Globalisation and India: Voices from the Ground

Rashmi BangaUNCTAD INDIA

Lucknow18th -19th December 2006

Globalisation and Poor

• Wide Agreement on trade contributes to growth but there is a need to assess the extent to which poor are being affected by trade.

• Basic economic theory suggests that trade expansion should have positive impact on poverty reduction but there is limited evidence on this.

Expected Impact of Globalisation on poor

Creation of new employment opportunities Higher wages for poor as demand for labour

intensive products rise. Cheaper imports of food and essential consumer

goods Lowering of domestic costs and prices due to

competition Increase in government revenue needed t

provide poor with basic human services• Resource allocation efficiencies and higher

productivity

Gains may not necessarily come through

• Trade and growth - growth and poverty

• trade, growth, income distribution, and poverty is likely to evolve as an economy changes in structure.

• The changes in product and factor prices triggered by opening up of an economy inevitably produce both winners and losers in the short term.

Varying Experiences

• Countries differ significantly with respect to their experiences regarding trade, growth and poverty nexus.

• Sri Lanka and Maldives, have high trade ratios; on the other hand, there are countries like India, Nepal and Bangladesh have low trade ratios but interestingly, almost all the countries experienced growth in the 1990s.

• However, growth in many of these countries did not lead to corresponding reduction in poverty and improvement in human development.

External Factors

• But the extent to which openness affects poverty and has a bearing on where and how these gains and losses occur depends on a number of external factors,

stage of development of the country; the timing, scale, and sequencing of policy

reforms; as well as pre-existing domestic and

international conditions.

Significance of domestic policies

• international trade dynamics need corresponding domestic reforms for the gains to percolate to poor.

• Measured liberalisation is required so that competitiveness in domestic sectors may not occur more quickly than industries’ learning curves.

• Proactive role of government in developing safety nets and meeting adjustment costs

Policies of other developed countries

• In poverty-sensitive sectors like agriculture and textiles and clothing, policies of developed countries can have major impacts on poverty dynamics in developing countries.

• Tariff reductions in agriculture alone will not have poverty reduction effect on Indian farmers.

Removal of Green Box Subsidy Generates Gains for Developing Countries

•In a recent study by UNCTAD, Green Box subsidies have been shown to be production enhancing and trade distorting.

•Removal of removal of green box subsidies would increase India’s Agri Output by 1.22%, reduce imports by 6% and increase exports by about 20%.

Limited market access limit opportunities to gain for poor

• Barriers such as tariff escalation and peaks, domestic support, export subsidies and non-tariff barriers such as SPS measures restrict market access.

• Limited opportunities of gains for poor from trade.

• Ultimately, trade’s effect on poverty depends on the extent to which the poor are able to participate in the expanding sectors.

• Sufficient national policy space to favourably guide trade liberalisation process towards development is required.

Globalisation in India and Poor• 30 of India’s GDP is traded many employment

intensive sector depend on trade, e.g., textile and clothing (20 million)

• created additional employment opportunities for women in sectors like outsourcing and textile and clothing.

• It has led to improved access to technology and increased labour productivity.

• But it has also led to massive restructuring within and across the sectors, especially in the agricultural sector.

Poverty-Trade Linkage for India

• Agriculture is the mainstay of the economy with more than 60% of total employment.

• Growth rate of agriculture is slow: avg 1.5% since 1997.

• But share of agriculture in total trade is small. India is net exporter.

• Major items of imports: Edible oils (50%) and pulses due to rising per capita consumption.

• Need to balance consumer and producer interests.

Export Basket India (2004)

Others14%

Wheat4%

Bovine meat prods5%

Vegetable oils and fats12%

Vegetables, fruit, nuts12%Crops n.e.c.

12%

Processed rice18%

Food products n.e.c.23%

Exports show erratic growth with exception of Horticulture and Tobacco

0

500

1,000

1,500

2,000

2,500

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Processedrice

Wheat

Vegetables,fruit, nuts

Crops n.e.c.

Vegetableoils and fats

Foodproductsn.e.c.Beveragesand tobaccoproduct

Effective Policies needed

• Ensure remunerative prices to farmers.

• Control inflation especially on products of mass consumption of the poor.

• Palm Oil Tariffs Classic Example – Bound Tariff at 300 whereas Applied at 70 (80 in case of crude oil).

Export Growth & Domestic Production

India's Domestic Production in Major Exports Sectors

-

5,000

10,000

15,000

20,000

25,000

1994 1995 1996 1997 1998 1999 2000

Year

Pro

ductio

n (

in U

SD

Millio

n) Textiles

Industrialchemicals

Textiles

Iron andsteel

Footw ear

Leatherproducts

Trade liberalisation and employment generation

• The growth in export oriented sector has not necessarily led to employment generation*, subject to some important caveats– Exception to this trend: textiles and clothing– Growth of informal sector could answer for this

anomaly ( see next chart)

____________________________________________

*The employment elasticity of output growth has fallen from0.52 to 0.16 during 1993-2000.

Share of formal/ informal employment in key sectors

Share of employment

0 20 40 60 80 100

Iron and steel

Leather

Textile

Othermanufacturing

Agriculture

secto

rs

Share of employment

Formal

Informal

Trade liberalisation and impact on wages

• Wages as a proportion of total value added have gone down for all manufacturing – Due to increased casualisation of labour

• The counterfactual in terms of reduction in head count ratio of poverty suggests that the informal sector absorbed unemployed labour thus contributing to a reduction in poverty, even though inequalities may have increased.

Trade Liberalisation and adjustment costs

• Adjustments costs vary from sector to sector.• Gradualism Vs Swift sharp shocks

– Sequenced trade liberalization and the optimum use of flexibilities under the existing framework ensured better preparedness within the industry.

• Policy reforms aimed at structural changes in industry structure– E.g. SSI policy

• Strategy to be framed to address the social costs of trade liberalisation, CMP and Employment Guarantee scheme

Trade and Gender Empowerment

• Employment opportunities for women have increased in textiles and clothing sector

• But gender wage gap persists• In all South Asian countries, exception being Sri

Lanka, females earn less than 50 per income as compared to males.

• Vulnerabilities of women have increased.• Women, in particular, are more affected in the

race to cut labour cost and increase production levels by increasing the number of working hours.

Key Inferences from India's Trade Reforms

• Soft landing of trade reforms so far • Further tariff liberalisation could result in adverse effects for

output and employment, particularly skilled employment• Need for safety net for unemployed• Competitiveness of industrial products in selected sectors

remains a major challenge• Trade policy must go hand in hand with domestic reforms.• Consultative procedures and micro studies- need of the

hour to identify sectors and sections affected and develop strategies accordingly