Course Code: Eco 605 Course Title: Advanced Macroeconomic Analysis

WTO and Nepal: An Effort towards Globalization

Submitted to Central Department of Economics (CEDECON) for internal assessment of partial fulfillment of Master of Philosophy (M. Phil.) Economics

Student's Name: Nirmal Kumar Raut Roll No: 22 Date: September 16, 2009

Introduction
The WTO represents the rules-based regime of the policy of economic globalization. The central operating principal of the WTO is that commercial interests should supersede all others. Any obstacles in the path of operations and expansion of global business enterprise must be subordinated. The International Forum on Globalization (IFG) focused its efforts throughout most of 1999 on the WTO and its relation to the larger issue of economic globalization.1 The Nepalese economy experienced various economic reform programmes under the aegis of World Bank (WB) and International Monetary Fund (IMF) since 1985 when the country was in such an ailing state that it could do nothing than accept the conditionalities in the form of Structural Adjustment Program (SAP) and Enhanced Structural Adjustment Facility (ESAF) required to avail the funding from them. Trade liberalization was one of the important requirements of these programs. This then became the part of economic reform programmes initiated by the government after the restoration of multiparty democracy in 1990. Though the genesis of globalization in Nepal emerged with the initiation of the First five year development plan, it became more pronounced with the Eighth Five year development plan which was framed in line with the Structural Adjustment Programme (SAP) of the World Bank (WB) and International Monetary Fund (IMF).
A wide

array of external and trade policy reform was undertaken. The dual exchange rate was abolished, quantitative restrictions and import licenses were eliminated, peak tariff rates were lowered by more than half to 110 percent, and export procedures were simplified with facilities for duty-draw back and simpler documentation (Dixit, 1995). Nepal formally became the 147th member of WTO on 23rd April 2004. Nepal has made commitments in several areas in goods, services and intellectual property rights (IPRs) with a view to locking-in its domestic reform agenda. With its membership, Nepal opened itself to the world economy more intensely than with the various trade liberalization efforts made after 1990. This was another milestone added in its process of globalization. Nepal needed to open its economy either as a prerequisite of membership in the GATT/WTO or as part of the conditionally accompanying loans from the IMF or World Bank. Nepal also is a member of South Asian Free Trade Arrangement (SAFTA) and Bay of Bengal Initiative for MultiSectoral Technical and Economic Cooperation (BIMSTEC) which adds to its story of globalization efforts though at the regional level. Nepal, therefore, is theoretically integrated with the world economy with acceptance of all the rules and regulations that these organizations require the member nations to be abided by. The present paper attempts to answer basically the following questions: (i) How far Nepal have been able to gain from WTO? (ii) What are the challenges Nepal is facing
1

See: http://www.ifg.org/wto.html

with its entry to WTO? And (iii) What are the measures to be undertaken to gain benefits and mitigate the possible threats from its accession?

Globalization, WTO and Nepal: An Assessment

Academic debates currently raging about globalization include whether it even exists (Unger, 1997), whether it is more important now than at some earlier date (Bordo, Eichengreen, and Irwin, 1999), whether it is displacing the nation state (Strange, 1996; Wade, 1996), and whether it is more important than regionalism (Fishlow and Haggard, 1992; Oman, 1994) or localism (Rosenau, 1997a). However, the macroeconomic components of globalization are perhaps the best known. The dramatic increase in the value of international trade, and the fact that trade has grown much faster than production in the postwar period, are frequently cited as evidence of globalization (Stallings, 2001). It is a well known fact that WTO has been acting as an important mechanism to diffuse globalization in its entirety at least in its member countries if not globally. There has been a continuous debate whether Nepal would gain or lose from being a member of WTO. The debate is going on even today to assess the rationality of the membership. The recent global crisis also raised a big question mark on the globalization aspect of the WTO regime. A Review of the WTO Principles and Major Agreements: The general principle of WTO is to have freer and more predictable trade without discrimination which is more beneficial for less developed countries. It encourages trade without discrimination by granting Most Favored Nation (MFN) and National treatment status. The former requires a country to extend a tariff reduction to all countries in the GATT if such reduction is granted to one country whereas the latter requires them to treat both its local product and foreign product equally. The WTO also aims at gradually reducing trade barriers through negotiation; providing stability and predictability that helps widening business opportunities; promoting fair competition and encouraging development and economic reform through special assistance and trade concessions to developing countries. The major agreements in WTO include General Agreement on Trade and Tariffs (GATT), General Agreement on Trade in Service (GATS) and Trade Related Aspects of Intellectual Property Rights (TRIPS) among others (Adhikari, 2005). GATTS is a multilateral agreement on trade in goods. It carries the general principles of trade in goods provided for in its older version (GATT 1947), but provides some clarifications and comes out with a few more agreements in order to suit the requirement of changing landscape of international trade (ibid, 2005). This agreement is concerned with associate agreements, understandings, and decisions made for the biggest portion of constraints and allow for most of the exclusions in trade policy formulation by members. GATT is led by the principles of WTO under which the members must design and implement their policies to be non-discriminatory. Members must observe the national

