6.4 CHARACTERISTICS OF THE DEVELOPING COUNTRIES
Nepal is a developing country. The following are the main characteristics of the
developing countries like Nepal:
1. Low Per Capita Income: The Gross National Product (GNP) per capita or Gross National
Income (GNI) per capita is often considered to be a good index of the economic welfare
of the people in a country. Judging developing nations by this criterion one finds
them in an extremely miserable position. As per the World Bank World Development
Indicators 2020, the GNI per capita of Nepal is US $ 900.
2. Mass Poverty: Developing countries are characterized Subsistence economy is
by mass poverty. Widespread poverty is due to lack of an economy in which peo-
development and under utilization of resources. As per KEY ple produce food, clothes,
the Economic Survey of 2018/19, the population living IDEA etc. for their own use
below the poverty line in Nepal is 18.5 percent.
3. Agriculture as the Main Occupation: Developing economies are basically agrarian in
their character. In Nepal most of the people are engaged in agriculture as the industrial
sector is both small and backward. About two- third population lives in rural area
and their main occupation is agriculture. About 62.2 percent population of Nepal are
engaged in agriculture.
4. Dualistic Economy: One of the features of developing economies is dualistic economy or
economic dualism. It refers to the co existence of a backward sector alongside a modern
sector. This means that market economy and subsistence economy exist side by side. The
developed market economy is found in urban areas and rural areas are characterized by
subsistence economy.
5. Underemployment and Disguised Unemployment: Developing countries suffer from
the problem of under-employment and disguised unemployment. There is problem of
disguised unemployment and under-employment in Nepal. Disguised unemployment
is a situation where more people are engaged than the actual requirement. As non-
agricultural employment is limited people remain unemployed during off-season.
6. Lack of Capital: Least developed countries are characterized as “capital poor” countries.
In these countries not only present capital stock is poor but also the current rate of capital
formation is very low. People have low capacity to save due to low level of income. In most
least developed countries gross investment is only 5 - 6 per cent of gross national income.
Nepalese economy faces the problem of deficiency of capital. Due to lack of capital the
pace of industrialization is very slow in Nepal. There is problem of capital formation.
7. Lack of Industrialization: As we know Viewpoint “Lack of capital is a major setback
industrial development is the back bone to economic development in devel-
of economic development. The pace of oping countries” Elaborate it?
industrial development is very slow in
Nepal. Most of the people are engaged in
agriculture. Due to less development of industrial sector economic growth rate is also
low in Nepal.
8. High Growth rate of Population: Rapid population growth is one of the common
features of all developing countries. In all countries, death rate is declining due to
modern medical facilities but birth rate is not falling. The population growth rate of
101 Vedanta High School Economics - 10
Nepal is very high (1.35 percent). The employment is low as well as GDP growth rate is
also low compared to population growth rate. Key Term
9. Dependency on Foreign Aid: Developing countries are Market economy: economic sys-
excessively dependent on foreign aid. They prepare tem in which prices are deter-
deficit budget and hence need foreign aid to finance mined by the interaction of sup-
development projects. Nepal depends on foreign aid to ply and demand
fulfill deficit budget and other development work.
10. Technological backwardness: In developing countries, production techniques are
inefficient over a wide range of industrial activity. They rely on primitive methods
of production, which takes more efforts and less production. Lack of research and
development (R&D), weak communication system between the research institutes and
industries, abundance of labour and capital scarcity are some obvious reasons for the
use of techniques which have otherwise become obsolete. Nepal is still in primitive
technology. Due to technological backwardness the productivity is very low in Nepal.
11. Under Utilization of Natural Resources: Most of the developing countries are unable to
utilize their available resources. the developing countries have rich natural resources
like land, water, forest, mineral etc. To utilize these resources, developing countries do
not possess necessary capital, manpower and infrastructure and technology. For example,
Nepal is rich in water resources. It has immense hydro power potential of 83000 MW with
techno economic hydro power potential of 42000 MW. So far only 1116.809 MW has been
harnessed by 98 operational projects as of Jan, 2020.
12. Deficit Trade Balance: Trade balance refers the difference Nepal’s has been experi-
between export and import. If export is greater than import it encing deficit trade bal-
is said to be surplus trade. Contrary to it, if import is higher ance over the years due to
than export it is deficit trade. Nepal faces trade deficit due imports value being greater
to more import than export. Dependency in foreign goods is than exports value
high and there is always pressure of import.
13. Political Instability: Developing countries are also trapped inKeynote
party politics. The political parties instead of working for the benefit of the people engage
in mis-utilization of power for personal benefit. Corruption, lack of transparency in
government work, lack of justice, slackness in implementation of law and order, insecurity
of life and wealth, misappropriation of country’s resources are responsible for despair
and frustration among the people. Political instability is the major cause of economic
backwardness in many underdeveloped countries.
• The GNI per capita of Nepal as per the World Bank Development Indicators is US
$ 900
• The growth rate of population in Nepal is 1.35 percent per annum
• The average annual economic growth rate of the last decade has been 4.6 per-
cent
6.4 THEORIES OF ECONOMIC DEVELOPMENT
There are different theories of economic development. Development theory has
changed over time with changes in ideology and the international environment.
Among them classical theory of economic development. Marxian theory of economic
development and Lewis theory of unlimited supply of labour are explained below.
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A THE CLASSICAL THEORY OF ECONOMIC DEVELOPMENT
Classical economists like Adam Smith, David Ricardo, T.R Malthus J.S Mill
propounded the first theory of development. The generalized classical theory
on growth and stagnation is a combination of the contributions of Adam Smith, Ricardo
and Malthus. The theory was put together by combining the common strands of thought
of these renowned classical economists.
The classical theory of economic development is build upon the base of laissez faire
doctrine which is free from any government interference. The theory may be analyzed with
regard to the three basic foundations. These are Adam Smith’s Production Function, his
views on the process of growth of labour force and capital accumulation in the economy.
a. The Production Function: Adam Smith recognized only three factors of production:
land, labour and capital. Considering these three factors, his production function may be
expressed as
Point to Note
Y=f(K,L,N)
Three basic foundations of the theory
where, a. Adam Smith production function
K represents the capital b. The growth of labour force
L denotes labour force c. Capital accumulation
N stands for land
According to Smith, with the passage of time, the size of the market will increase, which
will lead to both internal and external economies of scale, which will eventually lower
down the cost of production. This process would be initiated by improvement in the
production techniques and a greater degree of division of labour.
b. The Growth of Labour Force: The growth of the labour force is largely dependent on
the rate at which population grows in a country. As per Smith, the demand for labour
increases with the increase in revenue and capital stock of a country. The demand of
labour, naturally increases with an increase in a nation’s wealth.
The supply of labour is normally expected to be in equilibrium with the demand for
labour. If the demand of labour continuously rises, the wage rate rises above subsistence
level. This induces the workers to multiply faster, as a result of which supply of labour
would also increase. This pushes the wages down. In case, the wage rate has fallen below
the level of subsistence, the demand for labour would restore it to the subsistence level
again.
c. Capital Accumulation: All classical economists regard capital accumulation or capital
formation as the key to economic process.According to the classical economists only
capitalist and landlord are capable of saving but working class is not capable of saving
because wages paid to them is just in subsistence level.
Smith relates capital accumulation with profit and the rate of interest.
1. Profit: Smith’s view on rate of profit is quite precise. Profits induce investment and
capital accumulation. He states that over time when a country develops and its capital
stock expands, the profit rate shows a tendency to fall.
2. Rate of Interest:In relation to falling rate of interest and capital accumulation Smith
postulated a negatively sloped supply curve of capital implying that supply of capital
increases in response to a decline of interest rate.
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According to Adam Smith, capital accumulation will only stop when the rate of interest
falls to a rate of profit that is sufficient only to compensate of the risk premium. In other
words, when no profit can be made from investment, entrepreneurs lose their interest in
investment activity and the economy reaches the Stationary state.
d. The Growth Process: Taking into the consideration, the production function, the process
of growth of labour and the process of capital accumulation, we can now summarize the
process of growth as visualized by Adam smith.
According to Smith, in a developing economy, both income level and capital stock rise. In
addition to this, the rate of capital accumulation also shows a tendency to increase. Another
important factor which contributes to the progress of an economy is the successive decline
in the incremental capital output ratio due to the influence of capital on the productivity
of labour. These factors reinforce each other and accelerate the pace of development of
the economy. This development continues until a point where the economy’s capital stock
grows large enough to eliminate any chance of profits. At this stage the economy has
reached its stationary state.
Having reached the stationary state, the common characteristics of the economy becomes
unchanged population, constant income, subsistence According to Smith, an
wages, complete elimination of profits, and absence economy which reaches a
of net investment. According to Smith, an economy KEY stationary state in its growth
which reaches a stationary state in its growth process IDEA process has reached the
highest level of prosperity
has reached the highest level of prosperity consistent
with its present natural resources.
e. Economic Stagnation: In the classical model, the end result of capitalist development
is stagnation. So. economic stagnation refers to crisis of capital. The stagnation results
from the natural tendency of profit to fall. Economic stagnation even leads to downfall
of capitalism.
Glossary Laissez faire: Non interference of the government in the working of the market
mechanism
Division of labour: Splitting a work into different specialized process
Prosperity: Flourishing, or thriving condition
B MARXIST THEORY OF ECONOMIC DEVELOPMENT
Karl Marx, in his book, “Das Kapital”, developed a theory of economic development
which came to be called the Marxist theory of economic development. Marxist
theory of economic development is different from classical theory, which was based
on Laissez-Faire. The Marxist holds the conviction that capitalism will be inevitably
replaced by socialism.
Marx distinguished between four main types of society - primitive, slave, feudal and
capitalist. Marx saw the relation between “forces of production” and “ the relations
of production” as the main determinant of the type of society existing and of social
change. The forces of production may be loosely regarded as the type of productive
technology the society has; e.g., slave labour, machine and technology. The relations of
production refer to the social organization of production; i.e., basically who owns the
productive forces, or how they are controlled. The relation between the forces and the
social relations of production and the consequences this generates is the major dynamic
factor in history and the primary cause of social change.
Vedanta High School Economics - 10 104
The main idea of Marxist theory of economic development includes:
Materialistic interpreta-
a. Materialistic Interpretation of History
tion of history is also called
b. Surplus Value
KEY Dialectical Materialism
c. Capital Accumulation
IDEA
d. Capitalist Crisis
a. Materialistic Interpretation of History: Materialistic Interpretation of history attempts
to show that all historical events are the results of continuous economic struggle
between different classes in the society. The main causes of struggle arise due to mode
of production and the relations of production. Mode of production (production system)
is formed by the combination of productive forces (labour and capital). Material
production is the determining force of socio-economic development. Production
relation refers to the relation between capitalist and labor working for capitalist. So,
Marxist development theory suggests that economic development is the result of
struggle between owner of capital and labour working for capitalist.
b. Surplus Value: The theory of surplus value is the cornerstone of the Marxist theory of
development. Marx treated labour power as a commodity and argued that the value
of goods should be calculated in terms of the amount of labour that went into their
production. The capitalist produces the commodity by combining constant capital
(machinery and materials) and variable capital (labour). A worker is paid subsistence
wages for his labour, which is less than his contribution (marginal productivity). The
surplus goes into capitalist’s pocket. This surplus which is the difference between the full
value of a worker’s labour and the wages received for this labour is called surplus value.
The surplus value constitutes the exploitation by the capitalist. The larger the surplus
value, the greater is the exploitation.
c. Capital Accumulation: According to Marx, the surplus value pocketed by the capitalist
leads to capital accumulation. The surplus value swells capitalist’s profits. The capitalist
tries to maximize profits in the following ways:
Marginal productivity of
a. By increasing working hours.
a worker is the contribu-
b. By decreasing labour hours to produce a commodity. KEY tion of a worker in produc-
IDEA tion activity
c. By increasing productivity of labour.
Capitalists transform this profit (surplus value) into capital by investing this in
production, which ultimately generate more capital. Marxists stressed that the drive to
accumulate capital leads to innovation and change. The capitalists must constantly seek
more profitable fields for investment, because they are competing against each other and
if they fall behind they will be eliminated.
d. Capitalist Crisis: According to Marxist, capitalists increase the degree of exploitation of
workers by reducing wages, lengthening the working hour. Every capitalist is engaged
in labour saving and cost reducing policy. This leads mass unemployment which is the
cause of struggle between capitalists and workers. Due to unemployment, consumption
in the society decreases. This leads decline in the price, decline in demand, decline in
production, which is the total lead to economic crisis in capitalist system. According
to Marx the crisis forms in capitalism ultimately collapses the capitalism and socialism
replaces capitalism. Viewpoint • Karl Marx Dialectical materialism was inspired by dia
lectic and materialist philosophical traditions.
.. What is the core idea behind Marx’s Materialistic Interpreta-
tion of History?
105 Vedanta High School Economics - 10
PB LEWIS THEORY OF UNLIMITED SUPPLY OF LABOUR
rof. W A Lewis propounded a very systematic theory of economic development in
1954 which is commonly known as theory of unlimited supply of labour. Lewis in
his theory tries to explain how unlimited supply of labour in developing countries can
be used for economic development. For his path breaking work, “Economic Development with
Unlimited Supplies of Labour” he got the “Nobel prize” in 1979.
Assumptions:
1. There is dualistic economy in developing countries.
2. The traditional sector is dominated by agriculture with a surplus of unproductive
labour.
3. With the modern sector, also called urban sector, there is high probability of
industrialization and capital accumulation.
4. The wage difference between rural and urban sector must be remained more than
30%.
5. There is unlimited supply of labour from the rural (traditional or subsistence) sector to
the urban (modern or capitalistic) sector.
The Theory
The “Dual Sector Model” is a theory of development in which surplus labour from
traditional agricultural sector is transferred to the modern industrial sector whose growth
over time absorbs the surplus labour, promotes industrialization and stimulates sustained
development.
Lewis divided the economy of an underdeveloped country into two sectors: the subsistence sector and the
modern sector.
a. The Subsistence Sector: This sector was defined by Lewis as “that part of the economy
which is not using reproducible capital. It can also be considered as the indigenous
traditional sector or the “self employed sector”. The output per head is comparatively lower
in this sector as the sector is not fructified with capital. The subsistence agricultural sector
is typically characterized by low wages, an abundance of labour, and low productivity
through a labour intensive production process.
b. The Capitalist Sector: Lewis defined this sector as “that part of the economy which uses
reproducible capital and pays capitalists thereof”. The use of capital is controlled by the
capitalists, who hire the services of labour. It includes manufacturing, plantations, mines
etc. The capitalist manufacturing sector is defined by higher wage rates, higher marginal
productivity, and a higher demand for workers. Also, the capitalist sector is assumed to
use a production process that is capital intensive, so investment and capital formation in
the manufacturing sector are possible over time as capitalists’ profits are reinvested in the
capital stock.
