Hel044 Two Decades of LPG - Francis - Ch-Pre

Government Intervention in the Economy through the Ages
Two Decades of LPG
TWO DECADES OF LPG
Dr. Francis Cherunilam

Professor, School of Management Studies, Cochin University of Science & Technology, Cochin 682 022. E-mail: cherunilam@gmail.com
(Formerly: Professor & Chairman, Marketing Area, IIMK; Director, Albertian Institute of Management, Cochin; Director, SMS, CUSAT)
MUMBAI NEW DELHI
NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI
AUTHOR
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Two Decades of LPG
Preface Preface
Two Decades of LPG, my 50th book, has considerable linkages with the first book, Business and Government, first published in 1982. Business and Government deals with the role of government vis--vis business. Until 1991, it looked at the increasing government controls on the business and their implications; since the 1992 edition it scanned the easing of the regulations. The last chapter of Business and Government, viz., A Critic of Government Controls in India, was deleted with effect from the 1992 edition as the economic reforms have substantially diminished the relevance of this chapter and in 1992 I had brought out a book on Economic Reforms in India and Abroad. The present work is a modest attempt to critically examine the transformation of the Indian business environment under the liberalisation, privatisation and globalisation (LPG) process that India has been undergoing. The first two chapters of the book are intended to provide a background to the LPG in India. The introductory chapter provides a short description of the changes, historically, in the economic roles of Government across the world and the global LPG wave of the recent decades. The second chapter examines the government-business dynamics in India over the last six and a half decades, viz., the growth of the control regime and its impact and the transition in the last two decades. The next three chapters go into some macro details of the reforms in three important sectors - industrial, financial and external. The last chapter takes a birds eye view of the changes in the position of India in the world economy over the last two millennia. Particular attention has been given to evaluate Indias economic performance since 1950 and to the impact of the economic reforms. The chapter concludes with a look at the future prospects and challenges for the Indian economy. It is the profuse blessings of the Almighty that has made possible what would have been impossible for me in the last three decades of my writing career. The response to many of the books from the academic community has been overwhelming. The constant encouragement and unstinted support of the Himalaya Publishing House have played an important role in taking me to the 50th book. I remember with great love and gratitude late Sri. D.P. Pandey, the founder of Himalaya Publishing House, for the emotional bondage and the empowering of an young author. I would like to place on record my indebtedness to Mrs. Meena Pandey, Anuj Pandey and Niraj Pandey.
Dr. Francis Cherunilam

Cochin, 29th December, 2011
Contents Contents
1. GOVERNMENT INTERVENTION IN THE ECONOMY THROUGH THE AGES Growth of state in market economies; rationale and scope of state intervention; economic roles of government; economic systems; trends in political/economic policies and philosophies; economic crisis of the communist world and the march from Marx to the the market; the global LPG wave; economic reforms in India; impact of LPG; LPG and developing countries; conclusion. 2. THE CONTROL AND PROMOTIONAL REGIME IN INDIA Economic implications of the constitution; important policies and regulations; expansion in state intervention; evaluation of the control regime. 3. INDUSTRIAL SECTOR REFORMS Industrial policy reforms; evaluation of the industrial policy liberalisation; conclusion. 4. FINANCIAL SECTOR REFORMS Banking sector reforms; capital market reforms and developments; conclusion. 5. EXTERNAL SECTOR REFORMS Reform of trade policy and regulation; foreign trade policy; special economic zones; Indias trade performance; service exports; reform of foreign exchange rate regime; impact of LPG on BoP and forex reserves; conclusion 6. THE EMERGING INDIA Indian economy through the ages; phase of accelerated pace of growth; drivers of growth; challenges; conclusion.
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65 90
91 117
118 132
133 185
186 211
GOVERNMENT INTERVENTION IN THE ECONOMY THROUGH THE AGES
1
From Laissez Faire Through Statism to Liberation Government intervention in the economy and vis--vis business is universal, albeit varies widely in kind and degree depending on the development and regulatory needs and political philosophies. Historically, the role of the government in the economy differed enormously, from laissez faire (free market system) to conventional communism characterised by centralised planning and almost state monopoly. The last six-and-a-half decades or so, the period since the end of the II World War (and the coming into being of World Bank IMF and GATT, the forerunner of WTO), have witnessed several shifts, evolutionary to revolutionary, in the approach, policy and mode of government intervention in the economy across the world. There are very divergent perceptions of the functions of the state. On the one extreme is the laissez faire philosophy that the government that governs the least is the best and on the other extreme is the demand for government ownership or control of almost everything. Further, the philosophy regarding the states role in the society has undergone significant changes over time in many countries. A number of countries have, in fact, been transitioning from Marx to the market.
GROWTH OF STATE IN MARKET ECONOMIES

The economic role of the state has been recognised for several centuries now. States have come in all shapes and sizes, depending on a mix of factors including culture, natural endowments, opportunities for trade and distribution of power.1 Seventeenth century mercantilists wanted the state to play a major role in guiding trade. Adam Smiths Wealth of Nations, published in the late eighteenth century,
however, popularised the view that economic growth and welfare are best achieved by the free market mechanism and the state should confine itself to certain core functions such as law and order, defence etc. and enforcement of contracts, essential for the proper functioning of the market economy. But even then, state intervention went on to play a vital, catalytic role in the development and growth of markets in Europe, Japan and North America.2 Even in the United States, which is regarded as the citadel of market economy, the state has been playing an active role in the development of several industries/sectors and in welfare measures through public finance. In most of the modern economies the states regulatory role is now broader and more complex than ever before, covering such areas as the environment, spatial dispersal etc. as well as more traditional areas such as monopolies. The first half of the twentieth century witnessed an increase in the state intervention in the economy. The Russian Revolution of 1917 and the consequent establishment of communist rule in the USSR had great influence across the globe on the thinking of the states role. The Russian model had a great influence in formulating the economic policy of Independent India. The Great Depression in USA (which eventually spread to other countries), that set in with the Wall Street collapse of 1929 and assumed terrific proportions in the early 1930s, brought to the fore the important role the state has in a capitalist economy. The economic crisis that swept across the world during 2008 - 09 once again demonstrated the economic stabilisation role of the government. The post II World War paradigm coalesced around three basic themes, all of which commanded broad, if not uniform, agreement. This three-pillared consensus remained largely undisturbed until the first oil price shock of 1973. First was the need to provide welfare benefits to those suffering from transitory loss of income or other deprivation. Second was the desirability of a mixed public-private economy, which would often mean nationalizing a range of strategic industries. Third was the need for a coordinated macroeconomic policy, on the grounds that the market alone could not deliver stable macroeconomic outcomes that were consistent with individuals objectives. In time, the goals of macroeconomic policy were made explicit: full employment, price stability, and balance of payments equilibrium. States thus took on new roles and expanded existing ones. By mid-century the range of tasks performed by public institutions included not only wider provision of infrastructure and utilities, but also much more extensive support for education and health care.3 A reversal of this trend started in the 1980s. Communism collapsed in the USSR and East Europe. China started economic reforms in the late 1970s and widely opened the economy for foreign investment in the eighties. Privatisation caught on at an amazing speed in many developed market economies and developing economies.
Two Decades of LPG
Government, however, plays a very important role in the modern economy. Even those which are described as capitalist or market economies are mixed or regulated systems. In such economies a substantial share of the nations product goes to satisfy public wants, a substantial part of the private income originates in the public budget, and public tax and transfer payments significantly influence the state of private income distribution.4 Even in the market economies, state ownership of enterprises and even the whole of certain industries has not been uncommon, particularly until the privatization move ushered around the 1980. The public utilities in these countries had either been under strong state control or owned by the state. Shortage of entrepreneurship and other development resources and ideological flavour encouraged many developing countries to assign a very important role to the state in the socio-economic system. Government policies like the budget policy and the monetary policy (which also is an instrument of intervention, although supposed to be independent of the government) affect the level of investment, employment, prices and consumption in the private sector. Thus, the present day capitalist economy is a mixed system, including a sizable and virtually important sphere of public economy along with the market sector. Government intervention is necessitated even in the market economies by the limitations of the invisible hand and the fact that the market mechanism alone cannot perform all economic functions. However, the extent of State control and the types of control may vary widely between nations depending upon the nature and stage of development of the economy, the behaviour of the private sector, the political philosophy, social attitude, administrative system etc. As R. A. Musgrave and P. B. Musgrave, renowned authors on Public Finance, point out, public policy is needed to guide, correct and supplement it in certain respects due to a variety of reasons, including the following:5 1. The contractual arrangements and exchanges needed for the market operation cannot exist without the protection and enforcement of a governmentally provided legal structure. 2. The claim that the market mechanism leads to efficient resource use (i.e., produces what consumers want most and does so in the cheapest way) is based on the condition of the competitive factors and product markets. This means that there must be no obstacles to free entry and that consumers and producers must have full market knowledge. Government regulation or other measures are needed to secure these conditions. 3. Even if all barriers to competition were removed, the production or consumption characteristics of certain goods are such that these goods cannot be provided through the market. Problems of externalities arise which lead to market failure and require solution through the public sector.
4. The rate of discount used in the valuing of future (relative to present) consumption may differ as seen from a public and a private point of view. 5. The market system, especially in a highly developed financial economy, does not necessarily bring high employment, price level stability, and the socially desired rate of economic growth. Public policy is needed to secure these objectives. 6. Social values may require adjustments in the distribution of income and wealth, which results from the market system and from the transmission of property rights through inheritance. The Musgraves, however, rightly caution that to argue that these limitations of the market mechanisms call for corrective of compensating measures of public policy does not prove, of course, that any policy measure which is undertaken will in fact improve the performance of economic system. Public policy, no less than the private policy, can err and be inefficient.6
RATIONALE AND SCOPE OF STATE INTERVENTION

Functions of the state varies from basic minimum requirements to active participation in several other sectors. Figure 1.1 classifies the functions of government along a continuum, from activities that will not be taken at all without state intervention to activities in which the state plays an active role in coordinating markets or redistributing assets. The basic functions include the pure public goods such as the provision of property rights, macroeconomic stability, control of infectious diseases, safe water, roads, and protection of the destitute. In many countries the state is not even providing these. Recent reforms have emphasized economic fundamentals. But social and institutional (including legal) fundamentals are equally important to avoid social disruption and ensure sustained development. Going beyond these basic services are the intermediate functions, such as management of externalities (pollution, for example), regulation of monopolies, and the provision of social insurance (pensions, unemployment benefits). Here, too, the government cannot choose whether, but only how best to intervene, and government can work in partnership with markets and civil society to ensure that these public goods are provided. States with strong capability can take on more-activist functions, dealing with the problem of missing markets by helping coordination. East Asias experience has renewed interest in the states role in promoting markets through active industrial and financial policy.7
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Two Decades of LPG
Addressing market failure Minimal functions Providing pure public goods Defence Law and order Property rights Macroeconomic management Public health Addressing externalities Basic education Environmental Protection Regulating monopoly Utility regulation Anti-trust Policy Overcoming imperfect information Insurance (health life, pensions) Financial Regulation Consumer Protection
Improving equity Protecting the poor Anti-poverty programmes Disaster relief Providing social insurance Redistributive pensions Family allowances Unemployment insurance Redistribution Asset redistribution
Intermediate functions
Activist functions
Coordinating private activity Fostering markets Cluster initiatives
Figure
1.1
Functions of the State (Adopted from World Bank, World Development Report, 1997).
ECONOMIC ROLES OF GOVERNMENT

