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Ratnakar AdhikariNavin Dahal

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Progressive Regional Action and Cooperation on Trade (PROACT)

Positive TradeAgenda forSouth AsianLDCs

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This Discussion Paper has been prepared under the Progressive Regional Ac-tion and Cooperation on Trade (PROACT ) Phase II being implemented bySAWTEE with financial support from Novib, the Netherlands. The broad aimof the project is to build the capacity of civil society organisations (CSOs) ofthe South Asia region thereby contributing to create an atmosphere conduciveto formation of and commitment to common position of South Asian Asso-ciation for Regional Cooperation (SAARC) countries in negotiations at the WorldTarde Organisation (WTO) by taking “development dimension” into consider-ation.

We wish to thank the following experts who provided useful comments: MsAradhana Agrawal, Mr Md. Golam Robbani, Dr Hiramani Ghimire, Dr J.George and Ms Sizu Upadhaya. We would also like to thank Mr KamaleshAdhikari, Mr Bhaskar Sharma and Ms Dikshya Thapa for their support in edit-ing this paper.

ACKNOWLEDGEMENTS

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LIST OF ACRONYMSAoA Agreement on AgricultureASCM Agreement on Subsidies and Countervailing MeasuresATC Agreement on Textiles and ClothingBoI Board of InvestmentDTIS Diagnostic Trade Integration StudyEBA Everything But ArmsECOSOC Economic and Social Council of the United NationsEPRP Export-led Poverty Reduction ProgrammeEPZ Export Processing ZoneE U European UnionFAO Food and Agriculture OrganisationFDI Foreign Direct InvestmentGATS General Agreement on Trade in ServicesGATT General Agreement on Tariffs and TradeGDP Gross Domestic ProductGSP Generalised System of PreferencesICT Information and Communication TechnologyIF Integrated FrameworkIMF International Monetary FundIPB Industrial Promotion BoardIPO Intellectual Property OfficeIPR Intellectual Property RightIT Information TechnologyITC International Trade CentreKBE Knowledge Based EconomyLDC Least Developed CountryMFA Multifibre ArrangementMFN Most Favoured NationNTB Non Tariff BarrierOECD Organisation for Economic Cooperation and DevelopmentPPP Purchasing Power ParityPRSP Poverty Reduction Strategy PaperQR Quantitative RestrictionRCA Revealed Comparative AdvantageRMG Readymade GarmentROO Rules of OriginS&DT Special and Differential TreatmentSEZ Special Economic ZoneSPS Sanitary and PhytosanitaryTBT Technical Barriers to TradeTPC Trade Promotion CentreTRIMs Trade Related Investment MeasuresTRIPS Trade Related Aspects of Intellectual Property RightsTRTA Trade Related Technical AssistanceU N United NationsUNCTAD United Nations Conference on Trade and DevelopmentUNDAF United Nations Development Assistance FrameworkUNDP United Nations Development ProgrammeUR Uruguay RoundUS United StatesWHO World Health OrganisationWTO World Trade Organisation

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EXCHANGE RATES (as of 18.09.2004)1 US $ = Bangladeshi Taka 60.631 US $ = Bhutan Ngultrum 45.25

1 US $ = Maldive Rufiyaa 12.851 US $ = Nepalese Rupee 74.02

Published by : South Asia Watch on Trade, Economics & Environment(SAWTEE)

Copyright © : 2004, SAWTEE

The materials in this publication may be reproduced inwhole or in part and in any form for education or non-profituses, without special permission from the copyright holder,provided acknowledgement of the source is made. The pub-lisher would apreciate receiving a copy of any publicationwhich uses this publication as a source.

No use of this publication may be made for resale or othercommercial purposes without prior written permission ofthe publisher.

Citation : Adhikari, Ratnakar and Navin Dahal. 2004. Positive TradeAgenda for South Asian LDCs, V+39, Kathmandu: SAWTEE

First Published : 2004

Price :

Cover Design : Water Communication

Layout : Indra Shrestha

Printed at : Modern Printing Press

ISBN :

Available from : South Asia Watch on Trade, Economics & Environment(SAWTEE)

GPO Box 19366, 254 Lamtangeen MargBaluwatar, Kathmandu, NepalTel: 977-1-4444438, 4415824Fax: 977-1-4444770Email: sawtee@sawtee.orgWeb: www.sawtee.org

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Executive Summary 1

Background 3

Past Trade Policies and Perfomance 6

Weaknesses Plaguing the South Asian LDCs 13

Efforts Made by the International Community 20

A Proactive Agenda for the South Asian LDCs 25

Conclusion 33

Bibliography 34

CONTENTS

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South Asia is one of the poorest re-gions of the world and houses 40percent of the world’s poor sur-viving on less than US$ 1 a day. Of theseven countries in South Asia, four –Nepal, Bangladesh, Bhutan, and theMaldives – are least developed countries(LDCs) while the other three – India, Pa-kistan and Sri Lanka – are developingcountries.

The South Asian region has a long his-tory of inward looking policies regard-ing international trade. Apart from SriLanka that started liberalising in the 1970s,the other South Asian countries remainedclosed economies until the late 1980s withliberalisation taking pace only in the 1990s.

Evidence has shown that market reformsand open trade policies have helped manydeveloping countries to achieve sustainedgrowth and alleviate poverty. Accordingto Sachs and Warner (1995), in the 1990sopen economies grew 2 percent to 2.5percent faster than closed economies.Though this study has received roughtreatment from Rodriguez and Rodrik(2000), they too have not disputed the factthat trade liberalisation in general contrib-utes to economic growth.

With the same aspirations, in the last coupleof years, the South Asian LDCs havetaken bold initiatives to liberalise theireconomies, particularly for their success-ful integration into the international trad-ing system. They consider World TradeOrganisation (WTO) membership as oneof the ways to integrate themselves intothe international trading system.

E XECUTIVESUMMARYBangladesh and the Maldives are found-ing members of the WTO while Nepalbecame a member on 23 April 2004.Bhutan is in the accession process and islikely to become a member in a few yearstime.

In their pursuit to integrate themselvesinto the international trading systemNepal and Bangladesh have gone throughrigorous liberalisation efforts, evidentfrom the reduction in tariff rates in thesecountries. Bhutan and the Maldives havealso initiated reform programmes andare gradually opening up to the worldeconomy. Dismantling of trade restric-tions has resulted in an overall exportgrowth and integration of these coun-tries into the world market. The SouthAsian countries have sustained a growthrate of 5.5 percent over the last two de-cades making South Asia one of the fast-est growing regions in the world.

There is though no reason for these coun-tries to be assured of sustained develop-ment, as their exports are highly concen-trated and thus remain extremely vulner-able to external shocks. The lack of skilledhuman resources, inadequate infrastruc-ture and highly protective developedcountry markets restrict the potential ofSouth Asian LDCs to benefit from ex-ports. They are also likely to face prob-lems in implementing the commitmentsthey made at the WTO due to weak in-stitutional and human capacities.

Recognition of the problems of LDCsand the need to integrate them into theworld economic system have led their de-

In the last couple ofyears, the South AsianLDCs have taken boldinitiatives to liberalisetheir economies but theirmarginalisation from theglobal economy contin-ues.

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velopment partners and the internationalcommunity to make efforts to assist theLDCs. The efforts fall into three catego-ries: special and differential treatment(S&DT), improved market access, andtechnical assistance. The effectiveness ofthese measures is, however, questionableas the gap between prescription and prac-tice has been wide and LDCs are beingincreasingly marginalised. At the sametime, LDCs are also to be blamed fornot fulfilling their part of responsibilitywith all sincerity.

The efforts made by the internationalcommunity notwithstading, the SouthAsian LDCs, to fully benefit from their

integration into the multilateral trading sys-tem, need to be proactive and take mea-sures at two levels – domestic and inter-national.

At the domestic level, the South AsianLDCs need to, among others, mainstreamtrade into their developmentprogrammes, promote accountable gov-ernance, improve infrastructure, and de-velop human resources. At the interna-tional level, given their limited resources,they will have to focus on their priorityareas and form issue-based alliances withother developing and least developedcountries to strengthen their say at inter-national fora such as the WTO.

To benefit from themultilateral trading

system, the South AsianLDCs need to be proac-tive and take measuresat the domestic as well

as the internationallevels.

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The South Asia region, comprisingIndia, Pakistan, Bangladesh,Nepal, Sri Lanka, Bhutan and theMaldives, is home to 22 percent of theworld’s population; but 40 percent of theworld’s absolute poor surviving on lessthan US$ 1 a day live here. The gross do-mestic product (GDP) per capita in termsof purchasing power parity (PPP) of theregion, US$ 2,000, is markedly lower thanthat of East Asia and Pacific region atUS$ 3,950 and Latin American and Car-ibbean region at US$ 6,880 (RIS 2004).This is despite the fact that South Asiancountries have sustained a growth rate of5.5 percent over the last two decadesputting South Asia among the fastestgrowing regions in the world.

Apart from Sri Lanka that startedliberalising in the 1970s, the other SouthAsian countries remained closed econo-mies until late 1980s with liberalisationtaking pace only in the 1990s. Out of theseven countries in South Asia, Nepal,Bangladesh, Bhutan and the Maldives areleast developed countries (LDCs), whileIndia, Pakistan and Sri Lanka are devel-oping countries.

