Study On Trade and Poverty Linkages in Nepal

A Study on Trade and Poverty Linkages in Nepal
Final report on
A Study on
Trade and Poverty Linkages
in Nepal
Submitted to:
Enhancing Nepal’s Trade-Related Capacity (ENTReC)

(Nep/05/06)
Government of Nepal
Ministry of Industry, Commerce, and Supply
Submitted by:
Dr. Pradip P. Upadhyay

e-mail: praup2004@yahoo.com
Kathmandu, Nepal
DISCLAIMER: This research report represent s t he 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.
i
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 18-2 1

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 81-100

and Trade
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 101-100

Poverty
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 111-120

Recommendations
7.1 Summary 111
7.2 Conclusion 117
7.3 Recommendation 119
References 121-127
iii
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 11

by HH and Region
Table 1.3 Size Distribution of Agricultural Land Ownership 13

by HHs and Region
Table 1.4 Distribution of HHs by Land Entitlement Status 13

and Region
Table 1.5 Land Holding Pattern of the Households 14
Table 4.1 Growth of Trade and its Relation with GDP at 46

Current Price
Table 4.2 Growth of Export and Import and its Relation with 47
GDP
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 51

Countries
Table 4.7 Share of Exports of Major Buying Countries from 52

Nepal
Table 4.8 Share of Imports from Major Countries 52
Table 4.9 Direction of International Trade 71
iv
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 77

Countries
Table 4.15 Income and Expenditure of Convertible Foreign 78

Exchange
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 90

Standards Survey (NLSS): 1995/96 and 2003/04
Table 5. 4 Incidence of Poverty Among Rural Household 92

Groups
Table 6.1 Status Tea Production in Nepal (2005/06) 102
Table 6. 2 Export of Nepal’s Tea in Selected Countries 104
v
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
vii
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 prom ote econom ic growth and industrial developm ent,
the econom y is still traditional. Over the years, the per capita incom e of
the people of Nepal has gradually increased, and has changed the
consum ption pattern. The dem and for im port-goods has increased and
has caused increase in trade imbalances.
3. Rural agricultural production system is characterized as subsistence

farm ing. Due to land distribution pattern and the structure of land
ownership, m ost of the rural people are small and m arginal farm ers.
Majority of the population have lim ited 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 m ostly 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 num ber
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 developm ent as well as the
viii
structure of its econom y. Sustained poverty reduction occurs through

the efficient development and utilization of productive capacities.
6. The question of liberalization and its im pact on the benefit to the poor
is also debatable. The literatures support that trade liberalization
improves growth prospects by enhancing productivity temporarily
through m ore efficient resource allocation and permanently through
the import of modern technologies and effects on competition.
7. The East Asian countries were successful in overall developm ent and
poverty reduction because they featured the institutional
characteristics of the developm ental state, where as most of the African
countries failed to harness such features. State capacity to deliver good
quality interventions in the econom y 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
prom otion through labor-intensive production and value addition. The
redistributive effect of trade reform is a m ajor factor im peding its
launch in poor countries. Successful poverty reduction requires
outward-looking developm ent policies that put constant attention to
trade.
9. In case of Nepal, the relationship between trade and poverty appears to

be m ore contentious, though there is broad agreem ent that in the long
run liberalization can help reduce poverty levels.
Nepal’s International Trade
10. Trade has becom e m ore significant during the years of liberalization.
The share of total trade to GDP has rem ained to som e extent constant
ranging from a minim um of 35 percent to a m aximum of 43 percent in
the last decade under review. Till 20 0 0 , the effect of trade on the
econom ic 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 econom ic growth. Such growth in export was due
to the growth of labor-intensive industries like carpets and garm ents
which later on seized to grow because of structural problem and non-
tariff restrictions.
ix
12. There is positive growth in export during these years, except in

20 0 1/ 0 2. Maximum annual change of export is noted in 1999/ 20 0 0
when export has increased by about 39.65 percent. There is also similar
trend in im port during these years, but the values are less erratic. The
m axim um value of im port is also seen during 1996/ 97, with 34.7
percent change. The ratio of export to GDP as well as ratio of im port 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 20 0 5/ 0 6 while the ratio of
import to GDP is 27.89 percent in the sam e period. The share of im port
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, 20 0 7-10 (Approach Paper) has adopted
the policy of developing industrial and business infrastructure,
catalyzing the private sector and im proving trade, and fostering
innovative measures to promote the export sector.
15. Nepal’s landlocked position and heavy dependence on a single m arket

for its trade has also been a cause of trade barrier. The only direct
access to sea is to Kolkata port, which is 660 m iles away from Nepal.
Alternative routes to the sea through Bangladesh or the Tibet of China
do not appear feasible for large freight m ovem ents. From the
perspectives of Nepal’s participation in the multilateral trading system ,
Nepal needs to diversify its trading partners m ainly to reduce the
negative im plications 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
m ajor agro-ecological zones. Rural poverty incidence is highest in the
hills (42 percent) followed by the m ountains (33 percent) and the Terai
(29 percent).
18. Land-ownership is the crucial factor determ ining 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 m ore than 0 .2 hectares of land.
The data also substantiate the significance of literacy/ education in
reducing poverty. A slower poverty reduction rate am ong 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 developm ent. The first attem pt to formulate a
separate plan with long-term perspective for poverty alleviation was
m ade 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 (20 0 2-0 7), also known as Nepal's Poverty Reduction
Strategy Paper (PRSP), had recognized the role of local bodies,
com munity organizations, and NGOs in developm ent and reflects the
governm ent's com m itm ent to decentralization and functional
devolution. It had clearly defined priorities: P1, P2 and P3 projects and
clear-cut allocation/ disbursem ent com m itments, addressing poverty
issues of Nepal.
21. PRSP of Nepal emphasized in maintaining macroeconom ic stability

and implem entation of structural and policy reform in key areas.
Annual m onitoring of the status of poverty and other targets are set to
ensure effective im plementation of program s, and process m onitoring
has been given due im portance. 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, environm ent and other aspects of
hum an developm ent. Some of the indicators and targets of the MDGs
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are difficult to achieve by 20 15. The second MDG progress report of

20 0 5 em phasizes on setting and im plem enting future national
development strategies to this direction.
23. The decline in transport costs, increasing yields of cash crops and
transform ation of agriculture, and increase non-farm employm ent
contribute im mensely in poverty reduction in Nepal. Nepali producers
need to minim ize cost of production prim arily of exportable goods so
that the goods can gain access to the international markets. .
24. Nepal has a daunting challenge to reduce poverty. Attem pts 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 em ployment should be
increased substantially through public works program s. Furtherm ore
? ? cash crop production should be further increased, ? ? tradable
goods production should be diversified, ??large-scale temporary
em ployment through public works program s 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 3,30 0 ha which increased to 18,726 ha by the end of
20 0 5/ 0 6 at an annual growth rate of 19.0 percent in last ten-year
period. In 1995/ 96, the total tea production was 2,10 0 M Tons which
increased to 14,60 0 ha by the end of 20 0 5/ 0 6 at an annual growth rate
of 21.4 percent in last ten-year period. At present there are 157 tea
estates and 27,494 farm ers involved in tea production. The share of
total tea production between the tea estates and the sm all
farm ers/ holders is alm ost 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 im pact
in the rural econom y. Although, the tea plantation takes five to seven
years to give full output, the small and m arginalized farmers have also
been attracted as the rate of return is five tim es higher than the cereal
crops. So the sm all and m arginalized farm ers have been able to gain
substantive incom e from the tea plantation and alleviate their poverty
level. Irrespective of other factors, the incom e earned by these farmers
xii
has been helpful to gain a m inimum level of human developm ent as

spelled in the MDGs.
27. With the assumption that one worker’s incom e is sufficient to meet the
poverty alleviation level incom e; the workers fam ilies are found living
above the poverty level. In this context, with the assum ption of a family
of 5.5 mem bers, it is assum ed that it has directly benefited about
660 ,0 0 0 population of workers family. Sim ilarly, a total of 151,271
population of sm all and marginalized farm ers have received
substantive benefit from tea plantation.
28. Consequently, m any new entrant-farmers are found attracted in this

cash crop and given up traditional farming. The farmers are now
growing tea and utilize their incom e from tea for purchasing essential
food grains. The adequate knowledge of technology, and marketing and
trade, even the sm all farm ers 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
exam ple in this context. Sm allholders’ 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 im pact on a significantly greater num ber of
households.
Findings and Suggestions
29. In the past decade, Nepal has broadly m aintained m acroeconom ic

stability; however, attaining sustained, high, and sufficiently broad-
based econom ic 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 m ore attributed
to agriculture, micro finance activities, and remittances.
30. In case of Nepal, the relationship between trade and poverty appears to
be m ore contentious, though there is broad agreem ent 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
com petitive environm ent in world m arket is intense that Nepal has to
face at present and in the future. Therefore, Nepal has to search and
xiii
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 m arket. However, the
econom y 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
com peting 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 em ploym ent 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 m ay

provide a great prospect to the Nepali entrepreneurs to penetrate in the
world m arket. High rate of return may further attract m any new
entrant-farm ers. The experience of Ilam district in tea production m ay
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 m acroeconom ic stability for

sustained economic growth and pro-poor economic activities. Policies
for agriculture infrastructure should be developed to prom ote export of
agro-forestry based raw products as well as processed goods.
35. Production of labor-intensive agro-forestry farming and m anufactured

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 fam ilies relying
on subsistence agriculture, the governm ent 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 prim arily allocated for im plem enting
poverty reduction and hum an developm ent program s. It should address
xiv
econom ic 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

com prehensive industrial plan should be formulated and strategy
should be set to invest in the industries producing goods for
international m arket. Expansion of m anufacturing will thus lead
em ployment 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 prom oting sm all and

m edium enterprises in the rural as well as urban areas so that the
produces could access international m arket and enhance the level of
exports.
40. To prom ote 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, m easures 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 m obilized for
building trade infrastructure in Nepal.
xv
xvi
Chapter I
Introduction: Trade and Poverty Linkages
1.1 Structure of the Economy
Nepalese econom y has traditional as well as m odern m odes of econom ic

activities. It is featured as having dualistic characteristics: on the one hand it
has m onetized m odern economy and on the other non-m onetized traditional
economy. Comparatively, urban areas have physical facilities like roads,
electricity, health and educational institutions, means of m odern
comm unication and other infrastructure necessary for the developm ent of
industry, trade, transportation etc. The urbanized econom y is m onetized and
relatively m odern. On the other hand, there are vast rural areas where 84
percent of the total population of the country lives. The developm ent of
infrastructure like road, com munication, electricity etc. is negligible in these
areas, where people are largely dependent on agriculture. The technology used
is traditional and the investm ent is very low. Large num ber 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-econom ic instrum ents like m oney, foreign exchange,

capital market, governm ent finance etc. lies m ostly upon the monetized
m odern economy, and less upon the less-m onetized traditional econom y of
the rural areas. With the adoption of open policy for grain trade, the cheap
im port of rice from India, has pressurized the farmers to sell their products at
lower price. In the sam e way the farm ers have to pay high price for the
im ported 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 attem pt has been m ade in the area of investm ent for the im provem ent of
the agriculture of hills and mountains. If som ething is done, it is not sufficient
for the developm ent of the rural areas. The m acro econom ic policy measures
could not bring substantial im provem ent in the socio-econom ic life of the
people of such areas. The rural sector is still having more closed economy.
During the last one and half decade, the econom ic 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
econom ic ideas in the form of globalization have influenced the Nepalese
policy makers to adopt the liberal economic policy.
1
Due to the open boarder and free m ovements of goods and services between
Nepal and India, econom ic 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 20 th. century (1990-20 0 0 ), India has not only begun to
im plement the process of economic reform s but has also changed its policy
from the government regulated mixed economy to the liberal and open market
economy giving greater em phasis on privatization and foreign investm ent.
Sim ilarly, its other neighboring country China has also changed her policy
from a fully controlled com mand of econom y to open m arket economy from
early 80 s. 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 Novem ber 1990 ,
ending direct rule by the King. A new elected governm ent cam e in power after
a general election in May 1991. The new Government abandoned the form er
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 Governm ent
negotiated a new Enhanced Structural Adjustment Facility (ESAF)
arrangem ent with the IMF. Thereafter, Nepal initiated sweeping econom ic
reform programs in alm ost all sectors of the econom y, including fiscal and
m onetary policies, trade and investm ent, 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 m acroeconom ic stability was given top priority. To this end,
government em phasized upon cut in unproductive expenditures. The tax
system was drastically reformed. Top tax rates were reduced and the tax base
was broadened. Im port duty rate was reduced from the highest 300 percent
to 110 percent . The im port duty rates were reduced to six percent. The reform
also reduced the average as well as the dispersion of tariff rates to m inim um
and quantitative restrictions on the exports of food items were abolished.
2
Corporate tax rate was reduced and the m axim um incom e tax rate for
corporate and partnership business was reduced to 25 percent from 33
percent . Self-assessm ent tax paym ent system was given prominence. A
number of measures were introduced in order to im prove 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
item s to 5 items and rates were converted from specific to advalerom . The
rates were also rationalized. New m easures were introduced to m obilize
additional tax revenues to the level of 0 .5 percent of the GDP each year.
Dom estic 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 alm ost all im port restrictions were withdrawn. All
item s, 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 sim plified.
Moreover, quantitative restrictions and im port licensing were eliminated and
full convertibility for all current account transactions was introduced.
The trade policies were dram atically 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, im ports of raw
m aterials, consum er goods, industrial m achinery, 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 im plemented. Necessary institutional changes

were carried out to deregulate the control. Banking and other com m ercial
sectors adopted the changes and grew accordingly. Making necessary changes
in the tariff rate, the governm ent further supported the process. The invoice
valuation process was abandoned, and recognition was m ade 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.
3
The trade is still not com pletely free. There are restrictions to trade by Letter
of Credit mechanism . In the case of export, there is no allowance for credit
shipm ent 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 determ ined by free m arket 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 com m ercial
banks on the earnings from exports of goods and services. Additional
m easures taken to increase exports were the introduction of bonded-ware
house, duty draw back schem e and the initiation of the m ulti-m odal 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 Investm ent Act and
Technology Transfer Act (1992) were enacted in line with the open, liberal and
m arket oriented policy. Foreign investment was perm itted 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.
Dom estic as well as foreign private sector was allowed to invest in hydro-
electricity generation. Foreign investors were allowed to remit their dividend
and com mitment was explicitly m ade 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 developm ent of infrastructures like roads, transport
facilities, and electricity on BOT principles. It was accepted to lim it the rate of
the governm ent in providing social services, maintaining law and order and
providing infrastructure facilities.
Monetary Policy Reforms
The m onetary policy was shifted to indirect instrum ent like open m arket
operations (OMOs). The governm ent 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 form ulation and im plem entation of
m onetary policy by enacting new Central Bank Act. Reform s on the following
were also made:
4
Interest Deregulation
Foreign exchange rate fixation m echanism abolished and the exchange rate
determ ined on the basis of the market dem and and supply. Liberal policies
adopted to allow the operation of financial institutions such as com m ercial
banks, finance com panies, 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 Lim ited
(NBL), Rastriya Banijya Bank (RBB), Nepal Industrial Developm ent
Corporation (NIDC), and Agricultural Development Bank, Nepal (ADB/ N) are
not functioning satisfactorily. Because of the high political influence, high
proportion of non-perform ing 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 com panies. This m easure is expected to improve the financial
position of these two banks. Sim ilarly, the governm ent 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 environm ent for the prom otion of econom ic activities. This has led to
the developm ent 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 m ade in the econom y. Basically two
approaches have been taken to have sectoral policy reforms. First, it has been
endeavored to reduce the regulatory m echanism and secondly, the
prom otional 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, prom otion
of high value crops, livestock development, improvement of agro-business and
5
forestry. The government has removed subsidy in fertilizers, and private

sector has been given permission to import and distribute fertilizer.
All these factors have dem anded for drastic reforms in the rural areas. It is
thought that the land reform is an essential instrum ent that would help to
bring such reform s in the rural areas. In Nepal, there is political consensus on
the need for land reform program. A high-level land reform com m ission was
form ed in 1995 and it had prepared a com prehensive program of land reform
and subm itted 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 m akers are reluctant to initiate it. It is being felt that
Nepal is not in a position to acquire m ore 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 m arket responsiveness
needs to be developed am ong 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 1980 s and 1990 s indicates that real
GDP growth during 1990 s was little bit higher than during 1980 s. After
liberalization, the GDP growth rate has averaged around 4.4 percent per
annum as com pared 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 m uch 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. Am ong the non-agriculture sector, im provem ents
were observed in trade and services sector but the initial increase in
m anufacturing sector growth could not be sustained due to the political
instability, lack of com petitiveness of the dom estic industrial sector and the
external factor.
During the post liberalization period, som e progress was observed in savings
and investm ent. Average savings rate increased from 10 .6 percent in 198 5/ 86
to 15.0 percent in 1999/ 0 0 . 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 m arket liberalization,
acted as an im petus 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 im provem ent is needed to reduce
the saving-investment gap, which was widening slightly during this period.
6
During the post-liberalization period, the average investment increased by

