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TABLE OF CONTENT
SR.NO TOPIC PG.NO
1. CHAPTER I
(Introduction,Hisorical development)
2-4
2. CHAPTER II
(Objective,Important reforms,Trade,Globalization)
5-13
3. CHAPTER III
(Recent development,Trade pattern & other aspects)
14-20
4. CHAPTER IV
(Concerns & fears,Indias Stance )
21-26
5. CHAPTER V
(Action plans)
27-30
6. CONCLUSION(Indias growth in the next era)
31
7. BIBLIOGRAPHY
(Internet sources,References)
32-33
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CHAPTER I
INTRODUCTION
Globalization has many meanings depending on the context and on the person who is talking
about. Though the precise definition of globalization is still unavailable a few definitions are
worth viewing, Guy Brainbant: says that the process of globalization not only includes
opening up of world trade, development of advanced means of communication,
internationalization of financial markets, growing importance of MNCs, population
migrations and more generally increased mobility of persons, goods, capital, data and ideas
but also infections, diseases and pollution. The term globalization refers to the integration of
economies of the world through uninhibited trade and financial flows, as also through mutualexchange of technology and knowledge. Ideally, it also contains free inter-country movement
of labour.
In context to India, this implies opening up the economy to foreign direct investment by
providing facilities to foreign companies to invest in different fields of economic activity in
India, removing constraints and obstacles to the entry of MNCs in India, allowing Indian
companies to enter into foreign collaborations and also encouraging them to set up joint
ventures abroad; carrying out massive import liberalization programs by switching over from
quantitative restrictions to tariffs andImport duties, therefore globalization have been
identified with the policy reforms of 1991 in India. It is a new buzzword that has come to
dominate the world since the nineties of the last century with the end of the cold war and the
break-up of the former Soviet Union and the global trend towards the rolling ball.
The frontiers of the state with increased reliance on the market economy and renewed faith in
the private capital and resources, a process of structural adjustment spurred by the studies
and influences of the World Bank and other International organizations have started in many
of the developing countries. Also Globalisation has brought in new opportunities to
developing countries. Greater access to developed country markets and technology transfer
hold out promise improved productivity and higher living standard. But globalization has
also thrown up new challenges like growing inequality across and within nations, volatility in
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financial market and environmental deteriorations. Another negative aspect of globalization
is that a great majority of developing countries remain removed from the process. Till the
nineties the process of globalization of the Indian economy was constrained by the barriers to
trade and investment liberalization of trade, investment and financial flows initiated in the
nineties has progressively lowered the barriers to competition and hastened the pace of
globalization.
Historical Development
Globalization has been a historical process with ebbs and flows. During the Pre-
World War I period of 1870 to 1914, there was rapid integration of the economies in terms of
trade flows, movement of capital and migration of people. The growth of globalization was
mainly led by the technological forces in the fields of transport and communication. There
were less barriers to flow of trade and people across the geographical boundaries. Indeed
there were no passports and visa requirements and very few non-tariff barriers and
restrictions on fund flows. The pace of globalization, however, decelerated between the First
and the Second World War. The inter-war period witnessed the erection of various barriers
to restrict free movement of goods and services. Most economies thought that they could
thrive better under high protective walls.
After World War II, all the leading countries resolved not to repeat the mistakes they had
committed previously by opting for isolation. Although after 1945, there was a drive to
increased integration; it took a long time to reach the Pre-World War I level. In terms of
percentage of exports and imports to total output, the US could reach the pre-World War
level of 11 per cent only around 1970. Most of the developing countries which gained
Independence from the colonial rule in the immediate Post-World War II period followed an
import substitution industrialization regime. The Soviet bloc countries were also shielded
from the process of global economic integration.
However, times have changed. In the last two decades, the process of globalization has
proceeded with greater vigour. The former Soviet bloc countries are getting integrated with
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the global economy. More and more developing countries are turning towards outward
oriented policy of growth. Yet, studies point out that trade and capital markets are no more
globalized today than they were at the end of the 19 thcentury. Nevertheless, there are more
concerns about globalization now than before because of the nature and speed of
transformation. What is striking in the current episode is not only the rapid pace but also the
enormous impact of new information technologies on market integration, efficiency and
industrial organization. Globalization of financial markets has far outpaced the integration of
product markets.