Governments normally play four important roles in an economy, viz., regulation, promotion, entrepreneurship, and planning. As stated above, the extent and nature of these roles in a given situation depend on a number of factors. Some salient features of these roles are outlined below:
Regulatory Role
Government regulation of the business may cover a broad spectrum extending from entry into business to the final results of a business. The reservation of industries to small scale, public and co-operative sectors, licensing system etc. regulate the entry. Regulations of product mix, promotional activities etc. amount to regulation of the conduct of business. Results of business operations may be regulated by such measures as ceilings on profit margins, dividend etc. The State may also regulate the relationship between enterprises. Examples of this include restrictions on intra-corporate investments, interlocking of directors and appointment of sole selling agents.
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Government regulation of the economy may be broadly divided into direct controls and indirect controls. Indirect controls are usually exercised through various fiscal and monetary incentives and disincentives or penalties. Certain activities may be encouraged or discouraged through monetary and fiscal incentives and disincentives. For instance, a high import duty may discourage imports and fiscal and monetary incentives may encourage the development of export-oriented industries. The direct administrative or physical controls are more drastic in their effect. The distinguishing characteristic of direct controls is their discretionary nature. They can be applied selectively from firm to firm and industry to industry, at the discretion of the State. Regulation of the business had been rampant in the developing countries. Since the late 1980s, however, a deregulation trend has set in. This has drastically transformed the competitive environment and has given an impetus to globalisation.
BOX 1.1
The State, Institutions, and Economic Outcomes
The State sets the formal rules laws and regulations that are part and parcel of a countrys institutional environment. These formal rules, along with the informal rules of the broader society, are the institutions that mediate human behavior. But the state is not merely a referee, making and enforcing the rules from the sidelines; it is also a player, indeed often a dominant player, in the economic game. Every day, state agencies invest resources, direct credit, procure goods and services, and negotiate contracts; these actions have profound effects on transactions costs and on economic activity and economic outcomes, especially in developing economies. Played well, the states activities can accelerate development. Played badly, they will produce stagnation or, in the extreme, economic and social disintegration. The state, then, is in a unique position: not only must it establish, through a social and political process, the formal rules by which all other organizations must abide; as an organization itself, it, too, must abide by those rules. Reproduced from: World Bank, World Development Report, 1997.
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Two Decades of LPG
Government Interventions
Governance Structure
Policies and Guidelines
Planning
Entrepreneurship
Regulation
Industrial Policy
Fiscal Policy
Trade Policy
Other Policies
Promotional and Development Organisations
Laws and Other Regulations
Figure
1.2
Promotional Role
Ways of State Intervention in the Economy
The promotional role played by the Government is very important in developed countries as well as in the developing countries. In developing countries, where the infrastructural facilities for development are inadequate and entrepreneurial activities are scarce, the promotional role of the Government assumes special significance. The State will have to assume direct responsibility to build up and strengthen the necessary development infrastructures, such as power, transport, finance, marketing, institutions for training and guidance and other promotional activities. The promotional role of the State also encompasses the provision of various fiscal, monetary and other incentives, including measures to cover certain risks, for the development of certain priority sectors and activities.
Entrepreneurial Role
In many economies, the State also plays the role of an entrepreneur establishing and operating business enterprises and bearing the risks. A number of factors such as socio-political ideologies; dearth of private entrepreneurship; neglect of certain sectors, like the unprofitable sectors, by the private entrepreneurs; absence of or inadequate competition in certain segments and the resultant exploitation of consumers, etc. have contributed to the growth of State owned enterprises (SOEs) in many countries.
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There was a tendency in many developing countries to assign a dominant place to the public sector. Public sector dominance was usually established in capitalintensive projects like steel, capital goods, petrochemicals and fertilizers for which investment requirements were very large and the expected private returns, at least in the short-run were too low to provide an incentive for private profitability. In many cases even when the private sector was prepared to undertake the risk and invest. State ownership of such industries existed for one reason or other. However, recently many governments have resorted to privatisation in varying degrees, and have redefined the role of the public sector.
BOX 1.2
The Impact of State
Ways of State Promoting Development By providing a macroeconomic and a microeconomic environment that sets the right incentives for efficient economic activity By providing the institutional infrastructure property rights, peace, law and order, and rules that encourages efficient longterm investment, and By ensuring the provision of basic education, health care, and the physical infrastructure required for economic activity, and by protecting the natural environment Harmful Impact of State The wrong kind of rules can actively discourage the creation of wealth. For example, the state may penalize private wealth by distorting prices through an overvalued currency, for example, or by creating agricultural marketing boards that tax farmers output and give them little in return. Even if the rules themselves are benign, they may be applied by public organizations and their employees in harmful fashion. They may, for example, impose huge transactions costs, in the form of red tape or bribery, on entrepreneurs setting up new businesses or restructuring old ones. But potentially the largest source of state-inflicted damage is uncertainty. If the state changes the rules often, or does not clarify the rules by which the state itself will behave, businesses and individuals cannot be sure today what will be profitable or unprofitable, legal or illegal, tomorrow. They will then adopt costly strategies to insure against an uncertain future by entering the informal economy, for example, or sending capital abroad all of which impede development.
Courtesy: World Bank, World Development Report, 1997.
Planning Role
Especially in the developing countries, the State plays a very important role as a planner.
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Two Decades of LPG
The importance of planning to a less developed economy was often emphasised by Jawaharlal Nehru, the chief architect of Development Planning in India. He rightly observed: Whatever it may be in other countries, in under-developed countries like ours, which have to develop fairly rapidly, the time element is important and the question is how to use our resources to the best advantage. If our resources are abundant it will not matter how they are used. They will go into a common pool of development. But where ones resources are limited, one has to see that they are directed to the right purpose so as to help to build up whatever one is aiming at.
ECONOMIC SYSTEMS
The scope of private business depends, to a large extent, on the economic system which indeed is rooted in political philosophy. At one end, there are the free enterprise / market economies or capitalist economies, and at the other end are the centrally planned economies or communist countries. In between these two are the mixed economies. Within the mixed economic system itself, there are wide variations. The freedom of private enterprise is the greatest in the market economy, which is characterised by the following assumptions: 1. The factors of production (labour, land, capital) are privately owned, and production occurs at the initiative of the private enterprise. 2. Income is received in monetary form by the sale of services of the factors of production and from the profits of the private enterprise. 3. Members of the free market economy have freedom of choice in so far as consumption, occupation, savings and investment are concerned. 4. The free market economy is not planned, controlled or regulated by the government. The government satisfies community or collective wants, but does not compete with private firms; nor does it tell the people where to work/ or what to produce. The completely free market economy, however, is an abstract system rather than a real one. Today, even the so-called market economies are subject to a number of government regulations. Countries like the United States, Japan, Australia, Canada and member countries of the EEC are regarded as market economies. The communist countries have, by and large, a centrally planned economic system. Under the rule of a communist or authoritarian socialist government, the state owns all the means of production, determines the goals of production and controls the economy according to a central master plan. There is hardly any consumer sovereignty in a centrally planned economy, unlike in the free market economy. The consumption pattern in a centrally planned economy is dictated by the state.
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China, East Germany, Soviet Union, Czechoslovakia, Hungary, Poland, etc., had centrally planned economies. However, these countries have discarded communist system and have moved towards the market economy, although politically several of them, particularly China, continue to be authoritarian. In between the capitalist system and the centrally planned system falls the system of the mixed economy, under which both the public and private sectors coexist, as in India. The extent of state participation varies widely between the mixed economies. However, in many mixed economies, the strategic and other nationally very important industries are fully owned or dominated by the state. The economic system, thus, is a very important determinant of the scope of private business. The economic system and policy are, therefore, a very important external constraint on business.
TRENDS IN POLITICAL/ECONOMIC PHILOSOPHIES/OUTLOOK

While there are no radical differences in the philosophies of major political parties in some countries, the situation is quite different in some others. The government system in a number of countries, including several countries which are making rapid economic progress and having liberal policies towards foreign capital and technology, is not very democratic. That does not mean that they are not good to do business with. As a matter fact, in several such countries the procedures are simpler and decisions are quicker than in some of the democratic countries. Until the political and economic changes ushered in the late 1980s and in the early 1990s in the Eastern Europe, and erstwhile U.S.S.R, these countries were a separate block by themselves with several common characteristics. Private enterprises were very limited and State trading, particularly counter trade, was the rule. There were a lot of restrictions on imports and foreign business. This did not, of course, mean that the communist system was insurmountable for multinationals or other foreign firms. Under such a system, in several instances, winning over the top brass of the party or government was a strategy to obtain business. It may be noted at a time when companies like PepsiCo were kept out of India they were going better with countries like USSR. In the past, public sector was assigned a very important role in many noncommunist, particularly the developing, countries too. In India, for example, where the industrial policy wanted the public sector to gain control over the commanding heights of the economy, limited the scope of the private enterprise, both domestic and foreign. Even in areas where foreign capital was allowed, there was ceiling on the foreign equity participation.
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Two Decades of LPG
Further, in the past, foreign firms in many developing countries were under the fear of nationalisation. The clock, however, has turned a full circle in most of the communist and many other countries. Privatisation has progressed at an amazing speed. The erstwhile communist countries and the Peoples Republic of China where the communist party is still in power, are on the rapid road from Marx to the market. In India, the economic policies of governments of States ruled by communist and leftist parties now compete with other States to woo national and foreign private capital. Although the trend of the direction of government policies across the world appears to be broadly one of convergence, there are lots of differences in the restrictions and regulations of business, scope of foreign business, trade policies, procedures, incentive systems and so on. Coalition governments of different political parties are becoming common. Sometimes the constituents of the coalition are parties with very different economic ideologies, making the scenario complex or confusing/uncertain. Some political leaders are so powerful that they wield enormous control over the party. The vision and ideology of such leaders have stupendous implications for business. Changes in the nature of states role or extent of states involvement in the economy can affect the business environment. When public sector was assigned a major role in the industrial development and industrial licensing was very widely applicable, the Central Government in India had an imposing position in deciding the location of projects and type and size of enterprises. However, the substantial reduction in the role of the public sector and delicensing drastically changed the situation and now State Governments have a much greater role and freedom than in the past in the industrial development, including promotion of FDI. There has been a universal trend towards political decentralization and democratization. The recent developments in West Asia is also a part of it. The number of politically independent nations has been on the increase as a result of the splitting up of what was once a single country in to several ones. A major reason for this is the rise of what Naisbitt calls tribalism which is defined as the belief in fidelity to ones own kind, defined by ethnicity, language, culture, religion, or, (now) the profession.8 Universally, the desire of ethnic groups to become independent of the supremacy of others is growing. Naisbitt observes that democracy greatly magnifies and multiplies the assertiveness of the tribes; repression does the opposite. And the anguished drama of the tribalism is most pronounced where they are repressed the most brutally. According to Naisbitt, it may be a long time
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before there are 1,000 countries in this world, but by the middle of this century we should be close to that number.9
ECONOMIC CRISIS OF THE COMMUNIST WORLD AND THE MARCH FROM MARX TO THE MARKET
One of the major motivators of economic reforms in the communist and other developing countries was the economic crisis that had been looming over the communist and socialist countries. Decades of communist regime in China, USSR, Eastern Europe and elsewhere had driven them towards a perpetual economic crisis. The open acceptance of the palpable failure of the communist system to deliver the goods it propagated, with the continued suppression of democratic and human rights for the achievement of the avowed objectives, was a critical turning point in the economic history of the world. The famous statement by Mao Zedongs successor Deng Xiaoping , referring to the private and public sectors, it does not matter whether a cat is black or white as long as it catches mice marked a historical change in the Chinese economic policy in 1978. It was, then, a matter of time for the USSR and its allies to confess and reform. Although many people in India and abroad wanted us to believe that these communist countries were fast becoming a socialist heaven and that the communist models of development presented the solution to problems of India and other developing countries, the real situation in these countries was quite disgusting. A long period of authoritarian rule which could not improve the living conditions of the common man belied the great hopes of people in the communist system. People became frustrated with shortages of essential goods, poor quality of goods, lack of choice, limitation of wants and absence of democratic rights, while their counterparts in the developed and even in several developing countries were enjoying much better living conditions and political freedom. The command economies under which the workers pretended to work and the government pretended to pay the workers, as the famous statement attributed to a Russian worker goes, after decades of Communist rule presented a very bleak picture. Even the mightiest among the Communist countries, the big brother USSR, which was looked upon by many as a countervailing force against the capitalist imperialism, was headed for a disintegration, economically and politically. The USSR spent very lavishly on arms build up, taking on itself the responsibility to protect and spread communism and to fight capitalist imperialism. The USSR also made great strides in the space research and development. Although the political leaders in the USSR and Eastern Europe and communists all over the world were propagating that the communist models of development practiced in different countries were the appropriate ones for the development of the developing countries,
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Two Decades of LPG
the economic conditions in the USSR and other communist/socialist countries have been, ironically enough, said to be similar to those in the Third World countries. The Soviet Union was a superpower, yet what kind of superpower had a pathetic Third World-looking domestic economy, in which 25 per cent of its GNP was in the military and space sector, where manufactured products were of such poor quality that few were purchased outside its political orbit.10 While India attained food self-sufficiency, the USSR with a population much less than half of India and a land area which was several times that of of India, had to import huge quantities of food grains, from the capitalist countries, chiefly the USA, as it was not able to produce enough of it domestically. Mikhail Gorbachev, who took over the reins of the USSR in March 1985, knew that the problems were deep rooted and that if long-term corrective measures were not taken the situation would go from worse to worst. The situation was indeed so critical that when asked what his chances of success of the reform were, Gorbachev said: It does not matter what our chances of success are, we have no choice.11 So he set the stage for a change with his well known perestroika and glasnost The picture of Peoples Republic of China after three decades of communist rule was nothing but bleak. The following paragraphs, reproduced from a paper by Swaminathan S. Anklesaria Aiyar, a well known economic journalist, give a brief picture of the development of the Peoples Republic of China:12 There are four Chinas, not one. That is, there are four countries inhabited overwhelmingly by Chinese. The biggest by far is mainland China. The three others are Taiwan, Hong Kong and Singapore. The four provided very different economic philosophies. They also reveal, as starkly in East Europe, the grave limitations of the command economy and the major advantages of market-driven economies. Quoting statistics from the latest World Development Report, Aiyar, in the Paper referred to above, brought out in 1990, pointed out: The per capita income of China is still no more than $ 290 per head, after 40 years of communism. By contrast the per capita income of Taiwan is around $ 6,000, that of Singapore $ 7,900, that of Hong Kong $ 8,070. Taiwans foreign exchange reserves are now larger than those of Saudi Arabia at the height of the oil boom. Singapore and Hong Kong are now richer, per head, than developed countries like New Zealand ($ 7,750), Ireland ($ 6,120), Spain ($ 6,010) and Greece ($ 4,020). By contrast China remains mired in the low-income category, below even India ($ 300), the Central African Republic ($ 330) and Pakistan ($ 360). In short, of the four Chinas, Maos China has been a colossal failure. The Chinese people have shown that, given the opportunities of a market-driven economy, they can do infinitely better than in a command economy overseen by benevolent despots. Aiyar also observed:Riches in the three mini-Chinas are by no means confined to a few entrepreneurs. The working classes are up to ten times better off in the mini-
19
Chinas than in the land of Mao. The top 20 per cent in Taiwan earn just five times as much as the bottom 20 per cent, making it one of the most egalitarian countries in the world (on par with Communist countries like Hungary and Yugoslavia). Chinese incomes are even more egalitarian, but at an extremely low level, and the constant exodus of people from the mainland to the mini-Chinas makes it clear that the Chinese prefer high incomes to mere egalitarianism. They are more interested in raising their standard of living than in lowering that of others. Forces of an economic leap forward were set in motion in China two decades after the Great Leap Forward of the late 1950s. And forces of a new revolution got unleashed in the USSR and Eastern Europe seven decades after the Russian Revolution of 1917, ringing the death knell of a disastrous socio-politicaleconomic experiment. The progress of economic reform in China was a pointer to the direction of change required. As a former minister of Agriculture, Mikhail Gorbachev was keenly aware that in the five years since introduction of the reform in the agricultural sector, the Chinese farmers achieved the greatest productivity anywhere in the world.13 Mikhail Gorbachev and his thesis of perestroika (restructuring of the economy) and glasnost ( openness and criticism of old ways) gave a great moral boost and impetus for a reform movement in the Eastern Europe. Oleg Bogomolov, Director of the Institute of the Economy of the World Economic System, USSR, in his Paper The Changing Image of Socialism, published in 1990 in Social Science (Quarterly Review of the USSR Academy of Science) observed: Perestroika in the USSR has opened a new page in the growing process of transformation. Born of the specific conditions of our country and not claiming to be an example for other countries to follow, it, nevertheless, has substantially improved the general climate for a search for ways of socialist development: Eastern Europe has found itself facing difficulties similar to ours, in as much as it has been developing primarily by the Soviet model forced on it, or blindly borrowed by it, in the post war years. This is why the changes taking place in the USSR have been favourably received there to bolster up the reformist forces.14 Gorbachevs perestroika and glasnost indeed sent a message to the people in the Eastern Europe that the USSR would not any more use its mighty power in these countries to suppress the democratic rights. People in these countries wanted to free themselves from the decades old deprivation and suppression. The fall of the Berlin Wall was symbolic. Despite the Tiananmen square tragedy in China, people in the Eastern Europe revolted against the wall of authoritarianism and oppression, demanding bread and freedom. Even the very words communism and socialism began to be opposed, tooth and nail, by the very people who were put under these regimes for quite a long time. The East European Prime Ministers and Finance Ministers who attended the Davos symposium unanimously expressed the view that:15
20
Two Decades of LPG
1. The command economy is a failure and cannot be made to work efficiently. 2. The market is a better instrument for producing goods needed by the people than a centrally planned system. 3. Foreign investment and technology are vital for rejuvenating the flagging economies of East Europe. 4. The transition to a market-driven system is compatible with the positive social aspects of the old regime, such as public housing, health and education. The Socialist International at its one hundredth anniversary meeting, held in Stockholm on June 22, 1989, embraced the market economy and rejected nationalization of industry. Voting for this major revision were representatives from 80 left-wing and social democratic parties from around the world. In short, there was a thorough overhauling of the socio-economic and political philosophies, policies and development strategies in the communist countries, for good or bad, but certainly realising the limitations of the system and strategies they had followed hitherto. These developments gave an impetus for liberalisation in many countries including India.
THE GLOBAL LPG WAVE

