TRADE n Reforms

8/10/2019 TRADE n Reforms

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TABLE OF CONTENT

SR.NO TOPIC PG.NO

1. CHAPTER I

(Introduction,Hisorical development)

2-4

2. CHAPTER II

(Objective,Important reforms,Trade,Globalization)

5-13

3. CHAPTER III

(Recent development,Trade pattern & other aspects)

14-20

4. CHAPTER IV

(Concerns & fears,Indias Stance )

21-26

5. CHAPTER V

(Action plans)

27-30

6. CONCLUSION(Indias growth in the next era)

31

7. BIBLIOGRAPHY

(Internet sources,References)

32-33


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CHAPTER I

INTRODUCTION

Globalization has many meanings depending on the context and on the person who is talking

about. Though the precise definition of globalization is still unavailable a few definitions are

worth viewing, Guy Brainbant: says that the process of globalization not only includes

opening up of world trade, development of advanced means of communication,

internationalization of financial markets, growing importance of MNCs, population

migrations and more generally increased mobility of persons, goods, capital, data and ideas

but also infections, diseases and pollution. The term globalization refers to the integration of

economies of the world through uninhibited trade and financial flows, as also through mutualexchange of technology and knowledge. Ideally, it also contains free inter-country movement

of labour.

In context to India, this implies opening up the economy to foreign direct investment by

providing facilities to foreign companies to invest in different fields of economic activity in

India, removing constraints and obstacles to the entry of MNCs in India, allowing Indian

companies to enter into foreign collaborations and also encouraging them to set up joint

ventures abroad; carrying out massive import liberalization programs by switching over from

quantitative restrictions to tariffs andImport duties, therefore globalization have been

identified with the policy reforms of 1991 in India. It is a new buzzword that has come to

dominate the world since the nineties of the last century with the end of the cold war and the

break-up of the former Soviet Union and the global trend towards the rolling ball.

The frontiers of the state with increased reliance on the market economy and renewed faith in

the private capital and resources, a process of structural adjustment spurred by the studies

and influences of the World Bank and other International organizations have started in many

of the developing countries. Also Globalisation has brought in new opportunities to

developing countries. Greater access to developed country markets and technology transfer

hold out promise improved productivity and higher living standard. But globalization has

also thrown up new challenges like growing inequality across and within nations, volatility in


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financial market and environmental deteriorations. Another negative aspect of globalization

is that a great majority of developing countries remain removed from the process. Till the

nineties the process of globalization of the Indian economy was constrained by the barriers to

trade and investment liberalization of trade, investment and financial flows initiated in the

nineties has progressively lowered the barriers to competition and hastened the pace of

globalization.

Historical Development

Globalization has been a historical process with ebbs and flows. During the Pre-

World War I period of 1870 to 1914, there was rapid integration of the economies in terms of

trade flows, movement of capital and migration of people. The growth of globalization was

mainly led by the technological forces in the fields of transport and communication. There

were less barriers to flow of trade and people across the geographical boundaries. Indeed

there were no passports and visa requirements and very few non-tariff barriers and

restrictions on fund flows. The pace of globalization, however, decelerated between the First

and the Second World War. The inter-war period witnessed the erection of various barriers

to restrict free movement of goods and services. Most economies thought that they could

thrive better under high protective walls.

After World War II, all the leading countries resolved not to repeat the mistakes they had

committed previously by opting for isolation. Although after 1945, there was a drive to

increased integration; it took a long time to reach the Pre-World War I level. In terms of

percentage of exports and imports to total output, the US could reach the pre-World War

level of 11 per cent only around 1970. Most of the developing countries which gained

Independence from the colonial rule in the immediate Post-World War II period followed an

import substitution industrialization regime. The Soviet bloc countries were also shielded

from the process of global economic integration.

However, times have changed. In the last two decades, the process of globalization has

proceeded with greater vigour. The former Soviet bloc countries are getting integrated with


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the global economy. More and more developing countries are turning towards outward

oriented policy of growth. Yet, studies point out that trade and capital markets are no more

globalized today than they were at the end of the 19 thcentury. Nevertheless, there are more

concerns about globalization now than before because of the nature and speed of

transformation. What is striking in the current episode is not only the rapid pace but also the

enormous impact of new information technologies on market integration, efficiency and

industrial organization. Globalization of financial markets has far outpaced the integration of

product markets.


