Hel044 Two Decades of Lpg - Francis_ch-pre

Government Intervention in the Economy through the Ages 1

Two Decades of LPG2

TWO DECADES OF LPG

Dr. Francis Cherunilam Professor,

School of Management Studies,

Cochin University of Science & Technology,

Cochin – 682 022.

E-mail: [email protected]

(Formerly: Professor & Chairman,

Marketing Area, IIMK; Director,

Albertian Institute of Management,

Cochin; Director, SMS, CUSAT)

MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI


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First Edition : 2012

Two Decades of LPG4

Two Decades of LPG, my 50th book, has considerable linkages with the first book, Businessand Government, first published in 1982. Business and Government deals with the role ofgovernment vis-à-vis business. Until 1991, it looked at the increasing government controlson the business and their implications; since the 1992 edition it scanned the easing of theregulations. The last chapter of Business and Government, viz., A Critic of GovernmentControls in India, was deleted with effect from the 1992 edition as the economic reformshave substantially diminished the relevance of this chapter and in 1992 I had brought out abook on Economic Reforms in India and Abroad.

The present work is a modest attempt to critically examine the transformation of the Indianbusiness environment under the liberalisation, privatisation and globalisation (LPG) processthat India has been undergoing.

The first two chapters of the book are intended to provide a background to the LPG in India.The introductory chapter provides a short description of the changes, historically, in theeconomic roles of Government across the world and the global LPG wave of the recentdecades. The second chapter examines the government-business dynamics in India over thelast six and a half decades, viz., the growth of the control regime and its impact and thetransition in the last two decades. The next three chapters go into some macro details of thereforms in three important sectors - industrial, financial and external. The last chapter takesa bird’s eye view of the changes in the position of India in the world economy over the lasttwo millennia. Particular attention has been given to evaluate India’s economic performancesince 1950 and to the impact of the economic reforms. The chapter concludes with a look atthe future prospects and challenges for the Indian economy.

It is the profuse blessings of the Almighty that has made possible what would have beenimpossible for me in the last three decades of my writing career. The response to many of thebooks from the academic community has been overwhelming. The constant encouragementand unstinted support of the Himalaya Publishing House have played an important role intaking me to the 50th book. I remember with great love and gratitude late Sri. D.P. Pandey,the founder of Himalaya Publishing House, for the emotional bondage and the empoweringof an young author. I would like to place on record my indebtedness to Mrs. Meena Pandey,Anuj Pandey and Niraj Pandey.

Dr. Francis Cherunilam

Cochin,29th December, 2011

PrefacePreface


Contents

1. GOVERNMENT INTERVENTION IN THE ECONOMYTHROUGH THE AGES 1 – 64Growth of state in market economies; rationale and scope of stateintervention; economic roles of government; economic systems; trends inpolitical/economic policies and philosophies; economic crisis of thecommunist world and the march from Marx to the the market; the globalLPG wave; economic reforms in India; impact of LPG; LPG and developingcountries; conclusion.

2. THE CONTROL AND PROMOTIONAL REGIME IN INDIA 65 – 90

Economic implications of the constitution; important policies andregulations; expansion in state intervention; evaluation of the control regime.

3. INDUSTRIAL SECTOR REFORMS 91 – 117

Industrial policy reforms; evaluation of the industrial policy liberalisation;conclusion.

4. FINANCIAL SECTOR REFORMS 118 – 132

Banking sector reforms; capital market reforms and developments;conclusion.

5. EXTERNAL SECTOR REFORMS 133 –185

Reform of trade policy and regulation; foreign trade policy; special economiczones; India’s trade performance; service exports; reform of foreign exchangerate regime; impact of LPG on BoP and forex reserves; conclusion

6. THE EMERGING INDIA 186 – 211

Indian economy through the ages; phase of accelerated pace of growth;drivers of growth; challenges; conclusion.

Contents

1

GOVERNMENT INTERVENTION IN THEECONOMY THROUGH THE AGES

From Laissez Faire Through Statism to Liberation

Government intervention in the economy and vis-à-vis business is universal,albeit varies widely in kind and degree depending on the development and regulatoryneeds and political philosophies. Historically, the role of the government in theeconomy differed enormously, from laissez faire (free market system) to conventionalcommunism characterised by centralised planning and almost state monopoly. Thelast six-and-a-half decades or so, the period since the end of the II World War (andthe coming into being of World Bank – IMF and GATT, the forerunner of WTO), havewitnessed several shifts, evolutionary to revolutionary, in the approach, policy andmode of government intervention in the economy across the world.

There are very divergent perceptions of the functions of the state. On the oneextreme is the laissez faire philosophy that “the government that governs the least isthe best” and on the other extreme is the demand for government ownership or controlof almost everything. Further, the philosophy regarding the state’s role in the societyhas undergone significant changes over time in many countries. A number ofcountries have, in fact, been transitioning from Marx to the market.

GROWTH OF STATE IN MARKET ECONOMIES

The economic role of the state has been recognised for several centuries now.“States have come in all shapes and sizes, depending on a mix of factors includingculture, natural endowments, opportunities for trade and distribution of power.”1

Seventeenth century mercantilists wanted the state to play a major role in guidingtrade. Adam Smith’s Wealth of Nations, published in the late eighteenth century,


however, popularised the view that economic growth and welfare are best achievedby the free market mechanism and the state should confine itself to certain corefunctions such as law and order, defence etc. and enforcement of contracts, essentialfor the proper functioning of the market economy. “But even then, state interventionwent on to play a vital, catalytic role in the development and growth of markets inEurope, Japan and North America.”2 Even in the United States, which is regarded asthe citadel of market economy, the state has been playing an active role in thedevelopment of several industries/sectors and in welfare measures through publicfinance.

In most of the modern economies the state’s regulatory role is now broader andmore complex than ever before, covering such areas as the environment, spatialdispersal etc. as well as more traditional areas such as monopolies.

The first half of the twentieth century witnessed an increase in the stateintervention in the economy. The Russian Revolution of 1917 and the consequentestablishment of communist rule in the USSR had great influence across the globeon the thinking of the state’s role. The Russian model had a great influence informulating the economic policy of Independent India. The Great Depression in USA(which eventually spread to other countries), that set in with the Wall Street collapseof 1929 and assumed terrific proportions in the early 1930s, brought to the fore theimportant role the state has in a capitalist economy. The economic crisis that sweptacross the world during 2008 - 09 once again demonstrated the economic stabilisationrole of the government.

The post II World War paradigm “coalesced around three basic themes, all ofwhich commanded broad, if not uniform, agreement. This three-pillared consensusremained largely undisturbed until the first oil price shock of 1973. First was theneed to provide welfare benefits to those suffering from transitory loss of income orother deprivation. Second was the desirability of a mixed public-private economy,which would often mean nationalizing a range of strategic industries. Third was theneed for a coordinated macroeconomic policy, on the grounds that the market alonecould not deliver stable macroeconomic outcomes that were consistent withindividuals’ objectives. In time, the goals of macroeconomic policy were made explicit:full employment, price stability, and balance of payments equilibrium.

States thus took on new roles and expanded existing ones. By mid-century therange of tasks performed by public institutions included not only wider provision ofinfrastructure and utilities, but also much more extensive support for educationand health care.”3

A reversal of this trend started in the 1980s. Communism collapsed in the USSRand East Europe. China started economic reforms in the late 1970s and widely openedthe economy for foreign investment in the eighties. Privatisation caught on at anamazing speed in many developed market economies and developing economies.

Two Decades of LPG8

Government, however, plays a very important role in the modern economy. Eventhose which are described as capitalist or market economies are mixed or regulatedsystems. In such economies “a substantial share of the nation’s product goes to satisfypublic wants, a substantial part of the private income originates in the public budget,and public tax and transfer payments significantly influence the state of privateincome distribution.”4 Even in the market economies, state ownership of enterprisesand even the whole of certain industries has not been uncommon, particularly untilthe privatization move ushered around the 1980. The public utilities in thesecountries had either been under strong state control or owned by the state. Shortageof entrepreneurship and other development resources and ideological flavourencouraged many developing countries to assign a very important role to the statein the socio-economic system.

Government policies like the budget policy and the monetary policy (which alsois an instrument of intervention, although supposed to be independent of thegovernment) affect the level of investment, employment, prices and consumption inthe private sector. Thus, the present day capitalist economy is a mixed system,including a sizable and virtually important sphere of public economy along with themarket sector.

Government intervention is necessitated even in the market economies by thelimitations of the invisible hand and the fact that the market mechanism alone cannotperform all economic functions. However, the extent of State control and the types ofcontrol may vary widely between nations depending upon the nature and stage ofdevelopment of the economy, the behaviour of the private sector, the politicalphilosophy, social attitude, administrative system etc.

As R. A. Musgrave and P. B. Musgrave, renowned authors on Public Finance,point out, public policy is needed to guide, correct and supplement it in certainrespects due to a variety of reasons, including the following:5

1. The contractual arrangements and exchanges needed for the market operationcannot exist without the protection and enforcement of a governmentallyprovided legal structure.

2. The claim that the market mechanism leads to efficient resource use (i.e.,produces what consumers want most and does so in the cheapest way) isbased on the condition of the competitive factors and product markets. Thismeans that there must be no obstacles to free entry and that consumers andproducers must have full market knowledge. Government regulation or othermeasures are needed to secure these conditions.

3. Even if all barriers to competition were removed, the production orconsumption characteristics of certain goods are such that these goods cannotbe provided through the market. Problems of ‘externalities’ arise which lead to‘market failure’ and require solution through the public sector.


4. The rate of discount used in the valuing of future (relative to present)consumption may differ as seen from a public and a private point of view.

5. The market system, especially in a highly developed financial economy, doesnot necessarily bring high employment, price level stability, and the sociallydesired rate of economic growth. Public policy is needed to secure theseobjectives.

6. Social values may require adjustments in the distribution of income andwealth, which results from the market system and from the transmission ofproperty rights through inheritance.

The Musgraves, however, rightly caution that “to argue that these limitations ofthe market mechanisms call for corrective of compensating measures of public policydoes not prove, of course, that any policy measure which is undertaken will in factimprove the performance of economic system. Public policy, no less than the privatepolicy, can err and be inefficient.”6

RATIONALE AND SCOPE OF STATE INTERVENTION

Functions of the state varies from basic minimum requirements to activeparticipation in several other sectors. Figure 1.1 classifies the functions of governmentalong a continuum, from activities that will not be taken at all without stateintervention to activities in which the state plays an active role in coordinatingmarkets or redistributing assets.

The basic functions include the pure public goods such as the provisionof property rights, macroeconomic stability, control of infectious diseases,safe water, roads, and protection of the destitute. In many countries thestate is not even providing these. Recent reforms have emphasizedeconomic fundamentals. But social and institutional (including legal)fundamentals are equally important to avoid social disruption and ensuresustained development.

Going beyond these basic services are the intermediate functions, such asmanagement of externalities (pollution, for example), regulation of monopolies,and the provision of social insurance (pensions, unemployment benefits).Here, too, the government cannot choose whether, but only how best tointervene, and government can work in partnership with markets and civilsociety to ensure that these public goods are provided.

States with strong capability can take on more-activist functions, dealing withthe problem of missing markets by helping coordination. East Asia’s experiencehas renewed interest in the state’s role in promoting markets through activeindustrial and financial policy.7

Two Decades of LPG10

Figure1.1

Providing pure public goods Protecting theDefence poor

Law and order Anti-povertyProperty rights programmes

Macroeconomic management Disaster reliefPublic health

Coordinating private activity RedistributionFostering markets AssetCluster initiatives redistribution

Addressing Regulating Overcoming Providing socialexternalities monopoly imperfect information insurance

Basic Utility Insurance (health Redistributiveeducation regulation life, pensions) pensions

Environmental Anti-trust Financial Regulation Family allowancesProtection Policy Consumer Protection Unemployment

insurance

Addressing market failure Improving equity

Minimalfunctions

Intermediatefunctions

Activistfunctions

Functions of the State (Adopted from World Bank, World DevelopmentReport, 1997).

ECONOMIC ROLES OF GOVERNMENT

Governments normally play four important roles in an economy, viz., regulation,promotion, entrepreneurship, and planning.

As stated above, the extent and nature of these roles in a given situation dependon a number of factors. Some salient features of these roles are outlined below:

Regulatory Role

Government regulation of the business may cover a broad spectrum extendingfrom entry into business to the final results of a business. The reservation of industriesto small scale, public and co-operative sectors, licensing system etc. regulate theentry. Regulations of product mix, promotional activities etc. amount to regulationof the conduct of business.

Results of business operations may be regulated by such measures as ceilingson profit margins, dividend etc. The State may also regulate the relationship betweenenterprises. Examples of this include restrictions on intra-corporate investments,interlocking of directors and appointment of sole selling agents.


Government regulation of the economy may be broadly divided into directcontrols and indirect controls.

Indirect controls are usually exercised through various fiscal and monetaryincentives and disincentives or penalties. Certain activities may be encouraged ordiscouraged through monetary and fiscal incentives and disincentives. For instance,a high import duty may discourage imports and fiscal and monetary incentives mayencourage the development of export-oriented industries.

The direct administrative or physical controls are more drastic in their effect.The distinguishing characteristic of direct controls is their discretionary nature.They can be applied selectively from firm to firm and industry to industry, at thediscretion of the State.

Regulation of the business had been rampant in the developing countries. Sincethe late 1980s, however, a deregulation trend has set in. This has drasticallytransformed the competitive environment and has given an impetus to globalisation.

BOX 1.1

The State, Institutions, and Economic Outcomes

The State sets the formal rules — laws and regulations — that are part and parcel of acountry’s institutional environment. These formal rules, along with the informal rules of thebroader society, are the institutions that mediate human behavior. But the state is not merely areferee, making and enforcing the rules from the sidelines; it is also a player, indeed often adominant player, in the economic game. Every day, state agencies invest resources, directcredit, procure goods and services, and negotiate contracts; these actions have profound effectson transactions costs and on economic activity and economic outcomes, especially in developingeconomies. Played well, the state’s activities can accelerate development. Played badly, theywill produce stagnation or, in the extreme, economic and social disintegration. The state, then,is in a unique position: not only must it establish, through a social and political process, theformal rules by which all other organizations must abide; as an organization itself, it, too, mustabide by those rules.

Reproduced from: World Bank, World Development Report, 1997.


GovernanceStructure

Policies andGuidelines Planning Entrepreneur-

ship Regulation

IndustrialPolicy

Promotionaland

DevelopmentOrganisations

FiscalPolicy

TradePolicy

OtherPolicies

Laws andOther

Regulations

GovernmentInterventions

Figure1.2

Ways of State Intervention in the Economy

Promotional Role

The promotional role played by the Government is very important indeveloped countries as well as in the developing countries. In developingcountries, where the infrastructural facilities for development are inadequateand entrepreneurial activities are scarce, the promotional role of the Governmentassumes special significance. The State will have to assume direct responsibilityto build up and strengthen the necessary development infrastructures, such aspower, transport, finance, marketing, institutions for training and guidance andother promotional activities.

The promotional role of the State also encompasses the provision of various fiscal,monetary and other incentives, including measures to cover certain risks, for thedevelopment of certain priority sectors and activities.

Entrepreneurial Role

In many economies, the State also plays the role of an entrepreneur – establishingand operating business enterprises and bearing the risks. A number of factors suchas socio-political ideologies; dearth of private entrepreneurship; neglect of certainsectors, like the unprofitable sectors, by the private entrepreneurs; absence of orinadequate competition in certain segments and the resultant exploitation ofconsumers, etc. have contributed to the growth of State owned enterprises (SOEs) inmany countries.


Ways of State PromotingDevelopment

By providing a macro-economic and a micro-economic environment thatsets the right incentives forefficient economic activityBy providing the institutionalinfrastructure –propertyrights, peace, law andorder, and rules – thatencourages efficient long-term investment, andBy ensuring the provisionof basic education, healthcare, and the physicalinfrastructure required foreconomic activity, and byprotecting the naturalenvironment

Harmful Impact of State

The wrong kind of rules can actively discourage thecreation of wealth. For example, the state may penalizeprivate wealth by distorting prices – through an overvaluedcurrency, for example, or by creating agricultural marketingboards that tax farmers’ output and give them little in return.Even if the rules themselves are benign, they may beapplied by public organizations – and their employees –in harmful fashion. They may, for example, impose hugetransactions costs, in the form of red tape or bribery, onentrepreneurs setting up new businesses or restructuringold ones.But potentially the largest source of state-inflicted damageis uncertainty. If the state changes the rules often, ordoes not clarify the rules by which the state itself willbehave, businesses and individuals cannot be sure todaywhat will be profitable or unprofitable, legal or illegal,tomorrow. They will then adopt costly strategies to insureagainst an uncertain future – by entering the informaleconomy, for example, or sending capital abroad – all ofwhich impede development.

