of the civil society and the people. Participatory monitoring at different levels complements the macro-monitoring systems. The Government is institutionalizing participatory monitoring as a part of the PMAS to ensure greater accountability at all levels and also to facilitate quick interventions for making necessary corrections. The participatory monitoring tools include citizens' report cards, social audits, budget reviews by civil society groups and parliamentary reviews of policy and program/project performance.

5.6 PRSP and Millennium Development Goals (MDGs)

Nepal endorsed the Millennium Declaration in September 2000 and has committed to work towards achieving the MDGs. The MDGs set quantitative poverty reduction targets and specific goals in health, education, gender equality, environment and other aspects of human development. Most of the indicators and targets of the MDGs are included in the Tenth Plan. However,


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in order to ensure focused realization of the goals, the government is undertaking a need assessment exercise, which encompasses five sectors – primary education, child and maternal mortality, communicable diseases, drinking water and sanitation, and rural roads and rural electrification. The study indicates that unless the country receives additional resources especially from foreign assistance, MDGs are hard to achieve by 2015. However, the government has made consistent effort at expenditure management and increased revenue mobilization.

In 2002, Nepal published its first MDG Progress Report. In 2005, the government released the second MDG progress report, which is the first five-year mark for reviewing the progress made towards achieving the MDGs globally. The report is expected to enlarge the national capacity for monitoring and reporting on progress as well as strengthening the foundation for preparing future national development strategies.

Achievements

The mid-period achievements of the PRSP/ Tenth Plan are generally satisfactory, given the difficult development environment resulting from the prevailing conflict situation until April 2006. Nepal's basic economic indicators, though critical in some cases, have improved over the years. It was possible to attain and maintain the growth levels because of stringent fiscal and monetary discipline, and enhanced efforts to reduce poverty through improvements in governance, corruption control, and continued implementation of targeted and quick-yielding programs.

The concept of MTEF was introduced in 2002. The framework was used as an effective public expenditure planning and programming instrument with basic objectives as – making development budget more realistic, reducing number of priority projects/ programs, linking projects/ programs 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. Performance-based budget release system has also been internalized from 2003 onwards.

The devolution process has begun with transfer of management responsibility of primary schools, sub-health posts and agriculture and livestock extension services. The government is also transferring responsibility for building local infrastructures, such as small irrigation schemes, rural drinking water systems, and rural roads to local bodies and community organizations. Besides, this full devolution is being initiated throughout the country in a phase-wise manner.


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An autonomous Poverty Alleviation Fund (PAF) has been institutionalized and implemented at all 75 districts of the country to address the root causes of conflict, emerged mainly from exclusion, deprivation and income inequality.

The development of the PMAS is a milestone, which offers an opportunity to harmonize donors in the field of poverty monitoring and MDG tracking.

Political instability and conflict have affected service delivery and hampered the efforts towards building the social capital. To explore a new mechanism has been a great challenge for the successful implementation of the PRSP. The existing government mechanism and people's participation for service delivery should be further strengthened. It would help achieve sustained implementation and management of service delivery systems. To build the macro-economic framework more sensitive to poor and to allocate more resources to anti-poverty programs and projects have become very complex 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.

5.7 Impact of Trade Policy on Poverty

The PRSP lays the basis for providing both short-term mitigation and long-term solutions to poverty within a comprehensive framework of policy reform, structural changes, and program implementation. This comprehensive approach is necessary if trade is to have an important role, as it should, in poverty reduction. This is because many 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 commodities, etc. It is also evident that programs such as those dealing with various social safety net activities are necessary conditions for any improvement in trade opportunities. The poverty problems of Nepal are so broad and deep that many factors have to be addressed simultaneously and no single policy change is sufficient of itself. And because of the structure of household income, and the clearly felt need for food security, a series of overall policy changes are needed and improvements in trade – may be just as effective in a number of areas through small, targeted programs.

In implementing programs for poverty reduction policymakers tend to be interested in what the effects of a reform are for functional or geographical groupings e.g. rice farmers versus informal urban workers or western region vis-à-vis eastern region. In case of Nepal there might be varied possible groupings e.g. ethnicity, location, homogeneity in economic activities, land


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ownership etc. A number of policy changes and specific actions are needed to inject cash into the economy and to modify the vicious circle of poverty. The limitations in baseline data do not allow the direct and satisfactory testing of these, but provide sufficient evidence to suggest that robust and simultaneous actions can free Nepalese people from this poverty circle.

