Trade Insight Vol5No2 2009

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PUBLISHED BYSouth Asia Watch on Trade,

Economics & Environment (SAWTEE)

REGIONAL ADVISORY BOARDBangladesh

Dr. Debapriya BhattacharyaIndia

Dr. Veena JhaNepal

Dr. Posh Raj PandeyPakistan

Dr. Abid Qaiyum SuleriSri Lanka

Dr. Saman Kelegama

EDITOR-IN-CHIEFRatnakar Adhikari

EDITORKamalesh Adhikari

EXECUTIVE EDITORParas Kharel

DESIGNEffect, 4433703

ILLUSTRATION & COVERAbin Shrestha

PRINTED ATModern Printing Press

Kathmandu

P.O. Box: 19366254 Lamtangeen Marg

Baluwatar, Kathmandu, NepalTel: 977-1-4415824/4444438

Fax: 977-1-4444570E-mail: [email protected]

Web: www.sawtee.org

PUBLISHED WITH SUPPORT FROM

e d i t

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June-July 2009

Tackling the global crisisTHE decoupling hypothesis has proved wrong. The financial crisisthat erupted in September 2008 in the US quickly spilled over to the realsector and transformed into an economic crisis of a global scale not

seen since the 1930s. South Asia, which benefited from its impressiveintegration with the world economy over the last two decades, is beinghit by external shocks stemming from the crisis. Its economies are slow-ing down. Exports, remittances and foreign capital flows are under strainand the resultant micro-level impacts are alarming. For example, as theUN reports, a significant number of workers, mostly female, in garmentfactories in Bangladesh and Sri Lanka, diamond cutters in India, andoverseas migrant workers from the region are all bearing the brunt of thecrisis and facing severe human development challenges. The social di-mensions of the crisis are already evident in reduced household income,increased unemployment and underemployment, and adverse impactson education, health, etc. All these are a recipe for social strife and, inparticular, endanger progress towards the MDGs. So much so that thesubstantial progress made in income poverty reduction is being reversed.South Asia is paying for the sins committed by others.

Mitigating the impacts of the crisis calls for the extension and imple-mentation of targeted social security programmes, for example, those re-lating to income and employment generation, and food security. Effectivepolicy reforms and increased spending to shore up the economies arealso critical. Substantial fiscal stimulus packages are required, but SouthAsian governments may not have the leverage for such stimulus spend-ing. Monetary policy too has its limitations. Hence, there has to be a great-er amount of external assistance and cooperation. Collectively, SouthAsian governments should seek assistance from SAARC observersAus-tralia, China, the EU, Japan, South Korea and the US. However, such

assistance and cooperation need to be supported by productive use andmanagement of aid, foreign direct investment and other resource flowssuch as remittance.

The external assistance and cooperation also need a special focus onhow to strengthen and streamline the multilateral trade reform agendaand ensure better trade conditions for South Asian countries. The DohaRound of trade negotiations under the WTO has a major role to play inthis regard. Increased market access, effective operationalization of theaid-for-trade initiative, and the liberalization of services trade underMode 4 (temporary movement of natural persons) are essential. If themultilateral trading system fails to represent a global public good insubstance, together with many other developing and least-developed

countries, South Asia will continue to remain vulnerable to externalshocks, including those generated by the global economic crisis.Similarly, within the region, South Asian countries should address

their supply-side constraints to trade. While lack of export diversifica-tion and capacity to export enhances the severity of external shocks,addressing supply-side constraints is crucial for export diversificationand the mitigation of the impacts of future crises. They can promoteSouth-South cooperation, and also intensify regional trade and economicintegration, as they are still more integrated with the rest of the worldthan with each other. Deeper regional integration will help cushion theimpacts of crises as well as promote their collective development inter-ests. The inclusion of services and investment issues within the Agree-ment on South Asian Free Trade Area and bringing down existing trade barriers are essential.

However, all these efforts of South Asian countries will not achievethe desired goals if they are not complemented by substantial reforms inglobal economic governance architecture.


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Can the multilateral trading system be considered a global publicgood when the WTO lacks legitimacy and is plagued withdemocratic deficit?

ContentsTrade Insight Vol. 5, No. 2, 2009

MULTILATERAL TRADE DEBATE 11

FARMERS RIGHTS 33View s exp ressed in Trad e Insigh t are o f the a uthors and ed itors and do not ne c essarilyreflec t th e o fficia l po sition o f SAWTEE or its me mb er institutio ns.

CLIMATE CHANGE 4

TRADE WINDS 5

ECONOMIC NEWS 7

ECONOMIC GOVERNANCE 8The Global Crisis and the WTO

ECONOMIC CRISIS:COUNTRY CASE STUDIES

Readymade Garments inBangladesh 18Business ProcessOutsourcing in India 21Remittance in Nepal 24Foreign Direct Investmentin Pakistan 26Tourism in Sri Lanka 28

TECHNOLOGY TRANSFER 31Climate Change, TechnologyTransfer and South Asia

UNDERSTANDING WTO 36Anti-Dumping Agreement

BOOK REVIEW 38Return of Depression Economics

NETWORK NEWS 39

BANGLADESH1. Bangladesh Environmental Lawyers

Association (BELA), Dhaka2. Unnayan Shamannay, Dhaka

INDIA1. Citizen consumer and civic Action Group(CAG), Chennai

2. Consumer Unity & Trust Society (CUTS),Jaipur

3. Development Research and Action Group(DRAG), New Delhi

NEPAL1. Society for Legal and Environmental

Analysis and Development Research(LEADERS), Kathmandu

2. Forum for Protection of Public Interest(Pro Public), Kathmandu

PAKISTAN1. Journalists for Democracy and Human

Rights (JDHR), Islamabad2. Sustainable Development Policy Institute

(SDPI), Islamabad

SRI LANKA1. Institute of Policy Studies (IPS),

Colombo2. Law & Society Trust (LST), Colombo

SAWTEE NETWORK

COVER FEATURE 12

Implications forSouth Asia

GlobalEconomic

Crisis

Is the WTO aglob a l pub lic good ?

Realization of

Farmers RightsDoes the new resolution onfarmers rights hold anysignificance without globalsupport for its implementation?


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4 Trade Insight Vol.5, No.2, 2009

c lima te c hange

THE likelihood of a new global cli-mate change deal by 2009 as envi-sioned by the Bali Roadmap is di-minishing. Two weeks of talks inBonn in June showed how far apartcountries were on various issues. Asper the Bali Roadmap, the 15th ses-sion of the Conference of the Partiesto the the United Nations Frame-work Convention on ClimateChange (UNFCCC) in Copenhagenin December should yield a deal toreplace the Kyoto Protocol, set to ex-pire in 2012.

Although the 30-page draft nego-tiating text grew to 200 pages duringthe 12-day talks, there was noprogress on how to share the burdenof future emissions cuts. Developedcountries have not offered emissionsreduction commitments to the extentrequired to stabilize the atmospher-ic concentrations of greenhouse gas-es (GHGs). Many developing coun-

tries have demanded that rich coun-tries take the lead by cutting theiremissions by 2540 percent by 2020over 1990 levels.

On its part, the European Union(EU) has set itself the biggest targetof 20 percent reduction by 2020 with1990 as the base year. It has offeredto deepen its targeted cut to 30 per-cent if other advanced economies, in-cluding the United States (US), do thesame.

The US, which had stayed out of the Kyoto Protocol, wants fast de-veloping countries such as Brazil,

Trade andc lima te changereportEXAMINING the intersections be-tween trade and climate changefrom four perspectives: the scienceof climate change; economics; mul-tilateral efforts to tackle climatechange; and national climatechange policies and their effectson trade, the World Trade Organi-zation (WTO) and the United Na-tions Environment Programmehave published a report on Tradeand Climate Change.

Opening up trade and combat-ing climate change can be mutu-ally supportive towards realizinga low-carbon economy, the reportstates. It notes that contrary tosome claims, trade and trade open-ing can have a positive impact onthe emissions of greenhouse gas-es (GHGs) in a variety of ways, forexample, by accelerating cleantechnology transfer and enhanc-ing opportunities for developingeconomies to adapt technologies.Rising incomes, linked with tradeopening, can also change socialdynamics and aspirations withwealthier societies having the op-portunity to demand higher envi-ronmental standards, includingones on the emissions of GHGs.

The report highlights the ef-fects that the complex web of na-tional policy measures might haveon international trade and the

multilateral trading system. Thereport also reviews two particulartypes of pricing mechanisms thathave been used to reduce GHGemissions: taxes and emissionstrading systems. Highlighting thescope of WTO rules for addressingclimate change at the national lev-el, the report cautions that the rele-vance of WTO rules to climatechange mitigation policies will verymuch depend on how these poli-

cies are designed and the specificconditions for implementing them(Adapted from www.wto.org).

China and India to also make emis-sions reduction commitments.

However, hopes that the US un-der Barack Obamas leadershipwould offer significant reductioncommitments are increasingly givingrise to doubts. A watered-down cli-mate change bill was passed by theUS House of Representatives on 26 June by a narrow 219-212 margin.

The bill, if approved by the Senate,would cut US emissions by 17 per-cent by 2020 over 2005 levels using acap-and-trade system. This approachwould translate into a reduction of only 4 percent compared to 1990 lev-els. Though the bill entails an 83 per-cent reduction by 2050, many devel-oping countries counter that given theurgency of the crisis, the woefully in-adequate short-term target divests theotherwise impressive long-term com-mitment of meaning.

Furthermore, the provisions in

the US bill that allow the applica-tion of border measures to importsfrom countries that fail to take mea-sures to reduce GHG emissionscould further deepen divisions be-tween the US and the developingworld, and trigger disputes at theWorld Trade Organization.