The last two decades of the 20th century witnessed a liberalisation-privatisationglobalisation wave across the world and across economic-political systems and the world economic expansion continues to be driven by, chiefly, the forces unleashed by this wave. Actually, the term liberalisation encompasses, broadly, privatisation and globalisation. Privatisation is a component of liberalisation and globalisation is both a component and result of liberalisation. The LPG wave was triggered by, mostly, the following developments: Economic reforms in China and other communist/socialist countries. Economic reforms in other countries. The Privatisation wave. Multilateral negotiations (The GATT/WTO impact and PTAs).
Economic Reforms in Communist Countries

The economic crisis which the communist countries got engulfed in and the resultant inevitability of economic reforms were described in the previous section.
21
It was in the Peoples Republic of China, which had been following one of the most conservative policies, even among the communist countries, towards foreign economic relations and private enterprise, that the recent wave of economic reforms first set in in the communist world. The success of the Chinese experiment encouraged the launching of perestroika in the USSR which eventually spilled over to other communist/socialist countries. China embarked upon a big push liberalisation in 1978. The economic reforms which started with the agricultural sector moved on to infrastructural, industrial and foreign trade sectors encompassing privatisation and aggressive globalisation. The results, in terms of economic growth statistics, have been fantastic. For a long time now, the GDP growth rate has been amazing and historic globally and the country which has overtaken large economies like Germany, U K, France, Italy and, lately, Japan is all set to become the largest economy, relegating the US to the second place, in the near future. Three decades ago, Chinas position in the global merchandise trade was insignificant, but in 2010, with more than 10 per cent share, China was the largest exporter and second largest importer. In the mid 1980s, China had a trade deficit which was nearly double that of India, but in 2009 the value of the merchandise trade surplus of China was much more than that of the total merchandise exports of India. Today China has the biggest foreign exchange reserves in the world. The Chinese economic miracle was made possible, to a very large extent, by the huge influx of foreign capital both debt and FDI. China, one of the largest borrowers from the World Bank, is one of the top countries in respect of foreign debt (until some years ago it had the largest external debt). In 2010, China was the second largest recipient of FDI in the world (second only to USA). With about 18 per cent of the total FDI inflows to developing countries, it was the largest recipient of FDI among developing countries. A manifestation of the surging FDI inflows to China and internationalisation of production by MNCs is the number of foreign affiliates (FAs) of MNCs in China. In 2010, China had more than 4.34 lakh FAs of MNCs (compared to only about 2200 in India). This was about 85 per cent of the total number of FAs located in developing countries and nearly half of the world total.16 The huge foreign exchange reserves of China is influencing the international financial markets. The global significance of Chinese economic reforms is not only that China has come to account for a very significant share of the global financial and trade flows, thus contributing substantially to globalisation, but also it is encouraging LPG in other countries. For example, although India was the first Asian country to set up (in 1965) an export processing zone the forerunner of todays special economic zone (SEZ) the contribution of SEZs to Indias export growth was not significant for a long period. However, triggered by the stories of great success of Chinese SEZs in boosting the exports and employment generation, Government of India gave a big thrust to the SEZs programme with the announcement of a Special Economic Zone Policy in 2000
22
Two Decades of LPG
and brought the Special Economic Zone Act in 2005, leading to a proliferation of SEZs and jump in exports. Similarly, the fact that most of the major global retailers are operating in China is often an argument advanced in favour of FDI in Indias retail sector. That even a communist country like China has a very liberal policy towards private sector and foreign capital, enabling it to achieve unmatched economic growth, has been encouraging liberalization in many countries including India. The Chinese liberalization and economic success story dampen the arguments against liberalisation.
Privatisation
It is not only the centrally planned and other developing economies which resorted to economic reforms but also the market economies. As indicated in the previous section, the public sector came to play an important role even in the market economies. Public ownership was common in very important sectors/industries like public utilities. An important ingredient of economic reforms in the market economies was privatisation, which amounted to a strong reversal of the trend of the statist economic expansion. The privatisation wave set in, globally, since around the 1980 and became the hallmark of the new wave of economic reforms that swept across the world. The bold initiatives taken by Prime Minister Margaret Thatcher in the UK had far reaching impact in the developed economies. Privatisation has been a very important integral part of economic reforms in the erstwhile communist countries. Non-communist developing economies too have been carrying out privatisation in varying forms, degrees and measure of success. In short, the trend towards privatisation has been observed in developed and developing economies; in market oriented and socialist, including communist countries; and cuts across sociocultural systems. During 1980-92 alone more than 8,500 state owned enterprises were privatised in over 80 countries. Privatisation means transfer of ownership and/or management of an enterprise from the public sector to the private sector. It also means the withdrawal of the State from an industry or sector, partially or fully. Another dimension of privatisation is opening up of an industry that has been reserved for the public sector to the private sector. Privatisation marks a change from dogmatism to pragmatism and amounts to a reversal of policy. In the 1960s, there was a trend towards nationalisation in Britain. But, since the late 1970s, the trend was towards privatisation by selling state-owned enterprises (SOEs). It indeed became a universal trend.
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Expansion of Public Sector and its Defects The rapidity with which the public sector in many countries expanded over roughly in the period from 1960 to 1980, is frequently overlooked. In effect a revolution, a quiet one, occurred in the shifting of resources into the public sector in the decade of the 1970s. In the less developed countries and in many of the poorest countries, the growth of the public sector was characterised by the growth of the parastatal sectorState-owned enterprises. Stateowned enterprises had come to account for 10 to 20 per cent of GDP in much of the less developed world, and they were dominant in manufacturing in a great number of countries. What is true for GDP was also true for capital investment. Parastatal enterprises were estimated to be responsible for between 20 and 60 per cent of total investment spending in the less developed world. Regardless of whether socialist or market-oriented, virtually all countries in the 1960s and 1970s saw an expansion of the public sector, and in particular an expansion of state-owned enterprises, across a broad front.17 The performance of SOEs in many countries was, by and large, been far from satisfactory. They often put large burdens on public budgets and external debt. For example, the net deficit of a sample of SOEs accounted for about 4 per cent of Nigers GDP in 1982. For the seven largest Latin American economies, the combined deficit of SOEs rose from about one percent of GNP in the mid-1970s to about 4 per cent in 1980-82. One study has found that countries in which SOEs accounted for higher shares of gross domestic investment generally had lower rates of economic growth.18 The heavy financial burden imposed by the SOEs and the growing public discontent against them due to their inefficiency, indifferent, irresponsible and sometimes even arrogant attitude and lack of concern for the customer needs; and corruption, nepotism and squander associated with their organisation and management led to the growing interest in privatisation. It is pointed that,19 in country after country, unbridled state expansion has led to: 1. Economic inefficiency in the production activities of the public sector, with high costs of production, inability to innovate, and costly delays in delivery of the goods produced; 2. Ineffectiveness in the provision of goods and services, such as failure to meet intended objectives, diversion of benefits to elite groups, and political interference in the management of enterprises; and 3. Rapid expansion of the bureaucracy, severely straining the public budget, causing problems in labour relations within the public sector, inefficiency in government, and adverse effects on the whole economy. These problems have led many governments to undertake programmes of public sector reform, and pushed by a need to curb public expenditure, to reevaluate the possibilities for shifting publicly managed activities into the private sector.
24
Two Decades of LPG
The Privatisation Reaction Privatisation is an inevitable historical reaction to the indiscriminate expansion of the State sector and the associated problems. Even in the communist countries it became a vital measure of economic rejuvenation. Referring to the privatisation movement, a Russian periodical observed: The crisis of the state sector is usually linked (in particular, during ideologically tinged debates) with the 20-year-old idea of peoples capitalism. It is attributed to the then West German Chancellor Ludwig Erhard, who advocated the principle of increasing the number of owners as a way towards economic democratisation and social progress. Apparently, others also lay claim to the idea. However, more importantly, the idea has had followers: Margaret Thatcher, Jacques Chirac and lesser known politicians. It is very significant that although they have been labelled conservative at least in their life time, these politicians, more than anybody else, sought to change the existing economic machinery, and not to preserve it. Besides, they tried to do so not by returning to the early days of capitalism, when property was concentrated in the hands of select few, but by distributing shares among ordinary people.20 The article referred to above exalted: When hundreds, thousands and even millions of people in the USSR have shares in their hands, they will be able to see for themselves how the Western model of the right to vote and the right to leave works. Owners (surprise, surprise to a lathe or crane operator) can interfere in the companys affairs and say openly what they like and what they dont like. When their protests are ignored, they can sell their shares and leave the company. It is going to be a real surprise to many, but this is precisely what we have been looking forward to the right to voice ones opinion and the right to leave.21 It may be noted that as a result of privatisation the number of people owning shares in Britain almost tripled from 7 to 20 per cent of the adult population between 1978-89. Interestingly, in 1988 Britain experienced a symbolic cross over for the first time in history more British citizens were holders of shares than were members of unions.22 Further, as the proportion of shareholders in the total population increases and as the economic lot of the workers and the poor improves, leftist parties increasingly lose their ground. In 1988, for instance, the Labour Party in Britain lost 8 per cent of its members, the biggest exodus since 1981.23 A major driver of the massive increase in the FDI during the recent period was cross-border mergers and acquisitions (M&As). Privatisation has been one of the destinations of such flows. Privatisation has increased competition, prompted restructuring of industries and business portfolio of companies. In a number of countries like India, there still remains a lot of scope for privatisation.
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Public-Private Partnership
Public-Private Partnership (PPP also referred to as P3 and P3 ) has emerged as a very important infrastructure development and maintenance/servicing strategy across economies of different levels of development developed and developing and politico-economic systems capitalist, communist/socialist and mixed. The Role In the last two decades or so, PPP has substantially contributed to the infrastructure development and management in many countries in North America, Europe, Latin America and Asia. The Report of the International Conference on Meeting Indias Infrastructure Needs with Public Private Partnerships, held in New Delhi on 5th and 6th February 2007, has made the following observations: In the United Kingdom a focused effort by the government was required to expand the program, resulting in the signing of over 700 PPP projects in various sectors by 2006. The volume of transactions has meant that a new class of investors has come in to invest in them through the secondary market. Chile has succeeded in increasing its infrastructure investments to a level of 5 per cent of GDP, in good part through encouraging private participation in almost all infrastructure sectors. Today, in Chile, investments and operations in power, gas, telecom, airports, major highways, rail freight services and water and sanitation are mostly in the realm of the private sector, and the presence of the government in service provision is limited to a few areas, such as passenger rail services and small airports. The governments strategy that resulted in this substantive expansion in the private sectors role was based on the following key elements: Active promotion of private participation; establishment of stable and efficient regulatory frameworks; credible mechanisms for dispute resolution; stringent norms of environmental protection; and continued government role and support to ensure provision of infrastructure services to poor people. Brazil opted for private participation in roads like many other countries, as a way to overcome its budget constraints, and its experience has been very encouraging. Today, nearly 6 per cent of its paved roads (164,000 km) are under private administration through 36 state and federal toll road concessions, and the share of the private sector is expected to be doubled in the near future. In Korea, PPPs in roads form part of a wider government initiative, called Private Participation in Infrastructure (PPI), which led to an increase in the share of private investment in infrastructure from 0.2 per cent in 1995 to 14.4 per cent in 2005. In Philippines, the trials and tribulations of the South Luzon expressway over the years highlight various pre-requisites for the success of PPPs, namely, the political will and commitment, presence of champions in the government to provide and sustain momentum, and private operators who know how to deal with the government. The Intent and Extent The scope of public private partnership is very wide, encompassing several vital economic and social spheres. PPP mode may be used for very short term projects (like the Kerala Travel Mart 2010, an event organized to promote Kerala tourism in partnership between the Kerala Travel Mart Society and Government
26
Two Decades of LPG
of Kerala, held at Cochin from 23rd to 26th September, 2010) to massive projects of very long duration (the contract period of many large PPP projects is 20 - 30 years). A PPP contract may involve one government agency on the one side and a private partner on the other side or several parties on either or both sides. The Cochin International Airport Ltd.(CIAL), the first airport developed under the PPP model in India, which commenced operation in 1999, for example, has equity participation from the Government of Kerala, industrialists, financial institutions, airport service providers and the public (about 11,000 individual investors, mostly NRIs, from 30 countries). There is, however, no universally accepted definition of what a PPP is. Most countries embarking on PPP programmes have attempted to provide some form of definition of what a PPP is. There are a number of definitions/descriptions of the term public private partnership given by various government agencies in India. According to the Panel of Transaction Advisors for PPP projects, Department of Economic Affairs (DEA), Ministry of Finance, Government of India, a PPP project is a project based on a contract or concession agreement between a Government or statutory entity and a private sector company for delivering a service on payment of user charges. As per the IIPDF Guidelines issued by the DEA, PPP is a partnership between a public sector entity (sponsoring authority) and a private sector entity (a legal entity in which 51% or more of equity is with the private partner/s) for the creation and/or management of infrastructure for public purpose for a specified period of time (concession period) on commercial terms and in which the private partner has been procured through a transparent and open procurement system. The Report of the PPP Sub-Group on Social Sector, Government of India, referred to earlier, gives a more comprehensive description of the concept: Public-PrivatePartnership or PPP is a mode of implementing government programmes/schemes in partnership with the private sector. The term private in PPP encompasses all nongovernment agencies such as the corporate sector, voluntary organizations, selfhelp groups, partnership firms, individuals and community based organizations. PPP, moreover, subsumes all the objectives of the service being provided earlier by the government, and is not intended to compromise on them. Essentially, the shift in emphasis is from delivering services directly, to service management and coordination. The roles and responsibilities of the partners may vary from sector to sector. While in some schemes/projects, the private provider may have significant involvement in regard to all aspects of implementation; in others he may have only a minor role. The above Report points out that three things generally distinguish PPP from direct provision of services by governments, namely (i) a partnership based on well articulated contract (ii) a long term relationship between the public and private sector (iii) flexibility and responsiveness in decision making. It is argued that PPP leads to improvement in both efficiency and effectiveness in service delivery.
27
According to the Rajasthan Governments document on PPP, entitled Rajasthan: Mainstreaming Public Private Partnership, PPP broadly refers to long-term, contractual partnerships between public and private sector agencies, specially targeted towards financing, designing, implementing, and operating infrastructure facilities services that were traditionally provided by the public sector. The Policy on Public Private Partnership of the Government of Assam (which is to a large extent adopted from the Rajasthan: Mainstreaming Public Private Partnership) gives a fairly detailed description of the concept as in the following three paragraphs: Broadly, PPP refers to an agreement between government and the private sector regarding the provision of public services or infrastructure. Purportedly a means of bringing together social priorities with the managerial skills of the private sector, relieving government of the burden of large capital expenditure, and transferring the risk of cost overruns to the private sector. Rather than completely transferring public assets to the private sector, as with privatization, government and business work together to provide services. In a PPP, each partner, usually through legally binding contract(s) or some other mechanism, agrees to share responsibilities related to implementation and/or operation and management of a project. This collaboration or partnership is built on the expertise of each partner that meets clearly defined public needs through appropriate allocation of: Resources Risks Rewards Responsibilities The allocations of these elements and other aspects of PPP projects, such as details of implementation, termination, obligations, dispute resolution and payment arrangements are negotiated between the parties involved and are documented in written contract agreement(s) signed by them. Nature of Collaboration The government may collaborate with the private developer/service provider in any one of the following ways (Report of the PPP SubGroup on Social Sector): (i) as a funding agency: providing grant/capital/asset support to the private sector engaged in provision of public service, on a contractual/noncontractual basis. (ii) as a buyer: buying services on a long term basis. (iii) as a coordinator: specifying various sectors/forums in which participation by the private sector would be welcome.
28
Two Decades of LPG
The funding pattern and collaboration between the public sector and the private sector could take any one of the following forms: (i) Public funding with private service delivery and private management . (ii) Public as well as private funding with private service delivery and private management. (iii) Public as well as private funding with public/private service delivery and public/private/joint management. (iv) Private funding with private service delivery and private management. Categories (ii), (iii) and (iv) have a special appeal as they promise to supplement government resources through private participation. The Private Finance Initiative (PFI) in the United Kingdom is stated to have been introduced to make the contractor/ concessionaire foot the bill of construction, instead of the taxpayer. In lieu of the PFI, the concessionaire is conferred the right to recover his cost of construction and maintenance (and profit) through charging rent or imposing toll charges for the use of assets so created. Funding pattern as mentioned under category (i) is, however, the more common one in regard to the social sector; the gain expected, nevertheless, is in the realm of efficiency and effectiveness in service delivery.
BOX 1.3
PPP and Privatisation
The key differences between public-private-partnership and privatisation may be summarised as follows:* Responsibility Under privatisation the responsibility for delivery and funding a particular service rests with the private sector. PPP, on the other hand, involves full retention of responsibility by the government for providing the service. Ownership While ownership rights under privatisation are sold to the private sector along with associated benefits and costs, PPP may continue to retain the legal ownership of assets by the public sector. Nature of Service While nature and scope of service under privatisation is determined by the private provider, under PPP the nature and scope of service is contractually determined between the two parties. Risk & Reward Under privatisation all the risks inherent in the business rest with the private sector. Under PPP, risks and rewards are shared between the government (public) and the private sector. *Adopted from: Planning Commission, Government of India, Report of the PPP Sub-Group on Social Sector.
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PPP is often found in economic infrastructures such as telecom, power, roads, seaports, airports, railways, industrial development zones etc. PPP has, however, come to assume an important role in social infrastructures like, health, water supply & sanitation, education, etc. too in India as well as in a number of countries abroad.
Economic Reforms in Developing Countries