In case of Malawi9, an African landlocked country, reveals the fact that some factors have positive impact on the reduction of poverty through increased level of trade. These are:

a reduction in transportation costs;

an increase in soil quality and thus improvements in yields through the provision of fertilizer;

an expansion in employment in forestry and construction industry with the implementation of the public works program and expansion in manufacturing industry with capacity-building and reforms; and

increase in income from cash crops through diversification and higher level of food security.

These factors are quite similar to Nepal. The simulations made on the factor reveals that decrease in the transportation cost by 25 percent can have positive impact on increasing the trade volume, primarily the export volume could be increased and could befit both the producers and consumers. Households in the lower and middle expenditure deciles capture a greater percentage of income gains when transport margins for purchase of consumption items, inputs for crops and for the marketing of their produce is reduced. In addition, there may be additional benefits such as the greater use of markets by households which, in turn, will encourage the use of more 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 competitiveness of Nepal’s exports more generally. The recent access of road network to the apple producers of J umla and Kalikot districts will have similar impact 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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Increasing Yields of Cash Crops

Transformation of agriculture in Nepal is quite slow. However, some districts such as Ilam of far eastern region has been an exemplary case, where farmers are shifting their land cultivation from cereal crops to cash crops. Farmers are abandoning production of maize, rice and wheat and planting tea, cardamom, ginger, amrisho, grass (for feeding cattle and buffaloes), vegetable, and herbs. The farmers mostly sell their products to the exporters and meet their food grain requirements from purchase. This sort of changing cultivation pattern has helped alleviate the poverty level to a maximum extent. Due high income raising crops, the farmers are now interested to use organic fertilizer rather than to depending on chemical fertilizers and pesticides.

Increasing Non-Farm Employment

Currently about three percent of Nepali laborers are employed in manufacturing industries and construction. In the Tenth Plan under the targeted program, public works such as construction of rural roads, irrigation canals and other rural-based physical infrastructure works, were emphasized by deploying rural laborers through food for work programs, and other rehabilitation and reconstruction programs. It was found that the construction laborers are paid good wage rate – two to three times higher than the officially set wage rate of Rs 70 per day. A large number of laborers mostly of the high hills and mountain get benefit from these programs.

It is therefore assumed that if the transportation costs are reduced by 50 percent, food crop yields are increased, and jobs in public works are created, and income impacts of diversification of crops give high rate of return in agriculture produce, the impact on poverty reduction will be greater.

A study10 on Nepal reveals the poverty impacts of trade liberalization and reveals that urban poverty falls and rural poverty increases if the tariffs on agriculture produce are high. and in long run income inequality increases. This also show that cost of production should minimize primarily to exportable goods so that the goods can penetrate in the international markets. .

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

Nepal has a daunting challenge to reduce poverty. Attempts 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 employment should be increased substantially through public works programs. Furthermore cash crop production should be further increased, tradable goods production should be diversified, large-scale temporary employment through public works programs should be created, and transport costs should be reduced. All these should be done all together and concomitantly.

The problems are so broad and deep that many factors have to be addressed simultaneously to achieve results. Conversely, implementing a single policy has only a marginal impact on the economy. The measures based on actions listed below have visibly pro-poor and pro-rural impacts; some also produce positive impacts on households headed by women. If these actions are not jointly implemented the returns to individual interventions will be modest. For instance, if public works programs create no new jobs, all other measures would all together produce less than 9 percent improvement in the household sector. The key mechanisms of the much needed changes require political will as well as well coordinated donor support to protect the poorest.

The achievements made so far in PRSP implementation are not self-sustaining. It needs a concerted effort on the part of the government to take effective reforms and development measures. The key for implementing these actions would be to devolve more and more functions to local bodies and community organizations and encourage the widest possible participation of stakeholders during implementation. The process would further help empower people by putting them accountable of their development. This would set limits to the government, donors and other agencies to play supportive role rather than involve in direct implementation. These efforts need to be backed up with adequate funds and strong monitoring process. Reform programs initiated in all fronts, particularly in fiscal decentralization and governance should be expedited. Poverty monitoring system needs to be well established at all levels to achieve the overriding goal of poverty alleviation and other sectoral goals set in the PRSP.


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Chapter VI


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 commercially in Nepal since the 1863 with the influence of East India Company. A number 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 fame, Ilam tea although having a good orthodox variety of production could not gain adequate international market. The production even could not meet the national demand of the country basically due to high price.