Thus, a deal whose implementa-tion will be effective in combating cli-mate change can emerge only if de-veloped countries and fast develop-ing countries budge from their cur-rent stance (Adapted from Trade andDevelopment Monitor, July 2009).

Deal inCopenhagendifficult

Deal inCopenhagendifficult

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Vol.5, No.2, 2009 Trade Insight 5

trad e w inds

THE World Trade Organizations(WTO) Council for Trade in Goods,on 12 May, approved a 10-year ex-tension to a waiver allowing devel-oping countries to provide prefer-ential tariff treatment to products of least-developed countries (LDCs)without being required to extend thesame tariff treatment to other WTOmembers. The decision went to the

General Council for adoption. Bra-zil, China, India and South Koreaproposed the extension of the waiv-er, which was set to expire on 30 June 2009. Tanzania said the LDCGroup had been very much in-spired by the goodwill shown by themembership in approving the exten-sion ( Adapted from www.wto.org,12.05.09).

WTO G ood sCouncil extends

waiver for LDCs

FOLLOWING a four-year hiatus, the7th World Trade Organization (WTO)Ministerial Conference is going to beheld from 30 November to 2 Decem- ber 2009 in Geneva, Switzerland.

Due mainly to the continued di-vergence on negotiating issues of theDoha Round of trade talks, unlikeprevious editions, this Ministerial isgoing to be just a regular one, nota negotiating session, according toWTO General Council Chairman

Mario Matus. No Ministerial Decla-ration is expected in what Matusterms a scaled-down, no-frills, low-

WTO a p p roves imp ort restric tions for Ec ua d orIN a move hailed by developed anddeveloping countries as proof thatthe World Trade Organization(WTO) can tackle the needs of de-veloping countries in difficulties,the members of the WTOs Balance-of-Payments Committee on 4 Juneagreed to allow Ecuador to contin-ue to impose import restrictionswhile the country struggles to bring

its finances under control.The General Agreement on Tar-iffs and Trade, and the General

Agreement on Trade in Services al-low WTO members struggling with balance-of-payments difficulties tohike tariffs or impose import quotasand raise revenue to help them getthrough the crisis. This was the firsttime in 10 years that a member hadsought such an exemption, althoughBangladesh received one in 2007 ina follow-up to a previous request.

Ecuador introduced its import re-strictions in January, raising tariffsand imposing import quotas on a

wide range of goods to cut its bal-looning trade deficit, forecast thisyear at an unsustainable US$3.97 billion, which Ecuador says must be cut to US$2.69 billion. Follow-ing the committee meeting, Ecuadoragreed to replace the quotas withprice-based measures by 1 Septem- ber 2009, and promised to do awaywith all of its restrictive trade mea-

sures no later than 22 January 2010( Adapted from Reuters, accessed06.06.09).

key meeting. The general theme fordiscussion is The WTO, the Multi-lateral Trading System and the Cur-rent Global Economic Environment.

Chairman Matus indicated thatthe Ministerial would be conducted

based on the guiding principles of FITfull participation, inclusive-ness and transparencyand, adher-

Russia d rops unila tera l WTO b idAFTER 16 years of trying to join the World Trade Organization (WTO) asan individual country, Russia on 9 June announced that it would seekmembership as part of a customs union with Belarus and Kazakhstan, to be launched on 1 January 2010. The announcement came on the heels of high-level meetings where Russia generated strong political support for

a quick WTO accession, with both the top trade officials of the EuropeanUnion and the United States (US) reiterating their commitment to Rus-sias entry to the WTO. Russia had completed mandatory bilateral nego-tiations with 60 countries. A number of trade and political issues stood inits way, including disagreements over state monopolies, Russias ban of US pork, and tense relations with neighbour and WTO member Georgia.Russia, whose main exports are oil and gas, is the worlds only majoreconomy that is still outside the WTO (Adapted from http://en.rian.ru, ac-cessed 24.06.09; The Journal of Commerce, 24.06.09).

7th WTOMinisterial

ing to these principles, it will be cen-tred around plenary sessions inwhich all Ministers can participateequally. In the past, small-group dis-cussions characterized such meet-ings. The last Ministerial of the mul-

tilateral trade body was held in 2005in Hong Kong. WTO rules requireregular sessions of the MinisterialConference to be held at least onceevery two years (Adapted fromwww.wto.org, accessed 20.06.09).

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trad e w inds

POLICIES enacted by theUnited States (US) and theEuropean Union (EU), andaggressively pushedthrough global institu-tions during the last sev-eral decades, laid theground for the ongoingfood crisis, finds a new re-port by CIDSE, an interna-tional alliance of Catholicdevelopment agencies,and the Institute for Agri-culture and Trade Policy(IATP).

The report highlightspolicy failures, includingneglected agricultural

G20 toinjectUS$1.1tn MEETING for the secondtime since the onset of theglobal financial crisis,G20 leaders on 2 Aprildecided to inject US$1.1trillion into the globaleconomy throughinternational institutions.The International Mone-tary Funds (IMF) re-sources are to be trebledfrom US$250 billion toUS$750 billion, and it isto be allowed to issueUS$250 billion worth of its quasi-currency, theSpecial Drawing Right, toease liquidity in emerg-ing and developingeconomies. However,only about half of themoney has been pledged,with US$40 billion fromChina.

The London summitalso pledged to provideUS$250 billion of tradefinance to arrest thedownward spiral inglobal trade. G20 coun-tries also reiterated andextended their pledge torefrain from raising anynew barriers to trade andinvestment, imposingnew export restrictions,and implementing

measures inconsistentwith World TradeOrganization (WTO)rules to stimulate exportstill 2010-end. They alsoagreed to notify the WTOof any such measures,urging it and otherrelevant internationalinstitutions to monitorand report publicly ontheir adherence to theircommitment on a quarter-ly basis (Adapted from TheEconomist, 410 April2009).

programmes, ill-advisedeconomic adjustment pol-icies, commodity specula-tion and unjust trade rulesas causes of a vulnerableglobal food system.

The reports key recom-mendations for US and EUpolicy makers include: aninclusive and binding global partnership for agri-culture and food securitythat strengthens UnitedNations agencies, involvesnon-state actors and has astrong mandate; a substan-tial increase in aid for ag-riculture, delivered in line

with the right to food; re-spect for the multifunc-tionality of agriculture, in-cluding ecological and so-cial sustainability, accessto land and water forsmall-scale producers andgreater use of local seedvarieties; measures to ad-dress price volatility, in-cluding food reserves andtight regulation on specu-lation; and a shift in tradepolicies away from thequest for market access forEuropean and US agri- business firms (Adapted from www.iatp.org).

BRIC a sserts its roleTHE first-ever summit of the BRIC groupBrazil,

Russia, India and Chinaheld on 16 June in Yekat-erinburg, Russia, dis-cussed issues ranging fromthe current financial crisisto food and energy securi-ty, and public health.

While promising tostrengthen cooperation,the leaders of the quartetcalled for stepping up theimplementation of theagreements reached at G20summits, and the reform of international financialsystem, as well as safe-guarding and promotingthe interests of developingcountries.

To facilitate interna-tional economic and finan-cial reforms, the four lead-ers asked all participatingparties to adopt democrat-ic and transparent poli-cies; abide by relevantlaws and regulations; en-hance financial supervi-sion and risk control; pro-tect a healthy internation-

al trade and investmentenvironment; and firmlyoppose trade protection-ism. The summit also putspecial emphasis on worldfood security, among oth-er long-term issues such asenergy safety and publichealth. The summit wasseen as a concerted effortof the four countries,which together account for42 percent of the worldspopulation, comprise 15percent of the global econ-omy and have over 40 of global currency reserves, toassert their weight in theglobal economic and fi-

nancial arena. However,in the summit's officialstatement, BRIC leaderstreaded cautiously on how best to diversify their assetsaway from the dollar whiletrying to avoid disruptingmarkets amid attempts atglobal economic recovery.While the joint statementfrom the meeting called fora diversified, stable andpredictable currency sys-tem, it made no direct chal-lenge to the dollar as theworld's global reserve cur-rency (Adapted from Xinhua,17.06.09; www.marketwatch.com, 16.06.09).


EU, US blamed for FOOD CRISIS

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Alte rna tives to IMFTHE global financial crisishas prompted developingcountries to seek a region-al alternative to the Inter-national Monetary Fund(IMF). Finance ministersfrom China, Japan, SouthKorea and the 10 membersof the Association of Southeast Asian Nations(ASEAN) agreed on 3 Mayto set up a US$120 billionemergency forex liquidityfund by the end of this yearto help counter the globalfinancial crisis.

The fund will offer acontingency credit lineshould any of the 13 Asiancountries come underspeculative attacks, asthey did in the 1997 Asianfinancial crisis. Japan,South Korea and Chinawill provide 80 percent of the funding and ASEAN

members the remaining 20percent. Both Japan andChina (including HongKong) will contributeUS$38.4 billion each,while South Korea willprovide US$19.2 billion.The forex pooling pro-gramme is part of theChiang Mai Initiative,which aims to create a net-work of bilateral currency-swap arrangements amongASEAN and the three EastAsian countries. Smallereconomies will be able to borrow larger amounts inproportion to their contri- butions than the more de-veloped economies.