23.6 percent per annum as com pared 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 dom inated by the agriculture sector has
been a trend of maintaining agriculture activity with lim ited investment. High
dependency of population in agriculture, land distribution pattern, and dual
ownership land system has created such an econom ic environm ent, which is
not favorable for investm ent. When the country is exposed to the process of
liberalization and globalization, econom ic sectors other than agriculture are
found to be attractive. So far as other econom ic sectors like industry, trade
and services are concerned, they have not any “inherent weakness” for low
investment, as overall investm ent might have grown during the post
liberalization period. It is apparent in the first half of 1990 s. However, in the
second half of 1990 s, there is relatively slow growth in investm ent in m ost 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 20 0 6 — mainly due to the slow increase in net
foreign assets. The major source of m onetary 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 m onetary growth in m any of the years, its
contribution to money supply has been slow.
Inflation
Inflation in Nepal is m ore a structural phenom enon than a monetary one. The
supply side constraints are more pronounced than the dem and side variables
in affecting the rate of inflation. The role of m onetary policy is very lim ited 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 dem and 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 com pared to 17.2 percent during
the pre-liberalization period. However, this growth in the regular expenditure
7
could be attributed to the change m ade in the structure of public expenditure.

The government grouped som e items of the developm ent expenditure into the
regular expenditure category. However, in 1998/ 99, there has been negative
growth in developm ent expenditure. There is a decline in the developm ent
expenditure of the government during the post liberalization period, which is
m ore 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 90 s. The
m ajor reason for this decline was political instability and the introduction of
the VAT that had created an im passe between the governm ent and business
people. Definite declines were noticed in non-tax revenue in the post-
liberalization period due to the utm ost em phasis 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, alm ost equal to the
population growth rate. The growth rate of non-agricultural sector rem ained
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 1990 s, the
growth of electricity sector was highest as m anufacturing sector recorded the
highest growth in the first half of 1990s. The growth rate of transportation and
comm unication services was also observed high during that period. During
the second half of 1990 s, almost all the sectors witnessed a slow growth. The
enthusiasm brought about by rapid econom ic liberalization in early 1990 s
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 econom y 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 volum e as well as in relative prices. The term s of trade have
also gone in favor of the non-agricultural sector during 1990 s. All sectors,
except agriculture, have increased their share in GDP. The share of the
m anufacturing sector has grown fast, particularly during 90 s. This is
attributed to the expansion of export-oriented industries in 1990 s, 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/ 20 0 0 . The share
8
of manufacturing in GDP had increased by 6 percent in an average in m id

1995/96 to 10 percent in 1999/2000.
The share of the trade, restaurant, and hotel sector rem ained more or less
sam e. The share of transportation and comm unication 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
m anufacturing including m ining. Transport and trade sectors witnessed a
consistently high growth rate during 1995-20 0 6 though suffered to som e
extent in the beginning of present decade. The construction turned to be the
sector of the highest growth rate during 1990 s. 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 20 0 0 to 20 0 6 period. The details
are presented in Table 1.1.
9
Table 1.1: Nepal: GDP by Origin at Constant Market Prices
Rs in Million
Annual
2000/0 2001/0 2002/0 2003/0 2004/0 2005/0 2006/0 Growth
Sector 1 2 3 4 5 6 7 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 5.89
communications 31425 34055 35825 38509 39272 40982 44305
Financial intermediation 11455 11892 12090 12838 15957 18594 20186 9.90
Real estate, rending, and 1.30
business activities 35267 33543 32212 31538 34700 35071 38104
Public administration and 10.20
defense 5288 7237 8070 8019 8551 9140 9469
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 2.79
personal service 12896 11785 12303 13955 13483 14490 15213
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 8.77

services 12026 13309 12428 16173 17180 18431 19912
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.
10
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 m ajority of
people and is the backbone of the econom y. However, Nepal’s agriculture is
still heavily depended on rain fed condition as the developm ent of irrigation
facilities is lim ited. Only 70 percent of agricultural land has irrigation facility
in sum mer, of which 38 percent land has year-around irrigation facility.
Lim ited irrigation and unreliability of rainfall have resulted in the fluctuating
production trend in the last decades.
Cereals (paddy, m aize, wheat, millet, and barley) play determ ining 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 65.0 3 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 m ost 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
11
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
m ountains and 33 percent in the Terai. 20 percent of households in the Terai
have a holding of m ore than 2 ha as com pared to only 6.6 percent in the Hills
and 14 percent in m ountains. This points out the relatively sm all size of
landholding in the Hills, as com pared 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 entitlem ent in Nepal is owner-tiller. About 8 5

percent of the operated land is owner-operated and the remaining 15 percent
is rented (Table 1.3). Am ongst 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 m ultifarious problems despite m any

attempts for reform. First, there is the problem of land tenure, which
embodies dual ownership between the landowners and tenants, with neither
party m otivated to invest on land nor benefit from the resulting gains. The
Rural Credit Survey (NRB 1994) reports that investm ent in the land
im provem ent is less than 3 percent of HH incom e. 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 sm all holders are being marginalized and converted into the
landless workers relying on scare wage employm ent. 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 lim ited 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.
12
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 Rented Owner Rented
Operated Operated
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 Rented out Rented in land Rented in
land land 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 com prised of the
agricultural land. The per capita landholding is 0 .14 ha. Land ownership is
highly fragm ented. 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 m ore 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 com prises 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 m ost of the agricultural land in Nepal by

him self. 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).
13
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 im portant trends and their effects are exhibited
below:
Trend Effect
There is heavy dependency of rural The m arginal product of labor is very

population with about 78.1 percent low. As a result, output and incom e of
of the working population of Nepal labor is very low.
are engaged in agriculture.
The land distribution is very skewed Majority of the population have

with 6 percent if the population lim ited land to cultivate and they
occupying 33 percent of the land have to carry on agriculture activity
and 40 percent of the agriculture for survival.
household operate only 9 percent of
the agriculture land.
There is arrangem ent of tenant in Such system is prohibiting

the land, thus establishing dual investm ent in agriculture sector.
ownership of landowner and tenant. 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 cum ulative effects on creating hindrances for
agriculture development and poverty is rampant in Nepal.
14
1.6 Industrial Development
Since 1956 all the plans have provided priority to industrial developm ent.
Establishm ent of Industrial Developm ent Centre, formulation and
am endments of Industrial Policy, Enactm ent of Factory and Factory Workers
Act, Establishm ent and operation of Industrial Estates, priority to the private
sector for industrial developm ent, regional balance policy, export prom otion
and im port substitution policy, generating incom e and employment are the
prioritized issues for the industrial development in Nepal.
The industrial classification in Nepal for the purpose of inform ation is

categorized in two groups – manufacturing establishments and cottage and
small-scale industries. This division is sim ply based on the num ber of
employm ent generated by the establishment. The first is em ploying 10
persons or m ore 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 governm ent that encouraged the im ports of
cheap products from neighboring India and China.
The 1991/ 92 Censuses of Cottage and Small-scale industries have reported

46,410 establishm ents providing em ploym ent to 86,140 persons. Som e of the
large and medium industrial establishm ents are based on the joint venture
and foreign investm ent, but it is not at satisfactory level despite the
continuous efforts of the governm ent. To attract foreign investm ent for the
industrialization of the country, the governm ent had enacted Foreign
Investm ent and Technology Transfer Act 1992, and Industrial Enterprises Act
1992, which laid due em phasis on im port of capital, m odern technology,
m anagem ent, technical skills, access to international m arkets, development of
cooperative attitude and awareness about increasing productivity. Foreign
investm ent at current tim e is open to all type of industries except those
relating to defense, cigarette, bidi and alcohol (excluding 10 0 percent export
oriented). Technology transfer is allowed to the cottage and sm all-scale
industries. Nepalese governm ent has ensured various facilities and
comm itm ents to attract the foreign investm ent. Despite these various efforts,
the growth of industrial sector, particularly the m anufacturing 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
establishm ents in Nepal. It is 2 percent of the total industry, when cottage
and sm all scale industries are excluded from the statistics. Even m any “large”
15
industries in this category are, in fact, only of medium scale when com pared
with the standard of other countries. Many reasons could be assum ed for such
lim ited number of the large scaled industries. Weak dem and 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
form ulation of periodic Plans. These Plans have taken into account the
development approaches of the governm ent, the developm ent priorities,
sectoral programs, the regional and the district development plan and
specialized program s to address the cross cutting issues, such as, poverty,
environm ental degradation, gender im balance, poor governance and
inadequate decentralization. During the decade of 1990 s, 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 econom ic 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 encouragem ent of private as well as foreign sector for the investm ent
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
econom ic 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 econom ic 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 m ore
effective and result oriented m anagement and reduce the drawbacks of Plan
im plementation. It has given more em phasis on the infrastructure
development. The Plan aim ed for coordinated developm ent for the m aximum
utilization of all kinds of sources for the infrastructure, such as, highway, air
16
transport, com m unication and inform ation system , hydropower generation,

electricity distribution system and developm ent centers, for achieving
sustainable and broad economic growth. Governm ent investm ent 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 im pacts in non-agricultural sectors. But,
dependency on m onsoon 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 m obilization 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 rem ained weak towards
the end of the Tenth Plan.
17
Chapter II
Research Design
2.1 General
The present study is carried on the basis of the term s of reference provided by
the UNDP supported project “Enhancing Nepal’s Trade-Related Capacity
(ENTReC) (NEP/ 0 5/ 0 0 6).” The study was initiated in August 20 0 7 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, m ost 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 m ore inclined it
m ight be to open up to the outside world. An alternative explanation m ight
also be that both are caused by a third factor such as the quality of institutions
in a country that im pacts positively on both the prospects for enhanced
growth as well as the effectiveness of trade policy.
The problem is made even m ore 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 reform s 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 im pact trade openness has on
efficiency through im proving price signals, prom oting specialization, reducing
opportunities for rent seeking and opening opportunities for the im port
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 im pacts on poverty depending on how the im pacts are channeled
18
down. In econom ic term s the im pacts on poverty are observed through:

profits and wages gained in the enterprise; the prices and availability of goods;
and government revenues and spending. Trade reform s are likely to have a
m ajor effect on the prices of factors of production – where wages of the
unskilled are the m ost im portant 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 em ploym ent. 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 consum er goods,
prim arily the prices of food item s have positive im pacts if the trade reform
policies im pel to com e down. In such case households from lower income
strata gain from their disposable incom e on foodstuffs than higher incom e
strata. Therefore, the im pact 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 m arket may cause negative im pact
when the economies largely depend on import goods.
Trade reform can also affect government revenue, which may increase welfare
through the governm ent spending on pro-poor activities. Sometim es
reductions in tariffs lead to lower collection of trade revenue and thus its
im pacts on poverty reduction, but lowering the trade tax can also increase the
volum e of im port 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 em ployment 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 im pacts of trade policies in poverty in Nepal. The scope of the study
will be as follows:
19
Review available literature on trade poverty linkages in Nepalese

context;
Review Nepalese trade policies from poverty and hum an developm ent
perspective;
Identify the main channels through which trade policy may affect
poverty situation in Nepal;
Assess poverty and hum an developm ent im pacts of Nepalese trade

policies;
Identify the bottlenecks confronting trade policy im plem entation in

reducing poverty;
Com pare other LDC experiences to make Nepal’s trade policies

effective for poverty reduction;
Review/ assess sector specific policies and problem s and suggest

measures to capitalize their potentials;
Suggest m easures to m ake 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
sam ple studies carried at different periods are used to conduct the study. The
inform ation collected from som e micro studies is also used to substantiate the
facts. In addition, som e qualitative analysis has also been made to
substantiate the impact of trade policies.
In order to translate the design into reality, the research m ade individual
interactive with key inform ants concerned with this sector in Kathm andu.
The study analysis macroeconom ic situation, trade employm ent, incom e
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, prim ary focus has
been given on m acroeconom ic, trade, and poverty data beginning of the
FY1995/96 to FY2005/06. Thus information covering the period from 1995 to
20 0 6 is taken for analysis. In addition, the available data and inform ation
have been used to approach correctly to the issues of poverty. In som e cases,
20
where the quantitative inform ation is not available, qualitative analysis has
been m ade, based primarily on the experience of the researcher. However,
efforts are made to substantiate the findings with the studies m ade 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, H uman Development and