In 1966, the Government of Nepal established Nepal Tea Development Corporation with a view to promote tea farming and tea processing to meet national demand as well as export to surplus tea to other countries. However, with the Government policy to privatize public enterprises, the NTDC was also privatized in 1993 and its regulatory authorities were handed to the state owned National Tea Development Corporation. In 2000, the Ministry of Agriculture and Cooperatives formulated a new tea sector policy with a view to enhance facilities of credit to the tea producers and exporters.

In Nepal, there are orthodox and CTC types of tea produced in hilly areas of the country. Orthodox tea is primarily produced in Ilam district, which now has been proliferated in other districts, such as Panchthar, Dhankuta, Terathum, Sindhupalchowk, and Kaski. The climate 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 volume of orthodox tea is about 15 percent. In the FY 2005/ 06, it was cultivated in about 9775 ha and produced 1600 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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Most of the tea production comes from the small holders, though there have been numbers of tea estates. This sector involves 18750 small farmers and thus has given opportunity to employment 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 complete export, the earnings of the small farmers are quite high.

Table 6.1: Status Tea Production in Nepal (2005/06)

Description Orthodox CTC Total Area / ha 9775 8951 18,726 Production / tons 1600 13000 14600 Export as % of total production 96 40 46.1 Tea estates

63

94

157

Factories 19 25 44 Small farmers share in area (percentage) 77 26.62 67.9 No. of small farmers 18750 8744 27,494 Small farmers % share in production 67.8 28.6 32.9 No. of workers 55000 65000 120,000

Source: Ministry of Agriculture and Cooperatives.

As compared to orthodox tea, ctc tea is primarily 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 estimated that it meets an annual demand of about 90 percent of the domestic tea demand.

Although institutional supports are provided by the Government for increasing production of the both orthodox tea and ctc tea, the basic priority is given by the tea policy of 2000 for the promotion of orthodox tea as it has comparatively high value and export possibility. At present GTZ and Winrock International are supporting the producers in marketing and technical trainings.

Tea production faces a number of problems such low economy 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 marketing of the finished products.

6.2 Status of Tea Exports in Nepal

Although Nepal has a long history of export of orthodox tea, formal and organized tea export has been found in past few decades. In 2003 the export volume was less than 100 metric ton, but after the increase in awareness and


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interests of the farmers in cash crops, tea production in the eastern part of the country increased rapidly and, as a consequence, the export volume 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$ 1200 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 dramatically within the span of 10 years. It is observed that compared to the value of exported tea the value of imported 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$2200, which decreased to US$ 1200 in 2003, and again jumped to US$ 2400 in 2004. Besides this uncertainty in the prices the value of export is consistently high.

Source: FAO 2006

In comparison to the world trade of tea, it is observed that Nepal occupies only 0 .2 percent of the total volume 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:

Nepal's Tea Trade 1994 - 2004

0

1,000

2,000

3,000

4,000

5,000

6,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Year

Import 1000$

Export 1000$


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Table 6. 2

Export of Nepal’s Tea in Selected Countries (FY 2004/05)

Description (Importers of Nepal tea)

Export value in $ 1000

Export Quantity in tons

Unit value 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 comparison to the ctc tea. In the year 2004/ 05, tea was exported mostly to the following countries:

Country

Metric Ton

Price per M Ton

in US $

Japan 3 metric ton

15,252

USA 1 metric ton

12,000

Germany 77 metric ton

8,777

Holland 13 metric ton

5,538

Belgium 2 metric ton

5,000

India 2869 metric ton

1,290

Pakistan 631 metric ton

1,154

Nepal’s tea production basically suffers from the economy of scale. Although there is a huge market of orthodox tea in Germany, Russia, and the USA, the


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importers 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 importers from Russia demand ctc tea in bulk, which is not possible to supply from the present production quantity and business scale of the country.

6. 3 Some Issues on Tea Production

Production Costs in the Estate Sector

Production costs in the estate sector are difficult to ascertain for reasons of commercial 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 investment 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 most producers are struggling to make sufficient profits for adequate reinvestment in factories, irrigation, and replanting. The limited investment that is taking place at present supports this view.

Other issues

Low prices for the last four years

Unstable exchange rate for the Nepali Rupee against US Dollar affecting export.