The categorisation of countries as ‘leastdeveloped’ happened in the 1970s. In1971, the United Nations (UN) desig-nated the poorest countries of the worldas LDCs. Based on the criteria establishedat that time, 25 countries fell into this cat-egory. However, in the last three decades,the number of countries in this categoryhas grown, with only one country,Botswana, graduating to the developingcountry status. At present, there are 50LDCs in the world.1

BACKGROUNDIn its report, “The Least DevelopedCountries Report 2004”, the Economicand Social Council of the United Nations(ECOSOC) used the three criteria – lowincome, weak human assets and eco-nomic vulnerability2 – proposed by theCommittee for Development Policy indetermining the new list of LDCs. In the2003 review of the list, a country fell intothe LDC category if it met the three cri-teria and did not have a populationgreater than 75 million.

LDCs have, for decades, been striving tofind the right development strategy toenable them to reduce economic dispar-ity between them and the more advancedeconomies. Over the past two decades,an increasing number of LDCs haveplaced their hopes on a developmentstrategy based on increased participationin the world economy, through exportsand inward foreign investment(UNCTAD 2001). According to theUnited Nations Confernece on Trade andDevelopemnt (UNCTAD) LDC Report2004, trade liberalisation in many LDCshas actually proceeded further than insome developing countries. In 2002, 60percent of the 42 LDCs for which datais available had average tariff barriersbelow 25 percent, and non-tariff barri-ers (NTBs) were absent or minor in 29LDCs.

In many cases, LDCs have liberalisedfaster than Chile did in the 1970s and1980s. However, their success in both in-creasing their trade and attracting foreigndirect investment (FDI) has remainedmarginal. It is worrisome to note that theLDCs, despite serious efforts to integrate

Chapter 1

Over the past twodecades, a number ofLDCs have liberalisedtheir economies fasterthan many developingcountries but theirsuccess in increasingtrade and attracting FDIhas remained marginal.

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TABLE: 1.1

PROPORTION OF TRADE IN GDP (IN PERCENT)

PERIOD COUNTRY

Bangladesh Bhutan Maldives Nepal

1985-87 24.26 61.52 60.26 31.91

1990-92 19.83 75.05 88.51 36.28

1996-98 30.47 76.15 167.08 59.59

2000-01 35.50 89.74 168.94 55.06

Source: RIS 2004

some sanitary and phytosanitary (SPS) re-quirements in the importing countries.Moreover, heavy protection of domesticagriculture in the developed countriesthrough tariffs and subsidies also reducesthe export potential of South Asian LDCs,as agricultural export is a key area of theircomparative advantage. Furthermore, tar-iff escalation in the developed countriesdiscourages processing and value additionin the exporting countries.

Services are occupying an increasingly im-portant role in the economies of SouthAsian LDCs and some of them have sig-nificant export potential. For example,Mode 4 of servcie delivery envisioned inthe General Agreement on Trade in Ser-vices (GATS), which refers to temporarymovement of natural persons, is strategi-cally important for the South Asian LDCs,particularly Bangladesh and Nepal, whichhave potential to export low skilled labour.The liberalisation of Mode 4 in the de-veloped countries, by relaxing the tem-porary movement of natural persons, canprove very beneficial for these countries.

Hence, it is parodoxical that the developedcountries while talking about S&DT tohelp the LDCs to benefit from interna-tional trade, have created tariff and nontariff barriers to goods and servcies ofLDCs. The S&DT provisions have alsobeen ineffective in promoting exportsfrom LDCs due to the gap between whatis promised and what gets implemented.It has now become evident that the onlyway for the South Asian LDCs to benefitfrom their integration into the internationaltrading system is to have a proactiveagenda and not rely solely on promisesmade by the develoed countries.

In light of the above facts, the objectiveof this discussion paper is to elementsfo the positvie trade agenda the SouthAsian LDCs need to pursue to benefitfrom their integration into the interna-tional trading system. The paper focuseson the policies that South Asian LDCsneed to proactively pursue at the domes-tic and international levels to gain inter-national competitiveness3 . The chapters

into the multilateral trading system, arebeing marginalised.

The South Asian LDCs’ efforts to be in-tegrated into the international trading sys-tem started even before the establishmentof the WTO in 1995. Two of the fourSouth Asian LDCs, Nepal andBangladesh, have undertaken substantialliberalisation measures since the early1990s. The extent of such liberalisation isevident from the reduction of tariff ratesover the years in these countries. Bhutanand the Maldives have also initiated re-form programmes and are graduallyliberalising their trade regime. In 2001,unweighted average tariff in all the fourcountries was less than 20 percent (RIS2004). The dismantling of restrictions ontrade has also resulted in greater integra-tion of the South Asian LDCs into theinternational trading system as shown bythe increase in trade-GDP ratios in thesecountries (See Table:1.1) .

Although today the South Asian LDCsare much integrated into the internationaltrading system, it is difficult to say whetherthey can sustain the export growth seenin the last few decades because it is a well-known fact that preferential market ac-cess in the developed country marketsalone is not enough to ensure increasedexports for these countries. The SouthAsian LDCs will have to develop costcompetitiveness in selected manufactur-ing sectors to benefit from preferentialmarket access.

In many cases, the advantage of prefer-ential market access is eroded by compli-cated rules of origin (ROO) and burden-

Services are occupyingan increasingly importantrole in the economies of

the South Asian LDCsand some of them have

significant exportpotential.

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ISSUES FOR COMMENTS

• How can the South Asian LDCs sustain the growth seen in the decade of the 1990s?

• What was the contribution of the liberalisation policies adopted by the South Asian LDCs in the growth theywere able to achieve?

• What can the South Asian LDCs do to use trade for poverty reduction?

• What do the South Asian LDCs need to do to benefit from services exports?

• In what ways can the South Asian LDCs collaborate to negotiate better terms in international trade negotiations?

are organised as follows: Chapter 2 out-lines the historical background of tradeliberalisation in South Asian LDCs.Chapter 3 analyses the weaknesses plagu-ing these countries. Chapter 4 makes anappraisal of the efforts made so far to

integrate LDCs into the multilateral trad-ing system. Chapter 5 looks at the do-mestic and international measures LDCsneed to take to enhance their overallcompetitiveness. Finally, Chapter 6 con-cludes the discussion paper.

The issue of competitive-ness is vital for thesuccessful integration ofthe South Asian LDCsinto the global economy.

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The South Asian LDCs, tradition-ally closed and inward looking,have in general been adopting lib-eral and export oriented policies since theearly 1990s. This chapter looks briefly atcountry profiles: trade policies adoptedby these countries and their performancein the recent past.

2.1 BangladeshBangladesh, which lies in the Bay of Ben-gal between India and Burma, becamean independent state in 1971 when thethen East Pakistan separated from WestPakistan. Despite sustained domestic andinternational efforts to improve economicand demographic prospects, with a percapita income of US$ 351.00 in 2002(UNDP 2004),Bangladesh remains apoor nation. With a land area of 144,000square kilometers and a population of141,340,476, Bangladesh has the highestpopulation density in the world. Most ofthe country is situated on deltas of largerivers flowing from the Himalayas.

Although half of the GDP is generatedthrough the service sector, nearly two-third of the Bangladeshi population isemployed in the agricultural sector, withrice as the single most important prod-uct. In the 1970s and 1980s, trade andinvestment regimes in Bangladesh weredesigned to service an inward-looking,import-substitution growth strategy. Theliberalisation policies first pursued in thelate 1980s by Bangladesh can be segre-gated into three phases. The first phaseof reforms started with the introductionof a new industrial policy in 1982, and

PAST TRADE POLICIESAND PERFORMANCEChapter 2

the liberalisation measures included,among others, a shift from a positive listof import controls to a negative list, re-duction in the number of banned com-modity imports and the introduction ofduty drawback facilities. The second phaseof reforms was initiated in 1986 and cov-ered a period up to 1991. During thisphase, the number of quantitative restric-tions (QRs) decreased from 478 to 239.This phase also saw the rationalisation oftariffs, reduction in the number of tariffslabs and introduction of systems of con-cessions and incentives such as zero-tar-iff access and the establishment of ex-port processing zones (EPZs). The thirdphase of reforms started in 1991, result-ing in a decrease in the average nominaltariff rates from 89 percent in 1991 to17 percent in 2000 (CPD 2001). As a re-sult, the average nominal protection ratefell from 89 percent in 1990 to 25 per-cent in 1995 and 17 percent in 2001 (CPD2001, 10). In addition, Taka, theBangladeshi currency, was made fully con-vertible for current account transactionsin 1996. At present, the major elementsof the country’s trade policy includeliberalised import with no need of licens-ing, rationalisation of tariff structures andreduction in QRs.

It is encouraging to note that, as a resultof these reforms, growth rate has been asteady 5 percent for the past several years.However, there are still many impedi-ments to growth. These include frequentcyclones and floods, inefficient state-owned enterprises, inadequate port facili-ties, a rapidly growing labour force that

Various economic reformmeasures pursued by

Bangladesh have helpedthe country to achieve asteady 5 percent growth

in the last couple ofyears.

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cannot be absorbed by the agricultural sec-tor alone, delays in exploiting energy re-sources such as natural gas, insufficientpower supplies, and slow implementa-tion of economic reforms. The reformsare also frequently stalled by political in-fighting and corruption at all levels of thegovernment.

