Nepal’s recipe for sustainable economic development

12 October 2017
ITC News
Speech delivered by ITC Executive Director Arancha Gonález at Kathmandu University School of Management (KUSOM)
12 October 2017 - Kathmandu, Nepal

Vice Chancellor Dr. Ram Kantha Makaju Shrestha,

Dean Dr. Devi Bedari,

Faculty and students of Kathmandu University,

Namaste! Aaja malai yaha ayera dherai khushi laagyo.

I would like to thank Kathmandu University School of Management (KUSOM) for inviting me to share what we do at the International Trade Centre to promote inclusive trade. I am also very curious to understand your point of view on how Nepal can achieve growth that is more inclusive.

In many ways, Nepal has captured the world’s attention.

Nepal attracts international praise for its export of fine quality pashmina, silver jewellery, breath taking touristic attractions and warm hospitality.

In April 2004, you were the first Least developed country (LDC) to join the World Trade Organization.

At the end of last year, the United Nations LDC report estimated that within the next 8 years, Nepal is likely to “graduate” and cease being an LDC. When we consider that in the last 23 years, Botswana has been the only landlocked LDC to ever graduate from being an LDC, it is a credit to the progressiveness and accomplishments of the Nepalese people to be identified along with a few other countries, as being next in line for graduation.

Getting to that point calls for a recipe of smart domestic policies aimed at boosting the reach of Nepalese trade as well as broadening the reach of trade benefits. For a small landlocked country like Nepal, inclusive trade is a key ingredient.

SMEs represent the most successful model of inclusive trade and growth. ITC’s research on companies across the world shows that improving SME productivity translates into more and better paying jobs, distributed across less fortunate sections of the economy; and that helping these small firms export leads to high productivity, wage, and employment gains.

Let us not forget that Nepalese small and medium-sized enterprises (SMEs) represent over 90% of businesses; generate over 70% of jobs in the industrial sector; are a major generator of foreign currency; and make an important contribution to the national GDP.

SMEs being the lifeline of Nepal’s economy provide the biggest hope of ensuring inclusive trade and they deserve support.

So what kind of support do Nepalese SMEs need?

ITC has been supporting SMEs across the world for more than 50 years. And, one of the first things we have found most useful in helping SMEs is to actually talk to them and to identify their weaknesses and needs. ITC, with support from your very own KUSOM recently surveyed Nepalese businesses to do just that.

Through the survey, we learned many things. For example, we found that small firms in Nepal perform well in having audited financial statements and accessing an educated workforce. However, they underperform in using emails and owning foreign technology licences – which are proxies for the extent to which SMEs can connect and compete in the global economy. Also, the largest gap between small and large firms lies in having bank accounts; and poor electricity reliability is a major obstacle in the Nepalese business ecosystem.

Over and above these findings, there are four areas which have strategic importance for inclusive trade in Nepal.

1. First, Nepalese SMEs are less likely to export than their larger counterparts. Aside from issues related to limited managerial trade capacity and access to finance, a key reason behind this are that Nepalese SMEs have difficulty gaining international quality certificates that render them unable to compete with larger and/or external competitors.

Actually getting products across the border means compliance with regulations. However, in Nepal small-sized companies face proportionally more difficulties with export related measures (34%) compared to medium (15%) and large (16%) companies.

Only 13% of all problems faced by exporters seem to be problematic due to the given regulations being too strict or difficult to comply with. In contrast, 73% of difficulties faced by exporters are due to various procedural obstacles, most of which occur in Nepal itself.

Overall, exporters report 900 incidents of procedural obstacles that make compliance with a given regulation difficult. 64% of these incidents occur in Nepalese agencies.

The major types of procedural obstacles hindering export process in Nepal relate mostly to unavailability of testing/certification facilities. Limited or inappropriate facilities for testing in Nepal account for 19% of the procedural obstacles reported by Nepalese exporters, while another 9% relate to testing facilities in Nepal not being internationally accredited leading to certification issued by these agencies not being accepted in partner countries.

The second most reported procedural obstacles relates to high fees and changes to obtain the required certification or testing (16%). The majority of these procedural obstacles occur in foreign countries. This issue is related to the lack of appropriate facilities for testing/certification in Nepal – which leads to exporters having to send their products to other countries for necessary testing. The fees for such services in foreign countries are deemed too expensive by the Nepalese companies.

Informal payments to get the necessary paper work issued, clear shipment or expedite the process account for 15% of the reported procedural obstacles. Close to two-thirds of issues related to informal payment happen in Nepalese agencies while the other third occur in customs of destination markets or transit countries.