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CHAPTER II

OBJECTIVE

To understand the trade and Commercial policies in case of developing counties with

special reference to Globalization.

Also understand the key reforms that were undertaken for the same.

View the impact and the result out of the same.


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The Important Reform Measures (Step towards Globalization)

Indian economy was in deep crisis in July 1991, when foreign currency reserves had

plummeted to almost $1 billion; Inflation had roared to an annual rate of 17 percent; fiscal

deficit was very high and had become unsustainable; foreign investors and NRIs had lostconfidence in Indian Economy. Capital was flying out of the country and we were close to

defaulting on loans. Along with these bottlenecks at home, many unforeseeable changes

swept the economies of nations in Western and Eastern Europe, South East Asia, Latin

America and elsewhere, around the same time. These were the economic compulsions at

home and abroad that called for a complete overhauling of our economic policies and

programs. Major measures initiated as a part of the liberalization and globalization strategy

in the early nineties included the following:

Devaluation: The first step towards globalization was taken with the announcement of the

Devaluation of Indian currency by 18-19 percent against major currencies in the international

Foreign exchange market. In fact, this measure was taken in order to resolve the BOP crisis

Disinvestment-In order to make the process of globalization smooth, privatization and

Liberalizations policies are moving along as well. Under the privatization scheme, most of

the

public sector undertakings have been/ are being sold to private sector

Dismantling of The Industrial Licensing Regime At present, only six industries are under

Compulsory licensing mainly on accounting of environmental safety and strategic

Considerations. A significantly amended locational policy in tune with the liberalized

licensing

policy is in place. No industrial approval is required from the government for locations not

Falling within 25 kms of the periphery of cities having a population of more than one

million.

Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and

encouraging non-debt flows. The Department has put in place a liberal and transparent

foreign

Investment regime where most activities are opened to foreign investment on automatic route


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without any limit on the extent of foreign ownership. Some of the recent initiatives taken to

Further liberalize the FDI regime, inter alias, include opening up of sectors such as Insurance

(up to 26%); development of integrated townships (up to 100%); defense industry (up to

26%); tea plantation (up to 100% subject to divestment of 26% within five years to FDI);

enhancement Of FDI limits in private sector banking, allowing FDI up to 100% under the

automatic route for Most manufacturing activities in SEZs; opening up B2B e-commerce;

Internet Service Providers (ISPs) without Gateways; electronic mail and voice mail to 100%

foreign investment Subject to 26% divestment condition; etc. The Department has also

strengthened investment Facilitation measures through Foreign Investment Implementation

Authority (FIIA).

Non Resident Indian Scheme the general policy and facilities for foreign direct

investment as Available to foreign investors/ Companies are fully applicable to NRIs as well.

In addition, Government has extended some concessions especially for NRIs and overseas

corporate bodies having more than 60% stake by NRIs.

Throwing Open Industries Reserved For The Public Sector to Private Participation.

Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion

The removal of quantitative restrictions on imports.

The reduction of the peak customs tariff from over 300 per cent prior to the 30 per cent

rate that applies now. Severe restrictions on short-term debt and allowing external

commercial borrowings based on external debt sustainability.

Wide-ranging financial sector reforms in the banking, capital markets, and

insurance sectors, including the deregulation of interest rates, strong regulation and

supervisory systems, and the introduction of foreign/private sector competition.


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Despite reducing import restrictions several times in the 2000s,India was evaluated by the

World Trade Organization in 2008 as more restrictive than similar developing economies,

such as Brazil, China, and Russia. The WTO also identified electricity shortages and

inadequate transportation infrastructure as significant constraints on trade. Its restrictiveness

has been cited as a factor which has isolated it from the global financial crisis of 2008

2009 more than other countries, even though it has reduced ongoing economic growth.

PAYMENTS

Since independence, India's balance of payments on its current account has been negative.

Since liberalization in the 1990s (precipitated by a balance of payment crisis), India's exports

have been consistently rising, covering 80.3% of its imports in 200203, up from 66.2% in

199091. Although India is still a net importer, since 199697, its overall balance of

payments (i.e., including the capital account balance), has been positive, largely on account

of increased foreign direct investment and deposits from non-resident Indians; until this time,

the overall balance was only occasionally positive on account of external assistance and

commercial borrowings. As a result, India's foreign currency reserves stood at $285 billion in

2008, which could be used in infrastructural development of the country if used effectively.