There was a tendency in many developing countries to assign a dominant placeto the public sector. Public sector dominance was usually established in capital-intensive projects like steel, capital goods, petrochemicals and fertilizers for whichinvestment requirements were very large and the expected private returns, at leastin the short-run were too low to provide an incentive for private profitability. In manycases even when the private sector was prepared to undertake the risk and invest.State ownership of such industries existed for one reason or other.

However, recently many governments have resorted to privatisation in varyingdegrees, and have redefined the role of the public sector.

BOX 1.2

The Impact of State

Courtesy: World Bank, World Development Report, 1997.

Planning Role

Especially in the developing countries, the State plays a very important role as aplanner.


The importance of planning to a less developed economy was often emphasisedby Jawaharlal Nehru, the chief architect of Development Planning in India. He rightlyobserved: “Whatever it may be in other countries, in under-developed countries likeours, which have to develop fairly rapidly, the time element is important and thequestion is how to use our resources to the best advantage. If our resources areabundant it will not matter how they are used. They will go into a common pool ofdevelopment. But where one’s resources are limited, one has to see that they aredirected to the right purpose so as to help to build up whatever one is aiming at.”

ECONOMIC SYSTEMS

The scope of private business depends, to a large extent, on the economic systemwhich indeed is rooted in political philosophy. At one end, there are the free enterprise/ market economies or capitalist economies, and at the other end are the centrallyplanned economies or communist countries. In between these two are the mixedeconomies. Within the mixed economic system itself, there are wide variations. Thefreedom of private enterprise is the greatest in the market economy, which ischaracterised by the following assumptions:

1. The factors of production (labour, land, capital) are privately owned, andproduction occurs at the initiative of the private enterprise.

2. Income is received in monetary form by the sale of services of the factors ofproduction and from the profits of the private enterprise.

3. Members of the free market economy have freedom of choice in so far asconsumption, occupation, savings and investment are concerned.

4. The free market economy is not planned, controlled or regulated by thegovernment. The government satisfies community or collective wants, butdoes not compete with private firms; nor does it tell the people where to work/or what to produce.

The completely free market economy, however, is an abstract system rather thana real one. Today, even the so-called market economies are subject to a number ofgovernment regulations. Countries like the United States, Japan, Australia, Canadaand member countries of the EEC are regarded as market economies.

The communist countries have, by and large, a centrally planned economicsystem. Under the rule of a communist or authoritarian socialist government, thestate owns all the means of production, determines the goals of production andcontrols the economy according to a central master plan. There is hardly anyconsumer sovereignty in a centrally planned economy, unlike in the free marketeconomy. The consumption pattern in a centrally planned economy is dictated bythe state.


China, East Germany, Soviet Union, Czechoslovakia, Hungary, Poland, etc., hadcentrally planned economies. However, these countries have discarded communistsystem and have moved towards the market economy, although politically several ofthem, particularly China, continue to be authoritarian.

In between the capitalist system and the centrally planned system falls thesystem of the mixed economy, under which both the public and private sectors co-exist, as in India. The extent of state participation varies widely between the mixedeconomies. However, in many mixed economies, the strategic and other nationallyvery important industries are fully owned or dominated by the state.

The economic system, thus, is a very important determinant of the scope of privatebusiness. The economic system and policy are, therefore, a very important externalconstraint on business.

TRENDS IN POLITICAL/ECONOMICPHILOSOPHIES/OUTLOOK

While there are no radical differences in the philosophies of major political partiesin some countries, the situation is quite different in some others. The governmentsystem in a number of countries, including several countries which are makingrapid economic progress and having liberal policies towards foreign capital andtechnology, is not very democratic. That does not mean that they are not good to dobusiness with. As a matter fact, in several such countries the procedures are simplerand decisions are quicker than in some of the democratic countries.

Until the political and economic changes ushered in the late 1980s and in theearly 1990s in the Eastern Europe, and erstwhile U.S.S.R, these countries were aseparate block by themselves with several common characteristics. Private enterpriseswere very limited and State trading, particularly counter trade, was the rule. Therewere a lot of restrictions on imports and foreign business. This did not, of course,mean that the communist system was insurmountable for multinationals or otherforeign firms. Under such a system, in several instances, winning over the top brassof the party or government was a strategy to obtain business. It may be noted at a timewhen companies like PepsiCo were kept out of India they were going better withcountries like USSR.

In the past, public sector was assigned a very important role in many non-communist, particularly the developing, countries too. In India, for example, wherethe industrial policy wanted the public sector to gain control over the commandingheights of the economy, limited the scope of the private enterprise, both domestic andforeign. Even in areas where foreign capital was allowed, there was ceiling on theforeign equity participation.


Further, in the past, foreign firms in many developing countries were under thefear of nationalisation.

The clock, however, has turned a full circle in most of the communist and manyother countries. Privatisation has progressed at an amazing speed. The erstwhilecommunist countries and the Peoples’ Republic of China where the communist partyis still in power, are on the rapid road from Marx to the market. In India, the economicpolicies of governments of States ruled by communist and leftist parties now competewith other States to woo national and foreign private capital.

Although the trend of the direction of government policies across the worldappears to be broadly one of convergence, there are lots of differences in therestrictions and regulations of business, scope of foreign business, trade policies,procedures, incentive systems and so on.

Coalition governments of different political parties are becoming common.Sometimes the constituents of the coalition are parties with very different economicideologies, making the scenario complex or confusing/uncertain.

Some political leaders are so powerful that they wield enormous control overthe party.

The vision and ideology of such leaders have stupendous implications forbusiness.

Changes in the nature of state’s role or extent of state’s involvement in theeconomy can affect the business environment. When public sector was assigned amajor role in the industrial development and industrial licensing was very widelyapplicable, the Central Government in India had an imposing position in decidingthe location of projects and type and size of enterprises. However, the substantialreduction in the role of the public sector and delicensing drastically changed thesituation and now State Governments have a much greater role and freedom than inthe past in the industrial development, including promotion of FDI.

There has been a universal trend towards political decentralization anddemocratization. The recent developments in West Asia is also a part of it.

The number of politically independent nations has been on the increase as aresult of the splitting up of what was once a single country in to several ones. Amajor reason for this is the rise of what Naisbitt calls tribalism which is defined as“the belief in fidelity to ones’ own kind, defined by ethnicity, language, culture,religion, or, (now) the profession.”8 Universally, the desire of ethnic groups to becomeindependent of the supremacy of others is growing. Naisbitt observes that democracygreatly magnifies and multiplies the assertiveness of the tribes; repression doesthe opposite. And the anguished drama of the tribalism is most pronounced wherethey are repressed the most brutally. According to Naisbitt, it may be a long time


before there are 1,000 countries in this world, but by the middle of this century weshould be close to that number.9

ECONOMIC CRISIS OF THE COMMUNIST WORLDAND THE MARCH FROM MARX TO THE MARKET

One of the major motivators of economic reforms in the communist and otherdeveloping countries was the economic crisis that had been looming over thecommunist and socialist countries.

Decades of communist regime in China, USSR, Eastern Europe and elsewherehad driven them towards a perpetual economic crisis. The open acceptance of thepalpable failure of the communist system to deliver the goods it propagated, with thecontinued suppression of democratic and human rights for the achievement of theavowed objectives, was a critical turning point in the economic history of the world.The famous statement by Mao Zedong’s successor Deng Xiaoping , referring to theprivate and public sectors, “it does not matter whether a cat is black or white as longas it catches mice” marked a historical change in the Chinese economic policy in1978. It was, then, a matter of time for the USSR and its allies to confess and reform.Although many people in India and abroad wanted us to believe that these communistcountries were fast becoming a socialist heaven and that the communist models ofdevelopment presented the solution to problems of India and other developingcountries, the real situation in these countries was quite disgusting.

A long period of authoritarian rule which could not improve the living conditionsof the common man belied the great hopes of people in the communist system. Peoplebecame frustrated with shortages of essential goods, poor quality of goods, lack ofchoice, limitation of wants and absence of democratic rights, while their counterpartsin the developed and even in several developing countries were enjoying much betterliving conditions and political freedom. The command economies under which theworkers “pretended to work and the government pretended to pay the workers”, asthe famous statement attributed to a Russian worker goes, after decades of Communistrule presented a very bleak picture.

Even the mightiest among the Communist countries, the big brother USSR, whichwas looked upon by many as a countervailing force against the capitalist imperialism,was headed for a disintegration, economically and politically.

The USSR spent very lavishly on arms build up, taking on itself the responsibilityto protect and spread communism and to fight ‘capitalist imperialism’. The USSRalso made great strides in the space research and development. Although the politicalleaders in the USSR and Eastern Europe and communists all over the world werepropagating that the communist models of development practiced in differentcountries were the appropriate ones for the development of the developing countries,


the economic conditions in the USSR and other communist/socialist countries havebeen, ironically enough, said to be similar to those in the Third World countries.

The Soviet Union was a ‘superpower’, yet what kind of superpower had a patheticThird World-looking domestic economy, in which 25 per cent of its GNP was in themilitary and space sector, where manufactured products were of such poor qualitythat few were purchased outside its political orbit.10

While India attained food self-sufficiency, the USSR with a population muchless than half of India and a land area which was several times that of of India, had toimport huge quantities of food grains, from the capitalist countries, chiefly the USA,as it was not able to produce enough of it domestically.

Mikhail Gorbachev, who took over the reins of the USSR in March 1985, knewthat the problems were deep rooted and that if long-term corrective measures werenot taken the situation would go from worse to worst. The situation was indeed socritical that when asked what his chances of success of the reform were, Gorbachevsaid: “It does not matter what our chances of success are, we have no choice.”11 So heset the stage for a change with his well known perestroika and glasnost

The picture of People’s Republic of China after three decades of communist rulewas nothing but bleak. The following paragraphs, reproduced from a paper bySwaminathan S. Anklesaria Aiyar, a well known economic journalist, give a briefpicture of the development of the People’s Republic of China:12

“There are four Chinas, not one. That is, there are four countries inhabitedoverwhelmingly by Chinese. The biggest by far is mainland China. The three othersare Taiwan, Hong Kong and Singapore. The four provided very different economicphilosophies. They also reveal, as starkly in East Europe, the grave limitations of thecommand economy and the major advantages of market-driven economies.

Quoting statistics from the latest World Development Report, Aiyar, in the Paperreferred to above, brought out in 1990, pointed out: The per capita income of Chinais still no more than $ 290 per head, after 40 years of communism. By contrast theper capita income of Taiwan is around $ 6,000, that of Singapore $ 7,900, that ofHong Kong $ 8,070. Taiwan’s foreign exchange reserves are now larger than thoseof Saudi Arabia at the height of the oil boom. Singapore and Hong Kong are nowricher, per head, than developed countries like New Zealand ($ 7,750), Ireland ($6,120), Spain ($ 6,010) and Greece ($ 4,020). By contrast China remains mired inthe low-income category, below even India ($ 300), the Central African Republic ($330) and Pakistan ($ 360). In short, of the four Chinas, Mao’s China has been acolossal failure. The Chinese people have shown that, given the opportunities of amarket-driven economy, they can do infinitely better than in a command economyoverseen by benevolent despots.

Aiyar also observed:”Riches in the three mini-Chinas are by no means confinedto a few entrepreneurs. The working classes are up to ten times better off in the mini-


Chinas than in the land of Mao. The top 20 per cent in Taiwan earn just five times asmuch as the bottom 20 per cent, making it one of the most egalitarian countries inthe world (on par with Communist countries like Hungary and Yugoslavia). Chineseincomes are even more egalitarian, but at an extremely low level, and the constantexodus of people from the mainland to the mini-Chinas makes it clear that the Chineseprefer high incomes to mere egalitarianism. They are more interested in raising theirstandard of living than in lowering that of others.”

Forces of an economic leap forward were set in motion in China two decadesafter the Great Leap Forward of the late 1950s. And forces of a new revolution gotunleashed in the USSR and Eastern Europe seven decades after the RussianRevolution of 1917, ringing the death knell of a disastrous socio-political-economic experiment.

The progress of economic reform in China was a pointer to the direction of changerequired. As a former minister of Agriculture, Mikhail Gorbachev was keenly awarethat in the five years since introduction of the reform in the agricultural sector, theChinese farmers achieved the greatest productivity anywhere in the world.13

Mikhail Gorbachev and his thesis of perestroika (restructuring of the economy)and glasnost ( openness and criticism of old ways) gave a great moral boost and impetusfor a reform movement in the Eastern Europe. Oleg Bogomolov, Director of the Instituteof the Economy of the World Economic System, USSR, in his Paper “The ChangingImage of Socialism”, published in 1990 in Social Science (Quarterly Review of theUSSR Academy of Science) observed: “Perestroika in the USSR has opened a newpage in the growing process of transformation. Born of the specific conditions of ourcountry and not claiming to be an example for other countries to follow, it,nevertheless, has substantially improved the general climate for a search for ways ofsocialist development: Eastern Europe has found itself facing difficulties similar toours, in as much as it has been developing primarily by the Soviet model forced on it,or blindly borrowed by it, in the post war years. This is why the changes taking placein the USSR have been favourably received there to bolster up the reformist forces.”14

Gorbachev’s perestroika and glasnost indeed sent a message to the people in theEastern Europe that the USSR would not any more use its mighty power in thesecountries to suppress the democratic rights. People in these countries wanted to freethemselves from the decades old deprivation and suppression. The fall of the BerlinWall was symbolic. Despite the Tiananmen square tragedy in China, people in theEastern Europe revolted against the wall of authoritarianism and oppression,demanding bread and freedom. Even the very words communism and socialism beganto be opposed, tooth and nail, by the very people who were put under these regimesfor quite a long time.

The East European Prime Ministers and Finance Ministers who attended theDavos symposium unanimously expressed the view that:15


1. The command economy is a failure and cannot be made to work efficiently.

2. The market is a better instrument for producing goods needed by the peoplethan a centrally planned system.

3. Foreign investment and technology are vital for rejuvenating the flaggingeconomies of East Europe.

4. The transition to a market-driven system is compatible with the positive socialaspects of the old regime, such as public housing, health and education.

The Socialist International at its one hundredth anniversary meeting, held inStockholm on June 22, 1989, embraced the market economy and rejectednationalization of industry. Voting for this major revision were representatives from80 left-wing and social democratic parties from around the world.

In short, there was a thorough overhauling of the socio-economic and politicalphilosophies, policies and development strategies in the communist countries, forgood or bad, but certainly realising the limitations of the system and strategies theyhad followed hitherto.

These developments gave an impetus for liberalisation in many countriesincluding India.

THE GLOBAL LPG WAVE

The last two decades of the 20th century witnessed a liberalisation-privatisation-globalisation wave across the world and across economic-political systems and theworld economic expansion continues to be driven by, chiefly, the forces unleashedby this wave.

Actually, the term liberalisation encompasses, broadly, privatisation andglobalisation. Privatisation is a component of liberalisation and globalisation is botha component and result of liberalisation.

The LPG wave was triggered by, mostly, the following developments:

Economic reforms in China and other communist/socialist countries.

Economic reforms in other countries.

The Privatisation wave.

Multilateral negotiations (The GATT/WTO impact and PTAs).

Economic Reforms in Communist Countries

The economic crisis which the communist countries got engulfed in and theresultant inevitability of economic reforms were described in the previous section.


It was in the People’s Republic of China, which had been following one of themost conservative policies, even among the communist countries, towards foreigneconomic relations and private enterprise, that the recent wave of economic reformsfirst set in in the communist world. The success of the Chinese experiment encouragedthe launching of perestroika in the USSR which eventually spilled over to othercommunist/socialist countries.

