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Trade Liberalisation: Can Restriction and Protectionism ever be a sound policy (Part 1)

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Guest post by Sumantra Maitra

Trade liberalization or free trade is a highly contested subject, especially in the current global financial scenario and ongoing economic recession and slowdown, which draws feverish support and equally violent condemnation. Whether trade liberalization hurts the poor or not is itself a matter of great debate and difference of opinion, one that can be seen in the recent latest move to allow Foreign Direct Investment (hereinafter FDI) by the Indian Government, and the varied reactions from both sides of the spectrum.  There are arguments that Trade liberalization helps in growth and growth ultimately helps in lowering poverty, but on the other hand the uniformity of the benefits of globalisaion and trade liberalization is questioned. Arguments against trade liberalization claim that it can cost jobs and even lives, due to cheaper goods not facing the stringent checks at the market, or due to the loss of livelihood due to competition.  Proponents and supporters, claim trade liberalization ultimately lowers consumer costs, fosters economic growth while maximizing efficiency.  In this essay an effort is made to point down the basic aspects of trade liberalization and free and open market, how they benefit, and how they hurt poor, if at all, and when.

Trade Liberalization: The Arguments

Trade liberalization or openness can be defined as “ The openness of an economy is the degree to which nationals and foreigners can transact without artificial (that is governmental imposed) costs (including delays and uncertainty) that are not imposed on transactions among domestic citizens. “  So, in other words, it is free exchange of goods between nations, and removal or reduction of restrictions and barriers in the borders and policies, and includes dismantling of tariff (duties and surcharges) and non-tariff obstacles (like licensing rules, quotas and other requirements). Trade liberalization can provide a massive shock to the economy, and one of the immediate micro effects would be a decrease in prices of imported goods, and a possible increase in the prices of the exports. Thus it would generally help in the overall standard of living for the poor people, as they would have saved income even after spending on consumerism. Also, low prices and greater competition keeps the domestic goods price low, and benefits the consumer. The increase in capital goods flow and competition influence the employment and wages. The benefits can be seen with a Stolper-Samuelson theorem, which states that a relative increase in the price of commodity will increase the real return to the factor used intensively in that industry. In a developing country, trade liberalization helps increase in relative prices of labour intensive products, and relative wages, demand for unskilled labour and employment. Stolper-Samuelson theorem is however based on perfect labour mobility, and zero policy distortion, which is not true in every developing country. Country studies as diverse as ranging from India to Poland, shows that labour mobility is also not similar or uniform, at times hardly mobile.

Competition is also a very important factor when it comes to trade liberalization and its effect on the poor. There is an argument that opening of the economy, benefits workers by making it possible to export more goods, at a higher price, which will in turn lead to higher profits and incomes, and better standard of living for the poor. But on the other hand there is also an argument, that if such sectors, which were protected by trade liberalizations, if they were opened up, it might hurt the poor badly, as a lot of domestic firms will die away in front of competition from firms from outside. Generally it is seen that in developing countries, the sectors which are traditionally protected, like manufacturing, textiles or fast food and drinks, suffer massively as they cannot compete with multinational brands. With loss of Government protection, like stoppage of subsidies, firms become uncompetitive, and shut down, thus in “short run” there might be massive unemployment and increase in poverty.

However, efficiency and competition in the long run increases productivity. And higher productivity increases the growth rate of an economy. Global Poverty Report of 2001 states that trade liberalization can be beneficial in the long term, as it helps in making investment more efficient, allows FDI, which in turn increases the participation of newer technologies, and more productivity. Overall productivity also increases overall growth, and FDI and foreign investment increases employment and business opportunities in different sectors, which balances the employment loss resulting from the removal of protectionism. The liberalization of Indian centralized and command economy during the early nineties led to quite a few public sector job losses, but subsequently with the opening and free competition and influx of Multi National Companies, the service industries notably IT and Telecom and Pharmaceuticals, led to massive employment and growth compensating for the earlier shock.

Open Trade and Poverty

If we exclude sub-Saharan Africa and parts of Eastern Europe, extreme poverty rates are lower today than they were 20 years ago, percentage of world population living under extreme poverty has fallen from 30 percent to 17 percent in the last two decades.   Two important and interesting examples of the benefits of trade liberalization are that of China and India.  China from 1980 to 1992, immediately after their liberalization per capita income grew by 3.6 percent per annum, Even though GINI coefficient increased from .32 to .38, which is a massive increase in inequality by international standards, the actual number of poor fell by around 250 million. In India, in two stages of liberalization, around 1991 and 1996, poverty fell “dramatically” from 35 percent in 1987/88 to 29 percent in 1993/94 and to 23 percent in 1999/2000.