India's reliance on external assistance and commercial borrowings has decreased since 1991

92, and since 200203, it has gradually been repaying these debts. Declining interest rates

and reduced borrowings decreased India's debt service ratio to 4.5% in 2007. In

India, External Commercial Borrowings (ECBs) are being permitted by the Government for

providing an additional source of funds to Indian corporate. The Ministry of

Finance monitors and regulates these borrowings (ECBs) through ECB policy guidelines.


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Impact of Globalization

The implications of globalization for a national economy are many. Globalization has

intensified Interdependence and competition between economies in the world market. These

economic reforms have yielded the following significant benefits: Globalization in India hada favorable impact on the overall growth rate of the economy. This is major improvement

given that Indias growth rate in the 1970s was very low at 3% and GDP growth in countries

like Brazil, Indonesia, Korea, and Mexico was more than twice that of India. Though Indias

average annual growth rate almost doubled in the eighties to 5.9%, it was still lower than the

growth rate in China, Korea and Indonesia. The pickup in GDP growth has helped improve

Indias globalposition. Consequently Indias position in the global economy has improved

from the 8thposition in 1991 to 4th place in 2001; when GDP is calculated on a purchasing

power parity basis. During 1991-92 the first year of Raos reforms program, The Indian

economy grew by 0.9%only.However the Gross Domestic Product (GDP) growth accelerated

to 5.3 % in 1992-93, and 6.2% 1993-94. A growth rate of above 8% was an achievement by

the Indian economy during the year 2003-04.Indias GDP growth rate can be seen from the

following graph since independence.


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Gains from Globalization

The gains from globalization can be analyzed in the context of the three types of

channels of economic globalization identified earlier.

Trade in Goods and Services

According to the standard theory, international trade leads to allocation of resources

that is consistent with comparative advantage. This results in specialization which enhances

productivity. It is accepted that international trade, in general, is beneficial and that

restrictive trade practices impede growth. That is the reason why many of the emerging

economies, which originally depended on a growth model of import substitution, have

moved over to a policy of outward orientation. However, in relation to trade in goods and

services, there is one major concern. Emerging economies will reap the benefits of

international trade only if they reach the full potential of their resource availability. This will

probably require time. That is why international trade agreements make exceptions by

allowing longer time to developing economies in terms of reduction in tariff and non-tariff

barriers. Special and differentiated treatment, as it is very often called has become an

accepted principle.

Trade Policies, Developing Countries, and Globalization

The past fifty years have seen dramatic increases in the importance of trade in the world

economy. Trade has grown much more rapidly than output, and most of the countries that

have grown the fastest have done so with rapid increases in their participation in world trade.

Policies of import substitution were widely used in the 1950s, 1960s and 1970s, but appeared

to be much less successful than the more export-oriented policies used in the high-growth

economies of East Asia. By the 1980s, policy makers in developing countries, in particular,had begun to turn towards policies that involved more open trade regimes. By the end of the

1980s, virtually all of the centrally planned regimes that previously eschewed the use of

market-based trade had either collapsed or made dramatic reforms that brought foreign trade

and investment into a prominent place in their development programs. Associated with these


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reforms of trade policy in developing countries was a dramatic change in the nature of their

involvement in international trade. Prior to the mid 1980s, developing countries relied

primarily on exports of commodities, a situation which exposed themto the higher volatility

of commodity prices and to secular declines in commodity prices, and gave rise to concerns

about dependency on imported manufactures. From the early 1980s, however, developing

countries dramatically increased the share of manufactures in their exports. By the late

1990s, around 80 percent of their exports were manufactured goods, greatly Diminishing the

earlier developing country concerns about the role of trade.

The year 1994 was perhaps the high-water market of recent international

policyEnthusiasm for open trade policies. At Marrakech, an unprecedented 124 economies

signed the Uruguay Round Agreement that introduced trade disciplines to agriculture and

services and locked all members into a set of agreements, on issues such as the protection of

intellectual property, that required the development of entirely new institutions in many

developing countries. In the same year, in Bogor, Indonesia, the leaders of Asia-Pacific

countries, representing nearly half of the world economy, set a goal of achieving completely

free trade in the Pacific by 2010 for the industrial countries and 2020 for the developing

countries. Many observers took a triumphalism view that free trade and ever-closer

integration between countries,and the more general phenomenon of globalization, had

become unstoppable.