As pointed out earlier, the LPG in the communist countries encouraged economic reforms in other countries like India. The dramatic economic policy changes in the communist countries reinforced the favourable attitudes towards private sector and lent political expediency for change. Look at, for example, the Indian Scenario, depicted in Box 1.4.
BOX 1.4
Political Environment and Economic Reforms
Despite his pragmatic views, dynamism and the dream of the 21st century India, Prime Minister Rajiv Gandhi could not introduce any far reaching changes even with the candid mandate that overwhelmed him in the election of 1984. But, the Congress government under Narasimha Rao did it in 1991 and the successive non-Congress Governments have carried further forward the economic liberalisation. Why? The changing global scenario, particularly the developments in the communist countries, provides the answer. There were considerable differences between the Rajiv era and 1991. Rajiv Gandhi who assumed office in 1984 had given great hopes to the teeming millions of India. No wonder, the Congress party led by the young prime minister who promised to mould India for the 21st century was given a thumping victory by the grief-stricken electorate. Rajiv who was well aware of the damages done by the unpragmatic regulations was eager to radically reform the economic regime. Hence, many in India and abroad naturally expected that he would introduce far reaching reforms. But alas, the great expectations were belied soon as he succumbed to what he thought, or was made to believe, was political prudence. The word socialism was still dominant on the political surface. The leftists were severely opposed to even minor economic liberalisations and deregulations. To speak against socialism or public sector was regarded a sin. Many in the Congress party, who thought that socialism and public sector still had a magic spell, thought that it was still necessary to swear by these ideas which were losing glamour in many other countries. Although the number of people who were in favour of deregulation and privatisation could be more than those who opposed it, the latter was very vociferous and therefore a determinant force. In short, what was thought to be political expediency prevented even Rajiv from making any major departure from the old regime and, therefore, dogmatism continued to dominate pragmatism. And what started with a big bang ended with a whimper.
30
Two Decades of LPG
Of course, Rajiv carried further forward, with a little more vigour, the policy of piece-meal economic liberalisations started since the early 1980s. These have had favourable effects. These measures were, however, quite insufficient to rejuvenate the economy. Even the perestroika and glasnost in the USSR and the developments in the Eastern Europe and China, let alone the developments in several other countries, failed to make Indians socialist political genera either to openly admit the folly or to rethink. And Indians development continued to be handicapped by the irrelevant political dogmatism which was being discarded by others. The environment in 1991, however, has been quite different and conducive for a major change. Mikhail Gorbachev and his perestroika and glasnost send a message to the people in the Eastern Europe that the USSR would not any more use its mighty power in these countries to suppress the democratic rights. People in these countries wanted to free themselves from the decades old deprivation and suppression. The fall of the Berlin Wall was symbolic. Despite the Tiananmen square tragedy in China (gunning down of students who demonstrated demanding democratic freedom), people in the Eastern Europe revolted against the wall of authoritarianism and oppression, demanding bread and freedom. Even the very words communism and socialism began to be opposed, tooth and nail, by the very people who were put under these regimes for quite a long time. These nations have been seeking large financial, technical and managerial assistance not only from such institutions as the IMF and the World Bank, which had been described by many leftists in the past as organs of capitalist imperialism, but also from the capitalist governments for reconstructing the economies impoverished by decades of communist rule. Gorbachev has gone on knocking at the doors of capitalist countries, known as group of seven (G7), for help. Some of the debates in the G7 and in the Western media as to whether the USSR should be given assistance or what should be the extent and mode of help etc. should have been embarrassing for the aid seeker but Gorbachev consoled, quite rightly, that it was for the economic salvation of the millions of his countrymen that he has been doing it. The communist countries had taken up privatisation at an amazing speed. Their economies have been opened up even for multinationals. Consequently there has been an influx of investment. In short, in the communist countries the clock turned a full round. There was a time when certain political parties all over the world put the blame for the world economic disorder on the capitalist nations, particularly the USA. And now, nations or provinces which have been ruled by these very parties seek varied assistance of American capitalism and the like. In short, the global political environment in 1991 was quite different from that during the Rajiv era. At the same time, economic crisis in India was assuming more serious proportions demanding effective measures for economic rejuvenation and survival in a highly competitive and transnationalising global environment. And the emerging global political environment made the political decision of a dramatic change in the economic policy easy in India. Thus, the economic and political factors acted and reacted upon each other resulting in a drastic change in the economic policy and direction of the nation. Reproduced from Francis Cherunilam, Economic Reforms in India and Abroad, (Himalaya Publishing House, Mumbai, 1992).
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Multilateral Trade Negotiations

Impact of GATT/WTO Considerable trade liberalisation had taken place as a result of the multilateral trade negotiations (MTNs) held under the auspices of the GATT. The first six Rounds of MTNs concentrated almost exclusively on reducing tariffs, while the Seventh Round (Tokyo Round-1973-79) moved on to tackle non-tariff barriers (NTBs). Until the eighth Round, only trade in goods was within the ambit of the MTNs. The Uruguay Round (UR), however, went far beyond the traditional negotiation agenda. [Uruguay Round (UR) is the name by which the eighth Round of the MTNs is popularly known because it was launched in Punta del Este in Uruguay, a developing country, in September 1986. Because of the complexities of the issues involved and the conflicts of interests among the participating countries, the UR could not be concluded in December, 1990 as was originally scheduled but was finalised only in December, 1993 prolonged. Following the UR Agreement, GATT was converted from a provisional agreement into a formal international organisation called World Trade Organisation (WTO) with effect from January 1, 1995.] The UR was a historic Round in that it expanded the scope of liberalisation and encouraged globalisation by broadening the scope of MTNs far wider by including new areas such as: Trade in services Trade related aspects of intellectual property (TRIPs) Trade related investment measures (TRIMs). It is true that the WTO provides a framework - principles, policies and regulations - for liberalisation. The WTO is credited with or accused of driving globalisation but two points may be noted: One, liberalisation and globalisation would take place even in the absence of WTO or any such scheme, although the pace and pattern would be different. For example, China had brought in far reaching liberalisations even before it became a member of the WTO. Secondly, WTO mandates certain measures on its members whether they are in the interest of a member country or not. For instance, India had to amend its patent law as stipulated under the WTO system; many regard some of these amendments, which may serve the vested interests of the MNCs of developed countries, are detrimental to the interests of developing countries like India. For good or bad, WTO and the MTNs make their on contributions to fostering globalisation. Figure 1.3 sums up the impact of WTO on the economy.
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THE WTO IMPACT
Two Decades of LPG
GATT /GATS
TRIMs
TRIPs
Liberalisation of trade in goods and services
Liberalisation of international investments
Provides monopoly power to owners of intellectual property
Increases competition from foreign goods/services
Facilitates global sourcing
Opportunity for Indian firms to export
Increases foreign investment and competition from foreign firms
Facilitates joint ventures and technology acquisition
Facilitates foreign investment by Indian firms (including joint ventures)
Threat to domestic firms
Benefits consumers
Increases competitiveness of domestic firms
Threat to domestic firms
Benefits the economy
Benefits domestic firms
Encourages globalisation of Indian firms
Figure
1.3
Preferential Trade Agreements
The WTO Impact
Proliferation of Preferential Trade Agreements (PTAs) between nations [also known by such other names as Regional Trade Agreements (RTAs), Regional Integration Agreements (RIAs), Free Trade Agreements (FTAs) etc.] also cause trade and investment liberalisations. The last two decades have witnessed a fast proliferation of PTAs. During 1950 1990, the growth of PTAs was comparatively slow vis--vis the recent period. The number of PTAs in force in 2010 was close to 300, compared to about 70 in 1990.24
33
The surge in PTA activity is driven both by a growing number of countries taking an interest in reciprocal trade opening and by an increase in the number of PTAs per country. All WTO members (with the exception of Mongolia) belong to at least one PTA. PTA activity has transcended regional boundaries. One half of the PTAs currently in force are not strictly regional. The advent of cross-regional PTAs has been particularly pronounced in the last decade. The trend towards a broader geographical scope of PTAs is even more pronounced for those PTAs that are currently under negotiation or have recently been signed (but are not yet in force). Practically all of these are of the cross-regional type.25 The proliferation of RTAs and the increasing number of bilateral free-trade agreements has meant overlapping membership for many countries bringing in a complex network of PTAs including bilateral, plurilateral and cross-regional arrangements and encompassing countries at different levels of development (besides the developed-developed, and developing-developing, pattern). The significance of PTAs are increasing also due to the fact that they, particularly the very recent agreements also address WTO+ type issues, such as services, capital flows, standards, intellectual property, regulatory systems (many of which are non-discriminatory) and commitments on labour and environment issues. For instance, about one-third of PTAs in force today contain services commitments compared to less than a tenth in 1990. Intra-PTA trade represented about 35 per cent of total world merchandise trade in 2008, compared with 18 per cent in 1990. Plurilateral trade agreements accounted for half of global intra-PTA trade in 2008, while bilateral trade agreements (including those where one party is a PTA) accounted for the other half. Preferential trade that is, trade actually receiving preferential tariff treatment represents a much smaller share of world trade. However, it is still worth considering total trade among PTA members because the latest generation of trade agreements may be motivated by a broader set of considerations than just tariff reductions, including the development and maintenance of supply chains.
ECONOMIC REFORMS IN INDIA

Until 1991, economic policy and regulatory changes in India were, by and large, incremental or evolutionary. However, a discontinuous or revolutionary change was ushered in Indias economic horizon with the announcement of a new industrial policy which marked a paradigm shift from the previous more than four decades of the controlled regime. Adjectives such as dramatic, revolutionary, drastic etc. have been used to describe the nature of the change in the industrial policy. Economic reforms in India have not been a one stroke or few strokes affair. It is rather a process which continues, influenced by lessons of hitherto experiences, debates, controversies, confusions and developments across the world.
34
Two Decades of LPG
The reforms which started with the industrial policy gradually moved to other spheres like external sector (foreign trade, foreign exchange rate and currency convertibility, and foreign investment both FDI and FPI), financial sector ( banking sector, capital market etc.), price and distribution, and fiscal policy and taxation. No comprehensive reform has so far been attended in respect of some vital areas like agriculture and labour. Chapters 3 onwards provide details of economic reforms in India.
IMPACT OF LPG
The LPG have significantly transformed the global economy, particularly the business scenario. It has several harmful as well as beneficial ramifications. The universal economic liberalisation which seems to have come to stay despite the global economic crises, tends to make globalisation irreversible and unstoppable. If it is an option, it is an inevitable option. The environment seems to be such that if it is an evil, it is an inevitable evil. The challenge, therefore, to the individuals, businesses and nations is to endeavour to take advantage of the benefits of globalisaton and mitigate the adverse effects. In his Management Challenges for the 21st Century, renowned Management guru Peter Ducker cautions: All institutions have to make global competitiveness a strategic goal. No institution, weather a business, a university or a hospital, can hope to survive, let alone to succeed, unless it measures up to the standards set by the leaders in its field, any place in the world. 26
Globalisation of World Economy

We may consider globalisation at two levels, viz., at the macro level (i.e., globalisation of the world economy) and at the micro level (i.e., globalisation of the business and the firm). Globalisation of the world economy is achieved, quite obviously, by globalising the national economies. Globalisation of the economies and globalisation of business are very much interdependent. The world economy has been emerging as a global or transnational economy. A global or transnational economy is one which transcends the national borders unhindered by artificial restrictions like Government restrictions on trade and factor movements. Globalisation is a process of development of the world into a single integrated economic unit. The Transnational economy is different from the international economy. The international economy is characterised by the existence of different national economies, the economic relations between them being regulated by the national
35
Governments. The transnational economy is a borderless world economy characterised by free flow of trade and factors of production across national borders. Peter Ducker in his New Realities observes that in the early or mid nineteen seventies - with OPEC and the floating of the US dollar - the world economy changed from being international to transnational. According to Ducker, the transnational economy is characterised by, inter alia, the following features.27 1. The transnational economy is shaped mainly by money flows rather than by trade in goods and services. These money flows have their own dynamics. The monetary and fiscal polices of sovereign Governments increasingly react to events in the international money and capital markets rather than actively shape them. 2. In the transnational economy management has emerged as the decisive factor of production and the traditional factors of production, land and labour, have increasingly become secondary. Money and capital markets too have been increasingly becoming transnational and universally obtainable. Ducker, therefore, argues that it is management on which competitive position has to be based. 3. In the transnational economy the goal is market maximisation and not profit maximisation. 4. Trade, which increasingly follows investment, is becoming a function of investment. 5. The decision making power is shifting from the national state to the region (i.e., the regional blocs like the European Community, North American Free Trade Agreement, etc.) 6. There is a genuine - and almost autonomous - world economy of money, credit and investment flows. It is organised by information which no longer knows national boundaries. 7. Finally, there is a growing pervasiveness of the transnational corporations which see the entire world as a single market for production and marketing of goods and services. There are, thus, many factors which tend to promote the transnationalisation of the world economy. The multilateral trade negotiations under the auspices of GATT/WTO have been liberalising trade and investment. A growing proportion of the world output is traded internationally and the faster growth of trade, than the GDP, is bringing about world economic integration. This economic integration is reinforced by the massive cross-border capital flows. The progress of the regional blocs increasingly integrate the regional economies, as pointed out earlier.
36
Two Decades of LPG
Old and New Globalisations