Likewise, in May, sev-en Latin American coun-triesArgentina, Bolivia,Brazil, Ecuador, Paraguay,Uruguay and Venezuelacommitted US$7 billion for

NEPALS efforts toaccelerate econom-ic growth and re-duce poverty are being hampered bypolitical instability,poor infrastructure,and other criticalobstacles, a newstudy has found.The study, Nepal:Critical DevelopmentConstraints , is a collabora-tive effort by the Asian De-velopment Bank, the Unit-ed Kingdom Departmentfor International Develop-ment and the Internation-al Labour Organization.According to the study,

Nepal has underper-formed all other SouthAsian economies and in

SRI LANKA hasaccused the Internation-al Monetary Fund (IMF)of politicizing financialaid following the fund'sdelay in considering aUS$1.9-billion bailoutfor the war-ravagedeconomy. Never everhas the IMF takenpolitical factors intoaccount. Now, it seemsfor the first time they aredoing thatindirectly,Sri Lankan TradeMinister G.L. Peiris saidon 28 June. Sri Lankatapped the IMF for aidin March in a bid tostave off its first bal-ance-of-paymentsdeficit in four years afterthe island nationsforeign currencyreserves fell to aroundsix weeks' worth of imports. The loan has been put off due topolitical pressure fromthe United States,Britain and otherWestern nations overColombo's handling of the final stages of a battle against theLiberation Tigers of Tamil Eelam (LTTE)

and charges thatthousands of civilianswere killed. The LTTEwas defeated in May.Peiris said the IMF andSri Lankan authoritieshad completed what hecalled tactical discus-sions over the standbyfacility as early as April but that the fund's board had still not metto consider the issue(Adapted from AFP,28.06.09).

IMF playingpolitics:Sri Lanka

ec onomic news


the Bank of the South (Ban-co del Sur), an institutionto fund infrastructureprojects and developmentin the region, and alsoagreed on its charter.

Unlike the IMF, theBanco del Sur, to be head-quartered in Venezuela,will give its members equalvoting power, regardless of the size of their financialcontribution to the institu-tion. But decisions con-cerning loans worth morethan US$70 million will re-quire the approval of coun-tries that represent at leasttwo thirds of the banks to-tal capital (Adapted fromBeijing Review, Vol. 52,No.20; www.ft.com, accessed03.05.09; online.wsj. com, ac-cessed 04.05.09; BridgesWeekly Trade News Digest,Vol. 13, No. 17).

Nep a l fa res p oorly in South Asia

terms of per capita grossdomestic product, it isnow where Sri Lanka wasin 1960, Pakistan was in1970, and India and Bhu-tan were in 1980. Thestudy notes that the unsta- ble political environment,

infrastructure shortcom-ings, labour market rigidi-ties, problems in industri-

al relations, and in-equitable access toopportunities haveu n d e r m i n e dgrowth and pover-ty reduction.

In order to ad-dress these obsta-cles, the report sug-gests stronger gov-ernance, accelerat-ed infrastructure de-

velopment, particularly inthe power, road and irri-gation sectors, labourmarket reforms and great-er efforts to ensure all sec-tors of society have accessto productive assets, edu-cation and other key so-

cial services (Adapted fromwww.adb.org, accessed 29.06.09).

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ec onomic governance

The world is in the middle of theworst economic crisis since the

Great Depression of the 1930s. Fol-lowing the deepening of the finan-cial crisis, any hope that the real econ-omy would get off lightly has beensquashed. World gross product isexpected to contract for the first timesince World War II. While developedcountries are facing the greatestdownturn percentage-wise, develop-ing countries have been affectedmore severely. Exports, migrants re-

mittances and foreign direct invest-ment have already dropped signifi-cantly.

The World Bank, the Internation-al Monetary Fund, the Organisationfor Economic Co-operation and De-velopment and United Nations agen-

Shifting the focus from the shortcomings of the WTO to its values,the global economic crisis has reemphasized the relevance, credibilityand working of the regular functions of the multilateral trading system.

Steffen Grammling

The Global Crisis

a nd the WTO

cies paint a gloomy picture of a deepand prolonged recession. For in-stance, the International Labour Or-ganization estimates a rise in globalunemployment of up to 50 millionpeople in 2009.

The current crisis is not the firstone and certainly not the last one.However, it marks probably the larg-est economic depression in a centu-ry. Professor Jean-Pierre Lehmann of the International Institute for Man-agement Development, Switzerland

has rightly called it a seismicshock. It has put into question thefundamentals of economic theoryand global governance and illustrat-ed the limitations of the prevailingeconomic ideology. The crisis hasalso revealed the deficiency of thecurrent global economic governanceand made clear that different ele-

ments of the world economy, suchas finance, trade and employment,are more closely connected thanmany would have liked them to be. Ithas shown that the international fi-nancial system is much less regulat-

ed, supervised and transparent thanthe international trading system, andits fundamental failures have notonly triggered severe economic, so-cial and human disasters but also af-fected trade and the liberalizationprocess. All these underline the needfor a more coherent, efficient andcomprehensive global economic gov-ernance architecture.

Trade and protectionismAccording to a forecast by the WorldTrade Organization (WTO), globaltrade volumes will decline by 9 per-cent in 2009, the biggest contractionin 60 years. With a range of implica-tions for developing countries, thisdownturn is caused mainly by thefollowing three factors.

First, global demand has fallendramatically, particularly in majorimporting countries such as the Unit-ed States (US). Developed countries,and a few emerging powers, first and

foremost China, have tried to revivedemand with huge stimulus andconsumption packages. These mea-sures have, however, exerted trade-distorting effects, given that they wereprimarily targeted at rescuing na-tional companiesfor example, theBuy American provisions in theAmerican Recovery and Reinvest-ment Act 2009. By contrast, smallerdeveloping countries that are strong-ly linked to world production, with

their enterprises being part of the global value chain, lack the necessaryresources to both stimulate the de-clining national production and pro-vide social safety nets for the increas-ing number of unemployed people.

Second, trade finance instru-ments have become more costly andcaused a major gap between demandand supply. Despite various efforts by multilateral and regional devel-opment banks as well as major econ-omies to address the liquidity issue,the WTO has warned of a gap in thetrade finance market in developingcountries of up to US$300 billion.


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eco nomic governance

Third, various governments haveincreasingly taken protectionist andother trade-distorting measures sincethe end of 2008. The WTO has report-ed the imposition of new import andexport restrictions, trade-related sub-

sidies, and trade remedies such asanti-dumping duties. Developingcountries have criticized, in particu-lar, the reintroduction of export sub-sidies for dairy products by the Eu-ropean Union and later by the US.

In the light of these developments,a rapid global trade and economicrecovery seems unlikely. This willaggravate the situation of variousindustries and complementary ser-vices, such as the transportation sec-tor. Moreover, many developing coun-tries will be confronted with a wors-ening trade balance that finally couldlead to balance-of-payments (BoP)problems.

WTO reactionsThe economic crisis has shifted thefocus from the shortcomings of theWTO to its values. It is worth recall-ing that the WTOs main function isto provide a stable, open and rules- based trading system, backed by a

forceful dispute settlement mecha-nism. The crisis has reemphasizedthe relevance, credibility and work-ing of the regular functions of thesystem. WTO members have re-frained from taking WTO-incompli-ant measures, although protection-ist pressures are strong. While someminor tit-for-tat skirmishes havealready taken place, for instance, be-tween the US and Mexico, the disas-trous beggar-thy-neighbour trade

fights of the 1930s have been avoid-ed so far.The WTO Secretariat has reacted

actively to the crisis by implementingmore vigorously its monitoring andsurveillance mandate under the TradePolicy Review Mechanism. Since Jan-uary, two reports on trade policy de-velopments during the crisis have been conducted and this practice will be continued. Enhanced transparen-cy is crucial, particularly in times of crisis, to assure that members do notinfringe on their obligations, simply because of the incapacity of the sys-tem to exert effective controls.

A major part of the WTOs legiti-macy arises out of the strong enforce-ment of its rules and regulations. Giv-en that a variety of protectionist mea-sures have been taken, disputes areexpected to increase, especially on

anti-dumping, although attempts aremade to avoid formal dispute settle-ment cases. In this context, it is re-markable that WTO members grant-ed Ecuador the requested waiver toimpose temporarily higher tariffsand other protectionist measures byreferring to a BoP crisis, according toArticle XVIII of the General Agree-ment on Tariffs and Trade (GATT)1994. It was reportedly the first timein the last decade that this exemp-tion was used, demonstrating theflexibility and functioning of the sys-tem. However, it remains to be seenif it opened the door for countries ina similar situation to follow suit.

Although the crisis has raiseddoubts about the excessive relianceon export-oriented developmentstrategies, trade has been providinga strong impetus to economic growthin many countries and thus couldalso play an important role in the re-covery process. This makes the ful-

filment of Aid for Trade commitmentseven more important. Building pro-ductive capacities could turn into amajor stimulus package for poor de-veloping countries. Moreover, itcould provide the opportunity to di-versify production patterns, investmore sustainably and build up re-gional trade networks.

Doha Development RoundWTO Director-General Pascal Lamy

has argued that the Doha Develop-ment Round would be a good solu-tion to the global economic crisis, bystating that it would be one of themost appropriate collective stimuluspackages. However, the existingnature and the current trend of ne-gotiations under the Round indicatethat most of its effects will be long-term. Moreover, the net benefits forindividual countries remain ambig-uous. Nonetheless, it is important tonote that the crisis has changed thenegotiation dynamics of the DohaRound, mainly in two respects.

First, domestic problems have

drawn off the attention from theDoha Round. Short-term fire-fightinghas prevailed over negotiations onlong-term financial regulation, muchless on a reform of international traderules. Furthermore, governments

have used their flexibilities in theirWTO commitments to limit imports,promote exports and subsidize na-tional companies in desperate at-tempts to secure domestic jobs. Thishas made it even more difficult to build support for deeper trade liber-alization.

