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Nepals route to prosperity: Free Trade
In the early 1980s, Brazil and Taiwan had similar per capita incomes. Both countries wanted to become a force in electronics. However, they both pursued radically different paths. Taiwan went for free trade with zero duty on electronics including fax machines. In 1988 Brazilian congress imposed high tariffs to protect its infant electronic industry and to prevent dumping.
The results teach us a lesson. The electronics industry of Taiwan flourished; Fujitsu of Japan transferred the latest technology for fax machines realizing rightly that a tariff free Taiwan would invite competition from around the world. Brazils electronics industry was all but destroyed. As so often happens with government policies, the actual consequences were completely the opposite of what was intended by Brazil. High tariffs kept most imports out from Brazil and this meant Fujitsus products did not face any world-wide competition here, it could get by with the transference of old, outdated technology for fax machines. By 1994, hit by the reality of a dying industry, the same Brazilian congress rescinded tariffs on fax machines. Till today Brazil lags far behind Taiwan in electronics. The latest news from Brazil is not encouraging; it faces an imminent economic collapse.
This example is one of many supporting free trade and removal of tariffs. Invariably, open economies flourish; those which protect themselves with tariffs, import licensing, non-tariff barriers, outright import bans and currency controls, punish themselves and impoverish their own citizens. The link between an open economy and high growth is clear; Between 1980 and 1989 the low trade restriction countries like Singapore, Hong Kong, Malaysia, Ireland, South Korea and Thailand showed growth rates which averaged 5%. High trade restriction countries Iran, Brazil, India, Peru, Bangladesh, Rwanda, Sierra Leone, Ghana and Argentina averaged zero growth.
Why do free trade countries prosper? Dont free imports result in ruining a nations industries? In todays globalised world, imports and exports go hand in hand. Advantage goes to countries which can import materials or machines (such as faxes) from the cheapest source in the world. Their final products or sales prices also then become hugely competitive and enjoy a world-wide market.
This is the reason why all free-trade countries rack up gigantic amounts of both imports and exports. This is why India, a country of over a billion people, exported goods and services valued at only US$51.6 billion in 2001. India does not import enough. A relatively free Switzerland, with its 7 million people, exported more than twice as much, US$116.4, during the same period. Similarly Indian imports were at US$59 while the Swiss imports were US$104.6 billion.
In an open, zero tariff Nepal, what will happen? Nepal will become a shopping paradise for the region. Why would Indians go to Dubai, Singapore or Hong Kong for shopping? Why not Nepal? The weather is better, the view unmatched by any other nation, the flying time is shorter. Logic would dictate that Nepal becomes the destination of choice for not only Indians but for Bangladeshis and other SAARC countries as well.
I can visualize people from the US, Europe and even the zero tariff Hong Kong and Singapore coming to shop here. Hong Kong and Singapore are no longer cheap as they have become rich, labour costs and hence salaries they have to pay to their sales staff in shops have risen to some of the highest levels in the world. Nepals lower labour cost gives it a great edge, combine it with zero tariffs and Nepal is on its way to becoming a shoppers paradise. Way to go!
Let goods come to Nepal from all over the world and then go from Nepal to wherever the buyers will take them. The people of Nepal will happily reap the benefits they will, after all, retain a nice margin of profit on every such transaction.
What does the government have to do? Work hard, very hard, to remove all rules and laws restricting trade and abolish all tariffs. How long would it take? Laws can be changed in days. Every country is realizing the benefits of open trade and most countries including Nepal and India have reduced barriers in recent times. Hence Nepal has to make people around the world take notice. This can only come about by Nepal becoming a zero-tariff state. If you have to cross a chasm - from poverty to prosperity - you have to take a big leap. Small steps will not suffice today.
This is exactly why Singapores 2001 exports were US$132 billion and imports US$129 billion. Compare with Nepals exports of US$1.2 billion and imports of US$1.6 billion. Singapore exports are higher by 110 times and on a per capita basis higher by over 500 times. Free trade made Singapore rich. It can make Nepal rich, beginning tomorrow.