Globalisation, of course, is not a new phenomenon. The period 1870 to 1914 experienced a growing trend toward globalisation. The new phase of globalisation which started around the mid 20th century became very widespread, more pronounced and overcharging since the late 1980s by gathering more momentum from the political and economic changes that swept across the communist countries, economic reforms in other countries, the multilateral trade agreements which seek to substantially liberalise international trade and investment and the technological and communication revolutions. There are several similarities and differences between the two phases of globalisation (1870 1913 and 1950 onwards). Both the phases were characterised by rising trade-GDP ratio and rising international investments. During the first phase of the globalisation, the tariff barriers to trade were fairly very high; during the second phase although the tariff barriers have substantially come down, the NTBs have been high. However, NTBs are being brought down. Besides these, Nayyar 28 draws the following four similarities of both the phases of globalisation. 1. The absence or the dismantling of barriers to international economic transactions. 2. The development of enabling technologies. 3. Emerging forms of industrial organisation. 4. Political hegemony or dominance. Nayyar also highlights important differences between both the phases of globalisation in respect of trade flows, FDI flows, Financial flows and labour flows.29 The salient points are the following. Trade Flows During 1870 to 1913 an overwhelming proportion of international trade was constituted by inter-sectoral trade, where primary commodities were exchanged for manufactured goods. This trade was, to a significant extent, based on absolute advantage derived from natural resources or climatic conditions. During the period 1950-1970, inter-industry trade in manufactures, based on differences in factor endowments, labour productivity or technological leads and lags, constituted an increasing proportion of international trade. Since 1970 intra-industry trade in manufactures, based on scale economies and product differentiation, has constituted an increasing proportion of international trade.
37
Further, now about one-third of the international trade is estimated to be intrafirm trade, i.e., trade between affiliates of the same company located in different countries. The composition of intra-firm trade has undergone a change, characterised by a steady decline in the importance of primary commodities and an increase in the importance of manufactured goods and intermediate goods. FDI Flows There is also a marked difference between the two phases in respect of the spatial and sectoral distribution of FDI. During the second phase, its distribution between the developed and developing countries was more uneven than in the first phase. However, the last two decades have witnessed an increase in the share of the developing countries in FDI inflows and in 2010 the share of the developing and transition economies crossed 50 per cent of the total. In 1913, the primary sector accounted for more than half (55 per cent) of the long term foreign investment, followed by trade and distribution (30 per cent) and the share of the manufacturing sector was very low (10 per cent). In 1992, half of the stock of the FDI in the world was in the services sector. The manufacturing sector took the next major share (40 per cent) leaving hardly 10 per cent for the primary sector. In the early twentieth century foreign investment was only long-term. Twothirds of it was portfolios while one-third of it was direct. In the second phase, much of the long-term investment is direct but portfolio investment has risen sharply in the recent decades. Financial Flows Nayyar also points out that there are important differences in the destination, the object, the intermediaries and the instruments in respect of the financial flows and transactions. In the last quarter of the nineteenth century, capital flows were a means of transferring investible resources to underdeveloped countries or newly industrialising countries with the most attractive growth opportunities. In the second phase, these capital flows have been destined mostly for the industrialised countries which have high deficits and high interest rates to finance public consumption and transfer payments rather than productive investment. During the first phase of globalisation from 1870 to 1913, the object of financial flows was to find avenues for long-term investment in search of profit. During the second phase of globalisation since the early 1970s, financial flows are constituted mostly by shortterm capital gains. The intermediaries, too, are different. In the late nineteenth century, banks were the only intermediaries between lenders and borrowers in the form of bonds with very long maturities. In the latter phase, institutional investors such as pension-funds and mutual-funds are more important than banks: the latter continue to act as intermediaries but now borrow short to lend long, thus resulting in a maturity mismatch. Consequently, the financial instruments need to be far more sophisticated and diversified than earlier. In the late nineteenth century, there were mostly long-term bonds with sovereign guarantees provided by the imperial powers
38
Two Decades of LPG
of the governments in borrowing countries. In the late present phase, there has been an enormous amount of financial innovation through the introduction of derivatives (futures, swaps and options). These derivatives (which are also not entirely new to the world and are reported to have existed in the seventeenth and eighteenth centuries: options in the Amsterdam stock exchange and futures in the Osaka rice market) are a means of managing the financial risks associated with international investment. This is essential now because, unlike the earlier phase of globalisation, there is a maturity mismatch and there is no effective securitisaton provided by national states. International financial markets have simply developed the instruments to meet the needs of the times. It is paradoxical that such derivatives, which have been introduced to counter risk may, in fact, increase the risk associated with international financial flows by increasing the volatility of short-term capital movements. Labour Flows The fundamental difference between the two phases of globalisation is in the sphere of labour flows. In the late nineteenth century, there were no restrictions on the mobility of people across national boundaries. Passports were seldom needed. Immigrants were granted citizenship with ease. Between 1870 and 1914, international labour migration was enormous. The only significant evidence of labour mobility during the last quarter of the twentieth century is the temporary migration of workers to Europe, the Middle East and East Asia. The present phase of globalisation has found substitutes for labour mobility in the form of trade flows and investment flows. For one, industrialised countries now import manufactured goods that embody scarce labour. The first phase of globalisation in the late nineteenth century was characterised by an integration of markets through an exchange of goods which was facilitated by the movement of capital and labour across national boundaries. This was associated with a simple vertical division of labour between countries in the world economy. The second phase of globalisation is characterised by an integration of production with linkages that are wider and deeper, except for the near absence of labour movements. It is reflected not only in the movement of goods, services, capital, technology, information and ideas, but also in the organisation of economic activities across national boundaries. This is associated with a more complexpart horizontal and part verticaldivision of labour between the industrialised countries and a few developing countries in the world economy. The process of globalisation in the first phase was dominated by imperial states not only in the realm of politics but also in the sphere of economics. An UNCTAD Report30 mentions the following as the new features of the current phase of globalisation.
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New Markets Growing global markets in services banking, insurance, transport. New financial markets deregulated, globally linked, working around the clock, with action at a distance in real time, with new instruments such as derivatives. Deregulation of antitrust laws and proliferation of mergers and acquisitions. Global consumer markets with global brands. New Actors Multinational corporations integrating their production and marketing, dominating food production. The World Trade Organization the first multilateral organization with authority to enforce national governments compliance with rules. An international criminal court system in the making. A booming international network of NGOs. Regional blocs proliferating and gaining importance European Union, Association of South-East Asian Nations, Mercosur, North American Free Trade Association, Southern African Development Community, among many others. More policy coordination groups G-7, G40, G-22, G-77, OECD. New Rules and Norms Market economic policies spreading around the world, with greater privatisation and libralisation than in earlier decades. Widespread adoption of democracy as the choice of political regime. Human rights conventions and instruments building up in both coverage and number of signatories and growing awareness among people around the world. Consensus goals and action agenda for development. Conventions and agreements on the global environment biodiversity, ozone layer, disposal of hazardous wastes, desertification, climate change. Multilateral agreements in trade, taking on such new agendas as environmental and social conditions. New multilateral agreements for services, intellectual property, communications more binding on national governments than any previous agreements. The Multilateral Agreement on Investment under debate.
40
Two Decades of LPG
New (Faster and Cheaper) Tools of Communication Internet and electronic communications linking many people simultaneously. Cellular phones. Fax machines. Faster and cheaper transport by air, rail and road. Computer-aided design.
Globalisation of Business
Globalisation in its true sense is a way of corporate life necessitated, facilitated and nourished by the transnationalisation of the World economy and developed by corporate strategies. Globalisation is an attitude of mind - it is a mind-set which views the entire world as a single market so that the corporate strategy is based on the dynamics of the global business environment. International marketing or international investment does not amount to globalisation unless it is the result of such a global orientation. Globalisation encompasses the following: Doing, or planning to expand, business globally. Giving up the distinction between the domestic market and foreign market and developing a global outlook of the business. Locating the production and other physical facilities on a consideration of the global business dynamics, irrespective of national considerations. Basing product development and production planning on the global market considerations. Global sourcing of factors of production, i.e., raw materials, components, machinery/technology, finance etc. are obtained from the best source anywhere in the world. Global orientation of organisational structure and management culture. Companies which have adopted a global outlook stop thinking of themselves as national marketers who venture abroad and start thinking of themselves as global marketers. The top management and staff are involved in the planning of world-wide manufacturing facilities, marketing policies, financial flows and logistical systems. The global operating units report directly to the chief executive or executive committee, not to the head of an international division. Executives are trained in world wide operations, not just domestic or international. Management is recruited from many countries, components and supplies are purchased where they can be obtained at the least cost, and investments are made where the anticipated returns are the greatest.31
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A truly global corporation views the entire world as a single market it does not differentiate between domestic market and foreign markets. In other words, there is nothing like a home market and foreign market there is only one market, the global market. Normally, a firm passes through different stages of development before it becomes a truly global corporation. Typically, a domestic firm starts its international business by exporting. Later it may establish joint ventures or subsidiaries abroad. From an international firm it may then develop into a multinational firm and finally into a global one. Ohmae identifies 32 five different stages in the development of a firm into a global corporation. The first stage is the arms length service activity of essentially domestic company which moves into new markets overseas by linking up with local dealers and distributors. In stage two, the company takes over these activities on its own. In the next stage, the domestic based company begins to carry out its own manufacturing, marketing and sales in the key foreign markets. In stage four, the company moves to a full insider position in these markets, supported by a complete business system including R & D and engineering. This stage calls on the managers to replicate in a new environment the hardware, systems and operational approaches that have worked so well at home. It forces them to extend the reach of domestic headquarters, which now has to provide support functions such as personnel and finance, to all overseas activities. Althrough stage four, the headquarters mentality continues to dominate. Different local operations are linked, their relation to each other established by their relation to the centre. In the fifth stage, the company moves toward a genuinely global mode of operation. In this context Ohmae points out that a companys ability to serve local customers in markets around the globe in ways that are truly responsive to their needs as well as to the global character of its industry depends on its ability to strike a new organisational balance. What is called for is what Akio Morita of Sony has termed global localisation, a new orientation that simultaneously looks in both directions. Getting to stage five, however, means venturing onto new ground altogether. Ohmae argues that to make this organisational transition, a company must denationalise its operations and create a system of values shared by corporate managers around the globe to replace the glue a nation based orientation once provided.
42
Two Decades of LPG
BOX 1.5
A Borderless and Flat World
Some candid indications of the increasing integration and globalisation of the world economy and the factors which foster them are given below. The value of foreign trade (goods and services) as a percentage of world GDP increased from about 42 per cent in 1980 to 62 per cent in 2007 33 (in 2008 and 2009, the figures were lower, impacted by the global economic crisis). What this implies is that, on an average, about 30 per cent of the goods and services produced in a country now, typically, is meant for sales in the foreign market and, similarly, an equivalent proportion of the domestic consumption is met by imports. It may be noted that trade of the developing economies has been growing faster than that of the developed ones. Further, their trade-GDP ratio is higher than that of the developed, implying that they are more integrated with the world economy by trade than the developed nations. Foreign direct investment (FDI) has increased tremendously in the last few decades and has been playing an increasing role in investment in a growing number of countries. More information on this is provided in the following sub-section. The foreign portfolio investment (FPI), like the foreign institutional investment (FII), has surged and it plays a very important role in the capital markets of developing countries. Thomas L Friedman in his highly acclaimed The World is Flat 34 explains that a combination of technological, market, and geopolitical events at the end of the twentieth century had levelled the global economic playing field in a way that was enabling more people than ever, from more places than ever to take part in the global economy and, in the best of cases, to enter the middle class. The combination of the important factors which contributed to this flattening are: 1. The proliferation of the personal computer, which enabled individuals to create words, data, spreadsheets, photos, designs, videos, drawings, and music etc. on their own PCs in the form of bits and bytes, which, in its turn, could be shaped in many more ways and distributed to many more places. 2. The power of the PC has been propelled to globalisation by the Internet, the World Wide Web, and the Web browser a set of tools that enabled individuals to send their digital content anywhere in the world virtually for free and to easily display or access that content via Web pages. 3. The third flattener was a quiet revolution in software and transmission protocols, which Friedman calls the work flow revolution because of how it made everyones computer and software interoperable thus enabling work to flow farther and faster through internal company networks, the Internet, and the World Wide Web. This enabled organisations and individuals across the world to link together for efficient R&D and supply chain management. 4. These flatteners were given a substantial thrust by a big geopolitical flattener - the collapse of Communism resulting in the elimination of a huge physical and political roadblock on the global economic playing field. The collapse of communism has given an impetus to liberalization in a number of other countries including India.
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Friedman observes that, put all these flatteners together and what we have is a much more seamless, unobstructed global marketplace. In this global agora, millions and millions of new consumers and producers were able to buy or sell their goods and services as individuals or companies and were able to collaborate with more people in more places on more things with greater ease for less money than ever before. That is what Friedman means by a flat world. However, there are many, particularly in the context of rethinking globalisation against the background of the global economic turmoil, that we have not reached the end of history or geography and that the world is not as flat as some people want us to believe. World Banks World Development Report 2009, for example, argues that the world is not flat. According to the Report, development is neither smooth nor linear at any geographic scale. Growth comes earlier to some places than to others. Geographic differences in living standards diverge before converging, faster at the local scale and slower as geography exercises its influence. These are the stylized facts, based on the experiences of successful developers over the last two centuries. Technological progress and globalisation have increased market potential in the leading areas of developing countries, intensifying concentration and amplifying spatial disparities.
FDI and International Production

As UNCTADs World Investment Report 2011, observes, foreign direct investment is a key component of the worlds growth engine.35
2500 2000 1500 1000 Developed economies 500 0 1980 2010 Transition economies Developing economies
World total
52%
1985
1990
1995
2000
2005
Figure
1.4
FDI Inflows: Global and by Group of Economies, 1980-2010 (billions of dollars)
Source: UNCTAD, World Investment Report, 2011.
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Two Decades of LPG
Table 1.1: Selected Indicators of FDI and International Production, 1990-2010

