Multilateral Trading System and Nepals Development Presentation by D' R' Khanal Two Day Seminar on M

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Multilateral Trading System and Nepals
DevelopmentPresentation byD. R. KhanalTwo
Day Seminar on Mainstreaming Trade Agreements
into Development Organized by Pro Public,
SAWTEE and SEJON13, January
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Introduction

• WTO is a negotiating forum for promoting global
  trade
• In the forum governments make trade policy
  commitments
• To improve access to each others market on a MFN
  basis
• To establish rules governing world trade

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Contd.

• Hence, despite itself not being a comprehensive
  development institution, its role is considered
  vital in promoting trade and thereby economic
  development. This is regarded to be true, among
  others, on the assumptions that
• Rule based multilateral trading system protects
  small players that have little ability to
  influence the policies of developed (large)
  countries
• Rules, in turn, reduce uncertainty by placing
  mutually agreed limits on the policies that
  governments may adopt potentially helping to
  increase investment and lower risks
• Trade openness, growth and poverty reduction are
  mutually reinforcing

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Contd.

• This again would occur through comparative
  advantages as a result of
• Factor productivity gains through higher
  specialization
• Scale of economies and expansion in markets for
  domestic firms
• Stronger interaction with foreign firms and
  markets with technological innovations and
  improved managerial practices
• Lessening of anti-competitive practices and
  rent-seeking activities leading to reallocation
  of resources away from protected unproductive
  firms/sectors to more efficient activities
• Ultimately spill over effect on both factor and
  product markets and creation of income and
  employment opportunities leading to welfare gains
  and poverty reduction.

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Contd.

• All these are expected on the assumptions that
  multilateral trading system is fair and
  safeguards the interest of poor countries
• However, it is irony that many rules adopted at
  the time of WTO establishment were guided by
  protecting the interest of the developed
  countries in general and TNCs in particular
• Examples are agriculture subsidy, discriminatory
  tariff rules, protection of intellectual property
  rights requiring changes in the developing
  country rules keeping old rules of developed
  countries in tact. The lists are too long.
• Details are in OXFAM study ( 2002) and many
  others and they reveal that even the
  discriminatory rules and provisions are distorted
  and rigged by the developed countries.

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Contd.

• Host of factors/developments amidst increased
  pressures from developing countries including
  movements by many civil society organizations led
  to the adoption of Doha development Round. Which
  recognized the role of
• i) enhanced market access, ii) balanced trade
  rules, and iii) technical assistance
• Further a framework was agreed on 1st August 2004
  called July Package. It identified five priority
  areas
• Agriculture,
• NAMA,
• Services,
• Trade Facilitation, and
• Development Dimensions
• But the stalemate is continuing. The point to be
  made is that the international rules and their
  treatments are crucial for enhancing development
  in countries like Nepal through multilateral
  trading system

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Nepals WTO Obligations/Fulfillments

• Commitments/Obligations
• Nepal commitments/obligations in the time of
  accession to WTO include
• In the agriculture binding rate of tariff 51
  percent for the transition and 42 percent
  thereafter 42 percent.
• In the non-agriculture manufactured products
  average binding rate 39 percent in the transition
  to 24 percent thereafter.
• Removal of all additional import duty like
  special duty and local development tax within 10
  years.
• Tariffs on ITC products to be completely
  eliminated within 5 to 7 years from 5 percent at
  the time of accession.

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Contd.

• More open up of services sector allowing up to 80
  percent foreign equity participation
• Formulation, Revision and Implementation of Acts
  including Dozens of new laws or revision in old
  ones required. Among them, New Industrial
  Property Act by 1 Jan 2006, Implementation of
  TRIPS by Jan 2007, Anti-dumping, Countervailing
  and Safeguard Law within one year of accession,
  Implementation of the Agreement on Sanitary and
  Phytosanitary Measures by 1 Jan 2007, Legislation
  on the Valuation of Imports for Customs and
  Taxation by 1 Jan 2004 and Full Implementation
  from 1 Jan 2007. Similarly, new laws in the areas
  like competition, bankruptcy, cyber, access to
  genetic resources, bank and finance institution,
  plant resources, and health institution
  operation. In addition, custom, industrial
  enterprises, labor, company, security exchange,
  foreign investment and technology transfer, plant
  protection, pharmaceutical laws be revised and
  enacted.

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Contd.

• Upon the date of accession establishment or
  designation of tribunal for the prompt review of
  actions to the implementation of laws,
  regulations, judicial decisions and
  administrative rulings required.
• Elimination or non-applicability of quantitative
  restrictions on imports or other non-tariff
  measures including licensing, quotas, bans,
  permits, prior authorization requirements, and
  other restrictions.
• From the date of accession execution of domestic
  taxes like value added and excise duties in a
  non-discriminatory manner.

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Contd.