Relationship between the Two Sectors
The primary relationship between the two sectors is that when the capitalist sector
expands, it extracts or draws labour from the subsistence sector. This causes the output
per head of labourers who move from the subsistence sector to the capitalist sector to
increase. Since Lewis in his model considers overpopulated labour surplus economies,
he assumes that the supply of unskilled labour to the capitalist sector to be unlimited.
A large portion of the unlimited supply of labour consists of those who are in disguised
unemployment in agriculture and domestic services.
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d. Capital Accumulation and Growth Process: For economic development, capital
accumulation or capital formation is inevitable. Due to increase in productivity of
labour and use of advance technology in capitalist sector, profit arises and this profit
can be used for investment which also works for capital formation. According to Lewis,
only profit is not the source of capital formation.
Surplus labour can be used instead of capital in the creation of new industrial investment
projects, or it can be channelled into nascent industries, which are labour intensive in their
early stages. Labour must be encouraged to move to increase productivity in agriculture.To
start such a movement, the capitalist sector will have to pay a compensatory payment as
much as 30 per cent above the average subsistence wage obtained in subsistence sector. If
workers move from the subsistence to the capitalist sector general welfare and productivity
will improve. Eventually, the wage rates of the agricultural and manufacturing sectors will
equalize as workers leave the agriculture sector for the manufacturing sector, increasing
marginal productivity and wages in agriculture while driving down productivity and
wages in manufacturing.
When all the surplus labour in the subsistence sector has been attracted into the capitalist
sector, wages in the subsistence sector will begin to rise. Capital accumulation catches
with the population and there is no longer scope for unlimited supplies of labour. When
all the surplus labour is exhausted, the supply of labour to the industrial sector becomes
less than perfectly elastic. It is now in the interests of producers in the subsistence sector
to compete for labour as the agricultural sector has become fully commercialized.
ECONOMISTS PROFILE - KARL MARX - May 5, 1818–March 14, 1883
Karl Marx was a Prussian political economist, journalist, and activist, and
author of the seminal works, “The Communist Manifesto” and “Das Kapi-
tal,” influenced generations of political leaders and socioeconomic think-
ers. He is also known as the Father of Communism. The Marxian analysis
is the greatest and the most penetrating examination of the process of eco-
nomic development. He expected capitalistic change to break down because
of sociological reasons and not due to economic stagnation and only after
a very high degree of development is attained. His famous book ‘Das Kapi-
tal’ is known as the Bible of socialism (1867). He presented the process of
growth and collapse of the capitalist economy.
CONCEPTS FOR REVIEW
Economic development Sustenance Self esteem
Servitude Gross national product Per capita income
Human Development Index Class conflict Dualistic economy
Production function Capital accumulation Surplus value
Disguised unemployment Dialectical materialism Subsistence sector
107 Vedanta High School Economics - 10
UNIT OVERVIEW
Concept of economic development Classical theory of economic development
The generalized classical theory on growth
In general, economic is the quantitative as and stagnation is a combination of the
well as qualitative improvement in economic contributions of Adam Smith, Ricardo and
variables. It is a passage from a lower to Malthus. The main idea of classical theory of
higher stage. development includes:
Distinction between growth and development • Laissez-Faire policy
1. Economic growth refers to the process of • Capital accumulation
expansion of backward economies, while • Profits, the incentive to investment
economic growth relates to that of advanced • Stationary state
economies. a. Laissez-Faire Policy: The classical
2. Economic growth is a narrow concept. economists believe in the existence of an
While economic development is a broad automatic free market and perfect competition
concept. market economy which is known as Laissez-
3. Growth may well imply not only more Faire policy.
output and also more inputs and more b. Capital Accumulation: All classical
efficiency. Development goes beyond these economists regard capital accumulation or
to imply changes in the structure of outputs capital formation is the key to economic
and in the allocation of inputs by sectors process. So, they emphasize on more saving.
4. Economic growth signifies the progress This is because more saving indicates capital
of an economy under the stimulus of accumulation. Capital accumulation has been
certain favourable circumstances. Economic assigned a strategic and calculated role in the
development is the outcome of conscious growth process in Adam smith’s theory.
and deliberate efforts involved in planning. Capital formation plays an important role in
5. The raising of income levels is generally economic development.
called economic growth in rich countries c. Profits, the incentive for investment:
and in poor ones it is called economic According to classical economists profit is an
development. incentive for saving and investment. Larger
the profit, the greater will be the saving.
Indicators of economic development Saving is the key factor for capital formation.
1. Gross National Product
2. Per Capita Income d. Stationary state: According to the
3. Physical Quality of Life Index classical economists profits do not increase
4. Human Development Index continuously. As a result of increased
5. Living Standard Criterion competition among capitalists, profit
6. Basic Human Needs declines. Profits start declining and this
process continues till profit become zero.This
Characteristics of the developing countries development continues until a point where the
1. Low per capita income economy’s capital stock grows large enough to
2. Under utilization of natural resources eliminate any chance of profits. At this stage
3. Lack of capital the economy has reached its stationary state.
4. Rapid growth of population
5. Disguised unemployment e. Economic stagnation: In classical model,
6. Dualistic economy the end result of capitalist development is
7. Absence of entrepreneurship stagnation. So. economic stagnation refers
8. Lack of infrastructure crisis of capital. The stagnation is resulted
9. Technological backwardness from the natural tendency of profit to fall.
10. Excessive dependence on agriculture Economic stagnation even leads downfall of
capitalists.
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UNIT OVERVIEW
Marxist theory of economic development d. Capital accumulation: According to Marx,
Karl Marx, in his book, “Das Kapital”, the surplus value pocketed by the capitalist
developed a theory of economic development leads to capital accumulation. The capitalist
and distinguishes between four main types of increases surplus value and tries to maximize
society - primitive, slave, feudal and capitalist. profits in the following ways:
Marx saw the relation between “forces of a. By increasing working hours.
production” and “the relations of production”
as the main determinant of the type of society b. By decreasing labour hours
existing and of social change. The outline of
the theory is given below: c. By increasing productivity of labour.
a. Classes, and class conflict: The social e. Capital crisis: There is a tendency over time
relations of production involve different for capitalists to increase the percentage of
classes. In any historical period dominant their capital investment and to decrease the
and subservient classes can be identified. percentage put into buying labour. As such,
Marx said, “The history of all hitherto existing there is a tendency for capitalist’s profits to fall
society is the history of class struggles”. in the long run.This leads decline in the price,
decline in demand, decline in production,
b. Materialistic Interpretation of History: It which is the total lead to economic crisis in
attempts to show that all historical events capitalist system. According to Marx the crisis
are the result of continuous struggle between forms in capitalism ultimately collapses the
different classes in the society. It provides capitalism and socialism replaces capitalism.
explanation of the nature of the nature of Lewis theory of unlimited supply of labour
primitive, slave, feudal and capitalist society, Lewis in his theory tries to explain how
and what has moved society from one to the unlimited supply of labor in developing
other. countries can be used for economic
development. He believes that unlimited
c. Theory of surplus value: Marx treated supply of labour in developing countries is
labour power as a commodity. A worker is available at subsistence wage rate.
paid subsistence wages for his labour, which is The main idea of Lewis theory of unlimited
less than his contribution. This surplus which supply of labor includes
is the difference between the full value of a 1. Unlimited supply of labor
worker’s labour and the wages received for this 2. Two sector economy
labour is called surplus value. The larger the 3. Capital accumulation and growth process
surplus value, the greater is the exploitation.
EYE ON THE WORLD ECONOMY
MULTIDIMENSIONAL POVERTY INDEX
The MPI was introduced as a new experimental series in 2010 by the UNDP. It identifies
multiple deprivations at the household and individual level in health, education and standard
of living. It uses micro data from household surveys, and all the indicators needed to construct
the measure must come from the same survey. Each person in a given household is classified
as poor or non-poor depending on the number of deprivations his or her household experiences.
This data are then aggregated into the national measure of poverty. The MPI reflects both the
prevalence of multidimensional deprivation, and its intensity—how many deprivations people
experience at the same time.
Multidimensional poverty is made up of several factors that constitute poor people’s experience
of deprivation – such as poor health, lack of education, inadequate living standard, lack of
income (as one of several factors considered), disempowerment, poor quality of work and threat
from violence. The MPI is based on the deprivations on these fronts.
109 Vedanta High School Economics - 10
QUESTIONS FOR REVIEW
Very Short Answer Type Questions
1. If a country is increasing its per capita income for a long time what is it called?
2. What are the three core values of development according to Amartya Sen?
3. What is growth plus change called?
4. What is the main characteristic of Nepalese economy?
5. Mention any two indicator of economic development of a country.
6. What is meant by dualistic economy?
7. What is meant by subsistence agricultural economy?
8. Mention any two characteristics of the Nepalese economy.
9. What is the main basis of economic development according to Meier?
10. What is the rural economy of Nepal based on?
11. Who is the pioneer of the classical theory of economic development?
12. What is meant by the laissez faire policy adopted by classical economists?
13. What is meant by stationary state?
14. What is meant by materialistic interpretation of history?
15. What is surplus value?
16. How does a capitalist increase his surplus value as per Marx?
17. How is the exploitation of a worker measured in Marx theory of economic development?
18. Mention the main points of Lewis` theory of unlimited supply of labor?
19. Who is the profounder of Lewis` Theory of Unlimited supply of labor?
20. Lewis model consists of two sectors in the economy. What are these two sectors?
21. What is the main objective of Lewis theory of unlimited supplies of labour?
22. Which type of economy is suitable for economic development according to Lewis?
23. In which sector is the wage rate 30 percent higher than the subsistence sector?
Short Answer Type Questions
1. Define economic development? Mention the indicators of economic development.
2. Distinguish between economic growth and economic development.
3. What are the essential indicators of economic development? Explain briefly.
4. What are the characteristics of Nepalese economy? Explain any four.
5. What should be done for the economic development of Nepal? Write any five suggestions.
6. Explain the Classical theory of Economic Development.
7. Explain in short the Marxist Theory of Economic Development.
8. How do the capitalists accumulate capital according to Marxist theory? Explain it with
example.
9. How surplus value is the source of capital accumulation according to Marx? Explain.
10. Explain the Lewis’ theory of Unlimited Supply of Labour.
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7UNIT FOREIGN TRADE
Learning Objectives Weight:16 Lecture Hours
On Completion of this unit the student will be
able to:
• Understand the meaning of foreign trade
and its types
• Show the difference between internal trade
and external trade
• Explain the growth, composition and
direction of foreign trade of Nepal
• Explain the prospects and problems of
Nepalese foreign trade Before you begin
• Point out the advantages and disadvantages International trade is seen as an “Engine
of free trade and protection of Economic Growth”. Increased trade
• Understand the role of Multilateral trade integration has helped to drive economic
growth in advanced and developing econo-
organizations like WTO and SAFTA
mies. At the same time, international
• Explain the Ricardian Comparative Cost trade is leaving too many individuals and
Advantage theory of International Trade communities behind, notably also in ad-
vanced economies.
Very Short Type Short Type Long Answer Type Total Marks
0 2
0 10
111 Vedanta High School Economics - 10
7.0 MEANING OF INTERNATIONAL TRADE
Foreign trade is exchange of capital, goods, and services across international borders
or territories. Foreign trade or international trade refers to the trade link between
two or more than two countries. It is the exchange of capital, goods, and services
across international borders or territories. It involves different currencies of different
countries and is regulated by laws, rules and regulations of the concerned countries.
D.G Luchet - “The purchase of goods and services by the citizens of one country from
the citizen of another country is called international trade.”
Eugeworth:- “International trade means trade between nations”.
In modern time, no country is self-sufficient. It has to depend upon other countries for
importing the goods which are either not available with it or are available in insufficient
quantities. Similarly, it can export goods, which are in excess quantity with it and are
in high demand outside. This necessitates foreign trade.
Types of International Trade
International trade can be divided into the following three groups:
1. Import Trade: Import trade refers to purchase of goods by one country from another
country or inflow of goods and services from foreign country to home country.
2. Export Trade: Export trade refers to the sale of goods by one country to another country
or outflow of goods from home country to foreign country.
3. Entrepot Trade: Entrepot trade is also known as Re-export. It refers to purchase of
goods from one country and then selling them to another country after some processing
operations.
IMPORTANCE OF FOREIGN TRADE
Foreign trade plays an important role in developed as well as developing countries. The
importance of foreign trade in the economic development of Nepal can be explained as
follows:
1. Division of Labour and Specialization: Foreign trade leads to division of labour
and specialisation at the world level. Each country adopts the specialization in the
production of those commodities, in which it has comparative advantage. The countries
with abundant natural resources export raw materials and import finished goods from
countries which are advanced in skilled manpower. So all trading countries enjoy
profit through international trade.
2. Economic Development: Foreign trade is regarded as an engine of economic growth It
influences all sectors of economy positively. It helps in increasing the pace of economic
activities. Increase in export helps in expansion and development of industries which
results in increase in employment opportunities and living standard of the people of
the country. With the import of capital goods and technology, a country can generate
growth in all sectors of the economy, i.e. agriculture, industry and service sector.
3. Earning Foreign Currency: Foreign trade is the major source of foreign currency. Export
of the products produced in a country to the foreign market will earn foreign currency
which is vital for economic development of the country.
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4. Expansion of Employment Opportunities: Increase in foreign trade increases
employment opportunities. Production of more exportable goods require more raw
materials. More manpower will be required for the collection of raw materials and
productions of goods which means increases in employment opportunities.
5. Market Expansion: The demand factor plays very important role in increasing the
production of any country. The foreign trade expands the market and encourages the
producers. In countries where home market is limited it is necessary to sell product in
other countries.Foreign trade expands market beyond national boundary.
6. Optimum Allocation and Utilisation of Resources: Due to specialization, unproductive
lines can be eliminated and wastage of resources avoided. In other words, resources are
channelised for the production of only those goods which would give highest returns.
Thus there is rational allocation and utilization of resources at the international level
due to foreign trade.