China embarked upon a big push liberalisation in 1978. The economic reformswhich started with the agricultural sector moved on to infrastructural, industrialand foreign trade sectors encompassing privatisation and aggressive globalisation.The results, in terms of economic growth statistics, have been fantastic. For a longtime now, the GDP growth rate has been amazing and historic globally and the countrywhich has overtaken large economies like Germany, U K, France, Italy and, lately,Japan is all set to become the largest economy, relegating the US to the second place,in the near future. Three decades ago, China’s position in the global merchandisetrade was insignificant, but in 2010, with more than 10 per cent share, China wasthe largest exporter and second largest importer. In the mid 1980s, China had atrade deficit which was nearly double that of India, but in 2009 the value of themerchandise trade surplus of China was much more than that of the total merchandiseexports of India. Today China has the biggest foreign exchange reserves in the world.

The Chinese economic miracle was made possible, to a very large extent, by thehuge influx of foreign capital – both debt and FDI. China, one of the largest borrowersfrom the World Bank, is one of the top countries in respect of foreign debt (until someyears ago it had the largest external debt). In 2010, China was the second largestrecipient of FDI in the world (second only to USA). With about 18 per cent of the totalFDI inflows to developing countries, it was the largest recipient of FDI amongdeveloping countries. A manifestation of the surging FDI inflows to China andinternationalisation of production by MNCs is the number of foreign affiliates (FAs)of MNCs in China. In 2010, China had more than 4.34 lakh FAs of MNCs (compared toonly about 2200 in India). This was about 85 per cent of the total number of FAslocated in developing countries and nearly half of the world total.16

The huge foreign exchange reserves of China is influencing the internationalfinancial markets.

The global significance of Chinese economic reforms is not only that China hascome to account for a very significant share of the global financial and trade flows,thus contributing substantially to globalisation, but also it is encouraging LPG inother countries. For example, although India was the first Asian country to set up (in1965) an export processing zone – the forerunner of today’s special economic zone(SEZ) – the contribution of SEZs to India’s export growth was not significant for a longperiod. However, triggered by the stories of great success of Chinese SEZs in boostingthe exports and employment generation, Government of India gave a big thrust to theSEZs programme with the announcement of a Special Economic Zone Policy in 2000


and brought the Special Economic Zone Act in 2005, leading to a proliferation ofSEZs and jump in exports.

Similarly, the fact that most of the major global retailers are operating inChina is often an argument advanced in favour of FDI in India’s retail sector.That even a communist country like China has a very liberal policy towardsprivate sector and foreign capital, enabling it to achieve unmatched economicgrowth, has been encouraging liberalization in many countries including India.The Chinese liberalization and economic success story dampen the argumentsagainst liberalisation.

Privatisation

It is not only the centrally planned and other developing economies whichresorted to economic reforms but also the market economies. As indicated in theprevious section, the public sector came to play an important role even in the marketeconomies. Public ownership was common in very important sectors/industries likepublic utilities.

An important ingredient of economic reforms in the market economies wasprivatisation, which amounted to a strong reversal of the trend of the statist economicexpansion. The privatisation wave set in, globally, since around the 1980 andbecame the hallmark of the new wave of economic reforms that swept across theworld. The bold initiatives taken by Prime Minister Margaret Thatcher in the UKhad far reaching impact in the developed economies. Privatisation has been a veryimportant integral part of economic reforms in the erstwhile communist countries.Non-communist developing economies too have been carrying out privatisation invarying forms, degrees and measure of success. In short, the trend towardsprivatisation has been observed in developed and developing economies; in marketoriented and socialist, including communist countries; and cuts across socio-cultural systems. During 1980-92 alone more than 8,500 state owned enterpriseswere privatised in over 80 countries.

Privatisation means transfer of ownership and/or management of an enterprisefrom the public sector to the private sector. It also means the withdrawal of the State froman industry or sector, partially or fully. Another dimension of privatisation is opening upof an industry that has been reserved for the public sector to the private sector.

Privatisation marks a change from dogmatism to pragmatism and amounts to areversal of policy.

In the 1960s, there was a trend towards nationalisation in Britain. But, sincethe late 1970s, the trend was towards privatisation by selling state-owned enterprises(SOEs). It indeed became a universal trend.


Expansion of Public Sector and its Defects The rapidity with which the publicsector in many countries expanded over roughly in the period from 1960 to 1980, isfrequently overlooked. In effect a revolution, a quiet one, occurred in the shifting ofresources into the public sector in the decade of the 1970s. In the less developedcountries and in many of the poorest countries, the growth of the public sector wascharacterised by the growth of the parastatal sector—State-owned enterprises. State-owned enterprises had come to account for 10 to 20 per cent of GDP in much of theless developed world, and they were dominant in manufacturing in a great numberof countries. What is true for GDP was also true for capital investment. Parastatalenterprises were estimated to be responsible for between 20 and 60 per cent of totalinvestment spending in the less developed world. Regardless of whether socialist ormarket-oriented, virtually all countries in the 1960s and 1970s saw an expansion ofthe public sector, and in particular an expansion of state-owned enterprises, acrossa broad front.17

The performance of SOEs in many countries was, by and large, been far fromsatisfactory. They often put large burdens on public budgets and external debt. Forexample, the net deficit of a sample of SOEs accounted for about 4 per cent of Niger’sGDP in 1982. For the seven largest Latin American economies, the combined deficitof SOEs rose from about one percent of GNP in the mid-1970s to about 4 per cent in1980-82. One study has found that countries in which SOEs accounted for highershares of gross domestic investment generally had lower rates of economic growth.18

The heavy financial burden imposed by the SOEs and the growing publicdiscontent against them due to their inefficiency, indifferent, irresponsible andsometimes even arrogant attitude and lack of concern for the customer needs; andcorruption, nepotism and squander associated with their organisation andmanagement led to the growing interest in privatisation. It is pointed that,19 in countryafter country, unbridled state expansion has led to:

1. Economic inefficiency in the production activities of the public sector, withhigh costs of production, inability to innovate, and costly delays in delivery ofthe goods produced;

2. Ineffectiveness in the provision of goods and services, such as failure to meetintended objectives, diversion of benefits to elite groups, and politicalinterference in the management of enterprises; and

3. Rapid expansion of the bureaucracy, severely straining the public budget,causing problems in labour relations within the public sector, inefficiency ingovernment, and adverse effects on the whole economy.

These problems have led many governments to undertake programmes of publicsector reform, and pushed by a need to curb public expenditure, to reevaluate thepossibilities for shifting publicly managed activities into the private sector.


The Privatisation Reaction Privatisation is an inevitable historical reaction tothe indiscriminate expansion of the State sector and the associated problems. Evenin the ‘communist’ countries it became a vital measure of economic rejuvenation.Referring to the privatisation movement, a Russian periodical observed: “The crisisof the state sector is usually linked (in particular, during ideologically tinged debates)with the 20-year-old idea of “people’s capitalism.” It is attributed to the then WestGerman Chancellor Ludwig Erhard, who advocated the principle of increasing thenumber of owners as a way towards economic democratisation and social progress.Apparently, others also lay claim to the idea. However, more importantly, the ideahas had followers: Margaret Thatcher, Jacques Chirac and lesser known politicians.It is very significant that although they have been labelled “conservative” at least intheir life time, these politicians, more than anybody else, sought to change the existingeconomic machinery, and not to preserve it. Besides, they tried to do so not byreturning to the “early days of capitalism,” when property was concentrated in thehands of select few, but by distributing shares among ordinary people.20

The article referred to above exalted: “When hundreds, thousands and evenmillions of people in the USSR have shares in their hands, they will be able to see forthemselves how the Western model of “the right to vote” and “the right to leave” works.Owners (surprise, surprise to a lathe or crane operator) can interfere in the company’saffairs and say openly what they like and what they don’t like. When their protestsare ignored, they can sell their shares and leave the company.

“It is going to be a real surprise to many, but this is precisely what we have beenlooking forward to — the right to voice one’s opinion and the right to leave.”21

It may be noted that as a result of privatisation the number of people owningshares in Britain almost tripled from 7 to 20 per cent of the adult population between1978-89. Interestingly, in 1988 Britain experienced a symbolic cross over— for thefirst time in history more British citizens were holders of shares than were membersof unions.22 Further, as the proportion of shareholders in the total populationincreases and as the economic lot of the workers and the poor improves, leftist partiesincreasingly lose their ground. In 1988, for instance, the Labour Party in Britain lost8 per cent of its members, the biggest exodus since 1981.23

A major driver of the massive increase in the FDI during the recent period wascross-border mergers and acquisitions (M&As). Privatisation has been one of thedestinations of such flows.

Privatisation has increased competition, prompted restructuring of industriesand business portfolio of companies. In a number of countries like India, there stillremains a lot of scope for privatisation.


Public-Private Partnership

Public-Private Partnership (PPP – also referred to as P3 and P3 ) has emerged asa very important infrastructure development and maintenance/servicing strategyacross economies of different levels of development – developed and developing –and politico-economic systems – capitalist, communist/socialist and mixed.

The Role In the last two decades or so, PPP has substantially contributed to theinfrastructure development and management in many countries in North America,Europe, Latin America and Asia. The Report of the International Conference on MeetingIndia’s Infrastructure Needs with Public Private Partnerships, held in New Delhi on 5th

and 6th February 2007, has made the following observations: In the United Kingdoma focused effort by the government was required to expand the program, resulting inthe signing of over 700 PPP projects in various sectors by 2006. The volume oftransactions has meant that a new class of investors has come in to invest in themthrough the secondary market. Chile has succeeded in increasing its infrastructureinvestments to a level of 5 per cent of GDP, in good part through encouraging privateparticipation in almost all infrastructure sectors. Today, in Chile, investments andoperations in power, gas, telecom, airports, major highways, rail freight services andwater and sanitation are mostly in the realm of the private sector, and the presenceof the government in service provision is limited to a few areas, such as passengerrail services and small airports. The government’s strategy that resulted in thissubstantive expansion in the private sector’s role was based on the following keyelements: Active promotion of private participation; establishment of stable andefficient regulatory frameworks; credible mechanisms for dispute resolution;stringent norms of environmental protection; and continued government role andsupport to ensure provision of infrastructure services to poor people. Brazil opted forprivate participation in roads like many other countries, as a way to overcome itsbudget constraints, and its experience has been very encouraging. Today, nearly 6per cent of its paved roads (164,000 km) are under private administration through 36state and federal toll road concessions, and the share of the private sector is expectedto be doubled in the near future. In Korea, PPPs in roads form part of a widergovernment initiative, called Private Participation in Infrastructure (PPI), which ledto an increase in the share of private investment in infrastructure from 0.2 per centin 1995 to 14.4 per cent in 2005. In Philippines, the trials and tribulations of theSouth Luzon expressway over the years highlight various pre-requisites for the successof PPPs, namely, the political will and commitment, presence of champions in thegovernment to provide and sustain momentum, and private operators who know howto deal with the government.

The Intent and Extent The scope of public private partnership is very wide,encompassing several vital economic and social spheres. PPP mode may be used forvery short term projects (like the Kerala Travel Mart 2010, an event organized to promoteKerala tourism in partnership between the Kerala Travel Mart Society and Government


of Kerala, held at Cochin from 23rd to 26th September, 2010) to massive projects ofvery long duration (the contract period of many large PPP projects is 20 - 30 years). APPP contract may involve one government agency on the one side and a privatepartner on the other side or several parties on either or both sides. The CochinInternational Airport Ltd.(CIAL), the first airport developed under the PPP model inIndia, which commenced operation in 1999, for example, has equity participationfrom the Government of Kerala, industrialists, financial institutions, airport serviceproviders and the public (about 11,000 individual investors, mostly NRIs, from 30countries).

There is, however, no universally accepted definition of what a PPP is. Mostcountries embarking on PPP programmes have attempted to provide some form ofdefinition of what a PPP is.

There are a number of definitions/descriptions of the term public privatepartnership given by various government agencies in India. According to the Panelof Transaction Advisors for PPP projects, Department of Economic Affairs (DEA),Ministry of Finance, Government of India, a PPP project is a project based on a contractor concession agreement between a Government or statutory entity and a privatesector company for delivering a service on payment of user charges. As per the IIPDFGuidelines issued by the DEA, PPP is a partnership between a public sector entity(sponsoring authority) and a private sector entity (a legal entity in which 51% ormore of equity is with the private partner/s) for the creation and/or management ofinfrastructure for public purpose for a specified period of time (concession period) oncommercial terms and in which the private partner has been procured through atransparent and open procurement system.

The Report of the PPP Sub-Group on Social Sector, Government of India, referredto earlier, gives a more comprehensive description of the concept: Public-Private-Partnership or PPP is a mode of implementing government programmes/schemes inpartnership with the private sector. The term private in PPP encompasses all non-government agencies such as the corporate sector, voluntary organizations, self-help groups, partnership firms, individuals and community based organizations. PPP,moreover, subsumes all the objectives of the service being provided earlier by thegovernment, and is not intended to compromise on them. Essentially, the shift inemphasis is from delivering services directly, to service management and coordination.The roles and responsibilities of the partners may vary from sector to sector. While insome schemes/projects, the private provider may have significant involvement inregard to all aspects of implementation; in others he may have only a minor role.

The above Report points out that three things generally distinguish PPP fromdirect provision of services by governments, namely (i) a partnership based on wellarticulated ‘contract’ (ii) a long term relationship between the public and private sector(iii) flexibility and responsiveness in decision making. It is argued that PPP leads toimprovement in both ‘efficiency’ and ‘effectiveness’ in service delivery.


According to the Rajasthan Government’s document on PPP, entitled Rajasthan:Mainstreaming Public Private Partnership, PPP broadly refers to long-term, contractualpartnerships between public and private sector agencies, specially targeted towardsfinancing, designing, implementing, and operating infrastructure facilities servicesthat were traditionally provided by the public sector.

The Policy on Public Private Partnership of the Government of Assam (which is to alarge extent adopted from the Rajasthan: Mainstreaming Public Private Partnership) givesa fairly detailed description of the concept as in the following three paragraphs:

Broadly, PPP refers to an agreement between government and the private sectorregarding the provision of public services or infrastructure. Purportedly a means ofbringing together social priorities with the managerial skills of the private sector,relieving government of the burden of large capital expenditure, and transferringthe risk of cost overruns to the private sector. Rather than completely transferringpublic assets to the private sector, as with privatization, government and businesswork together to provide services.

In a PPP, each partner, usually through legally binding contract(s) or some othermechanism, agrees to share responsibilities related to implementation and/oroperation and management of a project. This collaboration or partnership is built onthe expertise of each partner that meets clearly defined public needs throughappropriate allocation of:

Resources

Risks

Rewards

Responsibilities

The allocations of these elements and other aspects of PPP projects, such asdetails of implementation, termination, obligations, dispute resolution and paymentarrangements are negotiated between the parties involved and are documented inwritten contract agreement(s) signed by them.

Nature of Collaboration The government may collaborate with the privatedeveloper/service provider in any one of the following ways (Report of the PPP Sub-Group on Social Sector):

(i) as a funding agency: providing grant/capital/asset support to the private sectorengaged in provision of public service, on a contractual/noncontractual basis.

(ii) as a buyer: buying services on a long term basis.

(iii) as a coordinator: specifying various sectors/forums in which participation bythe private sector would be welcome.


The funding pattern and collaboration between the public sector and the privatesector could take any one of the following forms:

(i) Public funding with private service delivery and private management .

(ii) Public as well as private funding with private service delivery and privatemanagement.

(iii) Public as well as private funding with public/private service delivery andpublic/private/joint management.

(iv) Private funding with private service delivery and private management.

Categories (ii), (iii) and (iv) have a special appeal as they promise to supplementgovernment resources through private participation. The Private Finance Initiative (PFI)in the United Kingdom is stated to have been introduced to make the contractor/concessionaire foot the bill of construction, instead of the taxpayer. In lieu of the PFI,the concessionaire is conferred the right to recover his cost of construction andmaintenance (and profit) through charging rent or imposing toll charges for the useof assets so created. Funding pattern as mentioned under category (i) is, however,the more common one in regard to the social sector; the gain expected, nevertheless,is in the realm of ‘efficiency’ and ‘effectiveness’ in service delivery.

BOX 1.3

PPP and Privatisation

The key differences between public-private-partnership and ‘privatisation’ may be summarisedas follows:*

Responsibility Under privatisation the responsibility for delivery and funding a particularservice rests with the private sector. PPP, on the other hand, involves full retention of responsibilityby the government for providing the service.

Ownership While ownership rights under privatisation are sold to the private sector alongwith associated benefits and costs, PPP may continue to retain the legal ownership of assets bythe public sector.

Nature of Service While nature and scope of service under privatisation is determined bythe private provider, under PPP the nature and scope of service is contractually determined betweenthe two parties.

