There has been some debate about whether or not trade liberalization has been in favor of poor people of Nepal. However, the relationship between poverty and trade liberalization is very complex. But we cannot disagree with the fact that trade liberalization has affected the poor in Nepal. Trade liberalization can affect poverty in a number of ways. Indirectly, trade liberalization has affected poverty through its effect on poverty. Directly it has affected poverty through effect on factor markets (income and employment), product markets (prices and availability of commodities) and government capacities to implement pro-poor policies (government revenue and expenditure) in Nepal.
- Factors effecting Poverty through Trade Liberalization
Nepal is a poor country with a Gross Domestic Product (GDP) growth rates averaging less than 5% (see Appendix I). The growth of the agricultural sector, in which most of the people depend upon, was very slow as compared to the growth of the non-agricultural sector in Nepal. Due to the slow growth in the agricultural sector, Nepal’s trade liberalization process did not favor the country’s to meet the objective of government to reduce poverty through agricultural development.
International Trade has been one of the main sources of revenue. Despite of slow growth in the revenue from international trade taxes, international trade still accounts for nearly 50 percent of revenue in Nepal (see Appendix II). Government revenue in the post-reform period has increased significantly. It has been believed that reducing tariff barriers helps to reduce revenue of government. But in the case of Nepal, government revenue from international trade has increased from the economic reformation. Actually, the negative crash of tariff reduction has been counteracted by creating higher revenue base. These revenue bases are created by higher imports, wider income tax base, introduction of value added tax (VAT) system, and upward revision of VAT rate.
Sources: http://www.tradingeconomics.com/nepal/taxes-on international-trade-percent-of-revenue-wb-data.html
Nepal is an agricultural country. More than 80% of the populations are engaged in agriculture. In spite of high unemployment and underemployment, some improvements in wages rates have been seen during last three decades. During 1981-2010 real wage rates has increased unequally in agricultural (averaging 1.7%) and non-agricultural sector (2.5%). Most of the workers in Nepal are in the unorganized sector and self-employed (78 % self-employed and 22 percent wage-workers). Thus, trade liberalization in the labor market has not benefitted the rural poor.
- Micro Level Effects: Household Income and Consumption
42.5 % of Nepalese were below the poverty line at the time of economic reformation. In 2003/2004 poverty rate was 30.85% and in 2010/2011 poverty rate was 25.16% (see Appendix II). Amazingly, poverty was reduced when there was low GDP growth (less than 4 %) as well as high population growth (1.768%). Hence, it cannot be said that poverty was reduced only because of trade liberalization. One of the main determinants for reducing poverty in Nepal is large inflow of remittance. Around 55.86 % households of Nepal receive remittance every year by which it has helped a lot to reduce poverty in Nepal. Hence, remittance should also be credited for reducing poverty in Nepal.
It was expected that Trade liberalization in Nepal would accelerate high and sustained growth and poverty reduction.
But facts imply that the benefits of Nepal’s economic reforms have been limited to a few sectors. Furthermore, trade liberalization only focused on non-agricultural sector and did not give emphasis to the agricultural sector. Due to the low response or better to say “no response” towards agricultural sector has resulted in low agricultural growth. It has lead to slow growth in incomes.
- Links between Trade liberalization and Poverty in Vietnam
Vietnam has been a prime example how to bring the development and reduce poverty by embracing the markets. The country once a communist state is now fully utilizing the benefits of free markets. It has become an attractive destination to either invest or do business in the region as well as a globally. This has been done through both trade liberalization and also economic reforms.
The major features during external reform process were as follows:-
- There were rationalization and unification in the rate of exchange,
- No barriers in the export and import controls,
- Free trade for the foreign direct investment,
- Simple in licensing procedure,
- Strategy of ‘open door policy’ to promote foreign investment and the formation of legal frame work to approve,
- Integrating the economy of the world via regional and multi trading agreement.
To make engagement directly in external trade, it was made allowed to the private companies in 1990-1991. There was a rule while licensing for enterprise to be involved in trade and later, it was in progress in a decade. After some years, ministry of trade eliminated the licensing process. We all know that Vietnam is continuously working in encouraging ever since the making of open door policy in 1987. Approval of foreign direct investment was under control by the ministry of planning and investment. There was a diverse in entering number of trading arrangements during the 1990s. In 1992 treaties agreement were done with strong economies with European Union and it increases the quotas of Vietnamese textiles and clothing in the European market. After the increase of export goods in European market later it joined with different types of association to develop the free trade to different countries.
