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  Free Trade and Developing Countries: Beneficial or Detrimental?  
 

 

By: Aruni Mukherjee
aruni_mukherjee@yahoo.co.uk
March 19, 2004

Since the collapse of the erstwhile Soviet Union, the already huge sphere of influence of Liberal Free market ideology has expanded further to include several countries, mostly those from the third world or developing countries. Since Deng Xiaopeng’s market reforms were brought in the late 1970s in Communist China, several developing states like India, Brazil, and various African nations have slowly but surely moved away from a regulated economy towards a more market oriented approach. Effects of this spread of free trade have varied significantly from country to country. In the last two decades of the 20th century, world income went up by 25% per annum yet poverty rose by 100 million.[1] Free marketeers can point to the astounding growth rates achieved by China since the early 80s and India since the 90s to explain the benefits developing states can reap by embracing free trade. However, this march to free trade has not been without hiccups as depicted vividly in the Latin American crisis, 1997-8 East Asian depression and the reluctance of the west to stick to the principles of global free trade when it comes to securing domestic interests. Overall, in determining whether reduction of trading barriers is actually beneficial for these countries, the two most important contemporary issues to be considered are that of rising disparity in wealth in these countries and that of opportunity cost rising as a result of the developed countries actually violating the norms of free trade.

The Chinese economic miracle has been the classic example used to hail the success of free trade. Indeed, ever since China liberalised in 1978, it has sustained a growth rate well over 7% and poverty has been drastically falling. During the second phase of its liberalisation, i.e. during the last decade of the 1990s, proportion of people living below $1/day fell from 31% [2] to 5.5%.[3] As a result of liberalisation, foreign direct investment has flown to China and from around $590 million in 1979, today China attracts nearly $50 billion of FDI which fund around 23,000 projects in the country. [4] In terms of purchasing power parity, China’s GDP per capita has risen from less than $980 in 1978 to in excess of $2,600 today. [5] However, under the shadow of this colourful portrayal exist serious macro-economical problems. China faces a threefold problem of disparity of wealth- rural-urban, regional as well as between urban dwellers. For example, China’s rural population earns only 40% of its urban counterpart where in most countries, developing or developed, the figure is around 66%. [6] China’s mid-west has a GDP per capita which equals to 47% of that of the East Coast. [7] There is also a great divergence in the incomes of the richer and poorer urban classes. [8] One of the biggest problems China has faced since resorting to free trade is that of unemployment and currently more than 10% of urban Chinese and much more amongst the rural population remain unemployed. [9] This problem was something which China rarely faced during its socialist tenure, although living conditions in general, especially in urban areas, have improved greatly since the embracing of free trade. Inequality is a problem common for most developing countries as free trade ensures only selective inflow of money in certain areas, sectors and industries and less and less government intervention has meant that there is no regulatory force to control the distribution of resources. African countries, in their slow transition to a market economy, have experienced this vividly. For instance, Nigeria has experienced a rise in inequality with its Gini co-efficient rising from 0.387 in 1985 to 0.449 in the 1990s. [10] India has experienced a rise in urban inequality as well especially during the time since 1999 when it increased the pace of its liberalisation process although poverty has come down overall from over 35% to below 26% during the same period and GDP has grown in excess of 5.5% by average. [11]

Critics of free trade have often argued that it results in overrunning of the domestic industry of the developing nation by the multi national corporations. This can be seen, to an extent, in China where much of the economy is in the hands of foreign companies and Chinese entrepreneurs have generally taken a back seat to them. However, impact of free trade on domestic companies in India have been very different indeed with the commanding heights of the economy are led by Indian firms like Reliance, Wipro, Infosys, Tata, Mahindra, etc. We can even see an expanding trend in the domestic companies in India who are venturing into other Asian and African countries. [12] The important factor to note here is that it was China which resorted to a more rapid and widespread liberalisation compared to India which was much too cautious and selective in treading on that path. Thus, it could be argued that, in the long-term, the control of India’s economy remains in domestic hands while China might run into trouble if other developing countries manage to take away its USPs. Hence, we could conclude that selective and cautious free trade is more beneficial for developing countries in the longer term rather than wholesale opening up of markets. The most stable economies of South East Asia followed this approach and are reaping the benefits while the East Asian countries that rapidly liberalised their capital markets and followed the rather questionable line set down by the IMF sunk into depression in the late 1990s. [13]

