Will Nepal graduate out of being a Least Developed Country?

AdhirariDr. Ratnakar Adhikari is Executive Director of the Enhanced Integrated Framework Executive Secretariat at the World Trade Organization (WTO). Prior to this, he was the Chief Executive Director of South Asia Watch on Trade, Economics and Environment (SAWTEE), a Kathmandu-based regional think tank.  He spoke to LDC News Service about the Nepalese government’s wishes to graduate from the LDC status in a decade.

 What are the main obstacles for Nepal towards graduating from the LDC status?

Of the three criteria for graduating from LDC status, Nepal has already achieved the criterion of Economic Vulnerability Index (EVI) and it is very much likely to attain the criterion of Human Assets Index (HAI) by 2021. However, it is not likely to meet the Gross National Income (GNI) criterion even by 2024, which has been vindicated by a report produced by UNCTAD in 2012 titled Enabling the Graduation of LDCs: Enhancing the Role of Commodities and Improving Agricultural Productivity. This is partly because of Nepal’s own weaknesses particularly in achieving sustained high level of economic growth, but also because of several exogenous factors. 

First of these is the “shifting goalpost” – although this is true for other indicators as well. For instance, income criterion for graduation was Gross Domestic Product (GDP) per capita of US$ 700 in 1991, this has evolved such that the criterion has been changed to Gross National Income per capita of US$ 1190 based on the triennial review conducted by the Committee on Development Policy (CDP) of the United Nations Economic and Social Council (ECOSOC) in March 2012.  At this rate, GNI per capita threshold is likely to reach US$ 1,630 while Nepal’s GNI would likely be around US$ 1,560.

Secondly, another exogenous factor on which Nepal has little control is the exchange rate. The above income prediction does not take into account possible fluctuation in exchange rates either way. However, given the relatively gloomy outlook of the global economy and lackluster growth of Indian economy coupled with its ballooning imports and less than anticipated export growth, exchange rates are more likely to head North in the years to come. The second factor is particularly crucial because of the de facto peg of Nepalese currency with that of India. 

The impossibility of graduating based on income criterion has probably led Nepal to focus on two other criteria for graduation, which seem to be attainable. However, going by these criteria also present a few challenges.

First, the indicators to be achieved on human asset front are daunting to say the least even if we go by the data prepared by the National Planning Commission of the Government of Nepal. For example, in order to achieve the HAI graduation threshold by 2021, Nepal needs to reduce the share of undernourished population to 13 percent by 2021 from 17 percent and mortality rate to 26 per 1000 from 49 per 1000 in 2012. Similarly, gross secondary school enrolment will have to be increased from 52 percent in 2012 to 65 percent in 2021 and literacy rate from 59 percent to 95 percent in the corresponding period. 

Second, the complacency amongst policymakers that Nepal has attained EVI threshold for graduation does not augur well for Nepal. This is because climate change can reverse the gains made thus far on a number of vulnerability-based indicators such as percentage of people falling victims of natural disasters due to potential for flash flood, glacier lake outburst flood as well as country facing instability of agricultural production.

Third, on EVI criteria, Nepal can become a victim of what I would term as “false comfort” because “Merchandise export concentration” is one of the eight indicators of vulnerability whereas “Export destination concentration” is not considered as an indicator. While Nepal’s merchandise export basket is fairly diversified which has contributed to the country achieving better score on this indicator, more than 2/3rd of its exports are destined to a single market – India, which makes the country equally vulnerable. The fact that this is not accounted for gives a false sense of assurance, which is dangerous.  

One has to take cognizance of the fact that graduation thresholds – even if going by only two criteria – should be met by a country for two consecutive reviews held at an interval of three years before it could graduate. Even if Nepal meets the threshold in 2021, it has to sustain the progress in 2024 (and meet the criteria set for the year by the review committee) to be eligible to graduate. It is equally worth noting that no country, including Nepal, should regress back to the LDC status once it has graduated. Although this has not happened so far, it is likely to become a reality in the context of the turbulent environment – economic, ecological and political – we face at present. 

What type of concessions will Nepal lose if it graduates from the LDC status?

The threat of discontinuation of concession after graduation need not dissuade a country with high national pride like Nepal to graduate to a developing country status. This is because some of these concessions are merely rhetorical while others will continue during “transitional” period. Yet some others would have outlived their utility by the time Nepal is likely to graduate.

Let me start with the first one. Although, at a rhetorical level, LDCs are eligible for concessional foreign assistance, which is 0.15 percent of the GNI of the OECD countries, this has rarely happened in the past and there is no way this could be made enforceable. This is partly because most foreign assistance are dictated by the aid policy of providing countries rather than based on the needs of the LDCs. Moreover, since Nepal has never been a “donor darling” country and continued dependence on foreign aid is not likely to be sustainable, this concession should not be taken seriously.

Second category of concessions is critical, though. Among these one of the prominent is the preferential market access. Although there is no agreement within the World Trade Organization so far that provides for a binding duty free quota free market access for its member LDCs on all its products, some markets such as those of European Union, Canada, Australia, Norway and Switzerland do provide duty free access to LDC products. The list of countries providing increased market access concession to LDCs is growing with some emerging countries such as Brazil, China, India and Turkey providing reasonably generous concession to LDCs. However, given the fact that these concessions could continue three years after graduation, this should also not pose a major problem.

Another area of concession is the access to aid for trade, which is available only for the LDCs, such as those provided by Enhanced Integrated Framework (EIF). However, the initiative has not only been supporting recently graduated countries such as Cape Verde and the Maldives, but will continue to provide “second generation” support in days to come depending on the availability of resources. It is not sure whether this initiative will continue to operate around the time of the proposed year of Nepal’s graduation, should that be the case, a concrete policy would be adopted by the initiative to support countries that have graduated but continue to require assistance of the nature provided by the initiative. Moreover, since the major objective of the initiative is to promote economic growth and contribute to poverty alleviation, those countries which have graduated based on other criteria without meeting income threshold, may require support for an extended period from the initiative. 

A third category of concessions includes flexibilities in implementation of different international obligations such as under the WTO. Various agreements of the WTO such as those on agriculture, intellectual property rights, standards related agreements and trade remedy measures provide flexibilities for the LDCs through reduced level of commitment, higher transitional period, threshold for triggering certain unilateral measures and possibility of obtaining technical assistance for implementing commitments. The last one of the above is particularly important in the context of the fact that the Agreement on Trade Facilitation recently agreed at the Bali Ministerial Conference of the WTO makes an explicit mention for the provision of technical assistance to the LDCs and makes the commitment conditional upon acquiring requisite capacity for which technical assistance is indispensible. If Nepal is committed to graduate within 10 to 12 years, it would be wise for the country to make use of all the technical assistance available for the implementation of the Agreement on Trade Facilitation and implement all the commitments within this period such that no such assistance is required after three years from the date of her graduation.

However, Nepal and other LDCs which plan to graduate without attaining the requisite income threshold should explore the possibility of continuing to benefit from several flexibilities provided by the WTO, particularly those that directly contribute to economic growth, as long as income threshold is not achieved. 



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