7. Raises Standard of Living of the People: Imports can facilitate standard of living of the
people. This is because people can have a choice of new and better varieties of goods
and services. By consuming new and better varieties of goods, people can improve their
standard of living.
6. International Cooperation and Cultural Relation: Foreign trade helps in establishing
cooperation among various countries. Cultural exchange also occurs in course of
foreign trade. Businessperson of different countries will visit the country for business
purpose which will also promote truism in the country.
9. Consumption at Cheaper Cost: International trade enables a country to consume things
which either cannot be produced within its borders or production may cost very high.
Therefore it becomes cheaper to import from other countries through foreign trade.
10. Promotes Efficiency in Production: International trade promotes efficiency in
production as countries will try to adopt better methods of production to keep costs
down in order to remain competitive. Countries that can produce a product at the
lowest possible cost will be able to gain larger share in the market.
Glossary Laissez faire: Non interference of the government in the working of the market
mechanism
Division of labour: Splitting a work into different specialized process
Prosperity: Flourishing, or thriving condition
7.1 CONCEPTS OF BALANCE OF TRADE AND BALANCE OF PAYMENTS
Balance of payments and balance of trade are the two frequently used concepts in the
discussion of international trade. Let’s understand the meaning of these terms.
BALANCE OF TRADE
Balance of trade is defined as the difference between the value of a nation’s imports and
exports over a defined period of time. Balance of trade (BOT) is the difference between
Balance of Trade records
total exports and total imports of visible (or
only the visible items and is
merchandise) goods of a country in a year. The
the difference between the
Balance of Trade shows the variability in the monetary value of a nation’s
imports and exports of merchandise made by a exports and imports over a
country with the rest of the world over a period. certain period.
113 Vedanta High School Economics - 10
Balance of trade confines to trade in visible items only. Visible items are those, which are
physically exported and imported like merchandise, gold, silver and other commodities.
The invisible items are the services mutually rendered by shipping, insurance and banking
companies, payment of interest and dividend, tourist spending and so on. Thus, the
balance of trade refers to the difference between physical imports and exports of visible
items only for a given period, say, a year.
Types of Balance of Trade
A country faces three types of balance of trade which may be explained as below:
1. Favourable Balance of Trade: A situation, wherein country’s exports exceed imports is a
situation of favourable or surplus balance of trade.
2. Unfavourable or Deficit Balance of Trade: Excess of total value of goods, imported over
the total value of goods exported is termed as unfavourable or adverse or deficit balance
of trade.
3. Balanced Balance of Trade:Equality between the total value of goods exported and total
value of goods imported is termed as equilibrium in balance of trade.
Key Takeaways
Thus,
1. The balance of trade refers to the
• If exports > imports then trade surplus difference between a country’s ex-
• If exports < imports then trade deficit ports and imports.
2. A positive BOT does not necessari-
ly indicate a healthy economy, nor
• If exports = imports then balanced trade does a negative one necessarily in-
dicate a weak economy.
BALANCE OF PAYMENT
Balance of payments means a systematic record of all the economic transactions of a
country with the rest of the world during a given period, say one year. It throws light
on the international economic position of a country. It is a summary statement of all the
economic transactions between the residents of one country with the rest of the world
during a particular period of time, usually one year.
Benham - “Balance of payments of a country is a record of its monetary transaction, over
a period with rest of the world“.
Kindleberger -“The balance of payment of a country is a systematic record of all economic
transactions between the residents of the reporting country and residents of foreign
countries during a given period of time“.
In short, Balance of Payments is the difference between total amount of foreign currencies
received and paid by a country is a year, i.e. BOP = total amount of foreign currencies
received - total amount of foreign currencies paid.
Composition of Balance of Payments
Balance of payment has the following four forms or accounts:
1. Current Account: Balance of payment of a current account is a statement of actual receipts
and payments in the short period. It includes imports and exports of both material goods
and services. Items of current account are actually transacted.
2. Capital Account: All types of short-term and long-term international capital transfers,
movement of gold and bullion, receipts and payments of private and government accounts,
institutional and private loans, interest, profit, grants etc., form part of capital account.
Vedanta High School Economics - 10 114
3. Unilateral Transfer Account: This account is somewhat like the capital account, except
that it involves capital movements and gifts for which there are no return commitments
or claims. Thus, a personal remittance to a resident of a foreign country involves no
commitment for repayment and is classified as a unilateral transfer. These unilateral
transfers may be on private account or governmental accounts in the form of grants.
4. Official Reserve Transaction Account: This consists of changes in international reserve
assets – those used for setting accounts between government central banks. On account of
deficit or surplus emerging out in capital account, current account and unilateral transfers
with other countries, the inter-governmental settlements needed to be done regularly.
Types of Balance of Payments
A country faces three types of balance of payments which may be explained as below:
1. Favourable Balance of Payments: A situation, wherein country’s receipts exceed its
payments is a situation of favourable or surplus balance of payments.
2. Unfavourable Balance of Payments: A situation, wherein country’s payments exceed its
receipts is a situation of favourable or surplus balance of payments.
3. Balanced Balance of Payments: A situation, wherein country’s payments and its receipts
are equal is a situation of balanced balance of payments. Point to Note
Thus, Balance of payments is a state-
ment or an account, which re-
• If total receipts > total payments then BOP surplus. cords all the foreign receipts and
• If total receipts < total payments then BOP deficit payments of a country. It records
• If total receipts = total payments then balanced BOP. all the visible and invisible items
There always has to be a perfect balance in a balance of payments. However, there can be
imbalances in either the capital account or the current account of a country at any given
moment in the economy. Even if the country is in a deficit situation, this deficit ought
to be countered by returns from investments, utilizing of reserves, or borrowing of loans
either from other sovereign nations or from international financial institutions. In essence
a balance of payments is an accounting statement, much like a balance sheet, and should
be perfectly balanced for it to qualify as such.
Basis Balance of Trade Balance of Payment
Meaning
A statement that captures the A statement that keeps track of all
Coverage country’s export and import of economic transactions done by the
Nature of items goods with the remaining world. country with the remaining world.
Component
Record Balance of trade is a narrow BOP is a broad concept. It includes
Capital
Transfers concept. It is a part of BOP. BOT.
BOT deals with only visible and Balance of payment deals with both
material goods. visible and invisible goods
It is a component of Current Current Account and Capital Account.
Account of Balance of Payment.
BOT is only a partial record of the BOP is the complete record of
foreign trade of the country. international trade of the country.
Are not included in the Balance of Are included in Balance of Payment.
Trade.
115 Vedanta High School Economics - 10
7.2 FREE TRADE AND PROTECTION
FREE TRADE
In the simplest of terms, free trade is the total absence of government policies restricting
the import and export of goods and services. Free trade is a policy by which a government
does not discriminate against imports or interfere with exports by applying tariffs (to
imports) or subsidies (to exports). It is the act of opening up economies and is also known
as “trade liberalization.”
A free-trade policy does not necessarily imply that the government abandons all control
and taxation of imports and exports, but rather that it refrains from actions specifically
designed to hinder international trade, such as tariff barriers, currency restrictions, and
import quotas.
Free trade occurs when there are no artificial barriers put in place by governments to restrict
the flow of goods and services between trading nations. Such trade allows specialization
in member states of free trade areas, and lowers costs.
Features of free trade
1. Trade of goods without taxes (including tariffs) or other trade barriers (e.g., quotas on
imports or subsidies for producers)
2. Trade in services without taxes or other trade barriers
3. The absence of “trade-distorting” policies (such as taxes, subsidies, regulations, or laws)
that give some firms, households, or factors of production an advantage over others
4. Free access to markets Free trade agreements
are contracts between
KEY
5. Free access to market information IDEA countries to allow access
6. Inability of firms to distort markets through government- to their markets
imposed monopoly or oligopoly power
ADVANTAGES OF FREE TRADE
The advocates of free trade put forward the following advantages of free trade:
1. Benefits of Specialization: Free trade encourages international specialization. There are
economies of production from specialization. A country produces that commodity which
it can produce in comparatively low cost. This increases production efficiency and reduces
costs. The exportable surplus increases and different kinds of commodities are produced
in the country at low costs. This increases the standard of living of people.
2. Cheaper Goods: The consumers can consume cheaper goods due to foreign trade. The
freely imported goods are cheaper. This does not permit the situation of monopoly to
arise and checks the price increase. Since each country produces the goods which have
comparatively low costs, the situation of competition arises. The country further tries to
reduce the costs.
3. Benefits to Consumers: Consumers are benefitted on account of free trade as they get the
best quality foreign goods at low prices. When trade restrictions are removed, consumers
tend to see lower prices because more products imported from countries with lower labor
costs become available at the local level.
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116
Viewpoint4. Promotion of Competition: Free trade promotes competition. The foreign competition
compels the firms to reduce costs, improve quality and adopt new techniques of production
and marketing of goods. The free competition has ‘educative effect’ as well. This compels
the countries to make efficient management of resources, increase efficiency by adopting
efficient technologies. Monopoly flourishes in the absence of free trade.
5. Increase in World Output: If certain goods were produced only for the home market, it
would not be possible to achieve the full advantage of large-scale production. So, free
trade increases the world production and the world consumption of internationally traded
goods as every trading country produces only the selected goods at lower costs.
6. Safeguard against the Advent of Monopolies: If there were no international competition,
the home market would be so narrow that it would be comparatively easy for the
combinations of firms in many industries, e.g., motor cars, paper and electrical goods, to
exercise some control over it. Free trade is often an efficient way of breaking up domestic
monopolies.
7. Technology Transfer: In addition to human expertise, domestic businesses gain access to
the latest technologies developed by their multinational partners. The new and improved
technology has great significance in industrial development. Free trade helps to receive
improved technology from foreign countries. This helps developing countries in their
developmental process.
8. Access to New Markets: Not only does free trade allow foreign-owned companies to
establish themselves in developing countries, it also allows native companies to sell to
foreign markets. The size of the market extends beyond geographical frontier of a country..
9. Links with Other Countries: International trade and commercial relations often lead to
an interchange of knowledge, ideas and culture between nations. This often produces a
better understanding among those countries.This leads to amity between trading nations
and reduces the possibility of commercial rivalry and war.
10. Optimum Utilisation of Resources: Free trade stimulates home producers, who face to
foreign competition, to put forth their best effort and thus increase managerial efficiency.
Again, as under free trade each country produces those goods in which it has the best
advantages, the resources (both human and material) of each country are utilised in the
best possible manner.
• Free trade and the resultant international specialization lead to un-
balanced development of the national economy
.... Does this argument hold good in a developing country like Nepal? Pro-
vide your view with regard to the above statement.
DISADVANTAGES OF FREE TRADE
Free trade is not without disadvantages. The following disadvantages may be pointed out
about free trade:
1. Exhaustion of Natural Resources: The developed countries exploit the developing
countries by the help of free trade. The developed countries import mineral-based, forest-
based unprocessed raw materials at cheaper price from developing countries. The same
materials are exported in processed forms at higher prices to developing countries. Due to
117 Vedanta High School Economics - 10
this, the developing countries become poor in terms of natural resources.
2. Danger to the Domestic Industries: The domestic industries always feel insecure due to
free trade. The industries of developing countries are almost at an infant stage. Hence,
they cannot compete with the goods of developed countries produced by using advanced
technology. Consequently, the very existence of domestic industries fall in crisis. These
effects have been clearly visible in Nepal after the trade liberalization policy.
3. Dependency on Imports: A nation does not produce the goods at high cost which can be
imported cheaply under free trade. Hence, no country can be self reliant. Each country
should depend on other countries for one or other goods. This creates political dependency
beside economic dependency.
4. Dumping: Free trade creates cut-throat competition in the world market. This leads to
dumping or the practice of selling goods at cheaper price in foreign market and high price
in domestic market. Dumping is regarded as an unfair competition.
5. Deterioration of Public Health and Morality: The free trade policy increases the import of
harmful commodities like drugs, wine and cigarettes. In the same manner, the import of
nude and crime-based movies and newspapers bring deterioration in people’s health and
morality. Consequently, the criminal activities increase in the country.
6. Destruction of Native Cultures: As development moves into isolated areas, indigenous
cultures can be destroyed. Local peoples are uprooted. Many suffer disease and death
when their resources are polluted
7. Disturbance in Capital Formation: Under free trade, luxurious goods like motor car,
camera, computer, T, V. set, cosmetics, jewelleries are imported without any restriction.
This diverts the scarce capital of the country towards unproductive sectors consequently,
capital formation is hampered.
8. Less Benefits: The benefit of free trade has not been proved by empirical evidence as
claimed by the economists. Hence, the economists cannot assert that free trade is better
than restricted trade. To conclude in the words of Kindleberger, “ It is proper to believe in
the doctrine of free trade, but it is improper to be doctrinaire in it”.
9. Theft of Intellectual Property: Many developing countries don’t have laws to protect
patents, inventions, and new processes. The laws they do have aren’t always strictly
enforced. As a result, corporations often have their ideas and innovation stolen. As a
result they have to compete with lower-priced domestically-made fake products.
10. Poor Working Conditions: Multi-national companies may outsource jobs to emerging
market countries without adequate labour protections. As a result, women and children
are often subjected to grueling factory jobs in sub-standard conditions.
Key Takeaways
• Free trade agreements are contracts between countries to allow access to their markets.
• Free Trade can force local industries to become more competitive and rely less on govern-
ment subsidies.
• Free Trade can open new markets, increase GDP, and invite new investments.
• Free Trade can open up a country to degradation of natural resources, loss of traditional
livelihoods, and local employment issues.
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PROTECTION
Protectionism is the trade measures or economic policy imposed by countries’ governments
to protect their domestic businesses and industries from foreign competition. It is the
economic policy of restraining trade between states through methods such as tariffs on
imported goods, restrictive quotas, and a variety of other government regulations designed
to boost the domestic production of goods and services and limit foreign goods and services
The policy to encourage
in the marketplace.
domestic industries by
Under this policy, two types of instruments are used: providing subsidy or imposing
a. Tariff barrier, and KEY tariff or custom duties on import
b. Non-tariff barrier IDEA is called protection policy.
Under tariff barrier, the government imposes high custom duties on the import of foreign
goods. Consequently, foreign goods become expensive and the imports decline or stop.
Under non-tariff barrier, the quota system, exchange control, subsidy, are used as the
weapons of import control. The quota system, exchange control by government reduce
imports, while the direct subsidy, subsidized credit increase the exports. In present time,
the non-tax barriers are used more than the tax barriers.