Lack of adequate formal credit and high interest rates on borrowings

High tariffs for electricity.

Inadequate social welfare programs for the laborers such as housing, water, education, and health.

Continued hike in wage rates.

Ineffective role of labor trade unions to resolve labor disputes.

Lack of R & D


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6.3 New Initiations in Tea Sector

The tea sector of Nepal consists of small landholders and large-scale tea estates – both known as private producers. The Government after privatizing the Nepal Tea Development Corporation has initiated policies to promote the individual farmers and entrepreneurs with a view to involve private companies in production and marketing of processed tea. The National Tea Policy of 2000 aimed at providing financial incentives for encouraging investment, facilitate in the access land required to plantations, develop institutions to promote export, and maintain quality of final product. In building human resources, it aimed 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 small holders. Additional efforts are being made to expand in new districts, such as Solukhumbu, Dolakha, Sindhupalchowk, Nuwakot, and Kaski districts. Except Kaski district, no much effort could have been made in expanding its cultivation in western three regions of the country.

The features of tea cultivation can be summarized as follows:

In 1995/ 96, the total tea cultivated was 3,300 ha which increased to 18,726 ha by the end of 2005/ 06 at an annual growth rate of 19.0 percent in last 10 year period.

In 1995/ 96, the total tea production was 2,100 M Tons which increased to 14,600 ha by the end of 2005/ 06 at an annual growth rate of 21.4 percent in last 10 year period.

At present there are 157 tea estates and 27,494 farmers involved in tea production.

The share of total tea production between the tea estates and the small farmers/holders is almost equal.

The estates and the tea factories provided employment to as much as 120,000 workers.


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6.4 SWOT Analysis for the Tea Industry

Strength, weakness, Opportunity, and Threat (SWOT) has been analyzed to see the prospects of Tea Industry in Nepal for poverty reduction. Strengths and Weaknesses are based on internal factors that are within the control of firms or the industry working together. Opportunities and Threats are based on external factors, beyond the control of the industry.

Strengths

Long established estate sector that is well organized and functions well

Well established efficient routes to stable export markets (EU, J apan, USA, and Russia)

Strengthening relationship between newly established tea estates and factories (having both technical and processing capacity), and smallholders who have higher quality green leaf available.

Improving supports from the estates to the smallholders

Credit facilities for fertilizer and meeting labor cost.

Gradual increase in smallholders’ area under tea due to improving returns and regular income.

Support for improving good quality for higher yielding varieties suitable for hill districts of Nepal.

Weaknesses

Production is too dependent on rainfall making it vulnerable to poor rains.

Production is very concentrated with 80 percent of green leaf available in 20 weeks, making poor use of capacity.

Predominant .seedling. variety is relatively low yielding, compared even to other competitors of South Asia.

Predominant .seedling. variety produces low to medium quality tea resulting in relatively low prices compared to other competitors.

Estate production costs are relatively high due to limited investment in new processing plant.


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Continuing low profitability over the last four years has limited reinvestment.

Limited access to finance at viable interest rates.

Lack of adequate attention to support the sector

Smallholders are relatively inefficient due to limited access to inputs (fertilizer) and technical know-how and support

Some factories very old processing equipment and has very limited operating resources.

The factories are not successful in promptly collecting green leaves supplied by the smallholders.

Opportunities

Replanting program of new orthodox varieties suitable for Nepal with higher yields and quality to improve long-term viability

Increasing sales of tea through direct export to the European, American, Russian, and Japanese markets might improve immediate profitability.

Continued development of other export markets to provide more diversified and more profitable markets

Irrigation support to small farmers needs to be enhanced to increase production of tea.

Investment support in new processing equipment to improve yield and quality of tea.

Improve the infrastructure for getting product to export markets to reduce marketing/ selling costs resulting from landlocked position of Nepal.

Threats

Continuation or worsening of high credit cost including the high interest rates has an adverse effect on profits and investment

Continued labor migration to Gulf countries and Malaysia drives up the cost of labor.

Lack of proper and adequate prioritization of the Government in this


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sector may lead further inefficiency and poor return in the industry.

Continued threat of propaganda of the use of child labor and pesticides and chemical fertilizers may adversely affect export in developed countries.

Loss of export sales through dependence on a limited number of export destinations.

Continued weak or declining world prices for tea undermines sector profitability further.

World supply grows at a higher rate than demand which continuously exert pressure on marinating high at a high cost.