Second, the reactions to the crisishave shown that the water in tar-iffs (WTO terminology) or policyspace (terminology of the UnitedNations Conference on Trade andDevelopment) as well as the level of allowed subsidies constitute a strongeconomic value and, therefore, alsoimportant bargaining chips. Fromthe perspective of developing coun-tries, it is crucial to retain flexibilityin their tariff systems, as long as de-veloped countries possess and exer-cise the option of increasing their al-ready huge amount of agriculturalsubsidies.

The conclusion of the Doha

Round would definitively send astrong political signal against pro-tectionism. This requires responsibleleadership, the willingness to com-promise and a shared vision about asustainable future. The political cli-mate of the negotiations has turnedslightly more favourable, althoughmuch insecurity remains and a finalDoha deal is not in sight yet.

Conclusion

The WTO has proved to be a fairlyrobust system during the global eco-nomic crisis but the future of its func-tioning and the successful handlingof the crisis depends very much onthe political leaders of today and onwhether they have learnt the lessonsof the past. Critical preconditions areto restore mutual trust, agree on com-mon values, and show the politicalwill to act resolutely, even against theinterests of strong lobby groups.

The author is Programme Officer for Tradeand Development, Friedrich-Ebert-Stiftung,Geneva.


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multilateral trade debate

Public goods, as opposed to pri-vate goods, are non-rival inconsumption and have non-exclud-able benefits. The distinction be-tween private and public goods con-cerns the restriction or freedom onmodes of access, control and owner-ship. 1 Whereas it is possible to ex-clude the non-paying actor from theconsumption of private goods,which are consequently most effi-ciently provided by the market, it is

not possible to exclude the non-pay-ing or even non-cooperating member(free rider) from the consumptionof public goods.

Since the market cannot pricepublic goods, they are often seen asexamples of market failure, and jus-tified cases for government interven-tion. 2 Given the collective process of policy determination required for theprovisioning of public goods, it ispredominantly the responsibility of

the state, armed with the monopolyof coercive power, to deliver thesegoods. 3

The provisioning of public goodsat the global level is much more diffi-cult than that at the local/national-level. Global public goods, definedas goods whose benefits extend toall countries, people and genera-tion 4, are different than their localcounterparts in that the state does nothave any coercive power to collecttaxes and make provision of publicgoods. Since the collective action andcoordination problem assumes amuch more magnified proportion at

Is the WTO agloba l pub lic good ?

the global level, international coop-eration is vital for the provisioningof global public goods.

Of late, there is an emerging dis-cussion on whether or not the multi-lateral trading system is a globalpublic good. 5 Pascal Lamy, Director-General of the World Trade Organi-zation (WTO), seems fully convincedthat the multilateral trading systemis a global public good. 6 Althoughmentioned in a different context and

in a relative sense, Ernesto Zedilloand his team too aver that: TheWTO is the only instrument that can

be used to deliver the global publicgood of non-discriminatory multilat-eral trade liberalization. 7

It is not clear whether these state-ments view the public good charac-ter of the multilateral trading systemas a positive or a normative issue.However, a few studies portray theWTO either as a club goodwhereit is possible to exclude certain members from participating in and ob-taining benefits, 8or as a public

good, though merely in a formal,and not substantive, sense. 9 This ar-ticle uses the conceptual framework

Looking at the multilateral trading system through the lens of the triangle of publicness, there arereasons to believe that the system fails the test of publicness in substance.

Ratnakar Adhikari

FigureTriangle o f pub licne ss

Source: Kaul, I. and R. U. Mendoza. 2003. Advancing the Concept of PublicGoods. In Providing Global Public Goods: Managing Globalization, ed. I. Kaul,P. Concei o, K. Le Goulven, and R. U. Mendoza, pp. 78112. New York: Oxford University Press.

PD PB

PC

PC: Publicness in consumptionPD: Publicness in decision makingPB: Publicness in the distribution of benefits


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of Triangle of Publicness (see fig-ure), developed by Kaul and Mendo-za (2003)10 albeit in a different con-text, to examine whether the WTO isa public good.

WTO as a global public goodKaul and Mendoza have pointed outsome of the discernible weaknessesin the WTO system. However, theyseem to only capture the deficiency inpublicness in benefit sharing and notin consumption and decision making.Using the very triangle developed bythem, one can clearly capture theseshortcomings, and argue that theWTO, as it currently stands, fails thetest of publicness in substance.

Publicness in consumptionIn a formal sense, the criterion of publicness in consumption is epito-mized by the rules-based non-dis-criminatory nature of the WTO. Forexample, due to its most-favoured-nation (MFN) principle, it is not pos-sible to exclude any WTO memberfrom the benefits of trade liberaliza-tion offered by any other member. 11Again, in a formal sense, it is possible for any WTO member to initiate

actions against any other member vi-olating WTO rules and causing nul-lification and impairment of the benefits provided by WTO agree-ments to the former.

However, in a substantive sense,many WTO members have not beenable to use the system to their advan-tage. For example, due to the absenceof missions in Geneva, a large number of developing countries and least-developed countries (LDCs) cannot

make the required contribution to theWTO discussions, some of which arevital to their national interests. 12

Likewise, due to limited capacityand prohibitive costs, some of theweaker members have not been ableto use the WTOs Dispute SettlementUnderstanding, though it providesa platform for the resolution of dis-putes among members. For example,the inability of Ecuador to use sanc-tions against the European Commu-nities even after being authorized todo so by the WTO has cruelly ex-posed the limitation of the system. 13In a similar vein, Petersmann (2007)

argues that small developing coun-tries and LDCs lack sanctioning po-tential to use the provision of re-taliation, which is considered an ef-fective means to compel the memberviolating WTO provisions to bring

its measures in conformity withWTO agreements. 14 The weakness of the system is also reflected in the factthat no LDC member has so far beenable to lodge a dispute as a complain-ant and complete the entire disputesettlement proceedings in the WTO.

Publicness in decision making Since the WTOs decision-makingprocess is based on consensus andevery member is entitled to one vote,irrespective of its share in globaltrade or financial contribution to theinstitution, it meets the formal re-quirement of publicness in decisionmaking. However, in a substantivesense, several scholars have arguedthat the WTO lacks legitimacy andis plagued with democratic deficit. 15Although this is the case with mostglobal governance institutions, Hig-gott (2007) argues that the legitima-cy of the WTO should be judged notonly by how it achieves the objective

of efficiency-based delivery of pub-lic goods in a strictly technicalsense, but also by how it ensures eq-uity- and justice-based and more in-clusive global governance. 16

The WTO is considered an insti-tution that compromises the issue of deliberative democracy at the altarof promoting efficiency in the deci-sion-making process. 17 The practiceof informal consensus building, in-cluding through the green-room pro-

cess, mini-ministerials and coali-

tions of interested parties, has hada role in decision making in theWTO.18 The officials of the WTO andits powerful members claim thatthese processes do not compromisethe consensus- based principle of the

WTO because decisions are eventu-ally made by all the members. How-ever, in reality, weak and vulnerablemembers cannot block decisionseven if they run counter to their na-tional policy objectives. 19 These prac-tices have led Stienberg (2002: 365)to surmise that the principles of sov-ereign equality and consensus- based decision-making process inthe WTO are nothing more than or-ganized hypocrisy in the procedur-al context. 20

Publicness in the distribution of benefitsIn a formal sense, publicness in thedistribution of (net) benefits is reflect-ed in the ability of members to exporttheir goods and services to, as wellas protect their intellectual propertyrights in, other members marketswith a reasonable degree of certain-ty. 21 Distribution of benefits meansthat the system should be able to en-

sure equity for all its members andpromote distributive justice if equityis lacking. In order to promote equityin the global trading system, it is nec-essary to provide equality of oppor-tunity. Discriminatory preferentialtrading arrangements and selectiveprotection mean that LDCs goodsface higher trade barriers in the mar-kets of the Organisation for Econom-ic Co-operation and Development. 22At the same time, some of the posi-

tive discrimination treatments pro-vided in the WTO system under therubric of special and differentialtreatments are either mere transition-al arrangements or best-endeavourpromises. Moreover, due to supply-side constraints, LDCs in particularhave not been able to utilize the mar-ket access opportunities offered un-der the WTO.

In relation to distributive justiceas a vehicle for promoting equitywithin the multilateral trading sys-tem, Kapstein (1999) views that dis-tributive policies have the characterof a global public good, but they are

The weakness of themultilateral trading

system is reflected in thefact that no LDC memberhas been able to lodge adispute as a complainantand complete the entire

dispute settlementproceedings in the WTO.


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under-provided so far. 23Therefore, headvocates the need to address theseconcerns at the international level." 24In line with this thinking, a measuretaken by the WTO to promote equitywithin the system is the Integrated

Framework (IF), a trade-related tech-nical assistance programme. How-ever, this programme has only metwith partial success. 25 The current ef-forts at introducing Enhanced IF andAid for Trade to help LDCs and de-veloping countries facilitate domes-tic adjustments and overcome sup-ply-side constraints have some mer-it and are worth pursuing. 26

Way forwardZedillo (2007: 12), making an obser-vation in the context of the multilat-eral trading system, suggests thatglobal public goods in general are inshort supply and that this insuffi-ciency not only distorts and threat-ens the process of global integration but also undermines each countrysindividual effort to procure the wellbeing of its citizen. He further ob-serves that this is mainly due to thelack of support extended by its members, in particular the major powers,

for strengthening the system, al-though these powers have benefitedthe most from the system. This cre-ates a vicious cycle because such lackof support restricts the ability of members to perform, creates a credibilitycrisis for the system, and leads to re-duced support from members. 27

He argues that this cycle can only be broken if rich and powerful na-tions recognize their responsibilityfor improving cooperation in this

area. They should not only take theleadership and become more accom-modative of the grievances as wellas demands of weak and vulnerablemembers, but also commit resourcesand actions to make the system work.In the present context, this is the re-sponsibility of the United States andthe European Union with active sup-port and cooperation from emergingpowers such as Brazil, China and In-dia. However, given the fact that coun-tries are essentially motivated by theirnational interests, it might be a tallorder to demand such generosity of them. Therefore, it is possible to cor-

rect the malaise only if concerted ef-forts are made to convince these pow-erful members that it is in their collec-tive interest to transform the WTO intoa truly global public good.