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CHAPTER II
OBJECTIVE
To understand the trade and Commercial policies in case of developing counties with
special reference to Globalization.
Also understand the key reforms that were undertaken for the same.
View the impact and the result out of the same.
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The Important Reform Measures (Step towards Globalization)
Indian economy was in deep crisis in July 1991, when foreign currency reserves had
plummeted to almost $1 billion; Inflation had roared to an annual rate of 17 percent; fiscal
deficit was very high and had become unsustainable; foreign investors and NRIs had lostconfidence in Indian Economy. Capital was flying out of the country and we were close to
defaulting on loans. Along with these bottlenecks at home, many unforeseeable changes
swept the economies of nations in Western and Eastern Europe, South East Asia, Latin
America and elsewhere, around the same time. These were the economic compulsions at
home and abroad that called for a complete overhauling of our economic policies and
programs. Major measures initiated as a part of the liberalization and globalization strategy
in the early nineties included the following:
Devaluation: The first step towards globalization was taken with the announcement of the
Devaluation of Indian currency by 18-19 percent against major currencies in the international
Foreign exchange market. In fact, this measure was taken in order to resolve the BOP crisis
Disinvestment-In order to make the process of globalization smooth, privatization and
Liberalizations policies are moving along as well. Under the privatization scheme, most of
the
public sector undertakings have been/ are being sold to private sector
Dismantling of The Industrial Licensing Regime At present, only six industries are under
Compulsory licensing mainly on accounting of environmental safety and strategic
Considerations. A significantly amended locational policy in tune with the liberalized
licensing
policy is in place. No industrial approval is required from the government for locations not
Falling within 25 kms of the periphery of cities having a population of more than one
million.
Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and
encouraging non-debt flows. The Department has put in place a liberal and transparent
foreign
Investment regime where most activities are opened to foreign investment on automatic route
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without any limit on the extent of foreign ownership. Some of the recent initiatives taken to
Further liberalize the FDI regime, inter alias, include opening up of sectors such as Insurance
(up to 26%); development of integrated townships (up to 100%); defense industry (up to
26%); tea plantation (up to 100% subject to divestment of 26% within five years to FDI);
enhancement Of FDI limits in private sector banking, allowing FDI up to 100% under the
automatic route for Most manufacturing activities in SEZs; opening up B2B e-commerce;
Internet Service Providers (ISPs) without Gateways; electronic mail and voice mail to 100%
foreign investment Subject to 26% divestment condition; etc. The Department has also
strengthened investment Facilitation measures through Foreign Investment Implementation
Authority (FIIA).
Non Resident Indian Scheme the general policy and facilities for foreign direct
investment as Available to foreign investors/ Companies are fully applicable to NRIs as well.
In addition, Government has extended some concessions especially for NRIs and overseas
corporate bodies having more than 60% stake by NRIs.
Throwing Open Industries Reserved For The Public Sector to Private Participation.
Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion
The removal of quantitative restrictions on imports.
The reduction of the peak customs tariff from over 300 per cent prior to the 30 per cent
rate that applies now. Severe restrictions on short-term debt and allowing external
commercial borrowings based on external debt sustainability.
Wide-ranging financial sector reforms in the banking, capital markets, and
insurance sectors, including the deregulation of interest rates, strong regulation and
supervisory systems, and the introduction of foreign/private sector competition.
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Despite reducing import restrictions several times in the 2000s,India was evaluated by the
World Trade Organization in 2008 as more restrictive than similar developing economies,
such as Brazil, China, and Russia. The WTO also identified electricity shortages and
inadequate transportation infrastructure as significant constraints on trade. Its restrictiveness
has been cited as a factor which has isolated it from the global financial crisis of 2008
2009 more than other countries, even though it has reduced ongoing economic growth.
PAYMENTS
Since independence, India's balance of payments on its current account has been negative.
Since liberalization in the 1990s (precipitated by a balance of payment crisis), India's exports
have been consistently rising, covering 80.3% of its imports in 200203, up from 66.2% in
199091. Although India is still a net importer, since 199697, its overall balance of
payments (i.e., including the capital account balance), has been positive, largely on account
of increased foreign direct investment and deposits from non-resident Indians; until this time,
the overall balance was only occasionally positive on account of external assistance and
commercial borrowings. As a result, India's foreign currency reserves stood at $285 billion in
2008, which could be used in infrastructural development of the country if used effectively.