ADVANTAGES OF PROTECTION
The advocates of protectionism put forward the following advantages of protection policy:
1. Infant Industry Argument: This argument is based on the saying “Nurse the baby, protect
the child and free the adult”. The industries of developing countries are in infant or learning
stage. They cannot compete with the industries of the developed countries. Hence, the
industries die in the infant stage in the absence of protection.
2. Diversification of Industries Argument: It is risky for a country to depend on the
industries which produce one, two or few commodities. Under free trade, a country run
only few appropriate industries and other goods are imported from foreign countries. But
in case of disturbance in relationship with other countries the economies of economically-
dependent countries are badly hurt.
3. Promotion of Employment Argument: The protection increases employment at least in
the short period. Protection secures the market for the products of domestic industries.
This leads to diversification of industries. Consequently, the employment opportunities
increase in the country. The consumption of domestic goods increase since the foreign
goods becomes expensive. This, in turn encourages investments.
4. Balance of Payment Argument: The developing countries are suffering from balance
of payment problem. Protection is thus needed to correct unfavorable balance
of payment. The custom protection checks imports. Due to this, the price of goods in
exporting countries decreases. The importing countries can import large quantity from
small quantity of export. The terms of trade comes in favour of importing countries.
5. Combat Unfair Trade Argument: At present, the demand for fair trade is growing than
free trade. The non-tariff barrier, invisible methods to restrict import, subsidy or direct
and indirect intervention of government in export, dumping are examples of unfair trade.
These methods restrict sound competition. Hence, the protectionists argue that trade
should be in ‘levelled playing field’.
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6. Preserving Key Industries Argument: The basic industries like iron, steel, electricity are
required to strengthen the industrial situation of the country. Hence, protection is needed
to preserve these industries. For this, subsidy is more appropriate than import control
or custom. Subsidy does not increase price and does not add burden to the consumers,
though it may cause burden on government budget.
7. Lever to Open Market Argument: Some developed Key industries are those in-
countries regard protection as a lever or means to open dustries which are pivotal to
the market of other countries. Some are of opinion KEY the growth (or sometimes the
that the closing of domestic market by protection IDEA survival) of an economy.
leads to the opening of others market. But other country may also take similar political
decision which may cause ‘trade war’. This violates the rule of trade.
8. Preserving the Income of Certain Group Argument: The industrial countries impose
custom duty in the import of agricultural products to protect their agro-industries. This
is done to protect the interest of farmers. But this policy increases the price of land and
thus benefits the landlords. Hence, it is now argued that the direct income transfer to the
farmers is more appropriate than trade protection.
9. Safeguard the Interest of Labour Argument: The protection policy is adopted to safeguard
the interest of labour as well. The exports of developing countries are labour- intensive.
They are related to the products like clothe, garment, and leather. It is therefore, argued
that high tariff wall is required to restrict imports and to maintain the living standard and
high wage rate of labourers.
10. Preservation of Natural Resources Argument: The foreigners take the natural resources
like mineral, forest, wild animals of developing countries under free trade. Due to this
there is depletion of natural resources. Finally, a country becomes bankrupt.
Subsidy: A direct or indirect payment, economic concession, or privilege
Glossary granted by a government to private firms or consumers
Tariff: Tax on imports
Bankrupt: Non being able to pay off debts
Terms of Trade: The amount of import goods an economy can purchase per unit of
export goods
DISADVANTAGES OF PROTECTION
The following disadvantages may be pointed out about free trade:
1. Higher Prices: Whether tariffs, quotas, exchange rate controls, or regulations are used,
they can all affect the final price of a product. Tariffs are the most obvious because a tax is
imposed on imported goods. These are paid for largely by the consumer as importers pass
on the majority of this cost to consumers.
2. Dumping will not be Always Bad: Protection hurts Key Terms
the consumers. The foreign goods become expensive Dumping: the selling of goods in
due to high import tax. The consumers are deprived of quantity at below market price
the consumption of high quality goods at lower price. Exchange controls: a govern-
They are compelled to consume low quality goods at mental restriction on the move-
ment of currency between coun-
high price. Hence, dumping is not bad if the people can tries
consume quality goods at lower price.
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3. Impossible to be Self-sufficient: No country is endowed with all kinds of natural resources.
Even the developed countries cannot be fully self-sufficient. The self-sufficient argument
destroys the basis of international trade such as the benefits of comparative cost theory
and specialization.
4. Fear of Permanency: Protection once given to the infant industries is difficult to remove.
Temporary protection may turn into a permanent one. Protection creates vested interest
and any efforts to remove it creates unrest. It is also difficult to fix the criteria of infant
industry.
5. Increase in Inequality: Policy of protection leads to inequality in the distribution of
income. On one hand, it imposes an additional burden on consumers in the form of higher
prices and on the other hand, it gives an opportunity to earn higher profits to industrialists
who already belong to rich section of the society.
6. Creation of Monopoly: Protection is the mother of monopoly. There are only few industries
“Proctectionism though argued as a
in developing countries. In the absence of Viewpoint
tool to protect domestic industries
foreign competition, these industries convert
breeds inefficiency” Elaborate it?
into monopoly. In general, the monopolists
exploit the consumers.
7. Economic Loss: Protectionist policies impose an additional cost and loss onto all parties.
First of all, domestic consumers must pay a higher price for goods. At the same time,
importers face a decline in demand, so international jobs are lost.
8. Misunderstanding between Countries: If a country adopts protection policy, other country
may also follow suit in response. This creates misunderstanding between countries and
may also create atmosphere for war.
9. No Improvement in Terms of Trade: The argument that the tax reduces prices in exporting
countries and brings terms of trade in favour of tax-imposing country is also wrong. If
the supply of exporting country is perfectly elastic, the price may remain unaffected.
Similarly, if the tax restriction measure is adopted even by the unaffected country, the
terms of trade return to the old position.
10. Political Corruption: Protectionism leads to political corruption. The big and influential
industrialists try to secure protection for their industries, even though they are quite strong
to face foreign competition, by offering bribes to corrupt political leaders and government
officials. There is no scope of such corruptions under free trade policy.
EYE ON THE ECONOMY
FREE TRADE AND PROTECTION
There is a clear consensus among economists about trade liberalisation improving wealth and
income, and free trade benefiting a country as a whole. It is equally true that both protectionism
and system of free trade create winners and losers. While protectionism ends up handpicking
winners amongst industries and jobs which are more influential to governments, free trade
picks its winners based on competition.
Inevitably, free trade does leave some people behind. And betterment of these people requires
supportive measures from governments. In a world where protectionism is rising, Nepal cannot
singlehandedly cut own tariff rates and open the market for other parties. This calls for strong
trade negotiations and engaging in meaningful regional or bilateral trade agreements.
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7.3 COMPARATIVE COST THEORY OF INTERNATIONAL TRADE
The classical theory of international trade is popularly known as the Theory of Comparative
Costs or Advantage. It was formulated by David Ricardo in 1815. The theory went through
many additions improvements and refinements at the hands of economists like Mill,
Cairns & Bastable. The theory is also called the Ricardian comparative cost theory or the
classical theory of international trade. The classical approach, in terms of comparative
cost advantage, as presented by Ricardo, basically seeks to explain how and why countries
gain by trading.
Assumptions
The comparative advantage theory is based on the following assumptions:
1. Two Countries, Two Commodities Model: This theory is based, on the assumption that
trade takes place between two countries and only on two commodities.
2. Labour is the Only Factor: This theory takes labour as the only productive factor. Hence,
production cost means only labour cost.
3. Homogenous Labour: This theory is based on the assumption that all labors are
homogenous and equal in efficiency.
4. Constant Returns: This theory assumes constant returns to scale or production increases
in proportion to increase in inputs.
5. Mobility of Factors: According to this theory, the factors of production are perfectly mobile
within a country. But they are immobile between, two countries.
6. Free Trade: This theory is based on the assumption of free trade without any restriction
like tax, quota in the trade between two countries.
Statement of the Theory
The term comparative advantage means the special ability of a country in producing a
particular commodity relatively cheaper than other commodity. Ricardo stated that,
other things being equal, a country tends to specialise in and export those commodities
in the production of which it has maximum comparative cost advantage or minimum
comparative disadvantage. Similarly, the country’s imports will be of goods having
relatively less comparative cost advantage or greater disadvantage.
When a country has an absolute superiority over the other in both commodities, it will
be advantageous for it to specialize in that commodity in which it has comparative
cost advantage. On the other hand, a country has comparative disadvantage in both
commodities too can gain by specializing in that commodity in which it has least
comparative disadvantage.
Comparative Cost Difference
Country Cost Qty of Garment Qty of Carpet Terms of Trade
Nepal 5 units of Labour 20 20 1G=1C
India 5 units of Labour 8 16 1G=2C
Even if a country can produce many goods in absolute advantage, it does not produce
all goods. That country produces only that good which has lower comparative cost and
higher comparative advantages.
Vedanta High School Economics - 10 122
Viewpoint Similarly, although the other country has disadvantage in the production of all goods, ‘it
produces good which has lower comparative disadvantage. The trade between countries
based on the specialized production of goods is advantageous to both the countries.
As in the table, Nepal can specialize in garment and import carpet. While, India can
specialize in carpet and import garment. This will be beneficial for both the countries.
CRITICISMS OF THE COMPARATIVE COST ADVANTAGE THEORY
The Ricardian theory of comparative advantage has been criticized on the following
grounds:
1. Unrealistic Assumption of Labour Cost: The doctrine is based on the labour theory
of value. In calculating production costs, it neglects non-labour costs involved in the
production of commodities. This is highly unrealistic because it is money costs and not
labour costs that are the basis of national and international transactions of goods.
2. Unrealistic Assumption of Constant Costs: The theory is based on another weak
assumption that an increase of output due to international specialisation is followed by
constant costs. But the fact is that there are either increasing costs or diminishing costs.
3. Ignores Transport Costs: Ricardo ignores transport costs in determining comparative
advantage in trade. This is highly unrealistic because transport costs play an important
role in determining the pattern of world trade. For instance, high transport costs may
nullify the comparative advantage and the gain from international trade.
4. Factors not fully Mobile Internally: The doctrine assumes that factors of production are
perfectly mobile internally and wholly immobile internationally. This is not realistic
because even within a country factors do not move freely from one industry to another or
from one region to another.
5. Two-Country Two-Commodity Model is Unrealistic: The Ricardian model is related to
trade between two countries on the basis of two commodities. This is again unrealistic
because, in actuality, international trade is among countries trading many commodities.
6. Unrealistic Assumption of Free Trade: Another serious weakness of the doctrine is that it
assumes perfect and free world trade. But, in reality, world trade is not free. Every country
applies restrictions on the free movement of goods to and from other countries. Thus
tariffs and other trade restrictions affect world imports and exports.
7. Unrealistic Assumption of Full Employment: Like all classical theories, the theory of
comparative advantage is based on the assumption of full employment. This assumption
also makes the theory static. Keynes falsified the assumption of full employment and
proved the existence of underemployment in an economy.
8. One-Sided Theory: The Ricardian theory is one-sided because it considers only the supply
side of international trade and neglects the demand side.
• The theory of comparative costs is simply an application of the
principle of division of labour to different countries.
.... Explain the comparative advantage theory of international trade.
.... What are its criticisms?
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7.4 GROWTH AND TREND OF FOREIGN TRADE OF NEPAL
The history of foreign trade of Nepal is very old. The trade link with India and Tibet
was established since the medieval period. Prior to 1950s, over 90 percent of its foreign
trade was conducted with India. Trade with China was comparatively less. Nepal’s
trade with overseas countries of Asia, America, Europe and Australia started only after
1956 A.D.
From 1982, Nepal adopted liberal trade policy. The government brought about a new
trade policy that promised to provide incentives to private entrepreneurs to invest in
the growth and expansion of the export sector. The new policy sought to “open a wide
international market” for indigenous products instead of confining them “within the
narrow bounds” of the domestic market.
Nepal introduced its first trade policy in 1983. It helped Nepal diversify its trade
relation with the rest of the world. Over the years the total volume of foreign trade of
Nepal has increased significantly.
Growth and trend of foreign trade in Nepal (Rs.crores)
Fiscal Year Total Export Total Import Total Trade Volume Trade Balance
2007/08 5926.65 22193.77 28120.42 -16267.12
2008/09 6769.75 28446.96 35216.71 -21677.21
2009/10 6082.4 37433.52 43515.92 -31351.12
2010/11 6433.85 39617.55 46051.40 -33183.70
2011/12 7426.10 46166.80 53592.90 -38740.70
2012/13 7691.70 55674.00 63365.70 -47982.30
2013/14 9199.13 71436.59 80635.72 -62237.46
2014/15 8531.91 77468.42 86000.33 -68936.51
2015/16 7011.71 77359.91 84371.63 -70348.20
2016/17 7304.91 99011.32 106316.23 -91706.41
2017/18 8135.98 124510.32 132646.30 -116374.34
2018/19 9710.95 141853.53 151564.48 -132142.57
Source: Nepal Rastra Bank Current Macro Economic Situation (CMES)
The table shows that the volume of trade is increasing over the years. Both imports and
exports of Nepal are increasing while trade deficit has been observed to be increasing due
to excess of imports over exports. Total volume of trade has increased from Rs.19018.78
crores in 2003/04 to Rs. 151564.48 crores in 2018/19. While during the same period, trade
deficit has increased from Rs. 8236.64 crores to Rs.132142.57crores. In the fiscal year
2018/19 the share of exports in total trade was 5.9 percent while that of imports was 94.1
percent. The share of trade with India was 64.2 percent of the total trade.
During the last ten years, the average growth rate of export stood at only 5.6 percent,
while that of imports has been 18.2 percent. During last decade, average exports to India
and other countries remained at 7.2 percent and 4.1 percent respectively. However,
imports during the same period expanded by 19.9 percent and 16.4 percent respectively.
Vedanta High School Economics - 10 124
7.5 COMPOSITION OF FOREIGN TRADE
Composition of foreign trade means the export and import of goods and services.
Composition of foreign trade can be divided into export and import. The commodities
traded in foreign countries are classified according to SITC (Standard International
Trade Classification) in ten categories.
Major items imported by Nepal are petroleum, chemicals, SITC is a classification of
fertilizer, pesticides, transport vehicles & Spare Parts, goods used to classify the ex-
medicine, other machinery equipment & spare parts, ports and imports of a country
to enable comparing differ-
electrical equipments, synthetic thread, readymade ent countries and years. The
garments and vegetable. petroleum products, motor classification system is main-
vehicles and parts, electronics, computer and peripherals, tained by the United Nations.
medicinal products crude soybean oil etc.