Risk & Reward Under privatisation all the risks inherent in the business rest with theprivate sector. Under PPP, risks and rewards are shared between the government (public) and theprivate sector.

*Adopted from: Planning Commission, Government of India, Report of the PPP Sub-Groupon Social Sector.


PPP is often found in economic infrastructures such as telecom, power, roads,seaports, airports, railways, industrial development zones etc. PPP has, however, cometo assume an important role in social infrastructures like, health, water supply &sanitation, education, etc. too in India as well as in a number of countries abroad.

Economic Reforms in Developing Countries

As pointed out earlier, the LPG in the communist countries encouraged economicreforms in other countries like India. The dramatic economic policy changes in thecommunist countries reinforced the favourable attitudes towards private sector andlent political expediency for change. Look at, for example, the Indian Scenario,depicted in Box 1.4.

BOX 1.4

Political Environment and Economic Reforms

Despite his pragmatic views, dynamism and the dream of the 21st century India, PrimeMinister Rajiv Gandhi could not introduce any far reaching changes even with the candid mandatethat overwhelmed him in the election of 1984. But, the Congress government under NarasimhaRao did it in 1991 and the successive non-Congress Governments have carried further forward theeconomic liberalisation. Why? The changing global scenario, particularly the developments in thecommunist countries, provides the answer.

There were considerable differences between the Rajiv era and 1991. Rajiv Gandhi whoassumed office in 1984 had given great hopes to the teeming millions of India. No wonder, theCongress party led by the young prime minister who promised to mould India for the 21st centurywas given a thumping victory by the grief-stricken electorate.

Rajiv who was well aware of the damages done by the unpragmatic regulations was eager toradically reform the economic regime. Hence, many in India and abroad naturally expected thathe would introduce far reaching reforms. But alas, the great expectations were belied soon as hesuccumbed to what he thought, or was made to believe, was political prudence. The word socialismwas still dominant on the political surface. The leftists were severely opposed to even minoreconomic liberalisations and deregulations. To speak against socialism or public sector wasregarded a sin. Many in the Congress party, who thought that socialism and public sector stillhad a magic spell, thought that it was still necessary to swear by these ideas which were losingglamour in many other countries. Although the number of people who were in favour of deregulationand privatisation could be more than those who opposed it, the latter was very vociferous andtherefore a determinant force.

In short, what was thought to be political expediency prevented even Rajiv from making anymajor departure from the old regime and, therefore, dogmatism continued to dominate pragmatism.And what started with a big bang ended with a whimper.


Of course, Rajiv carried further forward, with a little more vigour, the policy of piece-mealeconomic liberalisations started since the early 1980s. These have had favourable effects. Thesemeasures were, however, quite insufficient to rejuvenate the economy. Even the perestroika andglasnost in the USSR and the developments in the Eastern Europe and China, let alone thedevelopments in several other countries, failed to make Indians socialist political genera either toopenly admit the folly or to rethink. And Indians development continued to be handicapped by theirrelevant political dogmatism which was being discarded by others.

The environment in 1991, however, has been quite different and conducive for a major change.Mikhail Gorbachev and his perestroika and glasnost send a message to the people in the EasternEurope that the USSR would not any more use its mighty power in these countries to suppressthe democratic rights. People in these countries wanted to free themselves from the decades olddeprivation and suppression. The fall of the Berlin Wall was symbolic. Despite the Tiananmensquare tragedy in China (gunning down of students who demonstrated demanding democraticfreedom), people in the Eastern Europe revolted against the wall of authoritarianism and oppression,demanding bread and freedom. Even the very words communism and socialism began to beopposed, tooth and nail, by the very people who were put under these regimes for quite a longtime.

These nations have been seeking large financial, technical and managerial assistance notonly from such institutions as the IMF and the World Bank, which had been described by manyleftists in the past as organs of capitalist imperialism, but also from the capitalist governments forreconstructing the economies impoverished by decades of communist rule. Gorbachev has goneon knocking at the doors of capitalist countries, known as group of seven (G7), for help. Some ofthe debates in the G7 and in the Western media as to whether the USSR should be givenassistance or what should be the extent and mode of help etc. should have been embarrassingfor the aid seeker but Gorbachev consoled, quite rightly, that it was for the economic salvation ofthe millions of his countrymen that he has been doing it.

The communist countries had taken up privatisation at an amazing speed. Their economieshave been opened up even for multinationals. Consequently there has been an influx of investment.In short, in the communist countries the clock turned a full round.

There was a time when certain political parties all over the world put the blame for the worldeconomic disorder on the capitalist nations, particularly the USA. And now, nations or provinceswhich have been ruled by these very parties seek varied assistance of American capitalism andthe like.

In short, the global political environment in 1991 was quite different from that during the Rajivera. At the same time, economic crisis in India was assuming more serious proportions demandingeffective measures for economic rejuvenation and survival in a highly competitive andtransnationalising global environment. And the emerging global political environment made thepolitical decision of a dramatic change in the economic policy easy in India. Thus, the economicand political factors acted and reacted upon each other resulting in a drastic change in theeconomic policy and direction of the nation.

Reproduced from Francis Cherunilam, Economic Reforms in India and Abroad, (HimalayaPublishing House, Mumbai, 1992).


Multilateral Trade Negotiations

Impact of GATT/WTO

Considerable trade liberalisation had taken place as a result of the multilateraltrade negotiations (MTNs) held under the auspices of the GATT. The first six Roundsof MTNs concentrated almost exclusively on reducing tariffs, while the Seventh Round(Tokyo Round-1973-79) moved on to tackle non-tariff barriers (NTBs). Until the eighthRound, only trade in goods was within the ambit of the MTNs. The Uruguay Round(UR), however, went far beyond the traditional negotiation agenda. [Uruguay Round(UR) is the name by which the eighth Round of the MTNs is popularly known becauseit was launched in Punta del Este in Uruguay, a developing country, in September1986. Because of the complexities of the issues involved and the conflicts of interestsamong the participating countries, the UR could not be concluded in December,1990 as was originally scheduled but was finalised only in December, 1993prolonged. Following the UR Agreement, GATT was converted from a provisionalagreement into a formal international organisation called World Trade Organisation(WTO) with effect from January 1, 1995.]

The UR was a historic Round in that it expanded the scope of liberalisation andencouraged globalisation by broadening the scope of MTNs far wider by includingnew areas such as:

Trade in services

Trade related aspects of intellectual property (TRIPs)

Trade related investment measures (TRIMs).

It is true that the WTO provides a framework - principles, policies and regulations- for liberalisation. The WTO is credited with or accused of driving globalisation buttwo points may be noted: One, liberalisation and globalisation would take place evenin the absence of WTO or any such scheme, although the pace and pattern would bedifferent. For example, China had brought in far reaching liberalisations even beforeit became a member of the WTO. Secondly, WTO mandates certain measures on itsmembers whether they are in the interest of a member country or not. For instance,India had to amend its patent law as stipulated under the WTO system; many regardsome of these amendments, which may serve the vested interests of the MNCs ofdeveloped countries, are detrimental to the interests of developing countries likeIndia. For good or bad, WTO and the MTNs make their on contributions to fosteringglobalisation. Figure 1.3 sums up the impact of WTO on the economy.


Figure1.3 The WTO Impact

Preferential Trade Agreements

Proliferation of Preferential Trade Agreements (PTAs) between nations [alsoknown by such other names as Regional Trade Agreements (RTAs), RegionalIntegration Agreements (RIAs), Free Trade Agreements (FTAs) etc.] also cause tradeand investment liberalisations.

The last two decades have witnessed a fast proliferation of PTAs. During 1950 -1990, the growth of PTAs was comparatively slow vis-à-vis the recent period. Thenumber of PTAs in force in 2010 was close to 300, compared to about 70 in 1990.24

THE WTO IMPACT

GATT /GATS TRIMs TRIPs

Opportunity for Indian firms to export

Increases competition from

foreign goods/services

Facilitates global sourcing

Threat to domestic

firms

Benefits

consumers

Increases competitive-

ness of domestic

firms

Liberalisation of trade in goods and services

Liberalisation of international investments

Facilitates foreign

investment by Indian

firms (including

joint ventures)

Increases

foreign investment

and competition from foreign

firms

Facilitates

joint ventures

and technology acquisition

Threat to domestic

firms

Benefits the economy

Benefits domestic

firms

Provides monopoly power to owners of intellectual property

Encourages globalisation of Indian firms


The surge in PTA activity is driven both by a growing number of countries takingan interest in reciprocal trade opening and by an increase in the number of PTAsper country. All WTO members (with the exception of Mongolia) belong to at least onePTA. PTA activity has transcended regional boundaries. One half of the PTAs currentlyin force are not strictly “regional”. The advent of cross-regional PTAs has beenparticularly pronounced in the last decade. The trend towards a broader geographicalscope of PTAs is even more pronounced for those PTAs that are currently undernegotiation or have recently been signed (but are not yet in force). Practically all ofthese are of the cross-regional type.25

The proliferation of RTAs and the increasing number of bilateral free-tradeagreements has meant overlapping membership for many countries bringing in acomplex network of PTAs including bilateral, plurilateral and cross-regionalarrangements and encompassing countries at different levels of development (besidesthe developed-developed”, and “developing-developing”, pattern). The significanceof PTAs are increasing also due to the fact that they, particularly the very recentagreements also address WTO+ type issues, such as services, capital flows, standards,intellectual property, regulatory systems (many of which are non-discriminatory)and commitments on labour and environment issues. For instance, about one-thirdof PTAs in force today contain services commitments compared to less than a tenthin 1990.

Intra-PTA trade represented about 35 per cent of total world merchandise tradein 2008, compared with 18 per cent in 1990. Plurilateral trade agreements accountedfor half of global intra-PTA trade in 2008, while bilateral trade agreements (includingthose where one party is a PTA) accounted for the other half. Preferential trade – thatis, trade actually receiving preferential tariff treatment – represents a much smallershare of world trade. However, it is still worth considering total trade among PTAmembers because the latest generation of trade agreements may be motivated by abroader set of considerations than just tariff reductions, including the developmentand maintenance of supply chains.

ECONOMIC REFORMS IN INDIA

Until 1991, economic policy and regulatory changes in India were, by and large,incremental or evolutionary. However, a discontinuous or revolutionary change wasushered in India’s economic horizon with the announcement of a new industrialpolicy which marked a paradigm shift from the previous more than four decades ofthe controlled regime. Adjectives such as ‘dramatic’, ‘revolutionary’, ‘drastic’ etc. havebeen used to describe the nature of the change in the industrial policy.

Economic reforms in India have not been a one stroke or few strokes affair. It israther a process which continues, influenced by lessons of hitherto experiences,debates, controversies, confusions and developments across the world.


The reforms which started with the industrial policy gradually moved to otherspheres like external sector (foreign trade, foreign exchange rate and currencyconvertibility, and foreign investment – both FDI and FPI), financial sector ( bankingsector, capital market etc.), price and distribution, and fiscal policy and taxation. Nocomprehensive reform has so far been attended in respect of some vital areas likeagriculture and labour.

Chapters 3 onwards provide details of economic reforms in India.

IMPACT OF LPG

The LPG have significantly transformed the global economy, particularly thebusiness scenario. It has several harmful as well as beneficial ramifications.

The universal economic liberalisation which seems to have come to stay despitethe global economic crises, tends to make globalisation irreversible and unstoppable.If it is an option, it is an inevitable option. The environment seems to be such that ifit is an evil, it is an inevitable evil. The challenge, therefore, to the individuals,businesses and nations is to endeavour to take advantage of the benefits of globalisatonand mitigate the adverse effects.

In his Management Challenges for the 21st Century, renowned Management guruPeter Ducker cautions: “All institutions have to make global competitiveness a strategicgoal. No institution, weather a business, a university or a hospital, can hope to survive,let alone to succeed, unless it measures up to the standards set by the leaders in itsfield, any place in the world.” 26

Globalisation of World Economy

We may consider globalisation at two levels, viz., at the macro level (i.e.,globalisation of the world economy) and at the micro level (i.e., globalisation of thebusiness and the firm).

Globalisation of the world economy is achieved, quite obviously, by globalisingthe national economies. Globalisation of the economies and globalisation of businessare very much interdependent.

The world economy has been emerging as a global or transnational economy. Aglobal or transnational economy is one which transcends the national bordersunhindered by artificial restrictions like Government restrictions on trade and factormovements. Globalisation is a process of development of the world into a singleintegrated economic unit.

The Transnational economy is different from the international economy. Theinternational economy is characterised by the existence of different nationaleconomies, the economic relations between them being regulated by the national


Governments. The transnational economy is a borderless world economycharacterised by free flow of trade and factors of production across national borders.

Peter Ducker in his New Realities observes that in the early or mid nineteenseventies - with OPEC and the floating of the US dollar - the world economy changedfrom being international to transnational. According to Ducker, the transnationaleconomy is characterised by, inter alia, the following features.27

1. The transnational economy is shaped mainly by money flows rather than bytrade in goods and services. These money flows have their own dynamics.The monetary and fiscal polices of sovereign Governments increasingly reactto events in the international money and capital markets rather than activelyshape them.

2. In the transnational economy management has emerged as the decisive factorof production and the traditional factors of production, land and labour, haveincreasingly become secondary. Money and capital markets too have beenincreasingly becoming transnational and universally obtainable. Ducker,therefore, argues that it is management on which competitive position has tobe based.

3. In the transnational economy the goal is market maximisation and not profitmaximisation.

4. Trade, which increasingly follows investment, is becoming a function ofinvestment.

5. The decision making power is shifting from the national state to the region(i.e., the regional blocs like the European Community, North American FreeTrade Agreement, etc.)

6. There is a genuine - and almost autonomous - world economy of money,credit and investment flows. It is organised by information which no longerknows national boundaries.

7. Finally, there is a growing pervasiveness of the transnational corporationswhich see the entire world as a single market for production and marketingof goods and services.

There are, thus, many factors which tend to promote the transnationalisation ofthe world economy. The multilateral trade negotiations under the auspices ofGATT/WTO have been liberalising trade and investment.

A growing proportion of the world output is traded internationally and the fastergrowth of trade, than the GDP, is bringing about world economic integration. Thiseconomic integration is reinforced by the massive cross-border capital flows. Theprogress of the regional blocs increasingly integrate the regional economies, aspointed out earlier.


Old and New Globalisations

Globalisation, of course, is not a new phenomenon. The period 1870 to 1914experienced a growing trend toward globalisation. The new phase of globalisationwhich started around the mid 20th century became very widespread, more pronouncedand overcharging since the late 1980s by gathering more momentum from the politicaland economic changes that swept across the communist countries, economic reformsin other countries, the multilateral trade agreements which seek to substantiallyliberalise international trade and investment and the technological andcommunication revolutions.

There are several similarities and differences between the two phases ofglobalisation (1870 – 1913 and 1950 onwards).

Both the phases were characterised by rising trade-GDP ratio and risinginternational investments.

During the first phase of the globalisation, the tariff barriers to trade were fairlyvery high; during the second phase although the tariff barriers have substantiallycome down, the NTBs have been high. However, NTBs are being brought down.

Besides these, Nayyar 28 draws the following four similarities of both the phasesof globalisation.

1. The absence or the dismantling of barriers to international economictransactions.

2. The development of enabling technologies.

3. Emerging forms of industrial organisation.

4. Political hegemony or dominance.

Nayyar also highlights important differences between both the phases ofglobalisation in respect of trade flows, FDI flows, Financial flows and labour flows.29

The salient points are the following.

Trade Flows During 1870 to 1913 an overwhelming proportion of internationaltrade was constituted by inter-sectoral trade, where primary commodities wereexchanged for manufactured goods. This trade was, to a significant extent, based onabsolute advantage derived from natural resources or climatic conditions.

During the period 1950-1970, inter-industry trade in manufactures, based ondifferences in factor endowments, labour productivity or technological leads andlags, constituted an increasing proportion of international trade.

Since 1970 intra-industry trade in manufactures, based on scale economiesand product differentiation, has constituted an increasing proportion ofinternational trade.


Further, now about one-third of the international trade is estimated to be intra-firm trade, i.e., trade between affiliates of the same company located in differentcountries. The composition of intra-firm trade has undergone a change, characterisedby a steady decline in the importance of primary commodities and an increase inthe importance of manufactured goods and intermediate goods.