treatment principle and when granting protection, use tariffs, which are reasonable and bound (NRB, 2002). GATS is the first ever set of multilaterally, legally enforceable rules, covering international trade in services. It was negotiated in Uruguay Round. It also operates on three levels: the main text containing general principles and obligations; annexes dealing with rules for specific sectors; and individual countries specific commitment to provide access to their markets. Unlike in goods, however, it has a fourth special element: lists showing where countries are temporarily not applying the MFN principle of nondiscrimination. TRIPS attempt to narrow the gaps in the way intellectual property rights are protected around the world, and also bring them under common international rules. When there are trade disputes over these rights, the WTO dispute settlement mechanism is there to resolve the dispute. Finally, the major mechanisms in WTO consist of Dispute Settlement Mechanism and Trade Policy Review Mechanism (TPRM). Nepal and WTO Since the WTO is a 'single undertaking', all the agreements have to be taken as a package by all existing and prospective members. It does not allow any country to pick and choose any agreement and it also does not have any provision for reservation, as in the case of other international laws. Therefore, Nepal obviously did not opt out of any agreement. Some of the major commitments made by Nepal for the WTO membership are as follows: Table 1: Major Commitments Made by Nepal for the WTO Membership
Measures Agricultural tariffs Industrial tariffs Full implementation of TRIPS2 agreement Full implementation of SPS3 agreement Full implementation of TBT agreement Full implementation of Customs valuation agreement Not to introduce export subsidy on agriculture Not to impose new Trade related Investment measures (TRIMS) Zero tariff on IT products Complete phasing out of other Duties and charges (ODCs) Liberalization of 11 services sectors And 70 sub-sectors Initial Offer Average 51% Average 39% Final Offer Average 42% Average 24% Deadline 31/12/2006 31/12/2013 31/12/2006 31/12/2006 31/12/2006 31/12/2006 Accession Date Accession Date 31/12/2008 31/12/2013 Accession Date

Source: WTO (2003)

2 3

TRIPS refer to Trade related Intellectual Property Rights. SPS refers to Sanitary and Phytosanitay.

Besides, as per Legislative Action Plan (LAP) attached to the Working Party Report, Nepal is required to introduce or amend 37 different policies, legislation and rules in order to fulfill its commitment on goods, services, IPRs and systemic issues (Adhikari, 2005). Why Achievements are far below Expectations? During the WTO negotiations, Nepal admitted that notwithstanding a difficult economic and political environment Nepal had sought to systematically reform and open its economy. The Government had liberalized the economy unilaterally over the years because of the conviction that economic reform and trade liberalization would attract investments, promote development and, contribute to generate productive employment and alleviate poverty, in a general framework of equity, participation and market-based efficiency. WTO membership would be important for Nepals development and integration into the world trading system and would also constitute a major step forward in the WTO evolution to achieving the goal of universality and representation of the interests of all trading nations. 4 In the period between 1990/91 and 2000/01, Nepal initiated a series of market oriented economic reforms intended to facilitate its integration with the global economy by opening up to trade in goods and services, technology and investment. Major reforms included liberalization of trade and industrial policies and rationalization of foreign exchange regime including a substantial depreciation vis--vis the US dollar. This initially improved the business environment particularly in the exports of carpets and garments during early 1990s. But during the second half of the decade, the growth of merchandize exports declined mainly due to weak demand, quality problems and concern over employment of child labor in some factories. Readymade garment also initially benefited from Multi-Fiber Agreement but suffered as international trade regulations changed. Nepal also could not diversify it in terms of products and markets. Moreover, the lack of market positioning of Nepal's export products, low competitiveness, higher transport costs and the conflict also deepened the adverse impact on the trading front (Karmacharya, 2005). An increase in trade of goods and services in the international market has helped many countries achieve rapid economic growth. In the context of Nepal, we need to inquire what benefits we would have from the Doha Round in particular and the WTO in general. So far, there have not been discernible benefits in terms of growth, employment, poverty reduction and industrial production from joining the WTO. In fact, exports have declined, imports increased and the manufacturing sectors, especially the ones that weighted high in the exports basket, have been going downward. This means that even after joining the WTO, the country has failed to reap potential benefits; instead, it is at a disadvantage in terms of export promotion, public investment to prop up key industries and employment generation.
4