Item return (per cent) 1990 20052007 average FDI inflows FDI outflows FDI inward stock FDI outward stock Income on inward FDI Rate of return on inward FDIIncome on outward FDI Rate of return on outward FDI Cross border M&As Sales of foreign affiliates Value added (product) of foreign affiliates Total assets of foreign affiliates Exports of foreign affiliates Employment by foreign affiliates (thousands) GDP Gross fixed capital formation Royalties and licence fee receipts Exports of goods and non-factor services 207 241 2,081 2,094 75 6.6 122 7.3 99 5,105 1,019 4,602 1,498 21,470 22,206 5,109 29 4,382 1,472 1,487 1,744 1,911 1,185 1,171 1,244 1,323 22.5 16.9 9.4 11.9 35.1 0.5 19.9 0.4 -49.1 8.2 3.6 13.1 8.6 2.9 6.0 5.1 14.6 8.1 64.0 7.1 7.9 19.6 3.6 11.8 1.4 1.3 10.0 3.7 0.6 14.9 10.9 15.5 14.7 4.1 9.9 10.7 13.6 14.7 10.1 40.1 36.3 18.8 18.3 13.1 5.3 9.1 13.4 14.7 32.0 0.1 31.3 -32.1 -38.7 17.4 20.1 -11.3 -0.3 -6.8 0.2 -64.7 -9.3 1.4 -16.8 -20.3 3.4 -5.3 -9.0 -1.9 -20.3 4.9 13.1 6.6 6.3 20.3 0.3 20.6 0.3 35.7 9.1 8.3 6.3 18.6 2.3 8.6 9.5 1.7 18.6 2008 2009 2010 19911995 Value at current prices Annual growth rate or change (Billions of dollars)on 19962000 20012005 2009 2010
14,407 15,295 15,705 15,988 990 5.9 1,083 6.2 703 1,066 7.3 1,113 7.0 707
17,950 19,141 19,197 20,408 945 7.0 1,037 6.9 250 1,137 7.3 1,251 7.2 339
21,293 33,300 3,570 6,216
30,213 32,960 6,129 6,636
43,324 64,423 5,003 6,599
53,601 56,998 5,262 66,688 57,920 12,735 187 15,783 6,239 68,218 62,909 13,940 191 18,713
55,001 64,484 50,338 61,147 11,208 13,999 155 191
15,008 19,794
Note: Not included in this table are the value of worldwide sales by foreign affiliates associated with their parent firms through non-equity relationships and of the sales of the parent firms themselves. Source: UNCTAD, World Investment Report, 2011.
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As Figure 1.4 shows, there has been surge in FDI flows since the late 1980s. This is the impact of the economic liberalisations worldwide. FDI inflows increased about four-fold between early 1980s and 1990 and more than six times between 1990 and 2000. FDI inflows increased by 44 per cent between 2000 and 2007 (two years of peak flows). As a result, there has been a substantial increase in the FDI stock as a percentage of the GDP. For example, the world FDI inward stock - GDP ratio increased from about 11 per cent in 1995 to about 31 per cent in 2009. FDI now contributes about one-tenth of the global capital formation. Figure 1.4 also show that FDI flows to developing countries are much more stable than to developed countries and that their share in the total has increased in recent years. A corollary of the surge in FDI has been the fast proliferation of MNCs across the world, particularly in the present and erstwhile communist and socialist countries. According to UNCTADs World Investment Report (WIR) 1997, there were about 45,000 MNCs with about 282,000 foreign affiliates (FAs), but according to the WIR 2011, the number of MNCs was more than one lakh and of FAs nearly 9 lakh. Developing countries now account for nearly 30 per cent of the TNCs worldwide, compared to less than 10 per cent in 1992. Majority of the FAs of TNCs are in the developing countries. Interestingly, nearly half of the FAs in the world and about 85 per cent of the total number of FAs located in the developing countries are in communist China. With the proliferation of MNCs and rapid rise in FDI, the share of multinationals in global production has been on the increase. According to the estimates of UNCTAD, value added by TNCs worldwide, in their operations both at home and abroad, accounted for more than a quarter of global GDP in 2010. In 2010, foreign affiliates accounted for more than one-tenth of global GDP and one-third of world exports. In 2010, foreign affiliates of TNCs employed about 68 million people, compared to about 21 million in 1990.
State-owned TNCs
An interesting development is the growth of State-owned TNCs [defined as enterprises comprising parent enterprises and their foreign affiliates in which the government has a controlling interest (full, majority, or significant minority), whether or not listed on a stock exchange]. In 2010 there were at least 650 State-owned TNCs, with more than 8,500 foreign affiliates, operating around the globe. While this makes them a minority in the universe of all TNCs, they nevertheless constituted a significant number of the worlds 100 largest TNCs. (19 companies in 2010). SOEs from developing and transition economies have a larger share in their top 100 TNCs (28 in 2009). While relatively small in number (less than 1 per cent of all TNCs), their FDI is substantial, reaching roughly 11 per cent of global FDI flows in 2010.
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Two Decades of LPG
State-owned TNCs constitute a varied group. Developing and transition economies are home to more than half of these firms (56 per cent), though developed countries continue to maintain a significant number of State-owned TNCs. In contrast to the general view of State-owned TNCs as largely concentrated in the primary sector, they are diversified and have a strong presence in the services sector. State-owned TNCs tend to be most active in financial services and industries that are capital intensive, require monopolistic positions to gain the necessary economies of scale, or are deemed to be of strong strategic interest to the country. In 2010, roughly 70 per cent of State-owned TNCs operate in the services sector, led by financial services.
Ill Effects of Globalisation

The almost universal acceptance of the market economy and the globalisation driven by private enterprise tend to aggravate most of the harmful effects traditionally attributed to neocolonialism. 1. The global dominance of industries by MNCs is on the increase. Global gross product attributable to foreign affiliates of MNCs was about one-tenth of global GDP in 2000 compared to 5 percent in the beginning of the 1980s. However, it remained 10 per cent in 2010 too. 2. Many countries are indiscriminate in liberalising foreign investment. Pepsi, Coke and junk food are no more kept out. 3. A number of countries allow high foreign stake even in industries where that is not really required. This could affect the domestic enterprise of developing countries. 4. There has been a large number of cases of takeover of national firms by foreign firms. In some of these cases, the domestic firms are driven to a situation of having to hand over the majority or complete equity to the foreign partners of joint ventures because of the inability of the domestic partners to bring in additional capital or some other incapability. 5. Nexus between MNCs and governments is not uncommon. An alarming development under the Indian liberalisation was the unscrupulous way the Government was implementing the policy as well as the foreign companies had been behaving. The Government policy would have given the public an impression that even in the priority industries foreign equity participation would be limited to 51 per cent. However, a number of foreign companies, after having jacked up their equity holding in the Indian subsidiaries for a song, through preferential issue, to 51 per cent, are setting up new fully owned susbsidiaries to do business which their existing subsidiaries could do. Most of these are in non-priority areas. This was a covert deception by the
47
Government-multinational collusion using the saving clauses and exceptions of the policy. This could cause large foreign exchange outgo by way of dividend repatriation. Foreign investment should be discouraged in non-priority areas. 6. Replacement of traditional and indigenous products by modern products, resulting in the ruin of traditional crafts and industries and the livelihood of people in these sectors have also been happening in several countries. 7. Some times liberalisation is resorted to serve the vested interests of certain sections or without assessing the possible impacts, leading to miseries, for example, for farmers, small firms etc. 8. Another important problem is that in several cases domestic firms of developing countries are made to compete with foreign firms without a level playing field. For example, Indian firms which have several odds against them would find it difficult to compete with firms from countries where the interest rates, input costs etc. are low and infrastructural facilities are well developed and efficient. 9. One of the common criticisms is that the technology that the MNCs bring in may not be the one suited to the host country but that suits the objectives of the MNC. 10. Another usual criticism is that MNCs dump obsolete technology to the developing world. This criticism, however, is not as valid today as in the past and in future it is likely to be even less valid. In the past, because of the entry restrictions and resultant absence or lack of competition, developing countries could be used as a dumping ground for obsolete products, including technology. The business environment today, however, is vastly different. Because of the competition between MNCs (and national firms) made possible by the dismantling of entry barriers (and freeing of technology imports by national firms and added thrust on R&D by them) technological edge is an important determinant of success. The evolution of the motor car market in India, for example, gives some indication of this. 11. The developing countries, in general, have been disadvantaged by the international trading system. The least developed countries have been the most deprived. One of the reasons for the adverse terms of trade of the developing countries is the demand-supply factor. 12. While developing countries which, in the past, were against globalisation, have wide opened their doors for globalisation, many people in developed countries like USA are angry against globalisation. American jobs and wage levels are severely affected by the influx of cheap imports and shifting of production to low cost overseas locations. According to a BusinessWeek/Harris poll in early 2000, more than two-thirds of Americans believe that globalisation
48
Two Decades of LPG
drags down US wages. A strong majority of the Americans feel that trade policies have not adequately addressed the concerns of American workers, international labour standards, or the environment. The important adverse effects of globalisation according to the survey are the following. 1. Millions of Americans have lost jobs due to imports or production shifts abroad. Most find new jobs that pay less. 2. Millions of others fear losing their jobs, especially at those companies operating under competitive pressure. 3. Workers face pay cut demands from employers, which often threaten to export jobs. 4. Service and white collar jobs are increasingly vulnerable to operations moving offshore. 5. US employees can lose their comparative advantage when companies build advanced factories in low-wage countries, making them as productive as those at home. The above problems may be applicable to the developed countries in general.
Benefits of Globalisation
1. Foreign capital, if properly utilised, can make substantial contribution to the economic development of the nation. A classical example is the communist China. Foreign capital has made substantial contribution its capital formation. 2. Productivity grows more quickly when countries produce goods and services in which they have comparative advantage. Living standards can go up faster. 3. Increase in competition would make companies more cost and quality conscious and innovative. 4. Global competition and imports keep a lid on prices, so inflation is less likely to derail economic growth. 5. Liberalisation and global competition enhance consumer choice and consumer surplus. 6. An open economy spurs innovation with fresh ideas from abroad. 7. Export jobs often pay more than other jobs. 8. Unfettered capital flows give the country access to foreign investment and keep interest rates low. 9. Globalisation opens up enormous domestic and global opportunities for firms in developing countries.
49
10. Despite discriminations of the global economic order against them, there are chances of developing countries benefiting from trade.
Challenges
Globalisation throws up a number of challenges for the individuals, firms and nations. Globalisation will doom the future of those who fail to meet these challenges effectively. 1. In a competitive environment, a firm can survive only if it is efficient. Companies all around world, including many large multinationals, have been cutting down the size of their human resources as one of the means of achieving cost efficiency. The problem of over-manning is very severe in the developing countries. Unless these firms get rid of the surplus labour, they can hardly be competitive and successful. That means, the liberalisation can succeed only if the economy grows very fast to absorb the displaced labour and the new addition to the labour force. 2. Attracting foreign investment is a real challenge. It is criticised that developed nations receive most of the FDI. A very small number of the developing countries, which are the relatively developed or large or fast growing in the developing world, account for the lions share of the FDI flows to this category. What the critics do not appreciate is that, as foreign investment flows are based on economic rational, it is unrealistic to expect the pattern of flow to be different. 3. Another criticism is that the liberalisation increases the economic inequality. Even in China, the liberalisation has created many island of affluence. If inequality increases because of the worsening of the living conditions of the poor, it certainly is unjustifiable. But, if the increase in inequality is the result of improving the economic conditions of a section, while there is no economic deterioration of any section, or because of the disproportionate benefits, the question is whether the economic progress of some sections should be curbed so that there will not be a widening of the inequality. It goes without saying that a government shall strive towards growth with justice. The liberalisation may increase inequality. Further, several sectors and sections may not directly and immediately benefit from mere liberalisation. There may also be shocks and other adverse effects on the weaker sections. It is, therefore, necessary that there should be real socio-economic reforms rather than mere liberalisation. Targeted poverty eradication programmes and social safety net are very important. The fast growth and overall development resulting from liberalisation could have a major impact on poverty. Naisbitt points out
50
Two Decades of LPG
that there were an estimated 200 to 270 million Chinese living in absolute poverty in 1978 (the year in which the liberalisation began) and their number came down to 100 million by 1985.36 4. Although the MNCs, by the virtue of their size and resources, have certain advantages, they may also have limitations or disadvantages in certain spheres or aspects of business. Small and medium firms often have some edge over the very large ones in respects of standardised products or technologies like greater flexibility and adaptability, lower overheads, intimacy with the customers, etc. Lower costs is a great advantage which firms from developing countries enjoy. It may be noted that the major component of growth of several India pharmaceutical firms is the foreign market. They are relying mostly on bulk drugs and generics. What is often ignored while discussing the impact of the product patent is that patented drugs account for only about 15 per cent of the India drug market. There are several more products which would go off patent in the coming years which can also be taken up the India firms. The new patent regime should be expected to help the Indian industry by prompting it to give added thrust to R&D and thereby enabling Indian firms also to develop patented products. Positive signs are already there on the horizon. There are also many evidences of the better technology brought in by the MNCs inducing or provoking Indian firms to absorb similar technology leading to their enhanced competitiveness and market expansion. 5. The domestic and cross-border M&As pose a serious challenge to governments to ensure fair competition. An effective competition policy and law and their proper implementation assume great importance here. 6. There shall be national level and firm level strategies to take advantage of the opportunities thrown open by global liberalization. For example, the liberalization of trade in textiles by the phasing out of the MFA enormously expanded the international market for textiles. Most of its benefits have been reaped by China thanks to a national strategy it had in place; India has not been able to take much advantage because of the absence of a comprehensive and effective strategy. 7. Liberalisation will be successful only if the policy is proper and clear and there is the required political mandate, will and boldness. Lack of clarity regarding privatisation; lack of boldness to implement labour law reforms, downsizing etc., bureaucratic hurdles and so on are retarding Indias reform process. Lack of clarity in policies and delays can make the situation worse instead of realising the objectives of liberalisation.
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Policy Options
With a view to minimising the damages and maximising the opportunities of globalisation from the macro socio-economic point of view, the Human Development Report 1997 of the UNDP has made to following policy suggestions. 1. Manage trade and capital flows more carefully. 2. Invest in poor people. 3. Foster small enterprises. 4. Properly manage new technology. 5. Reduce poverty and introduce safety nets. 6. Influence governance. The Report also points out that to seize the opportunities of globalisation, the poorest developing countries need the following. 1. A more supportive macroeconomic policy environment for poverty eradication: The world clearly needs much more effective macroeconomic policy management at the global level with more stable sources of international liquidity, better surveillance, faster crisis response mechanisms and a larger multinational lender of last resort. Existing organisations serve these purposes inadequately. 2. A fairer institutional environment for global trade: There is an urgent need to treat the products of developing countries on a par with those of industrial countries and to accelerate the liberalisation of markets of interest to poor countries, such as textiles, and institute a comprehensive ban on dumping agricultural exports. 3. A partnership with multinational corporations to promote growth for poverty reduction: An incentive system that, while avoiding excessive regulation, encourages multinational corporations to contribute to poverty reduction and be publicly accountable and socially responsible. Both industrial and developing countries have interests here. Those of the industrial include preventing tax evasion. 4. Action to stop the race to the bottom: In a world of cutthroat competition, countries underbid each other in labour costs, labour standards and environmental protection to produce as cheaply as possible for the international market. Many countries unilaterally try to restrain these races to the bottom. And some may come under external pressure if they tolerate dangerous working conditions and child labour, with human rights issues a
52
Two Decades of LPG
basis for unilateral trade sanctions. A more efficient and equitable approach would be to strengthen institutions such as the International Labour Organisation to support respect for labour right and to develop similar institutions for international environmental protection. International coordination is also needed to avoid races to attract international investors by offering overly generous tax incentives that erode the tax base. 5. Selective support for global technology priorities: The R&D priorities should reoriented from the needs of the rich to the more urgent human needs of the poor. 6. Action on global debt: The highly indebted poor countries need debt relief now not at some indeterminate point in the future. Providing effective relief to the 20 worst-affected countries would cost between $ 5.5 billion and $ 7.7 billion less than the cost of one Stealth bomber and roughly equivalent to the cost of the Euro-Disney in France. These meager financial costs contrast with the appalling human costs of inaction.
LPG AND DEVELOPING COUNTRIES