Major items exported by Nepal are cereals, pulses, oilseeds, tea, ginger, jute products,
textiles, GI Sheet, GI Pipes, threads, juice, wool, woollen carpet, pashmina products,
readymade garments, catechu, cardamom, noodles, shoes and sandals, dairy products,
live animals, hides vegetables ghee etc. readymade garments, and medicinal herbs etc.
(Rs. in crores)
SITC Group Exports 2017/18 Imports
2015/16 2016/17 2015/16 2016/17 2017/18
Food & live Animals 1642.1 1830.6 2085.7 10975.6 13062.3 15111.2
Tobacco & Beverage 47.8 25.0 24.8 641.3 801.1 828.6
Crude Materials & Inedibles 221.8 299.3 315.8 3339.2 3665.5 4198.4
Mineral Fuels & Lubricants 0.1 0.0 1.4 8408.8 14137.9 79783.6
Animals & Vegetable Oil & Fats 10.7 15.9 40.6 2115.3 3015.6 2861.2
Chemicals & Drugs 461.8 442.1 470.3 10396.2 10285.7 12557.7
Classified by Materials 3266.6 3445.3 3720.4 16313.2 21089.9 27989.3
Machinery & Transport Equip- 40.0 20.5 145.2 18976.4 24700.7 31400.3
ment
Miscellaneous Manufactured 1320.5 1226.1 1359.2 4586.4 5509.6 6332.2
Articles
Not Classified 0.3 0.0 0.0 1607.4 2743.2 3220.4
Total 7011.7 7304.9 8163.3 77359.9 99011.3 124282.7
Source: Economic Survey 2018/19 Ministry of Finance, Government of Nepal
The table shows the major items exported and imported by Nepal. The value of imports of
SITC listed items amounts to Rs.77359.9 crores in 2015/16 as against the value of exports
of the same items which is Rs. 7011.7 crores . While in 2018/19, the value of imports
amount to Rs.124282.7 crores as against the value of exports of the same items which
amounts to Rs. 8163.3 crores.
Glossary Decade: Ten years period
Liberal trade policy: A policy aimed at encouraging foreign trade
Computer peripherals: Any external device that provides input and output for the computer
Crude: Raw, unprocessed
125 Vedanta High School Economics - 10
7.6 DIRECTION OF FOREIGN TRADE
The foreign trade of Nepal is directed towards wide range of countries in the world.
Nepal became a member of the WTO on April 23, 2004 which provided an opportunity
for the domestic economy to be integrated with the global economy. The major trade
partners of Nepal are India, Tibet and other overseas countries. Nepalese products
are exported to India, Tibet, the USA, Germany, Japan, Bangladesh, UK, France, Italy,
Switzerland, Belgium, Hong Kong, etc. The value of export from Nepal is less than the
value of import. Since Nepal is a landlocked country most of the trade of Nepal is with
India and foreign trade of Nepal is done with third countries through the two countries
India and China. The Northen border of Nepal is linked with Tibet (China) and it is
very difficult to promote trade link due to hills and mountains. So India is the only
place that Nepal establishes foreign trade using the land of that country. The direction
of foreign trade has been presented in the following table:
(Rs Crores)
Description 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
Export F.O.B. 7691.71 9199.13 8531.91 7011.71 7304.91 8163.33 97109.5
India 5099.98 5961.37 5586.46 3949.37 4144.92 4660.48 62731.8
Other coun- 2591.73 3237.76 2945.45 3062.34 3159.99 3502.85 34377.7
tries
Import C.I.F. 55674.03 71436.59 77468.42 77359.91 99011.32 124282.68 1418535.3
India 36703.13 47794.70 49165.59 47721.26 63366.96 80981.42 917909.3
Other coun- 18970.90 23641.89 28302.83 29638.66 35644.36 43301.25 500626.0
tries
Total volume 63365.73 80635.72 86000.33 84371.63 106316.23 132446.01 1515644.8
of Trade
India 41803.11 53756.07 54752.05 51670.63 67511.87 85641.91 980641.1
Other coun- 21562.63 26879.65 31248.28 32701.00 38804.36 456641.6 535003.7
tries
Share in To- 100 100 100 100 100 100 100
tal Trade %
India 66 66.7 63.7 61.2 63.5 64.9 64.7
Other coun- 34 33.5 36.3 38.8 36.5 35.1 35.3
tries
Source Nepal Rastra Bank, Current Macro Economic Situation (CMES)
The table above suggests that Nepal’s foreign trade is dominated by India. In the fiscal year
2012/13, India’s share in total trade was 66 percent and in 2013/14 , 2014/15, 2015/16, 2016/17
2017/18 and 2018/19 it was 66.7 percent, 63.7 percent,,61.2 percent, 63.5 percent, 64.9 percent
and 64.7 percent respectively.. On an average about 65 percent of Nepal’s foreign trade is
concentrated with India.
Nepal began trade diversification since early 1950s with the introduction of incentives
on third country exports at a time when more than 95 percent of the country’s trade
Vedanta High School Economics - 10 126
was confined to India. Following this, exports grew by more than 14 percent on average
during first half of the 1970s. Now the major trade partners of Nepal are India, China,
and other overseas countries. Nepalese products are exported to many countries like
India, China, USA, Germany, Japan, Bangladesh, UK, France, Italy, Spain, Switzerland,
Belgium and Hong Kong. Similarly, Nepal imports foreign goods from India, China,
Singapore, UK, Hong Kong, Saudi Arabia, Thailand, Japan, Malaysia, UAE and Kuwait.
Trade diversification is important to get more benefit Trade diversification is the
from foreign trade. It is the process of expanding KEY act of diversfying commodities
trading activities of several commodities in several IDEA and trading activities
countries.
Trade diversification can be done in two ways; (a) Country wise diversification and (b)
Commodity wise diversification
i. Country wise Diversification: Before 2007 B.S., Nepal had trade relation with limited
countries like India, China and UK. But, after the initiation of planned development
process, Nepal had started to diversify its trade in several overseas countries. The share
of other countries than India in the foreign trade of Nepal is increasing year by year.
At present the main trade partners of Nepal besides India are USA, Germany, Japan,
Bangladesh, UK, France, Italy, Spain, Switzerland, Belgium and Hong Kong.
ii. Commodity wise Diversification: For the commodity diversification, the agricultural as
well as industrial commodities should be made qualitative with an aim to export other
countries of the world. Nepal has changed the composition of its exports in recent
years. The major commodities being exported to other countries are raw jute and jute
goods, pulses, linseed, dried ginger, medicinal herbs, catechu, woolen goods, Nepalese
paper and paper products, skins of animals, carpet, garments, handicrafts etc.
Viewpoint • Until the 1950s, 90 percent of Nepal’s trade was with India. Trade
with Tibet, mostly the bartering of agricultural produce, went into
decline at the turn of the 20th century.
.... How has Nepal foreign trade progressed over the years?
PROSPECTS OF FOREIGN TRADE IN NEPAL
Nepal is an agro based country. There is no proper industrialization in Nepal. However,
there are some important sectors which have possibility to increase foreign trade of
Nepal.
1. Agriculture: Agriculture occupies a primary place in Nepalese economy. The main
export items of Nepal are agricultural products such as livestock, food grains, cash
crops, ginger, cardamom, jute, tea, fruits and vegetables. About 50 percent of Nepalese
exports consist of agricultural commodities.
2. Water Resource: Nepal is the second richest country in hydro power potential after
Brazil. It has the potentiality to produce 83000 Mega Watt of hydro-electricity of
which 44000 Mega Watt is considered as economically and technically feasible. Proper
utilization of water resources can produce enough hydro-electricity to export abroad,
which helps to earn foreign currencies.
3. Forest Resources: Forest is the main source of fodder and timber, which can be exported
127 Vedanta High School Economics - 10
to other countries. Similarly, many forest based industries can produce furniture, card
board, Nepali paper etc. These products can also be exported to earn valuable foreign
currency.
4. Tourism Based Industries: Tourism is the industry where foreign trade takes place
within the domestic territory of a country. Nepal is a well known country for world
tourists. The highest peak of the world (Mt. Everest), Buddha’s birth place (Lumbini)
natural beauty, geographical diversity and cultural & ethnic heritage constitute the
road to the development of tourism industry in Nepal. Tourists spend foreign currency
in fooding, lodging, transporting, trekking and in goods and services etc.
5. Handloom and Handicrafts: There are skilled craftsmen and artisans who produce
artistic handloom and handicraft items. Thanka painting, metal crafts, wood crafts,
idols and statues, Dhaka fabrics, pashmina etc. are some important handloom and
handicraft items produced by Nepal. Nepal has potential in export of these items.
6. Minerals and Mineral based Products: Nepal is rich in mineral resources. Nepal can
export of minerals like limestone, gypsum, The art of Thanka painting
manganese, copper, iron ore etc. Processed was practiced as early as 3rd
mineral products like iron and steel, cement, century B.C. in Nepal and Ti-
GI sheets and pipes, electric cables and optical bet.
fibres can also be exported.
7. Medicinal Herbs and Traditional Medicine: Nepal has over 800 medicinal herbs like
yarsha gumba, chiraito, paanchaule, bojho etc. These medicinal herbs can be processed
to prepare traditional medicine. Nepal has immense potential in export of these items.
8. Cheap Labour: Surplus labour abounds in agriculture. Proper diversion of cheap and
surplus labour from agricultural sector to manufacturing sector can help to increase
industrial output and thus generate surplus for export.
9. Facilitate Economic Development: Foreign trade is regarded as an engine of economicViewpoint
growth. Imports facilitate economic development of a nation. This is because with the
import of capital goods and technology, a country can generate growth in all sectors of
the economy, i.e. agriculture, industry and service sector.
• Foreign Trade is an engine of economic growth in a developing
country like Nepal
.... How can foreign trade help in the economic development of Nepal?
PROBLEMS OF FOREIGN TRADE IN NEPAL
The foreign trade of Nepal is besetted with various problems. The following are the
major problems of foreign trade in Nepal.
1. Less Export: The pace of industrialization in Nepal is very slow. So we have limited
industrial products. Most of the products which are produced in the country are also
consumed within the territory of the country. Since Nepal is agricultural predominant
country, the export of the raw agricultural good earns only a little foreign currency.
2. Increasing Imports: Daily needs item such as petroleum products, salts, medicine, etc
are the things for which Nepal should depend on foreign countries. Including the daily
Vedanta High School Economics - 10 128
needs items, the luxuries goods are also main import of Nepal. Although government
collect more tax revenue from those products, more home currencies outflow in the
purchase of such products causing trade deficit.
3. Geographical Location: Nepal is not only a landlocked country but also India-locked
country. It has to face many difficulties to make direct link for trading with overseas
countries. Nepal has to depend upon India while exporting and importing goods. As a
result, Nepal cannot accelerate the pace of foreign trade development.
4. Open Border: Nepal has open border policy with India. There is a large flow of Indian
goods at cheap price. Indian goods are smuggled in and imported foreign goods
smuggled out into India through unofficial routes. Individuals and businessmen get
high benefit but the country gains a little. This has been hurting foreign trade badly.
5. High Cost of Production: Nepal is a developing country and not industrialized yet. The
technological backwardness of the country is causing high cost of factor inputs and
output as well. So Nepalese products are less price competitive in international market.
On the other hand the products are less of quality i.e. inferior ones.
6. Concentration of Foreign Trade with Few Countries: Nepal’s foreign trade is only with
limited countries. Mainly Nepal’s foreign trade link is with India,USA, Germany for
export and Asian countries for import. If any problems arise in such countries then
Nepal’s foreign trade is affected adversely. Such concentration with few countries
creates problem in foreign trade.
7. Production of Bulk Materials: Since the exportable goods of Nepal are very bulky
i.e. rice, jute, timber, pulses, etc. They are very costly in terms of transportation and
inefficient. Similarly, the importable goods of Nepal like coal, iron, petroleum products
are also bulky. These bulky materials transport are causing problems in Nepalese
foreign trade.
8. Uncertainty of Trade Policy: Nepal’s political condition is very unstable. Due to this
Nepal’s foreign trade policy keeps on changing from time to time. There is lack of
consistent trade policy. This affects Nepal’s foreign trade.
9. Low Capital Formation: Low Capital Formation is one of the major problems of foreign
trade in Nepal. There are very limited economic activities in Nepal. The infrastructures
for development and industrial base are not well developed. There lacks favourable
environment for both private and foreign investment, which means there is very little
capital formation in the country. This is not a favourable situation for international
trade.
10.Weak Labour Relations: The relations between labourers and employers are not
satisfactory as manifested in increasing disputes between management and labourers.
In the last 15 years or so, the number of labour strikes, locks-outs, and industrial shut
downs have increased. Many of these actions were politically instigated requiring
political solutions.
Glossary Pashmima: A fine type of wool
Ethnic heritage: pertaining to or characteristic of a people, especially a group (ethnic
group) sharing a common and distinctive culture
Entirely surrounded by land; having no coastline
Landlocked:
129 Vedanta High School Economics - 10
REMEDIAL MEASURES OF FOREIGN TRADE OF NEPAL
The remedies to the problems of foreign trade of Nepal may be pointed out as:
1. Trade diversification: Nepal has to diversify its trade to increase to develop its foreign
trade. Trade diversification can be realized by applying various trading activities such as
trade fair, good diplomatic relations, strong transit treaty, publicity, increasing quality and
quantity of products etc.
2. Promotion of export oriented industries: Various fiscal incentives like tax concessions,
subsidies, protective tariffs etc. may be provided by the government to promote and
develop export oriented industries and import substituting industries. This helps to
increase exports and reduce imports.
3. Exports of manufactured goods: Exports of primary goods fetch low value in international
market. Nepal should focus on export of manufactured items which fetch good price in
the international market. This helps to improve the balance of payment situation.
4. Expansion of export base: Nepal exports basically agricultural items and primary goods.
It has a narrow export base. Nepal needs to increase its export items and not just depend
on its traditional list of exports items.
5. Development of infrastructure: Lack of infrastructures has proved an obstacle in the
development of industries and trade in Nepal. Development of physical infrastructures
leads to capital formation and in industrial development. This helps to increase exports
and develop Nepal’s foreign trade.
6. Political stability: Political instability creates uncertainty in business environment and
deters investment. Political stability builds up business confidence, encourage investment
and influences economic activity. This help in the development of Nepal’s foreign trade.