Adhering to free trade principles, it naturally follows from this that these companies would not hesitate to relocate to another country if it provides cheaper or better means of production. China so far has managed to keep its cost cutting USP intact, although this is harming India to an extent. So far, India has been the leading nation in terms of attracting off-shoring financial services jobs. However, recently countries like Czech Republic, Poland and South Africa have emerged as competitors for an estimated $356 billion[14] worth of jobs, and western companies are now switching to Eastern Europe due to closeness in terms of distance than India. One could argue, though, that increased free trade leads to enhancing competition and greater efficiency for the companies and a good deal for the consumers of the country. For instance, Nepalese and Pakistani competition has led to Indian textile exports to the US to fall in the last financial year, yet the Indian companies could boost their sales by tapping the European market. Similarly, opening up Jamaican markets to American milk imports has led to overrunning of domestic companies yet enabled the consumers to get a cheaper product.[15] The incidents which have been pointed out by left wing critics as monopolistic behaviour by MNCs are likely to become rarer due to the rapidly increasing number of competitors and owing to a high price elasticity of demand of their products in most developing countries.[16]

Thus, we see that in general reduction in trading barriers has indeed helped developing countries attract investment and improve growth prospects, and in some cases, even expand their own corporate sector. However, it can be argued that free trade, in its current form, has been harmful for developing nations in cases where the developed world has actually refused to follow the norms of free trade. For instance, the recent US ban on Business Process Outsourcing can hurt employment conditions in countries like India very much. [17] US tariffs on Chinese steel is also an example of such contradictory policies of the west especially since they violate WTO norms. [18] The arguments between the developing and developed nations at Cancun also underline the lost opportunities the current system is bringing about. While developing countries are asked to lower their agricultural subsidies, the US spends $3.9 billion subsidising 25,000 cotton farmers which gives them the edge over 2 million of their counterparts in Burkina Faso. Therefore, if we term the current system of international trade as ‘free’, then it has certainly proved itself to be detrimental for developing countries in many aspects.

Thus, we can arguably conclude that free trade is only beneficial for developing countries either when it is practised uniformly through out the global market or if it is conducted selectively. Forced liberalisation of the capital markets of East Asia led to the 1997-8 crisis. Similar stories exist elsewhere like Argentina, Ethiopia, Kenya, etc. Pressurising countries to formulate policies to liberalise their economy almost forcibly and resort to free trade has often yielded disastrous results. Adamant insistence on balancing the budget and withdrawing government arm from the economy as a condition of granting loans has become the norm with the IMF and this kind of forced free trade has proved damaging to the country’s development quite often. IMF insistence on cutting government subsidies has led to a 2% fall in income levels in the world’s poorest region, Sub-Saharan Africa. [19]

Thus, we see that the success stories of free trade namely South East Asia, India and China have mostly followed a regulated derivative. In fact, many would argue that following a more open form of free trade could be detrimental to long-term strategic interests of China. Most of the failures in the world of free trade have been countries which have embraced it, or been forced to toe the line, and opened their markets when conditions were not favourable. The principles on which free trade stands for are definitely, at least in theory, beneficial for the developing states. However, given the contradictions the developed world often makes to its own principles, it is perhaps safe to say that complete free trade is harmful to the interests of a developing country. The countries which have reaped, and indeed are reaping, the benefits of free trade have mostly done so because of their selective approach and flexibility, developing a way to counter the inconsistent policies of the developed world and making sure that a free economy causes the uplifting of all its social classes, especially the most downtrodden.

Aruni Mukherjee

(Introduction about Author: I am 18, and a first year undergraduate in History and Politics and I originate from Calcutta, India. I came to the United Kingdom in 2001 and studied A-levels here before joining university. I take a lot of interest in defence and strategic issues pertaining to India, especially economic aspects of our development.)