Growing Economic Power of Developing Countries
According to the World Banks World Development Report 2011, there were 144 low and middle income economies, each with a population of more than 30,000. While the low and middle income economies fall in the category of developing economies, some high income economies are also regarded as developing. The low and middle income economies give a rough approximation of the developing economies. The low and middle income economies are inhabited by about 84 per cent of the world population but has a share of only 28 per cent of the global GDP. In purchasing power parity terms, however, they account for more than 44 per cent of the global. LPG has both positive and negative effects on different categories of economies. The structural changes in the economy, sectors, and segments and the interplay of market forces impact fortunes of different economic actors.
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Table 1.2: Shares of Different Categories of Economies (Percentage), 2009

Economy Group High Income Middle Income Low Income Low and Middle Income India World Population 16.5 71.0 12.5 83.5 17.0 World GNI 71.9 27.4 0.7 28.1 2.3 World GNI measured at PPP 56.5 42.5 1.4 43.9 5.2
Source: Calculated from the data given by World Bank, World Development Report, 2011.
A number of developing economies which are characterised by fairly sound economic base, proactive government and conducive social environment have benefited substantially from the LPG environment while many, particularly the least developed countries (numbering 48) and other low income economies suffer the brunt of deleterious effects than benefiting from the new economic paradigm. In a large number of cases, socio-political conflicts, inefficient and corrupt administration or vicious circle of poverty and growth defeating forces not only retard their development but also make the situation more miserable. Further, even in countries which have remarkably benefited by LPG, there are economic segments and sections of population which are bypassed by the new development pattern or are victims of the new development forces.
The Bright Side

As a group, the developing countries present an encouraging picture of overall performance. Their GDP growth has been much faster than that of the developed ones. The share of the developing countries in the global trade has also been growing at almost twice the rate for the developed countries. The presence of developing countries in the global economy has been on the increase. The population, GDP, foreign trade and foreign investment of developing economies have been growing faster than those for the developed. That means that the global shares of developing economies in respect of these have been increasing and of the other group of countries decreasing. The global economic share of developing economies will further increase and they will play an increasingly important role in international business. FDI to the developing economies has increased substantially, as more international production moves to them: MNCs are increasingly investing in these countries to maintain cost-effectiveness and to remain competitive in the global
54
Two Decades of LPG
production networks. Figure 1.4 shows that in 2010 more than half of the FDI went to developing countries (including transition economies). It also clearly shows that the fluctuations in the global FDI flows are caused by the ups and downs in the flows to the developed countries and the developing world shows a relatively stable pattern. The increasing share of developing countries in the FDI inflows is reflected also in the global ranking of the largest FDI recipients: in 2010, half of the top 20 host economies were from developing and transition economies, compared to seven in 2009. The share of developing economies in the global FDI outflows reached 29 per cent in 2010, up from 16 per cent in 2007, the year prior to the financial crisis. In 2010, six developing economies were among the top 20 foreign investors. The trade of developing countries has been growing faster than that of the developed and as a result their share in the global trade has also been rising. Recently a developing country (China) has emerged as the largest exporter. Table 1.3 shows that about half of the top thirty global merchandise traders are developing countries. There is no rule or empirical evidence that any particular category of countries will have trade deficit or surplus. There are both developed and developing countries with trade surplus and there are countries in both these categories with trade deficit. Further, the status of trade balance of some countries changes from time to time. In recent years, while the developing countries as a group had a surplus trade balance, the high income countries had net deficit. The European Union had a trade deficit with the rest of the world of $ 190 billion in 2010. Among the developing economies, China has been occupying an enviable position regarding trade balance. China, which had a trade deficit of over $13 billion in 1985, had a surplus of nearly $ 9 billion in 1990 and $25 billion in 2000. Chinas merchandise trade surplus for 2010 totaled $ 183 billion, roughly 39 per cent less than the nearly US$ 300 billion surplus of 2008. China, the largest exporter and the second largest importer, had the second largest trade surplus in 2010. Germany had the largest surplus in 2010 ($ 202 billion). Other developing countries with significant trade surplus include Russia, Malaysia, S. Korea, Indonesia, Thailand, Brazil and Taipei. Many developing countries have been in deficit. In the last five decades or so, Indias trade balance was negative except in two years ( 197273 and 1976-77). In services trade too developing countries have been forging ahead, but they show a different picture of trade balance compared to goods trade. A small number of countries account for the bulk of the total exports of the developing countries.
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Table 1.3: Leading Merchandise Traders, 2010 (Billion dollars and percentage)
Rank 1 2 3 4 5 6 7 8 9 10 11 Exporters China United States Germany Japan Netherlands France Korea Republic of Italy Belgium United Kingdom Hong Kong China domestic exports re-exports 12 13 14 Russian Federation Canada Singapore domestic exports re-exports 15 16 17 18 19 20 21 22 23 24 25 26 Mexico Taipei, Chinese Kingdom of Saudi Arabia Spain United Arab Emirates India Australia Brazil Malaysia Switzerland Thailand Sweden Value Share 1,578 1,270 1,269 770 572 521 466 448 411 405 401 10 383 400 387 352 183 169 298 275 254 245 235 216 212 202 199 195 195 158 10.4 8.4 8.3 5.1 3.8 3.4 3.1 2.9 2.7 2.7 2.6 0.1 2.5 2.6 2.5 2.3 1.2 1.1 2.0 1.8 1.7 1.6 1.5 1.4 1.4 1.3 1.3 1.3 1.3 1.0 15 16 17 18 19 20 21 22 23 24 25 26 Singapore retained imports Mexico Taipei, Chinese Russian Federation Australia Brazil Turkey Thailand Switzerland Poland United Arab Emirates Malaysia 311 142 311 251 248 202 191 185 182 176 174 170 165 2.0 0.9 2.0 1.6 1.6 1.3 1.2 1.2 1.2 1.1 1.1 1.1 1.1 12 13 14 Belgium India Spain 390 323 312 2.5 2.1 2.0 Rank 1 2 3 4 5 6 7 8 9 10 11 Importers United States China Germany Japan France United Kingdom Netherlands Italy Hong Kong China retained imports Korea Republic of Canada Value 1,968 1,395 1,067 693 606 558 517 481 442 116 425 402 Share 12.8 9.1 6.9 4.5 3.9 3.6 3.4 3.1 2.9 0.8 2.8 2.6
56 27 28 29 30 Indonesia Poland Austria Czech Republic Total of above World 158 156 152 133 12,541 15,238 1.0 1.0 1.0 0.9 82.3 100.0 27 28 29 30 Austria Sweden Indonesia Czech Republic Total of above World
Two Decades of LPG
150 148 132 126 12712 15376
1.0 1.0 0.9 0.8 82.7 100.0
Source: WTO, World Trade Report, 2011.
The Market Shift

A far reaching development in the global business environment is the geographical shift in the market potential. This is caused by demographic factors and economic factors influenced by, inter alia, globalisation. The advanced countries North America, Western Europe and Japan are relatively shrinking in the market size while the markets of the emerging and developing countries particularly the BRIC and the N 1137 are growing explosively. In some respects, the developed country markets are shrinking absolutely too mainly due to the drastic decline in their population size consequent to the collapsing birthrate which was referred to by Peter Drucker in his Management Challenges for the Twentyfirst Century as collective national suicide. In Western and Central Europe and in Japan, the birthrate has already fallen well below the rate needed to reproduce the population. That is, below 2.1 live births for women of reproductive age. In some of Italys richest regions, for example, in Bologna, the birthrate by the year 1999 had fallen to 0.8; in Japan to 1.3. In fact, Japan and all of Southern Europe Portugal, Spain, Southern France, Italy, Greece are drifting toward collective national suicide by the end of the 21st century. By then Italys population, for instance now 60 million might be down to 20 or 22 million; Japans population now 125 million might be down to 50 or 55 million. But even in Western and Northern Europe the birthrates are down to 1.5 and falling. But in the United States, too, the birthrate is now below 2 and going down steadily. And it is as high as it is only because of the large number of recent immigrants who still, for the first generation, tend to retain the high birthrates of their country of origin for example, Mexico.2 While the developed country markets are shrinking ferociously, the developing world is experiencing a population explosion and demand boom. The surging population and GDP make the developing economies the future markets. Interestingly, their GDP is faster than the recent estimates of impressive growth. For example, in their 2001 paper, Goldman Sachs (GS) argued that the BRIC economies would make up more than 10 per cent of world GDP by the end of the decade. However, by the end of 2007, their combined weight was already 15 per cent of the global economy. China has already overtaken Germany and Japan to become the second largest economy in the world. According to the 2003 GS BRIC Report, these countries
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together could overtake the combined GDP of the G7 by 2035; the 2007 revised figures predict that this will happen in 2032.3 According to the predictions of Goldman Sachs (GS), by now the sizes of the incremental demand in G6 (USA, Japan, Germany, UK, France, Italy), and BRIC are almost equal. By 2030 the incremental demand in BRIC would be about 2.5 times that in the G6 and by 2050 it would be about four times. From 2007 to 2020, Indias GDP per capita in US$ terms is expected to quadruple. The fast increase in income and population in a number of other developing countries, besides the BRIC, also need to be considered here. Tom Burke, cofounder of the group of E3G (Third Generation Environmentalism), presents an interesting analogy: For many years there were only two Americums (one Americum is a group of 350 million people with a percapita income above $ 15,000 and a growing penchant for consumerism) - one in North America and another in Europe with small pockets of American style living in Asia, Latin America and the Middle East. Today, there are Americums taking shape all over the planet - China has given birth to one Americum and is pregnant with a second, which is due in 2030. India has one Americum now and also has another on the way, also due by 2030. Singapore, Malaysia, Vietnam, Thailand, Indonesia, Taiwan, Australia, New Zealand, Hong Kong, Korea and Japan constitute another Americum. Russia and Central Europe are nurturing another Americum, and parts of South America and the Middle East still another. Thus, by 2030 we will have gone from a world of two Americums to a world of eight or nine.38 It may be noted that while the developed economies underwent a recession during 2008/2009, several developing economies grew well, though slower than their normal pace. The growing influx of FII to the stock markets of developing countries and the increasing market capitalization is a reflection of the great potential of the developing country firms. Reflecting the huge investment and growth potential of the developing economies, there has been an influx of FDI inflow to developing countries, as pointed out earlier. Their share in the global FDI inflows has increased significantly, reaching nearly 50 per cent in 2009 and exceeding that of the developed countries in 2010.
The New Competition

While it is argued, on the one side, that liberalisation created a situation of the home country firms having to compete with mighty foreign firm without a levelplaying field, on the other side it is pointed out that gobalization has been leveling the playing field. A salient feature of the current business environment is the unprecedented access to everyone, everywhere and everything thanks to the universal liberalisation and technological revolution. This level playing field liberates the firms from
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Two Decades of LPG
developing countries (described as challengers by Sirkin, Hemerling and Bhattacharya 39) from several handicaps which would have otherwise affected them. In other words, the challengers are enjoying several benefits which were not available to the incumbents (a term used by Hemerling et.al. to refer to established firms from developed countries) during their development stage. There is, however, no denying the fact the global liberalisation has substantially benefited the incumbents by enabling them to leverage their dominance and strengths so as to find alternatives to the domestic market constraints and to exploit the expanding opportunities of the emerging and developing markets. They are also benefitting by accessing the talent pool, low cost labour and other resources of these economies. To a significant extent the incumbents have sought to fight the challengers, by accessing the low cost environment and growth impulses of the emerging and developing markets, by restructuring the supply chain and business process and collaborating with challengers. Some authors have described the global business environment as globality -a different kind of environment, in which business flows in every direction. Companies have no centres. The idea of foreignness is foreign. Commerce swirls and market dominance shifts. Western business orthodoxy entwins with eastern business philosophy and creates a whole new mindset that embraces profit and competition as well as sustainability and competition.40 In short, gone are the days when large well established companies from the developed countries (the incumbents) dominated the global business scenario. Firms from emerging and developing economies are increasing their global share in many industries. The number of developing country firms in the Fortune Global 500 has been on the rapid rise. In the 2010 Fortune 500, a developing country, China, had the third largest number (46) of firms. India, which made an entry in to the Fortune 500 in the recent past with Indian Oil Corporation, had 8 companies in 2010 consisting of 5 public sector and 3 private sector firms. In fact, government policies have backed the emergence of MNCs, both state owned and private, from several developing economies. For example, the adoption by the government in the early years of the new millennium of go global policy has boosted the global foray of Chinese firms. With a view to giving the well-performing public enterprises greater functional and financial autonomy and to help them to become globally competitive to emerge as global giants, Government of India initiated a strategy in 1997 and nine such enterprises were (called navarathnas - nine gems) identified. Now there are 19 such enterprises. The geographical shift in the industrial dominance is indeed a historical phenomenon. The dominance of Great Britain and other developed European nations was overshadowed by USA by the Second World War. The American supremacy however, had to face increasing challenge from the European nations later. Since
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the 1970s Japan emerged as strong power to be reckoned by America and Europe. Of late, it has become the turn of the Asian tigers, the BRIC and several other developing countries. In the present wave of new competition, powerful companies from developing countries are strongly slashing at the incumbents. It is like a tsunami a series of low powerful waves caused by an undersea disruption that crashed against the shore and surge for inland than the single sharp crest of a tidal wave.41 They are fast growing, hungry, and have access to all the worlds markets and resources. The challengers are showing up everywhere in each other markets throughout the world, in markets that are less developed than their own, and, increasingly, in the developed markets of Japan, western Europe and the United States.42 The home markets of the incumbents are increasingly invaded by the challengers at a time when these markets are showing signs of saturation or decline in many industries. That is, the challenges are eating away an increasing share of even the shrinking cakes at a time when at least maintaining the aggregate level of sales is often essential for survival. The challengers in many cases is well pitched than the incumbents low cost domestic environment, fast expanding domestic market, increasing supply of human resources of all categories unskilled, skilled and talented entrepreneurial dynamism, etc. The easy access to foreign capital and technology help level the playing field. The situation for the developed country firms today is very different from the past when they could expand into the developing markets with hardly any challengers. The incumbents today face a dual challenge: defending the home market from the challengers and effectively competing with the challengers in the foreign market. The developing country firms are no more the typical labour incentive, low-tech producers. Many of them are highly innovative. The categorisation of industries into glooming sunset and booming sunrise industries has not deterred the developing country firms from building up strength in the sunset industries while many incumbents appear to have preferred to exit these industries. The challengers have grown enormously by acquiring such businesses of incumbents and also organically so that they have become major global players in several of these industries. The good fortune of the challengers is that in their home markets most industries are growth industries. Several of the challengers have been globally consolidating their commodity business. Challengers have been globally expanding their business organically and inorganically in the sunrise industries and knowledge economy too. In all categories of economies low, middle and high income major part of the incremental income and employment are generated by the service sector. Developing
60
Two Decades of LPG
country firms present an impressive performance in sectors like IT and ITES (incumbent challenger differentiation is irrelevant in such industries). Not only that Indian firms like TCS, Infosys, Wipro and several others are globally well known, a significant part of the requirement of the IT professionals of multinationals (both in their home market operations and offshore businesses) are supplied by developing countries like India. While several large and well known incumbents in the financial sector collapsed and weakened under the global financial crisis of the last years of the previous decade, the financial sector of countries like India has shown great resilience, strength and substantial growth impulses. Several banks from developing countries, including State bank of India, are in the global Fortune 500. The aggressive foreign thrust by the developing country firms is reflected in the booming FDI outflow from them. They accounted for about a quarter of the global FDI outflows in 2009. The four BRIC countries alone accounted for almost 9 per cent of world outflows, compared to less than 1 per cent ten years ago. The outward FDI has been boosted by rising volumes of cross-border M&As. Many developing country firms have been on an overseas buying spree. Between 2000 and 2009, Indian firms finalized 812 deals abroad, Chinese firms finalized 450, Brazilian firms finalized 190, and Russian firms finalized 436. Some of these deals were valued at more than $1 billion.43 TNCs from developing countries share a number of common features. The World Investment Report 2010, for example, highlight the following points in respect of the TNCs from BRIC:44 They have developed various ownership-specific advantages that allow them to be competitive in foreign markets as well as in their own markets. Initially, firms tend to expanded mainly into their own region, often into countries with which they had close cultural links. A growing number of TNCs have ventured further afield, however, in search of new markets and resources A large number of TNCs from BRIC are motivated by strategic considerations rather than by short-term profitability, reflecting the role of state-owned enterprises in the outward FDI of the group. Many of the TNCs have become truly global players, as they possess among other things global brand names, management skills and competitive business models. Supportive government policies have backed the rise of outward FDI.
The Dark Side

