This study analyzes Nepal's tradepolicies and performance, identifies constraints toincreasing trade competitiveness, and recommends policychanges and technical assistance to improve tradeperformance. The study is timely, as Nepal's interimPoverty Reduction Strategy Paper of 2003 assigns a key roleto trade and exports as drivers of broad-based economicgrowth-one of the four main pillars of its strategy. Keyconclusions of this report suggest Nepal's tradepolicies are generally sound, and the country is competitivein a variety of products. However, these positive factorsare tempered by constraints that make Nepal'sproductivity among the lowest in the region, create aninhospitable business climate, and discourage foreign directinvestment-a key conduit for export-market access andtechnology transfer. The most critical constraints are: 1)delays in customs and transshipment to India's Kolkataport; 2) high infrastructure costs, especially transport andpower; 3) a rigid, formal labor market; and, 4) weak policyand institutions in the areas of taxation, investment andtrade promotion. But Nepal's prudent macroeconomicstance throughout most of the 1990s, helped increase itscompetitiveness. Low levels of domestic borrowing by thepublic sector, the nominal anchor of an exchange-rate pegwith India, and a large jump in remittances by expatriateNepalese labor have enabled Nepal to maintain macroeconomicstability. Notwithstanding, and despite liberalization andgrowth of trade in the 1990s, the study shows thatcompetitiveness of Nepal's economy is low, as measuredby firm-level surveys in manufacturing, farm yields, andaggregate productivity estimates. Labor productivity inmanufacturing and agriculture are among the lowest in theregion, while manufacturing unit labor costs are among thehighest, even though Nepal has comparative advantage in arange of agriculture and manufacturing products. This studyshows how three key factors contribute to low pricecompetitiveness and productivity in Nepal's economy: a)inadequate mechanisms and incentives for firms to acquirenew technology, b) weak infrastructure, and, c) anunfavorable business climate. Conclusions suggest majorimpacts of trade on the poor can come from switching to highvalue cash crops from subsistence agriculture. A keyconstraint to that is inadequate transportationinfrastructure. Growth of transport can lead to welfareeffects for the poor by enabling commercial crops and usemore fertilizers by farmers. Transportation also has directwelcome effects through creation of employment andincome-generating opportunities. To this end, transitionfrom traditional subsistence agriculture towardhigher-margin, tradable crops (such as spices, tea, andvegetables) can be promoted by increasing access toyear-round irrigation, inputs, technology, and, mostimportantly, markets.
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