FDI Flows There is also a marked difference between the two phases in respectof the spatial and sectoral distribution of FDI. During the second phase, its distributionbetween the developed and developing countries was more uneven than in the firstphase. However, the last two decades have witnessed an increase in the share of thedeveloping countries in FDI inflows and in 2010 the share of the developing andtransition economies crossed 50 per cent of the total.

In 1913, the primary sector accounted for more than half (55 per cent) of thelong term foreign investment, followed by trade and distribution (30 per cent) andthe share of the manufacturing sector was very low (10 per cent). In 1992, half of thestock of the FDI in the world was in the services sector. The manufacturing sectortook the next major share (40 per cent) leaving hardly 10 per cent for the primarysector.

In the early twentieth century foreign investment was only long-term. Two-thirds of it was portfolios while one-third of it was direct. In the second phase, muchof the long-term investment is direct but portfolio investment has risen sharply inthe recent decades.

Financial Flows Nayyar also points out that there are important differences inthe destination, the object, the intermediaries and the instruments in respect of thefinancial flows and transactions. In the last quarter of the nineteenth century, capitalflows were a means of transferring investible resources to underdeveloped countriesor newly industrialising countries with the most attractive growth opportunities. Inthe second phase, these capital flows have been destined mostly for the industrialisedcountries which have high deficits and high interest rates to finance publicconsumption and transfer payments rather than productive investment. During thefirst phase of globalisation from 1870 to 1913, the object of financial flows was to findavenues for long-term investment in search of profit. During the second phase ofglobalisation since the early 1970s, financial flows are constituted mostly by short-term capital gains. The intermediaries, too, are different. In the late nineteenthcentury, banks were the only intermediaries between lenders and borrowers in theform of bonds with very long maturities. In the latter phase, institutional investorssuch as pension-funds and mutual-funds are more important than banks: the lattercontinue to act as intermediaries but now borrow short to lend long, thus resultingin a maturity mismatch. Consequently, the financial instruments need to be far moresophisticated and diversified than earlier. In the late nineteenth century, there weremostly long-term bonds with sovereign guarantees provided by the imperial powers


of the governments in borrowing countries. In the late present phase, there has beenan enormous amount of financial innovation through the introduction of derivatives(futures, swaps and options). These derivatives (which are also not entirely new tothe world and are reported to have existed in the seventeenth and eighteenthcenturies: options in the Amsterdam stock exchange and futures in the Osaka ricemarket) are a means of managing the financial risks associated with internationalinvestment. This is essential now because, unlike the earlier phase of globalisation,there is a maturity mismatch and there is no effective securitisaton provided bynational states. International financial markets have simply developed theinstruments to meet the needs of the times. It is paradoxical that such derivatives,which have been introduced to counter risk may, in fact, increase the risk associatedwith international financial flows by increasing the volatility of short-term capitalmovements.

Labour Flows The fundamental difference between the two phases of globalisationis in the sphere of labour flows. In the late nineteenth century, there were norestrictions on the mobility of people across national boundaries. Passports wereseldom needed. Immigrants were granted citizenship with ease. Between 1870 and1914, international labour migration was enormous.

The only significant evidence of labour mobility during the last quarter of thetwentieth century is the temporary migration of workers to Europe, the Middle Eastand East Asia. The present phase of globalisation has found substitutes for labourmobility in the form of trade flows and investment flows. For one, industrialisedcountries now import manufactured goods that embody scarce labour.

The first phase of globalisation in the late nineteenth century was characterisedby an integration of markets through an exchange of goods which was facilitated bythe movement of capital and labour across national boundaries. This was associatedwith a simple vertical division of labour between countries in the world economy.The second phase of globalisation is characterised by an integration of productionwith linkages that are wider and deeper, except for the near absence of labourmovements. It is reflected not only in the movement of goods, services, capital,technology, information and ideas, but also in the organisation of economic activitiesacross national boundaries. This is associated with a more complex—part horizontaland part vertical—division of labour between the industrialised countries and a fewdeveloping countries in the world economy. The process of globalisation in the firstphase was dominated by imperial states not only in the realm of politics but also inthe sphere of economics.

An UNCTAD Report30 mentions the following as the new features of the currentphase of globalisation.


New Markets

Growing global markets in services — banking, insurance, transport.

New financial markets — deregulated, globally linked, working around theclock, with action at a distance in real time, with new instruments such asderivatives.

Deregulation of antitrust laws and proliferation of mergers and acquisitions.

Global consumer markets with global brands.

New Actors

Multinational corporations integrating their production and marketing,dominating food production.

The World Trade Organization — the first multilateral organization withauthority to enforce national governments’ compliance with rules.

An international criminal court system in the making.

A booming international network of NGOs.

Regional blocs proliferating and gaining importance — European Union,Association of South-East Asian Nations, Mercosur, North American Free TradeAssociation, Southern African Development Community, among many others.

More policy coordination groups — G-7, G40, G-22, G-77, OECD.

New Rules and Norms

Market economic policies spreading around the world, with greaterprivatisation and libralisation than in earlier decades.

Widespread adoption of democracy as the choice of political regime.

Human rights conventions and instruments building up in both coverageand number of signatories — and growing awareness among people aroundthe world.

Consensus goals and action agenda for development.

Conventions and agreements on the global environment — biodiversity, ozonelayer, disposal of hazardous wastes, desertification, climate change.

Multilateral agreements in trade, taking on such new agendas asenvironmental and social conditions.

New multilateral agreements — for services, intellectual property,communications — more binding on national governments than any previousagreements.

The Multilateral Agreement on Investment under debate.


New (Faster and Cheaper) Tools of Communication

Internet and electronic communications linking many people simultaneously.

Cellular phones.

Fax machines.

Faster and cheaper transport by air, rail and road.

Computer-aided design.

Globalisation of Business

Globalisation in its true sense is a way of corporate life necessitated, facilitatedand nourished by the transnationalisation of the World economy and developed bycorporate strategies. Globalisation is an attitude of mind - it is a mind-set whichviews the entire world as a single market so that the corporate strategy is based onthe dynamics of the global business environment. International marketing orinternational investment does not amount to globalisation unless it is the result ofsuch a global orientation.

Globalisation encompasses the following:

Doing, or planning to expand, business globally.

Giving up the distinction between the domestic market and foreign marketand developing a global outlook of the business.

Locating the production and other physical facilities on a consideration ofthe global business dynamics, irrespective of national considerations.

Basing product development and production planning on the global marketconsiderations.

Global sourcing of factors of production, i.e., raw materials, components,machinery/technology, finance etc. are obtained from the best sourceanywhere in the world.

Global orientation of organisational structure and management culture.

Companies which have adopted a global outlook stop “thinking of themselvesas national marketers who venture abroad and start thinking of themselves as globalmarketers. The top management and staff are involved in the planning of world-widemanufacturing facilities, marketing policies, financial flows and logistical systems.The global operating units report directly to the chief executive or executive committee,not to the head of an international division. Executives are trained in world wideoperations, not just domestic or international. Management is recruited from manycountries, components and supplies are purchased where they can be obtained atthe least cost, and investments are made where the anticipated returns are thegreatest.”31


A truly global corporation views the entire world as a single market – it does notdifferentiate between domestic market and foreign markets. In other words, there isnothing like a home market and foreign market – there is only one market, theglobal market.

Normally, a firm passes through different stages of development before it becomesa truly global corporation. Typically, a domestic firm starts its international businessby exporting. Later it may establish joint ventures or subsidiaries abroad. From aninternational firm it may then develop into a multinational firm and finally into aglobal one.

Ohmae identifies 32 five different stages in the development of a firm into aglobal corporation. The first stage is the arm’s length service activity of essentiallydomestic company which moves into new markets overseas by linking up with localdealers and distributors. In stage two, the company takes over these activities on itsown. In the next stage, the domestic based company begins to carry out its ownmanufacturing, marketing and sales in the key foreign markets. In stage four, thecompany moves to a full insider position in these markets, supported by a completebusiness system including R & D and engineering. This stage calls on the managersto replicate in a new environment the hardware, systems and operational approachesthat have worked so well at home. It forces them to extend the reach of domesticheadquarters, which now has to provide support functions such as personnel andfinance, to all overseas activities. Althrough stage four, the headquarters mentalitycontinues to dominate. Different local operations are linked, their relation to eachother established by their relation to the centre.

In the fifth stage, the company moves toward a genuinely global mode of operation.In this context Ohmae points out that a company’s ability to serve local customers inmarkets around the globe in ways that are truly responsive to their needs as well asto the global character of its industry depends on its ability to strike a neworganisational balance. What is called for is what Akio Morita of Sony has termedglobal localisation, a new orientation that simultaneously looks in both directions.

Getting to stage five, however, means venturing onto new ground altogether.Ohmae argues that to make this organisational transition, a company mustdenationalise its operations and create a system of values shared by corporatemanagers around the globe to replace the glue a nation based orientationonce provided.


BOX 1.5

A Borderless and Flat World

Some candid indications of the increasing integration and globalisation of the world economyand the factors which foster them are given below.

The value of foreign trade (goods and services) as a percentage of world GDP increasedfrom about 42 per cent in 1980 to 62 per cent in 2007 33 (in 2008 and 2009, the figures were lower,impacted by the global economic crisis). What this implies is that, on an average, about 30 percent of the goods and services produced in a country now, typically, is meant for sales in theforeign market and, similarly, an equivalent proportion of the domestic consumption is met byimports. It may be noted that trade of the developing economies has been growing faster than thatof the developed ones. Further, their trade-GDP ratio is higher than that of the developed, implyingthat they are more integrated with the world economy by trade than the developed nations.

Foreign direct investment (FDI) has increased tremendously in the last few decades andhas been playing an increasing role in investment in a growing number of countries. More informationon this is provided in the following sub-section.

The foreign portfolio investment (FPI), like the foreign institutional investment (FII), has surgedand it plays a very important role in the capital markets of developing countries.

Thomas L Friedman in his highly acclaimed The World is Flat 34 explains that a combinationof technological, market, and geopolitical events at the end of the twentieth century had levelledthe global economic playing field in a way that was enabling more people than ever, from moreplaces than ever to take part in the global economy — and, in the best of cases, to enter themiddle class. The combination of the important factors which contributed to this flattening are:

1. The proliferation of the personal computer, which enabled individuals to create words,data, spreadsheets, photos, designs, videos, drawings, and music etc. on their own PCsin the form of bits and bytes, which, in its turn, could be shaped in many more ways anddistributed to many more places.

2. The power of the PC has been propelled to globalisation by the Internet, the World WideWeb, and the Web browser — a set of tools that enabled individuals to send their digitalcontent anywhere in the world virtually for free and to easily display or access that contentvia Web pages.

3. The third flattener was a quiet revolution in software and transmission protocols, whichFriedman calls the “work flow revolution” because of how it made everyone’s computerand software interoperable — thus enabling work to flow farther and faster through internalcompany networks, the Internet, and the World Wide Web. This enabled organisationsand individuals across the world to link together for efficient R&D and supply chainmanagement.

4. These flatteners were given a substantial thrust by a big geopolitical flattener - the collapseof Communism resulting in the elimination of a huge physical and political roadblock onthe global economic playing field. The collapse of communism has given an impetus toliberalization in a number of other countries including India.


Friedman observes that, put all these flatteners together and what we have is a much moreseamless, unobstructed global marketplace. In this global agora, millions and millions of newconsumers and producers were able to buy or sell their goods and services — as individuals orcompanies — and were able to collaborate with more people in more places on more things withgreater ease for less money than ever before. That is what Friedman means by a flat world.

However, there are many, particularly in the context of rethinking globalisation against thebackground of the global economic turmoil, that we have not reached the end of history or geographyand that the world is not as flat as some people want us to believe. World Bank’s World DevelopmentReport 2009, for example, argues that the world is not flat. According to the Report, developmentis neither smooth nor linear — at any geographic scale. Growth comes earlier to some placesthan to others. Geographic differences in living standards diverge before converging, faster at thelocal scale and slower as geography exercises its influence. These are the stylized facts, basedon the experiences of successful developers over the last two centuries. Technological progressand globalisation have increased market potential in the leading areas of developing countries,intensifying concentration and amplifying spatial disparities.

FDI and International Production

As UNCTAD’s World Investment Report 2011, observes, foreign direct investmentis a key component of the world’s growth engine.35

2500

2000

1500

1000

500

0

World totalTransition economies

Developing economies

Developed economies

1980 1985 1990 1995 2000 20052010

52%

Figure1.4

FDI Inflows: Global and by Group of Economies, 1980-2010(billions of dollars)

Source: UNCTAD, World Investment Report, 2011.


Table 1.1: Selected Indicators of FDI and International Production, 1990-2010

Item Value at current prices Annual growth rate or changereturn (per cent) (Billions of dollars)on

1990 2005- 2008 2009 2010 1991- 1996- 2001- 2009 20102007 1995 2000 2005

average

FDI inflows 207 1,472 1,744 1,185 1,244 22.5 40.1 5.3 -32.1 4.9

FDI outflows 241 1,487 1,911 1,171 1,323 16.9 36.3 9.1 -38.7 13.1

FDI inward stock 2,081 14,407 15,295 17,950 19,141 9.4 18.8 13.4 17.4 6.6

FDI outward stock 2,094 15,705 15,988 19,197 20,408 11.9 18.3 14.7 20.1 6.3

Income on inward FDI 75 990 1,066 945 1,137 35.1 13.1 32.0 -11.3 20.3

Rate of return on inward FDI- 6.6 5.9 7.3 7.0 7.3 0.5 0.1 -0.3 0.3

Income on outward FDI 122 1,083 1,113 1,037 1,251 19.9 10.1 31.3 -6.8 20.6

Rate of return on outward FDI 7.3 6.2 7.0 6.9 7.2 0.4 0.2 0.3

Cross border M&As 99 703 707 250 339 -49.1 64.0 0.6 -64.7 35.7

Sales of foreign affiliates 5,105 21,293 33,300 30,213 32,960 8.2 7.1 14.9 -9.3 9.1

Value added (product) of 1,019 3,570 6,216 6,129 6,636 3.6 7.9 10.9 1.4 8.3foreign affiliates

Total assets of foreign 4,602 43,324 64,423 53,601 56,998 13.1 19.6 15.5 -16.8 6.3affiliates

Exports of foreign affiliates 1,498 5,003 6,599 5,262 6,239 8.6 3.6 14.7 -20.3 18.6

Employment by foreign 21,470 55,001 64,484 66,688 68,218 2.9 11.8 4.1 3.4 2.3affiliates (thousands)

GDP 22,206 50,338 61,147 57,920 62,909 6.0 1.4 9.9 -5.3 8.6

Gross fixed capital 5,109 11,208 13,999 12,735 13,940 5.1 1.3 10.7 -9.0 9.5formation

Royalties and licence 29 155 191 187 191 14.6 10.0 13.6 -1.9 1.7fee receipts

Exports of goods and 4,382 15,008 19,794 15,783 18,713 8.1 3.7 14.7 -20.3 18.6non-factor services

Note: Not included in this table are the value of worldwide sales by foreign affiliates associatedwith their parent firms through non-equity relationships and of the sales of the parentfirms themselves.

Source: UNCTAD, World Investment Report, 2011.


As Figure 1.4 shows, there has been surge in FDI flows since the late 1980s.This is the impact of the economic liberalisations worldwide. FDI inflows increasedabout four-fold between early 1980s and 1990 and more than six times between1990 and 2000. FDI inflows increased by 44 per cent between 2000 and 2007 (twoyears of peak flows). As a result, there has been a substantial increase in the FDIstock as a percentage of the GDP. For example, the world FDI inward stock - GDPratio increased from about 11 per cent in 1995 to about 31 per cent in 2009. FDI nowcontributes about one-tenth of the global capital formation.

Figure 1.4 also show that FDI flows to developing countries are much more stablethan to developed countries and that their share in the total has increased inrecent years.

A corollary of the surge in FDI has been the fast proliferation of MNCs across theworld, particularly in the present and erstwhile communist and socialist countries.According to UNCTAD’s World Investment Report (WIR) 1997, there were about 45,000MNCs with about 282,000 foreign affiliates (FAs), but according to the WIR 2011, thenumber of MNCs was more than one lakh and of FAs nearly 9 lakh. Developingcountries now account for nearly 30 per cent of the TNCs worldwide, compared toless than 10 per cent in 1992. Majority of the FAs of TNCs are in the developingcountries. Interestingly, nearly half of the FAs in the world and about 85 per cent ofthe total number of FAs located in the developing countries are in communist China.