India's reliance on external assistance and commercial borrowings has decreased since 1991
92, and since 200203, it has gradually been repaying these debts. Declining interest rates
and reduced borrowings decreased India's debt service ratio to 4.5% in 2007. In
India, External Commercial Borrowings (ECBs) are being permitted by the Government for
providing an additional source of funds to Indian corporate. The Ministry of
Finance monitors and regulates these borrowings (ECBs) through ECB policy guidelines.
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Impact of Globalization
The implications of globalization for a national economy are many. Globalization has
intensified Interdependence and competition between economies in the world market. These
economic reforms have yielded the following significant benefits: Globalization in India hada favorable impact on the overall growth rate of the economy. This is major improvement
given that Indias growth rate in the 1970s was very low at 3% and GDP growth in countries
like Brazil, Indonesia, Korea, and Mexico was more than twice that of India. Though Indias
average annual growth rate almost doubled in the eighties to 5.9%, it was still lower than the
growth rate in China, Korea and Indonesia. The pickup in GDP growth has helped improve
Indias globalposition. Consequently Indias position in the global economy has improved
from the 8thposition in 1991 to 4th place in 2001; when GDP is calculated on a purchasing
power parity basis. During 1991-92 the first year of Raos reforms program, The Indian
economy grew by 0.9%only.However the Gross Domestic Product (GDP) growth accelerated
to 5.3 % in 1992-93, and 6.2% 1993-94. A growth rate of above 8% was an achievement by
the Indian economy during the year 2003-04.Indias GDP growth rate can be seen from the
following graph since independence.
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Gains from Globalization
The gains from globalization can be analyzed in the context of the three types of
channels of economic globalization identified earlier.
Trade in Goods and Services
According to the standard theory, international trade leads to allocation of resources
that is consistent with comparative advantage. This results in specialization which enhances
productivity. It is accepted that international trade, in general, is beneficial and that
restrictive trade practices impede growth. That is the reason why many of the emerging
economies, which originally depended on a growth model of import substitution, have
moved over to a policy of outward orientation. However, in relation to trade in goods and
services, there is one major concern. Emerging economies will reap the benefits of
international trade only if they reach the full potential of their resource availability. This will
probably require time. That is why international trade agreements make exceptions by
allowing longer time to developing economies in terms of reduction in tariff and non-tariff
barriers. Special and differentiated treatment, as it is very often called has become an
accepted principle.
Trade Policies, Developing Countries, and Globalization
The past fifty years have seen dramatic increases in the importance of trade in the world
economy. Trade has grown much more rapidly than output, and most of the countries that
have grown the fastest have done so with rapid increases in their participation in world trade.
Policies of import substitution were widely used in the 1950s, 1960s and 1970s, but appeared
to be much less successful than the more export-oriented policies used in the high-growth
economies of East Asia. By the 1980s, policy makers in developing countries, in particular,had begun to turn towards policies that involved more open trade regimes. By the end of the
1980s, virtually all of the centrally planned regimes that previously eschewed the use of
market-based trade had either collapsed or made dramatic reforms that brought foreign trade
and investment into a prominent place in their development programs. Associated with these
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reforms of trade policy in developing countries was a dramatic change in the nature of their
involvement in international trade. Prior to the mid 1980s, developing countries relied
primarily on exports of commodities, a situation which exposed themto the higher volatility
of commodity prices and to secular declines in commodity prices, and gave rise to concerns
about dependency on imported manufactures. From the early 1980s, however, developing
countries dramatically increased the share of manufactures in their exports. By the late
1990s, around 80 percent of their exports were manufactured goods, greatly Diminishing the
earlier developing country concerns about the role of trade.
The year 1994 was perhaps the high-water market of recent international
policyEnthusiasm for open trade policies. At Marrakech, an unprecedented 124 economies
signed the Uruguay Round Agreement that introduced trade disciplines to agriculture and
services and locked all members into a set of agreements, on issues such as the protection of
intellectual property, that required the development of entirely new institutions in many
developing countries. In the same year, in Bogor, Indonesia, the leaders of Asia-Pacific
countries, representing nearly half of the world economy, set a goal of achieving completely
free trade in the Pacific by 2010 for the industrial countries and 2020 for the developing
countries. Many observers took a triumphalism view that free trade and ever-closer
integration between countries,and the more general phenomenon of globalization, had
become unstoppable.