The recent upsurge of concern about globalization, manifested in the streets of

Seattle, Washington, Prague and other cities where international policy makers have met,

makes it clear that a continuation of the globalizing trend of the last fifty years is far from

inevitable. Participation in the trend to globalization is, as Wolf (2001) has noted, a choice

that must be made by policy makers. Further, there is a strong interdependence between the

decisions of Policy makers. If some major countries turn away from world marketsas was

the case in the 1930sthe result can be a downward spiral in world trade that hurts even

those who would like to remain integrated with the world economy.


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Even at the national level, the choice of policies to manage interactions with the world

economy is not simple. More and more, trade policy reform requires the development of

Institutions, rather than merely the reform and streamlining of border barriers. Many of the

behind the border reforms that are involved require institutional capacity that is in scarce

supply in developing countries. In addition, supporting policies to help alleviate adverse

impacts on particular groups are likely to be needed. As Rodrik (1997) argues, it seems likely

that Globalization will be sustainable only if it is accompanied by policies that equip people

to take advantage of the benefits of globalization.

There is also a serious concern that some recent approaches to trade policy

reform may have created problems for developing countries. The World Trade Organization

is much more comprehensive than its predecessor, the General Agreement on Trade and

Tariffs (GATT), and this comprehensiveness appears to be creating some difficulties (Finger

and Schuler 2001). Indeed, developing countries problems in implementing the Uruguay

Round agreements were one of the factors that derailed the Seattle Ministerial meeting of the

World Trade Organization. But does this mean that trade policy reform has become a

hazardous obsession for developingcountries, as suggested by Rodrik (2001)? Or should

developing countries, and their trading partners, instead become more selective and

differentiated in the approaches that they take to reform of trade policies? Perhaps this

involves differentiating sharply between those areas where implementation requires few

resources, or actually saves resources, and those where it requires development and

strengthening of institutions, and hence important and costly investments.

The question of what needs to be done about trade policies cannot be adequately

answered without examining the current situation and the scope for improvement. Therefore,

the next section of this chapter examines recent changes in trade policies and other barriers to

trade. Then, in the third section, some major changes in trade patterns are examined. In the

final section, some approaches by which further improvements in trade policy might be made

are examined.


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CHAPTER III

Recent Developments in Trade Policies and Other Barriers to Integration

The period since the mid 1950s has been a period of extraordinary growth in

world trade, and in the openness of economies. Over the period since 1965, for which

consistent data are available, world trade has grown more rapidly than world income in all

but a few years of cyclical downturns. In the 1990s, trade grew much more rapidly than

income, with trade growing more than twice as fast as income over the period as a whole.

This very rapid growth in the openness of world economies reflects a

number of factors, including: reductions in trade barriers; reductions in transport costs; and

reductions in the costs of communications. Related influences include the increase in the

importance of trade in manufactures, for which twoway trade is much more prevalent than

for commodities, and the fragmentation of production processes, which necessarily involves

much more international trade in components In the remainder of this section, we first

examine some of the key changes that have taken place in barriers to trade, and then examine

some key changes in patterns of trade.

Developments in Trade Barriers

In the industrial countries, reductions in protection from the high levels reached

in the 1930s were already under way at the time of the establishment of the GATT in 1947

and continued under successive rounds of GATT negotiations. The process of reform was not

simply one of reducing tariffs. During the 1950s, an important component of liberalization

was the abolition of quantitative restrictions introduced for balance of payments reasons. Nor

was th process of liberalization smooth and continuous. During the 1950s, agricultureeffectively escaped from the multilateral system as a consequence of exceptions made for

domestic support price schemes. During the 1960s and 1970s, exports of textiles and clothing

from developing countries were put under a system of quotas that discriminated by country,

and violated all of the fundamental principles of the GATT. As tariffs fell, forms of


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reducing (Brecher and Diaz-Alejandro 1977) and policies that imposed export performance

requirements on foreign investors could be second-best welfare improving (Rodrik 1987).

