Introduction

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

2. Introduction • WTO is a negotiating forum for promoting global trade • In the forum governments make trade policy commitments: • To improve access to each other’s market on a MFN basis • To establish rules governing world trade

3. 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

4. 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.

5. 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.

6. 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

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

8. 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.

9. 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.

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

11. Development Performances in the Post WTO Era (Is trade liberalization a yard stick of development?) Overall and Sectoral Growth

12. Sectoral Growth Rate

20. Some Spill Over Effects?

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

24. 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

25. 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 Comparison of Inter Census Persons Engaged and Employees 2007 Year Total number of 2002 employees Total number of 1992 person engaged 0 100000 200000 300000 Number Employment, Poverty, Income Distribution and Livelihood

26. 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.

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

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

29. 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

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

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

32. 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

33. 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

34. 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

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