Why Should Nepal Open Up? A General Case for Developing Countries

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Globalization has become a reality in spite of protectionist policies prevalent in many countries of the world. It is no surprise that a man from Nepal can use the GM automobiles while a man from USA is able to furnish his house with the high quality carpets from Nepal. Owing to high competition among the global giants, the price of major products has gone down. Consumers have never experienced such a wide variety of products and price ranges ever before.

However, this is not the end of the story for all the developing countries. Many industries in the developing countries failed to compete with the international giants, and subsequently they went out of the market. This triggered the unemployment problem that already engulfed these nations. Yet, empirical evidences show that open economies have progressed more than the relatively closed economies. Hence, there is no doubt that developing countries should open their economies if they are to prosper in the long run.

Recent growth rates in many developing countries are evidences to the fact that globalization favors growth. In fact, the export share of developing countries in textiles, one of the major exports of developing countries, rose from a mere 15% to 50% from mid-1960s to 1998 while that of clothing rose from around 25% to 70% during the same period (IMF). This is just an example from among hundreds of others. To develop an economy, a country has to identify the products in which it has a comparative advantage and hence, specialize in those products.

International trade is based on comparative advantage and specialization. A country has to seek the areas in which it has the comparative advantage and export those goods. A country does not gain from producing what it can but from producing the products which are better suited to its environment. China, a developing economy, has a large labor surplus. So, it has the advantage in the businesses that are labor intensive. Japan is a country which has a labor shortage. Japan cannot focus on products which are labor intensive. Rather it has a highly educated labor force which is able to produce high quality products with the aid of technology. Japan should focus on hi-tech products in order to progress. So, developing countries can find an edge over developed countries in different areas only if there is an open economy with few barriers to trade.

Globalization has allowed countries to focus on the products in which they have comparative advantage. The need for production of all types of goods has long been obsolete. Today, a country produces the goods in which it is best and imports the goods it wants. Imagine all the products that lie on the shelves in a shopping mall. They must have come from many different countries. Imagine the Toyota car that you bought recently or the MP3 player that has China’s seal in it, all were manufactured abroad. We consume products from all over the world. We buy Toyota for its quality. We buy Chinese goods for their good bargain in terms of price. We no more produce all the goods we consume.

However, globalization has not been taken seriously in all parts of the world. Still there are many hindrances to globalization. Artificial manipulation of prices of goods has led to the malfunctioning of the theory of comparative advantage. USA gives a huge amount of subsidies in agriculture in which it does not have comparative advantage. The developing countries which have a comparative advantage in agriculture have thus become victim to the artificial manipulation of prices. It is interesting to note that USA alone spends 49,001 million dollars in support to farmers every year (IMF, 2001 figures). This is hurting the developing countries which have a comparative advantage. This money could have been employed in some other efficient sectors. Thus, it is like a dead weight loss to the world. Brazil, which has a huge potential for export in agricultural commodities, has been at a great disadvantage because of this. True benefit of globalization comes when there are no restrictions on trade such that all countries can specialize on products based on comparative advantage.

It is not only the rich countries that have hindered the growth of the developing countries through trade barriers. Developing countries fear from globalization. China has not opened its economy to the full despite its entry into WTO. The developing countries have been the victim of so-called “protectionism myths.”1 They believe that they need to protect their economy to boost domestic firms. Developing countries believe that protecting an economy will save the jobs from going out to foreign firms. While protectionism benefits domestic businesses in the short run, it fails to allocate resources efficiently in the long run. J.R. Kearl believes that import restrictions destroy domestic jobs. He believes that by opening an economy, a country forces people to move from relatively inefficient industries to relatively efficient industries. So, there is no such thing as destruction of jobs, but rather there will be a shift in the type of jobs available in an economy.

Furthermore, developing countries are in need of new technology, foreign investment and new skills. They can gain from these only if they open themselves to the external world. The initial boom of East Asian countries can be attributed in part to the huge capital inflow from the west. Western, the author of the book “East Asia: Growth, Crisis and Recovery,” believes that East Asian nations prospered because they had a huge capital inflow from the west, and at the same time they had an access to large markets in the west, particularly USA.