The political attractions of import-substituting policies to developing country

policy makers were not effectively countered by the multilateral trading system prior to the

Uruguay Round (1986-1994). In this era, developing country policy-makers generally

subscribed to the theory of import substitution, and focused their efforts in the GATT on

obtaining unreciprocated improvements in their access to industrial country markets under

the rubric of special anddifferential treatment. This policy was of some help to those

countries that received preferential market access, by improving their terms of trade.

However, it had a number of adverse economic consequences. Firstly, the policy made it

difficult to bargain for improvements in their market access in the products of greatest

interest to them. Secondly, such access was frequently constrained by quantitative

restrictions and the risk of preference erosion or removal. And thirdly, this policy approach

meant that domestic exporters had no incentive to lobby for reductions in domestic

protection as a way of improving their access to partner markets.

It was no coincidence that, during the period in which developing countries

focused on import substitution and on obtaining increased market access in the industrial

countries without reciprocation, the industrial countries introduced new barriers in areas of

particular interest to developing countries, such as agriculture and textiles and clothing.

In the long run, however, it is ideas and experience, rather than political power,

that are the most influential determinants of the broad thrust of policy. As Keynes (1936)

famously observed Madmen in authority, who hear voices in the air, are distilling their

frenzy from some academic scribbler of a few years back... Sooner or later, it is ideas, not

vested interests, which are dangerous for good or evil. A small group of developing

economies, primarily in East Asia, had either not followed the orthodoxy of import

substitution, or had used complementary export promotion policies as part of an export-

oriented development path. By the end of the 1960s, the outstanding performance of

economies such as Hong Kong, the Republic of Korea,and Taiwan (China) had begun to

attract attention. This evidence, combined with critical assessments of the performance of


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retention rates and other features of the foreign exchange rate regime. Clearly, however, for

mostcountries, that are now small enough to imply that foreign exchange distortions impose

relatively small taxes on trade.

Changes in Trade Patterns

The changes in trade policies and the reductions in trade barriers that have

occurred in recent years have been associated with major changes in developing countries

role in the world economy. In particular, over the period in which developing countries have

been reducing their trade barriers, the composition of developing country exports has

changed in fundamental ways. Since the 1980s, developing countries have drastically

increased their reliance on manufactures exports, and increased their reliance on exports to

other developing countries. Further, exports of services have become much more important

for developing countries.

The highly protectionist policies followed by most developing countries prior to

the 1980s were frequently designed, at least in part, to stimulate industrialization. However,

one of their effects was to greatly constrain countries ability to participate in the more

dynamic parts of International tradetrade in manufactures, and trade in services. Both of

these typically require access to intermediate inputs, capital and technology that are best

obtained from abroad.

Movement of Capital

Capital flows across countries have played an important role in enhancing the

production base. This was very much true in 19thand 20thcenturies. Capital mobility

enables the total savings of the world to be distributed among countries which have the

highest investment potential. Under these circumstances, one countrys growth is not

constrained by its own domestic savings. The inflow of foreign capital has played a

significant role in the development in the recent period of the East Asian countries. The

current account deficit of some of these countries had exceeded 5 per cent of the GDP in

most of the period when growth was rapid. Capital flows can take either the form of foreign


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direct investment or portfolio investment. For developing countries the preferred alternative

is foreign direct investment. Portfolio investment does not directly lead to expansion of

productive capacity. It may do so, however, at one step removed. Portfolio investment can

be volatile particularly in times of loss of confidence. That is why countries want to put

restrictions on portfolio investment. However, in an open system such restrictions cannot

work easily.

Financial Flows

The rapid development of the capital market has been one of the important features of

the current process of globalization. While the growth in capital and foreign exchange

markets have facilitated the transfer of resources across borders, the gross turnover in foreign

exchange markets has been extremely large. It is estimated that the gross turnover is around

$ 1.5 trillion per day worldwide (Frankel, 2000). This is of the order of hundred times

greater than the volume of trade in goods and services. Currency trade has become an end in

itself. The expansion in foreign exchange markets and capital markets is a necessary pre-

requisite for international transfer of capital. However, the volatility in the foreign exchange

market and the ease with which funds can be withdrawn from countries have created often

times panic situations. The most recent example of this was the East Asian crisis. Contagion

of financial crises is a worrying phenomenon. When one country faces a crisis, it affects

others. It is not as if financial crises are solely caused by foreign exchange traders. What the

financial markets tend to do is to exaggerate weaknesses. Herd instinct is not uncommon in

financial markets. When an economy becomes more open to capital and financial flows,

there is even greater compulsion to ensure that factors relating to macro-economic stability

are not ignored. This is a lesson all developing countries have to learn from East Asian

crisis. As one commentator aptly said The trigger was sentiment,but vulnerability was due

to fundamentals.


