In my latest column, I discuss Nepal’s exports sector; what specific products Nepal was exporting, is exporting, and could produce and export with comparative advantage. For this column, I rely on the analysis of product space and a study I had done before.
The exports sector is rapidly loosing its foothold in the economy, leading to closure of firms, unemployment, and loss of revenue needed to finance key development projects. With hopes of reviving rapidly declining exports starting 1997, the government is lobbying for trade treaties with the US and regional partners. Before wasting time and resources in signing trade pacts that have little relevance to Nepal’s exports sector, we need to seek answers to fundamental questions regarding our exports capability.
How competitive are Nepali products in the international market? Do we still have or can produce goods that could be exported with comparative advantage? How connected is production structure of different products, i.e. their ‘proximity’? Can we use the existing inputs (labor and capital) used in production of one good to produce a new exportable product (i.e. ‘nearby’ good)? These questions need unequivocal answers before we sign new trade treaties. Remember that no matter how many concessions we give and trade treaties we sign, if they do not aid our exports sector, it is of no use. Just opening up the economy does not mean that our exports and economy will grow. What we export determines the future of Nepal's exports sector and economy.
Studies have shown that assets and capabilities needed to produce a particular kind of product are imperfect substitutes for the inputs needed to produce other goods. Though the degree of asset specificity needed for the production of imperfect substitutes differ, they nevertheless can be used in one way or the other in production of both goods. A country's capability to produce one good is somehow tied with the installed capability in production of other similar goods, i.e. 'nearby goods'.
Sustained growth in exports is achieved by upgrading production of existing items to production of products that are not wholly different from them in terms of the use of inputs. It is easier to upgrade production if there is a high degree of input and structural complementarities in production of existing goods and services. The overall connectedness of an economy’s export basket, i.e. similarity in use of inputs (labor and capital) used to produce different exportable goods, affects the pace of upgrade and structural transformation of the economy.
How 'connected' are inputs of the products produced in Nepal? Are there any 'nearby' exportable products? Answers to these questions would reveal what products Nepal is exporting and, importantly, could export with comparative advantage.
Analysis of Nepal's 1985 'product space', which is a network of relatedness between products, shows that it had comparative advantage in production of labor-intensive goods. Specifically, it had comparative advantage in production of trousers, breeches of textile fabrics; skirts of textile fabric for women; undergarments of textile fabrics for women; textile men shirts; other textile outer garments; sacks and bags of textile materials; twine, cordage, ropes & cables; and women dresses of textile fabrics. In garments and textiles sector, the two most promising products, based on global market size and proximity of products, were undergarments knitted of cotton and footwear. Furthermore, the most promising products for the upgrade of export mix were in machinery industry. The products that had relatively large market size abroad and a fair degree of proximity in domestic production structure were electronics microcircuits; radio broadcast receivers for vehicles; and photographic cameras, parts & accessories.
Nepal was producing very few agricultural goods with comparative advantage. The agricultural goods that had comparative advantage were leather of other bovine cattle & equine leather; leather or other hides or skins; shellac, seed lac, stick lac, resins, gun resins, etc; art, collector species & antiques; fresh or dried grapes; fixed vegetable oil; beans, peas, lentil & other legume vegetables; and other cereal meals & flours. The proximity between agricultural products was very low, signaling the fact that ‘connectedness’ in this sector was weak and transition to new exportable agricultural products was difficult.
In 2000, the number of products produced with comparative advantage was higher than in 1985. In fact, pretty much all products that could be manufactured using the installed capacity used in production of comparatively advantageous goods in 1985 were produced in 2000. This means that there indeed was some upgrade in Nepal's exports mix. Some of the products were undergarments excluding shirts of textile fabrics; other outer garments & clothing knitters; other made up articles of textile materials; blouses of textile fabrics; suites & customs made of textiles for women; knitted jerseys, pullovers twin sets; and knitted synthetic undergarments, among others products. Not surprisingly, due to lack of nearby products and low proximity, the agricultural sector did not contribute new exportable product in 2000.
Analysis of Nepal’s latest product space shows that the following products are 'nearby' and could be produced and exported with comparative advantage: prepared or preserved crustaceans; frozen fish fillets; pyrotechnic articles; potatoes; electrical transformers; candles & matches; sinks & wash basins; fresh and chilled fish; statuettes & other ornaments; travel goods, handbags, briefcases and purses; frozen vegetables; footwear; building & monumental stone; art & manufacturing of carving or moulding materials; leather apparel & clothing accessories; manufactured goods; oranges, mandarins, clementines and other citrus; and temporarily preserved fruits, among other products. Based on domestic total production and global market size, there are very few promising exportable agricultural products. Note that the existing products in the export basket are outside of the clusters of goods that would enhance value-addition and utilize sophisticated technology.
Between 1985 and 2000, there was some form of transformation in production structure of the economy. Unfortunately, during this decade, the economy failed to keep up with the previous pace of transformation. Why? It is potentially because of strong constrains such as a lack of adequate infrastructure and low appropriability arising from labor disputes, corruption and strikes. Unless these constraints are addressed with decisive public policy, it will be hard to produce new exportable products and accelerate economic transformation.
[Published in Republica, February 28, 2010, pp.6]