2.2 Bhutan4Bhutan is strategically located betweenIndia and China. With a population ofabout 700,000 land area of 47,000 squarekilometres and per capita income of US$695 in 2002 (UNDP 2004), Bhutan is oneof the smallest least developed econo-mies in Asia. Government expenditure ac-counts for almost half of the GDP whiledonor-financed capital investments rep-resent almost half of the government ex-penditure. Agriculture and forestry pro-vide the main livelihood for more than90 percent of the population. Agricultureconsists largely of subsistence farming andanimal husbandry. The economy is closelyaligned with the Indian economy throughstrong trade and monetary links and de-pendence on India's financial assistance.

Bhutan's hydropower, with the potentialto generate 30,000 MW of electricity, isthe main economic resource, with tour-ism in second place. In 2001, Bhutan hada total installed capacity of 420 MW, withone project, the Chhukha Hydro Power,alone accounting for 336 MW. The im-portance of this sector can be gauged bythe fact that in 2001 it accounted for 11percent of the GDP and 45 percent ofthe total domestic revenue. The domi-nance of this sector will increase with thecommissioning of the 1,020 MW TalaProject in 2006.

Though the industrial sector is technologi-cally backward and dominated by cot-tage industries, the availability of cheapelectricity has given rise to power-inten-sive industries in the towns bordering In-dia. However, heavy controls and uncer-tain policies in areas like industrial licens-ing, trade, labour and finance continue tohamper industrial growth and foreign in-vestment.

Bhutan initiated a series of structural re-form measures in the 1990s to enhancegrowth and increase private sector par-ticipation in economic activities. The traderegime has been strengthened byrationalisation of import tariffs and ex-port duties. Bhutan has also decided tojoin the WTO and hopes to complete theaccession process by 2007. The govern-ment is gearing up for the necessary legis-lative and regulatory changes in a phasedmanner to comply with WTO require-ments.

2.3 The MaldivesThe Maldives, an archipelago in the In-dian Ocean, was for a long time a Sultan-ate under the Dutch and the British be-fore gaining independence in 1965 (WT02002). With a per capita income of US$2,182 in 2002 (UNDP 2004), populationof around 340,000 and 300 squarekilometres of land area, the Maldives isextremely vulnerable to rise in sea level as80 percent of the land area is less thanone meter above sea level.

Tourism, the Maldives' largest industry, ac-counts for one third of the GDP and 70percent of exports. Fishing is the secondleading sector and accounts for 6 percentof the GDP. Over 90 percent of gov-ernment tax revenue comes from importduties and tourism-related taxes. Manu-facturing continues to play a lesser role inthe economy. Most staple foods are im-ported because of the limited availabilityof cultivable land and the shortage ofdomestic labour.

The Maldivian government began an eco-nomic reform programme in 1989, ini-tially by lifting import quotas and open-ing agriculture and some exports to theprivate sector. Subsequently, it hasliberalised regulations to allow more for-eign investment.

Most of the tariffs are bound at 30 per-cent. However, 3 percent of the tariff linesare bound at 300 percent. Changes induties and customs commodity classifi-cations in May 2000 lowered the averageprotection rates. The average appliedmost favoured nation (MFN) tariff

While Bhutan initiatedstructural reform mea-sures in the 1990s toenhance growth andincrease private sectorparticipation, theMaldives began aneconomic reformprogramme in 1989 bylifting import quotas andopening agriculture andsome exports to theprivate sector.

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(unweighted) is 20.8 percent and few for-mal non-tariff barriers (NTBs) are in place(WTO 2002). Import quotas were elimi-nated in 1998, except on rice, sugar andwheat flour.

Permission to foreign banks to operatein the country, opening of state tradingfloor in 2002 and the rationalisation ofinterest rates initiated in 2001 are expectedto contribute positively towards eco-nomic development, including develop-ment of the country’s financial sector.

Small and many dispersed islands, heavydependence on fishing and tourism, smallsize of the domestic market, inadequatelyskilled human resources, lack of adequatetrade representation network abroad,weak support institutions and heavy reli-ance on imported inputs severely con-strain the export potential of theMaldives.

2.4 NepalNestled between China in the North andIndia on all other sides, Nepal is a land-locked country with a population of 23million and 147,181 square kilometres ofland area. Nepal’s per capita income ofUS$ 230 in 2002 (UNDP 2004) makes itone of the poorest countries in the world.During the last two decades, the share ofagriculture in the economy has decreasedfrom 60 percent to 40 percent while theshare of industry has not gone beyond22 percent. Nepal’s economy, thus, is stillhighly underdeveloped.

With a trade to-GDP ratio of more than50 percent, an average tariff rate of about14 percent and virtually no quantitativerestrictions, Nepal is one of South Asia’smost open and trade dependent econo-mies (MOICS/ HMGN, 2003, i) . How-ever, the country has not been able to fullyutilise the potential for export growth, asits exports are concentrated in a few prod-ucts and a few destination markets. Withinmanufacturing, Nepal’s export basketconsists of a few products: ready madegarments (RMG), carpets and pashmina.Also, Nepal depends on export to threemarkets with 90 percent of total exportsgoing to India, Germany and the USA.

Similarly, Nepal has also not been able tobenefit from its hydropower potentialand its tourism sector is suffering frompolitical instability.

The key measures of Nepal’s widespreadeconomic reforms during the 1990s in-cluded reduction and restructuring ofimport duties, elimination of most QRsand import licensing requirements, and in-troduction of full convertibility for cur-rent account transactions. Due to the re-forms, the average rate of protectiondeclined from 111 percent in 1989 to 22percent in 1993 and to 14 percent in 2002.Most rates now fall at 5-25 percent com-pared to more than 70 percent of therates exceeding 25 percent in 1990(MOICS/ HMGN 2003, 19).

Nepal’s trade reform programme wascomplemented by the enactment of In-dustrial Enterprises Act, 1992 and For-eign Investment and Transfer of Tech-nology Act, 1992 in line with the openmarket oriented policy. In addition, in-terest rates were deregulated and the op-eration of joint-venture banks permittedas part of the financial sector reformprogramme of the government.

Nepal’s geophysical constraint of being alandlocked country has limited its exportpotential. Moreover, high transit costs,political instability, Maoist insurgency, andwidespread corruption, in addition to adifficult terrain, have been the main im-pediments to Nepal’s growth.

2.5 Trade PerformanceTable 2.1 shows the annual growth ofexports and imports of the South AsianLDCs. Both exports and imports havegrown for these countries since they initi-ated reforms. It is remarkable that evenduring the East Asian crisis of the late1990s, the South Asian LDCs showedstrong growth in exports. The slowdownin the early years of the new millenniumcould be because of the sluggish worlddemand.

The RMG sector has played a significantrole in the overall growth of exports ofBangladesh (See Table: 2.2) . The share ofRMG in total exports of Bangladesh grew

The key measures ofNepal’s economic

reforms during the 1990sincluded reduction andrestructuring of import

duties, elimination ofmost QRs and import

licensing requirements,and introduction of full

convertibility for currentaccount transactions.

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from 16 percent in 1985-86 to 76 per-cent in 2001-02.

In the case of Nepal, exports to Indiaincreased in the late 1990s (See Table: 2.3) .Total exports to India grew from Rs1,552 million in 1990-91 to Rs 26,430million in 2002-03. However, this wasmainly due to export of goods such asvegetable ghee and copper wire, whichwould have otherwise been subjected tohigher tariff in India if imported from a

TABLE: 2.2

BANGLADESH GROWTH IN RMG SECTOR

Period Export Exports Share in Employ- Number ofVolume (US $ total exports ment garment

(‘000 doz) millions) (percent) (millions) factories

1985-86 4,763 131 16.0 0.2 594

1990-91 30,567 867 50.5 0.4 834

1995-96 72,005 2,547 65.6 1.3 2,353

1999-2000 111,906 4,349 75.6 1.6 3,200

2001-2002 140,445 4,583 76.6 1.8 3,618

Source: IMF 2004

third country, and exports of Indian sub-sidiaries based in Nepal. Since Nepal doesnot have comparative advantage on prod-ucts like vegetable ghee and cooper wire,their export volume to India will natu-rally shrink when Indian government re-duces tariff on these products.

In general, Nepalese exports to countriesother than India still depend largely oncarpets and RMG (See Table: 2.4) . In thefiscal year 2002-03, RMG accounted for

TABLE: 2.1

GROWTH RATES OF MERCHANDISE TRADE, 1991-2004

YEAR COUNTRYBangladesh Bhutan Maldives Nepal

Export Import Export Import Export Import Export Import

1991/92 12.7 -7.4 7.9 -14.4 1.9 17 12.8 -0.2

1992/93 16.1 0.5 -9.6 14.0 10 18.4 56.1 15.8

1993/94 19.5 15.5 4.9 50.4 -19 5.9 18 14.9

1994/95 6.3 2.9 -4.1 -25.7 43.1 9.7 3.6 21.9

1995/96 37.1 39.2 10.2 4.6 12.7 20.9 -9.7 21.7

1996/97 11.8 19.1 39.6 14.1 -6 12.6 1.9 5.8

1997/98 14.0 -7.5 1.7 18.4 15.8 15.6 10.2 21.6

1998/99 16.8 5.4 12.0 3.7 3.4 1.5 11.9 -12.4

1999/00 2.9 6.6 -5.9 20.5 -4.3 13.6 18.2 -10.3

2000/01 8.2 4.4 6.6 12.8 13.2 -1.0 42.3 20.1

2001/02 11.4 11.3 -12.9 6.1 1.4 1.3 4.6 -0.2

2002/03 -7.6 -8.7 -1.8 -4.0 18.1 -2.4 -18.0 -11.4

2003/04 9.5 3.5 6.7 8.5 6.3 8.5 5.0 5.0

Source: RIS 2004

The significant contribu-tion of the readymadegarment sector in exportsof Bangladesh is evidentfrom the increased shareof garments in totalexports from 16 percentin 1985-86 to 76 percentin 2001-02.