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CHAPTER IV

Concerns and Fears

On the impact of globalization, there are two major concerns. These may be

described as even fears. Under each major concern there are many related anxieties. The

first major concern is that globalization leads to a more iniquitous distribution of income

among countries and within countries. The second fear is that globalization leads to loss of

national sovereignty and those countries are finding it increasingly difficult to follow

independent domestic policies. These two issues have to be addressed both theoretically and

empirically.

The argument that globalization leads to inequality is based on the premise that since

globalization emphasizes efficiency, gains will accrue to countries which are favourably

endowed with natural and human resources. Advanced countries have had a head start over

the other countries by at least three centuries. The technological base of these countries is

not only wide but highly sophisticated. While trade benefits all countries, greater gains

accrue to the industrially advanced countries. This is the reason why even in the present

trade agreements, a case has been built up for special and differential treatment in relation to

developing countries. By and large, this treatment provides for longer transition periods in

relation to adjustment. However, there are two changes with respect to international trade

which may work to the advantage of the developing countries.

First, for a variety of reasons, the industrially advanced countries are vacating certain

areas of production. These can be filled in by developing countries. A good example of this

is what the East Asian countries did in the 1970s and 1980s. Second, international trade is

no longer determined by the distribution of natural resources. With the advent of

information technology, the role of human resources has emerged as more important.

Specialized human skills will become the determining factor in the coming decades.

Productive activities are becoming knowledge intensive rather than resource intensive.

While there is a divide between developing and the advanced countries even in this area


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some people call it the digital divide - it is a gap which can be bridged. A globalized

economy with increased specialization can lead to improved productivity and faster growth.

What will be required is a balancing mechanism to ensure that the handicaps of the

developing countries are overcome.

Apart from the possible iniquitous distribution of income among countries, it has

also been argued that globalization leads to widening income gaps within the countries as

well. This can happen both in the developed and developing economies. The argument is

the same as was advanced in relation to iniquitous distribution among countries.

Globalization may benefit even within a country those who have the skills and the

technology. The higher growth rate achieved by an economy can be at the expense of

declining incomes of people who may be rendered redundant. In this context, it has to be

noted that while globalization may accelerate the process of technology substitution in

developing economies, these countries even without globalization will face the problem

associated with moving from lower to higher technology. If the growth rate of the economy

accelerates sufficiently, then part of the resources can be diverted by the state to modernize

and re-equip people who may be affected by the process of technology up gradation.

The second concern relates to the loss of autonomy in the pursuit of economic

policies. In a highly integrated world economy, it is true that one country cannot pursue

policies which are not in consonance with the worldwide trends. Capital and technology are

fluid and they will move where the benefits are greater. As the nations come together

whether it be in the political, social or economic arena, some sacrifice of sovereignty is

inevitable. The constraints of a globalised economic system on the pursuit of domestic

policies have to be recognized. However, it need not result in the abdication of domestic

objectives.

Another fear associated with globalization is insecurity and volatility. When

countries are inter-related strongly, a small spark can start a large conflagration. Panic and

fear spread fast. The downside to globalization essentially emphasizes the need to create


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countervailing forces in the form of institutions and policies at the international level. Global

governance cannot be pushed to the periphery, as integration gathers speed.

Empirical evidence on the impact of globalization on inequality is not very clear. The

share in aggregate world exports and in world output of the developing countries has been

increasing. In aggregate world exports, the share of developing countries increased from

20.6 per cent in 1988-90 to 29.9 per cent in 2000. Similarly the share in aggregate world

output of developing countries has increased from 17.9 per cent in 1988-90 to 40.4 per cent

in 2000. The growth rate of the developing countries both in terms of GDP and per capita

GDP has been higher than those of the industrial countries. These growth rates have been in

fact higher in the 1990s than in the 1980s. All these data do not indicate that the developing

countries as a group have suffered in the process of globalization.

In fact, there have been substantial gains. But within developing countries, Africa has

not done well and some of the South Asian countries have done better only in the 1990s.