Trade
Chapter VI A Case of Tea Production and Its Im pact on

Poverty
Chapter VII Summary, Conclusion and Recommendation
21
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 lim it the analysis of trade and
poverty to analysis of the effects of trade liberalization on poverty?; and will it
be possible to identify the m ost effective policies for linking international
trade with poverty reduction if the analysis is limited in this way? The most
im portant effects of trade on poverty are likely to occur through indirect
im pacts and through long-term effects of sustained econom ic growth and
development. UNCTAD 1 suggests 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 im portant 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 accum ulation of physical, hum an, and organizational
capital, as well as innovation. Thus, sustained poverty reduction occurs
through the efficient developm ent 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.
22
The relationship between trade and poverty is affected by the

interdependence between trades on the one hand and international
financial and investm ent flows, debt, and technology transfer on the
other.
Sustained developm ent and poverty reduction are m ajor motors for
expanding international trade.
The poverty is defined in a m ultidimensional way to include low income and

consum ption, lack of hum an developm ent, vulnerabilities such as food
insecurity, and insufficient availability of rem unerative em ploym ent and
social services. This fram ework 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 m ore 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 im pacts on poverty through general growth
im pacts alone, or through im pacts on inequality as well. These debates have
spanned several decades and not reached definitive conclusions. They may
have become m ore com plicated by the treatment of “openness” and “trade
liberalization” as a single concept. Velde et al (20 0 4) m ake 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 m easure that results in
openness.
The assum ption is that trade liberalization im proves growth prospects by

enhancing productivity tem porarily through m ore efficient resource allocation
and permanently through the im port of m odern 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 exam ple, identify trade protection as a factor behind Africa’s weak growth
perform ance. 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.
23
Berg and Krueger (20 0 3) examine how openness affects poverty reduction
and conclude that although the evidence is m ixed it leans strongly towards the
conclusion that there is no system atic relationship between openness and the
incom es 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 (20 0 1) argue
that that within countries there is no system atic 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 som e positive
im pact on poverty reduction depending on production, trade, and
consum ption patterns. The em erging consensus is that trade liberalizations in
m ajority of cases worsened inequality (Cornia 20 0 4; Gunter and van der
Hoeven, 20 0 4). Cornia (20 0 4) and Gunter and van der Hoeven (20 0 4)
conclude that globalization has worsened socio-econom ic inequalities, both
within and between countries.
A recent World Bank study (20 0 5) on Latin Am erican 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 econom ic constraints and other
factors trade liberalization would have adverse effect on economic welfare.
Poverty effect on trade demands assessm ent of price changes im pinging 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, m arket 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 sm all farm ers 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 com pletely insulated from changes taking place at the
border – i.e. goods cease to be tradable. Only a few countries like Vietnam
24
were getting advantages due to increases in rice producer prices after lifting of
export restrictions over the 1990 s and Vietnam transform ed itself from a net
importer into a significant exporter. However in Zambia, after the government
abolished the official monopoly in m aize, cut throat com petition am ongst the
firm s resulted in low prices and no purchase by the firm s from the rem ote
areas of the country.
Very poor who are net consumers of purchased food items suffer most from
the price rises, whereas farm ers (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, Fafcham ps and
Sadoulet (1991) shows that m issing m arkets for, wage employm ent 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 m ain advantages of
stimulating agriculture is that it strongly increases the dem and for goods and
services produced by the poor (multiplier effect). In general, surveys show that
large shares of rural households’ incom es and consum ption are related to
locally produce non tradable, such as services, bulky traditional starch items,
perishable foods, and locally processed foods. This m eans 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 dem and. 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 dem and side linkages if the
conditions for a high supply response to prices are not in place
The relationship between trade and poverty reduction is m ore 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
25
literature include the relationship between trade liberalization and growth and
whether trade liberalization im pacts on poverty through general growth
impacts alone, or through impacts on inequality as well.
They m ay have becom e more com plicated by the treatm ent of “openness” and
“trade liberalization” as a single concept. Velde et al (20 0 4) m ake 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 investm ent flows is only one type of policy
measure that results in openness.
The assum ption is that trade liberalization im proves growth prospects by

enhancing productivity tem porarily through m ore efficient resource allocation
and permanently through the im port of m odern 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 exam ple, identify trade protection as a factor behind Africa’s weak growth
perform ance. 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 (20 0 2) present day industrial econom ies have benefited
from interventionist trade policies in the past rather than wholesale trade
liberalization. The studies have also been criticized on their use of
m ethodology 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 (20 0 0 ) 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 (20 0 3) examine how openness affects poverty reduction
and conclude that although the evidence is m ixed it leans strongly towards the
conclusion that there is no system atic relationship between openness and the
incom es 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 (20 0 1) argue that that
within countries there is no system atic tendency for trade to be associated
with rising inequality that undermines poverty reduction efforts.
Trade liberalization will typically affect both the m eans and variances of a
household’s sources of income, and could in four ways affect household
26
vulnerability: change in m ean d incom e; change in the portfolio of activities

undertaken by household; changes in the variability of existing incom e
sources (and/or the correlation between them); and poverty traps.
Shocks, including those induced by trade liberalization, m ay give rise to

poverty traps; that is, actual realizations of bad outcomes m ay of them selves
change the inter-tem poral distribution of incom e. 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 incom e or wealth this can create a poverty trap
(Galor and Zeira, 1993). Alternatively, if households are forced to deplete
productive assets in order to m aintain consum ption, this can reduce their
perm anent incom e and create a cycle of expected poverty. Similarly there can
be inter-generational transm ission of poverty effects if the response to a trade
shock is to reduce expenditure on education as Thomas et al (191) identified
for rural fam ilies following the Indonesian crisis of 1997 or on child nutrition
or health.
3.4 Asian and African Growth Pattern
Lockwood (20 0 6) argues that Africa’s poor growth record vis-à-vis East Asia
cannot be attributed to aid levels, trade perform ance, initial conditions, and
factor endowments, or to market access and the international environm ent.
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 com m itted 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-developm ental states characterized

by ‘abysmal’ policy interventions that actively discourage private investm ent,
such as the overtaxing of agriculture by parastatals, industrial policies
centered on protectionism not offset with export prom otion or incentives for
27
im provem ent in technology or learning, excessive political intervention and a

lack of bureaucratic and political com mitment. He argues that state capacity
to deliver good quality interventions in the econom y has been central to Asia’s
success and to Africa’s problems.
Studies also point to the institutional com plexities of designing and delivering
reforms to growth and trade, as opposed to health and education policies.
Foster et al (20 0 1) suggests that success in the productive sectors m ay depend
on effective joint working across a range of governm ent and private sector
institutions, rather than a single package delivered vertically across one sector.
In some instances, form al PRS mechanism s involving policym akers, private
sector, civil society representatives, and stakeholders have not functioned
properly due to breakdowns in com munication between officials in Ministries
of Trade and Finance and those in particular governm ent agencies driving the
PRS process (World Bank and IMF, 20 0 5). Singh (20 0 5) em phasizes that
developing international trade policy involves coordinating several ministries
and a high degree of expertise. General weaknesses in governm ent 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 m anagem ent 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, 20 0 1). Trade reform s
focused on improving custom s clearance m ay also be resisted because they
jeopardize opportunities for rent seeking and corruption by officials
(Hoekman et al, 2002).
Weak capacity inside governm ent is a problem highlighted by successive

reviews of PRS experiences, and one which is m ore acute for productive sector
line m inistries 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, 20 0 5). Capacity weaknesses inside governm ent
agencies dealing with trade appear be further com prom ised by accession
requirem ents 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 m em oranda on foreign trade
policies and practices and showing com m itm ent to im plem ent the WTO
Agreem ents. For new members this is without the benefit of long
im plementation lags that were available to members of the WTO when the
agreem ents were first negotiated. Bilateral trade bargaining with im portant
28
trade partners also has to take place to ensure that they ‘pay’ for the rights that
they will get as WTO partners. Controversial dem ands from existing mem bers
that new mem bers 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 “comm odities” rather than services and the task of m aking
numerous dom estic producers realize that they are exporting services can be
very challenging.
Two criticism s of the Integrated Fram ework and other form s 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 em phasis on supply side m easures which
relate to diversification and protection of new industries (Tan, 20 0 2). A DFID
evaluation conducted before 20 0 2 found that Poverty and Social Im pact
Assessm ents (PSIAs) have the potential to identify likely livelihood groups
that would be adversely affected by reform m easures and could help in
identifying balancing policy interventions that were needed to minim ize anti-
poor im pacts (Hamner and Hendrie, 20 0 2). The World Bank launched a
series of PSIAs between 20 0 0 and 20 0 2 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 20 0 5 a PSIA conducted in the m ining sector helped to
identify contingency measures for groups which would be disproportionately
affected by m ining closures. Other positive examples include PSIAs
influencing PRSP content on fuel tax reforms in Mozam bique 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 Fram ework. In the opinion of an
Oxfam study PRSPs continue to reflect uniform prescriptions without an
analysis of their impact on the poor (Oxfam , 20 0 4). A review by Nordic
governments of seven PRSPs found that PSIAs were not being utilized as an ex
ante m echanism to spell out policy im plications (Nordic Governm ents (20 0 3)
cited in CIDSE/ Caritas, 20 0 4). A World Bank review of PRSPs in 20 0 3 also
highlighted that the use of PSIA to inform policy design has been lim ited and
done in an indicative rather than specific way (World Bank and IMF, 20 0 3).
29
PSIA in areas such as macroeconom ic policy has also not been reflected in the
strategic priorities of PRSPs (OED, 2004).
The second com m on criticism concerns weak national ownership of the advice
given. Evaluations of the Integrated Fram ework indicate that country
engagem ent is largely confined to Ministries of Trade (World Bank, 20 0 4;
CAPRA 20 0 3; Liebrechts and Wijmenga, 20 0 4). Hewitt and Gilson’s (20 0 3)
study of 17 PRSPs and related donor docum ents 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 (20 0 4) points
out that the macroeconom ic fram eworks in PRSPs were often determ ined by
pre-existing PRGF agreements with the IMF that were not form ulated with
poverty reduction in m ind. 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, 20 0 2; 20 0 4). Hewitt and Gilson (20 0 3) 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 (20 0 3) study of 17 PRSPs produced before J une 20 0 3

reveals that trade was not generally treated as an autonom ous section in these
docum ents. The PRSPs did not include a broad discussion of policy options on
trade, but instead focused on a standard package of export prom otion
m easures. 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
dem and side constraints such as market access to regional and international
m arkets 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 im proving quality over time. A review of the trade
content of all PRSPs produced before J une 20 0 5 indicates continuing failure
to integrate trade adequately (World Bank and IMF, 20 0 5). Recent IMF
analysis of the trade content in PRSPs finds it lacking in coherence, with
m ention of both export prom otion and im port substitution m easures in the
sam e docum ent (IMF, 20 0 5). Operational m easures for a substantial number
of trade priorities listed are not included except in the case of issues related to
30
WTO accession where specific reform s were related to tariff and non-tariff
barriers. The m acro 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 1990 s it has increasingly become the subject of m ultilateral and regional
trade negotiations. The IMF has noted this absence and recom m ended 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 sim ilar om issions in their review of trade content in PRSPs com pleted
before and during 20 0 3. Their study found that PRSP content was silent on
both incom e 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 im pact 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 m ore difficult for growth and trade as in relation to the social
sectors. Reform of the social sectors in favor of poor people generally involves
som e 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, 20 0 6, on the
Uganda experience). By contrast, reform s 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, m aking it difficult to
identify clear winners who can make a supporting case through political
lobbying. The redistributive effects of trade reform can be a m ajor factor
im peding its launch in poor countries (Rodrik, 1998). Recent work by the
31
WTO points out that producers whose interests are comprom ised by a
particular accession-related policy reform are proving highly likely to lobby for
government consideration and support, though not norm ally 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 dom estic price, but non-tariff barriers result in com panies and
individuals receiving these rents through holding a license to im port. Im port
license holders are often am ongst 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. Comm odity marketing boards and parastatal
m onopolies have often stabilized prices at lower levels relative to world prices,
im plying the heavy taxation of small farm ers 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 econom ics 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
lim ited size of the local market. Del Ninno and Dorosh (20 0 1) show how trade
liberalization helped to m itigate 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 (20 0 6) argues that Africa’s
poor growth record vis-à-vis East Asia cannot be attributed to aid levels, trade
perform ance, initial conditions, and factor endowm ents, or to m arket access
and the international environm ent. East Asian tiger countries were successful
because they featured the institutional characteristics of the developm ental
state, including:
32
Econom ic development rather than welfare as a top priority for the

state;
The state is com mitted 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-developm ental states characterized

by ‘abysmal’ policy interventions that actively discourage private investm ent,
such as the overtaxing of agriculture by parastatals, industrial policies
centered on protectionism not offset with export prom otion or incentives for
im provem ent in technology or learning, excessive political intervention and a
lack of bureaucratic and political com mitment. He argues that state capacity
to deliver good quality interventions in the econom y has been central to Asia’s
success and to Africa’s problems.
Studies also point to the institutional com plexities of designing and delivering
reforms to growth and trade, as opposed to health and education policies.
Foster et al (20 0 1) suggests that success in the productive sectors m ay depend
on effective joint working across a range of governm ent and private sector
institutions, rather than a single package delivered vertically across one sector.
In some instances, form al PRS mechanism s involving policym akers, private
sector, civil society representatives, and stakeholders have not functioned
properly due to breakdowns in com munication between officials in Ministries
of Trade and Finance and those in particular governm ent agencies driving the
PRS process (World Bank and IMF, 20 0 5). Singh (20 0 5) em phasizes that
developing international trade policy involves coordinating several ministries
and a high degree of expertise. General weaknesses in governm ent 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 m anagem ent 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
33
there are few incentives for staff to do so (Brown et al, 20 0 1). Trade reform s
focused on improving custom s clearance m ay also be resisted because they
jeopardize opportunities for rent seeking and corruption by officials
(Hoekman et al, 2002).
Weak capacity inside governm ent is a problem highlighted by successive

reviews of PRS experiences, and one which is m ore acute for productive sector
line m inistries 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, 20 0 5). Capacity weaknesses inside governm ent
agencies dealing with trade appear be further com prom ised by accession
requirem ents 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 m em oranda on foreign trade
policies and practices and showing com m itm ent to im plem ent the WTO
Agreem ents. For new members this is without the benefit of long
im plementation lags that were available to members of the WTO when the
agreem ents were first negotiated. Bilateral trade bargaining with im portant
trade partners also has to take place to ensure that they ‘pay’ for the rights that
they will get as WTO partners. Controversial dem ands from existing mem bers
that new mem bers 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 “comm odities” rather than services and the task of m aking
numerous dom estic producers realize that they are exporting services can be
very challenging. (Singh, 2005).
Greater openness can result in a wider variety of com m odities being available,
or create new opportunities for production (e.g. by allowing im ported 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 m arket destruction due to
the effects of increased import com petition on a local market. Rom er (1994)
argues that the most substantial welfare costs of trade restrictions com e from
the goods and services that they exclude from the m arket and the loss of
productive activities those results from that exclusion. Winters(20 0 2) also
points out that if trade liberalization, or accompanying changes in dom estic
m arketing arrangements destroy m arkets, households can becom e com pletely
isolated from the market and suffer substantial income losses.
34
3.7 Trade Integration in Economic Growth
The role of trade integration in econom ic growth is particularly strong in the

context of obtaining export revenue required to finance im ports 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 m ay represent additional gains. Trade can enable more efficient use
of a country’s resources by enabling imports of goods and services that, if
produced dom estically, would be more costly. It can lift a balance-of-
payments constraint on sustained economic growth. It can improve returns on
investm ent by reducing production costs or enabling econom ies of scale.
Exposure to international trade com petition can act as a spur to greater
efficiency through acquisition of technology.
There is great diversity am ong developing countries in the interrelationships