Notes1 Geuss, R. 2001. Public Goods, Private

Goods , p 6. Princeton: PrincetonUniversity Press.

2 Kaul, I. and R. U. Mendoza. 2003.Advancing the Concept of PublicGoods. In Providing Global Public Goods: Managing Globalization , ed. I.Kaul, P. Concei o, K. Le Goulven, andR. U. Mendoza, pp. 78112. New York:Oxford University Press.

3 Desai, M. 2003. Public Goods: AHistorical Perspective. In Providing Global Public Goods: Managing Globalization , ed. I. Kaul, P. Concei o,K. Le Goulven, and R. U. Mendoza, pp.6377. New York: Oxford UniversityPress.

4 Kaul and Mendoza. 2003: 95. Note 2.5 See for example, Mendoza, R. U. 2003.

The Multilateral Trading System: AGlobal Public Good for All. In Providing Global Public Goods: Managing Globalization , ed. I. Kaul, P. Concei o,K. Le Goulven, and R. U. Mendoza, pp.45583. New York: Oxford UniversityPress; Higgott, R. 2005. The WTO, theGovernance Gap and the LegitimacyIssue. In Market and Institutions: How to Manage the Governance Gap at the WTO , by R. Higgott, J. Lehmann, and F.Lehmann, IV. Paris: CERI, Sciences Po.

6 Lamy, P. 2006. Humanising Globaliza-tion, Santiago de Chile, Chile, 30January. http://www.wto.org/english/ news_e/sppl_e/sppl16_e.htm (access-ed 15.06.09).

7 Yale Centre for the Study of Globaliza-tion. 2005. Strengthening the Global Trade Architecture for Economic Development: An Agenda for Action .Policy Brief. http://www.ycsg.yale.edu/ focus/briefs.html (accessed 15.06.09).

8 Keohane, R. O. and J. S. Nye, Jr. 2005.The Club Model of Multilateral Cooperation and the World Trade Organization: Problems of Demoractic Legitimacy . Working Paper No. 4.Cambridge: John F. Kennedy School ofGovernment, Harvard University.

9 Mendoza. 2003; Higgott. 2005. Note 5.10 Kaul and Mendoza. 2003. Note 2.11 Mendoza. 2003: 460. Note 5.12 See Milner, H. V. 2005. Globalization,

Development, and InternationalInstitutions: Normative and PositivePerspectives. Perspectives in Politics 3 (4): 83354.

13 Footer, M. 2001. Developing CountryPractice in the Matter of WTO DisputeSettlement. Journal of World Trade 35(1): 5598.

14 Petersmann, E. 2007. WTO DisputeSettlement Practice 19952005:Lessons from the Past and FutureChallenges. In The WTO in the Twenty- first Century: Dispute Settlement,Negotiations and Regionalism in Asia ,ed. Y. Taniguchi, A. Yanovich, and J.Bohanes. Geneva: World TradeOrganization, and Cambridge: Cam-bridge University Press.

15 Steinberg, R. H. 2002. In the Shadow ofLaw or Power? Consensus-BasedBargaining and Outcomes in the GATT/ WTO. International Organization 56(2): 33974; Higgott. 2005. Note 5.

16 Higgott, R. 2007. Global Governanceand Global Public Goods: SomeContradictions in the Relationshipbetween Trade Liberalization andDevelopment in the WTO. Paperpresented at the Workshop onTransnational Organization andDemocratization of Global Governance(draft), 23 February, Lund University.

17 UNDP. 2003. Making Trade Work for People. London: Earthscan PublicationsLtd.; Steinberg. 2002. Note 15.

18 See, for example, UNDP. 2003: 5.Note 17.

19 Adhikari, R. 2009. Evolving PowerDynamics in the Multilateral Trading

System. Trade Insight 5 (1). Kath-mandu: South Asia Watch on Trade,Economics & Environment (SAWTEE).

20 See also ibid.21 Mendoza. 2003. Note 5.22 UN Millennium Project. 2005. Investing

in Development: A Practical Plan to Achieve the Millennium Development Goals . New York: United Nations.

23 Kapstein, E. B. 1999. DistributiveJustice and International Trade. Ethics & International Affairs 13: 173204.

24 ibid.: 67.25 Prowse, S. 2006. Mega Coherence:

The Integrated Framework. In Trade and Aid: Partners or Rivals in Development Policy? , ed. S. Page.London: Cameron and May.

26 Prowse, S. 2005. Aid for Trade:Increasing Support for Trade Adjust-ment and Integration A Proposal.Mimeo; Laird, S. 2007. Aid for Trade: Cool Aid or Kool Aid? G-24 DiscussionPaper Series, No. 48, November.Geneva: United Nations Conference onTrade and Development (UNCTAD).

27

Zedillo, E. ed. 2007. The Future of Globalization: Explorations in Light of Recent Turbulence . London:Routledge.



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c over feature

The financial crisis that erupted in Sep-tember 2008 is extraordinary by anystandard since the 1930s, including thedebt crisis of the 1980s and the Asian andRussian crises of the late 1990s. Its epicentrehas been the United States (US)the centre

not the periphery in neo-Marxian terminolo-gy. The debate over whether it is a crisis of the capitalist system itself 1 or a regulatorycrisis of the capitalist system 2 remains ger-mane for time to come. But the reality is thatthe financial crisis and its upshot, namely ahuge financial meltdown and a string of bankruptcies, have already spilled from thefinancial sector to the real economy. 3

At the start of the financial crisis, first ob-served in July 2007, there was a firm view insome quarters, including the US Treasury,that it would not cross the financial frontier.Some believed that developing countries weredecoupled from the financial crisis as their banking systems were barely exposed to tox-ic assets and their economies had a comfort-able foreign exchange position. 4 But, as thevicious circle between the financial and realsectors intensified, the so-called decou-pling hypothesis proved wrong. For exam-ple, the International Monetary Fund (IMF)sharply revised its growth projection foremerging and developing economies for 2009from 6.7 percent in July 2008 to 1.5 percent in

July 2009.5Following the crisis, growth in virtually

all countries has decelerated sharply from therates observed during the last five years. TheIMF projects the global output to shrink by1.4 percent in 2009, the deepest global reces-sion since the 1930s. The brunt of the crisis ishere to stay for some time as the IMF statesthat the world economy is stabilizing,however, the recession is not over and therecovery is likely to be sluggish. 6

Casualties of the crisisDuring the five years preceding the crisis,developing countries as a group experiencedan impressive economic boom, growing at arate of 7 percent per year. It was driven by amix of increased integration with the globaleconomy, exceptional financing with low in-terest rates, high commodity prices, and, inparticular, for a significant number of coun-tries, large flows of remittances.

The impacts of the crisis on developingand least-developed countries are evident inthe reversal of the factors that led to their im-pressive growth 7, as well as the progressmade in the achievement of the MillenniumDevelopment Goals. Although developing

South Asia must develop national and regionalresponses to complement global responses to the crisis.

Posh Raj Pandey

Imp lic a tions forSouth Asia

GlobalEconomicCrisis


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modity prices, in particular oil pric-es, along with the contraction in in-vestment demand in destinationcountries may result in a furtherslowdown, or even a decline, in re-mittance inflows.

Data for the first quarter of 2009show that although remittance flowsto Bangladesh continued to grow,the rate of increase declined sharplyfrom an annual rate of 50 percent inAugust 2008 to 9.6 percent in 2009.In Nepal, the flow registered agrowth rate of 55.5 percent, measuredin domestic currency, during the pe-riod from July 2008 to April 2009,compared to the corresponding peri-od of 2007/08. 18 In Sri Lanka, net re-mittance inflows declined by 3.8 per-cent in March 2009 over a year ago.

Tourism also registered a sharpdecline in 2009. However, the declinewas mostly due to the domestic en-vironment in some countries. In Bhu-tan, where tourism contributes 7 per-cent of GDP growth, tourist arrivalsdeclined by 37.8 percent (year-on-year) in March 2009, compared withthe growth of 40 percent in 2008. Inthe Maldives, tourism declined byabout 10 percent. In Sri Lanka, the

recently ended civil war contributedto an 11 percent fall in tourist arriv-als in 2008. Nepal experienced ahighly volatile tourist flow in the firstquarter of 2009, a decline of 17.6 per-cent in March 2009 over the previ-ous year and a growth of 15.8 per-cent in April. 19

National responsesNational policy responses in SouthAsia should focus on a mix of finan-

cial, fiscal, monetary and trade poli-cies. However, the availability of pol-icy instruments depends on balance-of-payments situations, recent fiscalstances, the status of public-sectordebts and the stage of developmentof capital and bond markets. SouthAsian countries fall in differentscales on the above parameters and,thus, the policy package to be adopt-ed varies accordingly.

Countries with weak externaland fiscal indicators, for example,Pakistan and Sri Lanka, have limit-ed headroom for counter-cyclicalmeasures and huge stimulus pack-

ages. For countries with a strong debtand foreign exchange reserve posi-tion but a relatively weak fiscalstance (for example, India), the roomfor manoeuvre lies more in monetarythan in fiscal policy. It may include

easing domestic financing, facilitat-ing private-sector access to foreign ex-change, and reducing interest rates.