With the proliferation of MNCs and rapid rise in FDI, the share of multinationalsin global production has been on the increase. According to the estimates of UNCTAD,value added by TNCs worldwide, in their operations both at home and abroad,accounted for more than a quarter of global GDP in 2010. In 2010, foreign affiliatesaccounted for more than one-tenth of global GDP and one-third of world exports. In2010, foreign affiliates of TNCs employed about 68 million people, compared to about21 million in 1990.

State-owned TNCs

An interesting development is the growth of State-owned TNCs [defined asenterprises comprising parent enterprises and their foreign affiliates in which thegovernment has a controlling interest (full, majority, or significant minority), whetheror not listed on a stock exchange]. In 2010 there were at least 650 State-ownedTNCs, with more than 8,500 foreign affiliates, operating around the globe. While thismakes them a minority in the universe of all TNCs, they nevertheless constituted asignificant number of the world’s 100 largest TNCs. (19 companies in 2010). SOEsfrom developing and transition economies have a larger share in their top 100 TNCs(28 in 2009). While relatively small in number (less than 1 per cent of all TNCs), theirFDI is substantial, reaching roughly 11 per cent of global FDI flows in 2010.


State-owned TNCs constitute a varied group. Developing and transitioneconomies are home to more than half of these firms (56 per cent), though developedcountries continue to maintain a significant number of State-owned TNCs. In contrastto the general view of State-owned TNCs as largely concentrated in the primary sector,they are diversified and have a strong presence in the services sector.

State-owned TNCs tend to be most active in financial services and industriesthat are capital intensive, require monopolistic positions to gain the necessaryeconomies of scale, or are deemed to be of strong strategic interest to the country. In2010, roughly 70 per cent of State-owned TNCs operate in the services sector, led byfinancial services.

Ill Effects of Globalisation

The almost universal acceptance of the market economy and the globalisationdriven by private enterprise tend to aggravate most of the harmful effects traditionallyattributed to neocolonialism.

1. The global dominance of industries by MNCs is on the increase. Global grossproduct attributable to foreign affiliates of MNCs was about one-tenth of globalGDP in 2000 compared to 5 percent in the beginning of the 1980s. However,it remained 10 per cent in 2010 too.

2. Many countries are indiscriminate in liberalising foreign investment. Pepsi,Coke and ‘junk food’ are no more kept out.

3. A number of countries allow high foreign stake even in industries where thatis not really required. This could affect the domestic enterprise of developingcountries.

4. There has been a large number of cases of takeover of national firms by foreignfirms. In some of these cases, the domestic firms are driven to a situation ofhaving to hand over the majority or complete equity to the foreign partners ofjoint ventures because of the inability of the domestic partners to bring inadditional capital or some other incapability.

5. Nexus between MNCs and governments is not uncommon. An alarmingdevelopment under the Indian liberalisation was the unscrupulous way theGovernment was implementing the policy as well as the foreign companieshad been behaving. The Government policy would have given the public animpression that even in the priority industries foreign equity participationwould be limited to 51 per cent. However, a number of foreign companies,after having jacked up their equity holding in the Indian subsidiaries for asong, through preferential issue, to 51 per cent, are setting up new fully ownedsusbsidiaries to do business which their existing subsidiaries could do. Mostof these are in non-priority areas. This was a covert deception by the


Government-multinational collusion using the saving clauses and exceptionsof the policy. This could cause large foreign exchange outgo by way of dividendrepatriation. Foreign investment should be discouraged in non-priority areas.

6. Replacement of traditional and indigenous products by modern products,resulting in the ruin of traditional crafts and industries and the livelihood ofpeople in these sectors have also been happening in several countries.

7. Some times liberalisation is resorted to serve the vested interests of certainsections or without assessing the possible impacts, leading to miseries, forexample, for farmers, small firms etc.

8. Another important problem is that in several cases domestic firms of developingcountries are made to compete with foreign firms without a level playing field.For example, Indian firms which have several odds against them would find itdifficult to compete with firms from countries where the interest rates, inputcosts etc. are low and infrastructural facilities are well developed and efficient.

9. One of the common criticisms is that the technology that the MNCs bring inmay not be the one suited to the host country but that suits the objectives ofthe MNC.

10. Another usual criticism is that MNCs dump obsolete technology to thedeveloping world. This criticism, however, is not as valid today as in the pastand in future it is likely to be even less valid. In the past, because of the entryrestrictions and resultant absence or lack of competition, developing countriescould be used as a dumping ground for obsolete products, includingtechnology. The business environment today, however, is vastly different.Because of the competition between MNCs (and national firms) made possibleby the dismantling of entry barriers (and freeing of technology imports bynational firms and added thrust on R&D by them) technological edge is animportant determinant of success. The evolution of the motor car market inIndia, for example, gives some indication of this.

11. The developing countries, in general, have been disadvantaged by theinternational trading system. The least developed countries have been themost deprived. One of the reasons for the adverse terms of trade of thedeveloping countries is the demand-supply factor.

12. While developing countries which, in the past, were against globalisation,have wide opened their doors for globalisation, many people in developedcountries like USA are angry against globalisation. American jobs and wagelevels are severely affected by the influx of cheap imports and shifting ofproduction to low cost overseas locations. According to a BusinessWeek/Harrispoll in early 2000, more than two-thirds of Americans believe that globalisation


drags down US wages. A strong majority of the Americans feel that trade policieshave not adequately addressed the concerns of American workers,international labour standards, or the environment. The important adverseeffects of globalisation according to the survey are the following.

1. Millions of Americans have lost jobs due to imports or production shifts abroad.Most find new jobs that pay less.

2. Millions of others fear losing their jobs, especially at those companies operatingunder competitive pressure.

3. Workers face pay cut demands from employers, which often threaten toexport jobs.

4. Service and white collar jobs are increasingly vulnerable to operationsmoving offshore.

5. US employees can lose their comparative advantage when companies buildadvanced factories in low-wage countries, making them as productive as thoseat home.

The above problems may be applicable to the developed countries in general.

Benefits of Globalisation

1. Foreign capital, if properly utilised, can make substantial contribution to theeconomic development of the nation. A classical example is the communistChina. Foreign capital has made substantial contribution its capital formation.

2. Productivity grows more quickly when countries produce goods and servicesin which they have comparative advantage. Living standards can go up faster.

3. Increase in competition would make companies more cost and qualityconscious and innovative.

4. Global competition and imports keep a lid on prices, so inflation is less likelyto derail economic growth.

5. Liberalisation and global competition enhance consumer choice andconsumer surplus.

6. An open economy spurs innovation with fresh ideas from abroad.

7. Export jobs often pay more than other jobs.

8. Unfettered capital flows give the country access to foreign investment andkeep interest rates low.

9. Globalisation opens up enormous domestic and global opportunities for firmsin developing countries.


10. Despite discriminations of the global economic order against them, there arechances of developing countries benefiting from trade.

Challenges

Globalisation throws up a number of challenges for the individuals, firmsand nations. Globalisation will doom the future of those who fail to meet thesechallenges effectively.

1. In a competitive environment, a firm can survive only if it is efficient.Companies all around world, including many large multinationals, have beencutting down the size of their human resources as one of the means ofachieving cost efficiency. The problem of over-manning is very severe in thedeveloping countries. Unless these firms get rid of the surplus labour, theycan hardly be competitive and successful. That means, the liberalisation cansucceed only if the economy grows very fast to absorb the displaced labourand the new addition to the labour force.

2. Attracting foreign investment is a real challenge. It is criticised that developednations receive most of the FDI. A very small number of the developingcountries, which are the relatively developed or large or fast growing in thedeveloping world, account for the lion’s share of the FDI flows to this category.What the critics do not appreciate is that, as foreign investment flows are basedon economic rational, it is unrealistic to expect the pattern of flow to bedifferent.

3. Another criticism is that the liberalisation increases the economic inequality.Even in China, the liberalisation has created many island of affluence. Ifinequality increases because of the worsening of the living conditions of thepoor, it certainly is unjustifiable. But, if the increase in inequality is the resultof improving the economic conditions of a section, while there is no economicdeterioration of any section, or because of the disproportionate benefits, thequestion is whether the economic progress of some sections should be curbedso that there will not be a widening of the inequality. It goes without sayingthat a government shall strive towards growth with justice.

The liberalisation may increase inequality. Further, several sectors andsections may not directly and immediately benefit from mere liberalisation.There may also be shocks and other adverse effects on the weaker sections. Itis, therefore, necessary that there should be real socio-economic reforms ratherthan mere liberalisation. Targeted poverty eradication programmes and socialsafety net are very important. The fast growth and overall development resultingfrom liberalisation could have a major impact on poverty. Naisbitt points out


that there were an estimated 200 to 270 million Chinese living in absolutepoverty in 1978 (the year in which the liberalisation began) and their numbercame down to 100 million by 1985.36

4. Although the MNCs, by the virtue of their size and resources, have certainadvantages, they may also have limitations or disadvantages in certain spheresor aspects of business. Small and medium firms often have some edge overthe very large ones in respects of standardised products or technologies likegreater flexibility and adaptability, lower overheads, intimacy with thecustomers, etc. Lower costs is a great advantage which firms from developingcountries enjoy. It may be noted that the major component of growth of severalIndia pharmaceutical firms is the foreign market. They are relying mostly onbulk drugs and generics. What is often ignored while discussing the impactof the product patent is that patented drugs account for only about 15 percent of the India drug market. There are several more products which wouldgo off patent in the coming years which can also be taken up the India firms.The new patent regime should be expected to help the Indian industry byprompting it to give added thrust to R&D and thereby enabling Indian firmsalso to develop patented products. Positive signs are already there onthe horizon.

There are also many evidences of the better technology brought in by theMNCs inducing or provoking Indian firms to absorb similar technology leadingto their enhanced competitiveness and market expansion.

5. The domestic and cross-border M&As pose a serious challenge to governmentsto ensure fair competition. An effective competition policy and law and theirproper implementation assume great importance here.

6. There shall be national level and firm level strategies to take advantage of theopportunities thrown open by global liberalization. For example, theliberalization of trade in textiles by the phasing out of the MFA enormouslyexpanded the international market for textiles. Most of its benefits have beenreaped by China thanks to a national strategy it had in place; India has notbeen able to take much advantage because of the absence of a comprehensiveand effective strategy.

7. Liberalisation will be successful only if the policy is proper and clear andthere is the required political mandate, will and boldness. Lack of clarityregarding privatisation; lack of boldness to implement labour law reforms,downsizing etc., bureaucratic hurdles and so on are retarding India’s reformprocess. Lack of clarity in policies and delays can make the situation worseinstead of realising the objectives of liberalisation.


Policy Options

With a view to minimising the damages and maximising the opportunities ofglobalisation from the macro socio-economic point of view, the Human DevelopmentReport 1997 of the UNDP has made to following policy suggestions.

1. Manage trade and capital flows more carefully.

2. Invest in poor people.

3. Foster small enterprises.

4. Properly manage new technology.

5. Reduce poverty and introduce safety nets.

6. Influence governance.

The Report also points out that to seize the opportunities of globalisation, thepoorest developing countries need the following.

1. A more supportive macroeconomic policy environment for povertyeradication: The world clearly needs much more effective macroeconomicpolicy management at the global level — with more stable sources ofinternational liquidity, better surveillance, faster crisis response mechanismsand a larger multinational lender of last resort. Existing organisations servethese purposes inadequately.

2. A fairer institutional environment for global trade: There is an urgentneed to treat the products of developing countries on a par with those ofindustrial countries — and to accelerate the liberalisation of markets ofinterest to poor countries, such as textiles, and institute a comprehensiveban on dumping agricultural exports.

3. A partnership with multinational corporations to promote growth forpoverty reduction: An incentive system that, while avoiding excessiveregulation, encourages multinational corporations to contribute to povertyreduction and be publicly accountable and socially responsible. Bothindustrial and developing countries have interests here. Those of the industrialinclude preventing tax evasion.

4. Action to stop the race to the bottom: In a world of cutthroat competition,countries underbid each other in labour costs, labour standards andenvironmental protection — to produce as cheaply as possible for theinternational market. Many countries unilaterally try to restrain these racesto the bottom. And some may come under external pressure if they toleratedangerous working conditions and child labour, with human rights issues a


basis for unilateral trade sanctions. A more efficient and equitable approachwould be to strengthen institutions such as the International LabourOrganisation — to support respect for labour right — and to develop similarinstitutions for international environmental protection. Internationalcoordination is also needed to avoid races to attract international investorsby offering overly generous tax incentives that erode the tax base.

5. Selective support for global technology priorities: The R&D prioritiesshould reoriented from the needs of the rich to the more urgent human needsof the poor.

6. Action on global debt: The highly indebted poor countries need debt reliefnow — not at some indeterminate point in the future. Providing effective reliefto the 20 worst-affected countries would cost between $ 5.5 billion and $ 7.7billion — less than the cost of one Stealth bomber and roughly equivalent tothe cost of the Euro-Disney in France. These meager financial costs contrastwith the appalling human costs of inaction.

LPG AND DEVELOPING COUNTRIES

Growing Economic Power of Developing Countries

According to the World Bank’s World Development Report 2011, there were144 low and middle income economies, each with a population of more than30,000. While the low and middle income economies fall in the category ofdeveloping economies, some high income economies are also regarded asdeveloping. The low and middle income economies give a rough approximation ofthe developing economies.

The low and middle income economies are inhabited by about 84 per cent of theworld population but has a share of only 28 per cent of the global GDP. In purchasingpower parity terms, however, they account for more than 44 per cent of the global.

LPG has both positive and negative effects on different categories of economies.The structural changes in the economy, sectors, and segments and the interplay ofmarket forces impact fortunes of different economic actors.


Table 1.2: Shares of Different Categories of Economies (Percentage), 2009

Economy World World World GNIGroup Population GNI measured at PPP

High Income 16.5 71.9 56.5

Middle Income 71.0 27.4 42.5

Low Income 12.5 0.7 1.4

Low and Middle Income 83.5 28.1 43.9

India 17.0 2.3 5.2

Source: Calculated from the data given by World Bank, World Development Report, 2011.

A number of developing economies which are characterised by fairly soundeconomic base, proactive government and conducive social environment havebenefited substantially from the LPG environment while many, particularly the leastdeveloped countries (numbering 48) and other low income economies suffer thebrunt of deleterious effects than benefiting from the new economic paradigm. In alarge number of cases, socio-political conflicts, inefficient and corrupt administrationor vicious circle of poverty and growth defeating forces not only retard theirdevelopment but also make the situation more miserable. Further, even in countrieswhich have remarkably benefited by LPG, there are economic segments and sectionsof population which are bypassed by the new development pattern or are victims ofthe new development forces.

The Bright Side

As a group, the developing countries present an encouraging picture ofoverall performance. Their GDP growth has been much faster than that of thedeveloped ones.

The share of the developing countries in the global trade has also been growingat almost twice the rate for the developed countries.

The presence of developing countries in the global economy has been on theincrease. The population, GDP, foreign trade and foreign investment of developingeconomies have been growing faster than those for the developed. That means thatthe global shares of developing economies in respect of these have been increasingand of the other group of countries decreasing. The global economic share ofdeveloping economies will further increase and they will play an increasinglyimportant role in international business.

FDI to the developing economies has increased substantially, as moreinternational production moves to them: MNCs are increasingly investing in thesecountries to maintain cost-effectiveness and to remain competitive in the global


production networks. Figure 1.4 shows that in 2010 more than half of the FDI wentto developing countries (including transition economies). It also clearly shows thatthe fluctuations in the global FDI flows are caused by the ups and downs in the flowsto the developed countries and the developing world shows a relatively stable pattern.

The increasing share of developing countries in the FDI inflows is reflectedalso in the global ranking of the largest FDI recipients: in 2010, half of the top 20host economies were from developing and transition economies, compared to sevenin 2009.

The share of developing economies in the global FDI outflows reached 29 percent in 2010, up from 16 per cent in 2007, the year prior to the financial crisis. In2010, six developing economies were among the top 20 foreign investors.

The trade of developing countries has been growing faster than that of thedeveloped and as a result their share in the global trade has also been rising. Recentlya developing country (China) has emerged as the largest exporter. Table 1.3 showsthat about half of the top thirty global merchandise traders are developing countries.