between international trade, productive capacities, and poverty. International
trade can facilitate or hinder the process of productive developm ent and also
m odify the relationship between productive developm ent and poverty
reduction. Three dim ensions 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 econom ic
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 term s 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 m arkets for m anufactured
exports from developing countries and ensuing policy responses have becom e
im portant concerns in the design of export-oriented developm ent policies that
are coherent in terms of the global trading environment.
Regarding imports, ensuring sustained econom ic growth will im ply 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 econom ies that
depend on a narrow range of low-value-added primary com m odities and have
deep mass poverty, there is a strong tendency for the dom estic vicious circles
of econom ic stagnation and persistent poverty to be reinforced by external
trade and financial relationships. In this situation, trade can be part of an
35
international poverty trap in which low and unstable com m odity prices
interact with unsustainable external debts and an aid/ debt service system
(UNCTAD, 2002).
According to Chang (20 0 2) present day industrial econom ies 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 (20 0 0 ) 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 prom ote

development and poverty reduction in a newly liberalized m arket econom y.
There may be alternative developm ent strategies that induce trade for growth.
This is possible through an open-econom y 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 com plem entary inputs such as inputs or credit (McKay et al.,
Morrisey and Vaaillant 1997), as well as com plem entary policies related to
inform ation and extension services. However, in many Asian countries the
deregulation and m arket 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 system s and weak research base are found to be working
adversely to m ake the new m arket oriented policies effective in reducing
poverty (Vyas 20 0 2). Watkins (1997) shows the prospective consumer gains
from corn liberalization lower consumer prices failed to m aterialize in m any
countries.
In Malawi, however, trade liberalization encouraged the em ergence of traders

to buy food comm odities from farm ers and sell in urban areas or export
(Parris, 1999). Most smallholders who are unable to store their output and sell
in the im mediate post harvest are found to be most sufferers. In Nepal’s
36
context also some studies (UNDP 20 0 4, IPRAD 20 0 5) reveal little price

responsiveness and adverse terms of trade in agriculture.
An optim izing household will choose a portfolio which maxim izes its utility
taking into account its degree of risk aversion (Ellis, 1993, Kuotibm 1968), and
clearly trade liberalization could alter the optim al portfolio. Generally trade
liberalization would encourage farm ers to switch from subsistence to cash
crops with higher returns but at the sam e tim e with higher variance.
Fafcham ps and Pender (20 0 0 ) show that credit constraints faced by poor
farmers in India m ake them unwilling to sin non-divisible and irreversible
investm ents in risky tubewells despite the substantially higher returns. The
existence of undiversifiable risk could underm ine the potential gains from
trade liberalization among the poor and result in poverty traps. Poor m ay also
lack inform ation 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 pragm atic, inclusive, and outward-
looking. This can be achieved by creating a dynamic process of capital
accum ulation, structural change and technical progress in order to develop
productive capacities; m anaging integration with the global econom y,
including both external finance and external trade, and technology
acquisition; and incorporating m arginal groups, paying attention to gender
equity, and ensuring the achievement of certain m inimum standards of
human wellbeing.
Successful poverty reduction requires outward-looking developm ent policies

that put constant attention to trade, technological and investm ent
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 synonym ous 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 m oving workers into the form al sector will alleviate poverty only if the
loss of labor in subsistence agriculture is so large that the workers rem aining
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
37
that the employm ent effects of liberal trade policies were generally rather
m uted. Rama (1994) found a significant positive relationship between
protection and employment in m anufacturing, 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 m anufacturing led to job loss, but in
m ost firm s it led to lower m argins and alm ost no change in output or falls
resulting into decline in real wages. Winters (20 0 0 b) suggests similarly that
the real exchange rate depreciation could explain the sim ultaneous increase in
form al and decrease in informal m anufacturing em ployment 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 Am erica finds increasing skills gap
contrasts with the earlier experience of East Asia, where liberalization was
accom panied by a narrowing of the gap. Robbins and Grindling (1999) adduce
a sim ilar bias towards skilled workers in Costa Rica’s liberalization. Although
liberalization would generally raise the demand for relatively unskilled
workers in m any 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 im portant as well as
cases where segm ented import com peting 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 Im pact of Liberalization, carried by Shanker Sharm a and

Pushker Bajracharya in 1996 (IIDS 1996). Since the study was m ade in the
very early period of liberalization, the econom ic situation of that tim e was
relatively better, and the findings of the study are relatively optimistic. The
study shows that the average annual growth in exports alm ost doubled after
the liberalization as com pared to the pre-liberalization period. Sim ilarly, it
also shows that the share of trade in GDP increased by m ore than 40 percent
during this period. On the other hand, im port 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 1990 s. For achieving such a reduction, it
38
would also require significant changes in the distribution of incom e 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 incom e
and alm ost no surplus to redistribute, there is little scope for targeted poverty
alleviation efforts on any scale large enough to m ake difference at the national
level; therefore, poverty alleviation will require faster per capita incom e
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 em phasized that
“the globalization process in Nepal is rather a process of deeper and still
deeper penetration of the Nepalese m arket by the Indian capital and labor
with very little gains for the m ass of the population. A m inority has benefited
and incom e inequalities have increased, tearing the existing social fabric,
which may lead to explosive political situation. One indicator of such ferm ent
is the Maoist problem spiraling into higher and higher levels of violence, both
from the government and insurgents’ sides.”
Sapkota (20 0 2) 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 m anner and present the facts of the policy outcom e. The findings show
that urban households have m ore benefited from the liberal m arket econom y
than the rural one. The poverty im pact assessm ent of this study shows that
poverty increases up to the average m inim um and decreases thereafter. The
im pacts of trade liberalization according to this study decrease household
welfare and increase poverty at the lower incom e level and increase welfare
and reduce poverty at the higher incom e level. Thus the study suggests for
remolding taxation system to address the problems of poverty and inequality.
Trade and Com petitiveness Study undertaken in 20 0 3 identified key policy

m easures and technical assistance requirements for improving the trade
competitiveness of Nepal. To im plem ent the policy m easures, the governm ent
would utilize investm ent and technical assistance from the developm ent
partners. It identified the critical need of im proving the trade com petitiveness
through trade facilitation and through rem oving other constraints. Regardless
of the econom ic liberalization and the growth of trade observed in the 1990 s,
the competitiveness of the econom y rem ained very low and labor productivity
39
am ong the lowest in the neighboring and the com petitor countries. It was
observed that three key factors were responsible for the poor competitiveness
and productivity in the economy:
inadequate mechanisms and incentives for firm s 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 m arkets in the form al sector and inadequate bankruptcy and
foreclosure provisions raised the costs of reallocation of factors of production
to m ore productive uses. Rem oving these constraining factors would enable
Nepal to raise its competitiveness. Improving Nepal's trade com petitiveness
requires faster and m ore efficient movem ent of goods into, out of, and
throughout the country. Streamlined cargo-custom s procedures, including
transit, are important in reducing the delivery time and the transaction costs.
According to the Report, im provem ents in Nepal's custom s procedures,

including governance and customs infrastructure, will not produce the full
range of intended benefits unless corresponding improvements in the
transport and logistics are m ade. Both of these are concerned with facilitating
the m ovement of goods, with the principal objective of reducing the high
transaction costs of the business. This can rarely be accom plished if each
component is viewed in isolation, since m ore effective movem ent of goods via
any one com ponent m ust be m atched by the equivalent im provements in the
capacity throughout the system . Nepal's labor productivity is the lowest in
South Asia on account of one of the m ost rigid regulatory frameworks for
labor m arkets in the developing world, thereby discouraging investm ent and
growth of firm s and underm ining the process of operational efficiency and
competitiveness. Anti-dism issal 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 sm all, 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
m inim al cost and relocate capital elsewhere where returns are high becom es
extremely difficult in Nepal.
Nepal's investment climate rem ains fundam entally unfriendly, as reflected in
40
the lowest level of FDI among sim ilar landlocked countries. Regional
comparisons of concessions and facilities show that Nepal is prim a-facie less
generous to the export-oriented industries compared to m ost of its neighbors,
according to the Report. Despite possessing a num ber of advantages
including the relatively low labor costs which should enable local firm s to
exploit available and em erging opportunities in external m arkets, a series of
dom estic barriers and constraints that raise costs, dam pen productivity
growth, and hamper the ability of the firms to com pete in the overseas
m arkets have constrained this potential. Am ong the m ain barriers
characterizing all these sectors is the inadequate marketing which is
preventing adjustm ent to new m arket conditions and depriving the firm s 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 em erging from increased
competition in the m ajor overseas m arkets 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
m arketing 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 20 0 1,
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 Decem ber 31, 20 0 8.
Failure of Nepal's RMG exporters to penetrate the European Union m arket,
despite available preferences, suggests that marketing and m arket awareness
are the glaring problem s affecting them . Reducing costs, m eeting shortened
delivery tim es, and responding to design preferences are crucial for success in
this industry. The carpet industry has stagnated in the face of static global
dem and, international com petition from the machine-m ade carpets, and a
range of internal constraints, including restrictions on product variety, lack of
FDI, and inadequate m arketing networks and design capabilities. There is
need to respond to em erging patterns of demand in the m ajor carpet m arkets
as there have been concerns that the Nepalese producers are not responsive to
changes in consumer fashions and designs.
41
Productivity improvements should not be constrained by labor legislation and

industrial relations environm ent. In the RMG sector, as a measure of
flexibility in overcom ing many burdensom e im plications of the rigid labor
rules pertaining to the perm anent workers, m any 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
norm ally 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 im provem ents in the transit and
other logistic facilities. It is estim ated 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

econom ic activities through the adoption of liberal econom ic policy.
Globalization is the process through which national econom ies in different
part of the world are integrated. In fact, the globalization process was initiated
by the developed world with the support of m ultinational organizations. The
m ultinational organizations are m otivated to prom ote the globalization
process because of technological developm ents, wider trade and investm ent,
and the changing production, organizational and m arketing strategies
prom oted by them. The pace and depth of globalization differ across countries
and regions, but the main econom ic 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
42
Promotes equitable distribution of income
Promotes macroeconomic stability in the developing countries
The Critics view that it will lim it 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 wom en 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 wom en
are severely under-represented.
In Nepal, this is m ore prominent. Women are in jobs which are m ore likely to
be subcontracted, relocated abroad, or elim inated by labor-saving
technologies. The traditional gender disparities in wages appear to be
widening. The cum ulative effects of persistent discrim inatory practices m ay
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 problem s. 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 problem s 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 m ore contentious,

though there is broad agreement that in the long run liberalization can help
reduce poverty levels. Key points of disagreem ent include the relationship
between trade liberalization and growth and whether trade liberalization
43
im pacts on poverty through general growth impacts alone, or through im pacts

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 1950 s and 1960 s ‘big push’
industrialization, planning and im port-substitution policies were advocated.
In the 1970 s, these were replaced by policies centered on the price system and
outward orientation while the 1980 s saw the emergence of the Washington
consensus with its emphasis on m acroeconom ic belt-tightening and trade
liberalization. The current approach retains elements of the Washington
consensus but augm ents them with elem ents drawn from the PRS approach.
These include an emphasis on country-specific policies, good governance, and
poverty reduction. Along with expansion of foreign trade.
44
Chapter IV
4.1 Background
Nepal is still at its prelim inary stages of econom ic progress and

transform ation. 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 im portant sectors of the
economy have not only reduced the com petitiveness of the econom y but also
resulted in a lim ited production base, far below the consum ption needs of the
people and the investm ent requirem ents of the econom y. As a consequence,
Nepal has been heavily dependent on the im port trade for meeting its large
and varied needs.
The difficult topography, lim ited developm ent 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$ 30 0 . Past
attempts at socioeconom ic developm ent have not only remained m odest but
the socio-political disturbances in the recent years have also taken a heavy toll
of the econom y. At present, the task of putting the econom ic 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 regim e. In the early
phase of the trade and paym ents regime, Nepal placed its im ports under the
Open General Licensing (OGL) since 1992-93, replacing the then prevailing
im port licensing regim e, 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 1990 s, the trade volume of Nepal increased along with the positive change
in macroeconom ic indicators of the Nepalese econom y. 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.
45
20 0 5 period, the trade sector has been found im proved 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 rem ained 37.56 percent in 20 0 5/ 0 6 in
20 0 5/ 0 6. Although the share of trade volum e has decreased, there has been
continuous growth in the volum e 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 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
/96 /97 /98 /99 /00 /01 /02 /03 /04 /05 /06
Annual 12.61 7.50 13.86 10.76 16.41 4.37 6.64 9.39 9.38 9.97
growth of
GDP in %
Annual 23.17 0.28 5.74 28.51 8.22 -9.93 12.93 9.13 9.46 12.41
growth of
total trade
Ratio of 39.41 43.10 40.21 37.34 43.32 40.27 34.76 36.80 36.72 36.74 37.56
Total
Trade/GDP
Source: Calculated from Various Issues of Economic Survey
There is positive growth in export during these years, except in 20 0 1/ 0 2.

Maxim um annual change of export is noted in 1999/ 20 0 0 when export has
increased by about 39.65 percent (Table 4.2). There is also sim ilar trend in
im port during these years, but the values are less erratic. The m axim um value
of im port is also seen during 1996/ 97, with 34.7 percent change. The ratio of
export to GDP as well as ratio of im port 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 20 0 5/ 0 6 while the ratio of im port to GDP is 27.89
percent in the sam e period. The share of im port 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 1990 s,
the growth of export was higher than the growth of import reflecting a positive
im pact of the adoption of liberal econom ic policies. However, such trend did
not continue and is attributed to the im pact of the one decade long conflict.
Thus it is observed that though the competitiveness of the export sector had
increased in earlier econom ic reforms and liberalization period, the policies
had not been effective in the conflict period and post conflict transition.
46
Table 4. 2: Growth of Export and Import and its Relation with GDP
Description 1995/ 1996/ 1997/ 1998/ 1999/ 2000/ 2001/ 2002/ 2003/ 2004/ 2005/
96 97 98 99 00 01 02 03 04 05 06
Annual - 13.86 21.54 29.67 39.65 11.70 - 6.36 7.97 8.89 2.60
change in 15.65
Export (%)
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 - - 5.11 1.69 - -6.21 7.73 - -8.75 -8.83 -
change in 20.41 19.34 13.64 13.99
Import (%)
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/ im port 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, rem ittances, and grants are equally influential to
overcome the negative current account situation in these years of analysis.
Trade has becom e m ore significant during the years of liberalization. The
share of total trade to GDP has rem ained to som e extent constant ranging
from a minim um of 35 percent to a m axim um of 43 percent in the last decade
under review. Till 20 0 0 , 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 econom y
policies has highly contributed in econom ic growth. Such growth in export
was due to the growth of labor-intensive industries like carpets and garm ents
which seized to grow because structural problem and non-tariff restrictions.
47
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 25656.5
0 53.91 4.44 26.78
Others 1291.6 5379.1 21585.0
3 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
48
Export of Nepal has grown fast during 1990 s showing positive impact of
liberal environment in Nepalese economy. However, it has turned be stagnant.
Another feature of Nepalese export is its limited item s of export. About half of
the exportable item s are represented by three products, nam ely carpet,
garments, and vegetable ghee. These three item s are dom inating throughout
these years. Other few item s like jute, toothpaste; handicrafts etc are major
exportable items. The lim ited exportable products indicate the vulnerability of
Nepalese econom y. 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