Nonetheless, South Asian coun-tries need fiscal adjustments to avoidpro-cyclical fiscal impacts and toratchet up domestic demand. Somecountries have already announcedstimulus packages. India and Bang-ladesh have announced stimuluspackages equivalent to 3.5 percentand 0.7 percent of their GDP, respec-tively. However, these should focuson social-sector spending, includingfood security and employment-gen-erating infrastructure development.

Since South Asian countries sig-nificantly depend on internationaltrade, trade policy instruments maynot be sufficient on their own to easethe adverse impacts of the crisis. Anappropriate policy mix plays a sig-nificant role towards this end.

First, non-traditional exports can be encouraged, through a mix of ex-

change rate depreciation and sec-toral incentives. Second, backwardand forward linkages of existing

manufacturing activities can bestrengthened. Third, bilateral and re-gional trade can be encouraged. Pay-ments agreements among central banks can also facilitate such tradewithout the need for hard currencies.

Fourth, the role of domestic marketscan be reassessed and recognized inthe industrialization process. Fifth,the countries should refrain from re-sorting to protectionism. Finally, theyshould learn from the global finan-cial crisis how regulatory failure cre-ates a domino effect in the economy.They must rebuild and strengthentheir regulatory systems to ensureconfidence in the market mechanism,establish transparency in corporategovernance, and dismantle flawedincentives. 20

Regional responsesThe global crisis has compelledSouth Asian countries, which in gen-eral have stronger extra-regionalthan intra-regional trade and finan-cial ties, to critically assess the de-velopment in South Asian Associa-tion for Regional Cooperation(SAARC). Had there been more in-tense economic relations among

SAARC members in areas of tradeand investment, the prospect of de-coupling from the crisis would

c over feature

South Asia ind icators (annua l % c hange)Tab le 3

2007 2008 2009*GDP at market prices (at 2000 US$ prices) 8.4 6.1 4.6Private consumption 7.3 3.8 3.7

Public consumption 6.3 17.5 8.9Fixed investment 13.6 11.4 6.3Exports 8.1 10.4 -2.6Imports 8.0 15.2 0.4Current account balance/GDP ratio (%) -20.5 -59.1 n.a.Net private and official flows (US$ billion) 116.5 77.0 n.a.Net private flows (US$ billion) 112.5 66.5 n.a.Net FDI inflows (US$ billion) 29.9 47.5 n.a.Workers remittances (US$ billion) 52.1 66.0 n.a.

* forecast

Source: www.worldbank.org.


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have been better. Therefore, it is im-perative that they intensify regionaltrade and economic integration.

First, they must downsize thesensitive lists under the Agreementon South Asian Free Trade Area (SAF-

TA) and dismantle non-tariff barri-ers. Second, they need to strengthenregional trade linkages, including byreshaping the existing productionsupply chain and promoting intra-industry trade. Third, they shouldfinalize the agreement on investmentcooperation. Fourth, they have to es-tablish a mechanism for monetarycooperation and the harmonizationof macroeconomic policies. Fifth, theyshould further intensify cooperationin the services sector, for example, byincluding services in SAFTA.

Global responsesIn order to mitigate the impacts of thecrisis, a total of US$18 trillion has sofar been mobilized by the interna-tional community to recapitalize banks, nationalize financial institu-tions, and provide guarantees on bank deposits and other financialassets. As of April 2009, fiscal stim-ulus plans totaled US$2.7 trillion, to

be spent over 20092011. 21G20 leaders at their London Sum-

mit in April 2009 pledged to addressthe recession by, among others, restor-ing confidence, growth and jobs; re-pairing the financial system to restorelending; strengthening financial reg-ulation to rebuild trust; funding andreforming international financial in-stitutions; promoting global trade andinvestment; and rejecting protection-ism. They also pledged US$1.1 trillion

in financing, of which US$50 billionis for social protection, trade and de-velopment in low-income countries. 22

Nobel laureate Joseph Stiglitz hasrightly identified the causes of the fi-nancial crisis as the fruit of a pat-tern of dishonesty on the part of fi-nancial institutions, and incompe-tence on the part of policymakers. 23The global response should includenot only reinvigorating economic ac-tivities but also correcting the systemicfailure in the market mechanism, inparticular the financial architecture.

First, the magnitude of the currentcrisis is clearly associated with in-

adequate regulation and supervisionof banks and financial markets.Therefore, a new financial architec-ture with adequate representation of developing countries should be de-signed to create a stronger, broader

and more globally consistent macro-prudential supervisory, regulatoryand oversight framework.

Second, the stimulus packages,announced on an unprecedentedscale, need to be implemented with-out any protectionist intent, in a co-ordinated and harmonized manner,to promote sustainable and inclusivedevelopment. In the implementationprocess, it should be ensured thatdeveloping countries benefit from thestimulus packages.

Third, it is essential that the com-mitment repeatedly made by G20 lead-ers to avoid protectionist measures,including creating new barriers to in-vestment and export restrictions in theimmediate future, is fulfilled. A suc-cessful conclusion of the Doha Roundof trade negotiations under the WTOis also essential. Importantly, it is im-perative to ensure that LDCs reap net benefits of duty-free and quota-free ar-rangements. The exercise of WTO-

consistent rights to utilize the policyspace by developing and least-devel-oped countries should not be inter-preted as protectionism. The trade fi-nance needs of such countries shouldalso be addressed with improved lend-ing terms.

Fourth, there should be improvedcommitments on the assistance toneedy developing and least-devel-oped countries. In addition, condi-tionalities on access to resources

should be relaxed and debt relief pro-grammes need to be accelerated.

Dr. Pandey is President, SAWTEE.

Notes1 Wade, R. 2009. Steering Out of the

Crisis. Economic and Political Weekly ,28 March; Wolf, R. 2008. CapitalistCrisis, Marxs Shadow. Monthly Review,26 September. ww.monthlyreview.org;Wolf, R. 2009. Capitalism's Crisisthrough a Marxian Lens, 14 December.http://mrzine.monthlyreview.org.

2 Stiglitz, J. 2008. The Fruit of Hypocrisy.The Guardian , 16 September.

3 UNCTAD. 2009. Global Economic Crisis:Implication for Trade and Development.TD/B/C.I/CRP.1, 7 May; Rakshit, M. 2009.India amidst the Global Crisis. Economic and Political Weekly , 28 March.

4 IMF. 2007. World Economic OutlookUpdate. Washington, D.C.: InternationalMonetary Fund.

5 IMF. World Economic Outlook Update.Various Issues. Washington, D.C.:International Monetary Fund.

6 IMF. 2009. World Economic OutlookUpdate. Washington, D.C.: InternationalMonetary Fund.

7 Griffith-Jones, S. and J. A. Ocampo2009. The Financial Crisis and itsImpact on Developing Countries.International Policy Centre for Inclusive Growth Working Paper 53.Brasilia: International Policy Centre forInclusive Growth.

8 Lamy, P. 2009. Speeches by WTODirector-General on 2 and 25 March.

9 UNCTAD. 2009. Note 3.10 Hufbauer, G. and S. Sherry. 2009. Trade

Policy in a Time of Crisis: Suggestions for Developing Countries. Centre forEconomic Policy Research Policy InsightNo. 33.

11 Auboin, M. 2009. Boosting the Avail- ability of Trade Finance in the Current Crisis: Background Analysis for a Substantial G20 Package . Centre forEconomic Policy Research Policy InsightNo. 33.

12 World Bank. 2009. Global Development Finance: Charting a Global Recovery .Washington, D.C.: The World Bank.

13 World Bank. 2009. Swimming against the Tide: How Developing countries are Coping with the Global Crisis .Washington, D.C.: The World Bank.

14 World Bank. 2009. Note 12.15 ibid.16 Mohan, R. 2009. Monetary Policy in a

Globalized World: A Practitioners View. New Delhi: Oxford University

Press; and World Bank. 2009. Note 12.17 World Bank. 2009. Note 12; Nepal

Rastra Bank. 2009. Current Macroeco-nomic Situation (Based on the First TenMonths' Data of 2008/09). Kathmandu:Nepal Rastra Bank.

18 Nepal Rastra Bank. 2009. Note 17.19 World Bank. 2009. Note 12.20 Stiglitz. 2008. Note 2.21 United Nations. 2009. The World

Financial and Economic Crisis and itsImpact on Development. Report of theSecretary-General, 2426 June.

22 See www.londonsummit.gov.uk.23 Stiglitz. 2008. Note 2.

c over fea turec over fea ture


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The sharp contraction in globaltrade triggered by the global fi-nancial crisis has resulted in the re-duction of most of the major mer-chandise exports of Bangladesh. Interms of both volume and value, theleather, jute, tea and frozen food in-dustries experienced negativegrowth ratesup to -38.75 percentduring July 2008 to February 2009compared to the same period in2007/08.

However, the readymade gar-ment (RMG) industry, the largest ex-port sector and top foreign exchangeearner, has maintained solid rates of export growth (over 20 percent in vol-ume and value terms in the sameperiod). But it must be noted thatthere has been a significant declinein orders since the beginning of 2009.

Status of the RMG sectorWithin a decade or so of its establish-

ment in the early 1980s, the RMG in-dustry in Bangladesh became the mostdominant sector of the economy. Whileexport earnings from the sector wereas low as US$32 million in 1983/84,they increased to a staggering figureof around US$10 billion by 2007/08,accounting for more than three fourthsof the countrys total export earnings(Table 1). There has been a significantrise in the number of RMG factoriesover the period. Currently, the sectoremploys around 2.5 million workers,80 percent of them female.

The RMG sector managed to ben-efit from the protectionist policies

pursued in major export markets,most notably in the European Union(EU). The quotas put in place underthe Multi-fibre Arrangement (MFA)and subsequently under the Agree-ment on Textiles and Clothing (ATC)of the World Trade Organization(WTO) not only restricted suppliesfrom the most efficient global produc-ers, but also helped keep prices high-er than what would have been pos-sible under competitive conditions.