The recent upsurge of concern about globalization, manifested in the streets of
Seattle, Washington, Prague and other cities where international policy makers have met,
makes it clear that a continuation of the globalizing trend of the last fifty years is far from
inevitable. Participation in the trend to globalization is, as Wolf (2001) has noted, a choice
that must be made by policy makers. Further, there is a strong interdependence between the
decisions of Policy makers. If some major countries turn away from world marketsas was
the case in the 1930sthe result can be a downward spiral in world trade that hurts even
those who would like to remain integrated with the world economy.
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Even at the national level, the choice of policies to manage interactions with the world
economy is not simple. More and more, trade policy reform requires the development of
Institutions, rather than merely the reform and streamlining of border barriers. Many of the
behind the border reforms that are involved require institutional capacity that is in scarce
supply in developing countries. In addition, supporting policies to help alleviate adverse
impacts on particular groups are likely to be needed. As Rodrik (1997) argues, it seems likely
that Globalization will be sustainable only if it is accompanied by policies that equip people
to take advantage of the benefits of globalization.
There is also a serious concern that some recent approaches to trade policy
reform may have created problems for developing countries. The World Trade Organization
is much more comprehensive than its predecessor, the General Agreement on Trade and
Tariffs (GATT), and this comprehensiveness appears to be creating some difficulties (Finger
and Schuler 2001). Indeed, developing countries problems in implementing the Uruguay
Round agreements were one of the factors that derailed the Seattle Ministerial meeting of the
World Trade Organization. But does this mean that trade policy reform has become a
hazardous obsession for developingcountries, as suggested by Rodrik (2001)? Or should
developing countries, and their trading partners, instead become more selective and
differentiated in the approaches that they take to reform of trade policies? Perhaps this
involves differentiating sharply between those areas where implementation requires few
resources, or actually saves resources, and those where it requires development and
strengthening of institutions, and hence important and costly investments.
The question of what needs to be done about trade policies cannot be adequately
answered without examining the current situation and the scope for improvement. Therefore,
the next section of this chapter examines recent changes in trade policies and other barriers to
trade. Then, in the third section, some major changes in trade patterns are examined. In the
final section, some approaches by which further improvements in trade policy might be made
are examined.
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CHAPTER III
Recent Developments in Trade Policies and Other Barriers to Integration
The period since the mid 1950s has been a period of extraordinary growth in
world trade, and in the openness of economies. Over the period since 1965, for which
consistent data are available, world trade has grown more rapidly than world income in all
but a few years of cyclical downturns. In the 1990s, trade grew much more rapidly than
income, with trade growing more than twice as fast as income over the period as a whole.
This very rapid growth in the openness of world economies reflects a
number of factors, including: reductions in trade barriers; reductions in transport costs; and
reductions in the costs of communications. Related influences include the increase in the
importance of trade in manufactures, for which twoway trade is much more prevalent than
for commodities, and the fragmentation of production processes, which necessarily involves
much more international trade in components In the remainder of this section, we first
examine some of the key changes that have taken place in barriers to trade, and then examine
some key changes in patterns of trade.
Developments in Trade Barriers
In the industrial countries, reductions in protection from the high levels reached
in the 1930s were already under way at the time of the establishment of the GATT in 1947
and continued under successive rounds of GATT negotiations. The process of reform was not
simply one of reducing tariffs. During the 1950s, an important component of liberalization
was the abolition of quantitative restrictions introduced for balance of payments reasons. Nor
was th process of liberalization smooth and continuous. During the 1950s, agricultureeffectively escaped from the multilateral system as a consequence of exceptions made for
domestic support price schemes. During the 1960s and 1970s, exports of textiles and clothing
from developing countries were put under a system of quotas that discriminated by country,
and violated all of the fundamental principles of the GATT. As tariffs fell, forms of
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reducing (Brecher and Diaz-Alejandro 1977) and policies that imposed export performance
requirements on foreign investors could be second-best welfare improving (Rodrik 1987).
The political attractions of import-substituting policies to developing country
policy makers were not effectively countered by the multilateral trading system prior to the
Uruguay Round (1986-1994). In this era, developing country policy-makers generally
subscribed to the theory of import substitution, and focused their efforts in the GATT on
obtaining unreciprocated improvements in their access to industrial country markets under
the rubric of special anddifferential treatment. This policy was of some help to those
countries that received preferential market access, by improving their terms of trade.