SITC Group 1995/96 2000/01 2050/06 1995- 2001- 1995-
2001 2006 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 196.7 257.00
Products 4.04
Hides & Skins 387.6 658.4 310.4 11.18 -18.57 -4.85
Carpets (Hand Knotted 8163.9 8592.3 58.36.7
Wollen) 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
49
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 im port 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, m edicine, paper, telecom m unication accessories,

cloths (cotton & others), polythene granules, etc. are the major items imported
from India. In 1990 s, the som e items like gold, vehicles and its parts,
m edicines etc used to be im ported as the m ajor item s. Specially, in the im port
of gold has decreased as India has also opened up its im port with highly
reduced import tariffs.
50
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 som e raw materials like raw wool
has increasing trend during 20 0 0 / 0 1-20 0 5/ 0 6. On the other hand, increasing
im port 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 lim ited in number, but the num ber
of countries buying Nepalese products is also lim ited. India is m ajor trading
partner in terms of both export and import of goods. The share of Indian
m arket for our export has reached to 42.6 percent , in 1999/ 20 0 0 (Table 4.6).
USA and Germany are other m ajor buyers from Nepal, and these three
countries im port about 85 percent of the total export of Nepal. Other
importing countries like China, UK, and Japan have very limited shares.
Another m ajor feature of export of Nepal is that the industries are seen
producing exclusively for export market. The m ajor products like carpet,
51
garment, pashmina, vegetable ghee, and handicraft items are mainly produced
for export m arket. 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 garm ent, 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 im port also, there are not m any trading partners (Table 4.9).
Nepal imports m ore 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 im portant 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 im port 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
52
There are very lim ited data available to analyze the impact of trade on
employm ent. As m ajor export item s like carpet, garm ents, and pashm ina and
handicrafts items are produced m ainly 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 lim ited. There are basically four goods nam ely
carpet, garm ents, vegetable ghee and pashmina goods, which contribute m ore
than 60 percent of the total export. This indicates high dependency of export
on very few products. Moreover, the list of other exportable item s 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 lim ited. Only 80 percent of the products are
exported to three countries- India, Germ any, and USA. It shows another
dim ension of challenges faced by Nepal. High dependency on these lim ited
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 im ports 36.5 percent of the total
goods to Nepal. There is urgent need to address the problem of lim ited export
and limited trade patterns.
4.4 Assessment of Growth in Trade
A rapid rise in the export was observed in 1990 s am idst unfavorable domestic
and international factors. The trade statistics show that between FY 1991/ 92
and FY 20 0 0 / 0 1 and between FY 20 0 1/ 0 2 and FY 20 0 6/ 0 7 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 am ounted to
Rs. 60 .8 billion in FY 20 0 6/ 0 7, at an annual average growth rate of 1.5
percent from the FY 20 0 0 / 0 1 level, reflecting a poor perform ance of the
export in the latter period. Export to India decreased due to the quantitative
restrictions im posed on some prom inent 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 im port in the two periods increased significantly after the
adoption of liberal trading regim e. Total im port increased to Rs. 115.7 billion
in FY 20 0 0 / 0 1 from Rs. 31.9 billion in FY 1991/ 92 at 15.4 percent per annum .
53
The im port am ounted to Rs. 191.7 billion in FY 20 0 6/ 0 7, 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 20 0 6/ 0 7.
As a consequence, a m arginal rise in the export (1.5 percent) and a m uch
higher growth of im port (8.8 percent) between FY 20 0 1/ 0 2 and FY 20 0 6/ 0 7
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/ im port ratios came down from 39.6 percent
in FY 20 0 3/ 0 4 to 39.3 percent in FY 20 0 4/ 0 5, and then to 34.7 percent in FY
20 0 5/ 0 6 and 31.7 percent in FY 20 0 6/ 0 7. The decrease in export showed
twofold im pact – widening trade deficit and the loss of jobs in industries and
trading sectors.
4.5 Prospects of Export
The development plans and econom ic policy statem ents of the governm ent
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 phenom ena and circum stances. The Tenth Plan em phasized
to identifying new exportable products of comparative advantage and
im proving their quality and export volume. The Plan visualized increasing the
number and volum e of the exportable goods by prom oting the
interrelationship am ong the agro-forestry and other service-oriented
industries. Em phasis 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 em ploym ent in the rural areas. According to the
Plan, com petitiveness of the exportable item s would be enhanced by
promoting foreign investment and technology in the areas having comparative
advantage, based on an assessm ent of the demand and supply in the
international markets.
Sim ilarly, 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, com puter software and labor m arkets
would be tapped in the national interest. Emphasis would be placed on the use
of the dry ports. Export Prom otion Zones nearby these dry ports would be
54
established with the participation of the private sector. Feasibility studies

would be carried out to establish Special Econom ic 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 harm ony with the regional and m ultilateral agreem ents. The
quality prom otion of traditionally developed exportable item s such as the
woolen carpets, RMG, Pashmina, and handicrafts would be encouraged.
The Government planned to undertake various prom otional programs and

activities for the Tenth Plan period. The Plan envisaged to strengthen
institutional capacity of the governm ent, non-governm ent and the private
sector to enhance the collection, processing, and dissemination of inform ation
relating to the export prom otion. Activities like the organization of trade fairs,
participation in international trade fairs, and identification and prom otion of
exportable item s of com parative 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 um brella. The Plan also
underscored the role of the institutional reform s. To m ake foreign trade
sim pler, m ore reliable and cost effective, reform s were envisaged in the areas
of laws, regulations, and policy, procedure, and coordination m atters. To
create necessary environment for market development, integrated and
participatory program s among various institutions would be im plemented.
For this, organizational and m anagerial efforts would be strengthened and
export prom otion prioritized in a coordinated m anner. The econom ic
diplomacy is weak. The policy to m obilize Nepalese foreign agencies (like
embassies, consulates, etc.) in prom oting foreign direct investment (FDI),
export, and the econom ic interests of the nation would be adopted so as to
accelerate the industrial development addressing the expansion of export.
During the Plan period, attem pts have been made toward the developm ent of
the policy-level and legal foundation in the trade-related m atters. Legislations
like the Com petition Act, Insolvency Act, Com pany 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 m ovement 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 Prom otion Center, Export Prom otion Com m ittee, and Wool
Development Comm ittee, have been integrated into the Trade and Export
Promotion Committee.
Nepal becam e the 147th m em ber of the World Trade Organization (WTO) on
55
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
Econom ic Cooperation). In line with the international and regional
comm itm ents as well as the national requirem ents, the trade and tariff system
has accordingly been substantially rationalized. Despite a huge deficit in the
m erchandise trade, Nepal currently holds a satisfactory forex reserve level,
m ainly attributed to the balance of payments (BOP) surpluses resulting from
the rem ittance and other transfer flows along with the foreign assistance
receipts. However, for a sustainable developm ent of the external sector, the
competitiveness of the econom y 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
arrangem ents like the SAFTA and the BIMSTEC. India's declaration to reduce
to zero the customs on the im ports from the four SAARC LDCs (Bangladesh,
Bhutan, Maldives, and Nepal) from 20 0 8 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
m aintained 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 m ake them competitive. The process of industrial
development in Nepal has also suffered due to the unfavorable law and order
situation m ainly related with the conflicts. Besides, the inadequate and weak
physical infrastructure, lower utilization of the capacity, lack of favorable
business environment, problem s 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 m easures to prom ote the export sector. Foreign
diplomatic m issions of Nepal will be involved, through econom ic diplomacy,
in the promotion of foreign trade including development assistance, labor
m anagem ent, and tourism. The Plan would adopt m easures for prom oting
export trade and market access besides creating a suitable com mercial and
industrial environm ent for the export sector developm ent through utilizing
the import policy for making available the required goods and services.
56
The other policy is the identification, developm ent, and m arket diversification
of the exportable items possessing comparative and com petitive advantages.
Backward and forward linkages of the export sector would be expanded.
Existing policy, legal, procedural and institutional environment with respect
to the industrial prom otion will be refined and im proved 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 m ade for
reorienting the subsistent agriculture toward the com m ercial agriculture so as
to m ake this sector com petitive in line with the dem ands of the dom estic and
international markets. In addition, physical infrastructure relating to trade
will be developed. Work on policy reforms like formulating and implementing
of new com mercial, industrial, and foreign investm ent policies will be
continued.
Work on trade facilitation like sim plification of the custom s procedures,

criteria for procedures of the transit and standards verification, and
hom ogenizing the policies and rules with those of the trade partners like India
and China will be carried out. Institutional reform s including the capacity
enhancement and developm ent 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 developm ent of the comm ercial 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, m ake the import trade
competitive, contain the current account deficit within a specified ratio of the
GDP, and strengthen the econom ic fundam entals. This m easure will be
adopted to im prove 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 m onetary policies are crucial to enhance trade regim e and
support the growth of both the export and the im port sectors. Based on the
provisions of the Budget of FY 20 0 7/ 0 8 the fiscal and the monetary policies,
some important measures are analyzed as follows:
Trade and Fiscal Policy
The budget for FY 20 0 7/ 0 8 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 m easures such as legal and institutional
57
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 dom estic private sector to im prove the
investment climate in the country including enforcement of law and order.
The budget has identified the im portance 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 Econom ic Zone
will be introduced for the development and management of the industrial
zone, export processing zone, tourist and entertainment zone, and special
comm ercial zones in Rajbiraj, Simara, Nepalgunj, and Dhangadhi or
Mahendranagar. Sim ilarly, a powerful investment board will be established to
prom ote 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 m arket, 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 im proving the environm ent for investm ent
and prom oting dom estic 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
m olasses. 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 custom s 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 im port facility by
placing all the taxes on the im ports of the raw m aterials under the bank
guarantee. Similarly, for the export-oriented industries, tax refunds at par
rates from the custom s point at the tim e 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
58
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 comm ercial 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
m anufacturing and tourism industries, the Nepal Rastra Bank (NRB) has
allocated Rs. 2 billion annually to refinance the sick industries. With the
provision m ade in the current Budget, the sick industry refinance facility will
be disbursed as per the previously-determ ined criteria. Arrangem ent is made
to disburse the am ount allocated for the sick industry refinance through the
proposed Industrial Revival Fund, which aim s 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. 50 0 m illion for the
Fund, with the provision of contributions from the NRB and the com m ercial
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 com m ercial
or developm ent bank availing this refinance facility will not charge the
concerned borrower m ore than 4.5 percent interest. Looking at the
troublesom e situation that the small and cottage industries have been
encountering, the Nepal Rastra Bank will extend refinance to the com m ercial
or developm ent bank at 2.5 percent against the collateral of the loan extended
to these industries. The com m ercial or developm ent 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 m eans to alleviate poverty and ensure that countries attain
sustained econom ic growth. Although trade can be a powerful instrum ent of
poverty reduction and its virtues have been well docum ented, prospects of its
benefits have been often oversold.4 Trade negotiators of countries, which are
4
See Stiglitz (2003); Rodrik (2002); and Adhikari (2005)
59
‘convinced’ of the benefits of trade liberalization, tend to blindly follow

idealized benefits of trade and fall into the trap of negotiating trade
agreem ents without conducting adequate homework. This leaves them
without m uch knowledge on the mechanism to derive the ‘prom ised’ benefits
and measures to be put in place to mitigate the negative consequences.
When trade agreem ents are negotiated – at the m ultilateral, regional and
bilateral levels – the question of ‘policy space’ is bound to arise, because m ost
of these agreem ents 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 im pose

trade measures to safeguard its balance of paym ents. In contrast to Articles
XVIII: a and c, surveillance and approval procedures are less burdensom e,
and com pensation 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 $ 1,0 0 0 are exem pt
from the prohibition on export subsidies. Developing countries that have
becom e competitive in a product—defined as having a global m arket share of
3.25 percent—must phase out any export subsidies over a two-year period.
United Nations Conference on Trade and Developm ent (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 m arket
access for products of export interest to developing countries on a non-
reciprocal basis; elim ination of restrictions between primary and processed
products, taking account of trade policy instrum ents on developing countries;
c) Article XXXVIII, concerning international agreement to im prove m arket
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 m ultilateral trade negotiations that
60
culm inated in the form ation of the World Trade Organization (WTO)
weakened the special and differential provisions by incorporating the
principle of ‘single undertaking’ the m em ber 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 20 0 1 focused m uch attention to the free trade
in favor of developed countries without addressing the problem s of the
developing countries. Doha Developm ent 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 rem edy measures for protectionist

purposes;
patent protection on pharmaceutical products until 31 December 2016,
call for addressing the problem s of conflict between TRIPS Agreem ent
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 20 0 3, 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
20 0 5 discussed on the issues of agriculture, non-agricultural m arkets access
(NAMA), services, trade facilitation and development dimension.
Basically, the protectionist tendency prevalent in the importing country m ay

hinder the developing countries to get full benefit from the trading. However,
som e works have been m ade in favor of the LDCs for enhancing the supply
capacity and com petitiveness. 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 m ost of the developing countries and has
foregone most of its rights during the process of its accession to WTO.
61
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 20 13 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 tim e fram e
for TRIMS will provide an opportunity for Nepal to im pose perform ance
requirem ents 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
m ovem ents. 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 m ainly 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 prom oting trade in the
developing countries. A Conference on Mobilizing Aid for Trade organized by
the ADB/ Manila in Manila in September, 20 0 7 highlighted the need for
prioritizing the trade as “the export shares as percent of GDP of South Asian
econom ies still fall below world average, and are com paratively low when
m easured by its South-East Asian neighbors. It is also appearing that, after
20 0 1, 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 20 0 0 (US$ 676 million) and
20 0 6 (US$ 70 4 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 econom ies including Peoples' Republic of China and
India, and 15 other developing Asian countries. In the total exports of LDCs
and Sm all States of Asia and the Pacific (US$ 151,0 58 m illion in 20 0 0 and
US$ 30 1,364 million in 20 0 6), Nepal's share cam e down to 0 .23 percent in
20 0 6 from 0 .45 percent in 20 0 0 . 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)
62
based on the indicators such as the cost incurred for the trade, number of days
taken for the trade, infrastructure like roads, ports, inform ation technology
and com m unications network and other logistics, production technology,
liberalization of trade and investm ent, general business environm ent,
m arketing and m arket access, transit facilities, cross-border connectivity,
custom s m odernization, capacities for trade strategies and negotiations, trade
and investm ent 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
m eaningfully participating in the m ultilateral and regional trading systems.
Considering the problem s, the new initiatives on Aid for Trade (AfT) could
help overcome the problem s and open up new trade opportunities for these
countries. Nepal may also have breakthrough from these new initiatives.
The sixth WTO Ministerial Conference of Decem ber 20 0 5 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 sm allest countries benefit from new trading opportunities by building the
necessary capacity to trade effectively and efficiently—with donor support
coordinated through m ultilateral partnerships with institutions like the WTO,
the World Bank and regional development banks. Each sm all and weak
economy has its own specific needs. Some are isolated and landlocked, others
are in a post-conflict environm ent, and still others enjoy lim ited raw materials
or resource endowments. AfT will help these econom ies 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 custom s officials to help ease the flow of
goods across borders and for trade negotiators to take advantage of free trade
agreem ents. And it will also offer help in implem enting the required market-
oriented reform s and, yes, building the social safety nets needed for people to
adjust to the changing econom ic environm ent." (Lamy and Kuroda,
September, 2007)
In the Conference, the donors have pledged funds for the im plem entation of
the AfT. J apan announced developm ent 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 20 10 , and
the EU and its m em ber States announced trade-related developm ent
assistance spending of 2 billion Euro per year by 2010, totaling around US$ 15
billion. The AfT com plem ents but is not technically a part of the Doha Round
of WTO negotiations. The comm itm ent of governments to fully mainstream
63
trade into their national developm ent 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
environm ent 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 form ulation 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 boom ing neighbors. The
US$ 20 million project, approved in 2004, aims to reduce transportation costs
associated with Nepal's im ports and exports, and to im prove the efficiency
and organization of transit trade docum entation and data exchange. It will
also prom ote sub-regional econom ic cooperation through better trade
facilities under the South Asia Sub-Regional Econom ic 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 dram atically changed in 1992. Earlier, there was
regulated trade scenario, and licensing m echanism since 198 5 had regulated
the trade in Nepal. Little improvement was made by the adoption of Open
General License System in 1987. But the m ajor breakthrough happened with
the adoption of new trade policy in 1992. Under the system , im ports of raw
m aterials, consumer goods, industrial machinery, and services were made free.
Adoption of open current account system helped to facilitate specially im port
trade, allowing and m aintaining foreign currency account, foreign currency
loan facilities, and supporting the export sector. Market rate determ ination of
the exchange rate of national currency helped the exporter to be m ore
competitive in the international market.
Nepal’s trade is directly linked with the m acroeconom ic perform ance and the
m acroeconom ic policy variables. The external im balances of the econom y
depend on the current account deficits, capital flight, and rapidly expanding
external debts, however, internal im balances 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 investm ent, and slower output growth. So,
64
reducing absorption would not be the correcting m echanism for the trade
im balance. In contrast, expenditure-switching policies, which increase the
dom estic prices of the internationally traded goods, will stim ulate exports and
curtail im ports so that the econom y 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 dem and for wage increases, especially
given the m ilitancy of the labor unions these days. Such increased wage
dem and m ay lead to further inflationary expectation, which m ay m ake
im porting 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 im plem enting the labor m arket
reform would not help correct the trade im balance. In this perspective, the
suggestions have to address the m acroeconom ic policy areas such as fiscal,
m onetary 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 system s
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 m arket access and
im prove the potential benefits of the liberal multilateral and regional trading
regime.
It further requires exploring of potential products, encouraging