7. Improvement in quality: Nepal’s exports of manufactured goods lack competitive strength
due to low quality and high cost. Improvement in technology and skill development
training can help to improve the quality of production and reduce the cost of production.
8. Suitable trade policy: Lack of suitable trade policy has hampered the development of
foreign trade in Nepal. Suitable trade policy can help to influence investment and trade
activity and develop foreign trade.
9. Transit arrangement: Nepal should make transit arrangements with its neighbours- India
and China to gain unrestricted access to sea. This facilitates exports and imports and
develops Nepal’s foreign trade.
10. Credit arrangements: Export industries are handicapped due to lack of lack of capital.
Adequate provision of credit to industries and exporters can help to develop export
industries and correct the balance of payment problem.
READING BETWEEN THE LINES
RICARDIAN COMPARATIVE COST THEORY
Ricardo developed his approach to combat trade restrictions on imported wheat in England.
He argued that it made no sense to restrict low-cost and high-quality wheat from countries with
the right climate and soil conditions. England would receive more value by exporting products
that required skilled labour and machinery. It could acquire more wheat in trade than it could
grow on its own
Vedanta High School Economics - 10 130
7.7 GENERAL INTRODUCTION TO WTO AND SAFTA
WORLD TRADE ORGANIZATION
In 1947 AD, the General Agreement on Tariff and Trade (GATT) was established. Its
aim was to make the foreign trade simple and liberal.In April 1994, the Final Act was
signed at a meeting in Marrakesh, Morocco. It could not promote the trade liberalization
successfully.
The WTO is the successor to the General Agreement on Tariffs and Trade (GATT).
It was established on 1st January 1995. It represents the latest attempts to create an
organizational focal point for liberal trade management and to consolidate a global
organizational structure to govern world affairs. Its head quarter is located at Geneva
in Switzerland. It is the only international body that deals with the rules of trades
between nations. Nepal became a member of WTO on April 23, 2004.
Objectives of WTO Nepal was the first Least
Developed Country to ne-
Important objectives of WTO are mentioned below: gotiate its accession to the
1. To implement the new world trade system as World Trade Organization.
.
visualized in the Agreement.
2. To promote World Trade in a manner that benefits
every country.
3. To ensure that developing countries secure a better balance in the sharing of the advantages
resulting from the expansion of international trade corresponding to their developmental
needs.
4. To demolish all hurdles to an open world trading system and usher in international
economic renaissance because the world trade is an effective instrument to foster economic
growth.
5. To enhance competitiveness among all trading partners so as to benefit consumers and
help in global integration.
6. To increase the level of production and productivity with a view to ensuring level of
employment in the world.
7. To expand and ensure optimum utilization of world resources.
8. To improve the level of living for the global population and speed up economic development
of the member nations.
IMPORTANCE OF WTO TO DEVELOPING COUNTRIES
The importance of WTO for Nepal can be mentioned as follows.
1. Enhancing Trading Capacity: Acess to WTO helps member countries to enhance their
effectiveness and efficiency in trading capacity.
2. Expansion of Market: With WTO membership, the market for domestically produced
goods extends beyond national boundary. It would help us to expand our trade in the
global market thereby contributing to higher level of economic growth.
3. Economic Liberalization: WTO has helped developing countriesl in liberalizing the
economy over the years. Nepal has attempted to systematically reform and open its
131 Vedanta High School Economics - 10
economy under the guideline of WTO. The economic reform and trade liberalization
would attract investment and promote economic development.
4. Enhancing Productive Capacity: Free trade with other countries help to increase the
production capacity of the domestic industries.
5. Access to International Capital: WTO membership provides access to the international
capital market.Foreign investment will also increase. It also decreases the cost of capital
PRINCIPLES OF WTO
The principle of WTO is non-discrimination, with twin face of most favoured nation
and national treatment. Some of the major principles are listed below:
a. Principle of Most Favoured Nation (MFN): Any member country cannot discriminate
the product of other country. It should treat the product of other countries equally. It
should deal with the behavior of MFN to all the members.
b. Free Trade: All member countries should raise non- Key Term
tariff barriers. They should reduce custom duties, quota
system and tariff to encourage free trade. MFN Status: status is given to
an international trade partner
to ensure non-discriminato-
c. Guarantee of Security: The WTO provides security ry trade between all partner
guarantee to its member countries to invest in other countries of the WTO
countries.
d. Free Trade Competition: The WTO first focus on free and healthy competition among
its members in the economic activities.
e. Protection of Patent Right: The WTO protects the patent rights of its members like copy
rights, trade marks, design etc. it does not allow others to copy and reproduce them.
f. Emphasis on the Least Developed and Developing Countries: The WTO helps to
increase the competitive capacity of the developing countries. Subsidies are provided
to their products.
OPPORTUNITIES AND BENEFITS TO NEPAL FROM WTO
The following are the potential benefits offered by WTO membership:
1. Market Access: The WTO membership has secured extended market opportunities for
Nepal. Nepal has the opportunity of exploring other destinations among the member
states.
2. Special and Differential Treatments: The WTO offers special and differential treatments
for LDCs like Nepal. These include longer transition periods for the implementation
of the agreements, technical support, due restraint on disputes involving LDCs, and
special treatment while liberalizing the services sector.
3. Transit Right: Nepal would be granted access to the sea as a right as per Article V of the
GATT. In theory, as a WTO Member, Nepal should benefit from access to international
markets without discrimination.
4. Policy Stability: The WTO regime provides opportunity for policy stability internally
which is of utmost urgency in the context of the existing political instability in order to
provide an environment of predictability for investment and industrialization.
Vedanta High School Economics - 10 132
5. Attract Foreign Direct Investment: Policy stability due to WTO membership provides
credibility to the nation in terms of economic activities with predictable environment.
Such environment is essential to attract foreign direct investment (FDI) and technology
to expedite industrialization process in Nepal.
6. Gearing up Domestic Institutional Capability: An intellectual property right creates
a better situation for attracting investment. Joining WTO reflects national commitment
in gearing up domestic institutional capability in delivering services related to trade
and economic transactions.
7. Benefit from Liberalization: Nepal could benefit from liberalization through better
allocation of natural resources towards industries with the strongest advantages.
The obligatory requirement of transparency and self-discipline in economic policy
making bestowed by WTO membership would provide better environment for
“entrepreneurship”.
8. Access to Dispute Settlement Body: WTO best achievement is dispute settlement body.
WTO membership would accord Nepal the right to challenge in any measures taken by
trading partners, which are against Nepal’s economic and trade interest.
CHALLENGES OF WTO IN NEPAL
The major challenges of WTO membership in Nepal are as follows.
1. Nepal can benefit from WTO, but only if its economy is able to respond. This depends
on combination of actions from improving policy making and management training
and investment. It is a main challenge.
2. As a member of WTO, Nepal undertook various obligations such as traffic reductions
on industrial and agricultural goods and so on. It has increased the imports highly. As
a result, our trade deficit is increasing with other countries.
3. If the discriminatory domestic policies on agriculture are removed, the agreement on
agriculture will make Nepal’s agricultural products more difficult to be competitive in
the future. It is another challenge.
4. WTO membership has integrated Nepal with the global market. Nepal has got access
to international capital market. It has increased the competition on private sectors
to invest more and produce more. It has increased the risk of capital flight to other
countries due to lack of political and financial stability.
5. WTO has helped Nepal to liberalize and open its economy. It can supply a number of
products in the global market. But its products are unable to compete with the foreign
goods. Nepal is also unable to check the inflow of foreign goods in domestic market.
This will hamper our industries.
READING BETWEEN THE LINES
The current institutional framework of the WTO was created on 1 January 1995 replacing the
then General Agreement on Trade and Tariffs (GATT) under the Marrakesh Agreement, signed
by 124 nations on 15 April 1994.The General Agreement on Tariffs and Trade (GATT), was
formed in 1948. WTO is the largest international economic organization in the world. The
general principle of WTO is to have freer and more predictable trade without discrimination
and being more beneficial for less developed countries
133 Vedanta High School Economics - 10
7.8 SOUTH ASIAN FREE TRADE AGREEMENT (SAFTA)
Introduction
South Asian Free Trade Area (SAFTA) is a proposed “free trade area” between the original
seven members of SAARC – Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan,
Sri Lanka. Later in 2007, Afghanistan became the eighth member of SAARC. The 11th
SAARC Summit held in Kathmandu in January, 2002 introduced the concept of SAFTA.
The 12th SAARC Summit held in Islamabad in 2004 agreed upon its implementation.
It plans to establish a system of common market, currency and free flow of goods and
services between the member states.
Against the back drop of the “Islamabad Declaration” the SAFTA was signed to cut
down the trade barriers in the region by January 1, 2006 whereby the free trade area
will come into effect partially. However, it will be fully realized by 2016. It proposed to
reduce tariffs to zero. The ultimate aim of SAFTA is to put in place a full-fledged South
Asia economy by maintaining common tariff and non-tariff barriers on imports from all
non-member countries. The South Asian Free Trade Area
Objectives of SAFTA in accordance with KEY (SAFTA) is the free trade arrange-
IDEA ment of the South Asian Association
SAFTA shall be governed for Regional Cooperation (SAARC).
the following principles:
1. Governance by Provisions of Agreement: SAFTA will be governed by the provisions
of this Agreement and also by the rules, regulations, decisions, understandings and
protocols to be agreed upon within its framework by the Contracting States.
2. Affirmation of Existing Rights and Obligations: The Contracting States affirm their
existing rights and obligations with respect to each other under Marrakesh Agreement
Establishing the World Trade Organization and other Treaties/Agreements to which
such Contracting States are signatories.
3. Overall Reciprocity and Mutuality of Advantages: SAFTA shall be based on the
principle of overall reciprocity and mutuality of advantages so as to benefit equitably
all Contracting States, taking into account their respective level of economic and
industrial development, the pattern of their external trade, and trade and tariff policies
and systems.
4. Negotiation of Tariff Reform: SAFTA shall involve the free movement of goods,
between countries through elimination of tariffs, para tariffs and non-tariff restrictions
on the movement of goods, and any other equivalent measures.
5. Trade Facilitation and other Measures: SAFTA shall entail adoption of trade
facilitation and other measures, and the progressive harmonization of legislations by
the Contracting States in the relevant areas.
Viewpoint6. Recognition of the Special Needs of the LDCs: The special needs of the Least Developed
Contracting States shall be clearly recognized by adopting concrete preferential
measures in the•ir faTvhoeuSrAoFnTaAnaognre-reemceipnrtoccaaml ebainsitso.force on January 1, 2006, However,
its full operation is mired in doubt.
.... What do you think have hindered its ratification and implementation
Vedanta High School Economics - 10 134
IMPORTANCE OF SAFTA IN NEPAL
The importance of SAFTA in Nepal are shown in the following points:
1. It helps in economic development through free trade.
2. There is great importance of promoting regional cooperation for the overall development
of entire region.
3. Nepal can diversify is products by implementing the SAFTA agreement. It would help
to develop the local industries.
4. Nepal can initiate the various projects of hydropower with the regional cooperation. It
can use the SAFTA as a great potential market.
5. Through a regional agreement, Nepal stands to secure better transit rights, and the
realization of such rights will be less dependent on its political relationship with any
particular country.
6. It can provide access to Chittagong and Mangla ports in Bangladesh which are potential
alternative ports for Nepal.
7. Greater economic cooperation among SAFTA members holds important implications in
the form of a larger market, economies of scale in production and improved resource
allocation.
CHALLENGES OF SAFTA IN NEPAL
The region is full of challenges. Some of the main challenges of SAFTA in Nepal are as
follows.
1. Some of the main challenges of Nepal and the SAFTA include poverty, illiteracy,
underdevelopment, terrorism, human trafficking and social and ethnic conflicts.
2. Food and energy crisis have also come out as the burning issues in Nepal.
3. Nepal is abundant in human and other natural resources. There is a great challenge to
manage and utilize them effectively.
4. Despite the rise in multilateral trade turning the last two decades. Nepal is facing
problem of trade deficit with the other regional countries.
5. There are concerns about duty-free entry of Indian agricultural products, including
subsidized ones, adversely affecting the Nepali agricultural sector.
6. When SAFTA comes into force, Indian goods will start flowing across the border
without any tariff walls. Nepal will lose customs revenue, which are around five billion
rupees in annual terms at present.
7. With SAFTA coming into force, Nepal will have to compete with the products of other
SAARC countries in Indian markets since they will also have enjoyed free access to
India by then.
8. The unrestricted and untaxed inflow of Indian goods into Nepal can have a debilitating
impact on domestic industries.
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CONCEPTS FOR REVIEW
Internal trade Foreign trade Entrepot trade
Balance of payments
Factor immobility Comparative advantage Trade diversification
Non tariff barriers
Delicensing Transit
Tariff Para tariffs
UNIT OVERVIEW
Foreign trade: It is the exchange of capital, Composition of Nepal’s foreign trade:
goods, and services across international
borders or territories. Major items imported by Nepal are petroleum,
Types of foreign trade: chemicals, fertilizer, pesticides, transport
1. Import Trade vehicles & Spare Parts, medicine, other
2. Export Trade machinery equipment & spare parts, electrical
3. Entrepot Trade equipments, synthetic thread, readymade
Importance of foreign trade: garments and vegetable. petroleum products,
1. Greater variety of goods. motor vehicles and parts, electronics,
2. Efficient allocation of resources. computer and peripherals, medicinal products
3. Efficiency in production. crude soybean oil etc.
4. More employment.
5. Consumption at cheaper cost. Major items exported by Nepal are cereals,
6. Reduces trade fluctuations. pulses, oilseeds, tea, ginger, jute products,
7. Utilization of surplus produce. textiles, GI Sheet, GI Pipes, threads, juice,
8. Fosters peace and goodwill. wool, woollen carpet, pashmina products,
9. Division of labour and specialization. readymade garments, catechu, cardamom,
10. Facilitates economic development. noodles, shoes and sandals, dairy products,
Characteristics of Nepalese foreign trade: live animals, hides vegetables ghee etc.