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TABLE: 2.3

NEPALESE EXPORTS TO INDIA (RS. IN MILLION)

Goods 1990-91 1995-96 1999-2000 2001-02 2002-03*

Pulses 77.0 314.7 969.7 1005.7 880.4

Jute Goods 272.3 453.2 1103.9 1630.1 1899.0

Tooth Paste - 309.2 2262.9 1606.7 1002.8

Soap - 0 1083.5 528.9 469.2

Vegetable Ghee - 0 2743.0 7081.4 3812.3

Copper Wire Rod - 0 631.5 2620.5 356.0

Total Exports to India 1552.2 3682.6 35541.4 27956.2 26430.0

Source: MoF 2004 * Provisional

From 1974 until the end of the Uruguay Round (UR),trade in textiles was governed by the Multifibre Ar-rangement (MFA), and since 1995, textiles trade hasbeen regulated under the Agreement on Textiles andClothing (ATC). Although the WTO aimed for thetariffication of all QRs to trade, the ATC continuedto allow QRs, namely quotas, in specific imports. Tradein textiles and clothing was also characterised by ex-ceptions to the MFN principle, which demands thatall members in the international trading system treatall other members in the system alike. Under the agree-ment relegating the trade in textiles, countries wereable to treat others in an unequal manner, meaningthat they could set different import quotas for textileexports of different countries. But while most coun-tries faced relatively high import barriers on their tex-tile exports, LDCs and countries that are referred toas small suppliers of textile products, benefited frompreferential market access.

It is on this basis that some LDCs managed to diver-sify out of commodity exports and develop manu-factures exports. The Asian LDCs, in particular, havetaken advantage of these preferences. Textile exportswere equivalent to 61 percent of the merchandise ex-ports of the Asian LDCs, but only 2.0 per cent ofthose of the African LDCs. During the 1999-2001period, textile exports of 14 Asian LDCs accountedfor 94.2 percent of the total textile exports of 49 LDCs.

The ATC entails a 10-year schedule to bring the tradein textiles and clothing under General Agreement onTariffs and Trade (GATT) stipulations. In accordancewith this schedule, there has been a first group of tex-tile products (at least 16 percent of all relevant prod-ucts) that have been brought under the GATT rule in

the period 1995-1997. A second group of textile prod-ucts (at least 17 percent of all relevant products) hasbeen brought under the GATT rule in the period1998-2001. Likewise, a third group of textile prod-ucts (at least 18 percent of all relevant products) hasbeen brought under the GATT rule in the period2002-2004, while a final group of relevant products(all remaining 49 percent of the relevant products) willneed to be brought under the GATT rule by 1 Janu-ary 2005. These changes have gradually eroded thepreference margins enjoyed by LDCs. By 2005, thepreferential margins and the import quotas providedto LDCs will be completely eliminated.

The overall outcome, however, will also be determinedby whether the provision of unilaterally granted marketaccess preferences for LDCs can balance the negativeeffects of the phasing out of the MFA. It is probablethat most non-Asian LDCs will suffer only marginallosses from the phasing out of the textile regime,whereas the group of Asian LDCs may actually expe-rience significant losses. During the past years, Bangladeshand Nepal, for instance, have significantly increased theirproduction and export of textiles owning to the provi-sion of market access preferences by developed coun-tries, especially the European Union (EU) and the UnitedStates (US) (Appelbaum 2003). After the phasing outof the MFA, the Asian LDCs should still benefit fromfar-reaching market access preferences to the EU asthey are eligible for market access preferences grantedunder the ‘Everything but Arms’ (EBA) initiative. How-ever, they would no longer have a preferential marketaccess to the US as they are not eligible for market ac-cess preferences granted under the African Growth andOpportunity Act (AGOA).

Source: UNCTAD 2004b

THE PHASING OUT OF THE MULTIFIBRE ARRANGEMENTBOX: 2.1

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TABLE: 2.5

TRADE PERFORMANCE INDEX IN BASIC MANUFACTURESIN SOUTH ASIAN LDCs*

INDICATORS COUNTRYBangladesh Bhutan Nepal

Relative ranking among 184 countries 122 124 -

Trend of exports 18 123 70

Average annual change in per capita exports 105 121 25

Share in world market 83 119 121

Product diversification 81 123 90

Product Spread (concentration) 71 124 103

Market diversification 53 122 44

Market spread (concentration) 62 122 88

Source: RIS 2004

*Relative ranking among 184 countriesNote: Data year for Bangladesh is 1997-2001, Data year for Bhutan is1995-1999 and Data year for Nepal is 1995-99.

TABLE: 2.6

SECTORAL COMPOSITION OF PRODUCTION IN SOUTH ASIA(AS PERCENT OF GDP)

Country Agriculture Industry Services

1991 2002 1991 2002 1991 2002

Bangladesh 29.5 21.9 21.1 25.5 49.4 52.6

Bhutan 43.1 33.9 25.0 37.4 32.9 31.6

Maldives 20.6 9.5 17.1 15.5 62.3 75.0

Nepal 48.6 40.6 17.9 21.8 35.5 40.8

Source: RIS 2004

50 percent of Nepalese export to coun-tries other than India and 24 percent ofthe total exports.

It is, however, questionable if Nepaland Bangladesh would have ever en-tered the RMG sector had it notbeen for the quota system (See Box2.1) since competition fromneighbouring countries such as In-dia and China would have beenfierce.

In the case of Bhutan, out of thetotal exports of Nu 5,261.8 millionin 2002, electricity export fromChukha hydropower project to In-dia was Nu 2,171 million (41 per-cent of total export). In the sameyear, the total exports to India wasNu 4919.1 million (93 percent oftotal export) consisting of hydro-electricity, chemicals, metal, wood,processed food, mineral productsand textiles, followed by stone, ce-ment and asbestos products.

Inspite of the export growth ob-served in the South Asian LDCs’ inthe 1990s, their manufacturing sec-tor is still uncompetitive at the glo-bal level. According to the Trade Per-formance Index developed by theInternational Trade Centre (ITC), thetrade performance of the SouthAsian LDCs at the global level hasbeen dismal (See Table: 2.5) .

The South Asian LDCs’ share of ba-sic manufacturers in the global mar-ket has been insignificant. AlthoughBangladesh and Nepal have per-formed badly in terms of product

TABLE: 2.4

EXPORT TO OTHER COUNTRIES (RS. IN MILLION)

Goods 1990/91 1995/96 1999/2000 2001/02 2002/03*

Hand Knotted Carpets 3733.0 8163.9 9842.1 6212.5 5320.0

RMG 1350.3 5374.8 13942.4 7833.0 11890.1

Pasmina - - - 1245.0 1152.3

Total Exports to other countries 5835.3 16198.5 28602.0 18988.6 23500.6

Source: Economic Survey 2003/04, MOF, HMGN * Provisional

diversification, they seem to have donewell compared to Bhutan in terms ofmarket diversification.

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TABLE: 2.7

STRUCTURE OF SERVICE EXPORTS

Country Commercial Services Transport (% of Other (% ofExports (US$ mn.) Total Service) Total Service)

1990 2001 1990 2001 1990 2001

Bangladesh 29.5 21.9 21.1 25.5 49.4 52.6

Bhutan 43.1 33.9 25.0 37.4 32.9 31.6

Maldives 20.6 9.5 17.1 15.5 62.3 75.0Nepal 48.6 40.6 17.9 21.8 35.5 40.8

Source: RIS 2004Theoretically, with the growth of aneconomy, services occupy a more impor-tant role. The share of the services sectorin the economies of the South Asian LDCshas also been on the rise (See Table: 2.6) .

In this respect, the services sectors havethe potential to play an important role inincreasing exports from these countries(See Box 2.2) .

While LDCs account for only 0.5 percent of world ser-vices export, international services are an important as-pect of their economies. At the end of the 1990s, ser-vices accounted for nearly one fifth of their total exportof goods and services. The share of LDCs in worldexports of tourism services jumped from 0.6 percent in1988 to 0.8 percent at the end of the 1990s. Throughoutthe 1990s, tourist inflows to LDCs increased more rap-idly than to the rest of the world. Particularly, a stronggrowth was observed in seven LDCs: Cambodia, Mali,the People’s Democratic Republic of Lao, Myanmar,Samoa, Uganda, and the United Republic of Tanzania.In some LDCs, such as The Maldives, the Gambia,

TOURISM SERVICES IN LDCs: POOR NATIONS, RICH DESTINATIONSBOX: 2.2

Vanuatu and Tuvalu, tourism remained the main exportsector of the economy throughout the 1990s. It hasbeen among the top five sectors in nearly two thirds ofthe LDCs. In the case of The Maldives and Vanuatu,tourism services helped to generate a surplus in the ex-ternal balance of goods and services. In Comoros, Sa-moa and the United Republic of Tanzania, internationaltourism has been the most important source of foreignexchange earning since 1985. For many LDCs, tourismrepresents a viable option for sustainable economic andsocial development, poverty reduction, and beneficialintegration into the global economy.