Often it is seen that Trade liberalization is not enough for the economy to grow. A lot of African countries liberalized their economy, during or around the same time when China, Indonesia and India opened their market, starting from the early eighties to early nineties. But the African countries didn’t experience the same benefits. Similarly all the Eastern European formerly communist countries liberalized their highly centralized economy during the same period, but their growth pattern was not the same, it was highly uneven. One of the reasons for that maybe that trade liberalization only helps create opportunities but to sustain them massive structural and institutional reforms are needed along with. For example, infrastructure, education, technological know how, appropriate exchange rates are needed alongside trade reforms, to make the benefits from the reforms more sustainable. For example, Poland, or any East European country benefited hugely from trade liberalization, as although they were communist before, they had the base for good industrial investment, like roads and hospitals. Countries from Sub Saharan Africa like Zambia for example, lacked in these regards.

An effect which is more or less regarded to be backed by solid empirical evidence is that countries see a decline in poverty, regardless of their position in world trade. The inequality gap may rise, but there is overall a decline of poverty. Examples as diverse as Zambia, Poland and Colombia, with completely different socio-economic background, prove that Globalization and trade liberalization basically helped in the lowering of poverty. “The study on Zambia suggests that poor consumers gain from falling prices for the goods they buy, while poor producers in exporting sectors benefit from trade reform through higher prices for their goods. In Colombia, increasing export activity has been associated with an increase in compliance with labor legislation and a fall in poverty. In Poland, unskilled workers – who are the most likely to be poor – have gained from Poland’s accession to the European Union. “  Harrison/McMillan claims in their analysis. It doesn’t mean that the prosperity came from the same working solutions though. For example in the case of Poland, it was due to easy labor mobility across Europe, whereas in the case of Zambia and Colombia, it was due to competition and exports. Also, notably it is a common factor that poor countries would grow faster than comparatively rich countries, if they are well integrated and they have proper functioning institutions. There can be over time, absolute convergence, the literature on growth theorizes. Foreign investment has different effects on different countries though, depending their macroeconomic stabilization policies, and exchange rate flexibility. Factors like infrastructure can be the determining factor behind the success or failure of trade liberalization in a country. Also massive internal market can neutralize the shock of trade liberalization, like India, Indonesia and China could absorb the shocks comparatively better than Colombia or Argentina, being domestic consumption driven economy, being dependent on domestic markets more than less export sector performance.

There is ample evidence that Globalization and trade liberalization produces both winners and losers, but it is highly difficult to corroborate them into a solid hypothesis, as the data colection is extremely difficult and varied. Even in a single region, two different outcomes can be found for two different factors, depending on their two completely varied approaches to trade liberalization. “The heterogeneity in outcomes associated with poverty– globalization linkages is one theme that emerges from a number of the different country case studies. “  as per Harrison/McMillan. Also, different measures and degrees and approaches to trade liberalization can have different results. The difference of data, the difference of statistics, and the generalization of different approaches can give highly unsatisfactory answers to the impact of trade liberalizations, but according to Berg/Krueger some common factors can be derived, as increase in competition leading to lower prices and better quality of goods, leading to general betterment of poor consumers. Also, trade liberalization helps poor farmers, as generally in the developing countries, a major percentage among the poor are engaged in small scale agriculture.

(This is part 1 of a two part post. Part 2 will be posted shortly.)

(Sumantra Maitra is a freelance journalist, currently a post grad scholar of International Studies, and a tutor of New Zealand Foreign Policy and Theories of International Relations, at the University of Otago, New Zealand. He would like to thank Prof. Robert Patman, Politics Dept. University of Otago, and Prof. David Fielding, Economics Dept. University of Otago, for their support and guidance.)

India-US Relations Blog

U.S.-India Relationship in Testing Times

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Amidst the U.S. Commerce Secretary, John Bryson’s visit to India, there looms a growing pandemonium in the Indian Government’s thought and action. It could also result in severe and dire consequences with an impact on the U.S.-India economic partnership. The U.S has been vociferous to condemn that the Indian import duties were rather high. John Bryson addressed the need to relieve the steep duties on products such as medical equipment, capital goods, and fruits. At an FICCI (Federation of Indian Chamber of Commerce & Industry) event, he suggested, “It would be a miss, if I would not mention about the barriers which still exist in building our economic relationship. For example, there are many tariffs on American products which are still too high.” He also talked about the steep import duties on IT, electronics, and solar energy. He gave the audience a thought to ponder over.

However Anand Sharma, Union Commerce and Industry Minister raised his concern about the growing number of visa rejections on Indians by the U.S. and added that the U.S. was very aware of the Indian import duties and restrictions.

In this muddle, when the American economy is on its way to recovery, the Indian Government needs to ascertain a middle path. Business is two-sided and so is strategic economic partnership. It is not an act of coercion from anywhere either. It is about implementing a fresh set of rules and easing restrictions on duties so that mutual economic interests are addressed. That is one side of the coin.