While the growth rate in per capita income of the developing countries in the 1990s is nearly

two times higher than that of industrialized countries, in absolute terms the gap in per capita

income has widened. As for income distribution within the countries, it is difficult to judgewhether globalization is the primary factor responsible for any deterioration in the

distribution of income.

We have had considerable controversies in our country on what happened to the

poverty ratio in the second half of 1990s. Most analysts even for India would agree that the

poverty ratio has declined in the 1990s. Differences may exist as to what rate at which this

has fallen. Nevertheless, whether it is in India or any other country, it is very difficult to

trace the changes in the distribution of income within the countries directly to globalization.


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Indias Stance

What should be Indias attitude in this environment of growing globalization? At the

outset it must be mentioned that opting out of globalization is not a viable choice. There are

at present 149 members in the World Trade Organization (WTO). Some 25 countries are

waiting to join the WTO. China has recently been admitted as a member. What is needed is

to evolve an appropriate framework to wrest maximum benefits out of international trade and

investment. This framework should include (a) making explicit the list of demands that India

would like to make on the multilateral trade system, and (b) steps that India should take torealize the full potential from globalization.

Demands on the Trading System

Without being exhaustive, the demands of the developing countries on the multilateral

trading system should include:-

(1) Establishing symmetry as between the movement of capital and natural persons,

(2) Delinking environmental standards and labour related considerations from trade

negotiations

(3) Zero tariffs in industrialized countries on labour intensive exports of developing

countries,

(4) Adequate protection to genetic or biological material and traditional knowledge of

developing countries,

(5) Prohibition of unilateral trade action and extra territorial application of national laws and

regulations, and


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(6) Effective restraint on industrialized countries in initiating anti-dumping and

countervailing action against exports from developing countries.

The purpose of the new trading system must be to ensure free and fair trade among

countries. The emphasis so far has been on free rather than fair trade. It is in this

context that the rich industrially advanced countries have an obligation. They have often

indulged in double speak. While requiring developing countries to dismantle barriers and

join the main stream of international trade, they have been raising significant tariff and non-

tariff barriers on trade from developing countries. Very often, this has been the consequence

of heavy lobbying in the advanced countries to protect labour. Although average tariffs in

the United States, Canada, European Union and Japanthe so called Quad countriesrange

from only 4.3 per cent in Japan to 8.3 per cent in Canada, their tariff and trade barriers

remain much higher on many products exported by developing countries. Major agricultural

food products such as meat, sugar and dairy products attract tariff rates exceeding 100 per

cent. Fruits and vegetables such as bananas are hit with a 180 per cent tariff by the European

Union, once they exceed quotas. The tariffs collected by the US on $ 2 billion worth of

imports from Bangladesh are higher than those imposed on imports worth $ 30 billion from

France. In fact, these trade barriers impose a serious burden on the developing countries. It

is important that if the rich countries want a trading system that is truly fair, they shouldcome forward to reduce the trade barriers and subsidies that prevent the products of

developing countries from reaching their markets. Otherwise the pleas of these countries for

a competitive system will sound hollow.

To some extent, conflicts among countries on trade matters are endemic. Until

recently, agriculture was a major bone of contention between U.S. and E.U. countries.

Frictions are also bound to arise among developing countries as well. When import tariffs onedible oil were increased in India, the most severe protest came from Malaysia which was a

major exporter of Palm Oil. Entrepreneurs in India complain of cheaper imports from China.

In the export of rice, a major competitor of India is Thailand. If development is accepted as


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the major objective of trade as the Doha declaration proclaimed, it should be possible to

work out a trading arrangement that is beneficial to all countries.

There have been protracted negotiations at WTO in reforming the trade system.

Admittedly, the tariff and non-tariff barriers are coming down. However, there are

apprehensions that the concerns of developing countries are not being addressed adequately.

Looked at from this angle, the recent Hong Kong Ministerial is a modest success. Despite

reservations, we must acknowledge that it is a step forward. Domestic support to agriculture

by developed countries constitutes a major stumbling block to third world trade expansion.

However, Indias stand in relation to agriculture has been `defensive. We are not a major

player in the world agricultural market. The impact of what has been accepted in relation to

Non-Agricultural Market Access and services will vary from country to country. Despite

some contrarian opinion, the gain to India from services can be significant. However, the

Hong Kong Ministerial is only a broad statement of intentions. Much will depend upon how

these ideas are translated into concrete actions.