Source: UNCTAD 2004a

ISSUES FOR COMMENTS

• What are the main lessons from the trade policies initiated by the South Asian LDCs in 1990s?

• Have the South Asian LDCs given enough attention to domestic measures required to benefit fromtrade liberalisation?

• What policies do the South Asian LDCs need to pursue to improve their competitiveness in the manu-facturing sector?

• What are the areas of competitive advantage of the South Asian LDCs?

• How can the South Asian LDCs make optimum use of their hydropower and tourism potential ?

• How can the South Asian LDCs compete in the RMG sector in the post MFA era?

In the services sector, travel andtransport services play an impor-tant role in the economies of Nepaland the Maldives (See Table: 2.7) . Inthe case of Bhutan, hydroelectric-ity accounted for nearly 40 percentof its exports in the year 2002.

The discussions above show thatthe South Asian LDCs have pro-gressively liberalised their econo-mies since the early 1990s, with re-markable growth in exports. Thisis, however, no reason for these

countries to remain complacent, as theirexports are highly concentrated among afew goods and services and thus ex-tremely vulnerable to external shocks. Onthe other hand, the lack of skilled humanresources, inadequate infrastructure andhighly protective developed country mar-kets restrict their potential to benefit fromservices exports.

In the services sector,travel and transport

services play an impor-tant role in the econo-mies of Nepal and the

Maldives.

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The South Asian LDCs continueto suffer from serious social, economic, political and structuralweaknesses, which are the underlying rea-sons behind their inability to benefit fromintegration into the global trading system.Some of these are due to specific geo-physical constraints, such as land-lockedness (e.g. Nepal and Bhutan), somedue to the political situation, such as civilstrife (e.g. Nepal), some due to social fac-tors, such as poor health and education,while some others are infrastructure-re-lated. However, the factors are inextrica-bly intertwined and it is hard to single outany one factor as the reason behind thecondition of the economy. What followsis a discussion of the major weaknessesof the South Asian LDCs hindering theirprospects for better integration into theinternational trading system.

3.1 Lack of Competitive AbilityIn the era of global competition, it is notsufficient for the South Asian LDC com-panies to be competitive only at the na-tional level. It is crucial for them to pos-sess competitive advantages such aseconomies of scale, cutting-edge technol-ogy, marketing strengths, efficient pro-duction and distribution systems, and/orcheap labour to be competitive in the in-ternational trading system (Adhikari andGhimire 2001). The South Asian LDCsdo not have a comparative advantage inany one of these areas except for theavailability of cheap labour. Studies haveshown that the highest revealed compara-tive advantage (RCA) for the South AsianLDCs is in low technology manufactures

and primary products. However, becauseof the low productivity of labour, result-ing mainly from the lack of education,skills and poor health, even this compara-tive advantage has not been fully exploited.Moreover, a country’s ability to gain fromtrade and global integration depends onhow efficiently it is able to produce goodsand services.

What makes matters more complicatedis the fact that there are stark differenceseven among the South Asian LDCs interms of competitive ability and the re-sulting trade performance. Bangladeshand Nepal have been able to increase theirexports of manufactures from US$ 1,671million in 1990 to US$ 6,530 million in2001 and US$ 204 million in 1990 to US$737 million in 2001 respectively. However,there has been no significant increase inthe exports of manufactures of Bhutanand the Maldives during the same period.

According to the Global CompetitivenessReport (GCR) 2003-045 , which analysesthe potential of economies to attain sus-tained growth, Bangladesh’s ranking hasdeteriorated between 2002 and 2003. The2003, growth competitiveness rank (GCI)of Bangladesh was 98 out of 102 coun-tries and business competitiveness rank(BCI) was 86 out of 95 countries (CPD2003). Bangladesh is the only South AsianLDC included in the study. This may bean indication that the other South AsianLDCs are not considered significant play-ers in international trade. This clearlyshows that these economies have a lot ofhomework to do in order to catch upwith the more competitive economies.

W EAKNESSES PLAGUINGTHE SOUTH ASIAN LDCsChapter 3

There are stark differ-ences among the SouthAsian LDCs in terms ofcompetitive ability andthe resulting tradeperformance.

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Supply side constraints are major obstacles to theMaldives’ trade expansion. These include its small andmany dispersed islands, which greatly compound theproblem of regional development; heavy dependenceon fishing and tourism; limited natural resources; small-ness of the domestic market; limited technology; lim-ited trade, industry, and export financing; inadequateskilled human resources; lack of adequate trade rep-resentation network abroad; limited knowledge ofexport opportunities; weak infrastructure, includingtransportation facilities; weak human and resourcecapacity of support institutions; inadequate investmentregime; inefficient legal system; and heavy reliance onimported inputs. These problems are often inter-linked

and compounded, impairing the overall trading envi-ronment. For instance, weak infrastructure, particularlyinadequate shipping facilities, has compounded theproblems of the Maldives’ island dispersion,

Other infrastructural bottlenecks, including compre-hensive but expensive telecommunications and utilityservices, such as electricity, water, and sewerage facili-ties, may be linked to inappropriate technology,uncompetitive market structure, and inadequate invest-ment. In addition, lack of knowledge of export op-portunities and export financing facilities has con-strained the country’s ability to diversify its narrow ex-port base.

Source: WTO 2003

THE MALDIVES: SUPPLY SIDE CONSTRAINTSBOX: 3.1

3.2 Supply Side ConstraintsLack of linkages between productionand services and infrastructure facilities inthe South Asian LDCs have limited theirpotential to specialise in crucial produc-tive sectors and reap the benefit of pro-ductivity gains. Poorly developed humancapital has led to paucity of managerial,entrepreneurial and technical skills, and theability to conduct adaptive research is se-verely constrained by the lack of incen-tives and entrepreneurial zeal. Moreover,poorly developed infrastructure (e.g.transportation, power and storage facili-ties) and support services (e.g. telecom-munications, financial services and othertechnical support service institutions) havefurther hampered the competitiveness ofthe South Asian LDC economies in theinternational market (Adhikari 2004).

Trade support services such as access tobusiness information (particularly on rulesand procedures of export markets); useof information technology; and adviceon standards, packaging, quality control,marketing and distributional channels, anddevelopment of new products are virtu-ally non-existent in the South Asian LDCs.There is also a lack of capacity and re-sources to modernise and reform cus-toms and other government agencies in-volved in trade transactions and simpli-fying export and import procedures(Bhattacharya and Rahman 1999).

Access to finance is a major problem fac-

ing exporters in the South Asian LDCs.This can, in part, be ascribed to the vir-tual absence of capital market in mostof the South Asian LDCs and lack ofinvestor confidence where stock marketsdo exist. Moreover, due to high spreads6 ,and discriminatory lending rates based onrisk perception, access to credit is severelylimited for small borrowers. Low labourproductivity is another major problem. Be-sides lack of skills and poor health, indus-trial enterprises in the South Asian LDCscontinue to lose to their competitors frommore advanced countries because of a highdegree of politicisation of labour(Adhikari and Ghimire). Box: 3.1 presentssome supply side constraints of theMaldives as an example.

The gradual reduction of tariff and non-tariff barriers in international trade hasnow brought the focus to the reductionin cost of doing business. This in turn isaffected by delays in customs, inefficienttransport and port facilities and corruptand inefficient public sector. The cost oftransport for Nepal and Bhutan is ex-tremely high as both countries are land-locked.

3.3 High Export ConcentrationAll the South Asian LDCs depend on afew products for their exports. As shownin Table 3.1, Nepal and Bangladesh de-pend heavily on RMG. Bhutan dependson the export of electricity to India andthe Maldives depends on the export of

Trade support servicessuch as access to

business information andinformation technology,

advice on standards,packaging, quality

control, marketing anddistributional channels

and new product develop-ment are virtually non-

existent in the SouthAsian LDCs.

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RMG and seafood. Both Nepaland the Maldives rely heavily ontourism as well for foreign ex-change earnings. Because theSouth Asian LDCs have notbeen able to diversify their do-mestic production structures,they remain extremely vulner-able to international marketvolatility.

What makes the situation worseis that, while exports of a par-ticular product may constitute alarge share in the export basketof the South Asian LDCs, theycount for relatively little in termsof the international supply andhence are unable to influenceworld prices. Nepal has been ableto export new products to Indiain the late 1990s. However, as noted above,most of these goods are those that attracthigh tariffs in India if imported from athird country and have low value added inNepal. Hence, these exports will signifi-cantly decline once India lowers the tariffrates for imports from other countries.Carpets and RMG dominate Nepal’s ex-ports to countries other than India as Nepalstill lacks a strong manufacturing base andhas limited exportable items.

As already stated above, Bhutan’s mainexportable item is electricity. But the ex-cessive dependence on hydroelectricityand concentration in the Indian marketmake the Bhutanese economy vulnerableto political and geo-structural distur-bances. Likewise, though the Maldives hasbenefited from the growth of its tour-ism industry, the precarious nature of thisindustry makes the Maldivian economyvulnerable to external shocks.

3.4 Implementation ProblemsWTO membership requires countries tofulfill two types of commitments, onerelated to reducing trade barriers andother related to regulations and processesin the domestic economy such as techni-cal standards, SPS standards, customs pro-cedures and regulations and intellectualproperty law. At the time of signing the

Uruguay Round (UR) accord, LDCs weregiven certain transitional periods for theimplementation of most of these agree-ments, such as the Agreement on TradeRelated Aspects of Intellectual PropertyRights (TRIPS) and SPS. However, in spiteof the longer period available, implemen-tation will be an onerous task for theSouth Asian LDCs as there is a severelack of capacity to carry out these mea-sures.

