products (SAWTEE 2006). Trade vis-Ă -vis Political Dependency of Nepal The landlocked position of the country (three sides bordered with India), traditional business and trade relationship with India, open border with unrestricted movement of capital, labour and payment between the two countries and relatively good transportation links, among others, are the main factors behind this high trade dependency (SAWTEE 2006). Heavy trade dependency of Nepal, however, is directly associated with Nepal's political dependency11 and also constrains its decisive power to settle the internal problems domestically. Cross country visits of political leaders, from and to the most important trading countries, most frequently India and less frequently the US take place before any major political change in Nepal. Most of Nepal's political leaders rely on Indian political power centres for their internal or inter party decisions, while a few groups also rely on the US (second largest trade partner of Nepal) for these matters. In the present political setting of Nepal, the dominance of China12 and other countries is, however, very negligible. Prospects for Export Diversification As mentioned before, despite Nepal's efforts to diversity trade, its export continues to be dependent on a few products and destinations. Poor infrastructure, unfriendly investment climate and inadequate mechanisms and incentives for firms to acquire new technology, contribute to low price competitiveness and productivity in the economy (MOICS 2004). In addition, Nepal's rigid labour markets discourage investment and employment in the formal sector, inadequate bankruptcy and foreclosure provisions raise the costs of reallocation of factors of production to more productive uses, weak transport and transactions delays, and an unpredictable regulatory framework further raise the production costs (ibid.). Despite such weaknesses, Nepal has demonstrated its competitiveness across a range of labour intensive manufacturing and agricultural goods (MOICS 2004), and in various services sectors (Bhatt 2005, SAWTEE 2006).
(cardamom and ginger), leather and leather products (hides, skins, blue chromes), hand-knotted wool carpets, polyester yarns, garment and pashmina, niger seeds, stone carved Buddha statues, specialty teas, and fragrant grasses and oils sub-sectors as "areas of opportunity" for Nepal. Similarly, Industrial Development Perspective Plan: Vision 2020, Industrial Sector Profiles and Cross-Sector Issues (UNIDO 2002) mentioned lentils, spices seeds; leather and leather products; fibres, yarn, and textiles; apparel and clothing; cardamom and ginger; niger seeds, hides, skins and wet blue chromes, carpets, and pashmina as the products/sectors where Nepal has comparative advantage. A similar report prepared by Global Development Solutions, LLCTM (Asian Development Bank 2004) has identified some additional dynamic prospects for future export growth that includes sets of goods in arts and crafts, jewellery, specialised and origin branded foodstuffs (honey, tea, coffee), and handmade papers. The studies mentioned above provide a good picture of Nepal's comparative advantage products. Unfortunately, all these studies emphasised only agriculture and manufacturing sectors, while they ignored the services sectors. Available data on services trade shows that Nepal has tremendous potential in various services trade, particularly related to the tourism industry, software, education and health services, and trading of mode 4 services (Bhatt 2005; SAWTEE 2006). The study conducted by SAWTEE identified tea, medicinal herbs and leather as export potential sectors that have strong backward linkages; raw materials used in the sectors are produced domestically and there is much room for value addition. Moreover, these products require low skill and unsophisticated technology; the ratio of women employed in these sectors is significant compared to other industries. In addition, these products have the potential to generate employment opportunities in rural areas, where human development is much lower. Since tea production is entirely concentrated in eastern Nepal, leather production is more concentrated in central Nepal and the production and processing of herbs is concentrated in high mountains and western Nepal, it is claimed that the promotion of these three sectors will also lead to a geographically balanced development of the country.
A Review of Past Studies The Nepalese government, the private sector and some donor agencies have conducted various studies to identify sectors with comparative advantage for Nepal. The theory of comparative advantage suggests that it is beneficial for a country to specialise in products over which it has the highest comparative advantage against the rest of the world. However, in practice, quantifying comparative advantage is a difficult task as it depends on a host of variables. Generally speaking, it is understood that in Nepal's case, the presence of abundant labour—mostly unemployed and of working age—makes it a low cost factor of production. It is usually deduced that the country possess comparative advantage in labour-intensive industries. However, low labour costs alone are not sufficient; labour productivity, which measures the amount of input required to produce a good, is required to evaluate Nepal's comparative advantage in labour intensive industries.
The same study also suggests that various services (particularly related to travel and tourism and ICT, especially software development) have huge export potentiality; these services, therefore, can be a large source of income for Nepal. In Nepal, the travel industry accounted for 65.9 percent of Nepal's total service exports in 2003. The Himalayas, diverse landscapes, and rich cultural diversity provide Nepal with a natural advantage in the tourism industry. Tourism services can stimulate development through employment generation and foreign exchange earnings. In addition, the industry has a high multiplier effect and positive spill-over effects. The industry also generates a higher proportion of women employment. In Nepal's case, tourism also has the potential to aid rural development and contribute towards preservation of historic, natural and cultural sites.
Nepal Trade and Competitiveness Study (MOICS 2004) identified lentils, spices
Similarly, even though the current level of export in ICT services is not very
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