Recently ASSOCHAM (The Associated Chambers of Commerce and Industry of India) urged the Indian Government to raise the import duties of steel products so that local manufactures of such products could battle the imports from China and other countries. It reveals the motive behind the high-rise import duties; however, the Indian government needs to prepare the ground for solutions. Economic relations could be at stake.

India-US Relations Blog

The Voice of the Majority – 3 – Religion & Government Legitimacy

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Our second article in this series was based on the proposition that:

  • A regime that is seen, felt and recognized to be respectful and supportive of the majority religion tends in turn to be supported by the majority of the people.

In this article, we examine the related hypothesis:

  • A regime that is seen, felt and recognized to be disrespectful and unsupportive of the majority religion tends to be opposed by the majority of the people.

Think back to America in 2008 and 2009. Remember the 2008 election and the now famous quote of Candidate Obama about people in small towns “clinging to their religion and guns”? Though denied and explained away, this quote lives on as one of the more visible symbols of disrespect of religion and belief systems of the American majority.

The early policies and the tone of the Obama Administration persuaded the American majority that its core belief systems were being trampled. The result was the rise of the Tea Party, a movement that sprung like a geyser from the core of the American majority. The American Elite derided the Tea Party as backward, uneducated, right wing, prejudiced and overtly religious. That did not work.

The emotional and loud protest of the Tea Party culminated in a sweeping victory in the 2010 mid term election. The 2010 victory cooled down the temperature of the country. Gone are the rallies, the placards and the hot emotion that bubbled in 2009 and 2010.

This is why America is a shining validation of our hypothesis. On the other hand, India represents a seemingly perfect counterexample.

Last month New Delhi, India’s capital, witnessed a vicious attack in the dead of night by hundreds of baton charging policemen on a crowd of 50,000 people sleeping peacefully. This crowd had gathered to support a fast until death by Baba Ramdev, an Indian Guru with a national and international following. His fast was a protest against the deep corruption that has reportedly engulfed parts of the Indian Government including Cabinet Ministers.

Unlike another protest by Anna Hazare, a secular “Gandhian” activist, the protest by Baba Ramdev, the Indian Government believed, could become a religious “Hindu” movement. And, based on the 60-year track record of the Congress Government, a “Hindu” nationwide protest was deemed intolerable by the Congress Regime. And so the Indian Government behaved exactly like the minority Bahraini Government and launched a vicious night attack on a large group of peaceful, non-violent sleeping protestors.

This brings to fore the decades long suppression of core Indian belief systems by the Indian Elite. Much like American Elite Liberals, the self-proclaimed “modern”, “secular”, “progressive” Indian Elite have waged a coercive battle against India’s “Hindu” majority. This suppression of India’s majority is organized and planned with the full resources of the Congress Regime. The list of other deliberate legislative, executive acts against India’s majority religion would fill several such articles.

This might surprise many but the American and Indian people are very similar in their belief systems. Both societies are deeply religious and spiritual. In contrast, European and Asian societies are not. Both American and Indian societies are multi-religious, multi-ethnic and tolerant at heart. But their belief systems run deep. This is why foreign films, books and culture do not make inroads into these societies. This is why global Hollywood has not been successful in making inroads into India and US TV Networks have to create purely Indian channels to become financially successful in India.

Then, unlike the American majority, why does the India’s majority tolerate the trampling of its religion and belief systems by its governing regime?

  • One reason is that India’s majority has been under the rule of India’s minority religions for the past 1,000 years. So the behavior of the Congress regime is a continuation of the British and Mughal Regimes.
  • Secondly, India’s majority is totally focused on raising its economic standards. That is today’s top priority for the Indian people. So all other issues are being put aside. But they are not ignored.

But the calm you see on India’s surface is covering up the deep anger within India’s majority. Jim Yardley of the New York Times used the term “visceral rage” to describe the sentiments of India’s Middle Class. This Middle Class is the new factor in Indian society, a factor that will come to dominate India’s Society, Government Policy and its relationship with America in years to come.

India’s middle class is becoming broader, richer and more secure in demanding its rights. It is also much more religious and conservative than the Indian Elite who run India’s Government, NGOs and Media. It is beginning to feel confident in expressing its views in the terms and framework of its religion, culture and belief systems. This will put it in direct conflict with the self-proclaimed mission of India’s Elite to suppress India’s majority religion at the altar of a “modern, secular, progressive” culture.

As we saw in its reaction to the attack on Baba Ramdev, the Indian-American community is beginning to participate in the struggle of the Indian Middle Class. And this community understands the lessons of America’s Tea Party.

Will the Indian-American community succeed in helping India’s Middle Class attain the confident fighting spirit of the American majority? Will India’s majority and its driver, the Indian Middle Class, succeed in changing the regime of India’s Ruling Elite? The answers will drive both India and its relationship with America.