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March 31, 2000
The Rediff Business Special/Nirupam Bajpai
After export-boosting efforts, it's time for reform of labour laws, dereservation of products
The new Export Import policy for 2000/01 announced by Commerce Minister Murasoli Maran ushers in a series of reforms that will undoubtedly provide great impetus to India's export efforts. Now what is required is reform of India's labour laws and dereservation of products for the small-scale industry.
Yet sustaining high economic growth is not easy. Rapid growth can easily be derailed, as the East Asian crisis has reminded us yet again. For India, one key requirement to achieve sustained high growth is an appropriate growth strategy, one that recognises India's unique situation in the world economy, and that best positions India in the emerging global division of labour. A strategy focussing on export-led growth can go a long way in attaining and sustaining high rates of economic growth.
If there has been one lesson of recent development experience, it is that rapid overall economic growth depends on rapid export growth. The strategy of inward-looking development, in which exports would be unimportant because imports would be held to a minimum, proved to be ineffective in all countries in the world, even the most populous such as Brazil, China, India, and the former Soviet Union.
Inward-looking development was based on the idea that a large country such as India could develop its own capital goods sectors and intermediate goods sectors so that it would not have to rely on world markets for imports of capital and intermediate products (by intermediate products we refer of course to manufactured and semi-manufactured goods used as inputs for final products).
There was a little bit of truth to this proposition, in that India and the other large economies were more equipped to develop domestic capital goods industries than much smaller countries, but still the idea failed miserably. The failure, as is now appreciated, came from various directions.
First, the vast proportion of new technologies in the world inevitably had to be imported. There was no way for any single country, especially a developing country, to rely on its own activities for technological advance. Autarkic strategies inevitably cut the economy off from technological progress in the rest of the world.
Second, even a large domestic market such as India's or Brazil's was not large enough to spur strong internal competition in the absence of vigorous competition from abroad. Protected home markets turned monopolistic or oligopolistic, because the minimum efficient scale of production often represented a large proportion of the home market. Domestic enterprises, unchallenged by foreign competition, turned lazy and relied on state largess rather than their own efforts to survive.
The bottomline is that all economies, even the giants such as China and India, need to import vast amounts of capital goods, technology and intermediate products if they are to achieve technological efficiency and dynamism.
But these vast imports must be paid for somehow. For a while a country can try to rely on debt finance, but as India found in 1991, the external debt route is eventually precarious.
Even reliance on foreign direct investment or FDI rather than foreign borrowing is precarious unless the FDI is accompanied by rapid export growth, since the continued inflow of FDI is motivated by an expected future stream of repatriated profits. That profit stream must have as its counterpart a rise in future exports, or else the repatriated profits will come in the form of highly depreciated domestic currency as foreign investors attempt to repatriate domestic currency earnings.
The result is an imperative to export. Countries must export to import. And they must import to grow, since they require massive and continuing import of capital and intermediate goods that are only available at reasonable cost from abroad. It is not surprising, therefore, that all fast-growing economies in the developing world are also export success stories.
There have been fundamental differences in India and China's economic performance in the past two decades. China achieved rapid overall growth on the basis of rapid export growth, while India managed only moderate success in exports and moderate overall growth.
In China, exports of goods and services went from 6 per cent of GDP in 1980 to 21 per cent of GDP in 1995. In India, by contrast, the same ratio went from 7 per cent of GDP to 12 per cent. Yes, there has been some opening of the economy, but the results have been much more modest in terms of export-led growth.
In dollar terms, the comparison is even more striking. China's merchandise exports (excluding services) rose from $18.1 billion in 1980 to $148.8 billion in 1995. India's merchandise exports rose from $8.6 billion to a mere $30.8 billion. China exported $123 per person in 1995, while India managed only $33 per person.
Nothing more clearly accounts for the difference in growth performance of the two countries -- 8.3 per cent average annual growth per capita in China during 1985-95 compared with just 3.2 per cent in India -- than the difference in export growth.
India could have achieved what China has achieved in export growth, but India failed in basic policy strategy. China's export growth was based on core policy and economic management decisions carried out beginning in the early 1980s.
These can be summarised as follows: first, China understood that the root of export growth would be diversification away from traditional sectors, especially raw materials, into non-traditional sectors, especially manufactured goods. But China lacked the technology by itself to be competitive in manufactured goods.
Therefore, it invited in foreign direct investors to provide the capital and the expertise to achieve export competitiveness in a wide range of sectors, including electronics, apparel, plastic toys, stuffed animals, ceramics, and many other labour-intensive sectors.
In each sector, the key was to link foreign investor capital and expertise with a large and low-cost Chinese labour force. The foreign investors brought in the product design, specialised machine tools and capital goods, key intermediate products, and knowledge of world marketing channels. The Chinese assured these foreign investors certain key conditions for profitability, such as low taxes, reliable infrastructure, physical security, adequate power, decent logistics for the import and export of goods, and so forth.
At the centre of China's export strategy were the special economic zones or SEZs in which favorable export conditions were assured. These SEZs, along China's coastline, were designed to give foreign investors and domestic enterprises favorable conditions for rapid export promotion.
All key aspects of the export environment were secured. Exporters, for example, were allowed to import intermediate products and capital goods duty free. They were given generous tax holidays. The exporters were assured decent physical infrastructure, often through the provision of land, power, physical security, and transport to the ports, within specially created industrial parks.