1. Rapid growth readymade garments, and medicinal herbs etc.
2. Increasing deficit over the years
3. Predominance of agricultural exports Direction of Nepal’s foreign trade:
4. Concentration of trade with India
5. Lack of effective trade diversification The foreign trade of Nepal has been directed
Growth and trend of Nepal’s foreign trade: towards a number of countries in the world,
Traditionally, Nepal’s foreign trade was limited especially after Nepal became a member of the
to India and Tibet. Prior to 1950s, over 90 WTO on April 23, 2004. Nepal today has trade
percent of its foreign trade was conducted with relations with more than a hundred countries
India. Trade with China was comparatively although Nepal’s trade with other countries
less. started only after the establishment of
Nepal’s trade with overseas countries started democracy in 2007 B.S. Major trade partners of
only after 1956 A.D. Nepal introduced its first Nepal today are India, China, USA, Germany,
trade policy in 1983. It helped Nepal diversify Japan and many other countries.
its trade relation with the rest of the world.
Nepal began trade diversification since early
1950s with the introduction of incentives on
third country exports at a time when more than
95 percent of the country’s trade was confined
to India. Following this, exports grew by more
than 14 percent on average during first half of
the 1970s.
Now the major trade partners of Nepal are
India, China, and other overseas countries.
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UNIT OVERVIEW
Nepalese products are exported to many Agreement on Tariffs and Trade (GATT). It was
countries like India, China, USA, Germany, established on 1st January 1995. It represents
Japan, Bangladesh, UK, France, Italy, Spain, the latest attempts to create an organizational
Switzerland, Belgium and Hong Kong. focal point for liberal trade management and
Similarly, Nepal imports foreign goods from to consolidate a global organizational structure
India, China, Singapore, UK, Hong Kong, to govern world affairs. WTO has attempted
Saudi Arabia, Thailand, Japan, Malaysia, UAE to create various organizational attentions for
Prospects of foreign trade in Nepal: regulation of international trade. WTO created
1. Agricultural commodities a qualitative change in international trade. It is
2. Immense potentiality of water resource the only international body that deals with the
3. Forest resources rules of trades between nations. Nepal became
4. Tourism based industries a member of WTO on April 23, 2004.
5. Handloom and handicrafts
6. Minerals and mineral based products Objectives of WTO
7. Medicinal herbs and traditional medicine
8. Cheap labour 1. Administering trade agreements
Problems of foreign trade in Nepal:
1. Long political transition 2. Acting as a forum for trade negotiations
2. Difficult terrain
3. Landlocked geographical location 3. Settling trade disputes
4. Limited export basket
5. Weak labour relations 4. Reviewing national trade policies
6. Inadequate economic infrastructure
7. Inadequate social infrastructure 5. Assisting developing countries in trade
8. Insufficient skilled human resources policy issues, through technical assistance and
9. Inadequate market information training programmes
10. Inadequate trade related infrastructure
Remedial measures of Nepalese foreign trade: 6. Cooperating with other international
1. Trade diversification organizations.
2. Promotion of export oriented industries
3. Export of manufactured goods South Asian Free Trade Area (SAFTA)
4. Expansion of export base
5. Development of infrastructure The 11th SAARC summit held in January 2002
6. Political stability at Kathmandu had decided to prepare a model
7. Suitable trade policy of SAFTA. The member countries signed a
8. Improvement in quality of production free trade agreement on January 6. 2004 at the
9. Transit arrangement 12th SAARC summit held in Islamabad. The
10. Credit arrangements agreement has come into effect from January
1, 2006 whereby the free trade area will come
World Trade Organization: into effect partially. However, it will be fully
realized by 2016.
Objectives of SAFTA
1. To eliminate barriers in trade and facilitate
movement of goods between contracting states.
2. To promote conditions of fair competition in
the free trade area,
3. To create effective mechanism for the
implementation and application of the
agreement 4. To establish a framework for
further regional cooperation
The WTO is the successor to the General
137 Vedanta High School Economics - 10
QUESTIONS FOR REVIEW
Very Short Answer Type Questions
1. Define foreign trade.
2. What are the two main basis of foreign trade?
3. What kind of goods is mainly exported by Nepal?
4. What is called trade between two countries?
5. How is trade diversification done?
6. Write down any one of the possibility of foreign trade.
7. Mention any two importance of foreign trade.
8. Mention any two problems of foreign trade in Nepal.
9. Give any two remedial measures of foreign trade.
10. Write the full form of WTO and SAFTA.
11. When was WTO established?
12. Write any two opportunities to Nepal from WTO.
13. Mention any two challenges of WTO to Nepal.
14. When did Nepal get membership of WTO?
15. Write any two objectives of SAFTA.
16. Write the member countries of SAFTA.
17. What is “most favored nation” status?
18. Define Free Trade.
19. What is meant by Protectionism?
20. What is meant by infant industry?
Short Answer Type Questions
1. Define foreign trade. What is its importance?
2. Mention the problems of foreign trade of Nepal and write the remedial measures.
3. Explain the composition of foreign trade of Nepal.
4. Is there any possibility of foreign trade in Nepal? Explain.
5. What are the arguments in favour of free trade?
6. What are the arguments in favour of protectionism?
7. What is diversification of trade? In what ways is it done?
8. State the role of foreign trade in economic development of Nepal.
9. Briefly introduce the WTO and explain its objectives.
10. Briefly introduce SAFTA and explain its objectives
11. Explain the opportunities to Nepal from the membership of WTO.
12. What are the challenges of WTO to Nepal?
13. What are the principles of SAFTA?
14. What sort of measures can be applied to improve the conditions of foreign trade of Nepal?
Vedanta High School Economics - 10 138
UNIT 8 ECONOMIC PLANNING IN NEPAL
Learning Objectives Weight:13 Lecture Hours
On Completion of this unit the student will be
able to:
• Understand the concept of development
planning
• Explain the process of plan formulation
• Point out the objectives of various plans in
Nepal
• Point out the priorities and strategies of
various plans
• Understand and explain the features of the Before you begin
current plan Economic planning is the process of con-
ceiving, regulating and controlling the
economic activity by the states to achieve
the pre-determined objective in accord-
ance with pre-fixed priorities. Economic
planning is a process that involves struc-
turing the use of available resources to
help bring about desired outcomes
Very Short Type Short Type Long Answer Type Total Marks
1 1
06
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8.0 CONCEPT OF ECONOMIC PLANNING
Aplan is a set of thing or activities to operate in systematic order to achieve definite
target or objectives. Development planning is the systematic management of
resources for the purpose of achieving definite targets or objectives within specific
period of time. It is defined as the deliberate government attempt to implement,
monitor, supervise and coordinate economic decisions made on the economic issues
of the country.
The concept of development planning was first introduced in 1917 A.D. in the former Soviet
Union. It became popular after the end of 1930 Great Economic Depression. The systematic
development planning in Nepal was started in 2013 B.S. which was for 5 years (2013 B.S. to
2018 B.S.).
Dickinson- “Planning is to make major economic decisions on what and how much is to
be produced; how, when and where it is to be produced and to whom it is to be allocated”.
Dalton- “Economic planning in the widest sense is the deliberate direction by persons in
charge of large resources of economic activity towards chosen ends”.
Economic planning may thus be defined as the deliberate control and direction of the
economy by the state for achieving certain targets and objectives with in a schedule
time
8.1 PROCESS OF FORMULATION OF ECONOMIC PLAN
In Nepal, National Planning Commission (NPC) formulates the economic plan. It
prepares the economic plan by completing the following stages.
1. Assessment of Existing Status of Development: At the initial stage, the achievements
and failures of the previous plans are analyzed. Then, the existing status of the various
economic sectors is assessed thoroughly.
2. Objectives: Specification of goals and objectives is the main task of plan formulation.
Objectives may change from plan to plan. Plan performance cannot be evaluated without
objectives. The objectives should not be ambiguous and contradictory.
3. Determination of Targets and Priorities: Targets are essential for the plan to be successful.
Necessary provisions should be made and policies adopted to meet the targets. Due to the
scarcity of resources, all the works and projects of development can not fulfilled at the
same time. So economic sectors must be prioritized on the basis of its impact on the
overall development.
4. Strategies and Policies: Development policies should be stated for making the
development plan successful policies are prepared on sectoral basis. They should be
practical, So that they can be implemented easily by using the available resources.
5. Determination of Growth Rate: The growth rate of the economy as a whole is determined.
The growth rate is determined on the basis of available resources and the need of the
country.
6. Macroeconomic Projections: The macro economic projections of national income,
investment and employment are made on the basis of relevant statistics. The required rate
of investment is estimated to achieve the targets of the plan.
7. Monitoring and Evaluation: When the various programmes mentioned in the plan are
implemented, it is essential to monitor them. It will help to achieve the quantitative
targets of plan. After the implementation of plan, it is evaluated whether the
implementation has been made according to the plan or not.
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140
IMPORTANCE OF ECONOMIC PLANNING
The role of planning in the developing countries like Nepal are as follows:
1. Proper Utilization of Natural Resources: Economic planning facilitates best utilization
of natural resources. By adopting the process of economic planning it is possible to
utilise available labour and capital in the interest of nation which helps in maximization
of national output.
2. Poverty Alleviation: In Nepal poverty of people is major evil aspect. So creating
employment end social services to the poor people, to remove poverty is the first
importance of economic planning in Nepal.
3. Reducing Regional Imbalance: In Nepal there is vast economic imbalance between
various regions of the countries and between urban and rural areas. Migration from
hills to Terai and rural areas to urban areas is increasing. So the main importance of
planning is to reduce this imbalance by implementing effective plans and programmes
to those regions which are not developed and far from development.
4. People’s Participation on Development: The economic Key Terms
plan stimulates all people in country to involve in the Stimulate: encourage interest
development process of country because without the or activity
involvement of public its impossible. It starts various Sustainable: able to be main-
effective programmes to get benefits for those people tained at a certain rate or level
directly or indirectly.
5. Economic Growth: One important aim of planning is to increase the economic growth of
country because without this it’s possible to attain and maintain economic prosperity.
Therefore, the first plan has adopted the objectives of sustained rate of economic
growth.
6. Self-Sufficiency: The initial process of economic development requires huge capital
investment. By adopting the process of planning available capital resources can be best
utilized in the interest of the nation.
7. Foreign Aid: In modern economic activities the progress of one nation is related
directly or indirectly to the progress of other nations. A detailed plan, mentioning
specific output projects and investment projects, is very useful in creating favourable
atmosphere for bilateral and multi-lateral agreements of foreign aid.
Glossary Contradictory: Mutually opposed or inconsistent
Deliberate: Done consciously and intentionally
Priorities: Of utmost importance
Ends: Objectives
8.2 COMPONENTS OF DEVELOPMENT PLAN
A development plan contains the following components:
1. Summary report of Economic Progress: The progress report of the previous plan
currently in progress is a component of a development plan. In this section, major
achievements and shortcomings of the current plan are mentioned. The usefulness and
drawbacks of the policies are also spelt out here. At the time of making new plans, NPC
evaluates past and current plans; it gives clear ideas and projections for making new
plans.
141 Vedanta High School Economics - 10
2. Objectives: There are some objectives or the targets of the plan, which should beKeynote
mentioned according to the estimation of revenue and expenditures. The targets of the
plan are mentioned according to the long run planning of the country. The targets are
categorized in two aspects:
a. Physical Aspects: The national plan sets physical targets of production for
industries, agriculture, transportation, social and cultural services, employment,
and consumption. It may be called the plan in kind or physical plan. Obviously
the various targets are to be set in such a way that all the resources at the nation’s
disposal are utilised in the best possible manner. They must be knit together and
balanced mutually.
b. Financial Aspects: The plan has financial aspects as well because, as already
mentioned, the commodities produced and the means of production used are
accounted for in terms of money value. This is called plan in money or financial
plan.
3. Priorities in Plan: The main part of planning is setting up priorities. Priorities are
determined considering the available financial and physical resources and the need of
the country. More funds are allocated to the sector assigned more priority.
4. Strategies and Policies: The policies of different sectors are stated in the plan. The
policies work as guidelines in preparing programs for different sectors.The detailed
programs of different sectors are also stated in the plan. Similarly, the sectoral allocation
of resources is also made.
5. Allocation of Resources: Generally, in developing countries, available resources are
scarce and these resources are allocated in such a manner as to get maximum social
welfare. It needs to fix up priorities relating to economic development, thus, allocation
of resources in accordance to these fixed priorities.These scarce resources are also
allocated to eliminate wastages for maximizing social welfare, coordinating inter-sector
and international plans into a single unified unit which, in turn, promotes economic
development in an economy.
• The concept of economic plan was initiated for the first time in Russia in 1917 A.D.
• The systematic development planning in Nepal was started in 2013 B.S.
• In Nepal, National Planning Commission (NPC) formulates the economic plan.
8.3 OVERVIEW OF ECONOMIC PLANNING IN NEPAL
The history o the development planning is not so old in Nepal. In the year 1949 B.S.,
National Planning Commision’ was formed to formulate 15 years plan but it was
dissolved without formulating any plan. After the rise of democracy in B.S. 2007, the
development planning was taken seriously by the government. Formally, it started from
B.S. 2013, when the first five year plan was formulated.
A. FIRST FIVE YEAR PLAN (B.S. 2013-2018)
Nepal’s first five year plan started from B.S. 2013 and ended at B.S. 2018
Objectives
a. To increase production and employment.
b. To raise the living standard of people without discriminating between them.
Vedanta High School Economics - 10 142
c. To make short and simple rules for the successful implementation of plan and to
establish necessary institutions.
d. To develop economic bases and collect necessary data.
B. SECOND FIVE YEAR PLAN (B.S. 2019-2022)
After the first plan, there was no plan for one year in B.S. 2019, the second plan was
prepared. It was three year interim plan.
Objectives
a. To create suitable environment for the economic development and to maintain price
stability.
b. To increase the agricultural and industrial production to fulfill the demand of
increasing population.
c. To create employment opportunities through labor intensive techniques of
production.
d. To maintain judicial social system through land reform, expansion in social services.
C. THIRD FIVE YEAR PLAN (B.S. 2022-2027)
Third plan started in B.S. 2022 and ended in B.S. 2027. It had set the long run objective
of doubling the national income within 15 years. Point to Note
Objectives The National Planning
a To increase agricultural production Commission (NPC) is the
b. To improve the traditional system of agriculture. specialised and apex ad-
c. To do the industrial development visory body of the Gov-
ernment of Nepal for
d. To promote and diversify the foreign trade
formulating a national
e. To remove social disparity. vision, development pol-
D. FOURTH FIVE YEAR PLAN (B.S. 2027-2032) icy, periodic plans and
The fourth plan started in B.S. 2057 and ended in B.S. 2032 sectoral policies for over-
all development of the
Objectives nation.
a. To increase the production rapidly.
b. To develop infrastructures like road, communication, for sustainable development.
c. To diversify the foreign trade.
d. To maintain economic stability by controlling price.
e. To make the effective use of human resource and to control population.
f. To create no exploitation in the society. • After the first plan, there was
no plan for one year
E. FIFTH FIVE YEAR PLAN (B.S. 2032-2037)
• The second plan was a three
The fifth plan started in B.S. 2032 and lasted year plan
till 2037
• The third plan had the long
Objectives run objective of doubling na-
tional income within 15 years
a. To increase the consumer goods Keynote
b. To optimally use the human resource • The NPC formulates develop-
ment plan in Nepal
c. To maintain regional balance and integration.
