ECONOMIC LIBERALIZATION

Economic Liberalization:

Economic Liberalization has led to more deregulation, liberalization and privation of some of the public sector undertakings in India. This has resulted in the shares of some of the public sector undertakings being made available to the public. The Industrial policy adopted by the government earlier did not allow investment in core sector by either individuals or private sector. But with the privatization of some of the public sector undertakings, the shares are now available to the public for contribution. Recently, the shares of VSNL were bought by TATAs.

LPG Model of Development

            LPG model of development which was introduced in 1991 by the then Finance Minster Dr.Manmohan Singh with a big bang was intended to charter a new strategy with emphasis on Liberalization, Privatization and Globalization (LPG). Several major changes at the domestic level were introduced.

            Firstly, areas hitherto reserved for the public sector were opened to private sector. The Government intended to transfer the loss-making units to the private sector, but it failed because there were no takers for them. Instead, the government started disinvestment of the highly profit-making PSUs and the proceeds were used to reduce fiscal deficits. Thus, due to various social constraints the Government could not carry forward its programme of privatization, though it did succeed in liberalizing the economy to the private sector both – both domestic and foreign.

            Secondly, by permitting the private sector to setup industrial units without taking a license, the Government removed certain shackles which were holding back or delaying the process of private investment.

            Thirdly, by abolishing the threshold limit of assets in respect of MRTP companies and dominator undertakings, the Government freed the business houses to undertake investments without any ceiling being prescribed by the MRTP Commission. Obviously, considerations of promoting growth were more dominant with the Government and such issues as concentration of economic power took a back seat.

            Fourthly, with a view to facilitate direct foreign investment, the Govern decided to grant approval for direct foreign investment up to51 percent equity, but such proposals would require prior clearance of the Government. No permission was required for indigenously developed technologies etc.

            Fifthly, chronically sick public sector enterprises were referred to the Board for Industrial and financial Reconstruction (BIFR) for the formulation of revival rehabilitation schemes. A social security mechanism was introduced to protect the interests of workers likely to be affected by such rehabilitation packages.

            Sixthly, to improve the performance of public sector enterprises, greater autonomy was given to PSU managements and the Boards of public sector companies were made more professional.

            Lastly, the economy was opened to other countries to encourage more exports. To facilitate the import of foreign capital and technology and other allied imports, reduction in important duties and other barriers were brought about.

            LPG Model of development emphasises a biggest role for the private sector. It envisages a much larger quantum of foreign direct investment to supplement our growth process. It aims at a strategy of export led growth as against import substitution practiced earlier. It aims a reducing the role of the state significantly and thus abandons planning fundamentalism in favour of a more liberal and market driven pattern of development.

Globalization ands Its Impact on India            

“Our primary concerns are that globalizations should benefit all countries and should raise the welfare of all people throughout the world. This implies that it should raise the rate of economic growth in poor countries and reduce world poverty, and that its should not increase inequalities or undermine socio-economic security within countries”

-          World Commission on the Social dimension of Globalization (2004)

“Globalisation means free movement of capital, goods, technology, ideas and people. Any globalization that omits the last one is partial and not sustainable.”

-          Branko Milanovic

Globalization is the process of integrating various economies of the world without creating any hindrances in the free flow of goods and services, technology, capital and even labour or human capital. The term ‘globalization’ has, therefore, four parameters:

(i)                 Reduction of the trade barriers to permit free flow of goods and services among nation-states;

(ii)               Creation of environment in which free flow of capital can take place among nation-sates;

(iii)             Creation of environment, permitting free flow of technology; and

(iv)             Last, but not the least, from the point of view of developing countries, creation of environment in which free movement of labour can take place in different countries of the world.

The advocates of globalization, more especially from developed countries, limit the definition of globalization to only three components, unhindered trade flows, capital flows and technology flows. They insist developing countries to accept their definition of globalization and conduct the debate on globalization within the parameters set by them. However, several economists in the developing world believe that this definition is incomplete and in case the ultimate aim of globalization is to look upon the world as a ‘global’ village, then the fourth component, unrestricted movement of labour cannot he left out. But the entire issue whether debated at the World Bank, IMF or World Trade Organization (WTO) blacks out ‘labour flows’ as an essential component of globalization. More recently the report of the World Commission of Social Dimension of Globalization (WC SDG) setup by the ILO has taken note of the question of human capital flows and their role in helping developed countries. This has raised several questions which will be taken up later.