Hence, there is no doubt that globalization furthers growth. Though there will be some instabilities in the economy in the transition phase, all countries will gain from the liberalization of their economy in the long run. Access to a large market allows countries to specialize in the products in which they have comparative advantage. It is imperative that developing countries opened their economy if they are to prosper.

(sources suppressed for better view)

3 Responses to “Why Should Nepal Open Up? A General Case for Developing Countries”

  1. sanobhai Says:

    I think there is theory and there is practice.

    Lets talk about agriculture. As you mention there is a lot of subsidy to the agriculture sector in the US. In that case, is China justified in protecting its agriculture sector? You might say that US should end the subsidy but that is just a wishful thinking – it is not going to happen anytime soon. What is China to do now?

    You mention “International trade is based on comparative advantage and specialization. A country has to seek the areas in which it has the comparative advantage and export those goods”. I wonder if this is one of those rhetoric that I hear so many times because I fail to find a reasonable answer for Nepal. Please don’t say we are good and competitive in textiles/carpet – we are not and from what I understand the only reason those industries have survived is because of the quota system that was protecting them and guaranteeing access to the overseas market. Apparantly the Indians and Chinese, especially the Chinese, can do a much better job at a far lower price.

    I have stumbled on to two examples that are in Nepal’s favor. First is tourism. Nepal has reasonably developed business catering to trekkers and mountaineers. It is world-class and world-famous. If you are from anywhere else and you are interested in climbing big mountains, Nepal is the place to go. Read any Himalayan expedition books, you will find high praise for the people in the trade and the supporting business in Nepal. There is some form of “protection” that is favoring this business in Nepal because these big mountains happen to be in Nepal but we must also credit the people and the government for having the vision to develop this sector. India, Pakistan, China – they all have big mountains but ask an aspiring mountaineer and most like you will hear that he wants to go to Nepal. That is a good. But think about how much of our population can be supported based on tourism. Most of our population lives in Terai.

    Another example that comes to my mind is Vanaspati Ghee industry in Nepal. I don’t know a whole lot about this industry but apparantly the Nepalese industries are lot more productive than the Indian counterparts. It is surprising that the India industries are less competitive and I wonder what the reasons might be but if I were to believe what the Nepalese papers were writing Nepalese Vanaspati Ghee industry is competitive.

    It is hard for me to come up with other examples that shows Nepal can survive if her economy were to open suddenly. I am not convinced that Nepal will survive in a global economy until we start producing to sell to the globe competitively. What does Nepal have to offer to the global market now? in 5 years? 10 years? 20 years?

  2. dreamnepal Says:

    Sanobhai,
    As you have mentioned, we have to take advantage of the options we have. We should not waste resources on producing high-tech manufactured goods, it is too costly for us. Simply not worth it. We can try alternatives which are in our favor. We should get rid of public enterprises which are going in loss and privatize them.

    As you have said, some of our industries like vegetable oil and ghee are able to capture a sizable Indian market sufficient enough to create tension among indian manufacturers. They are not in a position to threaten Indian manufacturers though. So, if everyone opens up, we will have an edge.

    Exploitation of tourism is a good option. Besides, Nepalese carpets do have a good market provided we maintain quality without child labor.

    There might be short run problems as we open up. However, after a while, people will start businesses and firms which can be competitive.Moreover, it is not always true that you have to be a large industry to do well in the market. You can seek a market niche and focus on it. Demands of people vary over time and place, we should be able to capture them. However, these things are possible only if we open up. Otherwise we would be stuck up forever.

    (by the way sanobhai, if you have written articles of interest, do email me so that I can put it up here)

  3. Nepal Says:

    Hi, I am doing research in Nepal Food Aid and Food Security. I am wondering if you have any sources, theories on small farmers rights and food aid in Nepal. I am specifically looking at the flaws in the food aid regime (WFP, FAO, IFAD, UN, NGOS etc policies in Nepal) and how WTO and developed countries policies are harming small farmers and their capacity to generate food for local population instead of producing cash crops for exports and relying on short term imports (all using Nepal casestudy if any exist).
    Thanks

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