Many LDCs have not been able to fullyimplement several WTO agreements.However, arguing for the need to extendthe transitional periods for LDCs, a re-port by UNCTAD states that such ‘time-bound transitional periods’ given to LDCshave serious shortcomings. The reportsays: “Because of their limited duration,the transitional periods have limited im-pact on capacity creation for trade andproduction…. Such time-bound deroga-tion from obligations also assumes the ex-istence of both institutional and resourcecapacities in LDCs to take maximum ad-vantage of the relevant provisions. Formost South Asian LDCs these capacitiesdo not exist (cf SUNS, n.d).

It has been estimated that the cost ofimplementing three of the UR agree-ments, namely TRIPS, SPS and customsvaluation, for an advanced developing

TABLE: 3.1

CHARACTERISTICS OF SOUTH ASIAN LDCS’ EXPORTS

Country Concentration Concentration Market PrincipalIndex at HS-4 Index at HS-6 Diversifi- Products

level (1) level (2) cation (3)Bangladesh 32.6 24.1 2 RMG, leather

Bhutan 55.3 55.3 3 Hydroelectricity

Maldives 57.0 51.3 4 RMG, seafood, fish

Nepal 54.6 46.6 3 Carpets, RMG

Source: WTO 2002a

1. Share of top 3 exports in terms of value in total exports based on HS–4 digit classifi-cation

2. Share of top 3 exports in terms of value in total exports based on HS–6 digit classifi-cation

3. Defined as the number of different countries to which an LDC exports 90 percent of itsproducts

Many LDCs have notbeen able to implementseveral WTO commit-ments related to reduc-ing trade barriers andregulations and pro-cesses in the domesticeconomy.

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country like Mexico amounts to aroundUS$ 130 million (Finger and Schuler1999). This cost is more than the entireannual budget of many LDCs. The costwould probably be much higher inLDCs as one has to begin further fromthe required standards. In Box: 3.2 a sum-mary of the cost of implementing selectWTO agreements in Jamaica is given asan example.

At the time of accession to the WTO,Nepal submitted a detailed action plan forimplementing the SPS measures. The ac-tion plan estimates that it will cost US$ 12.5million to introduce an improved SPS re-gime. Similarly, the Nepalese governmentestimates that it will need US$ 12 millionover a five-year period to comply with theAgreement on Technical Barriers to Trade(TBT). This would cover procuring equip-

ment (including US$ 10 million for cali-bration equipment), training staff, and pur-chasing consulting services. Similarly, it isestimated that it will cost between US$ 4to US$ 32 million to fully implement in-tellectual property rights (IPR) laws inNepal (MOICS/HMGN 2003). Duringthe Trade Policy Review 2003, the Maldivesraised concerns regarding the implemen-tation of anti-dumping, safeguards, SPSand TRIPS agreements. The Maldives willhave difficulty in implementing the TRIPSAgreement by the end of 2005, as no IPRlegislation exists in the country. Similarly, itis estimated that the drafting and imple-mentation of new IPR laws in Bangladeshwill require a one-time cost of US$ 250,000and annual cost of US$ 1.1 million (Fin-ger and Schuler 1999).

Non-compliance of notification obliga-

The TRIPS AgreementImplementation of the TRIPS Agreement in Jamaicawill require an initial public sector investment of atleast US$ 1 million. This is associated with upgradingand modernising the domestic IPR system.Modernisation involves the revision of existing laws(on, for example, trademarks and patents), enactmentof new laws on layout design, geographical indica-tions, plant varieties, etc and the development ofproper administrative structures to implement intel-lectual property (IP) procedures and policies as re-quired by the legislation and the government.

A new Intellectual Property Office (IPO) will admin-ister the laws required by the TRIPS Agreement. Ap-proximately US$ 437,500 was already allocated to theexisting IPR structures; another US$ 875,000 - US$1.25 million will be required to develop the JamaicaIntellectual Property Office (JIPO) so that it coversall TRIPS areas. The estimated cost required for es-tablishing the JIPO comes to about US$ 775,000 ayear over five years, after which the office is expectedto be nearly self-sufficient. An additional estimatedUS$ 250,000 is needed to jump-start the implemen-tation of major enforcement programmes, includingborder controls.

Agreement on SPS MeasuresImplementation of the SPS Agreement will require atotal of US$ 7.6 million. This includes the costs ofrevising current laws and regulations to make them

WTO-compliant (US$ 200,000); establishing an Ag-riculture Health and Food Safety Authority to ad-minister and coordinate SPS activities (US$ 6 mil-lion); upgrading and equipping existing laboratoriesin areas such as pest identification, pesticide residueanalysis, and microbiology, and providing training inlab methodology, quality management, and use ofequipment (US$ 500,000); conducting pest surveys,surveillance, and monitoring (US$ 150,000); creatingand strengthening inspection facilities at ports of en-try and exit to serve all agencies involved in the certi-fication of food imports and exports with provisionfor additional staff, training, and equipment to detecthigh-risk materials in shipments (US$ 500,000); andfunding for participation in international standard-setting meetings, working groups, and the Commit-tee on SPS Measures (US$ 30,000). Many of thesecosts will be recurring in nature.

Agreement on Customs ValuationThe estimated initial cost of implementing the Agree-ment on Customs Valuation is US$ 840,000, mostof which is needed for training (US$ 120,000), com-puting equipment and databases (US$ 50,000) andincreased staffing (US$ 600,000). Staffing costs willbe recurring. (The estimates do not take into accountthe need for and cost of ancillary investments andreforms that may be required to support implemen-tation.)

Source: The World Bank 2002b

COST OF IMPLEMENTING SELECT WTO AGREEMENTS IN JAMAICA

BOX: 3.2

The Nepalese govern-ment has estimated thatfor Nepal it will cost US$12.5 million to introduce

an improved SPS regimeand US$ 12 million over

a five-year period tocomply with the TBT

Agreement.

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tions has been yet another obvious weak-ness. The WTO system puts great empha-sis on transparency, which requires mem-bers to notify the WTO about their tradepolicy measures. Altogether there are 215notification obligations. LDCs have laggedfar behind other countries in meeting theseobligations, with a compliance rate of lessthan 16 percent (Ghimire 2001). TheSouth Asian LDCs will also have prob-lems in fulfilling such obligations.

3.5 Lack of CapacityAn analysis of the lack of capacity re-veals that three issues figure prominently.The first relates to the capacity to imple-ment the WTO Agreements discussedabove. The second relates to the capacityto understand the texts of the differentWTO agreements and their implicationsfor the country. The third issue relates tothe capacity to negotiate effectively in theincreasingly loaded agenda items of theWTO. The latter two issues will be dis-cussed in this section (Adhikari 2004).

Most WTO agreements reflect the toughnegotiations that went on during thedrafting process. Most of these negotia-tions took place between the developedcountries, although some developingcountries too played a role. The finalagreements are highly legalistic7 andwould require a well-trained trade law-yer to understand these agreements andinterpret them. However, most SouthAsian LDCs have a shortage of such law-yers. Officials at the commerce ministries,who in most cases receive no other ex-posure than attending training courses ontrade policy offered by the WTO Secre-tariat, are not likely to be able to under-stand all the provisions relating to suchcomplicated agreements of the WTO suchas those on agriculture, SPS, TBT, TRIPSor anti-dumping (Adhikari 2004).

The capacity of the South Asian LDCrepresentatives to participate in the regu-lar negotiation process that takes place atvarious Committees of the WTO on aregular basis and to negotiate the built-in-agenda items and new issues is severelyrestricted for a number of reasons. The

first one again relates to the lack of un-derstanding of the issues at stake. Thesecond reason is the lack of institutionalcapacity of these countries. For example,the Maldives and Bhutan do not have apermanent mission in Geneva, while theNepali and Bangladeshi missions are toosmall and are unable to follow the nu-merous WTO proceedings. Hence, it isquite certain that the South Asian LDCswill face serious difficulties when negoti-ating at the level of WTO.

3.6 Exclusion from theKnowledge Based EconomyOne of the major factors of productionin the ‘new economy’ is knowledge. It cangreatly enhance the effectiveness of theother factors of production – land,labour and capital. Knowledge BasedEconomy (KBE) is a general phenom-enon, encompassing the exploitation anduse of knowledge in every productionand service activities, and not just thoseclassified as high-tech or knowledge in-tensive (Kelegama 2001).

Strong telecommunications and informa-tion infrastructure is a prerequisite for aKBE. An innovation system, effectivehuman resources development activitiesand a business environment supportiveto enterprise are some other requisites forconverting an economy into a KBE. Thesefactors are generally missing in the SouthAsian LDCs.

The South Asian LDCs are in fact net im-porters of technology and new products,and it is evident that the issue of technol-ogy transfer has not moved beyondrhetoric8 . This puts them in an extremelydisadvantageous position in the globaleconomy, especially since knowledge hasproven to be a critical element in the de-velopment of any economy today.

3.7 Other WeaknessesOut of the four South Asian LDCs,Nepal and Bangladesh have serious po-litical and governance problems. Nepalhas been facing a violent Maoist insur-gency for about a decade, and Bangladeshis plagued by political instability. Similarly,

Knowledge BasedEconomy (KBE) is ageneral phenomenon,encompassing theexploitation and use ofknowledge in everyproduction and serviceactivities, and not justthose classified as high-tech or knowledgeintensive.