            Thus, basically globalization signifies a process of internationalization plus liberalization. According to Stiglitz, “Globalization is the closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of costs transportation and communications, and the breaking down of artificial barriers to the flow of goods and services, capital, knowledge, and (to lesser extent) people across borders.” (Stiglitz 2002b, pp. 9) Jagdish Bhagwati defines globalization in the following words: “Economic globalization constitutes integration of national economies into the international economy through trade, direct foreign investment (by corporations and multinationals), short-term capital flows, international flows of workers and humanity generally, and flows of technology”.

Advocacy of Globalization

            Advocates of globalization support their defense of globalization on the following arguments:

(i)                 Globalization will promote direct foreign investment and, thus, it enables developing countries to raise capital without recourse to international indebtedness.

(ii)               Globalization enables developing countries to make use of technology developed by advanced countries without investment in Research and Development.

(iii)             Globalization widens the access of developing countries to export their produce in the developed countries. Simultaneously, it enables the consumers of developing countries to obtain quality consumer goods, especially consumer durables, at relatively much lower prices.

(iv)             Globalization introduces faster diffusion of knowledge and thus enables developing countries to raise their level of production and productivity. It, therefore, generates the momentum to reach international standards of productivity.

(v)               Globalization reduces costs of transport and communication. It also reduces tariffs and thus enlarges the share of   foreign trade as a percentage of GDP.

In nutshell, globalization is considered as the engine of growth, technical advancement, raising productivity, enlarging employment and bringing about poverty reduction along with modernization.

Global Business Environment:

The claims of the protagonists of globalization have been examined by various researches in different countries. A very powerful critique of globalization has been made by Stiglitz, Nobel Prize winner of Economics (2001) and former chief Economist of the World Bank. The World Commission on the social Dimension of Globalization (WCSDG) set up by ILO has also considered the experience of globalization of the world over and made certain very revealing observations.

The World Commission states: “The current path of globalization must change. Too few share in its benefits. Too many have no voice in its design and no influence on its course”. (ILO, 2004, p.2)

“We wish to make globalization a means to expand human well-being and freedom, and to bring democracy and development to local communities where people live”. (ILO, 2004, p. 2)

Globalizers advocated the acceptance of the new strategy of liberalization and globalization on the plea that India will be able to access foreign market more effectively.

This underlines the hard reality that foreigners have been able to penetrate the Indian market more effectively than Indians have been able to access foreign markets.

However, India’s performance in achieving a net positive balance in invisibles has helped it to wipe out the large trade deficit.

Foreign investment takes two forms – foreign direct investment (FDI) and foreign portfolio investment (FPI). Foreign direct investment helps to increase the productive capacity of the economy, while foreign portfolio investments is of a more speculative nature and is thus very volatile.

Outlining the objectives of globalization, ILO Report states:  “Our primary concerns are that globalization should benefit all countries and should raise the welfare of all people throughout the world. This implies that it should raise the rate of economic growth in poor countries and reduce world poverty, and that it should not increase inequalities or undermine socio-economic security within countries.” (WCSDG, 2004. p. 35) In that sense, the world should move towards more “humane globalization.”

This is a realizable vision. The resources exist to overcome the most pressing problems of poverty, disease and education. Mahatma Gandhi put it very simply: “There is enough in the world for every body’s need but there cannot be enough for everybody’s greed.”

However, globalization has not worked for the interests of the world’s poor. It has led to increase in inequalities across the countries as well as within the countries. It is not working to sustain environment. The transition from communism to market economy or from highly regulated states to market economy has been so badly managed that, but for china, Vietnam and a few other countries in Eastern Europe, poverty has soared as incomes have plummeted. The fault does not lie in globalization, but the way it has been managed. ILO Report sums up the situation: “The economy is becoming increasing global, while social and political institutions remain largely local, national or regional.”

Wide international consensus exists on essentials which all countries must strive for:

·         Good political government based on a democratic political system, respect for human rights, the rule of law and social equity.

·         An effective state that ensures high and stable economic growth, provides public goods and social protection, raise the capabilities of the people through universal access to education and other social services, and promotes gender equity.

·         A vibrant civil society, empowered by freedom of association and expression, that reflects and voices the full diversity of views and interests. Organizations representing public interests, the poor and other disadvantaged groups are also essential for ensuring participatory and socially just governance.

·         Strong representative organizations of workers and employers are essential for fruitful social dialogue.

The highest priority must be gives to policies to meet central aspiration of women and men for decent work, to raise the productivity of the informal economy and to integrate it into the economic mainstream; and to enhance the competitiveness of enterprises and economies. So far globalization has helped to create an increasingly global economy, but it has not succeeded in creating a global community with commonly shared goals. Thus there is a need for a more fair and inclusive globalization.

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