Based on WTO Press Release No. 356, September 11, 2003

The Tenth Plan (2002-2007) aimed at protecting intellectual property rights (IPR), preparation of industrial plan in accordance with WTO, SAFTA and BIMSTEC provisions, reforming existing labor laws and making it flexible, attracting foreign direct investment (FDI) in the areas of comparative advantage. But no progress to this end so far has been achieved. The rate of increase in volume of trade is not matched by the disappointing progress in economic growth rate and employment generation. The average growth rate in the postWTO period is 3.5 percent while the average growth rate in trade in the same period is 46 percent. The stalemate in production structure in the country even after six years of joining WTO is disappointing. No one knows how much will Nepal gain or lose if the Doha Round is completed by 2010.5 The achievements, therefore, has been rather meager. Recent political developments have even worsened the situation. The Comprehensive Peace Accord (CPA) signed in between the then Government and the Maoist in 2006 seems hard to be materialized. The post conflict period politics with short term government one after another helped make political climate more fragile. Economic agendas were overshadowed in the pretension of the so called 'Transitional period ' which never seems to end up. The 'new' Terai armed outfits in the post conflict era and an immature democratic feeling of the people added to the worsening climate. Many cottage and small scale industries along with other small and medium enterprises and large manufacturing entities had to be closed down owing to the conflict, the 'wrong' democracy and the relentless load shedding. Challenges Ahead: The challenges posed to Nepal after the membership of WTO can be looked at into sector-wise: Agriculture It is claimed that the Agreement on Agriculture (AoA) would liberalize international farm trade by improving 'predictability and security' to agriculture exporting and importing countries as it assures fair competition and less distorted trade besides developing a mechanism for further negotiations in this field. However, Nepal's eroding preferential margin which it has been enjoying under GSP scheme will expose it to a greater degree of competition with increased number of farm supplies from both developing and developed countries. The fall of the Most favored Nation (MFN) tariffs will further substantiate the problem. Besides, Nepal has not been able to promote its farm products in the international market. It needs to concentrate on product development and its diversification. The domestic support is rather less to the Nepalese traders and the market in rich nations are still highly protected especially with regards to the imports of farm products. Finally, Nepal could face increasing imports due to cheaper farm products arising from the lower tariffs on imported agricultural goods.

See: http://www.myrepublica.com/portal/index.php?action=news_details&news_id=8927

Industry Despite the importance and the contribution of the Small and Medium Enterprises (SME) sector to the Nepalese economy, the sector itself is encountering serious adjustment problems under a changing and dynamic environment, especially in the context of liberalization and globalization. Statistical records indicate that the Nepalese SMEs are finding it hard to survive in the new environment ushered in by increased competition. Domestic conflict may have a role to play, but certainly, with exports waning and the performance of the industrial sector on the downturn, possible adverse impact of the globalization and liberalization cannot be ruled out (Shrestha, 2004). As once the deteriorating business environment hit industries and investments, approximately 70 percent of registered Cottage and small Industries (CSIs) closed down (http://www.english.peopledaily.com.cn). According to the statistics of the Department of Cottage and Small Industries, 1, 64,000 industries had registered with the Department by July 15, 2005. Unfortunately, only 33 percent of those registered are currently in operation largely due to the escalating violence and political agitation, which have eroded the competitiveness of local industries significantly. The effect was worst in the hills because of widespread threats and extortion. The forced migration of youths and entrepreneurs and their turning to foreign employment (Pyakural and Sainju, 2007) Domestic firms have found themselves doubly affected by increased competition from foreign goods and by rising costs of production. In Nepal, the enterprise sector shows a distinct dual structure. At one extreme, there exist a few large modern capital-intensive, resource-based, import-dependent and assembly-oriented enterprises, while at the other, there are small and informal sector enterprises that use very simple and traditional technologies and serve a limited local market. The number of medium sized enterprises is relatively less. This structural imbalance has arisen despite many SME promotion programmes of the government. Some of the more apparent threats from WTO membership come from some WTO agreements, particularly Sanitary and Phytosanitary (SPS) Measures and Trade Related Aspects of Intellectual Property Rights (TRIPS). Developed countries may impose various trade barriers in the name of protecting plant, animal and human health. Moreover, the major challenge faced by the Nepalese SMEs, at least those that are export-oriented, would be in the form of standards. High technical standards set by the importing countries may act as barriers for the Nepalese SME products (Shrestha, 2004). One of the recent examples of how the Nepalese traders can suffer due to SPS measures is that of the Nepalese honey exporters. Norway banned the import of the Nepalese honey under its Hazard Analysis and Critical Control Point (HACCP) regulations stating that the Nepalese honey is unfit for human consumption. Services Financial services are the most important service sector in the context of Nepal. It provides an important vehicle for efficient allocation of financial assets and promotion of economic competitiveness. Liberalization of trade in financial services are expected to increase economic growth through foreign capital, adoption of advanced financial

