Determinants of Nepal's Export Instability

Determinants of Nepal’s Export Trade Instability

¹ Surya Bahadur Thapa

Central Department of Education, Tribhuvan University, Kirtipur

Postal Address: Central Department of Education, University Campus, Tribhuvan

University, Kirtipur

JEL Classification: C1, C22, F1, F 14.

Key Words: Export, GH Index, Commodity Concentration Index, Geographic

Concentration Index, Exponential Trend, Determinants of Export Instability

Determinants of Nepal’s Export Trade Instability

ABSTRACT

Fluctuation in export earnings is a great concern to policy makers and can be caused by many factors. This study has analyzed the causes of export instability from 1980/81 to 2012/13 based on secondary data. Using Ordinary Least Square technique the empirical result shows that there is positive relationship between export instability index and three independent variables: commodity concentration index, geographic concentration index and openness index with coefficient of 1.619, 1.163, and 6.023 respectively. Furthermore, it again establishes the negative relationship between export instability index and four independent variables: consumption ratio, food ratio, instability index of real agricultural GDP and instability index of real nonagricultural GDP having coefficients of -2.922, -7.633, -5.169, and -0.474 respectively.

Background

The export trade refers to the nominal value of goods produced in one country but consumed by other countries. The nominal value of export trade is often called export earnings. The governments of all countries want to increase their exports as it contribute for economic development through foreign currency earnings, increase in employment, increase in wage rates, upliftment of the standard of living and poverty reduction.

Acknowledging the above fact, Nepal has been shifting towards liberal and market oriented trade regime since the mid - 1980s with new export oriented policies replacing the import substitution policies. In addition to the shift in policy regime, the Government of Nepal (GoN) has developed several institutions and trade policies aiming at boosting up the export sector. In terms of institutional changes, the GoN has established Trade and Export Promotion Centre (TEPC) and dry ports. In 2009, the GoN announced a new trade policy by replacing the Trade Policy 1982. The Trade Policy 2009 has, also, been replaced by the Trade Policy 2015. Furthermore, the government of Nepal (GoN) has published Nepal Trade Integration Strategy (NTIS) 2016 by revising NTIS 2010 which has included 12 export potential goods and services having comparative advantage.

Size and Trend of Export Trade

The data on nominal export and import trade are presented in Appendix A. The nominal value of exports trade increased by, approximately, 103.4 times from Rs. 889.6 million in 1974/75 to Rs. 91,991.4 million in 2013/14. During the same time period, the rupee value of imports trade increased roughly by 393.7 times from Rs. 1,814.6 million to Rs. 714,365.9 million. It indicates that, the nominal value of export trade grew marginally while import trade increased to a greater extent. The trend of nominal export and import is presented in Figure 1.

Figure 1: Trend of Nominal Export and Import Trade

Abbildung in dieser Leseprobe nicht enthalten

Source: Appendix A.

The trend of nominal export and import trade shows that both the exports and imports are increasing over the years. It is also noted that the growth of import trade has exceeded export trade. Furthermore, the export trade is unstable and fluctuating during the study period.

The data on real export and import are also presented in Appendix A. The real value of foreign trade is the nominal value adjusted with price level taking particular year as a base year. The values of deflator for different years are presented in Appendix B. At base year price of 2005/06, the real value of total exports increased by 4.6 times from Rs. 9,995.5 million in 1974/75 to Rs. 46,413.4 million in 2013/14. During the same period the real value of total imports increased by 17.7 times from Rs. 20,388.8 million to Rs. 360,426.8 million. The trend of real export and import trade is presented in Figure 2.

Figure 2: Trend of Real Export and Import Trade

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Source: Appendix A.

The trend of real value of export and import trade shows that both the exports and imports are increasing over the years. It is also noted that the import trade has exceeded export trade. Furthermore, the export trade is unstable and fluctuating during the study period.

Direction and Growth Rate of Export Trade

The direction of Nepal’s export trade is analyzed in terms of two directions: India and other countries. Column 6 and 7 of Appendix A presents share of India and other countries to Nepalese exports. It indicates that the export share of India and other countries seems almost equal over the study periods. Specifically, the export share of India is about 49 percent and that of other countries is 51 percent, on average. However, the data show fluctuating trend: initially the share of export trade with other countries has increased initially reached up to 90.6 percent in 1992/93 and then declined. The export share of India in Nepal’s total trade was extremely high but later it fell down up to 9.4 percent in 1992/93 due to trade disputes between Nepal and India. There after it grew again rapidly. On the basis of these data it is observed that India is the largest trade partner of Nepal since 1974/75. Furthermore, after trade liberalization policy which was executed intensely in 1990s in Nepal, India’s share increased again rapidly. Hence, it is concluded that the trade liberalization policy could not address Nepal’s export dependence on India. The direction of Nepalese export trade is shown in Figure 3.

Figure 3: Direction of Nepal’s Export Trade

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Source: Appendix A.