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F. SIXTH FIVE YEAR PLAN (B.S. 2032-2042) Point to Note
The sixth plan began in B.S. 2037 and lasted till 2042.
Objectives The Planning Commis-
sion was first created in
a. To increase the production rapidly. Nepal in 1956. It was
b. To increase the production employment opportunities. soon renamed in accor-
c. To fulfill the minimum basic needs of people. dance with the Yojana
G. SEVENTH FIVE YEAR PLAN (B.S. 2042-2047) Mandal Act of 1957.
The seventh plan began in B.S. 2042 and lasted till 2047. Following the introduc-
Objectives tion of the partyless Pan-
a. To increase the production rapidly. chayat system in 1961,
b. To increase the production employment opportunities. the National Planning
Council was formed un-
der the then King.
c. To fulfill the minimum basic needs of people.
H. EIGHTH FIVE YEAR PLAN (B.S. 2040-2054)
After the restoration of democracy in B.S. 2046, the country remained plan less for two
years. The eights plan began in B.S. 2049 and ended in 2054.
Objectives
a. To achieve sustainable economic growth rate.
b. To reduce poverty.
c To reduce regional disparity.
I. NINTH FIVE YEAR PLAN (B.S. 2054-2059)
The ninth plan started in B.S. 2054 and lasted till B.S. 2059. It had put forward the
concept of 20 year long term planning. It had set the targets of reducing the people
below poverty line to 10%, Population growth rate to 1.5%, increasing economic growth
rate up to 7.2% till BS. 2074.
Objectives Point to Note
a. Development of agriculture and forest.
b. Water resource development. In 1968 the National
c. Industrialization. Planning Council mor-
d. Tourism development. phed into the National
Planning Commission
(NPC)
e. Development of physical infrastructure.
J. TENTH FIVE YEAR PLAN (B.S. 2059-2064)
The tenth plan started from B.S. 2059 and lasted till B.S. 2064
Objectives
a. Agricultural development, sustainable management of natural resources and bio-
diversity.
b. Development of rural infrastructure and rural energy.
c. Population management, social service and basic social security.
d. In participation of private sector, development of foreign water resource, information
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144
technology industries and trade areas.
e. Human resource development and women empowerments
f. Programmes to empower Dalits, poor and marginalized people, to provide
employment and security.
g Emphasis on the development of remote and rural areas.
K. ELEVENTH PLAN (Three Year Interim Plan B.S. 2064/65-2066/67)
The long term vision of three year interim plan was to make Nepal prosperous and
modern. After the restoration of
Objectives democracy in B.S. 2046, the
a. Reducing the unemployment level. KEY country remained plan less
b. Decreasing poverty. IDEA for two years
c. Reducing inequality between rich and poor
d. Giving direct feeling of change to the people.
Strategies
a. To give special emphasis on relief, reconstruction and reintegration.
b. To achieve employment oriented, pro-poor and broad-based economic growth.
c. To promote good governance and effective service delivery.
d. To increase investment in physical infrastructures
e. To give emphasis on social development.
f To adopt inclusive development process.
g. To carry out targeted programs.
TWELVE THREE YEAR PLAN (2067-2070)
Long-Term Vision
The long-term vision of the plan was to transform the Nepalese economic status from
least developed country into developing country. As per the plan, Nepal would be pro.
sperous, achieve high economic growth as a result of improvement in living standard
of people and there would be peace and good governance in each sector by the end of
the plan. All forms of discriminations and inequalities (Legal, Social, Cultural, Ethnic,
Physical, Gender and Regional) would be ended from the society.
Goal
The goal of this plan is to improve the living standard of general public and reduce
the poverty to 21 percent and achieve Millennium Development Goals (MDG) by 2015
through sustainable economic growth by attaining the following other goals as:
a. Generating employment opportunities The goal of the 13 plan is to
b. Reducing economic inequalities improve the living standard of
c. Achieving regional balances KEY general public and reduce the
d. Eliminating social exclusions IDEA poverty to 21 percent
145 Vedanta High School Economics - 10
Objectives
The main objective of this plan is to enable people to feel change in their livelihood and
quality of lives by establishment of sustainable peace and poverty alleviation through
employment oriented, inclusive and equitable economic growth.
Strategies
This plan has set up strategies to achieve employment oriented economic growth,
future federal state, regional balance, inclusive and equitable development, support
the process of socio economic transformation of the country, effective service delivery
as well as good governance.
The following are the major strategies:
1. To achieve employment and poverty alleviation oriented, sustainable and broad-
based economic growth.
2. To develop the physical infrastructures to support the federal structure and regional
economic growth.
3. To emphasize on inclusive and equi-justice development to achieve sustainable
peace.
4. To help in socio economic transformation of the country by improving the socio
economic services.
5. To make the result oriented development through ensuring good governance and
effective service delivery.
6. To attain economic growth and stability by developing private and community/
cooperative sectors through industrialization, trade and services.
Policies of the plan
In order to attain the objectives set by the Plan the following major policies were
adopted:
1. To prepare a structural and legal base for the formation of “Federal Nepal”, in a new
form.
2. To initiate the process of identification of the people living below the poverty line
and to formulate economic and social policies based on social justice, economic
growth and equitable distribution with focus on poverty alleviation.
3. Respecting the contribution of subsistence households to the national economy,
emphasis will be laid on their development.
4. Appropriate programs will be conducted in view of the features of diverse
geographical conditions of the Terai, Hills and Mountains.
5. Arrangement for the rehabilitation and re-integration of, and immediate relief for
the individuals, families and communities affected by the conflict will be made.
6. Adopting the Agriculture Perspective Plan as a principal policy for the development
of agriculture and to increase the production and productivity by using appropriate
technology.
7. To accord high priority to agriculture, hydroelectricity, tourism, information and
communication, science and technology, physical infrastructure and Human
resource development.
8. To provide cheap, convenient and effective services by making improvements in
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the management of corporations responsible for delivering services to the people.
9. To abolish corruption and red tapism and enhance transparency and good governance
by strengthening the existing mechanisms.
10. Adjustment and rehabilitation of Maoist combatants staying in the camps.
11. Education, health and employment to be more forward, as rights based development
programs.
12. Special emphasis on quality, employment-oriented, vocational and technical
education, within the access of the common people.
13. To protect the rights of the consumers by removing drawbacks in the public
distribution system.
14. To abolish all discriminations related to religion, language, and culture with special
arrangements for the protection, promotion and development of the languages and
cultures of all the castes and janajatis.
15. To provide opportunities of self employment and employment for youths,
particularly those affected by the conflict and to direct remittances towards the
productive sectors by making foreign employment well managed.
Targets and achievement of the plan
The targets and achievement of the twelve plan is shown in the table below:
Quantitative Targets of the 12th Three Year Plan
Statement Status of Targets Achievement
2009/10
Economic growth rate (%) 4.3 5.5 4.0
Agricultural sector 2.0 3.9 3.6
growth rate (%)
Non-agricultural sector 5.4 6.4 4.2
growth rate (%)
Population living below 25.4 21 -
the poverty line (%)
Employment growth rate (%) 3.0 3.6 2.9
The average annual economic growth at constant prices during the plan period was just
4.0 percent, with 3.6 and 4.2 percent growth in the agricultural and non- agricultural
sectors respectively. Because of favourable climatic conditions among other reasons,
the economic growth rate in the agricultural sector was better than hoped for in the
first two years. The non-agricultural sector failed to achieve the target in any year,
though it did increase. The low rates of growth in the industrial, mining, electricity,
gas, water, and financial sectors and the negative growth in the construction sector kept
overall growth low.
Glossary Equitable: Fair and impartial.
Alleviation: Rduce, lessen
A lot of official forms and procedures that are involved unnecessarily
Red-tapism: Relating to an occupation or employment
Vocational:
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THIRTEEN THREE YEAR PLAN (2013-2016)
Background
Nepal is considered a least developed country, but if development efforts are accelerated
and political commitment is forthcoming, Nepal may be upgraded to a developing
country by the next decade. The objectives, goals, strategy, and priorities of the plan
are all oriented towards securing this upgrade in status as well as to attaining the
millennium and SAARC development goals; promoting sustainable development,
human rights and adaptation to climate change; alleviating poverty by promoting a
green economy; and addressing regional and international commitments.
Long-Term Vision
To upgrade Nepal from a least developed to a developing country by 2022.
Objective
To bring about a direct positive change in the living standards of the general public by
reducing the economic and human poverty prevalent in the nation.
The present status of economic indicators and the targets for the thirteen plan are
shown in the table given below
S.N Indicators Status of Targets
FY 2012/13
1 Annual average economic growth rate (%) 3.6 6.0
2 Annual average agricultural growth rate (%) 1.3 4.5
3 Annual average non-agricultural sector growth rate 5.0 6.7
(%)
4 Annual average growth rate in employment (%) 2.9 3.2
5 Life expectancy at birth (in years) 69.1 71.0
6 Population (in millions) 27.2 28.3
7 Population growth rate (%) 1.35 1.35
8 Maternal mortality rate (per 100,000) 229.0 134.0
9 Population with access to drinking water (%) 85.0 96.25
10 Population with access to sanitation (%) 62.0 90.5
11 Net enrolment rate at the primary level (Grade 1-5) 95.3 100.0
(%)
12 Number of district headquarters with road connec- 73.0 75.0*
tivity
13 Density of mobile phones and telephones (per 100) 71.5 100
14 Installed capacity of electricity generation (in MW) 758.0** 1426
15 Population with access to electricity (%) 67.3 87.0
16 Irrigation (in hectares) 13,11,000 14,87,275
17 Forest coverage area (%) 39.6 40.0
18 Total length of road transport (km) 25,133 28,133
Source: An approach paper to the Thirteenth Plan 2013-16, NPC
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Index * The district headquarters of Humla is to be connected to the Chinese autonomous province
of Tibet.
** A total of 758 MW of electricity is connected to the national transmission network,
including 705 MW from hydropower and 53 MW from thermal power. The 35 MW generated
from alternative energy is not yet linked to the national transmission network.
It is projected that by the end of the plan, the current human development index of
0.463 will have risen to 0.508, the per capita gross national income will have
increased to USD 902 from the current USD 721, the human asset index will have
reached 66.0 from the current 62.2, and the economic vulnerability index will have
declined to 26.95 from the current 27.8.
Strategies of the Plan
1. Achieve inclusive, broad-based and sustainable economic growth by
enhancing the contributions of the private, government and cooperative sectors to
the development process.
2. Develop physical infrastructure.
3. Enhance access to social services and improve the use and quality of those services.
4. Enhance good governance in the public and other sectors.
5. Empower targeted groups and sectors both socially and economically.
6. Implement development programmes which support climate change adaption.
Priorities of the Plan
In pursuance of the objectives, the plan has identified the following priorities:
1. Developing hydropower and other alternative energies.
2. Increasing the productivity, diversification and commercialization of agriculture.
3. Developing the basic education, health, drinking water and sanitation.
4. Promoting good governance. The long term vision of the
5. Developing roads and other physical infrastructure. Thirteenth Plan was to up-
6. Developing the tourism, industrial and trade sectors. KEY grade Nepal from a least de-
IDEA veloped country to a develop-
7. Protecting natural resources and the environment.
ing country
FOURTEENTH PLAN (2016/17-2018/19)
Background
The Fourteenth plan is the first plan after the announcement of Nepal’s new constitution
2072. The plan is oriented towards reconstruction of the damage caused by massive
earthquake of 2072 and to create a self sufficient and prosperous economy, learning
lessons from the effects of economic blockade in the southern border of the country. It
seeks to address the rise in aspirations of the people after the announcement of the new
constitution.
With respect to the implementation of the Fourteenh Plan, it is necessary to achieve the
target of upgrading Nepal to the level of middle income country by 2087 B.S. as promised
in the Millennium Development Goals. Furthermore, it is of utmost concern to achieve
rapid economic growth and sustainable prosperity by increased involvement of public
sector, private sector and co-operative sector.
149 Vedanta High School Economics - 10
Challenges
It is a very challenging task to achieve rapid economic growth, poverty reduction, equitable
distribution, human development and to lead the economy towards sustainable socio-
economic development. Apart from these, there are other challenges too which are listed
below:
1. Generation of employment opportunities through expansion of intensive ecconomic
sectors.
2. Commercialization of subsistence agriculture and tto associate it with indusrial
development.
3. Enhance development in both state and local level by ensuring responsible, clean and
effective development administration.
4. Social and economic transformation
5. Establishment of the sources of economic growth by the development of
infrastructtures and rural- urban integration.
4. Social and economic transformation
Opportunities
Besides the challenges, there are opportunities for development, which are as follows:
1. With announcement the new constituion and settlement of political problems, there
are possibilities to achieve economic prosperitty by proper utilization of existing
resources.
2. Increase in active population, which is a positive factor for socio- economic
development.
3. The feeling of promoting self-sufficiency, balanced development that emerged after
the massive earthquake and economic blockade are opportunities for the country.
4. Utilization of the skill, capital and entrepreneurship recieved from foreign
employment.
Vision
The vision of the Fourteenth Plan is to develop independent, prosperous and
socialism oriented economy and prosperous Nepali people.
Target
The Fourteenth Plan aims to create a socially just welfare state and upgrade Nepal to
the level of mIddle income country.
Objective
The Plan has the objective o achieve economic and social transformation along with
poverty reduction through productive employment and justifiable distribution oriented
economic growth.
Strategies
The Fourteenth Plan has the following strategies to achieve its vision, targets and
objecives:
1. Increase in production by transformation of agriculture, tourism and expansion of
industrial as well as small and medium businesses.
2. Develop infrastructure for energy, road and air transport, information and
communication, rural-urban and tri-nation development.
Vedanta High School Economics - 10 150
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Vedanta Economics Book 10 Final (2077)
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