entrepreneurship, im proving the m anagem ent and production systems,
building better industrial relations, and strengthening the hum an resource
capability. Furtherm ore, focus should be given to enhance the efficiency and
capacity of the value chain m anagement so as to increase the com petitiveness
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 program s with the private sector to increase the
efficiency of delivery system s with a view to com peting in overseas markets,
supplying to big enterprises, m odifying products to meet the standards or
tastes of consum ers, reducing the num ber of transactions associated with the
supply chains to reduce delivery cost, and developing supply chains that
65
conform to the regulatory requirements in different m arkets. These all require

development of new and better supply chains supported by appropriate
strategies.
The trade policies of 1992 were im plem ented 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 governm ent’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 com pletely free. There are restrictions to trade by Letter
of Credit mechanism only. Full paym ent by telex transfer is allowed for the
am ount below US$ 30 0 0 only. In the case of export, there is no allowance for
credit shipm ent as practiced in India and China. This restriction is creating
hurdles for the expansion of export.
Improvem ent of the trade-related physical infrastructure such as transport,

storage, transactions processing procedure and technology, and inform ation
networking is essential to increase international trade and prom ote and
integrate the domestic markets. Standardization and quality enhancement are
also helpful to improve the competitiveness of the products.
Strengthening policy and regulatory fram ework along with its effective
im plementation for prom oting com petitive trade built on the national
advantages, endowments, priorities, and interests becom es very important.
Structural reforms and infrastructure investm ents to reduce transportation
and transactions costs are the key to im proving the external com petitiveness
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.
66
To address these problems would involve financial resources, tim e, efforts,

proper managem ent, and technical expertise, where the governm ent needs to
m anage financing through annual budget and through foreign aid. The new
initiative of the Aid for Trade would be prime source of funding.
67
Table 4.9 : Direction of International Trade

Rs. in Million
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 16198.5 17410.3 18719.1 23145.6 28602.0 29623.9 18988.6 23500.6 23133.6 19788.8 19519.40
Countries 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 50055.9 68700.1 61671.0 55405.6 68844.8 70476.2 50766.9 53427.9 57537.6 60798.1 66637.20
Countries 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 -33857.4 - 51289.8 -42951.9 -32260.0 -40242.8 -40852.3 -31778.3 -29927.3 -34404.0 -41009.3 -47117.80
Countries
Total Volume 94335.6 116189.9 116515.5 123201.6 158327.6 171341.3 154333.8 174282.7 190187.8 208179.3 234014.40
of Trade 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 66254.4 86110.4 80390.1 78551.2 97446.8 100100.1 69755.5 76928.5 80671.2 80586.9 86156.60
Countries 8.60 -2.96 2.66
% Share in 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.00
Total Trade 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 70.2 74.1 69.0 63.8 61.5 58.4 45.2 44.1 42.4 38.7 36.82
Countries -3.61 -8.81 -6.25
68
Table .10 : Commodity Trade by SITC Group

Rs. in Million
Description
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 2006 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
69
Table 4.11 Export of Major Commodities to India

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- 1995-
2001 2006 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
70
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
71
Table 4.12 : Export of Major Commodities to Other Countries
Rs. in Million
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- 1995-
2001 2006 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
72
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
73
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
74
Table 4.15 : Income and Expenditure of Convertible Foreign Exchange

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- 1995- 1995-
2001 2001 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
75
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.
76
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
77
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 farm s
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 econom ic reforms, especially in the early-1990 s, have counted on
structural changes in agriculture to stimulate trade in m ajor 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 m ore com prehensive reform package could not be
im plemented well, leaving poverty as extrem e as before. Attem pts to increase
its trade will help m eet this challenge, but these will have to be complemented
by efforts to ensure food security, nutrition and other basic requirem ents such
as education, health services and awareness to the m ajority 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) (20 0 2-20 0 7) envisages the early introduction of a series of social
safety net m easures im pacting households through the support of agricultural
inputs, public works program s and nutrition assistance, and health services.
These can provide the basis for survival and over tim e allow the possibility for
im provem ents in tradable surpluses among the more vulnerable. Currently,
those working in the production of tradable goods fare better; and improving
their perform ance will bring pro-poor benefits to the econom y. 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 m ore im portant and direct role in poverty alleviation. For this end following
conditionality need to be fulfilled:
81
Trade is diversified and targeted at new m arkets such as fisheries,

forestry, horticulture, and in areas which already show prom ise 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 problem s in transportation is

alleviated hence leading to a substantially reduced transportation costs
for consumers and producers;
Em igration 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 m icro, sm all and medium-sized enterprises

(SMEs), especially in sm all scale handicrafts, anim al husbandry,
poultry farming, and other small rural businesses.
Given the severity of the prevailing conditions, none of the individual

m easures will m ake a significant difference in welfare; thus, it is essential that
Nepal act on all fronts sim ultaneously with well coordinated donor support. If
this is done thoroughly, poverty and extrem e poverty will decrease by 10
percent6 within a short period. The implem entation of these program s should
all include a process of permanent social im pact m onitoring to track the level
of poverty in a periodic basis. This will ensure coordination with key
m acroeconom ic 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 im pact
on the current situation, and examining the potential for using internal and
external trade as m echanism s 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 m ajor mechanism s through which increased trade openness
affects the poor:
Im pacting the prices of goods and services the poor consum e 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).
82
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 econom ic growth, which in turns affects

poverty; and
Through design of social protection m echanism s 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 m echanism s outlined in the
PRSP. Household profiles have been used to assess the im pacts of proposed
policy changes on poverty alleviation. These profiles help in predicting the
potential im pacts of various reform s on affected groups. This assessm ent 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 m anifested by the

NLSS, and despite the fact that econom ic performance within the country, in
terms of GDP growth, is not vibrant, the poverty situation is relatively
im proving. 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 m ade by the
National Planning Com mission in the fiscal year 1976/ 77 through a survey on
employm ent, incom e distribution and consum ption patterns. Two criteria
were envisaged for the delineation of the poverty line: the minimum
subsistence level of income and the minim um subsistence level of expenditure.
This criterion at that tim e resulted in a level of poverty of 40 .4 percent.
Another significant effort on poverty m easurem ent on a national scale was
done by Nepal Rastra Bank, the central bank of Nepal, in 1984/ 8 5 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.
83
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 m easure the extent of
poverty. It had reported a poverty incidence (head count estim ate) of 42
percent. The Survey showed poverty in Nepal m ore a rural phenom enon and
concentrated m ostly 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 (20 0 4) is the analysis of poverty based on the household
statistics collected during the fiscal year 20 0 3/ 0 4. The Central Bureau of
Statistics conducted this NLSS II as per the fram ework and procedures
followed by the World Bank in conducting such Survey in m any countries of
the world. The report of NLSS II shows som e im provem ents 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 Developm ent Region, the incidence of poverty is lowest
in the Central Development Region (27 percent ) and highest in the Mid-
Western Developm ent Region (45 percent ). From the regional perspective, it
is estim ated that 7.5 percent out of the total poor dwell in the Him alayan
Region, 47.1 percent in the Hilly Region and 45.4 percent in the terai
Region.( Table 5.1 )
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Table 5.1: Poverty Situation in Nepal
Area Number of Poor Depth of Poverty Severity of Poverty

(Percent) (Percent) (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 hum an

development and overall social inclusion is increasing instead of looking
m erely on the incom e generation aspect. Such practice of incorporating social
indicators including economic factors has begun in Nepal as well. Indicators
related to human developm ent is inclusive of the literacy rate, enrolment at
the prim ary school level, infant m ortality rate, m aternal mortality rate,
average life expectancy, access to safe drinking water, utilization of housing
facilities, access to public services, etc.
The NLSS 20 0 3/ 0 4 reported some major improvements in living standards

and access to basic services as follows:
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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 Hum an 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 am ong 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 m ulti-dim ensional 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.
86
a long tim e is by its nature not chronic. However, it is hypothesized that

duration, m ulti-dimensionality and severity of poverty build upon each other.
Thus, while those in severe incom e poverty at any given time are not
necessarily chronically poor, the chronically poor are likely to be experiencing
severe and m ulti-dim ensional poverty. Further, duration (as well as m ulti-
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 em pirical, 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 m easures 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 incom es (or capabilities or m ultiple 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 incom es
or consumption levels in each period fall below a poverty line.
Usually poor: This type includes those poor whose m ean 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 sometim es 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.
87
Never poor: This category includes those individuals or households whose

mean expenditure in all periods is above the poverty line.
Furtherm ore, 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 supplem ented 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
estim ates 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 m ost part appeared to be a rural phenom enon. Further, at the
national level, the intensity of poverty was estim ated to be 0 .12 and severity
0 .0 5. Based on an exercise undertaken within the NPC in 20 0 0 , the poverty
incidence for Nepal was estim ated 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 Poverty Gap Index

(proportion of population
below poverty line)
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 m ade available the poverty figures based on the NLSS
88
20 0 3/ 0 4 according to which the poverty incidence for 20 0 3/ 0 4 has been

reduced to 30 .85 percent. The predom inance of rural poverty in Nepal has
been further substantiated by the NLSS 20 0 3/ 0 4 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 20 0 3/ 0 4). The probable reasons for
this decline are: remittance-supported consum ption, increased incom e of
agricultural labor, massive increment in econom ically active population, rapid
urbanization and increase in non-farm incomes (CBS/World Bank 2005).
Furtherm ore, 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
increm ent 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 m ajor agro-
ecological zones. For exam ple, rural poverty incidence is highest in the hills
(42 percent) followed by the m ountains (33 percent) and the Terai (29
percent) (NPC/UN 2005).
In 20 0 3/ 0 4, poverty also appears to vary based on land ownership and m ajor

sources of livelihoods (own-farm agriculture, agricultural wage labor and non-
farm). For instance, Sm all 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
am ong m edium farm ers of the Eastern Hills (36 percent) while poverty
between other medium as well as large farm ers varies only between 17 to 19
percent.
89
Table 5. 4: Incidence of Poverty Among Rural Household Groups
Household Types Poor household Poor HH as a % Per Capita

(%) of total rural Incomes (1995
population 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 35.98 6.19 7,737
Mountains
Medium farmers –Western Hills 18.31 2.26 9,365
and Mountains
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 20 0 3/ 0 4 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. Furtherm ore, 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. Sim ilarly, the 20 0 3/ 0 4 data
further substantiate that land-ownership is the crucial factor determ ining
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 m ore 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/ 96-20 0 3/ 0 4, poverty seem s to have declined am ong all
rural household groups except for the Sm all and Medium farm ers in the
Eastern Hills. During the sam e period, the share of Small Farm ers among the
rural poor increased from 45 to 54 percent, the share of m edium 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.
90
5.4 Other Aspects of Poverty
Nepal is currently ranked 140 in the HDI ladder just below Bangladesh. Even
though noteworthy im provem ents 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
20 0 4 (based on 20 0 2 data) is 0 .50 4. Com pared to the previous years, Nepal
has now m oved from the group of Low Hum an Development countries to the
group of Medium level Hum an Developm ent countries (UNDP,, 20 0 4). All
countries in South Asia are better placed than Nepal in term s of the HDI value,
except for Pakistan.
Moreover, the 20 0 3/ 0 4 figures indicate that there are m ajor differences by

caste and ethnic group in the degree to which poverty has been reduced. For
instance, poverty incidence am ong 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 am ong Tam angs is 61 percent , which is
nearly twice the national average and more than the poverty incidence among
Dalit. Furthermore, the consum ption levels among Dalit, Muslim and Hill
Janajati are the lowest.
Furtherm ore, during 1995/ 96 – 20 0 3/ 0 4, the real per capita expenditure

(PCE) increased by 42 percent (42 percent in urban areas com pared to 27
percent in rural areas). Overall, data indicate a rem arkable growth in
consum ption 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 inform ation on econom ic indicators (m ainly consum ption and
incom e) at the individual level, it is still possible to analyze two measures of
poverty, nam ely, the size distribution of male and fem ale in poor households
and the poverty incidence of fem ale-headed households. NLSS data for
1995/ 96 did not indicate that there were m ore fem ales than males in the poor
households. However, som e sort of fem inization 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 m ore likely to be poor if there was no
adult male present (World Bank 1999).
91
However, the above finding is not substantiated by the NLSS 20 0 3/ 0 4.