Bibliography 

1.       Stiglitz, Joseph: Globalization and its Discontents (London: Allen Lane, 2002)

2.       Hurrell, Andrew & Woods, Ngaire (Eds.): Inequality, Globalization and World Politics (New York: Oxford University Press, 1999)

3.       World Bank Poverty Monitor at http://www.worldbank.org/research/povmonitor (Accessed on 08/03/2004)

4.       ‘BPO Backlash can hurt economy: Shourie’ on Rediff India online at http://www.rediff.com//money/2004/mar/08bpo1.htm (Accessed on 08/03/2004)

5.       ‘China demands exemption from US steel tariffs’ at http://www.china.org.cn/english/2002/Mar/29380.htm (Accessed on 08/03/2004)

6.       Quinlivan, Gary M. :  Multinational Corporations: Myths and Facts at http://www.acton.org/publicat/randl/article.php?id=364 (Accessed on 08/03/2004)

7.       ‘India should watch competition from Eastern Europe’ on Times of India at http://timesofindia.indiatimes.com/articleshow/527728.cms (Accessed on 08/03/2004)

8.       ‘India inc. makes inroads into Africa’ on Times of India at http://timesofindia.indiatimes.com/articleshow/527732.cms (Accessed on 08/03/2004)

9.       Jha, Raghabendra: Has Liberalisation Helped?- Reducing Poverty and Inequality in India at http://www.wider.unu.edu/publications/wp204.pdf (Accessed on 08/03/2004)

10.   Asian Developmental Bank report on ‘Poverty, Inequality and Human Development in Developing Asian and Pacific Countries’ at http://www.adb.org/Documents/Books/Key_Indicators/2003/pdf/rt01.pdf (Accessed on 08/03/2004)

11.   CIA Factbook: China at http://www.cia.gov/cia/publications/factbook/geos/ch.html#Econ (Accessed on 08/03/2004)

  1. Han, Taejoon: China: A Shared Poverty to Uneven Wealth at http://www.gwu.edu/~econ270/Taejoon.html#contents (Accessed on 08/03/2004)
  2. World Bank, China 2020: Sharing Rising Incomes: Disparities in China,  The IBRD, 1997 (p.16)
  3. James Angresano, Zhang Bo, Zhang Muhan: China’s Rapid Transformation: The Role of FDI at http://www.aucegypt.edu/academic/econ/FDI_PAPER.HTM (Accessed on 08/03/2004)
  4. ‘GDP and GDP per capita in China and Hong Kong’ at http://www.eco.rug.nl/~Maddison/China_book/App_C_tables/TableC.5.pdf (Accessed on 08/03/2004)

[1] Joseph Stiglitz, Globalisation and its Discontents, p. 6

[4] China’s Rapid Transformation: Role of FDI at http://www.aucegypt.edu/academic/econ/FDI_PAPER.HTM

[6] World Bank, China 2020: Sharing Rising Incomes: Disparities in China,  The IBRD, 1997 (p.16).  

[8] Intra-Urban Disparity of Wealth in China at http://www.gwu.edu/~econ270/Taejoon.html#c.Intra-urban

[10] Andrew Hurrell & Ngaire Woods, Inequality, Globalisation and World Politics, p. 162

[11] Raghabendra Jha, Has Liberalisation Helped?- Reducing Poverty and Inequality in India at http://www.wider.unu.edu/publications/wp204.pdf

[13] Joseph Stiglitz, Globalisation & Its Discontents, p. 90

[15] Joseph Stiglitz, Globalisation and its Discontents, Ch. 1

[16] Gary M. Quinlivan, Multinational Corporations: Myths and Facts at http://www.acton.org/publicat/randl/article.php?id=364

[17] ‘BPO Backlash can hurt economy’ at http://www.rediff.com//money/2004/mar/08bpo1.htm

[19] Joseph Stiglitz, Globalisation & its Discontents, p. 61


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