However, it had a number of adverse economic consequences. Firstly, the policy made it
difficult to bargain for improvements in their market access in the products of greatest
interest to them. Secondly, such access was frequently constrained by quantitative
restrictions and the risk of preference erosion or removal. And thirdly, this policy approach
meant that domestic exporters had no incentive to lobby for reductions in domestic
protection as a way of improving their access to partner markets.
It was no coincidence that, during the period in which developing countries
focused on import substitution and on obtaining increased market access in the industrial
countries without reciprocation, the industrial countries introduced new barriers in areas of
particular interest to developing countries, such as agriculture and textiles and clothing.
In the long run, however, it is ideas and experience, rather than political power,
that are the most influential determinants of the broad thrust of policy. As Keynes (1936)
famously observed Madmen in authority, who hear voices in the air, are distilling their
frenzy from some academic scribbler of a few years back... Sooner or later, it is ideas, not
vested interests, which are dangerous for good or evil. A small group of developing
economies, primarily in East Asia, had either not followed the orthodoxy of import
substitution, or had used complementary export promotion policies as part of an export-
oriented development path. By the end of the 1960s, the outstanding performance of
economies such as Hong Kong, the Republic of Korea,and Taiwan (China) had begun to
attract attention. This evidence, combined with critical assessments of the performance of
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retention rates and other features of the foreign exchange rate regime. Clearly, however, for
mostcountries, that are now small enough to imply that foreign exchange distortions impose
relatively small taxes on trade.
Changes in Trade Patterns
The changes in trade policies and the reductions in trade barriers that have
occurred in recent years have been associated with major changes in developing countries
role in the world economy. In particular, over the period in which developing countries have
been reducing their trade barriers, the composition of developing country exports has
changed in fundamental ways. Since the 1980s, developing countries have drastically
increased their reliance on manufactures exports, and increased their reliance on exports to
other developing countries. Further, exports of services have become much more important
for developing countries.
The highly protectionist policies followed by most developing countries prior to
the 1980s were frequently designed, at least in part, to stimulate industrialization. However,
one of their effects was to greatly constrain countries ability to participate in the more
dynamic parts of International tradetrade in manufactures, and trade in services. Both of
these typically require access to intermediate inputs, capital and technology that are best
obtained from abroad.
Movement of Capital
Capital flows across countries have played an important role in enhancing the
production base. This was very much true in 19thand 20thcenturies. Capital mobility
enables the total savings of the world to be distributed among countries which have the
highest investment potential. Under these circumstances, one countrys growth is not
constrained by its own domestic savings. The inflow of foreign capital has played a
significant role in the development in the recent period of the East Asian countries. The
current account deficit of some of these countries had exceeded 5 per cent of the GDP in
most of the period when growth was rapid. Capital flows can take either the form of foreign
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direct investment or portfolio investment. For developing countries the preferred alternative
is foreign direct investment. Portfolio investment does not directly lead to expansion of
productive capacity. It may do so, however, at one step removed. Portfolio investment can
be volatile particularly in times of loss of confidence. That is why countries want to put
restrictions on portfolio investment. However, in an open system such restrictions cannot
work easily.
Financial Flows
The rapid development of the capital market has been one of the important features of
the current process of globalization. While the growth in capital and foreign exchange
markets have facilitated the transfer of resources across borders, the gross turnover in foreign
exchange markets has been extremely large. It is estimated that the gross turnover is around
$ 1.5 trillion per day worldwide (Frankel, 2000). This is of the order of hundred times
greater than the volume of trade in goods and services. Currency trade has become an end in
itself. The expansion in foreign exchange markets and capital markets is a necessary pre-
requisite for international transfer of capital. However, the volatility in the foreign exchange
market and the ease with which funds can be withdrawn from countries have created often
times panic situations. The most recent example of this was the East Asian crisis. Contagion
of financial crises is a worrying phenomenon. When one country faces a crisis, it affects
others. It is not as if financial crises are solely caused by foreign exchange traders. What the
financial markets tend to do is to exaggerate weaknesses. Herd instinct is not uncommon in
financial markets. When an economy becomes more open to capital and financial flows,
there is even greater compulsion to ensure that factors relating to macro-economic stability
are not ignored. This is a lesson all developing countries have to learn from East Asian
crisis. As one commentator aptly said The trigger was sentiment,but vulnerability was due
to fundamentals.