Analyses of this new dataset, interestingly, show that female-headed
households exhibit a lower incidence of poverty of 23.8 percent as com pared
with m ale-headed households’ poverty of 32 percent. In 1995/ 96, 9 percent of
the population was reported to have been living in fem ale-headed households
with a poverty incidence of 42 percent. In 20 0 3/ 0 4, 14 percent of the
population was in fem ale-headed households and the poverty incidence
am ong 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 incom e am ong such households as the m ale member could have
been working abroad. But the 20 0 3/ 0 4 data further reveals that those
households are poorer which have greater num ber of sm all children and/ or
larger number of household members. Furtherm ore, the rate of poverty
reduction am ong the households with 2 or m ore sm aller children or 6 or m ore
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 attem pt to formulate a separate
plan with long-term perspective for poverty alleviation was made during the
Eighth (1992-97) Plan. The Ninth Plan (1997-20 0 2) had adopted poverty
reduction as the m ain objective. However, the set targets of the Plans were not
achieved due to various reasons, such as, low econom ic growth, low
agriculture productivity, high population growth, and exclusion of the
majority of population in the mainstream of development process.
The Tenth Plan (20 0 2-0 7), also known as Nepal's Poverty Reduction Strategy
Paper (PRSP), had recognized the role of local bodies, comm unity
organizations and NGOs in developm ent and reflects the government's
comm itm ent 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 em phasized in m aintaining m acroeconom ic stability and

im plementation of structural and policy reform in key areas. Annual
m onitoring of the status of poverty and other targets have been made
m andatory to ensure effective im plem entation of programs, and process
m onitoring has been given due im portance. It is well linked with annual
92
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 (20 0 1/ 0 2) to 30 percent by 20 0 6/ 0 7.
For this, PRSP had form ulated a closely inter-related four-pillar strategies
such as (a) high, sustainable and broad-based econom ic growth; (b)
im provem ent in access and quality of infrastructure, social and econom ic
services in the rural areas; (c) targeted program s for social and econom ic
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 m ortality rate to 45; reduction of m aternal
mortality rate to 300, increase of life expectancy to 65 years; increase of access
to drinking water to 8 5 percent of the population and electricity to 55 percent;
and increase in school enrolm ent 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 m ade 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 com pared to investments that, usually take a long tim e.
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 im portant approaches and interventions, which would deliver
quick results to the rural poor.
Fourth, the Plan has focus on the interventions and policies to reassess
tim e 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
93
prim ary objective of the PMAS is to coordinate, consolidate, harm onize, and
analyze data from the existing m onitoring system and to comm unicate results
in ways, which provide effective feedback to the policy change. It seeks to
accom plish through: (i) im plem entation m onitoring; (ii) outcom e monitoring;
(iii) impact analysis; (iv) poverty management inform ation system ; and (v)
communication and advocacy.
Implementation monitoring relies prim arily on input and output indicators

and interm ediate process indicators. The aim is to: (a) monitor budget
allocation of all priority program s and policies; (b) m onitor process/ activity
indicators of the policies and programs; and , (c) m onitoring the level of
achievement of outputs of main PRS policies and programs.
Outcom e m onitoring tracks the changes in overall well-being of im pacts over

tim e. The goal is not to attribute outcom es to specific program s 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 governm ent has
decided to stream line household surveys and rely prim arily on the NLSS and
NDHS conducted at the interval of five years.
Impact analysis establishes linkages between outcom es/ im pacts and the
programs being m onitored. It has two main objectives: (a) to assess the effect
of a specific policy, program/ project on poverty or som e other well-being
outcom e, and (b) to assess the efficiency of different policies/ program s in
achieving a given well-being outcom e, i.e. could other policies or program s
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 Managem ent
Information System (PMIS), which would link all major data bases relevant to
poverty m onitoring. The main objective of PMIS is to assist decision-making
by: (i) providing instant access to relevant, correct inform ation on poverty, (ii)
making existing inform ation coherent, com patible and consistent, (iii) serving
as a flexible and evolving m echanism for data storage and analysis, and (iv)
ensuring data access while continuously generating inform ation through
greater control and monitoring function.
Nepal Info has been developed as a database software tool that features a
comprehensive set of social developm ent indicators selected to monitor the
PRSP, MDGs and other key development param eters. Nepal Info provides
inform ation for poverty m onitoring and thus helps in operationalizing and
institutionalizing the PMAS for effective m onitoring of PRSP and MDGs for
global as well as local level monitoring systems.
94
Monitoring progress towards PRSP including MDGs rem ains the mandate of
the National Planning Com m ission (NPC). A Poverty Monitoring Division
(PMD) has been established in the NPC, with the mandate of m onitoring and
analyzing poverty trends; tracking progress towards key human developm ent
and MDG indicators and the im plem entation of m easures 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 inform ation on implem entation m onitoring is m ainly

collected from routine data system and m anagem ent inform ation system such
as the H ealth Managem ent Information System and the Education
Management Inform ation System of the concerned m inistries. The outcom e
indicators under the outcom e-m onitoring com ponent of PMAS are monitored
based on the inform ation collected from national household surveys. In order
to link the implementation and outcom e m onitoring, an impact assessment of
relevant policies and programs are conducted annually. It is im portant that
the information generated from the three major com ponents of the
m onitoring and evaluation is stored in a m anagement inform ation 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 developm ental activities. A participatory poverty monitoring
m echanism has also been used to incorporate the voice of the civil society and
the people. Participatory m onitoring at different levels com plements 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 m aking necessary corrections.
The participatory m onitoring tools include citizens' report cards, social audits,
budget reviews by civil society groups and parliam entary reviews of policy and
program/project performance.
5.6 PRSP and Millennium Development Goals (MDGs)
Nepal endorsed the Millennium Declaration in September 20 0 0 and has

comm itted to work towards achieving the MDGs. The MDGs set quantitative
poverty reduction targets and specific goals in health, education, gender
equality, environm ent and other aspects of human development. Most of the
indicators and targets of the MDGs are included in the Tenth Plan. However,
95
in order to ensure focused realization of the goals, the governm ent is

undertaking a need assessment exercise, which encompasses five sectors –
prim ary education, child and m aternal m ortality, comm unicable 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 20 15. However, the
government has m ade consistent effort at expenditure m anagement and
increased revenue mobilization.
In 20 0 2, Nepal published its first MDG Progress Report. In 20 0 5, the

government released the second MDG progress report, which is the first five-
year mark for reviewing the progress m ade 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 developm ent environm ent resulting from the
prevailing conflict situation until April 20 0 6. Nepal's basic econom ic
indicators, though critical in som e cases, have improved over the years. It was
possible to attain and m aintain the growth levels because of stringent fiscal
and monetary discipline, and enhanced efforts to reduce poverty through
im provem ents in governance, corruption control, and continued
implementation of targeted and quick-yielding programs.
The concept of MTEF was introduced in 20 0 2. The fram ework was used as an
effective public expenditure planning and programming instrument with basic
objectives as – making development budget m ore realistic, reducing num ber
of priority projects/ programs, linking projects/ program s 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. Perform ance-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 governm ent 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.
96
An autonomous Poverty Alleviation Fund (PAF) has been institutionalized and

im plemented at all 75 districts of the country to address the root causes of
conflict, emerged mainly from exclusion, deprivation and income inequality.
The developm ent of the PMAS is a m ilestone, 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 ham pered
the efforts towards building the social capital. To explore a new m echanism
has been a great challenge for the successful im plementation of the PRSP. The
existing government mechanism and people's participation for service delivery
should be further strengthened. It would help achieve sustained
im plementation and m anagem ent of service delivery system s. To build the
macro-econom ic framework m ore sensitive to poor and to allocate m ore
resources to anti-poverty programs and projects have become very com plex
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 m itigation and long-
term solutions to poverty within a comprehensive fram ework of policy reform ,
structural changes, and program im plementation. This com prehensive
approach is necessary if trade is to have an im portant role, as it should, in
poverty reduction. This is because m any 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 com modities, etc. It is also evident that program s such
as those dealing with various social safety net activities are necessary
conditions for any im provem ent in trade opportunities. The poverty problem s
of Nepal are so broad and deep that m any factors have to be addressed
sim ultaneously and no single policy change is sufficient of itself. And because
of the structure of household incom e, and the clearly felt need for food
security, a series of overall policy changes are needed and im provem ents in
trade – may be just as effective in a num ber of areas through sm all, targeted
programs.
In implem enting programs for poverty reduction policym akers tend to be

interested in what the effects of a reform are for functional or geographical
groupings e.g. rice farmers versus inform al urban workers or western region
vis-à-vis eastern region. In case of Nepal there m ight be varied possible
groupings e.g. ethnicity, location, hom ogeneity in econom ic activities, land
97
ownership etc. A num ber of policy changes and specific actions are needed to
inject cash into the economy and to m odify the vicious circle of poverty. The
lim itations in baseline data do not allow the direct and satisfactory testing of
these, but provide sufficient evidence to suggest that robust and sim ultaneous
actions can free Nepalese people from this poverty circle.
In case of Malawi9, an African landlocked country, reveals the fact that som e
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 im provem ents in yields through the
provision of fertilizer;
an expansion in em ploym ent in forestry and construction industry with

the im plem entation of the public works program and expansion in
manufacturing industry with capacity-building and reforms; and
increase in incom e from cash crops through diversification and higher

level of food security.
These factors are quite sim ilar to Nepal. The sim ulations m ade on the factor
reveals that decrease in the transportation cost by 25 percent can have positive
im pact on increasing the trade volume, prim arily the export volum e could be
increased and could befit both the producers and consum ers. Households in
the lower and m iddle expenditure deciles capture a greater percentage of
incom e gains when transport m argins for purchase of consum ption items,
inputs for crops and for the marketing of their produce is reduced. In addition,
there m ay be additional benefits such as the greater use of m arkets by
households which, in turn, will encourage the use of m ore 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 com petitiveness of Nepal’s
exports m ore generally. The recent access of road network to the apple
producers of J umla and Kalikot districts will have sim ilar im pact on
increasing the apple export to other countries of SAARC region and beyond.
9
Trade and Poverty: Diagnostic Trade Integration Study, Malawi, March, 2003
98
Increasing Yields of Cash Crops
Transform ation of agriculture in Nepal is quite slow. However, some districts

such as Ilam of far eastern region has been an exem plary case, where farmers
are shifting their land cultivation from cereal crops to cash crops. Farmers are
abandoning production of m aize, rice and wheat and planting tea, cardam om ,
ginger, amrisho, grass (for feeding cattle and buffaloes), vegetable, and herbs.
The farm ers m ostly sell their products to the exporters and m eet their food
grain requirements from purchase. This sort of changing cultivation pattern
has helped alleviate the poverty level to a maxim um extent. Due high incom e
raising crops, the farm ers 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 em ployed in

m anufacturing 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 em phasized
by deploying rural laborers through food for work program s, 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 num ber of laborers m ostly
of the high hills and mountain get benefit from these programs.
It is therefore assum ed that if the transportation costs are reduced by 50

percent, food crop yields are increased, and jobs in public works are created,
and incom e 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 im pacts 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 incom e inequality increases.
This also show that cost of production should m inim ize 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.
99
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 com plem ented by
efforts to increase food production by facilitating and increasing the supply of
agricultural inputs and employment should be increased substantially through
public works program s. Furtherm ore cash crop production should be further
increased, tradable goods production should be diversified, large-scale
temporary em ployment through public works program s 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 m any factors have to be addressed
sim ultaneously to achieve results. Conversely, implementing a single policy
has only a marginal im pact on the econom y. The measures based on actions
listed below have visibly pro-poor and pro-rural impacts; some also produce
positive im pacts on households headed by women. If these actions are not
jointly im plem ented the returns to individual interventions will be m odest.
For instance, if public works program s create no new jobs, all other m easures
would all together produce less than 9 percent improvement in the household
sector. The key m echanism s 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 m easures. The key for implementing these actions
would be to devolve m ore and m ore functions to local bodies and comm unity
organizations and encourage the widest possible participation of stakeholders
during implem entation. The process would further help em power people by
putting them accountable of their development. This would set lim its to the
government, donors and other agencies to play supportive role rather than
involve in direct implem entation. These efforts need to be backed up with
adequate funds and strong m onitoring process. Reform program s initiated in
all fronts, particularly in fiscal decentralization and governance should be
expedited. Poverty m onitoring 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.
100
Chapter VI
A Case of Tea Production and Its Impact
on Poverty
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 com mercially in Nepal since the 1863 with the
influence of East India Com pany. A num ber 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 fam e, Ilam tea
although having a good orthodox variety of production could not gain
adequate international market. The production even could not m eet the
national demand of the country basically due to high price.
In 1966, the Government of Nepal established Nepal Tea Developm ent

Corporation with a view to prom ote tea farming and tea processing to m eet
national dem and 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 Developm ent Corporation. In 20 0 0 , 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 prim arily produced in Ilam district, which now
has been proliferated in other districts, such as Panchthar, Dhankuta,
Terathum, Sindhupalchowk, and Kaski. The clim ate 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 volum e of orthodox tea is about 15 percent. In
the FY 20 0 5/ 0 6, it was cultivated in about 9775 ha and produced 160 0 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.
101
Most of the tea production com es from the sm all holders, though there have
been numbers of tea estates. This sector involves 18 750 small farmers and
thus has given opportunity to em ployment 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 com plete export, the earnings of the sm all farm ers
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 com pared to orthodox tea, ctc tea is prim arily 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 estim ated that it meets an annual dem and 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 20 0 0 for the prom otion of orthodox tea as it has
comparatively high value and export possibility. At present GTZ and Winrock
International are supporting the producers in m arketing and technical
trainings.
Tea production faces a num ber of problem s such low econom y 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 m arketing of
the finished products.
6.2 Status of Tea Exports in Nepal
Although Nepal has a long history of export of orthodox tea, form al and
organized tea export has been found in past few decades. In 20 0 3 the export
volum e was less than 10 0 m etric ton, but after the increase in awareness and
102
interests of the farmers in cash crops, tea production in the eastern part of the
country increased rapidly and, as a consequence, the export volum e 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$ 120 0 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 dram atically within the span of 10 years. It is observed
that com pared to the value of exported tea the value of im ported 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$ 220 0 , which decreased to US$ 120 0 in 20 0 3, and
again jum ped to US$ 240 0 in 20 0 4. Besides this uncertainty in the prices the
value of export is consistently high.
Nepal's Tea Trade 1994 - 2004
6,000
5,000
4,000
Import 1000$
3,000
Export 1000$
2,000
1,000
0
94
95
96
97
98
99
00
01
02
03
04
19
19
19
19
19
19
20
20
20
20
20
Ye ar
Source: FAO 2006
In com parison to the world trade of tea, it is observed that Nepal occupies
only 0 .2 percent of the total volum e 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:
103
Table 6. 2
Export of Nepal’s Tea in Selected Countries
(FY 2004/05)
Description Export value Export Unit
(Importers of Nepal tea) in $ 1000 Quantity value in $/tons
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 com parison to the ctc tea. In the year 20 0 4/ 0 5, 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 econ om y of scale. Although
there is a huge m arket of orthodox tea in Germ any, Russia, and the USA, the
104
im porters 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 im porters 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
comm ercial 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 investm ent 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
m ost producers are struggling to m ake sufficient profits for adequate
reinvestment in factories, irrigation, and replanting. The lim ited investm ent
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 program s 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
105
6.3 New Initiations in Tea Sector
The tea sector of Nepal consists of sm all landholders and large-scale tea
estates – both known as private producers. The Governm ent after privatizing
the Nepal Tea Developm ent Corporation has initiated policies to prom ote the
individual farm ers and entrepreneurs with a view to involve private
companies in production and m arketing of processed tea. The National Tea
Policy of 20 0 0 aim ed at providing financial incentives for encouraging
investm ent, facilitate in the access land required to plantations, develop
institutions to prom ote export, and m aintain quality of final product. In
building hum an resources, it aim ed 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 sm all holders. Additional efforts are
being m ade to expand in new districts, such as Solukhum bu, Dolakha,
Sindhupalchowk, Nuwakot, and Kaski districts. Except Kaski district, no much
effort could have been m ade 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 3,30 0 ha which increased to
18,726 ha by the end of 20 0 5/ 0 6 at an annual growth rate of 19.0
percent in last 10 year period.
In 1995/ 96, the total tea production was 2,10 0 M Tons which increased
to 14,60 0 ha by the end of 20 0 5/ 0 6 at an annual growth rate of 21.4
percent in last 10 year period.
At present there are 157 tea estates and 27,494 farm ers involved in tea
production.
The share of total tea production between the tea estates and the sm all
farmers/holders is almost equal.
The estates and the tea factories provided em ploym ent to as much as
120,000 workers.
106
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
firm s 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 m arkets (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 m aking 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.
Predom inant .seedling. variety produces low to m edium quality tea

resulting in relatively low prices compared to other competitors.
Estate production costs are relatively high due to lim ited investment in
new processing plant.
107
Continuing low profitability over the last four years has lim ited
reinvestment.
Limited access to finance at viable interest rates.
Lack of adequate attention to support the sector
Sm allholders are relatively inefficient due to lim ited access to inputs