India too has experimented with special zones, mainly export processing zones or EPZs, but one has to say that India's approach to export zones has been one of relative neglect rather than support. While China's five main special economic zones (Shenzen, Zhuhai, Santou, Xiamen, Hainan) exported $26 billion in 1994, roughly 22 per cent of the national total, India's main export processing zones, or EPZs (Kandla, Santacruz, Noida, Madras, Cochin and Falta), managed a tiny fraction of that, both in absolute levels and as a proportion of total Indian exports.
Exports from our seven EPZs accounted for just 3.8 per cent of India's total exports in 1997-98. By contrast, EPZs in Mauritius accounted for more than 60 per cent of total exports and 12.2 per cent of its GDP. EPZs have been a success story elsewhere as well -- in Bangladesh, Costa Rica, Singapore, Malaysia and Sri Lanka, they have contributed significantly to the country's export effort.
India's export environment suffers from several other institutional weaknesses. India's labour laws, noted unfavourably in the 1998 Global Competitiveness Report, make it very costly to fire workers in enterprises of more than 100 workers.
The result is that formal-sector firms (those that are registered and that pay their taxes) are loath to take on new employment, and the vast majority of India's employment is informal, in small, tax-evading, inefficient enterprises. Equally remarkably, India's legislation continues to restrict the entry of large firms, or the growth of small firms into large firms, in several areas of potential comparative advantage.
Thus, garments, toys, shoes and leather products continue to be reserved, to a varying extent, for small-scale producers. Such restrictions virtually assure China's dominance in these sectors compared with India.
India's tax and tariff structures similarly remain anti-export biased. India's high overall tariff rates, especially tariffs on intermediate products that are used by exporters, impose a heavy indirect tax on export competitiveness. There are duty drawback systems to reduce this anti-export bias, but such programmes are administratively burdensome and often too costly to use effectively.
Finally, the regulatory attitude to foreign direct investors, who could be the fuel for India's export drive, continues to be ambivalent. The government promotes FDI on the one hand, but then maintains regulations against full foreign ownership, or insists on lengthy approval processes, on the other hand.
We must mention, in addition to labour-intensive manufacturing exports, India's clear and growing capacity in service-sector exports based on information technology or IT. The Global Competitiveness Report confirmed the high international opinion of India's engineering and scientific capacities, the products in part of India's long-term investments in the Indian Institute of Technology or IIT.
India's prowess has been most evident in the software sector, where world-class programmers operate in technology centres such as Bangalore, Delhi, Bombay, and Madras. Operating through satellite links, Indian programmers are providing IT support to US and European firms in areas ranging from software development and maintenance, back-office operations, data transcription and transmission, telemarketing, and other related areas.
Software exports have been growing around 50 per cent per year in recent years, reaching an estimated $1.75 billion in fiscal 1997-98, or roughly 5 per cent of merchandise exports, a proportion that is likely to rise significantly in the years ahead.
Here, as in labour-intensive exports, Indian government policy could do much more to spur export growth. On the plus side has been the government's long-term commitment to the IIT. More recently has been the government's support for Software Technology Parks or STPs, in Bangalore, Pune and other cities, which are the IT-industry equivalent of the EPZs in manufacturing industries.
There are serious negatives, however. India's telephone density is abysmally low, at around 1.3 per hundred in 1995, compared with around 62.6 per hundred in the United States. Costs of international telephone calls originating in India are among the highest in the world, largely due to lack of competition.
Physical infrastructure for data transmission within India (e.g. fibre optic cables) remain underdeveloped despite some recent progress. Restrictive policies on FDI have kept international chipmakers out of India, and have indirectly raised the prices of PCs in the Indian market.
The lack of enforcement of intellectual property laws most likely inhibits inward investments in IT sectors. All of these problems are remediable through further deregulation of telecomms and FDI, as well as effective law enforcement in a more liberalised and competitive environment. India's strengths in IT will be an important bulwark of export growth for many years to come assuming that the administrative barriers are overcome.
Foreign Direct Investment
The increased flow of foreign direct investment FDI from developed to the developing countries is increasingly becoming crucial for the latter group of countries to enhance their growth prospects and thereby raise the living standards of their people. The increase in FDI in the past decade-and-a-half has substantially outpaced the increase of global trade, which in turn has consistently outpaced the increase in global GNP.
All over the world, FDI is seen as an important source of non-debt inflows, and is increasingly being sought as a vehicle for technology flows and as a means of building inter-firm linkages in a world in which multinational corporations or MNCs are primarily operating on the basis of a network of global interconnections.
In the current global scenario, it is possible for India to achieve very dynamic growth based upon labour-intensive manufacturing, that combines the vast supply of Indian labour, including skilled managerial and engineering labour, with foreign capital, technology and markets.
On this basis, China has managed growth in excess of 10 per cent per year in the 1990s. Malaysia, to cite another example, has shifted from being a raw-material exporter in the 1970s (with commodities accounting for 80 per cent of exports) to a manufacturing exporter (with manufactures, mainly electronics, accounting for 70 per cent of exports), and with GDP growth of 8 per cent per year.
MNCs offer the capital, international market access, and technology that India lacks, and are therefore vital to remolding India as a strong and rapidly growing economy. India's neighbours that are relying heavily on FDI, such as China, Indonesia, Malaysia, and Thailand, have been pulling far ahead of India in economic growth, income levels and productivity, while also increasing their security and geopolitical influence in the world community.
India's continuing ambivalence to FDI, as a result, exacts a heavy toll on the Indian economy. Undoubtedly, India is ceding billions of dollars of FDI to its neighbours each year, flows that otherwise would have come to India. While China achieved actual FDI inflows of around $37.5 billion in 1995, India settled for a mere $2.1 billion!
Nirupam Bajpai is Research Fellow and Director of the India Programme at the Centre for International Development or CID at the Harvard University.
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