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CHAPTER IV
Concerns and Fears
On the impact of globalization, there are two major concerns. These may be
described as even fears. Under each major concern there are many related anxieties. The
first major concern is that globalization leads to a more iniquitous distribution of income
among countries and within countries. The second fear is that globalization leads to loss of
national sovereignty and those countries are finding it increasingly difficult to follow
independent domestic policies. These two issues have to be addressed both theoretically and
empirically.
The argument that globalization leads to inequality is based on the premise that since
globalization emphasizes efficiency, gains will accrue to countries which are favourably
endowed with natural and human resources. Advanced countries have had a head start over
the other countries by at least three centuries. The technological base of these countries is
not only wide but highly sophisticated. While trade benefits all countries, greater gains
accrue to the industrially advanced countries. This is the reason why even in the present
trade agreements, a case has been built up for special and differential treatment in relation to
developing countries. By and large, this treatment provides for longer transition periods in
relation to adjustment. However, there are two changes with respect to international trade
which may work to the advantage of the developing countries.
First, for a variety of reasons, the industrially advanced countries are vacating certain
areas of production. These can be filled in by developing countries. A good example of this
is what the East Asian countries did in the 1970s and 1980s. Second, international trade is
no longer determined by the distribution of natural resources. With the advent of
information technology, the role of human resources has emerged as more important.
Specialized human skills will become the determining factor in the coming decades.
Productive activities are becoming knowledge intensive rather than resource intensive.
While there is a divide between developing and the advanced countries even in this area
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some people call it the digital divide - it is a gap which can be bridged. A globalized
economy with increased specialization can lead to improved productivity and faster growth.
What will be required is a balancing mechanism to ensure that the handicaps of the
developing countries are overcome.
Apart from the possible iniquitous distribution of income among countries, it has
also been argued that globalization leads to widening income gaps within the countries as
well. This can happen both in the developed and developing economies. The argument is
the same as was advanced in relation to iniquitous distribution among countries.
Globalization may benefit even within a country those who have the skills and the
technology. The higher growth rate achieved by an economy can be at the expense of
declining incomes of people who may be rendered redundant. In this context, it has to be
noted that while globalization may accelerate the process of technology substitution in
developing economies, these countries even without globalization will face the problem
associated with moving from lower to higher technology. If the growth rate of the economy
accelerates sufficiently, then part of the resources can be diverted by the state to modernize
and re-equip people who may be affected by the process of technology up gradation.
The second concern relates to the loss of autonomy in the pursuit of economic
policies. In a highly integrated world economy, it is true that one country cannot pursue
policies which are not in consonance with the worldwide trends. Capital and technology are
fluid and they will move where the benefits are greater. As the nations come together
whether it be in the political, social or economic arena, some sacrifice of sovereignty is
inevitable. The constraints of a globalised economic system on the pursuit of domestic
policies have to be recognized. However, it need not result in the abdication of domestic
objectives.
Another fear associated with globalization is insecurity and volatility. When
countries are inter-related strongly, a small spark can start a large conflagration. Panic and
fear spread fast. The downside to globalization essentially emphasizes the need to create
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countervailing forces in the form of institutions and policies at the international level. Global
governance cannot be pushed to the periphery, as integration gathers speed.
Empirical evidence on the impact of globalization on inequality is not very clear. The
share in aggregate world exports and in world output of the developing countries has been
increasing. In aggregate world exports, the share of developing countries increased from
20.6 per cent in 1988-90 to 29.9 per cent in 2000. Similarly the share in aggregate world
output of developing countries has increased from 17.9 per cent in 1988-90 to 40.4 per cent
in 2000. The growth rate of the developing countries both in terms of GDP and per capita
GDP has been higher than those of the industrial countries. These growth rates have been in
fact higher in the 1990s than in the 1980s. All these data do not indicate that the developing
countries as a group have suffered in the process of globalization.
In fact, there have been substantial gains. But within developing countries, Africa has
not done well and some of the South Asian countries have done better only in the 1990s.