practices and know how and greater financial market efficiency through increased competition. Though financial sector have improved a lot in the economy, the unregulated increase in the number of banks and financial institutions needs to be properly monitored by the Central Bank of the country.6 The full commitment in this sector to WTO requires capital account liberalization resulting in an increased capital flow. This might lead to financial crisis given the inflow of funds and booming assets prices (Bhatta, 2002). This has been recently experienced by the economies especially with full convertibility of their capital accounts. Besides, this will also magnify the probability of exchange rate crisis due to the approaching criteria of the impossible trinity (Maskay, 1999). Green Marketing The twin concepts of globalization and green marketing (GM) are the hot issues of the 21st century. As the country's economic development and prosperity heightens, the awareness inclines towards the use of organic goods and/or quality services because of affordability. Many points including tackling of the greenhouse effects like global warming, ozone layer deterioration etc are in broader spectrum into the WTO. Nepal is in a very severe position in regard to the GM as only few business houses have initiated the endeavor in a brief sense. Use of chemical and colours, purity of natural raw materials and their ware housing, packaging and quality assurance, quality of breeds and seeds used etc are the central issues in the agriculture sector (Acharya, 2004). Others Other challenges include high population growth rate and low productivity, lagging political and institutional reforms, large and costly public sectors, inefficient and inequitable educational system and underdeveloped financial markets (Bhatta, 2004). Measures to be Undertaken In Nepal, plans are made without its translation in action. A much acclaimed Tenth Plan /PRSP failed in many of the instances. The targets made in Interim plan (2007/082009/10) also seem to encounter the same fate. Political turmoil and the much talked about Peace Accord are yet to be realized. Political commitment is the first and the foremost requirement. The capacity of the government officials to implement the WTO commitments has to be enhanced along with their skills in order to get better deal for Nepal during the future negotiation. Private sector should be given the lead role in the economic activities. Identification of competitiveness and diversification of export profile as well as export
6

At present (2009) there are 26 commercial banks, 61 development banks, 78 finance companies, 13 micro finance development bank, 16 cooperatives that have taken permission from NRB and 45 Non Governmental Organisations (NGOs) delivering financial services. (See: http://www.nepalnews.com/main/index.php/news-archive/3-business-aeconomy/769-nrb-suspends-registration-of-new-banks.html)

destination is also important. Good governance is another biggest problem. Government should aim to root out corruption from the Nepalese society. It is also necessary to create safeguards to protect the domestic industries by enacting competitive law and trade remedy laws and creating necessary institution to implement these laws in order to further the economic interest of the nation. Besides private sector, the government should also involve other stakeholders such as academic community, CSOs, trade unions, consumer groups, farmer's groups etc at each stage of trade policy making.

Conclusion
It is time to evaluate the progress made since joining the WTO and the possible impact on growth and employment due to planned reduction in tariffs in the coming years. No study has been done so far to figure out how much would Nepal gain by joining various trading blocs and under what trading scenario (tariff and subsidy rates) would Nepal lose and gain in what kind of sectors? What would be its impact on employment, which should be one of the main barometers for evaluating long-term success of trade? Nepal's economic fragility is mostly dependent on external forces than internal ones, barring the protracted internal politics of the past which greatly affect the domestic economy. The global financial crisis that recently hit the world, however, questions the benefits arising from the era of WTO and Globalization. The US economy and the other major economies have claimed that they are coming out of the recession in recent periods owing to their internal policies aimed at boosting the consumer spending through increased net exports and investment. In Nepal, the global crisis would have a direct impact on remittances earned from the US and other affected countries. Some lay offs of Nepalese labour in the Gulf was noticed but the remittance from these economies rather increased. This indicates that the direct effect, howsoever, in Nepalese Economy is least perceived. The current account is fully convertible whereas capital account is not. This also has acted as a protecting shield for the Nepalese economy from the effects of the crisis emanating from the bigger economies. The critics of WTO and globalization has, therefore, warned many economies that are integrated in the global economy through WTO and other regional mechanism of the possible external shocks that entangle these economies leaving no easy way to escape from it. It is high time to rethink whether globalization is always good or it can be harmful at times. Whatever may be the case, Nepal should focus on enhancing its competitiveness of the domestic sector; improve the supply side constraints and system of governance if it wants sustainable growth in the recent future with or without 'Globalizing' at least in the current situation.

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