It goes without saying that the area of standardized testing and certification is one concrete area that can and should be addressed in Nepal. If we want to seriously engage with Nepalese SMEs and to boost their participation in global trade, then lowering non-tariff barriers – or procedural obstacles – to trade that places under-resourced and inexperienced SMEs at a noticeable disadvantage must be a priority.

As key stakeholders, we should also guarantee effective implementation of trade agreements such as the WTO Trade Facilitation Agreement, in order to ensure a business environment that is simplified, coordinated and automated and reduce trade costs through mechanisms like the ‘single window’.

2. Second, only 12% of exporting Nepalese companies are women-owned. This poor representation of women is not unique to Nepal. ITC surveys also show that women-owned companies face greater challenges in scaling up their business. On average, ITC found in a recent survey that women export to nine markets, while male-led firms export to 15 markets. Why is this the case and what can be done about it?

Due to a range of financial, regulatory, familial, or logistical constraints, almost one billion women today across the globe are not able to fully participate in our economies. Moreover 90% of countries in this world have at least one law impeding women’s economic opportunities.

These gender-specific constraints on women’s participation in company ownership or management have serious adverse socio-economic impacts, as women’s company ownership is correlated with a number of key development outcomes at the country level, company level and community and family level:

In a scenario where women play an equal role to men in labour markets, global annual GDP could rise by as much as $28 trillion, or 26%, by 2025.

Greater gender diversity on the senior- executive team corresponds to the highest performance uplift: for every 10% increase in gender diversity, earnings rise by 3.5%

At the family level, women spend over 90% of their income on health, nutrition and education (compared to 40% for men).

The key takeaway from these data trends is that, relative to men, women are not successfully adapting to the challenges and opportunities of international markets.

To tap these inclusive growth opportunities we must better support and equip women to seize the opportunities that emerge from trade opening. Targeted interventions through development cooperation frameworks are helpful. We also need to invest in understanding the real life stakes for women in trade that will involve among other things a heavy investment in relevant gender-disaggregated data, training on gender for trade officials, and more gender-based value chain analysis.

On top of championing quality data and training, we need to invest in tooling and equipping women-owned SMEs in trade to be more competitive in the ever-changing trade landscape.

This is what led ITC to launch the SheTrades initiative seeking to connect one million women to market by 2020. To get there we need to ensure trade policies are not discriminatory; facilitate connections to digital and/or face-to-face business contacts and networks; support the creation or strengthening of trade support organisations that target women in trade; and develop managerial skills, technical skills, and training, based on higher value-added activities.

3. Three, digital connectivity is opening new opportunities for SMEs to access international markets. ITC's most recent e-commerce survey shows that over 80% of companies exporting cross border through e-Commerce are micro and small. Cross-border e-Commerce already accounts for 12% of global goods traded and is expected to grow at twice the rate of domestic e-Commerce. Nepalese companies need to leverage this opportunity to expand their exports in the global market.

E-Commerce is also very relevant for women to trade. Being online levels the playing field for women owned firms. Overall less than a quarter of firms engaged in offline trade are women-owned SMEs. The share of women-owned firms doubles when moving from traditional offline trade to cross-border e-Commerce. E-Commerce opens up new business opportunities and potential for broad socio-economic impact, especially for women.

Over and above this, it also helps to empower women through education and decision-making appointments. In this regard, Nepal is setting a tone for others to follow with recent changes to the constitution to empower women and youth; closing more than 90% of the education gender gap; and appointing women leaders as Head of State and Commander in Chief, Chief Justice of Supreme Court, President of Chamber of Commerce and Speaker of Parliament.

4. Fourth, Nepal still has billions of dollars of unrealized export potential. This potential lies mainly within its home region and especially so for potential exports of fresh or dried nuts; jute products; lentils; cardamom and carpets. These are significant gains worth realizing.

Moreover, regarding new exports, Nepal has diversification opportunities in the textiles and footwear sectors. The production of which involves a relatively strong participation of SMEs and scores relatively well on the price stability indicator.

Finally, there are big diversification opportunities in the services sectors, including around digital trade.

What this tells us is that it is just as important to be capable of connecting as much as it is to know what to connect and with whom. Trade and market intelligence provides many of the answers to these questions. In a few months ITC together with the WTO and UNCTAD will launch a new SME Trade Helpdesk that seeks to drill down at SME level intelligence on where and how to exploit trade opportunities.

In a nutshell ladies and gentlemen, the core issue here is one of SME competitiveness.

As the future CEOs, managers, and policymakers I urge you to make a stamp on Nepal by advancing in some of the areas of action and opportunity which I highlighted today – whether you decide to own or manage your own SME; to head a testing facility; or to lead change in domestic policy that will support women, SMEs and other segments of your economy. I trust my talk has given you enough ideas on how you can make that stamp.

Thank you