6.5 Poverty Analysis

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 times higher than the cereal crops. So the marginalized small farmers have been able to gain substantive income from the tea plantation and alleviate their poverty level. Irrespective of other factors, the human development indicators, it is quite sure that the income earned by these farmers is sufficient to meet the income requirement.

With the assumption that one worker’s income is sufficient to meet the poverty alleviation level income; the workers families are definitely found living above the poverty level. In this context, with the assumption of a family of 5.5 members, it is assumed that it has directly benefited about 660 ,000 population of workers family. Similarly, a total of 151,271 populations of small and marginalized farmers have received substantive benefit from tea plantation.

Consequently, many new entrant-farmers are found attracted in this cash crop and given up traditional farming. The farmers are now growing tea and utilize their income from tea for purchasing essential food grains.

The adequate knowledge of technology, and marketing 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 is a gradual improvement in yield and production because:

underlying estate productivity is likely to be increasing due to the adoption of better technologies and practices over time, whilst the area under tea is stable;

there is a gradual replanting of old seedling varieties with higher yielding orthodox tea;

there has been some investment in irrigation that would produce significant increases in yields, especially of ctc tea;

there appears to have been an increase in smallholder land under tea over the last ten years;

smallholder yields appear to be improving due to increasing number of farmers receiving assistance (fertilizer loans, extension help and

more regular collection/ processing of their crop) from the estates that they now sell directly to.

The main priorities for the estate sector seem to be investment in factory renovation and replanting. Refurbishment should be made immediately 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 development of the relationships between estates and smallholders has considerably more potential for both parties so that smallholders can get the return regularly from their sell of green-raw leaves.

Smallholders’ tea has the potential to deliver poverty reduction benefits. As a crop, tea has the attraction of a regular income and being relatively easy to grow, once established. There is potential to impact on a significantly greater number of households.


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Chapter VII

Summary, Conclusion, and Policy Recommendations

7.1 Summary

Structure of the Economy and Trade

Besides having a long experience of planned development and several initiations to promote economic growth and industrial development, the economy is still traditional. Over the years, with the rise in per capita income, basically earned from foreign employment earnings, the consumption pattern has changed and there has been increasing trade imbalances.

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 number of the people of these areas are poor and illiterate.

Various reform measures were adopted in the past such as:

New reforms in Industrial Policy and changes in the regulation of industries and foreign investment

More facilities for FDI

Withdrawal of governmental subsidy for inputs in agriculture sector

No market intervention in agricultural products

Agriculture and Land Reform

However, these macroeconomic policy measures could not bring substantial improvement in the socio-economic life of the people.

Land distribution and the structure of land ownership, most of the people residing in the rural areas are small and marginal farmers and are basically poor. Traditional and primitive agricultural base has not allowed them to rise


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from the extreme poverty level.

Rural agricultural production system is characterized as subsistence farming. The economy of this rural sector is less-monetized and the rural sector is still having more closed economy.

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.

The land distribution is much skewed with 6 percent if the population occupying 33 percent of the land and 40 percent of the agriculture household operate only 9 percent of the agriculture land. Majority of the population have limited land to cultivate and they have to carry on agriculture activity for survival.

There is arrangement of tenant in the land, thus establishing dual ownership of landowner and tenant. Such system is prohibiting investment 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 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.

Review of Literature

Several research works have strengthened the foundation of literature on poverty and trade poverty linkages. The relationship between trade and poverty varies with a country’s level of development as well as the structure of its economy. Sustained poverty reduction occurs through the efficient development and utilization of productive capacities.

The question of liberalization and its impact on the benefit to the poor is also debatable. The literatures support that trade liberalization improves growth prospects by enhancing productivity temporarily through more efficient resource allocation and permanently through the import of modern technologies and effects on competition.


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The East Asian countries were successful because they featured the institutional characteristics of the developmental state, where as most of the African countries to harness such features. State capacity to deliver good quality interventions in the economy has been central to Asia’s success and to Africa’s problems.

In recent years, pro-poor trade policies were adopted in PRSPs. However many developing countries could not give priority to export promotion through labor-intensive production and value addition. The redistributive effect of trade reform is a major factor impeding its launch in poor countries. Successful poverty reduction requires outward-looking development policies that put constant attention to trade.

In case of Nepal, the relationship between trade and poverty appears to be more contentious, though there is broad agreement that in the long run liberalization can help reduce poverty levels.