At the same time, favourable do-mestic trade policy reform throughthe use of a set of generous supportand promotional measures for ex-ports proved instrumental in the ex-pansion of the RMG industry. Ingeneral, Bangladeshs RMG exportgrowth rate has been on a risingtrend in the new millennium. Inter-estingly, the expiry of the ATC did

not have any negative impact on thegrowth of the sector.

The future of the RMG industrywill be critical for Bangladeshs so-cio-economic development. Al-though the evidence on trade-growthand trade-poverty relationships asfound in academic studies is far fromconclusive, there is no denying thatthe growth of RMG exports has beenassociated with the overall econom-ic growth of the country accompa-

nied by a remarkable progress inpoverty alleviation by creating mas-sive employment opportunities, most-ly for unskilled workers.

The period 20002005 experi-enced a fall in headcount povertyratio by 9 percentage points in tan-dem with the robust performance of the RMG sector. Raihan and Khond-ker (2008), using a computable gen-

Readymade garments in

BangladeshSelim Raihan

Imp ortanc e o f RMG exports for Banglad eshTab le 1

Source: http://bgmea.com.bd.

Number Employment Exports % of Valueof in million of RMG in total addition

factories US$ million exports (%)

1983/84 134 0.04 31.57 3.89 n.a.1990/91 834 0.402 866.82 50.47 n.a.1994/95 2,182 1.2 2,228.35 64.17 17.72000/01 3,480 1.8 4,860.12 75.15 46.532004/05 4,107 2.1 6,417.67 74.15 64.67

2007/08 4,740 2.5 10,699.8 75.83 70

Although the readymade garment industry in Bangladesh, thecountrys top forex earner, has so far been spared the adverse impactsof the global economic crisis, complacency could prove fatal.

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eral equilibrium (CGE) model, foundthat the growth in RMG exports con-tributed to a fall in poverty by morethan 1 percentage point out of the 9percentage points fall in headcountpoverty ratio. 1

With Bangladeshs export baskethighly concentrated in RMG, its ex-port sector is extremely vulnerable toexternal shocks. The figure along-side depicts the channels throughwhich a negative RMG export shockaffects sectoral prices and output inthe economy.

Ex-ante analysis of export shock The global financial crisis and theresultant economic downturn in de-veloped-country markets haveraised serious concerns over the pos-sibility of falling earnings from RMGexports. In this context, the macro-economic impacts of a 20 percent fallin woven and knit RMG exports arecalculated through a simulation ex-ercise using a CGE model for Bang-ladesh (Table 2).

The scenario results in a negativegrowth in real GDP compared to the base year. The manufacturing sectoras a whole contracts. On the other

hand, agricultural and services sec-tors register a low positive growth.The consumer price index rises andaggregate consumption falls. Ex-change rate depreciates, and importsand exports fall. The wage rates of agricultural labour rise while thoseof non-agricultural labour fall. Re-turns to non-agricultural capital andland fall while those to agriculturalcapital rise.

The sectoral effects suggest that

the fall in export demand for wovenand knit RMG results in productiondeclines in these two sectors by al-most the margin. This also leads to adecline in production in sectors thathave strong linkages with wovenand knit RMG, such as mill cloth andother textiles. Because of the depre-ciation of the domestic currency, im-port prices rise, leading to a fall inimports in general.

Similarly, the demand for import-ed raw materials also declines, fur-ther contributing to the reduction inimport demand. The free-on-boardexport prices of woven and knit

tracts with suppliers from least-de-veloped countries (LDCs). There arealso recent evidences that negotia-tions for orders are being divertedfrom India, Turkey, Indonesia andCambodia.

Unimpressive stimulus packageAlthough official data indicate a 20percent increase in RMG exportsduring July 2008 to February 2009,the extent to which the crisis will hurtBangladeshs RMG exports is stillunclear. There is a concern that diffi-cult days are ahead if the recessionin the major markets prolongs. There-fore, the Bangladeshi governmentcannot remain complacent.

Timely policy adjustments will

have to be made as demanded by thedepth of the crisis. A high-profiletaskforce, in addition to the routinemonitoring by technical groups, willhave to function continuously to pro-vide necessary guidelines to policymakers so that there is no scope of complacency, and hence inaction, inany quarter.

Recently, the government an-nounced a stimulus package forsome export sectors. But it was notwell-received by the business com-munity. In particular, the RMG sec-tor complained about its complete ex-clusion from the cash incentives,

RMG rise, implying a loss of compe-tiveness of such exports from Bang-ladesh. It also appears that there is acontraction of domestic demand formanufacturing and services prod-ucts, which is a result of fallinghousehold incomes. Such a scenar-

io implies a fall in welfare and realconsumption for all households,with poor households suffering morethan non-poor households.

Nearly 90 percent of Bangladesh'sRMG exports are destined for devel-oped-country markets, mostly theUnited States (US) and the EU. Withthe ongoing recession in the US andthe EU, it is likely that such exportswill be hurt. However, there are somemoderating factors that should be

considered. Since the countrys RMGexports mainly cater to the low pricesegment of the apparel market, thecurrent slowdown may exert a rela-tively less impact on such exports.

With incomes falling, even somediversion of demand from the high-end garment segment to the low-endone may take place. But consumersmay also adjust themselves to lowerincomes by not opting for low-endclothing and just buying far lesshigh-end clothing. Major purchasersof RMG products may take advan-tage of the market situation by nego-tiating less favourable order con-

FigureRMG export shoc k transmission m ec hanism

Decline inproduction in

sectors that havestrong linkages

with RMG

Fall in imports because of less import demand forRMG raw materials aswell as depreciation of

domestic currency

Fall in demand forfactors used

intensively in RMGand associatedsectors

Expansion of sectorsthat do not have strong

linkages with RMG asthese benefit fromfalling factor prices

Decline in RMGproduction

Fall in overallexports as RMGconstitutes over

75 percent of total exports

Fall in demandfor RMGexports

Fall in returns tofactors that are

used intensively inRMG and associat-ed sectors

ec ono mic c risis: c ase stud y


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though there were some policy sup-ports for them. Moreover, the pro-posed policy supports for the RMGsector in the stimulus package aresomewhat ambiguous in nature.There is no detailed work plan on

how they will be actually imple-mented. Reduced orders for RMGmean that smaller firms, in particu-lar sub-contracting firms, will be themost severely affected. These sub-sectors have not been identified formore focused government aid.

In contrast to the stimulus pack-ages of neighbouring countries suchas China and India, Bangladeshspackage is short-sighted in nature. Itdoes not emphasize long-term invest-ments in education, health and so-cial welfare necessary to increaseworkers productivity.

Besides targeting long-term gainsin competitiveness and productivi-ty, the government must also correct-ly identify the sub-sectors that arecurrently affected and could be af-fected in the near future. Private-sec-tor involvement in stimulating theeconomy should be encouraged. Inthe current stimulus package, policysupport to encourage investment is

weak. This must be addressed. Mostimportantly, a workable plan to im-plement the support measures is ur-gently needed.

Need for DFQF in the US

The need for duty-free and quota-free(DFQF) market access for BangladeshsRMG exports to the US market has nev-er been so critical. RMG exports origi-nating in Bangladesh are subject to thefull US most-favoured-nation (MFN)tariff rate. 2 About 32 percent of all USHarmonized Tariff Schedule (HTS) linesat the 8-digit level are subject to a tar-iff range of 59.9 percent. While an-other 18 percent of HTS lines face1015 percent tariffs, tariff rates high-er than 15 percent comprise 18 per-cent of HTS lines.

In particular, products that are of export interest to Bangladesh aremore concentrated in the higher tar-iff brackets. Thus, while productswith tariff peaks (i.e., products withtariff rates higher than 15 percent)constitute 42 percent of all HTS itemsthat Bangladesh exports, the compa-rable figure for the rest of the worldis only 18 percent. About 27 percentof Bangladeshs products face a tar-

iff range of 15.120 percent, and an-other 14 percent are subject to ratesin excess of 25 percent.

Raihan and Razzaque (2007)show that improved market accessis likely to have favourable impacts

on the Bangladeshi economy.3

RealGDP and aggregate welfare increasequite substantially, while both ex-ports and imports show a robustperformance in response to DFQFaccess.

More importantly, increased em-ployment through better export op-portunities for labour-intensive gar-ments helps raise the wages of un-skilled workers, thereby benefitingthe poorest households most signifi-cantly. The impact on poverty inci-dence is rather remarkable, as esti-mates show that in the long run, be-tween 200,000 and 300,000 house-holds in Bangladesh are likely tograduate out of poverty as a directconsequence of unrestricted marketaccess.

In sum, it can be argued that anynegative shock to Bangladeshs RMGsector will have profound impactson its economy, poverty situationand human development status, in-

cluding gender development.

The author is Associate Professor, Depart-ment of Economics, University of Dhaka, andExecutive Director, South Asian Network on Economic Modeling (SANEM), Dhaka.

Notes1 Raihan, S. and B. Khondker, B. 2008.

Poverty Impacts of Remittance andReadymade Garment Growth inBangladesh: A Computable General

Equilibrium Analysis. Mimeo. Dhaka: TheWorld Bank.2 The ensuing tariff analysis is based on

Razzaque, A. 2003. Agreement onTextiles and Clothing: BangladeshsInterest and Position in the Fifth WTOMinisterial. Paper prepared for the UnitedNations Conference on Trade andDevelopment (UNCTAD), Geneva.

