India’s Informal Trade with Nepal: An Exploratory Assessment

Taneja, Nisha and Pohit, Sanjib (2001): India’s Informal Trade with Nepal: An Exploratory Assessment.

Abstract

The large and vibrant informal trade between India and Nepal continues to thrive despite unilateral/bilateral/regional/multilateral trade liberalisation in the two countries. This calls for an indepth analysis of India's informal trade with Nepal. Using insights from the New Institutional Economics informal and formal institutions engaged in cross-border trade are contrasted. The objective in juxtaposing formal and informal institutions in performing similar transactions viz., engaging in crossborder international trade is threefold: first, to understand how informal trading markets function vis-à-vis formal trading arrangements second, to analyse formal and informal trading arrangements particularly in the context of the relative importance of institutional factors vis-à-vis trade and domestic policy distortions, and third, to see whether informal trading arrangements provide better institutional solutions than formal trading arrangements. The analysis, carried out on the basis of an extensive survey conducted in India and Nepal reveals that informal traders in India and Nepal have developed efficient mechanisms for contract enforcement, information flows, risk sharing and risk mitigation. Further, informal traders prefer to trade through the informal channel because the transaction costs of trading in the informal channel are significantly lower than the formal channel implying that informal trade takes place due to the inefficient institutional set up in the formal channel. Moreover, lower education levels of informal traders could be an important deterrent for using the formal channel. Finally, the analysis of discriminating characteristics of formal and informal traders in India and Nepal indicates that transaction cost and education level are the two common discriminating factors. An important policy implication from the study is that unless the transacting environment of formal traders improves, informal trade will continue to coexist with formal trade, even if free trade is established in the SAARC region.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade; Transaction cost; Institutional arrangements
• Subjects: F - International Economics > F1 - Trade > F19 - Other

References

1. Assaad, R., “Formal and informal institutions in the labor market, with applications to the construction sector in Egypt”, World Development, Vol. 21, No.6 (1993) pp 925- 939).

2. Bardhan, P. K. “The New Institutional Economics and Development Theory: A brief critical assessment”, World Development, Vol.17, No. 9 (1989), pp1389-1395.

3. Coase , R. H., “The problem of social cost,” Journal of Law and Economics, Vol. 3 (October 1960), pp1-44.

4. Deardorff, Alan V. and W.F. Stolper, “Effects of smuggling under African conditions: A factual, institutional and analytic discussion,” Weltwirtschaftliches Archiv, (1990), pp. 117-141.

5. Exim Bank of India, “Transaction costs of Indian exports: An analysis,” Working paper no. 104, (1999).

6. Jackson, B. B., Multivariate Data Analysis: An Introduction, Homewood, Irwin, (1983).

7. Klecka, W. R., Discriminant Analysis, Beverly Hills, Sage, (1980).

8. International Monetary Fund, Direction of Trade Statistics, (1999).

9. Langlois, Richard N., “The new institutional economics: An introductory essay,” in Richard N. Laglois (Ed.), Economics as a Process: Essays in the New Institutional Economics (New York: Cambridge University Press, 1986)

10. Lin, J.Y. and Nugent, J.B., “Institutions and economic development” in Handbook of Development Economics, Volume III, Edited by J. Behrman, and T.N. Srinivasan, (1995).

11. Muni, S.D. 'India and Nepal: A Changing Relationship, Konark Publishing Pvt. Ltd., (1992).

12. McDonald, D. C., “Trade data discrepancies and the incentive to smuggle,' International-Monetary-Fund-Staff-Papers; vol. 32, no. 4, December 1985, pp 668-692.

13. Nabli, M. K., and J. B. Nugent, “The new institutional economics and economic development: An introduction in M. K. Nabli and J. B. Nugent (Eds.), The New Institutional Economics and Development: Theory and Applications to Tunisia (Amsterdam: North Holland, 1989a).

14. Nabli, M. K., and J. B. Nugent, “The new institutional economics and its applicability to development,” World Development , Vol. 17, No. 9, (1989b) pp 1333-1347.

15. Pohit, S., and N. Taneja, “India’s informal trade with Bangladesh and Nepal: A qualitative assessment,” Working Paper No. 58, Indian Council for Research on International Economic Relations, (2000), New Delhi.

16. Rauch, J.E. and Vitor Trindade, “Ethnic Chinese Networks in International Trade,” Working paper no. 7189, National Bureau of Economic Research, (1999).

17. Srivastava, Pradeep, “Urban-informal credit in India: markets and institutions,” IRIS Working Paper no. 89, University of Maryland (College Park), U.S.A. (1992)

18. Taneja, N., “Informal trade in the SAARC region”, Working Paper No.47, Indian Council for Research on International Economic Relations, 1999, New Delhi.

19. Williamson, O.E. Markets and Hierarchies: Analysis and Antitrust Implications, (New York: Free Press, 1975).

20. Williamson, O.E., The Economic Institutions of Capitalism,(New York: Free Press, 1985).