• Fulfillments and Beyond
• Nepals trade liberalization has been more faster
  in many areas than WTO commitments and now Nepal
  is one of the most liberalized countries in South
  Asia
• Trade is completely deregulated and no trade and
  non-trade barriers including no support measures
  are there in exports contradicting WTO rules
• Expect transportation and fertilizer subsidy in
  remote areas (now limited irrigation subsidy
  also), no subsidy is there
• In large and medium industries up to 100 percent
  foreign equity participation is allowed with
  repatriation facilities
• In banking three fourth and in insurance 100
  percent foreign equity participation has been
  already allowed even if in a selected basis
• Now the average tariff rate is in the
  neighborhood of 7.11 percent and estimates reveal
  that the actual rate has reduced to 5.13 percent
  in 2007 from 6.1 percent in 2003. Likewise, the
  imports tariff rate has gone down to 6.23 percent
  from 7.72 percent during the same period.
• Many laws have been already enacted and many are
  in the process of enactment

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

• Overall and Sectoral Growth

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• Sectoral Growth Rate

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Some Spill Over Effects?
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Foreign Direct Investment

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

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Contd.

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

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Employment, Poverty, Income Distribution and
Livelihood

• Employment ( Manufacturing)

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

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• Although poverty data are not available for the
  post WTO accession period, trade liberalization
  partly may be indicative.
• Poverty reduced from 42 in 1996 to 31 percent in
  2004
• At the same time, income distribution worsened
  markedly. Gini rose to 41.4 in 2004 from 34.2 in
  1996.

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

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• Informal sector employment is as high as 94
  percent
• Labor productivity in manufacturing and services
  is declining
• Food security and peoples livelihood is now a
  major problem-35 districts in acute food deficit
  
• More than 1 million households are landless,
  comprising more than 23 percent of total
  households
• Gender based exclusion is high in terms of access
  to economic (low income, absence of opportunity),
  human (education, health) and physical assets
  (land, livestock etc). Same is true in case of
  poor and disadvantaged.
• Highly uneven development in rural/urban/remote
  and relatively accessible areas is manifesting
  overtime.

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Major Issues (Domestic)

• Urban centered consumption induced economic
  activities and hence no productive investment
  enhancing sustainable/equitable growth
• Widening income disparity in an unprecedented way
  amidst deepening structural and institutional
  impediments
• Job loss among unskilled workers, growing
  informalisation of the labor market and reduction
  in labor productivity
• Gradual collapsing of cottage and small scale
  industries
• Too much dependency on trade based revenue and
  accompanying policy distortions
• Cascading tariff structure discouraging high
  value added and resource based industries
• Problem of market and trade enhancing
  institutions

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• Absence of country and commodity diversification
  amidst low backward and forward linkages
• Serious food security and peoples livelihood
  problem
• Serious supply bottlenecks and absence of
  enabling environment to the investors
• Absence of institutionalizing wider consultation
  and policy coordination led policy formulation
  and execution taking political economy into
  special consideration
• Above all encouragement to defective economic
  policy regime dictated by liberalization,
  deregulation and open up centered policies and
  even the absence of comprehensiveness amidst
  captured policies/trade/resources etc

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International

• Failures to implement Doha Development Agenda in
  all three-fronts i) enhance market access, ii)
  balance trade rules and iii) well targeted
  technical assistance and other components under
  July Packages
• Discriminatory/ineffective global financial
  architecture and ill suited global policy regime
  to the countries like Nepal
• Increased vulnerability in the economy due to
  global uncertainty and big unanticipated
  shocks-based example todays global financial
  crisis and its contagion
• Ignorance to Food security and farmers
  livelihood issues ignored

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Required Initiatives/ Measures

• Domestic
• Re-structuring and rationalization of tariff
  structure
• Special incentive to small enterprises with focus
  on domestic resource based and labor incentive
  industries through wider policy consultation
  processes
• Strengthening of market institutions and
  dismantling of syndicate and cartelling practices
  
• A comprehensive approach in reforms with focus on
  removing structural and institutional impediments
  for ensuring better access to financial and
  physical resources of the small enterprises
• Special treatment to food security and livelihood
  issues
• Strengthening of trade capacity and trade related
  institutions
• Stabilization Fund
• Macro policy synchronization
• Massive skill development program for raising
  productivity of workers

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Contd.

• Development paradigm shift for equity led
  development with accompanying policy changes by
  giving equal priority on import competing and
  export promoting industrialization. This will
  require
• Massive investment in infrastructure and other
  related activities for expanding internal market
• Priority on easing supply bottlenecks and
  encouraging production through small producers
• High priority on cooperative modules of
  production, distribution and exchange
• Emphasis on developing production clusters and
  export processing zone in viable rural and
  semi-urban areas
• Massive investment in health and education
• Poverty reduction and rural development programs
  at the grass roots for raising purchasing
  capacity of the people

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Contd.

• International
• Implementation of Doha Commitments in all
  three-fronts i) enhance market access, ii)
  balanced trade rules and iii) well targeted
  technical assistances and other components under
  July Packages
• From LDC perspectives
• -Duty Free and Quota Free Market Access-the Hong
  Kong Ministerial Declaration vague despite
  commitment of facility to 97 percent products
  -Address other problems simultaneously
• -rules of origin
• -Non-tariff barriers ( UNTAD estimates show 40
  percent of LDC
• exports are affected by non-tariff barrier such
  as technical standards,
• sanitary and phytosanitary measures, custom rules
  and procedures,
• competition related restrictions etc.)
• -TRIPS
• -Preference erosion

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Contd.

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

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