The growth rate of export trade refers to the rate of change of its size or volume. It is usually, measured in terms of percent per year. The growth rate of nominal and real value of export trade has been measured by using exponential equation, Y = aebt For the trade data presented in Table 1, the result of the nominal growth rate obtained from trend line fitting is presented in Table 1.

Table 1: Growth Rate of Nominal Export and Import Trade (1974/75 – 2013/14)

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Source: Author’s calculation through SPSS 16 using data availed in Appendix 1.

Table 1 presents estimated growth rate of exports and imports over the study period of 40 years. From the table it is seen that the exports and imports are increasing at the rate of 13.6 and 15.3 percent per annum respectively. While comparing these growth rates, the growth rate of import (15.3 percent) is higher than that of export (13.6 percent).

Similar to the growth rate of nominal trade, the present analysis has also estimated the growth rate of real value of export and import. For this aim, the same exponential equation has been used. The result of the growth rate of real values of trade obtained from trend line fitting is presented in Table 2.

Table 2: Growth Rate of Real Export and Import Trade (1974/75 – 2013/14)

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Source: Author’s calculation through SPSS 16 using data availed in Appendix 1.

Table 2 presents the growth rate of real value of export and import trade from 1974/75 to 2013/14. The estimated growth rate indicates that the exports and imports trade increased at the rate of 5.4 and 7.1 percent per annum. It is important to note down herein that the growth rate of imports exceeded to that of exports.

Instability in Export Earning

As discussed above, the value of exports trade like other economic variables does not have a fixed trend and fluctuate over time. This fluctuation is called instability. Various alternative definitions of export instability are given in the trade literature. The first economist to define export instability was Coppock (1962). According to him, export instability is the volatility from the normal trend value of export. Similarly, Herrmann, (1989) defines export instability in terms of instability of export earnings, export prices, and export quantities. Export instability is often measured by an index which is calculated as relative changes in export earnings from a certain reference value (Abraha, 2004). Several methods have been used to estimate Export Instability Index (EII) ranging from a simple type that approximates instability to the average percentage deviation of export earnings from their five-year moving average (Macbean, 1966) to a complex one which is known as log variance index (Coppock, 1962). In between them there are other indices of export instability as well. They include coefficient of variation method, standard normalization approach, and so on. Different scholars have applied different formulae in different contexts. These formulae have their own strengths and weaknesses. But these formulae are not country specific. They are chosen depending on the availability of the data and researcher’s own familiarity with the formula. The formula used in this study is common. It is based on average percentage of deviation of the observed values of export proceeds from an exponential growth path.

Causes of Export Instability: The Review of Literature

A number of studies are available in the literature which explains causes of export earnings instability. Generally, the causes of export instability can be categorized in two ways: external and internal. The important factors on the external side are low elasticity of demand for primary products, fluctuations in commodity prices and tariff and nontariff barriers of importing countries. The crucial factors on the internal side are specialization in the export of primary products, concentration on a small range of commodities and market and other supply side rigidities.

Fluctuations in export earnings can be a great concern to many analysts and can be caused by many factors. In most of the empirical studies of export instability, the main issue is to examine the influence of the extent of commodity concentration and geographic concentration on export instability. Eminent scholars including Coppock (1962) and Macbean (1966) have carried out such studies. All these studies are based on cross section data of both developed and developing countries. These both studies show hardly any positive relationship between export instability and commodity and geographic concentration. However, Massell (1970) has presented positive relationship between export instability and commodity concentration.

Ozler and Harringan (1988) have found a negative effect of real export instability on growth of 26 developing countries. This implies that if export is more stable, then these countries would achieve economic growth. Tariq and Najeeb (1995) have examined the export earnings instability in Pakistan. With the help of the data from 1969/70 to 1990/91, they found the strong positive relationship between export instability and degree of commodity concentration in Pakistan. Their result showed that the relationship between export earning instability and degree of commodity concentration in Pakistan was found strong. It shows that commodity concentration explained a large portion of the instability in total export earnings. However, the geographic concentration and the instability in Pakistan’s export earnings were not correlated at all. The primary products ratio and the raw materials ratio were not found in explaining instability in case of Pakistan. The strong negative significance of food ratio shows that the encouragement of food exports would reduce export earning instability.

In a similar context, Roy (2002) has analyzed India’s changing export behavior from 1960/61 to 1999/2000 using demand-supply model of export determination using error-correction method. The study establishes the importance of demand factors such as world demand and real effective exchange rates in the determination of India’s exports as against the relatively weak relevance of supply side determinants.

Abolagba et al. (2010) have attempted to establish the major determinants of rubber and cocoa exports of Nigeria from 1970 to 2005. Using the method of Ordinary Least Squares (OLS), the findings show that rubber export is positively influenced by domestic rubber production and producer price and negatively influenced by exchange rate, domestic consumption, and interest rate.

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¹ This article is based on my Ph.D. dissertation accepted by Faculty of Humanities and Social Sciences, TU