TAKING STOCK : Technology, free trade and prosperity

Kathmandu :

In the 1980’s, Brazil and Taiwan had similar per capita incomes. Both countries wanted to develop their electronic industry. However, they pursued radically different paths. Taiwan went for free trade with zero duty on electronics, including fax machines. In 1988 the 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.

Brazil’s electronics industry was all but destroyed. As so often happens with government policies, the actual consequences were the opposite of what was intended. High tariffs kept most imports out from Brazil and this meant Fujitsu’s products did not face competition. Hence, it got by with the transfer of old, outdated technology for fax machines. By 1994, hit by the reality of a dying industry, the Brazilian congress rescinded tariffs on fax machines. Till today, Brazil lags behind Taiwan in electronics.

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 citizens. The link between an open economy and 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 five per cent. High trade restriction countries like Iran, Brazil, India, Peru, Bangladesh, Rwanda, Sierra Leone, Ghana and Argentina averaged zero growth.

Why do free trade countries prosper? Don’t imports result in ruining a nation’s industries? In today’s 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 also then become competitive and enjoy a worldwide market.

This is the reason why all free trade countries rack up gigantic imports and exports. This is why India, a country of over a billion people, exports goods and services of less than $100 billion. A relatively free Switzerland, with its seven million people, exports more than $140 billion. Indians also import less than the Swiss.

An open, zero tariff Nepal, would become a shopping paradise for the region. Why would Indians go to Dubai, Singapore or Hong Kong for shopping? The weather in Nepal is better, the view unmatched, and the flying time to it is shorter than to any other nation. Logic dictates that a duty free Nepal would become the destination of choice for not only Indians, but, for other SAARC nationals as well.

I can visualise 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, their salaries have risen to the highest levels in the world. Nepal’s lower labour cost gives it an edge. Combine it with zero tariffs and Nepal becomes a shopper’s 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 — retaining a nice profit margin on every transaction.

What does the government have to do? Rescind laws restricting trade and abolish tariffs. How long would it take? Laws can be changed overnight. Every country is realising 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. Do this by declaring Nepal 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 why Singapore’s exports are higher by over a 100 times and on a per capita basis higher by over 500 times than Nepal’s. Free trade made Singapore rich. It can make Nepal rich, beginning tomorrow.

(The writer can be contacted at: everest@mos.com.np)