The doi moi policy set in 1986 made reforms that made the impoverished, isolated, stagnant nation gradually through 1990’s into a vibrant, market driven capitalist nation. Much economic deregulation was set forward with the government playing decisive role. There was a boom in enterprise and trade which was also part due to the informal and shadow sector of family and peasant run through currency trading and smuggling existing before the policy was set. The trade was expanded from CMEA (The Council of Mutual Economic Assistance) to trade pacts with western and other south East Asian countries. The per capita income increased through many folds. The shocks international trade was transferred via many channels.
- Channels of Transmission: Price, Employment & Wages Channel & Fiscal Channel
The country’s real GDP grew with a 7-8 % annum growth in between 1990-2005. This can be taken as a clear indication in growth of household income. A clear relevance of trade can be seen with trade when export per capita is compared. In 1985 the export per capita was US $11.6 increased to US $390.3 in 2005. The share of export to GDP increased from 4.6 to 62.7 in same period. Thus the purchasing power of the people with increased in the trade.
The increase in trade was beneficial to agrarian rural population as it drove the price of rice high as their income increased from sale of their yields. The income went to landowners and finally to works through wages. However the net consumer share of food expenditure accounted more than before. The consumer benefited by low tariff as they were able to purchase more imported goods with less money.
- Channels of Enterprise: (Wages and Employment)
The labor intensive export industries had quite a growth due to availability of large pool of low skilled workers. These industries employed a large workforce providing a better pay than traditional informal sector and agricultural sector. The “doi moi” reform saw growth of employment in service, stable in industrial and downfall in agriculture sector. The unemployment decreased and foreign invested created better working environment for workers than the domestic industries.
- Government Channels: (Fiscal)
With the reduction of import rates and opening of market the government was able to collect larger revenue for its extensive social program for poor and needy. Government was able to invest in much poverty alleviation and income generation schemes. It was able to allocate, mobilize and utilize available in prioritized objectives and localities.
The case of Vietnam helps to ascertain that trade liberation help to reduce poverty. But there also raises the question economic inequality and gender disparity.
- Relationship between Trade Liberalization and Inequality
Trade liberalization is the reduction or removal of barriers or restrictions on the free flow/exchange of goods and services between countries/nations. It includes reduction or removal of both non-tariff (quotas, licensing rules, and other requirements) and tariff obstacles (surcharges and duties). All of this eradication or easing of these restrictions is time and again stated to as promoting “FREE TRADE”.
An unprecedented wave of trade liberalization has taken placed since the late 1970s. According to the Sachs-Warner (1995), the share of countries classified as open rose from 35% to a whopping 95% in the time gap from 1980 to late 1990s, & the trade shares rose from 59% of GDP to 74% for the average country. The difference between the wages of skilled workers and unskilled workers rose on average of 8% over the same period.
Trade liberalization makes it easy for all countries to have access to intermediaries (Esp. from developed countries) reducing the higher quality product’s relative price in a developing country, and because choice of quality differs across the income distributions, this relative price becomes a cause of inequality.
In developing countries, the sectors which are heavily protected tend to be the sector that employs a huge proportion of unskilled workers earning lower wages. This tells us that trade liberalization has a negative impact on the unskilled employees in the short and medium-run.
Industry wages premiums are decreased by trade liberalization in those sectors that experience the largest tariffs reductions. Labor market rigidities which constraints labor mobility and dissipation of industry rents are some of its main effects, thus it helped in spreading inequality.
- Overview of Trade Liberalization in Nepal
There are three distinctive episodes in the history of Nepal’s Trade regimes. Free trade regime was there in Nepal from 1923-1956 and which moved towards a protectionist trade regime from 1956, alike to other South-Asian countries. Protectionist trade regime was there in the period from 1956-1985, and it was in 1985 when it started its liberalization process. In 1990s, it implemented a series of market and trade-oriented reforms, which was relatively related to the process of Nepal’s WTO (World Trade Organization) membership. Over the last fifteen years or so, it has removed most of the Quantitative Restrictions (QRs) and licensing requirements during the process of trade liberalization.
Nepal’s current import-weighted tariff average is around 14.4 % and the simple average of tariff is around 12.6 %. Nepal was forced to adopt a gradual liberalization process because of its geographically landlocked nature and its special relationships with India. As the first LDC (Least Developed Country) to join the World Trade Organization (WTO) since its inception in 1st January 1995, Nepal became a member of World Trade Organization in 2004. Thus, as a member of the multilateral trading system, this has opened up trade opportunities for Nepal.
- Key Features of Economic Reformation in Nepal
In 1984/85 Liberal trade policy was initiated in Nepal. After the multi-party restoration process in 1984, liberal trade policy was introduced in Nepal.
Key features of liberalization in Nepal were:
- Devaluation and introduction of flexibility in the exchange rate.
- Rationalization of the tariff structure,
- Reduction in the average level of tariffs,
- Liberalization of foreign investment & privatization.