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The Index of Economic Freedom, published by TheHeritage Foundation, uses a relatively objective and trans-parent scoring system to rate countries on a 1-to-5(good-to-poor) scale, under a series of headings. WhileNepal rates relatively well to critical macro indicators,such as monetary policy, where it scores two for lowinflation environment it rates poorly on investment-related indicators. The score for capital flows and for-eign investment is four (high barriers), property rights isfour (low level protection) and regulation is four (bu-reaucratic delays, inefficiency, and pervasive corruption),thus contributing to an overall score of 3.5.How can Nepal move this score closer to one or toeven 2.5, as in such key competitor countries as Cam-bodia, Uganda, or Madagascar, which are able to at-tract much FDI and are increasing their world share?Nepal can take the following steps:

Facilitate Business Approval

n Review functions of Board of Investment (BoI), In-dustrial Promotion Board (IPB), Trade PromotionCentre (TPC), etc to rationalise to a maximum ofthree bodies addressing investment approval, con-cessions/facilitation, and trade and investment pro-motion.

n Implement policy of automatic business approvalwhere license requirements are met.

n Amend the Labour Act of 1992 and other mea-sures that make labour markets rigid.

n Implement bankruptcy and foreclosure laws to re-duce investor risk.Attract FDI

n Remove accounting, consulting, marketing, and allbusiness support services from the negative list forFDI.

n Review other items on the list.n Improve infrastructure.n Clarify regulations.n Publish amended versions of the Industrial Enter-

prises Act 1992 and the Foreign Investment andTechnology Act 1992 to fully reflect changes broughtabout by the Income Tax Act 2002 and any otherpolicy changes on incentives.

n Improve government–business relations.n Improve tax and customs administration.n Establish a consultative government-business body

to gather business opinion on government policyimplementation, beginning with required changes toimplementation of the tax code.

Source: MOICS/HMGN 2003

HOW TO IMPROVE NEPAL’S INVESTMENT SCORE?BOX: 3.3

the lack of democratic culture and plu-ralism is likely to affect economic growthin all the South Asian LDCs. Opennessto trade and investment and leaving ev-erything at the mercy of market mecha-nism do not guarantee economic growth.Institutions guaranteeing, inter alia, ad-equate protection of property rights,regulation to prevent fraud and decep-tions, macroeconomic stabilisation, socialinsurance and conflict management arenecessary to fully reap the benefit of open-ness. As an example, Box 3.3 illustratesthe case of Nepal. As Rodrik (2002) ar-gues, “All well-functioning market econo-mies are ‘embedded’ in a set of non-mar-ket institutions without which markets can-not perform adequately”. However, suchinstitutions are either non-existent or non-functional in invariably all the South AsianLDCs.

In addition, bribery and corruption in highoffices, which is a recurrent phenomenonin the South Asian LDCs, has contrib-

uted significantly towards holding backthe development prospects of theseeconomies (Adhikari 2004). According tothe Corruption Perception Index pro-duced by Transparency International9 , in2003, Bangladesh – a long time leaderof the LDC camp in the WTO – fig-ured at the top of the list. This problemis exacerbated by the fact that these coun-tries lack credible institutions to tackle cor-ruption issues.

Openness to trade andinvestment and leavingeverything at the mercyof market mechanism donot guarantee economicgrowth.

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ISSUES FOR COMMENTS

• Should the South Asian LDCs focus on few areas to increase their competitiveness? If yes, which arethe areas where they need to focus?

• How can the South Asian LDCs effectively utilise international technical assistance to address theirsupply side constraints?

• Is it too late for the South Asian LDCs to become KBEs?• What do the South Asian LDCs need to do to work in a coordinated manner involving all the relevant

stakeholders to benefit from international trade?

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The international community hasgiven due recognition to theproblems inherent to LDCs. Assuch, it has been assisting LDCs to pre-pare for better integration into the inter-national trading system. This chapter con-centrates on some of the major effortsundertaken in this process. The efforts fallinto three categories: S&DT, improvedmarket access and technical assistance.

4.1 Special and DifferentialTreatmentAnalysts are divided on whether or notS&DT is the right policy to facilitate theintegration of developing countries andLDCs into the international trading sys-tem. According to Srinivasan (2000), thecontinued insistence of developing coun-tries on S&DT and their reluctance to takepart in the GATT negotiations as equalpartners were the main reasons for theirmarginalisation from the global economy.However, developing countries, as a group,insisted on S&DT, asserting that applyingthe same rules to unequal trading coun-tries could be disastrous (Adhikari 2004).

It is true that countries that have achievedlong-term economic growth have usu-ally combined the opportunities offeredby world markets with a growth strat-egy that mobilises the capabilities of do-mestic institutions and investors (Rodrik2002). Therefore, well-designed, effec-tive, enforceable and time-bound S&DTis necessary for the successful integrationof the South Asian LDCs into the inter-national trading system. Some develop-ing economies, which are now well inte-grated into the global economy, were

major users of the preferential market ac-cess opportunities in the past and someof them (such as Thailand, South Koreaand Brazil) are reluctant to ‘graduate’ to ahigher status.

The Preamble to the WTO Agreementsrecognises the special provisions that de-veloping countries need in order to en-sure a share in the growth in internationaltrade commensurate with their economicdevelopment needs. The preambles tomany of the UR agreements contain simi-lar language. The references to LDCs aremore generous. It is stipulated that LDCswill only be required to undertake com-mitments and concessions to the extentconsistent with their individual develop-ment, financial and trade needs or theiradministrative and institutional capabili-ties. However, sincere initiatives to trans-late these broad objectives into concreteaction are wanting.

The Enabling Clause of 1979 providedthe basis for “special treatment of LDCsin the context of any general or specificmeasures in favour of developing coun-tries”.10 The UR Agreements contain 17provisions that apply specifically to LDCmembers, in addition to those that areapplicable to all developing members(WTO 1999). These include provisionsfor more extended transitional periodsthan those applicable to developing coun-tries for the implementation of agree-ments on TRIPS, SPS and Trade RelatedInvestment Measures (TRIMs). TheAgreement on Agriculture (AoA) ex-empts LDCs from all reduction commit-ments, while the Agreement on Subsidiesand Countervailing Measures (ASCM)

EFFORTS MADE BY THE INTER-NATIONAL COMMUNITYChapter 4

Unless well-designed,effective, enforceable and

time-bound S&DTs areprovided to the SouthAsian LDCs, they will

continue to fail tointegrate their economies

into the internationaltrading system.

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places no restriction on the ability ofLDCs to grant export subsidies (thoughit does require them to phase out im-port substitution subsidies, they are givena longer time frame than other develop-ing countries). The GATS Annex on Tele-communications contains a provisionseeking to encourage private suppliers totransfer technology and training to LDCswith the aim to develop the telecommu-nications sector (Michalopoulos 2000).

Inspite of the S&DT provisions con-tained in various WTO agreements,LDCs are being increasinglymarginalised. The ‘measures’ in favourof LDCs have not been of much helpto them due to the gap between pre-scription and practice. There are threemain reasons for this. First, developedcountries have not shown willingness tomeet their obligations because these pro-visions are not legally binding and aremerely ‘best endeavour’ clauses. This factwas well recognised in the UNCTADreport “The Least Developed CountriesReport 2004”(See Box 4.1). Secondly,LDCs are too weak to implement theirside of the programme. And finally, de-veloped countries and multilateral agen-cies have, by and large, failed to cometogether to provide effective technicalassistance to LDCs.

Kessie (1999) analyses five sets of S&DTprovided to LDCs in the UR and comesto the conclusion that the provisions per-mitting longer implementation periodsand the assumption of lesser obligationsare the only enforceable provisions thatare being applied in practice.11 The otherprovisions are nothing more than looselydrafted ‘best endeavour’ clauses.

4.2 Market AccessImproved market access for goods andservices originating in LDCs is muchneeded for any effective integration ofLDCs into the world trading system.Realising this need, many developedcountries have offered zero tariff formost LDC exports.

The idea of providing zero tariff accessfor LDCs was conceived at UNCTAD

VIII, held in Cartagena in 1992. The ideawas reborn in the Singapore Ministerialof the WTO, when the then WTO Di-rector-General made a plea to membersof the WTO to consider the proposalseriously. But the response to his proposalwas only lukewarm. During the prepa-ration for the Third Ministerial in Seattle,the EU formally launched a proposal di-rected at "entering into a commitment toensure duty-free market access not laterthan at the end of the new round of ne-gotiations for essentially all products ex-ported by LDCs”. Following the failureof the Seattle Ministerial, the proposal forgranting duty-free and/or quota-free ac-cess for ‘essentially all’ products was dis-cussed in the context of various interna-tional forums and included in theUNCTAD X Bangkok Plan of Action(Inama 2002).

Finally, just two months before the ThirdUN Conference on LDCs( LDC-III) inMay 2001, the EU made its “EverythingBut Arms” (EBA) proposal, which pro-posed duty-free treatment for all importsfrom LDCs except arms, and, for thetime being, rice, sugar and bananas. LDCswere jubilant, in hope of better marketaccess opportunities, but little did theyknow that stringent ROO requirementsand NTBs could still hamper their trad-ing prospects (Adhikari 2004).