While the growth rate in per capita income of the developing countries in the 1990s is nearly
two times higher than that of industrialized countries, in absolute terms the gap in per capita
income has widened. As for income distribution within the countries, it is difficult to judgewhether globalization is the primary factor responsible for any deterioration in the
distribution of income.
We have had considerable controversies in our country on what happened to the
poverty ratio in the second half of 1990s. Most analysts even for India would agree that the
poverty ratio has declined in the 1990s. Differences may exist as to what rate at which this
has fallen. Nevertheless, whether it is in India or any other country, it is very difficult to
trace the changes in the distribution of income within the countries directly to globalization.
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Indias Stance
What should be Indias attitude in this environment of growing globalization? At the
outset it must be mentioned that opting out of globalization is not a viable choice. There are
at present 149 members in the World Trade Organization (WTO). Some 25 countries are
waiting to join the WTO. China has recently been admitted as a member. What is needed is
to evolve an appropriate framework to wrest maximum benefits out of international trade and
investment. This framework should include (a) making explicit the list of demands that India
would like to make on the multilateral trade system, and (b) steps that India should take torealize the full potential from globalization.
Demands on the Trading System
Without being exhaustive, the demands of the developing countries on the multilateral
trading system should include:-
(1) Establishing symmetry as between the movement of capital and natural persons,
(2) Delinking environmental standards and labour related considerations from trade
negotiations
(3) Zero tariffs in industrialized countries on labour intensive exports of developing
countries,
(4) Adequate protection to genetic or biological material and traditional knowledge of
developing countries,
(5) Prohibition of unilateral trade action and extra territorial application of national laws and
regulations, and
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(6) Effective restraint on industrialized countries in initiating anti-dumping and
countervailing action against exports from developing countries.
The purpose of the new trading system must be to ensure free and fair trade among
countries. The emphasis so far has been on free rather than fair trade. It is in this
context that the rich industrially advanced countries have an obligation. They have often
indulged in double speak. While requiring developing countries to dismantle barriers and
join the main stream of international trade, they have been raising significant tariff and non-
tariff barriers on trade from developing countries. Very often, this has been the consequence
of heavy lobbying in the advanced countries to protect labour. Although average tariffs in
the United States, Canada, European Union and Japanthe so called Quad countriesrange
from only 4.3 per cent in Japan to 8.3 per cent in Canada, their tariff and trade barriers
remain much higher on many products exported by developing countries. Major agricultural
food products such as meat, sugar and dairy products attract tariff rates exceeding 100 per
cent. Fruits and vegetables such as bananas are hit with a 180 per cent tariff by the European
Union, once they exceed quotas. The tariffs collected by the US on $ 2 billion worth of
imports from Bangladesh are higher than those imposed on imports worth $ 30 billion from
France. In fact, these trade barriers impose a serious burden on the developing countries. It
is important that if the rich countries want a trading system that is truly fair, they shouldcome forward to reduce the trade barriers and subsidies that prevent the products of
developing countries from reaching their markets. Otherwise the pleas of these countries for
a competitive system will sound hollow.
To some extent, conflicts among countries on trade matters are endemic. Until
recently, agriculture was a major bone of contention between U.S. and E.U. countries.
Frictions are also bound to arise among developing countries as well. When import tariffs onedible oil were increased in India, the most severe protest came from Malaysia which was a
major exporter of Palm Oil. Entrepreneurs in India complain of cheaper imports from China.
In the export of rice, a major competitor of India is Thailand. If development is accepted as
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the major objective of trade as the Doha declaration proclaimed, it should be possible to
work out a trading arrangement that is beneficial to all countries.
There have been protracted negotiations at WTO in reforming the trade system.
Admittedly, the tariff and non-tariff barriers are coming down. However, there are
apprehensions that the concerns of developing countries are not being addressed adequately.
Looked at from this angle, the recent Hong Kong Ministerial is a modest success. Despite
reservations, we must acknowledge that it is a step forward. Domestic support to agriculture
by developed countries constitutes a major stumbling block to third world trade expansion.
However, Indias stand in relation to agriculture has been `defensive. We are not a major
player in the world agricultural market. The impact of what has been accepted in relation to
Non-Agricultural Market Access and services will vary from country to country. Despite
some contrarian opinion, the gain to India from services can be significant. However, the
Hong Kong Ministerial is only a broad statement of intentions. Much will depend upon how
these ideas are translated into concrete actions.