- Trade Liberalization, Financial Liberalization Technological Advancement & Inequality
- Definition of Trade Liberalization
The declining or deduction of barriers and restriction by the government on the free exchange of goods and services between nations are known as Trade Liberalization, which not only includes tariff such as surcharges and duties but also the non tariff Hindrance such as quotas, licensing rules and others requirement. The eradication or moderation of above restriction frequently referred as Promote “Free Trade.
- Definition on Financial Liberalization
Financial Liberalization arises when the barriers between financial Institution and financial markets are reduced or decreased by the government policy in the particular nations or when the financial modernism like as subprime mortgage loans are initiate in financial Marketplace. The country gain different advantage through the financial liberalizations and innovations because it guide to more well-organized financial markets endorse growth and lending, nevertheless, as restrictions are detached and innovation and financial liberalization are mishandle, the freedom can support financial institutions to take needless risks going on lending Sprees which know how to lead to financial condense.
- Definition of Technology Advancement
As we seen that every new technology is better as compared to previous one. The BMW’s car idea is the key example of this which is made by means of intense amount of research the car was developed and adopts new technology which is tested and used on it. It does not necessarily mean that technological advancement is only associated to cell phones, computers rather technology is more advance and cover every feature of human’s life whether it is business, agriculture or medicine. For Example: In mid 1800’s the method of irrigation improved which shows advancement in breeding and cultivation through technology. In industry the advance outline of robotics and videos conferencing that helps present employees to communicate effectively.
- Meaning of Inequality
In simple terms inequality refers the gap between the rich and poor or the quality of being unequal. For example : Lack of uniformity, unevenness, disproportion, diversity, disparity, inequality in size, power distance, numbers, property, ranks etc.
- Impact of Trade Liberalization on Inequality
As we know that Trade liberalization means to decrease or reduce in trade barriers. Exporting from home country to host country i.e. second country found to be associated with lower inequality. For developed country import from developing countries are effects in reduction on inequality where as export from developed countries to developing countries effect in increase on inequality. For developing countries like china, India and others agricultural exports can decline inequality. Agriculture employment increases inequality whereas industry employments reduce it.
- Impact of Financial Liberalization on inequality
It is noticed that the impact on financial openness mainly felt through FDI. Financial liberalization means reduce in barriers between financial institution and financial marketplace. FDI is the key element associated with increase or decrease on inequality. Inward FDI is linked with rising inequality whereas outward FDI is linked with reducing inequality. Within past two decade financial liberalization is increasing in very rapid pace. Financial Liberalization may reduce income inequality by increasing access to capital for the poor people.
- Impact of Technological Advancement on Inequality
Every new gadget is more advanced as compared to previous one. Technology consist not only the computer or the cell phones but also covers the all aspects of human life. The impact of Technology is also closely related through FDI. IT progress enlarges returns on human capital, underscoring the importance of education and training in both developed and developing countries in addressing rising inequality. It has favored higher skilled worker than lower skills ones. Higher access to education has reduced inequality in developing countries by allowing population to engage in high skill activities. Technology advancement is the premium on higher skills, rather than limiting opportunities for economic advancement Thus, Technological progress increases the relative demand for higher skills, exacerbating inequality.
References:
Heo, Y., and Doanh, N., (2009) Trade Liberalisation and Poverty Reduction in Vietnam. The World Economy, 934-964.
Jaumotte, F., Lall,S.,and Papageorgiou, C.(2008) ‘Rising Income Inequality: Technology, or Trade and Financial Globalization?’, IMF Working Paper, 08/185.
IMF. 2006. World Economic Outlook Database 2006. Washington, D.C.: International Monetary Fund.
APPENDICES
Figure.1.1
Figure. 1.2
Figure. 1.3 Average GDP Growth in Nepal
Figure. 1.4 Nepal Living Standard Survey (2011)
Sources: Nepal Living Standard Survey, 2011
Figure. 1.5 Growth of Nepal Taxes On International Trade Percent Of Revenue
Sources: Trading Economics available at:
Sources: http://www.tradingeconomics.com/nepal/taxes-on international-trade-percent-of-revenue-wb-data.html
Accessed on: 2nd May 2012.
Figure. 1.6 Living Standard of Vietnamese
Figure. 1.7 Vietnam GDP (in Billions of US dollars)
Figure. 1.7 Vietnam Unemployment Rate
Figure. 1.8 Price Movements 1993-1998 (Real Prices in Dong)
Figure. 1.9 The Effects of Actual Trade on Employment Income in Vietnam
Figure 1.10 Some Selected Items in The Central Government Budget, 1990 – 2000
Figure. 1.11 Change in the number of people, 1990-2004 (millions)
Figure. 1.12 Contribution of Technological Progress on Income Inequality
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