At present, the effectiveness of S&DT appears to be underminedby the fact that a good number of S&DT provisions are of non-binding nature, and also by the fact that the right to such provi-sions is undermined by the process of accession to the WTO,which requires LDCs to negotiate all trade rules, including all S&DTprovisions, on an individual basis. In order to increase the utilityand effectiveness of the different S&DT provisions, it thereforeappears important that the provisions be turned into rights forLDCs and obligations for other countries. And they must be grantedin an automatic manner to all LDCs that decide to become mem-bers of the multilateral trading system. It is also vital that they beactually statements of intent. Otherwise, they will not be effectiveand will not achieve their objectives.

Source: UNCTAD 2004a

STRENGTHENING SPECIAL ANDDIFFERENTIAL TREATMENT

BOX: 4.1

The LDCs were jubilantwith the EBA initiative, inhope of better marketaccess opportunities, butlittle did they know thatstringent ROO require-ments and NTBs couldstill hamper their tradingprospects.

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much higher (eg. 85 percent on second-stage fruit products entering the EU, 82percent on first-stage sugar products en-tering Japan and 28 percent on second-stage sugar products entering the US(Cuddy 2001)). Tariff peaks are also amajor problem for LDCs. The boundtariffs on certain agricultural products inthe Quad countries are as follows:

Canada : Butter (360 percent), cheese (289percent), eggs (236.3 percent)

E U : Beef (213 percent), wheat (167percent), sheep meat (144 per-cent)

Japan : Wheat products (388.1 per-cent), wheat (352.7 percent),barley products (361 percent)

US : Sugar (244.4 percent), peanuts(173.8 percent), milk (82.6 per-cent) (Das 1999)

Looking at the utilisation rates of the ex-isting preferences granted by various de-veloped countries, one finds that LDCsstill face a host of tariff barriers on ex-ports that are supposed to be coveredby the ‘preferential’ arrangement. Accord-ing to Inama – If one considers that amajor part of current LDC exports stillface MFN duties inspite of the availablepreferences, action should be taken toeliminate the remaining obstacles to fullaccess by expanding product coverageand increasing utilisation rates of avail-able trade preferences (Inama 2002).

Inama further maintains that the fourmajor factors that affect the utilisation ofunilateral trade preferences are:

• Lack of security of access, due tounilateral and optional nature ofpreferences, which can be elimi-nated at the discretion of the pro-viders.

• Insufficient product coverage, dueto exclusion of certain ‘sensitive’sectors from the preferencescheme by the providers.12

• ROO that is excessively stringent inlight of the industrial capacity ofLDCs.

Trade restrictions imposed by rich countries are costing the world’spoorest a staggering US$ 2.5 billion a year in lost foreign exchangeearnings. At the same time, aid to the developing world has fallento its lowest level since the early 1970s.

On trade, the industrialised countries have operated a policy ofhighway robbery masquerading as market access preferences. TheUS and Canada are the worst offenders. For example, Bangladeshloses US$ 8 from trade restrictions for every US$ 1 it receives inUS aid.

Canada’s record on market access for LDCs is downright embar-rassing. Tariff peaks in excess of 15 percent affect nearly one thirdof LDC exports to Canada, compared to less than four percentof average LDC exports to Europe, the US, Canada and Japan.Average duties in Canada on LDC products covered by tariffpeaks are 28 percent – almost six times the average Organisationfor Economic Cooperation and Development (OECD) tariff.

Though the EU’s EBA proposal for providing duty-free and quota-free access to LDC products represented a bold step in the rightdirection, intensive agribusiness lobbying resulted in key agricul-tural items - rice, sugar and banana - being dropped. EBA hasnow been mutated into “Everything But Farms”.

Source: www.oxfam.org

DISTORTIONS IN MARKET ACCESSFACILITIES

BOX: 4.3

The existing preference schemes have notbeen effective because they are complex,temporary in nature, and contain numer-ous exclusions in areas of key interest toLDCs. Some have even questioned theintention of developed countries (See Box4.2) . In addition, LDCs find it difficult tocompete with the more advanced coun-tries, which are also eligible for preferen-tial treatment. In the US, for example,only around one percent of imports en-tering under the Generalised System ofPreferences (GSP) come from LDCs(Sugisaki 1999).

Among the tariff barriers, the most per-nicious one is tariff escalation, which dis-courages LDCs from advancing along theprocessing chain where much of the valueaddition takes place. Food and Agricul-ture Organisation (FAO) studies haveshown that tariff escalation even in thepost UR era has averaged 17 percent inthe EU, the US and Japan. In many prod-ucts of interest to LDCs, tariffs have been

Among the tariff barriers,the most pernicious oneis tariff escalation, whichdiscourages LDCs from

advancing along theprocessing chain where

much of the valueaddition takes place.

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• Lack of understanding or awarenessof the preferences available and theconditions attached thereto, leadingto the application of MFN ratesrather than preferential ones.

Market access opportunities for LDCsare not only impeded by tariff barriers,such as tariff escalations, but also byNTBs, such as the requirements to meethealth standards. While standards require-ments to protect human, animal and planthealth are justifiable, the use of the sameto protect domestic markets is againstthe interest of the South Asian LDCs(See Table: 4.1) .

4.3 Technical AssistanceIt is beyond the capacity of the SouthAsian LDCs to implement many of theWTO agreements, particularly, Agreementon Customs Valuations, TRIPS, TBT andSPS. They also lack the capacity to de-velop and implement trade policies.Moreover, their capacity to participate invarious WTO negotiations is also severelylimited.

In response to the complexity of LDCs'trade-related problems, the IntegratedFramework (IF) was inaugurated in Oc-tober 1997 at the WTO High Level Meet-ing on ‘Integrated Initiatives for LeastDeveloped Countries' Trade Develop-ment’. The IF was launched by six multi-lateral institutions – International Mon-etary Fund (IMF), United Nations De-velopment Programme (UNDP), theWorld Bank, ITC, UNCTAD and theWTO, which, with their distinct compe-tence, could complement each other todeliver greater development dividends toLDCs in the multilateral trading system.

The IF has two objectives: (i) to ‘main-stream’ (integrate) trade into the nationaldevelopment plans such as the PovertyReduction Strategy Papers (PRSPs) ofLDCs; and (ii) to assist in the coordinateddelivery of trade-related technical assis-tance in response to needs identified byLDCs.

The IF was revamped after a review in2000. The revamped IF was initiallyimplemented on a pilot basis in Cambo-

Product

Bananas

Strawberries, applesand pears

Beef

Pork

Sausages

Chicken processed

Fish

Fresh flowers

Tomatoes, chilled

Tomato paste

Potatoes

Courgettes

CucumbersOrganic products

Problems

Health safety: Pesticide residue levels. Difficulties in complying with EU standards,lack of technical knowledge.

High cost of meeting SPS standards.

High cost of meeting and administering health regulations, and difficulties and costof testing procedures.

Difficulties in meeting environmental and social standards.

Health and safety regulations - maximum pesticide residue levels, lack of technicalassistance to administer standards.

High cost of complying with the EU standards and definitions.

TABLE: 4.1

PRODUCTS AND MEASURES IDENTIFIED BY DEVELOPING COUNTRIES THAT AFFECTMARKET ACCESS

In response to the trade-related problems of theLDCs, the IF waslaunched in October1997 at the WTO HighLevel Meeting but itsimplementation has beenfar short of expectation.

Source: WTO 2002a

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A lot of enthusiasm was generated among LDCs when the IFcame about. As a direct result of that, almost 40 countries pre-pared their need assessment papers. Bangladesh was no exception.It prepared its need assessment paper with the active involvementof private sector, civil society and government line ministries. Thefinancial commitment needed, as prescribed in the paper, was tothe tune of US$ 300 million. After several reviews of the needassessment paper, Bangladesh requested for a round table meeting.When the round table was finally scheduled (with representativesof country’s donors, core agencies, etc), the experience was bitterto say the least. The representatives of the core agencies were ei-ther non-committal in terms of outlay of funds or, even worse.Some of the delegates of the donor agencies did not even knowwhat IF was! Ones they knew of it, they then did not know whetherIF was to be a part of their existing commitments to the countryor new funding was needed!

Source: www.cpd.org

BANGLADESH’S EXPERIENCE WITH IF

BOX: 4.3

ISSUES FOR COMMENTS

• Has the international community done enough to improve LDCs integration into the world economy?

• How can S&DT provisions be made more effective?

• What can the South Asian LDCs do to force developed countries to remove tariff barriers as well asNTBs on exports of their interest?

• What can be done to improve the effectiveness of the IF?

dia, Madagascar and Mauritania. In lightof the lessons learned from the three ini-tial pilots, the pilot scheme was extendedto the second wave of 11 LDCs. In ad-dition, implementation of follow-up ac-tivities to the IF Round Table Meetingsheld under the ‘old IF’ is on-going (inBangladesh, Gambia, Haiti, Tanzania, andUganda).

The criteria for assessing the pilot candi-dates are as follows: (i) demonstration ofstrong commitment by the governmentto integrate trade into its national devel-opment strategy such as its PRSP; (ii) thepreparatory stage of a development plansuch as PRSP; (iii) the preparatory stageof upcoming meetings of the WorldBank Consultative Group or UNDPRound Table; and (iv) conducive opera-tional country environment (eg. level ofinfrastructure, resource base of the World

Bank/IMF and UNDP country offices,donor response, and the pace of do-mestic reform).