Trade has become more significant during the years of liberalization. The share of total trade to GDP has remained to some extent constant ranging from a minimum of 35 percent to a maximum of 43 percent in the last decade under review. Till 2000 , 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 economy policies has highly contributed in economic growth. Such growth in export was due to the growth of labor-intensive industries like carpets and garments which seized to grow because structural problem and non-tariff restrictions.

There is positive growth in export during these years, except in 2001/ 02. Maximum annual change of export is noted in 1999/ 2000 when export has increased by about 39.65 percent. There is also similar trend in import during these years, but the values are less erratic. The maximum value of import is also seen during 1996/ 97, with 34.7 percent change. The ratio of export to GDP as well as ratio of import to GDP is seen increasing, indicating the growth of trade than GDP itself during this period. The ratio of export to GDP is 9.67 percent in 2005/ 06 while the ratio of import to GDP is 27.89 percent in the same period. The share of import 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. In the second half of 1990s, the growth of export was higher than the growth of import reflecting a positive impact of the adoption of liberal economic policies. However, such trend did not continue


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and is attributed to the impact of the one decade long conflict. Thus it is observed that 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.

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 movements. Similarly, another problem associated with Nepal is high dependency on India for its foreign trade. From the perspectives of Nepal’s participation in the multilateral trading system, Nepal needs to diversify its trading partners mainly to reduce the negative implications of dependence on a single large country. Further trading alliance with other LDCs will be beneficial for Nepal.

Poverty Reduction, Human Development, and Trade

Poverty in Nepal is pervasive and deep-rooted.

According to the NLSS 2003/ 04, 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 Development Region, the incidence of poverty is lowest in the Central Development Region (27 percent ) and highest in the Mid-Western Development Region (45 percent ). From the regional perspective, it is estimated that 7.5 percent out of the total poor dwell in the Himalayan Region, 47.1 percent in the Hill Region and 45.4 percent in the terai Region.

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 mountains (33 percent) and the Terai (29 percent) (NPC/UN 2005).

Land-ownership is the crucial factor determining poverty as 39 percent of the people having less than 0 .2 hectares of land are poor while only 24 percent of those are poor who own more than two hectares of land. The data also substantiate the significance of literacy/ education in reducing poverty. A


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slower poverty reduction rate among households with greater number 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 attempt to formulate a separate plan with long-term perspective for poverty alleviation was made 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.

The Tenth Plan (2002-07), also known as Nepal's Poverty Reduction Strategy Paper (PRSP), had recognized the role of local bodies, community organizations, and NGOs in development and reflects the government's commitment 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.

PRSP of Nepal emphasized in maintaining macroeconomic stability and implementation of structural and policy reform in key areas. Annual monitoring of the status of poverty and other targets have been made mandatory to ensure effective implementation of programs, and process monitoring has been given due importance. It is well linked with annual budget through the Medium Term Expenditure Framework (MTEF).

Given the nature of Nepal's poverty problem and the social/ political context, the Tenth Plan's poverty reduction strategy had focused as follows:

First, the poverty reduction strategy is made rural-oriented and has focused the growth strategy to be broad-based and pro-poor, besides supporting overall income and employment growth,

Second, the priority is given to actions and interventions, which give quick results, as compared to investments that, usually take a long time. This requires a careful balancing to short-term as well as long-term needs.

Third, the Plan has given a strong strategic focus and concentrated on a few important approaches and interventions, which would deliver quick results to the rural poor.

Fourth, the Plan has focus on the interventions and policies to reassess time to time and revised if necessary in order to achieve the poverty


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reduction goals.

The MDGs set quantitative poverty reduction targets and specific goals in health, education, gender equality, environment and other aspects of human development. Most of the indicators and targets of the MDGs are hard to achieve by 2015. However, the government has made consistent effort at expenditure management and increased revenue mobilization.

The second MDG progress report of 2005 gives emphasis on building the national capacity for monitoring and reporting on progress as well as strengthening the foundation for preparing future national development strategies.

The decline in transport costs, increasing yields of cash crops and transformation of agriculture, and increase non-farm employment contribute immensely in poverty reduction in Nepal. Nepali producers need to minimize cost of production primarily of exportable goods so that the goods can penetrate the international markets. .

Nepal has a daunting challenge to reduce poverty. Attempts 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 employment should be increased substantially through public works programs. Furthermore ? ? cash crop production should be further increased, ? ? tradable goods production should be diversified, ??large-scale temporary employment through public works programs should be created, and ? ? and transport costs should be reduced. All these should be done all together and concomitantly.


