September 2005
Economy & Policy

BY Shiv Raj Bhatt

The latest Nepal Living Standard Survey (NLSS II) suggests a drastic decline in Nepal’s poverty. It shows that during the last eight years poverty has declined by 11 percent. Only 31 percent of the Nepalis are poor now, compared to 42 percent in 1995/96, the year when the Maoists declared the ‘People’s War’. Viewing the circumstances of the last eight years, the decline is doubtful. However, putting the doubt aside for a while, we can see that the results on the one hand demand for many adjustments in the country’s poverty reduction strategy paper (PRSP), also known as the tenth plan and on the other hand they call for actions to be undertaken for sustaining the factors that contributed for such amazing results. First, the goals and strategies of the tenth plan need restructuring. Poverty alleviation is the main objective of the tenth plan with the main target of bringing down the percentage of people living under the line of absolute poverty to 30 percent by the end of the plan. To achieve this, the plan fixed a target of 6.2 percent growth per annum in the GDP. Alternatively, the plan estimated a 4.3 percent growth rate (and 33 percent poverty target) if the security status and investment environment do not become so encouraging. It is very unlikely to have a 6.2 percent growth rate during the present situation of conflict, political instability and unfavourable investment climate. But NLSS II results show that 31 percent of Nepalis are now below the poverty line so it can be said that the poverty reduction target of the tenth plan has already been achieved. Therefore, a third alternative poverty reduction target should be determined immediately and some adjustments are needed in the plan strategies. Secondly, as has been argued, huge remittance inflows are behind this achievement; therefore, sustaining remittances in the long run is the other challenge for Nepal.

WTO Rules for Trade in Services:

Remittances come from services trade and thus WTO rules are important in determining such trade. Today, services have become one of the most important determinants of national incomes and trade world-wide. On average, services account for more than 60 percent of the national income in industrial countries and 50 percent in developing countries, and they constitute 20 percent of the total world exports. In Nepal too, the contribution of the service sector in its national income, and thus the importance of services trade, have significantly increased during the past few decades.

Realising the importance of services in global GDP and trade, services trade has been included in the WTO regime codifying the discipline in the General Agreement on Trade in Services (GATS). The GATS intended to establish a framework within which liberalisation commitments in the area of services are to be undertaken and implemented. The GATS proceeded to list the entire range of services covered in 12 sectors. They are: business services; communication services; construction services; distribution services; educational services; environmental services; financial services; health-related and social services; tourism and travel-related services; recreational, cultural and sporting services; transport services; and other services that are not included elsewhere. These sectors are further divided into sub-sectors, which contain various sub-groups.

According to GATS (Article I), there are four modes of trade in services: (i) Cross-border: services supplied from the territory of one member into the territory of another. An example is software services supplied by a supplier from one country through mail or electronic means to consumers in another country. (ii) Consumption abroad: services supplied in the territory by one member to the consumers of another. Examples are consumption of tourism or education services by the people of one member in the territory of another member. In this case; the consumers move and not the service. (iii) Commercial presence: services supplied through any type of business or professional establishment of one member in the territory of another. An example is a bank owned by citizens of one country establishing a branch in another country. (iv) Presence of natural persons: services supplied by nationals of one member in the territory of another. One such example is a doctor of one country supplying, through his physical presence, services in another country.

Importance of Services Trade in Nepal’s Economy:

The contribution of service sector in the total GDP of Nepal has been increasing continuously and the importance of services trade is significantly increased during the past decades (see accompanying figure 1 and table 1).

As can be seen from the table, the services, net as proportion of GDP reached 9.96 percent during the period 1995-2000 from 2.93 percent during 1975-1980. It is almost equal to the total merchandise export of Nepal. The huge trade deficit is compensated to a large extent by inflows on service account and capital inflows. The inflows on service account, nevertheless, are very erratic showing perpetual fluctuations. The longer-term trend, however, is an increasing one (see figure).

Service income (as percent of GDP) was below 5 percent before 1992-1993, but it reached approximately 10 percent in latter years.

Prospect of Services Trade Under GATS Mode 4:

LDC members of WTO, including Nepal, have an interest in market access for low and semi-skilled workers (movement of natural persons in the low and semi-skilled occupations through mode 4 commitments). The commitments and initial offers of developed countries are, however, void of low skilled worker access. However, projected demographic changes within major developed countries reveal that their need for low skilled workers will increase significantly in the future. In some developed countries, labour supply is projected to stagnate or fall in the next 10 years, if present demographic trends continue.

On the one hand, developed countries are substantially facing a shortage of low and semi-skilled workers; on the other LDCs as a whole are projected to have over 230 billion unemployed workers in 2010. In this situation, LDCs may provide a good source of temporary workers to the developed countries. At the same time, around 10 million Nepalis are also projected to be unemployed in the year 2010.

How can Nepal benefit?

A shortage of labour supply in developed countries and the recognition by the WTO at the Doha Work Programme for the need for special provisions in GATS articles IV and XIX to enable developing countries to participate in the international service trade in a much more efficient and equitable way, have enlarged the scope for movement of natural persons in the future. Unfortunately, in the absence of proper planning for human resources development, Nepal cannot benefit much from such developments. Therefore, to seize the opportunities created by WTO membership, Nepal has to develop human resources that match the requirements of developed countries. First, an institution (a ministry or a department of human resource development) is required that not only plans for the domestic human resource requirements but also looks upon the opportunities by analysing the facts and figures related to the recent development in demand for labour in developed countries and takes necessary steps to benefit from such opportunities.

Secondly, instead of spending millions of rupees in teaching traditional subjects that only produce a crowd of educated but unemployable and frustrated citizens, we have to design short courses to develop a semi-skilled workforce that is in high demand in developed countries. Thirdly, technical and vocational education centres should be opened throughout the country which train such semi-skilled workforce. Fourthly, we need appropriate institutions to finance education. Last but not the least, an institutional mechanism that assists in an overseas job search, in visa preparation, and in travel arrangements is necessary.

(Bhatt is associated with the Trade Related Capacity Building Project, UNDP, Nepal)