Print Edition - 2015-01-08 | MONEY
Try something else
- The government’s much hyped export promotion schemes have not worked
Jan 7, 2015-
The government has been reportedly reviewing two critical items in the national export promotion programme following vociferous protests by the private sector. The first is the much-hyped Nepal Trade Integration Strategy (NTIS) which identified and prioritized specific sectors with export potential for capacity building. The other is the export cash subsidy scheme aimed at boosting overseas exports.
It has been more than four years since the two policy instruments were introduced with much fanfare to promote exports. But both have performed poorly. This is evidenced by the low contribution of exports to the country’s GDP. Exports as a percent of GDP could not cross the 5 percent mark despite these inducements. It actually dropped from 7 percent in 2009, one year before the incentive programmes were introduced, to 6.9 percent in 2010 and continued to decrease further to 5.1 (in 2010), 4.7 percent (2011) and 4.8 percent (2012). Against this backdrop, demands for changes in the policy instruments is justifiable. But how can this be done?
First, let us examine the NTIS programme which accorded priority to 19 products and services. Barring the services sector, it explicitly identified seven agricultural commodities (large cardamom, ginger, lentils, honey, tea, herbal medicine and noodle) and five manufactured items (handmade paper, silver jewellery, pashmina items, woollen products and iron and steel) to be supported by the action plan. But the product composition did not complement the existing Trade Policy which classified 15 agricultural and craft products under the thrust area development scheme and four well-known export items (carpets, garments, pashmina and woollen goods and handicrafts) as special focus areas.
Amazingly, the NTIS not only excluded two focus areas of the existing trade policy (carpet and garment) which jointly contribute over half of the country’s exports to overseas countries and approximately one-fifth of the overall national export, it also picked some priority products arbitrarily. As a result, it had to bear severe criticism for incorporating products like iron and steel as a potential export items.
Iron and steel had huge export figures, but they had insignificant value addition to the economy. With shipments entirely confined to India, exports of this product category looked attractive simply because of the tariff advantage it got in the southern neighbour. Similarly, the export of honey, the next NTIS product, had a very disappointing performance as its export values were shockingly limited to four digits.
These steps resulted in two disappointing outcomes. One, there was a mismatch in selecting the priority areas, producing no tangible benefit from the NTIS programme. Instead, it avoided key export items like carpets and garments demotivating a majority of exporters in these product areas and leading to a clash between the government and exporters. Two, the programme was partially biased as it chose some superficial items (for example, iron and steel and honey) at the cost of comparative advantage sectors (most importantly carpets and garments) which were in need of government intervention.
As a consequence, the support programme could neither push the already established export areas nor pull the potential ones. Overall, the export sector remained stagnant despite the incentives. Hence, there is a need to hold an extensive dialogue and study the opinions of experts to produce a flawless NTIS programme.
Regarding the direct cash subsidy, it was even more controversial. The subsidy scheme, which was intended to boost hard currency based exports with the ultimate aim of overcoming the country’s growing trade imbalance had two obvious faults. First, it was self-contradictory as it favoured exports to overseas countries and ignored exports to India which accounted for more than half of Nepal’s overall trade deficit. In order to correct the trade imbalance with India, encouragement of exports to the southern neighbour was very urgent. Hence, the incentive programme had another mismatch.
Second, the subsidy scheme has been mired in controversy from the very beginning over the criteria for distributing cash to eligible exporters. The disagreement between the government and exporters over this issue led to the subsidy being slashed from a maximum of 4 percent to 2 percent and applied impartially to all overseas exports to settle the problem. However, exporters are not pleased with the decision and the issue is yet to be resolved.
Therefore, addressing these contentious issues will be the most challenging tasks for the government. It is also important to understand why there was no clear indication of a positive correlation between the subsidy and export values even after four years of its operation.
Empirical evidence suggests that the developing economies that have used export subsidies have not expanded their exports faster than those that did not have them. Thus, intervention should be in the form of productivity enhancement schemes as they have proved to be more successful and less distortionary in the developing economies.
This suggests that Nepal’s policymakers should consider transforming direct subsidies into indirect incentives in the form of trade financing, interest rates, freight charges and other activities which are directly connected to export competitiveness. So, the choice is between superfluous programmes and productivity enhancement of the entire export sector.
(Shakya specializes in the economic and trade interests of Nepal and the LDCs.)
Published: 08-01-2015 09:38