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January 8, 2012 By: nirmal
Academic scholars state that less developed countries can move up the development ladder by initially specializing in exporting low-technology, unskilled, labor-intensive manufactures. The hypothesis of a "fallacy of composition" states that if a number of developing countries simultaneously try to increase their exports in a range of similar products, many of them could end up losing from insufficient foreign demand and possibly depressed international prices. The hypothesis mostly applies to developing countries such as Nepal. Since Nepal exports mostly low-technology products to industrialized countries, it competes with exporters from other developing countries rather than with industrialized country producers.
Based upon the above posited "fallacy of composition", Nepal can move up the "ladder" once it develops more technologically sophisticated, skill-intensive products in the future. For Nepal to maintain continued exports to industrialized countries and not be in direct competition with exporters from other developing countries, it needs to diversify its exports. If Nepal's exports are not diversified, then the country's manufactured goods become highly substitutable in the world market and will also be in direct price competition with other developing countries' goods.
Nepal's export council is looking to stimulate the national economy by providing much needed incentives for people to export. The export council of Nepal state in their website that foreign exchange earnings will be increased and opportunities for gainful employment will be created by identifying and increasing the production of new products.
Besides ready-made garments, handicrafts and woolen goods, other products such as tea, both orthodox and CTC, large cardamom, coffee, floriculture products, non-timber forest products (NTFP), hand-made paper have been identified as having comparatively high potential, but there is no promotional package to boost their exports (The Rising Nepal, 2009). The government of Nepal needs to provide incentives such as subsidies to exporters of those high potential goods or allow entrepreneurs to capitalize on this market opportunity.
In the past decade, Nepal's terms of trade have worsened and has had an increasing trade deficit. If Nepal continues exporting the manufactured goods that it has been for quite some time now, it can lead to steadily declining terms of trade over time. Thus recognizing new and skill-intensive products and services that have export potential and also embracing industrialization, Nepal can move away from being export biased.
Export diversification has been recommended as a long-term policy response towards stabilizing export earnings of commodity-dependent countries (Marhubi, 1998). Nepal has traditionally exported goods such as ready-made garments, handicrafts and woolen goods. In the long run, diversifying its exports to the developed countries (DCs), Nepal can achieve major economic growth. The benefits of export-led development have been greater the less a nation relies on exports of basic commodities (Kavoussi 1984; Singer & Gray 1988; World Bank 1987 & 1991). Entrepreneurship accelerates the process of reallocating resources and adopting production and management know-how in industries with export potential (Preusse 1988). Various export incentives measures have been used in Nepal. Cash grants, customs duty and sales tax duty drawbacks on raw materials, pre-export credit, and the duty drawback scheme were all used to encourage export growth in Nepal since 1983.
New companies in Nepal that can arrange the exports of tea, both orthodox and CTC, large cardamom, coffee, floriculture products, non-timber forest products (NTFP), and hand-made paper will help increase the country's export industry. Government needs to help develop more technologically sophisticated and skill-intensive products for Nepal to maintain or increase its exports to industrialized countries. Government also should provide proper business tools to start-up export businesses and expedite the process of business registration. Having the government possibly reduce export costs will provide entrepreneurs an incentive to open a business.
Some of the ways to uplift Nepal's economy are through the growth of entrepreneurship and less bureaucracy in starting businesses. Embracing a strategy of export diversification will help a developing country like Nepal become competitive in the world market and possibly affect its terms of trade. The collaboration between Nepal's government and export oriented businesses is essential in making Nepal a strong competitor internationally and stronger domestically.
http://www.parakhi.com/blogs/2012/01/08/improving-on-nepals-trade-imbalance-part-ii