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compete with the rest of the world at levels of tariff comparable to those of other developing

countries. Obviously, the Indian Government should be alert to ensure that Indian industries

are not the victims of unfair trade practices. The safeguards available in the WTO agreement

must be fully utilized to protect the interests of Indian industries.

Indian industry has a right to demand that the macroeconomic policy environment

should be conducive to rapid economic growth. The configuration of policy decisions in the

recent period has been attempting to do that. It is, however, time for Indian industrial units to

recognize that the challenges of the new century demand greater action at the enterprise

level. They have to learn to swim in the tempestuous waters of competition and away from

the protected waters of the swimming pools. India is no longer a country producing goods

and services for the domestic market alone. Indian firms are becoming and have to become

global players. At the minimum, they must be able to meet global competition. The search

for identifying new competitive advantages must begin earnestly. Indias ascendancy in

Information Technology (IT) is only partly by design. However, it must be said to the credit

of policy makers that once the potential in this area was discovered, the policy environment

became strongly industry friendly.

Over a wide spectrum of activities, Indias advantage, actual and that which can be

realized in a short span of time must be drawn up. Of course, in a number of cases, it will

require building plants on a global scale. But, this need not necessarily be so in all cases. In

fact the advent of IT is modifying the industrial structure. The revolution in

telecommunications and IT is simultaneously creating a huge single market economy, while

making the parts smaller and more powerful. What we need today is a road map for the

Indian industry. It must delineate the path different industries must take to achieve

productivity and efficiency levels comparable to the best in the world.

Globalization, in a fundamental sense, is not a new phenomenon. Its roots extend

farther and deeper than the visible part of the plant. It is as old as history, starting with the

great migrations of people across the great landmasses. Only recent developments in

computer and communication technologies have accelerated the process of integration, with

geographic distances becoming less of a factor. Is this 'end of geography' a boon or a bane?


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Borders have become porous and the sky is open. With modern technologies which do not

recognize geography, it is not possible to hold back ideas either in the political, economic or

cultural spheres. Each country must prepare itself to meet the new challenges so that it is not

being bypassed by this huge wave of technological and institutional changes.

Nothing is an unmixed blessing. Globalization in its present form though spurred by

far reaching technological changes is not a pure technological phenomenon. It has many

dimensions including ideological. To deal with this phenomenon, we must understand the

gains and losses, the benefits as well as dangers. To be forewarned, as the saying goes, is to

be forearmed. But we should not throw the baby with bath water. We should also resist the

temptation to blame globalization for all our failures. Most often, as the poet said, the fault is

in ourselves.

Risks of an open economy are well known. We must not, nevertheless, miss the

opportunities that the global system can offer. As an eminent critic put it, the world cannot

marginalize India. But India, if it chooses, can marginalize itself. We must guard ourselves

against this danger. More than many other developing countries, India is in a position to

wrest significant gains from globalization. However, we must voice our concerns and in

cooperation with other developing countries modify the international trading arrangements to

take care of the special needs of such countries. At the same time, we must identify and

strengthen our comparative advantages. It is this two-fold approach which will enable us to

meet the challenges of globalization which may be the defining characteristic of the new

millennium.

The key to Indias growth lies in improving productivityand efficiency. This has to

permeate all walks of our life. Contrary to the general impression, the natural resources of

our country are not large. India accounts for 16.7 per cent of worlds population whereas it

has only 2.0 per cent of worlds land area. While Chinas population is 30 per cent higher

than that of Indias, it has a land area which is three times that of India. In fact, from the

point of view of long-range sustainability, the need for greater efficiency in the management

of natural resources like land, water and minerals has become urgent. In a capital-scarce

economy like ours, efficient utilization of our capacity becomes even more critical. For all


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Conclusion

The lesson of recent experience is that a country must carefully choose a combination of

policies that best enables it to take the opportunity - while avoiding the pitfalls. For over a

century the United States has been the largest economy in the world but major developments

have taken place in the world economy since then, leading to the shift of focus from the US

and the rich countries of Europe to the two Asian giants- India and China. Economics experts

and various studies conducted across the globe envisage India and China to rule the world in

the 21st century. India, which is now the fourth largest economy in terms of purchasing

power parity, may overtake Japan and become third major economic power within 10 years.


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