(fertilizer) and technical know-how and support
Som e factories very old processing equipm ent and has very lim ited
operating resources.
The factories are not successful in prom ptly 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 developm ent of other export m arkets to provide m ore

diversified and more profitable markets
Irrigation support to sm all farmers needs to be enhanced to increase

production of tea.
Investment support in new processing equipment to im prove yield and

quality of tea.
Im prove the infrastructure for getting product to export m arkets to

reduce m arketing/ 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 m igration to Gulf countries and Malaysia drives up the

cost of labor.
Lack of proper and adequate prioritization of the Government in this
108
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 m ay adversely affect export in developed
countries.
Loss of export sales through dependence on a lim ited number of export

destinations.
Continued weak or declining world prices for tea underm ines 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 tim es higher than the cereal crops. So the m arginalized
sm all farm ers have been able to gain substantive incom e from the tea
plantation and alleviate their poverty level. Irrespective of other factors, the
human developm ent indicators, it is quite sure that the incom e earned by
these farmers is sufficient to meet the income requirement.
With the assumption that one worker’s incom e is sufficient to m eet the
poverty alleviation level incom e; the workers families are definitely found
living above the poverty level. In this context, with the assum ption of a fam ily
of 5.5 members, it is assumed that it has directly benefited about 660 ,0 0 0
population of workers family. Sim ilarly, a total of 151,271 populations of sm all
and m arginalized farm ers have received substantive benefit from tea
plantation.
Consequently, many new entrant-farmers are found attracted in this cash crop
and given up traditional farm ing. The farm ers are now growing tea and utilize
their income from tea for purchasing essential food grains.
The adequate knowledge of technology, and m arketing 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.
109
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 tim e, 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 investm ent 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 num ber of

farmers receiving assistance (fertilizer loans, extension help and
m ore regular collection/ processing of their crop) from the estates that
they now sell directly to.
The m ain priorities for the estate sector seem to be investment in factory
renovation and replanting. Refurbishm ent should be made imm ediately 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 developm ent of the
relationships between estates and sm allholders has considerably more
potential for both parties so that sm allholders 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.
110
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 econom ic growth and industrial developm ent, the
economy is still traditional. Over the years, with the rise in per capita incom e,
basically earned from foreign em ploym ent 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 num ber 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 macroeconom ic policy m easures could not bring substantial

improvement in the socio-economic life of the people.
Land distribution and the structure of land ownership, m ost of the people
residing in the rural areas are sm all and marginal farmers and are basically
poor. Traditional and prim itive agricultural base has not allowed them to rise
111
from the extreme poverty level.
Rural agricultural production system is characterized as subsistence farm ing.

The econom y of this rural sector is less-m onetized 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
lim ited land to cultivate and they have to carry on agriculture activity for
survival.
There is arrangem ent of tenant in the land, thus establishing dual ownership
of landowner and tenant. Such system is prohibiting investm ent 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 im pacts of trade policies in poverty in Nepal and suggest m easures
to make trade related institutions proactive, business environm ent 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 developm ent as well as the structure of
its econom y. Sustained poverty reduction occurs through the efficient
development and utilization of productive capacities.
The question of liberalization and its im pact on the benefit to the poor is also
debatable. The literatures support that trade liberalization improves growth
prospects by enhancing productivity tem porarily through m ore efficient
resource allocation and permanently through the im port of m odern
technologies and effects on competition.
112
The East Asian countries were successful because they featured the
institutional characteristics of the developm ental state, where as m ost of the
African countries to harness such features. State capacity to deliver good
quality interventions in the econom y has been central to Asia’s success and to
Africa’s problems.
In recent years, pro-poor trade policies were adopted in PRSPs. However

m any developing countries could not give priority to export prom otion
through labor-intensive production and value addition. The redistributive
effect of trade reform is a m ajor factor impeding its launch in poor countries.
Successful poverty reduction requires outward-looking developm ent policies
that put constant attention to trade.
In case of Nepal, the relationship between trade and poverty appears to be

m ore contentious, though there is broad agreem ent that in the long run
liberalization can help reduce poverty levels.
Trade has becom e m ore significant during the years of liberalization. The
share of total trade to GDP has rem ained to som e extent constant ranging
from a minim um of 35 percent to a m axim um of 43 percent in the last decade
under review. Till 20 0 0 , 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 econom y
policies has highly contributed in econom ic growth. Such growth in export
was due to the growth of labor-intensive industries like carpets and garm ents
which seized to grow because structural problem and non-tariff restrictions.
There is positive growth in export during these years, except in 20 0 1/ 0 2.

Maxim um annual change of export is noted in 1999/ 20 0 0 when export has
increased by about 39.65 percent. There is also sim ilar trend in im port during
these years, but the values are less erratic. The maxim um value of im port 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 20 0 5/ 0 6 while the ratio of im port to GDP is 27.89 percent in the
sam e 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 im port reflecting a positive im pact of the
adoption of liberal econom ic policies. However, such trend did not continue
113
and is attributed to the impact of the one decade long conflict. Thus it is
observed that though the com petitiveness of the export sector had increased
in earlier econom ic reform s 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 m ovements. Sim ilarly, another
problem associated with Nepal is high dependency on India for its foreign
trade. From the perspectives of Nepal’s participation in the m ultilateral
trading system , Nepal needs to diversify its trading partners mainly to reduce
the negative im plications 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 20 0 3/ 0 4, 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 Developm ent Region (27 percent ) and highest in the
Mid-Western Developm ent Region (45 percent ). From the regional
perspective, it is estim ated that 7.5 percent out of the total poor dwell in the
Him alayan 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 m ountains (33 percent) and the Terai (29
percent) (NPC/UN 2005).
Land-ownership is the crucial factor determ ining 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
114
slower poverty reduction rate am ong households with greater num ber 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 attem pt to formulate a separate
plan with long-term perspective for poverty alleviation was made during the
Eighth (1992-97) Plan. The Ninth Plan (1997-20 0 2) had adopted poverty
reduction as the m ain objective. However, the set targets of the Plans were not
achieved due to various reasons, such as, low econom ic growth, low
agriculture productivity, high population growth, and exclusion of the
majority of population in the mainstream of development process.
The Tenth Plan (20 0 2-0 7), also known as Nepal's Poverty Reduction Strategy
Paper (PRSP), had recognized the role of local bodies, comm unity
organizations, and NGOs in development and reflects the government's
comm itm ent 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 em phasized in m aintaining m acroeconom ic stability and

im plementation of structural and policy reform in key areas. Annual
m onitoring of the status of poverty and other targets have been made
m andatory to ensure effective im plem entation of programs, and process
m onitoring has been given due im portance. 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 m ade 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 com pared to investments that, usually take a long tim e.
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 im portant approaches and interventions, which would deliver
quick results to the rural poor.
Fourth, the Plan has focus on the interventions and policies to reassess
tim e to time and revised if necessary in order to achieve the poverty
115
reduction goals.
The MDGs set quantitative poverty reduction targets and specific goals in
health, education, gender equality, environment and other aspects of hum an
development. Most of the indicators and targets of the MDGs are hard to
achieve by 20 15. H owever, the government has m ade consistent effort at
expenditure management and increased revenue mobilization.
The second MDG progress report of 20 0 5 gives em phasis on building the

national capacity for m onitoring and reporting on progress as well as
strengthening the foundation for preparing future national developm ent
strategies.
The decline in transport costs, increasing yields of cash crops and

transform ation of agriculture, and increase non-farm em ploym ent contribute
im mensely in poverty reduction in Nepal. Nepali producers need to m inim ize
cost of production prim arily 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 com plem ented 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 tem porary employment through public works program s
should be created, and ? ? 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
The tea sector of Nepal consists of sm all landholders and large-scale tea
estates – both known as private producers.
In 1995/ 96, the total tea cultivated was 3,30 0 ha which increased to 18,726 ha
by the end of 20 0 5/ 0 6 at an annual growth rate of 19.0 percent in last 10 year
period.
In 1995/ 96, the total tea production was 2,10 0 M Tons which increased to
14,60 0 ha by the end of 20 0 5/ 0 6 at an annual growth rate of 21.4 percent in
last 10 year period.
At present there are 157 tea estates and 27,494 farm ers involved in tea
production.
116
The share of total tea production between the tea estates and the sm all
farmers/holders is almost equal.
The estates and the tea factories provided em ploym ent to as much as 120 ,0 0 0
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 tim es higher than the cereal crops. So the m arginalized
sm all farm ers have been able to gain substantive incom e from the tea
plantation and alleviate their poverty level. Irrespective of other factors, the
human developm ent indicators, it is quite sure that the incom e earned by
these farmers is sufficient to meet the income requirement.
With the assumption that one worker’s incom e is sufficient to m eet the
poverty alleviation level incom e; the workers families are definitely found
living above the poverty level. In this context, with the assum ption of a fam ily
of 5.5 members, it is assumed that it has directly benefited about 660 ,0 0 0
population of workers family. Sim ilarly, a total of 151,271 populations of sm all
and m arginalized farm ers have received substantive benefit from tea
plantation.
Consequently, many new entrant-farmers are found attracted in this cash crop
and given up traditional farm ing. The farm ers are now growing tea and utilize
their income from tea for purchasing essential food grains.
The adequate knowledge of technology, and m arketing 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.
117
7.2 Conclusion
In the past decade, Nepal has broadly m aintained m acroeconomic stability;

however, attaining sustained, high, and sufficiently broad-based econom ic
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 volum e has not increased. The decline in poverty
observed in the recent years is more attributed to agriculture, m icro finance
activities, and remittances.
In case of Nepal, the relationship between trade and poverty appears to be

m ore contentious, though there is broad agreem ent 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 com petitive
environm ent 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
clim atic features of the country. The agro-forestry products available in Nepal
can secure world m arket. However, the econom y 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 com parative
advantage in com peting 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 im portant as it provides
employm ent to the poor and helps reduce poverty and achieve hum an
development as specified in the MDGs.
As an exam ple of labor-intensive industry, tea sector of Nepal m ay provide a

great prospect to the Nepali entrepreneurs to penetrate in the world m arket.
High rate of return m ay further attract many new entrant-farm ers. 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.
118
7.3 Recommendation
Attention should be given on maintaining macroeconomic stability for

sustained economic growth and pro-poor econom ic activities. Policies should
be developed agriculture infrastructure to prom ote export of agro-forestry
based raw as well as processed products.
Production of labor-intensive agro-forestry farming and m anufactured goods

should be prioritized to attain higher poverty reduction through social
inclusion of disadvantaged and m arginalized groups of people. Governm ent
supports such as extension services, and irrigation and fertilizer subsidies
should be increased.
Considering negative effects of trade openness on the fam ilies 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
Governm ent revenue should be prim arily allocated for im plementing poverty
reduction and hum an developm ent program s. It should address econom ic
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 form ulated and strategy should be
set to invest in the industries producing goods for international m arket.
Expansion of m anufacturing will thus lead em ployment and poverty
alleviation through backward and forward linkages. This would further
enhance international trade com petitiveness through increased level of supply
capacity.
Governm ent program s should be designed to prom oting small and m edium
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 econom ic 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 econom ic 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.
119
Trade sector requires financial and technical support to enhance the capacity.
In this context, m easures 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.
120
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Study On Trade and Poverty Linkages in Nepal

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A Study on Trade and Poverty Linkages in Nepal

Enhancing Nepal’s Trade-Related Capacity (ENTReC)

Dr. Pradip P. Upadhyay

DISCLAIMER: This research report represent s t he opinions of individual

Chapter I Introduction: Trade and Poverty Linkages 1-17

1.1 Structure of the Economy 1

Chapter II Research Design 18-2 1

Chapter III Review if Literature 22-44

Chapter IV Nepal’s International Trade 45-80

Chapter V Poverty Reduction, Human Development 81-100

Chapter VI A Case of Tea Production and Its Impact on 101-100

6.1 Introduction 101

Chapter VII Summary, Conclusion, and Policy 111-120

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

Table 1.2 Size Distribution of Agricultural Land Ownership 11

Table 1.3 Size Distribution of Agricultural Land Ownership 13

Table 1.4 Distribution of HHs by Land Entitlement Status 13

Table 1.5 Land Holding Pattern of the Households 14

Table 4.1 Growth of Trade and its Relation with GDP at 46

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 51

Table 4.7 Share of Exports of Major Buying Countries from 52

Table 4.8 Share of Imports from Major Countries 52

Table 4.9 Direction of International Trade 71

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 77

Table 4.15 Income and Expenditure of Convertible Foreign 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 90

Table 5. 4 Incidence of Poverty Among Rural Household 92

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

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

ADB : Asian Development Bank

MTEF : Medium Term Expenditure Framework

2. Besides having a long experience of planned development and several

3. Rural agricultural production system is characterized as subsistence

4. NLSS II shows that there is still 30 .8 percent of the population living

5. Several research works have strengthened the foundation of literature

structure of its econom y. Sustained poverty reduction occurs through

8. In recent years, pro-poor trade policies were adopted in PRSPs.

9. In case of Nepal, the relationship between trade and poverty appears to

Nepal’s International Trade

12. There is positive growth in export during these years, except in

15. Nepal’s landlocked position and heavy dependence on a single m arket

Poverty Reduction, Human Development, and Trade

16. Poverty in Nepal is deep-rooted and persistent. According to the NLSS

18. Land-ownership is the crucial factor determ ining poverty as 39 percent

21. PRSP of Nepal emphasized in maintaining macroeconom ic stability

are difficult to achieve by 20 15. The second MDG progress report of

A Case of Tea Production and Its Impact on Poverty

has been helpful to gain a m inimum level of human developm ent as

28. Consequently, m any new entrant-farmers are found attracted in this

Findings and Suggestions

29. In the past decade, Nepal has broadly m aintained m acroeconom ic

develop those few specific products that could secure international

31. Opportunity for Nepal is broad and extensive based on the