There is no rule or empirical evidence that any particular category of countrieswill have trade deficit or surplus. There are both developed and developing countrieswith trade surplus and there are countries in both these categories with trade deficit.Further, the status of trade balance of some countries changes from time to time.

In recent years, while the developing countries as a group had a surplus tradebalance, the high income countries had net deficit. The European Union had a tradedeficit with the rest of the world of $ 190 billion in 2010.

Among the developing economies, China has been occupying an enviableposition regarding trade balance. China, which had a trade deficit of over $13 billionin 1985, had a surplus of nearly $ 9 billion in 1990 and $25 billion in 2000. China’smerchandise trade surplus for 2010 totaled $ 183 billion, roughly 39 per cent lessthan the nearly US$ 300 billion surplus of 2008. China, the largest exporter and thesecond largest importer, had the second largest trade surplus in 2010. Germany hadthe largest surplus in 2010 ($ 202 billion). Other developing countries with significanttrade surplus include Russia, Malaysia, S. Korea, Indonesia, Thailand, Brazil andTaipei. Many developing countries have been in deficit. In the last five decades or so,India’s trade balance was negative except in two years ( 1972–73 and 1976-77).

In services trade too developing countries have been forging ahead, but theyshow a different picture of trade balance compared to goods trade.

A small number of countries account for the bulk of the total exports of thedeveloping countries.


Table 1.3: Leading Merchandise Traders, 2010(Billion dollars and percentage)

Rank Exporters Value Share Rank Importers Value Share

1 China 1,578 10.4 1 United States 1,968 12.8

2 United States 1,270 8.4 2 China 1,395 9.1

3 Germany 1,269 8.3 3 Germany 1,067 6.9

4 Japan 770 5.1 4 Japan 693 4.5

5 Netherlands 572 3.8 5 France 606 3.9

6 France 521 3.4 6 United Kingdom 558 3.6

7 Korea Republic of 466 3.1 7 Netherlands 517 3.4

8 Italy 448 2.9 8 Italy 481 3.1

9 Belgium 411 2.7 9 Hong Kong China 442 2.9

– retained imports 116 0.8

10 United Kingdom 405 2.7 10 Korea Republic of 425 2.8

11 Hong Kong China 401 2.6 11 Canada 402 2.6

– domestic exports 10 0.1

– re-exports 383 2.5

12 Russian Federation 400 2.6 12 Belgium 390 2.5

13 Canada 387 2.5 13 India 323 2.1

14 Singapore 352 2.3 14 Spain 312 2.0

– domestic exports 183 1.2

– re-exports 169 1.1

15 Mexico 298 2.0 15 Singapore 311 2.0

– retained imports 142 0.9

16 Taipei, Chinese 275 1.8 16 Mexico 311 2.0

17 Kingdom of Saudi Arabia 254 1.7 17 Taipei, Chinese 251 1.6

18 Spain 245 1.6 18 Russian Federation 248 1.6

19 United Arab Emirates 235 1.5 19 Australia 202 1.3

20 India 216 1.4 20 Brazil 191 1.2

21 Australia 212 1.4 21 Turkey 185 1.2

22 Brazil 202 1.3 22 Thailand 182 1.2

23 Malaysia 199 1.3 23 Switzerland 176 1.1

24 Switzerland 195 1.3 24 Poland 174 1.1

25 Thailand 195 1.3 25 United Arab Emirates 170 1.1

26 Sweden 158 1.0 26 Malaysia 165 1.1


27 Indonesia 158 1.0 27 Austria 150 1.0

28 Poland 156 1.0 28 Sweden 148 1.0

29 Austria 152 1.0 29 Indonesia 132 0.9

30 Czech Republic 133 0.9 30 Czech Republic 126 0.8

Total of above 12,541 82.3 Total of above 12712 82.7

World 15,238 100.0 World 15376 100.0

Source: WTO, World Trade Report, 2011.

The Market Shift

A far reaching development in the global business environment is thegeographical shift in the market potential. This is caused by demographic factorsand economic factors influenced by, inter alia, globalisation. The advanced countries– North America, Western Europe and Japan – are relatively shrinking in the marketsize while the markets of the emerging and developing countries – particularly theBRIC and the N – 1137 – are growing explosively.

In some respects, the developed country markets are shrinking absolutely toomainly due to the drastic decline in their population size consequent to the collapsingbirthrate which was referred to by Peter Drucker in his Management Challenges forthe Twentyfirst Century as ‘collective national suicide’. In Western and Central Europeand in Japan, the birthrate has already fallen well below the rate needed to reproducethe population. That is, below 2.1 live births for women of reproductive age. In someof Italy’s richest regions, for example, in Bologna, the birthrate by the year 1999 hadfallen to 0.8; in Japan to 1.3. In fact, Japan and all of Southern Europe — Portugal,Spain, Southern France, Italy, Greece — are drifting toward collective national suicideby the end of the 21st century. By then Italy’s population, for instance — now 60million — might be down to 20 or 22 million; Japan’s population — now 125 million— might be down to 50 or 55 million. But even in Western and Northern Europe thebirthrates are down to 1.5 and falling. But in the United States, too, the birthrate isnow below 2 and going down steadily. And it is as high as it is only because of thelarge number of recent immigrants who still, for the first generation, tend to retainthe high birthrates of their country of origin for example, Mexico.2 While thedeveloped country markets are shrinking ferociously, the developing world isexperiencing a population explosion and demand boom. The surging populationand GDP make the developing economies the future markets. Interestingly, theirGDP is faster than the recent estimates of impressive growth. For example, in their2001 paper, Goldman Sachs (GS) argued that the BRIC economies would make upmore than 10 per cent of world GDP by the end of the decade. However, by the endof 2007, their combined weight was already 15 per cent of the global economy.China has already overtaken Germany and Japan to become the second largesteconomy in the world. According to the 2003 GS BRIC Report, these countries


together could overtake the combined GDP of the G7 by 2035; the 2007 revisedfigures predict that this will happen in 2032.3

According to the predictions of Goldman Sachs (GS), by now the sizes of theincremental demand in G6 (USA, Japan, Germany, UK, France, Italy), and BRIC arealmost equal. By 2030 the incremental demand in BRIC would be about 2.5 timesthat in the G6 and by 2050 it would be about four times. From 2007 to 2020, India’sGDP per capita in US$ terms is expected to quadruple. The fast increase in incomeand population in a number of other developing countries, besides the BRIC, alsoneed to be considered here.

Tom Burke, cofounder of the group of E3G (Third Generation Environmentalism),presents an interesting analogy: For many years there were only two Americums(one Americum is a group of 350 million people with a percapita income above $15,000 and a growing penchant for consumerism) - one in North America and anotherin Europe with small pockets of American style living in Asia, Latin America and theMiddle East. Today, there are Americums taking shape all over the planet - Chinahas given birth to one Americum and is pregnant with a second, which is due in2030. India has one Americum now and also has another on the way, also due by2030. Singapore, Malaysia, Vietnam, Thailand, Indonesia, Taiwan, Australia, NewZealand, Hong Kong, Korea and Japan constitute another Americum. Russia andCentral Europe are nurturing another Americum, and parts of South America andthe Middle East still another. Thus, by 2030 we will have gone from a world of twoAmericums to a world of eight or nine.38

It may be noted that while the developed economies underwent a recessionduring 2008/2009, several developing economies grew well, though slower thantheir normal pace.

The growing influx of FII to the stock markets of developing countries and theincreasing market capitalization is a reflection of the great potential of the developingcountry firms. Reflecting the huge investment and growth potential of the developingeconomies, there has been an influx of FDI inflow to developing countries, as pointedout earlier. Their share in the global FDI inflows has increased significantly, reachingnearly 50 per cent in 2009 and exceeding that of the developed countries in 2010.

The New Competition

While it is argued, on the one side, that liberalisation created a situation of thehome country firms having to compete with mighty foreign firm without a level-playing field, on the other side it is pointed out that gobalization has been levelingthe playing field.

A salient feature of the current business environment is the unprecedentedaccess to everyone, everywhere and everything thanks to the universal liberalisationand technological revolution. This level playing field liberates the firms from


developing countries (described as ‘challengers’ by Sirkin, Hemerling andBhattacharya 39) from several handicaps which would have otherwise affected them.In other words, the challengers are enjoying several benefits which were notavailable to the ‘incumbents’ (a term used by Hemerling et.al. to refer to establishedfirms from developed countries) during their development stage. There is, however,no denying the fact the global liberalisation has substantially benefited theincumbents by enabling them to leverage their dominance and strengths so as tofind alternatives to the domestic market constraints and to exploit the expandingopportunities of the emerging and developing markets. They are also benefitting byaccessing the talent pool, low cost labour and other resources of these economies.To a significant extent the incumbents have sought to fight the challengers, byaccessing the low cost environment and growth impulses of the emerging anddeveloping markets, by restructuring the supply chain and business process andcollaborating with challengers.

Some authors have described the global business environment as globality -”adifferent kind of environment, in which business flows in every direction. Companieshave no centres. The idea of foreignness is foreign. Commerce swirls and marketdominance shifts. Western business orthodoxy entwins with eastern businessphilosophy and creates a whole new mindset that embraces profit and competitionas well as sustainability and competition.”40

In short, gone are the days when large well established companies from thedeveloped countries (the incumbents) dominated the global business scenario.Firms from emerging and developing economies are increasing their global sharein many industries.

The number of developing country firms in the Fortune Global 500 has been onthe rapid rise. In the 2010 Fortune 500, a developing country, China, had the thirdlargest number (46) of firms. India, which made an entry in to the Fortune 500 in therecent past with Indian Oil Corporation, had 8 companies in 2010 consisting of 5public sector and 3 private sector firms. In fact, government policies have backedthe emergence of MNCs, both state owned and private, from several developingeconomies. For example, the adoption by the government in the early years of thenew millennium of “go global” policy has boosted the global foray of Chinese firms.With a view to giving the well-performing public enterprises greater functionaland financial autonomy and to help them to become globally competitive to emergeas global giants, Government of India initiated a strategy in 1997 and nine suchenterprises were (called navarathnas - nine gems) identified. Now there are 19such enterprises.

The geographical shift in the industrial dominance is indeed a historicalphenomenon. The dominance of Great Britain and other developed European nationswas overshadowed by USA by the Second World War. The American supremacyhowever, had to face increasing challenge from the European nations later. Since


the 1970’s Japan emerged as strong power to be reckoned by America and Europe. Oflate, it has become the turn of the Asian tigers, the BRIC and several other developingcountries.

In the present wave of new competition, powerful companies from developingcountries are strongly slashing at the incumbents. “It is like a tsunami – a series oflow powerful waves caused by an undersea disruption that crashed against the shoreand surge for inland – than the single sharp crest of a tidal wave”.41 They are fastgrowing, hungry, and have access to all the world’s markets and resources. Thechallengers are showing up everywhere – in each other markets throughout the world,in markets that are less developed than their own, and, increasingly, in the developedmarkets of Japan, western Europe and the United States.42

The home markets of the incumbents are increasingly invaded by the challengersat a time when these markets are showing signs of saturation or decline in manyindustries. That is, the challenges are eating away an increasing share of even theshrinking cakes at a time when at least maintaining the aggregate level of sales isoften essential for survival.

The challengers in many cases is well pitched than the incumbents – low costdomestic environment, fast expanding domestic market, increasing supply of humanresources of all categories – unskilled, skilled and talented – entrepreneurialdynamism, etc. The easy access to foreign capital and technology help level the playingfield.

The situation for the developed country firms today is very different from thepast when they could expand into the developing markets with hardly anychallengers. The incumbents today face a dual challenge: defending the home marketfrom the challengers and effectively competing with the challengers in the foreignmarket.

The developing country firms are no more the typical labour incentive, low-techproducers. Many of them are highly innovative.

The categorisation of industries into glooming sunset and booming sunriseindustries has not deterred the developing country firms from building up strengthin the sunset industries while many incumbents appear to have preferred to exitthese industries. The challengers have grown enormously by acquiring suchbusinesses of incumbents and also organically so that they have become major globalplayers in several of these industries. The good fortune of the challengers is that intheir home markets most industries are growth industries. Several of the challengershave been globally consolidating their commodity business. Challengers have beenglobally expanding their business organically and inorganically in the sunriseindustries and knowledge economy too.

In all categories of economies – low, middle and high income – major part of theincremental income and employment are generated by the service sector. Developing


country firms present an impressive performance in sectors like IT and ITES(incumbent – challenger differentiation is irrelevant in such industries). Not onlythat Indian firms like TCS, Infosys, Wipro and several others are globally well known,a significant part of the requirement of the IT professionals of multinationals (both intheir home market operations and offshore businesses) are supplied by developingcountries like India.

While several large and well known incumbents in the financial sector collapsedand weakened under the global financial crisis of the last years of the previous decade,the financial sector of countries like India has shown great resilience, strength andsubstantial growth impulses. Several banks from developing countries, includingState bank of India, are in the global Fortune 500.

The aggressive foreign thrust by the developing country firms is reflected in thebooming FDI outflow from them. They accounted for about a quarter of the global FDIoutflows in 2009. The four BRIC countries alone accounted for almost 9 per cent ofworld outflows, compared to less than 1 per cent ten years ago. The outward FDI hasbeen boosted by rising volumes of cross-border M&As. Many developing countryfirms have been on an overseas buying spree. Between 2000 and 2009, Indian firmsfinalized 812 deals abroad, Chinese firms finalized 450, Brazilian firms finalized190, and Russian firms finalized 436. Some of these deals were valued at more than$1 billion.43

TNCs from developing countries share a number of common features. The WorldInvestment Report 2010, for example, highlight the following points in respect of theTNCs from BRIC:44

They have developed various ownership-specific advantages that allow themto be competitive in foreign markets as well as in their own markets.

Initially, firms tend to expanded mainly into their own region, often intocountries with which they had close cultural links. A growing number of TNCshave ventured further afield, however, in search of new markets and resources

A large number of TNCs from BRIC are motivated by strategic considerationsrather than by short-term profitability, reflecting the role of state-ownedenterprises in the outward FDI of the group.

Many of the TNCs have become truly global players, as they possess – amongother things – global brand names, management skills and competitivebusiness models.

Supportive government policies have backed the rise of outward FDI.

The Dark Side

Many developing countries have, undoubtedly, benefitted a lot from the globalliberalisation. However, the aggregate macroeconomic figures of impressive


performance of developing countries conceal the wide divergence in theirperformance. The performance indicators of developing countries are striking becauseof the exceptional performance of a small group within them, like the BRICS andsome countries in South-East Asia and Latin America. The performance of China,which accounts for nearly 30 per cent of the GNI of the low and middle incomeeconomies, is particularly decisive. A 10 per cent growth of the Chinese economycan pull up the income of the low and middle income economies by about 3 per centand of the world economy by about 0.8 per cent even if the income of other countriesstagnate.

Not only that a large number of countries continue to be characterised by acutederivation in the vital factors but also the sufferings of many of them have increasedin the new world order. It must, at the same time, be noted that that the problems ofmany of them are basically inherent and not the impact of globalisation albeit it iscommon to put the blame for the problems and evils on globalisation. As stated earlier,in a large number of cases, socio-political conflicts, inefficient and corruptadministration or vicious circle of poverty and growth defeating forces not only retardtheir development but also make the situation more miserable.

LPG or no LPG, the poor, particularly of the poor countries, are the victims ofseveral harmful developments - domestic or international, like food inflation.

It is true that many developing countries have benefitted a lot from the globalliberalisation. But, often they get a raw deal in multilateral trade negotiations.Further, their inherent weaknesses constrain their effective participation in theinternational economic system. The pattern of trade liberalisations has beensuch that they benefit largely the developed countries and bias against thedeveloping ones.

There are forces in the international economic order which disfavor or are biasedagainst developing countries. Multilateral trade liberalisations have been mostly inrespect of goods traded between industrial economies and those exported fromdeveloping to the developed nations did not benefit so much. Although most tariffsin industrial countries are low, those on several categories of goods exported bydeveloping countries to developed countries remain very high. While developingcountries as a group face tariffs which are significantly higher than the global average,the least developed countries face substantially higher tariffs. Several advancedcountries garner substantial share of their tariffs from the imports from the developingcountries which form a small part of their total import bill.

Another type of discriminatory tariff is tariff escalation — when tariffs increasewith the degree of processing involved in the product. This discourages value addedexports from developing countries.

