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Development Nepal |
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Development and Stability |
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Research abstract |
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May 6, 2006 |
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Title: Trade Policy Evolution and Nepali Export Performance Author: Sujan Rajbhandary, Carleton College (Currently at Vanderbilt University) (Summary by Yubraj Acharya)
Take away: The most effective “tool” for improving Nepali export performance is export incentives. Lower import tariffs and the presence of foreign investment also contribute positively to export performance.
Background: Although countries have adopted both import substitution—protecting domestic producers until they are capable of competing with foreign producers—and export promotion—encouraging domestic producers to export, usually by providing incentives, without necessarily protecting them—as a vehicle for economic development, export promotion has been the preferred choice in recent years. Exports are an integral part of the Nepali economy, accounting for as much as 13% of the GDP. Now that Nepal has officially joined the World Trade Organization, our success in reaping off the benefits of open trade will be largely contingent on how efficiently we can promote our exports. This paper attempts to find major factors that improve export performance.
The method: The author uses data between 1977/78 the 2000/01 for nine economic sectors available from various government and non-government sources. This period captures the different approaches to trade policy orientation the Nepali government has taken; the period from 1977/78 to 1982/83 was characterized by a protectionist regime while the years after that has seen a marked shift towards a more liberal approach. The author examines primarily the effect of export incentives and import duties/tariffs on export intensity—the ratio of total exports to total production. He controls for other factors that could potentially affect export performance. Such variables include the real effective exchange rate—the nominal exchange rate weighted by the price levels in Nepali rupees relative to a basket of foreign currencies; foreign investment; and nominal rates of protection. The models estimated is: Yit = β1 + β2INCit + β3REERit + β4NRPit + β5LNFITPRDit + uit, where Yit is export intensity, INCit is export incentives, REERit is the real effective interest rate, NRPit is the nominal rate of protection measured by the tariff rate, and LNFITPRD is the natural log of the ratio of foreign investment to total production. uit is the error term. i represents SITC export sectors and t represents time periods.
Major findings: · Export incentives have the most significant positive effect on export intensity, suggesting that export incentives are the most effective policy tools to enhance export performance. · Foreign investment also has a positive impact on export intensity, although this impact appears to be less significant. · A negative relationship exists between import duties/tariffs and export intensity. The implication of this finding is that the reduced import duties and tariffs in the post-1982 period have enhanced export performance. · There is no significant relationship between the Real Effective Exchange Rate and export intensity. This suggests either that the attractiveness, or unattractiveness, of Nepali goods in the international markets has little to do with the price or that the total volume of Nepali exports is very small compared to both domestic production and as a fraction of the total imports of Nepali goods importers. When all is said and done, the Nepali exports sector has responded positively to the changes that have occurred since the shift towards an outward-oriented export promotion strategy.
This paper is also recommended for: 1. A clear, in-depth discussion on the pros and cons of import substitution and export promotion strategies. 2. A brief summary of Nepal’s foreign trade policy since the 1950s. Various sources of data related to Nepali macroeconomy.
Recommended further readings: Sharma, Kishor et al. 2001a. “Liberalization, export incentives and trade intensity: new evidence from Nepalese manufacturing industries.” Journal of Asian Economics¸ Vol 12 (2001).
Sharma, Kishor et al. 2001b. “Liberalization, growth and structural change: evidence from Nepalese Manufacturing.” Applied Economics, August 15, 2001, v33 i10 p1253.
Major data sources:
Central Bureau of Statistics, Nepal. http://www.cbs.gov.np
Aarthik Sarbechhyan, Aarthik Barsha 2053/054 (Economic Survey, Fiscal Year 1996/97). 1997. Ministry of Finance, His Majesty’s Government, Nepal.
Aarthik Adhyadesh (Economic Ordinance). 2000. His Majesty’s Government, Nepal.
Census of Manufacturing Establishments, National Level, 1996/97. 1997. Central Bureau of Statistics, Nepal.
Economic Survey, Fiscal Year 2002/2003. 2003. Ministry of Finance, His Majesty’s Government, Nepal.
Foreign Trade Statistics, Fiscal Year 2056/057 (1999/2000). 2000. Department of Customs, Ministry of Finance, His Majesty’s Government, Nepal.
Foreign Trade Statistics, Fiscal Year 2057/058 (2000/01). 2001. Department of Customs, Ministry of Finance, His Majesty’s Government, Nepal.
Industrial Statistics, Fiscal Year 2059/060 (2002/2003). 2003. Department of Industries, Ministry of Industry, Commerce and Supplies.
Nepal’s Foreign Trade Statistics, F.Y. 2059/060 (2002/03). Issue No. 12 (Mid-July 2002 to Mid-July 2003). Nepal Rastra Bank.
Quarterly Economic Bulletin, Mid-October 2002/Mid-January 2003. Volume XXXVII, Number 1 & 2. Nepal Rastra Bank
Statistical Pocket Book, Nepal (Various Issues). Central Bureau of Statistics, Nepal.
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