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compete with the rest of the world at levels of tariff comparable to those of other developing
countries. Obviously, the Indian Government should be alert to ensure that Indian industries
are not the victims of unfair trade practices. The safeguards available in the WTO agreement
must be fully utilized to protect the interests of Indian industries.
Indian industry has a right to demand that the macroeconomic policy environment
should be conducive to rapid economic growth. The configuration of policy decisions in the
recent period has been attempting to do that. It is, however, time for Indian industrial units to
recognize that the challenges of the new century demand greater action at the enterprise
level. They have to learn to swim in the tempestuous waters of competition and away from
the protected waters of the swimming pools. India is no longer a country producing goods
and services for the domestic market alone. Indian firms are becoming and have to become
global players. At the minimum, they must be able to meet global competition. The search
for identifying new competitive advantages must begin earnestly. Indias ascendancy in
Information Technology (IT) is only partly by design. However, it must be said to the credit
of policy makers that once the potential in this area was discovered, the policy environment
became strongly industry friendly.
Over a wide spectrum of activities, Indias advantage, actual and that which can be
realized in a short span of time must be drawn up. Of course, in a number of cases, it will
require building plants on a global scale. But, this need not necessarily be so in all cases. In
fact the advent of IT is modifying the industrial structure. The revolution in
telecommunications and IT is simultaneously creating a huge single market economy, while
making the parts smaller and more powerful. What we need today is a road map for the
Indian industry. It must delineate the path different industries must take to achieve
productivity and efficiency levels comparable to the best in the world.
Globalization, in a fundamental sense, is not a new phenomenon. Its roots extend
farther and deeper than the visible part of the plant. It is as old as history, starting with the
great migrations of people across the great landmasses. Only recent developments in
computer and communication technologies have accelerated the process of integration, with
geographic distances becoming less of a factor. Is this 'end of geography' a boon or a bane?
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Borders have become porous and the sky is open. With modern technologies which do not
recognize geography, it is not possible to hold back ideas either in the political, economic or
cultural spheres. Each country must prepare itself to meet the new challenges so that it is not
being bypassed by this huge wave of technological and institutional changes.
Nothing is an unmixed blessing. Globalization in its present form though spurred by
far reaching technological changes is not a pure technological phenomenon. It has many
dimensions including ideological. To deal with this phenomenon, we must understand the
gains and losses, the benefits as well as dangers. To be forewarned, as the saying goes, is to
be forearmed. But we should not throw the baby with bath water. We should also resist the
temptation to blame globalization for all our failures. Most often, as the poet said, the fault is
in ourselves.
Risks of an open economy are well known. We must not, nevertheless, miss the
opportunities that the global system can offer. As an eminent critic put it, the world cannot
marginalize India. But India, if it chooses, can marginalize itself. We must guard ourselves
against this danger. More than many other developing countries, India is in a position to
wrest significant gains from globalization. However, we must voice our concerns and in
cooperation with other developing countries modify the international trading arrangements to
take care of the special needs of such countries. At the same time, we must identify and
strengthen our comparative advantages. It is this two-fold approach which will enable us to
meet the challenges of globalization which may be the defining characteristic of the new
millennium.
The key to Indias growth lies in improving productivityand efficiency. This has to
permeate all walks of our life. Contrary to the general impression, the natural resources of
our country are not large. India accounts for 16.7 per cent of worlds population whereas it
has only 2.0 per cent of worlds land area. While Chinas population is 30 per cent higher
than that of Indias, it has a land area which is three times that of India. In fact, from the
point of view of long-range sustainability, the need for greater efficiency in the management
of natural resources like land, water and minerals has become urgent. In a capital-scarce
economy like ours, efficient utilization of our capacity becomes even more critical. For all
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Conclusion
The lesson of recent experience is that a country must carefully choose a combination of
policies that best enables it to take the opportunity - while avoiding the pitfalls. For over a
century the United States has been the largest economy in the world but major developments
have taken place in the world economy since then, leading to the shift of focus from the US
and the rich countries of Europe to the two Asian giants- India and China. Economics experts
and various studies conducted across the globe envisage India and China to rule the world in
the 21st century. India, which is now the fourth largest economy in terms of purchasing
power parity, may overtake Japan and become third major economic power within 10 years.
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