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 3,300 ha which increased to 18,726 ha by the end of 2005/ 06 at an annual growth rate of 19.0 percent in last 10 year period.

In 1995/ 96, the total tea production was 2,100 M Tons which increased to 14,600 ha by the end of 2005/ 06 at an annual growth rate of 21.4 percent in last 10 year period.

At present there are 157 tea estates and 27,494 farmers involved in tea production.


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The share of total tea production between the tea estates and the small farmers/holders is almost equal.

The estates and the tea factories provided employment to as much as 120 ,000 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 times higher than the cereal crops. So the marginalized small farmers have been able to gain substantive income from the tea plantation and alleviate their poverty level. Irrespective of other factors, the human development indicators, it is quite sure that the income earned by these farmers is sufficient to meet the income requirement.

With the assumption that one worker’s income is sufficient to meet the poverty alleviation level income; the workers families are definitely found living above the poverty level. In this context, with the assumption of a family of 5.5 members, it is assumed that it has directly benefited about 660 ,000 population of workers family. Similarly, a total of 151,271 populations of small and marginalized farmers have received substantive benefit from tea plantation.

Consequently, many new entrant-farmers are found attracted in this cash crop and given up traditional farming. The farmers are now growing tea and utilize their income from tea for purchasing essential food grains.

The adequate knowledge of technology, and marketing 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.

Smallholders’ tea has the potential to deliver poverty reduction benefits. As a crop, tea has the attraction of a regular income and being relatively easy to grow, once established. There is potential to impact on a significantly greater number of households.


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7.2 Conclusion

In the past decade, Nepal has broadly maintained macroeconomic stability; however, attaining sustained, high, and sufficiently broad-based economic growth has not been achieved. The private sector investment has not been high to enhance production of agriculture and industrial goods. As a consequence the export volume has not increased. The decline in poverty observed in the recent years is more attributed to agriculture, micro finance activities, and remittances.

In case of Nepal, the relationship between trade and poverty appears to be more contentious, though there is broad agreement 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 competitive environment in world market is intense that Nepal has to face at present and in the future. Therefore, Nepal has to search and develop those few specific products that could secure international market.

Opportunity for Nepal is broad and extensive based on the topographical and climatic features of the country. The agro-forestry products available in Nepal can secure world market. However, the economy 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 comparative advantage in competing 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 important as it provides employment to the poor and helps reduce poverty and achieve human development as specified in the MDGs.

As an example of labor-intensive industry, tea sector of Nepal may provide a great prospect to the Nepali entrepreneurs to penetrate in the world market. High rate of return may further attract many new entrant-farmers. This example of Ilam district may be applied in coffee and herbs plantations which will have long-term impact on reducing poverty establishing trade-poverty linkages.


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7.3 Recommendation

Attention should be given on maintaining macroeconomic stability for sustained economic growth and pro-poor economic activities. Policies should be developed agriculture infrastructure to promote export of agro-forestry based raw as well as processed products.

Production of labor-intensive agro-forestry farming and manufactured goods should be prioritized to attain higher poverty reduction through social inclusion of disadvantaged and marginalized groups of people. Government supports such as extension services, and irrigation and fertilizer subsidies should be increased.

Considering negative effects of trade openness on the families relying on subsistence agriculture, the government support in the form of subsidy on the infrastructure like irrigation, power and road should be guaranteed to safeguard the livelihood of the farmers

Government revenue should be primarily allocated for implementing poverty reduction and human development programs. It should address economic services such as agriculture and rural infrastructure. In this context, foreign aid and donors’ supports should be enhanced.

To establish sustained industry and trade linkages, a long-term comprehensive industrial plan should be formulated and strategy should be set to invest in the industries producing goods for international market. Expansion of manufacturing will thus lead employment and poverty alleviation through backward and forward linkages. This would further enhance international trade competitiveness through increased level of supply capacity.

Government programs should be designed to promoting small and medium enterprises in the rural as well as urban areas so that the produces could access international market and enhance the level of exports.

To promote exports, potential export sectors should be targeted and appropriate economic and financial incentives should be provided to the private entrepreneurs.

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.


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Trade sector requires financial and technical support to enhance the capacity. In this context, measures 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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study on trade and poverty linkages in nepal

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