Another reflection of the bias against developing countries in the multilateraltrade liberalisations is the fact that trade in textiles and agriculture, in which


developing countries have an edge over the developed, remained highly protectedfor a long period. Agriculture continues to be highly protected in the developedcountries. Further, not only that the developed countries are not earnestlyimplementing the provisions of the UR Agreement which will benefit the developingcountries, but also they tend to become more protectionist in several respects.

The developing countries are disadvantaged in the WTO system also because oftheir inability to effectively participate in the negotiation process. They suffer fromlack of intellectual and financial capability to meaningfully participate in thediscussions and negotiations. They are not able to understand the implications andpossible impacts of different proposals and agreements because of their analyticaldeficiencies. It is pointed out that, “most of the agreements and understandingsreached during the Uruguay Round trade negotiations are unequal and unbalancedfrom the point of view of developing countries. This was mainly because of the weakbargaining position of these countries, their general state of unpreparedness for thenegotiations, their dearth of skilled manpower and financial resources to participateeffectively, and the lack of transparency in the negotiating process. Some of theagreements are inherently unequal and unbalanced.”45 See Box 1.6.

BOX 1.6

The Participation Gap

Just as inclusive democracy is needed to ensure minority participation at the national level,inclusive global democracy is needed in which all countries — small and weak as well as largeand powerful — have a voice in decisions. Participation is needed as a matter of right, and tocreate a global economy with fair and just rules. Global economic policy making occurs in a worldof grossly unequal economic and political power. The playing field is not level when the “teams”have vastly different resources, expertise and negotiating power. Poor and small countries can illafford the high costs of participating in the WTO, for example. Fourteen of them have either a one-person delegation in Geneva or none at all. They lack access to well-researched legal and economicpolicy advice. And they cannot afford top legal representation in dispute settlements. The communityof states has an obligation to put in place procedures for greater participation and transparency inglobal decision making. The WTO, for example, has been heavily criticised for its non-transparentand non-participatory decision making, depending more on informal consensus than formalprocedures. A major review of decision making in international bodies should focus on two issues.One is the participation of small and weak countries in the processes of negotiation and disputesettlement. The second is the participation of civil society — including corporations, trade unionsand global networks of NGOs — in a forum for open debate rather than in behind-the-sceneslobbying and on the street demonstrations.

Courtesy: UNDP, Human Development Report, 2000.


The developing countries are virtually deceived in several cases as themultilateral trade agreements have not been implemented in letter and spirit by thedeveloped countries. They have resorted to covert measures to deny the developingcountries the legitimate benefits of the proposed trade liberalisations.

It is pointed out that subsidies normally maintained by developed countrieshave been made non-actionable, while several of those given by developing countriesin pursuit of an export-led development strategy have either been prohibited or putin the actionable category. Subsidies to farmers maintained by major developedcountries have, instead of coming down, gone up primarily because these countrieswere able to switch over to subsidies permissible under the Agreement on Agriculture,before the commencement of its implementation.46 Liberalisation of textiles tradehas hailed as a boon for the developing countries. However, here also the developingcountries have been deceived because developed importing countries have soughtto comply with the targets of liberalisation set out in the Agreement on Textiles andClothing (ATC) by taking credit for the items already outside restriction.47

Developing countries have identified various instances of inequalities andimbalances in the Uruguay Round Agreements and submitted a large number offormal proposals for rectifying them. These proposals have been known as theimplementation issues. It is argued that the implementation issues should be urgentlyresolved and any new round of MTN shall be taken up only after that. However, thedeveloped countries want the new round of MTN soon.

“The implementation issues are not a spanner thrown by a group of developingcountries to ape a new round of trade negotiations. Their attempt to resolve them isdesigned to safeguard their most vital trading interests and to restore a modicum ofbalance in WTO agreements after an unfortunately belated realisation that developingcountries were short-changed in the Uruguay Round negotiations. What is at stakeis the very credibility of the international trading system in the eyes of the developingcountries. Resolution of the implementation issues is the only way to restorecredibility”48 But they continue to be serious issues.

It is generally felt that the patent regime of the WTO serves the interests ofthe MNCs and advanced nations and is detrimental to the interests of thedeveloping countries.

The developing countries will get a fair deal only if the international economicorder becomes orderly and inclusive.


LIBERALISATION AND REGULATION

Just as law and liberty shall go hand in hand, adequate regulation is aprerequisite for proper functioning of the market economy.

Liberalisation does not mean a world of business without rules, regulations andnorms. A market economy cannot function effectively without laws and norms toensure fair competition and protection of consumer and societal interests. Thereshall also be policies and other measures aimed at inclusive growth. Deregulationsor permissiveness devoid of these considerations will be destructive. The problemsthat plagued the financial sector of the US and several other countries, for example,expose this fact. A major cause of the sub-prime crisis originated in the US thatdeveloped into the global economic crisis during 2008-2009 was the indiscriminatefinancial sector deregulation.

One of the most important lessons of the great depression was the need for effectiveregulation of the financial sector and control of money supply. Milton Friedman, theNobel Laureate monetarist economist, who was an advocate of the free market system,had made it clear that proper regulation is a prerequisite for efficient and smoothfunctioning of market economies when he spelled out that the central bank mustensure a stable monetary background for the economy keeping inflation low byproperly regulating money supply.

For over four decades since the Great Depression, the U.S. financial sector waswell regulated and stable in which banks dominated, deposit rates were controlled,small and medium deposits were guaranteed, bank profits were determined by theinterest rate spread, i.e. the difference between deposit and lending rates, and bankswere restrained from straying into areas such as securities trading and insurance,thanks mainly to the Glass-Steagall Act (GSA), 1933, which sought to place the bankingsector of the US on a sound footing. The GSA set up a regulatory firewall betweencommercial and investment bank activities, both of which were curbed and controlled.

However, banking regulations began to be eased in the 1970s and the GSA wasrepealed in 1999 with the establishment of the Gramm-Leach-Bliley Act, whicheliminated the GSA restrictions against affiliations between commercial andinvestment banks. In other words, prohibition of a bank holding company from owningother financial companies disappeared. Consequently, the distinction betweencommercial banks and brokerage firms has blurred; many banks own brokerage firmsand provide investment services. Furthermore, the Gramm-Leach-Bliley Act allowsbanking institutions to provide a broader range of services, including underwritingand other activities. The consequent transformation of the financial sector has beenfar reaching. Banks extended their activity beyond conventional commercial bankinginto merchant banking and insurance. They have diversified their business bytransforming themselves into universal banks offering multiple services or


collaborating with other financial firms with inter-corporate investments orestablishing subsidiary firms.

The very feeble financial sector regulation and governance; the greed,irresponsibility and unscrupulousness of many top executives and other employeescoupled with the growing aspiration of consumers to live far beyond their meansresulted in the collapse of the financial sector causing the global crisis.

BOX 1.7

Occupy Wall StreetA Message Loud and Clear

Occupy Wall Street (OWS) movement is a reflection of the growing public resentmentagainst the indiscriminate deregulation and corporate-government nexus and the deterioratingeconomic conditions of the common man. OWS was initiated by the Canadian activist groupAdbusters, which received considerable public attention with its first demonstration of protest onSeptember 17, 2011 in the Wall Street in New York against social and economic inequality, highunemployment, greed, as well as corruption, and the undue influence of corporations — particularlyfrom the financial sector — on government. The protesters targeted Wall Street because of thepart it played in the economic crisis of 2008 which started the Great Recession. According tothem it is the Wall Street’s risky lending practices of mortgage-backed securities which ultimatelyproved to be worthless that caused the crisis, and that the government bail out breached a senseof propriety. The Wall Street recklessly and blatantly abused the credit default swap market, andthat the instability of that market must have been known beforehand. “The banks got bailed out,but our families are getting kicked out”, The protesters, therefore, demanded that the guilty partiesshould be prosecuted. Their three main demands are: get the money out of politics; reinstate theGlass-Steagall Act and draft laws against the little-known loophole that currently allows membersof Congress to pass legislation affecting Delaware-based corporations in which they themselvesare investors.

(Wall Street, named after and centered on the eight-block-long street, refers to the financialcentre of New York City, on which the New York Stock Exchange, the world’s largest stockexchange by market capitalisation of its listed companies is located. Several other major exchangeshave or had headquarters in the Wall Street area, including NASDAQ, the New York MercantileExchange, the New York Board of Trade, and the former American Stock Exchange. Over time,the term has become a metonym for the financial markets of the United States as a whole.)

Wealth inequality and income inequality have been central concerns among OWS protesters.Their slogan We are the 99 per cent refers to the growing difference in wealth in the U.S. betweenthe wealthiest 1 per cent and the rest of the population. The vast concentration of wealth amongthe top 1 per cent of income earners compared to the other 99 per cent and indicates that mostpeople are paying the price for the mistakes of a tiny minority. According to the CongressionalBudget Office (CBO) report, in 1980, the top 1 per cent earned 9.1 per cent of all income, while in2006 they earned 18.8 per cent of all income. The disparity in income distribution in the UnitedStates further widened, reaching 23.5 per cent in 2010. According to the CBO, between 1979 and2007 the incomes of the top 1 per cent of Americans grew by an average of 275 per cent. During


the same time period, the 60 per cent of Americans in the middle of the income scale saw theirincome rise by 40 per cent. Since 1979 the average pre-tax income for the bottom 90 per cent ofhouseholds has decreased by $900, while that of the top 1 per cent increased by over $700,000,as federal taxation became less progressive.

The protesters want, in part, more and better jobs, more equal distribution of income, bankreform, and a reduction of the influence of corporations on politics.

During an October 6, 2011, news conference, President Obama said about the OWS: “Ithink it expresses the frustrations the American people feel, that we had the biggest financialcrisis since the Great Depression, huge collateral damage all throughout the country ... and yetyou’re still seeing some of the same folks who acted irresponsibly trying to fight efforts to crackdown on the abusive practices that got us into this in the first place.”

There have, of course, been severe criticisms against the occupy movement. John Paulson,billionaire and founder of the hedge fund Paulson & Co., criticised the protesters for “vilifying ourmost successful businesses,” citing that “the top 1 per cent of New Yorkers pay over 40 per centof all income taxes, providing huge benefits to everyone in our city and state”. Businessman andCEO Peter Schiff wrote an opinion column where he stated, “I own a brokerage firm, but I didn’treceive any bailout money... Yes, I am the 1 per cent - but I’ve earned every penny. Instead oftrying to take my wealth away, I hope they learn from my example.” There are, however,businessmen who responded differently. Bill Gross, manager of PIMCO’s Total Return Fund, theworld’s largest mutual fund, stated: “Class warfare by the 99 per cent? Of course, they’re fightingback after 30 years of being shot at.” PIMCO’s co-CEO Mohamed El-Erian argued that peopleshould listen to Occupy Wall Street.

The spirit of Occupy Wall Street movement soon spread to many countries across theworld. It is a message and warning to the governments and corporates of all countries.(Several points of this piece are adapted from Wikipedia: The Free Encyclopedia)

LPG makes a profound paradigm shift. It has swept across economic systems of allpolitical colours and shades and economies in all income or development levels. Allthese countries have had their share of adverse effects of the LPG too.

LPG have flattened the world to a new playing field in which the players from everywherecan try their chance. A nation shall have clear vision, strategy and proper regulatorysystem to benefit from LPG and to alleviate the adverse effect.

In the new environment the powerful, dynamic and strategically proactive will bewinners and the weak or those do not effectively respond will be losers. This is true ofnations, firms and individuals. There is also the first mover advantage as has beendemonstrated by China.

LPG provide a lot of scope for unholy nexus between big business and politicians andbureaucrats. This may lead to indiscriminate and socially harmful liberalisation. Thisis particularly so in respect of countries which are not democratic or where democracyis weak. Public vigilance has a great role in protecting the genuine national and localinterests. It has been encouraging to note that in several countries, including India,agitations by ‘publics’ are influencing government policy formulations to protect socialand national interests. This trend has to become more pronounced.

CO

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The impact of LPG is very diverse. However, one impact on the market place is veryconspicuous. When the liberalisation was ushered in, one prominent Indian Industrialiststated: “All these days we had to go to the politicians and bureaucrats with foldedhands and bent knees for licences and permits, but hereafter will have to go to theconsumer with folded hands and bent knees.” This has come true to a large extent.

REFERENCES1. World Bank, World Development Report, 1997, p. 19.2. Ibid., p. 21.3. Ibid., p. 22.4. R.A. Musgrave, The Theory of Public Finance, Kogakusha Ltd., Tokyo, 1959, p. 3.5. R.A. Musgrave and P.B. Musgrave, Public Finance in Theory and Practice, McGraw-

Hill Kogakusha Ltd., Tokyo, 1976, p. 5.6. Ibid.7. World Bank, World Development Report, 1997.8. John Naisbitt, The Global Paradox, NicholasBrealy Publishing, London, 1994.9. Ibid.

10. John Naisbitt and Patricia Aburdane, Megatrends 2000, Avon Books, New York,1990, p. 91.

11. Cited by Naisbitt and Aburdane, ibid., p. 91.12. Swaminathan S. Anklesaria Aiyar, Peristroika for India, background paper presented

at a Seminar under the auspices of Project for Economic Education, New Delhi,April 21, 1990 ( The text of the Paper was published by Forum of Free Enterprise,Mumbai).

13. Ibid., p. 91.14. Oleg Bogomolov, The Changing Image of Socialism, Social Science, Vol.XXI, No.3, 1990,

pp. 84-85.15. Cited by Aiyar, op.cit., p. 2.16. The data regarding FDI are taken mostly from the World Investment Reports of

UNCTAD.17. Elliot Berg, Privatisation: Development a Pragmatic Approach, Economic Impact,

1987/1, pp. 6-7.18. World Bank, World Development Report 1987, World Bank, Washington D.C., 1987,

p. 67.19. Samuel Paul, Privatisation and the Public Sector, Finance and Development,

December, 1985, p. 42.


20. Alexander Polyukhov, Everything for Sale, New Times, October 2-8, 1990, p. 31.21. Ibid. p. 32.22. John Naisbitt and Patricia Aburdene, Megatrends 2000, Avon Books, New York,

1990, p. 162.23. Ibid., p. 160.24. The information about PTA given here is drawn from WTO, World Trade Report,

2011.25. Data pertaining to PTAs are from WTO, World Trade Report, 2011.26. Peter F. Drucker, Management Challenges for the 21st Century, Harper Business,

New York, 1999.27. Peter F. Ducker, The New Realities, Mandrin, London, 1990.28. Deepak Nayyar, Globalisation: The Past in our Present, Presidential Address at

the78th Annual Conference of Indian Economic Association, Chandigarh,December, 28-30, 1995.

29. The explanation of these four points given below is drawn from Deepak Nayyar,ibid.

30. UNCTAD, Human Development Report, 1999.31. Philip Kotler, Marketing Management, Prentice Hall of India, New Delhi, 1994,

p. 429.32. Kenchi Ohmae, The Borderless World, Fontana, London,1991.33. The statics related to trade are from various issues of World Bank’s World

Development Report and UNCTAD’s World Trade Report (either directly reproducedor computed).

34. Thomas L. Friedman, The World is Flat, The New York, The Penguin Group, 2005.35. The statistics of FDI are from UNCTAD’s World Investment Report (various issues).36. John Naisbitt, op.cit., 186.37. BRIC is an acronym for Brazil, Russia, India and China, used for the first time by

the global consultant firm Goldman Sachs (GS) in 2001. Later in 2005, GS introducedthe concept of the Next Eleven (N-11), with a view to identifying those countriesthat could potentially have a BRIC-like impact in rivaling the G7. Their maincommon ground - and the reason for their selection - was that they were the nextset of large-population countries beyond the BRIC. The N-11 is a very diversegrouping that includes Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria,Pakistan, Philippines, Turkey and Vietnam. The BRIC is now modified as BRICSadding South Africa also to it.

38. Cited in Thomas L. Friedman’s Hot, Flat and Crowded, The Penguin group, NewYork, 2008.


39. Harold L. Sirkin, James W. Hemerling and Arindam K. Bhattacharya, Globality:Competing with Every One for Everything, Headline Publishing Group, London, 2008.

40. Ibid., p. 7.41. Ibid., p. 7.42. Ibid., p. 3.43. UNCTAD, World Investment Report 2010.44. Ibid.45. Muchkund Dubey, Implementation Issues in the WTO, The Hindu, September 10,

2001.46. Ibid.47. Ibid.48. Ibid.

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