3 Raihan, S. and A. Razzaque. 2007. LDCsDuty-free and Quota-free (DFQF)Access to Developed Countries Markets:Perspectives from Bangladesh. In WTO and Regional Trade Negotiations Outcomes: Quantitative Assessments of Potential Implications on Bangladesh,ed. S. Raihan and A. Razzaque. Dhaka:Pathak Samabesh.

Macroec onomic effec ts of RMG shoc kTab le 2

Source: Authors calculations based on simulation results.

% change fromthe base year value

Real GDP -0.55Agriculture 0.13Manufacturing -1.88Services 0.48Consumer price index 0.18

Consumption -0.39Exchange rate 4.93Imports -6.83Exports -13.09Return to labour (agricultural unskilled) 0.40Return to labour (agricultural skilled) 0.70Return to labour (non-agricultural unskilled) -1.10Return to labour (non-agricultural skilled) -0.80Return to capital -0.60Return to land -0.20



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The business process outsourcing(BPO) industry, along with tele-com, is one of Indias biggest and brightest success stories. It has beena major growth driver, contributingsubstantially to the sharp pick-up inthe gross domestic product (GDP)growth rate in recent years. No lessimportant from Indias perspectiveis the role played by the industry inensuring that the benefits of thisgrowth are spread more evenly

across the country. By expanding em-ployment opportunities beyondmetros and big cities to smaller townsand cities, the BPO sector has playeda stellar role in transforming the hin-terland around big cities. Its contribution to the countrys export earn-ings has been no less significant.

Trends in business outsourcingSome numbers might help illustrate just how vital the sector has become

for Indias economic wellbeing. Ac-cording to the latest Nasscom Strate-gic Review 2009, the Indian informa-tion technology (IT)-BPO industry isestimated to have grown 12 percentduring the year ended March 2009.Total revenues touched US$ 72 bil-lion, with software and services ex-ports (exports of IT services, BPO, en-gineering services and R&D, andsoftware products) growing evenfaster (16 percent) to touch US$47 billion (Table 1).

As a proportion of GDP, revenueshave grown from 1.2 percent in Fis-cal Year 1997/98 to an estimated 5.8percent in 2008/09, while net value-added by this sector to the economyis estimated at 3.54.1 percent. Thesectors share of total Indian exports(merchandise plus services) has in-creased from less than 4 percent in1998 to almost 16 percent in 2009even as direct employment is expect-ed to reach nearly 2.23 million (Ta-ble 2). In addition, indirect job cre-ation is estimated to have touched 8million.

Threat from protectionismUnfortunately, such scorching paceof growth is now being threatened by the global economic crisis. Theopening salvo was fired by UnitedStates (US) President Barack Obama

while announcing a major interna-tional tax policy reform at the WhiteHouse earlier this year. We will stop

Mythili Bhusnurmath

Thanks to its strong fundamentals, Indias business processoutsourcing sector has tremendous growth prospects despite theglobal economic crisis and rising protectionist pressures.

Revenue of Ind ian IT-BPO industry (US$ billion)

2005 2006 2007 2008 2009EIT services 13.5 17.8 23.3 31 35.2 Exports 10.0 13.3 17.8 23.1 26.9

Domestic 3.5 4.5 5.5 7.9 8.3

BPO 5.2 7.2 9.5 12.5 14.8 Exports 4.6 6.3 8.4 10.9 12.8

Domestic 0.6 0.9 1.1 1.6 1.9

Engineeringservices and R&D,software products 3.8 5.3 6.5 8.6 9.5 Exports 3.1 4.0 4.9 6.4 7.3

Domestic 0.7 1.3 1.6 2.2 2.3

Hardware 5.6 7.1 8.5 12.0 12.1 Exports 0.5 0.6 0.5 0.5 0.3

Domestic 5.1 6.5 8.0 11.5 11.8

Total 28.1 37.4 47.8 64.0 71.7

Notes: E: Estimates. Source: www.nasscom.org.

Tab le 1

IndiaBusiness p roc ess outsourc ing in

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will be able to cut back very much.On the contrary, greater focus on costand operational efficiencies couldwell have the opposite effect. Thepressure on their bottom lines meanscompanies will increasingly look to

new ways of cutting costs of existingdelivery and production lines. Out-sourcing is a tried and tested meansof cutting costs. As a result, compa-nies are, perhaps, likely to resort evenmore to outsourcing than in the past.

Even US companies that willhenceforth be denied the tax breaksenjoyed in the past are likely to weighthe higher cost of producing at homevis- -vis the higher tax burden theywill incur if they outsource some of their production and then decidetheir course of action. After all, thesteady growth in outsourcing spend-ing was driven by increased adop-tion of global sourcing and this trendis unlikely to change.

Consequently, the mere fact of taxchanges in the US or protectionistmoves elsewhere need not necessar-ily translate into reduced opportu-nities for the Indian BPO sector. Re-member, while the global sourcingmarket size increased threefold in the

period 20042008, the addressablemarket, in the range of US$500 bil-lion in 2008, is more than five timesthe current market size, signifyingthe immense opportunities at hand.

Can India cash in on this? Yes, but only if it focuses on some aspectsof its BPO industry that at times seemto act as impediments to the growthof the sector.

The biggest drawback is theskewed geographic focus (Table 3).

The US, with a 60 percent share, re-mains the largest export market forIndian IT-BPO services. Althoughcompanies have been consciouslytrying to diversify and incrementalgrowth is being driven by the Euro-pean marketwith the United King-dom and Continental Europe grow-ing by a compound annual growthrate of over 40 percent over the lastfive yearsthe US remains over-whelmingly the main market. To theextent the US economy remainsmired in recession, this is bound toact as a brake on the growth of Indi-an BPO, though it could well be that

letting American companies that cre-ate jobs overseas take deductions ontheir expenses when they do not payany American taxes on their profits.We will use the savings to give taxcuts to companies that are investingin research and development here athome so that we can jump start jobcreation, foster innovation, and en-hance America's competitiveness,said Obama, setting off alarm bellsin many countries in the developingworld.

For India, worse was to come.Singling out Indias Silicon Valley,Bangalore, Obama criticized the ear-lier system of taxation, saying, It's a

tax code that says you should paylower taxes if you create a job in Ban-galore, India, than if you create onein Buffalo, New York. He could justas well have said Bucharest or Ma-nila but the fact that he said Banga-lore suddenly seemed to make the In-dian IT-BPO sector seem much morevulnerable to protectionist pressure.

And that brings us to the crux of the problem for this sunrise sector.As countries, reeling under growing

job losses, turn more protectionistObama is not the only Western politi-cal leader worried about protectingdomestic jobs, though others have beenless explicitand companies fearinga backlash from their political mas-ters cut back on outsourcing, will thesuccess of the past few years prove aflash in the pan? Or has BPO becomesuch an integral part of businessesworldwide that it is no more realisticto talk of an end to outsourcing than totalk of the end of globalization? Inwhich case will the BPO story in In-dia continue its dream run?

Addressing the problem

To answer the above question, oneneeds to consider two things. First,the outlook for technology spending.Second, the response of the corporatesector to the downturn. Lets takethem one by one.

Today, BPO is an integral part of the global delivery chain and is in-creasingly involved in mission-criti-cal applications. Consequently,though worldwide spending ontechnology products and related ser-vices is expected to decline in the firsthalf of 2009 due to the economicslowdown, it is expected to pick uptowards the latter part of the year andgrow more strongly in 2010. Overall

technology spending is estimated tocross US$1.6 trillion in 2009, withBPO spending accounting for a sig-nificant share of this expenditure.The global BPO market is expectedto grow 12 percent, the highestamong all segments, to reach US$181 billion by 2012.

As the recession in Western econ-omies begins to bite, it is true compa-nies might try to cut back on their tech-nology spending. But given how inte-

gral technology has become to most businesses, it is unlikely that they

Knowle dge p rofessiona ls in IT-BPO ind ustry (in 000) 2005 2006 2007 2008 2009

IT exports andservices exports 390 513 690 860 946.8

BPO exports 316 415 553 700 789.8Domestic market 352 365 378 450 500.0Total 1,058 1,293 1,621 2,010 2,236.6

Tab le 2

As the recession inWestern economies beginsto bite, companies are likely

to resort even more tooutsourcing than in the past

because outsourcing is a

tried and tested means of cutting costs.


Source: www.nasscom.org.


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Indian companies gain atthe expense of Indian armsof foreign companies.

Another drawback is theexcessive dependence onspecific verticals. The bank-

ing, financial services andinsurance segment remainsthe biggest sector with over41 percent share, though ver-ticals like hi-tech/telecom,manufacturing and retail areincreasingly gaining share.

The quality of the workforce isalso a constraint. Though India turnsout a large number of graduates andpost-graduates, including engineers,a very large proportion of them aresimply unemployable. This meanscompanies have to incur additionalexpenditure to train them to bringthem up to scratch.

What is encouraging is that de-spite these challenges, the Indianoutsourcing industry is still seen asinherently strong. According to theMay 2009 edition of A T KearneysGlobal Services Location Index, In-dia remains at the forefront of theoutsourcing industry and has actu-ally become an enabler for industry

growth through the expansion of In-dian offshoring firms into other coun-tries. The survey adds that while theglobal financial crisis has slowedrecent offshoring moves, the percent-age of companies staff offshore mayvery well increase as a result of thecrisis. Layoffs at home are not trans-lating into layoffs among offshoreworkers as companies go the extramile to try to reduce costs to cope withthe slowdown and remain competi-

tive in the coming days.According to Norbert Jorek, apartner with A T Kearney and man-aging director of the firms GlobalBusiness Policy Council, While costremains a major driver in decisionsabout where to outsource, the quali-ty of the labour pool

Documents

Trade Insight Vol5No2 2009