Many developing countries have, undoubtedly, benefitted a lot from the global liberalisation. However, the aggregate macroeconomic figures of impressive
61
performance of developing countries conceal the wide divergence in their performance. The performance indicators of developing countries are striking because of the exceptional performance of a small group within them, like the BRICS and some countries in South-East Asia and Latin America. The performance of China, which accounts for nearly 30 per cent of the GNI of the low and middle income economies, is particularly decisive. A 10 per cent growth of the Chinese economy can pull up the income of the low and middle income economies by about 3 per cent and of the world economy by about 0.8 per cent even if the income of other countries stagnate. Not only that a large number of countries continue to be characterised by acute derivation in the vital factors but also the sufferings of many of them have increased in the new world order. It must, at the same time, be noted that that the problems of many of them are basically inherent and not the impact of globalisation albeit it is common to put the blame for the problems and evils on globalisation. As stated earlier, in a large number of cases, socio-political conflicts, inefficient and corrupt administration or vicious circle of poverty and growth defeating forces not only retard their development but also make the situation more miserable. LPG or no LPG, the poor, particularly of the poor countries, are the victims of several harmful developments - domestic or international, like food inflation. It is true that many developing countries have benefitted a lot from the global liberalisation. But, often they get a raw deal in multilateral trade negotiations. Further, their inherent weaknesses constrain their effective participation in the international economic system. The pattern of trade liberalisations has been such that they benefit largely the developed countries and bias against the developing ones. There are forces in the international economic order which disfavor or are biased against developing countries. Multilateral trade liberalisations have been mostly in respect of goods traded between industrial economies and those exported from developing to the developed nations did not benefit so much. Although most tariffs in industrial countries are low, those on several categories of goods exported by developing countries to developed countries remain very high. While developing countries as a group face tariffs which are significantly higher than the global average, the least developed countries face substantially higher tariffs. Several advanced countries garner substantial share of their tariffs from the imports from the developing countries which form a small part of their total import bill. Another type of discriminatory tariff is tariff escalation when tariffs increase with the degree of processing involved in the product. This discourages value added exports from developing countries. Another reflection of the bias against developing countries in the multilateral trade liberalisations is the fact that trade in textiles and agriculture, in which
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Two Decades of LPG
developing countries have an edge over the developed, remained highly protected for a long period. Agriculture continues to be highly protected in the developed countries. Further, not only that the developed countries are not earnestly implementing the provisions of the UR Agreement which will benefit the developing countries, but also they tend to become more protectionist in several respects. The developing countries are disadvantaged in the WTO system also because of their inability to effectively participate in the negotiation process. They suffer from lack of intellectual and financial capability to meaningfully participate in the discussions and negotiations. They are not able to understand the implications and possible impacts of different proposals and agreements because of their analytical deficiencies. It is pointed out that, most of the agreements and understandings reached during the Uruguay Round trade negotiations are unequal and unbalanced from the point of view of developing countries. This was mainly because of the weak bargaining position of these countries, their general state of unpreparedness for the negotiations, their dearth of skilled manpower and financial resources to participate effectively, and the lack of transparency in the negotiating process. Some of the agreements are inherently unequal and unbalanced.45 See Box 1.6.
BOX 1.6
The Participation Gap
Just as inclusive democracy is needed to ensure minority participation at the national level, inclusive global democracy is needed in which all countries small and weak as well as large and powerful have a voice in decisions. Participation is needed as a matter of right, and to create a global economy with fair and just rules. Global economic policy making occurs in a world of grossly unequal economic and political power. The playing field is not level when the teams have vastly different resources, expertise and negotiating power. Poor and small countries can ill afford the high costs of participating in the WTO, for example. Fourteen of them have either a oneperson delegation in Geneva or none at all. They lack access to well-researched legal and economic policy advice. And they cannot afford top legal representation in dispute settlements. The community of states has an obligation to put in place procedures for greater participation and transparency in global decision making. The WTO, for example, has been heavily criticised for its non-transparent and non-participatory decision making, depending more on informal consensus than formal procedures. A major review of decision making in international bodies should focus on two issues. One is the participation of small and weak countries in the processes of negotiation and dispute settlement. The second is the participation of civil society including corporations, trade unions and global networks of NGOs in a forum for open debate rather than in behind-the-scenes lobbying and on the street demonstrations.
Courtesy: UNDP, Human Development Report, 2000.
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The developing countries are virtually deceived in several cases as the multilateral trade agreements have not been implemented in letter and spirit by the developed countries. They have resorted to covert measures to deny the developing countries the legitimate benefits of the proposed trade liberalisations. It is pointed out that subsidies normally maintained by developed countries have been made non-actionable, while several of those given by developing countries in pursuit of an export-led development strategy have either been prohibited or put in the actionable category. Subsidies to farmers maintained by major developed countries have, instead of coming down, gone up primarily because these countries were able to switch over to subsidies permissible under the Agreement on Agriculture, before the commencement of its implementation.46 Liberalisation of textiles trade has hailed as a boon for the developing countries. However, here also the developing countries have been deceived because developed importing countries have sought to comply with the targets of liberalisation set out in the Agreement on Textiles and Clothing (ATC) by taking credit for the items already outside restriction.47 Developing countries have identified various instances of inequalities and imbalances in the Uruguay Round Agreements and submitted a large number of formal proposals for rectifying them. These proposals have been known as the implementation issues. It is argued that the implementation issues should be urgently resolved and any new round of MTN shall be taken up only after that. However, the developed countries want the new round of MTN soon. The implementation issues are not a spanner thrown by a group of developing countries to ape a new round of trade negotiations. Their attempt to resolve them is designed to safeguard their most vital trading interests and to restore a modicum of balance in WTO agreements after an unfortunately belated realisation that developing countries were short-changed in the Uruguay Round negotiations. What is at stake is the very credibility of the international trading system in the eyes of the developing countries. Resolution of the implementation issues is the only way to restore credibility48 But they continue to be serious issues. It is generally felt that the patent regime of the WTO serves the interests of the MNCs and advanced nations and is detrimental to the interests of the developing countries. The developing countries will get a fair deal only if the international economic order becomes orderly and inclusive.
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Two Decades of LPG
LIBERALISATION AND REGULATION

Just as law and liberty shall go hand in hand, adequate regulation is a prerequisite for proper functioning of the market economy. Liberalisation does not mean a world of business without rules, regulations and norms. A market economy cannot function effectively without laws and norms to ensure fair competition and protection of consumer and societal interests. There shall also be policies and other measures aimed at inclusive growth. Deregulations or permissiveness devoid of these considerations will be destructive. The problems that plagued the financial sector of the US and several other countries, for example, expose this fact. A major cause of the sub-prime crisis originated in the US that developed into the global economic crisis during 2008-2009 was the indiscriminate financial sector deregulation. One of the most important lessons of the great depression was the need for effective regulation of the financial sector and control of money supply. Milton Friedman, the Nobel Laureate monetarist economist, who was an advocate of the free market system, had made it clear that proper regulation is a prerequisite for efficient and smooth functioning of market economies when he spelled out that the central bank must ensure a stable monetary background for the economy keeping inflation low by properly regulating money supply. For over four decades since the Great Depression, the U.S. financial sector was well regulated and stable in which banks dominated, deposit rates were controlled, small and medium deposits were guaranteed, bank profits were determined by the interest rate spread, i.e. the difference between deposit and lending rates, and banks were restrained from straying into areas such as securities trading and insurance, thanks mainly to the Glass-Steagall Act (GSA), 1933, which sought to place the banking sector of the US on a sound footing. The GSA set up a regulatory firewall between commercial and investment bank activities, both of which were curbed and controlled. However, banking regulations began to be eased in the 1970s and the GSA was repealed in 1999 with the establishment of the Gramm-Leach-Bliley Act, which eliminated the GSA restrictions against affiliations between commercial and investment banks. In other words, prohibition of a bank holding company from owning other financial companies disappeared. Consequently, the distinction between commercial banks and brokerage firms has blurred; many banks own brokerage firms and provide investment services. Furthermore, the Gramm-Leach-Bliley Act allows banking institutions to provide a broader range of services, including underwriting and other activities. The consequent transformation of the financial sector has been far reaching. Banks extended their activity beyond conventional commercial banking into merchant banking and insurance. They have diversified their business by transforming themselves into universal banks offering multiple services or
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collaborating with other financial firms with inter-corporate investments or establishing subsidiary firms. The very feeble financial sector regulation and governance; the greed, irresponsibility and unscrupulousness of many top executives and other employees coupled with the growing aspiration of consumers to live far beyond their means resulted in the collapse of the financial sector causing the global crisis.
BOX 1.7
Occupy Wall Street A Message Loud and Clear
Occupy Wall Street (OWS) movement is a reflection of the growing public resentment against the indiscriminate deregulation and corporate-government nexus and the deteriorating economic conditions of the common man. OWS was initiated by the Canadian activist group Adbusters, which received considerable public attention with its first demonstration of protest on September 17, 2011 in the Wall Street in New York against social and economic inequality, high unemployment, greed, as well as corruption, and the undue influence of corporations particularly from the financial sector on government. The protesters targeted Wall Street because of the part it played in the economic crisis of 2008 which started the Great Recession. According to them it is the Wall Streets risky lending practices of mortgage-backed securities which ultimately proved to be worthless that caused the crisis, and that the government bail out breached a sense of propriety. The Wall Street recklessly and blatantly abused the credit default swap market, and that the instability of that market must have been known beforehand. The banks got bailed out, but our families are getting kicked out, The protesters, therefore, demanded that the guilty parties should be prosecuted. Their three main demands are: get the money out of politics; reinstate the Glass-Steagall Act and draft laws against the little-known loophole that currently allows members of Congress to pass legislation affecting Delaware-based corporations in which they themselves are investors. (Wall Street, named after and centered on the eight-block-long street, refers to the financial centre of New York City, on which the New York Stock Exchange, the worlds largest stock exchange by market capitalisation of its listed companies is located. Several other major exchanges have or had headquarters in the Wall Street area, including NASDAQ, the New York Mercantile Exchange, the New York Board of Trade, and the former American Stock Exchange. Over time, the term has become a metonym for the financial markets of the United States as a whole.) Wealth inequality and income inequality have been central concerns among OWS protesters. Their slogan We are the 99 per cent refers to the growing difference in wealth in the U.S. between the wealthiest 1 per cent and the rest of the population. The vast concentration of wealth among the top 1 per cent of income earners compared to the other 99 per cent and indicates that most people are paying the price for the mistakes of a tiny minority. According to the Congressional Budget Office (CBO) report, in 1980, the top 1 per cent earned 9.1 per cent of all income, while in 2006 they earned 18.8 per cent of all income. The disparity in income distribution in the United States further widened, reaching 23.5 per cent in 2010. According to the CBO, between 1979 and 2007 the incomes of the top 1 per cent of Americans grew by an average of 275 per cent. During
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Two Decades of LPG
the same time period, the 60 per cent of Americans in the middle of the income scale saw their income rise by 40 per cent. Since 1979 the average pre-tax income for the bottom 90 per cent of households has decreased by $900, while that of the top 1 per cent increased by over $700,000, as federal taxation became less progressive. The protesters want, in part, more and better jobs, more equal distribution of income, bank reform, and a reduction of the influence of corporations on politics. During an October 6, 2011, news conference, President Obama said about the OWS: I think it expresses the frustrations the American people feel, that we had the biggest financial crisis since the Great Depression, huge collateral damage all throughout the country ... and yet youre still seeing some of the same folks who acted irresponsibly trying to fight efforts to crack down on the abusive practices that got us into this in the first place. There have, of course, been severe criticisms against the occupy movement. John Paulson, billionaire and founder of the hedge fund Paulson & Co., criticised the protesters for vilifying our most successful businesses, citing that the top 1 per cent of New Yorkers pay over 40 per cent of all income taxes, providing huge benefits to everyone in our city and state. Businessman and CEO Peter Schiff wrote an opinion column where he stated, I own a brokerage firm, but I didnt receive any bailout money... Yes, I am the 1 per cent - but Ive earned every penny. Instead of trying to take my wealth away, I hope they learn from my example. There are, however, businessmen who responded differently. Bill Gross, manager of PIMCOs Total Return Fund, the worlds largest mutual fund, stated: Class warfare by the 99 per cent? Of course, theyre fighting back after 30 years of being shot at. PIMCOs co-CEO Mohamed El-Erian argued that people should listen to Occupy Wall Street. The spirit of Occupy Wall Street movement soon spread to many countries across the world. It is a message and warning to the governments and corporates of all countries.
(Several points of this piece are adapted from Wikipedia: The Free Encyclopedia)
CONCLUSION
LPG makes a profound paradigm shift. It has swept across economic systems of all political colours and shades and economies in all income or development levels. All these countries have had their share of adverse effects of the LPG too. LPG have flattened the world to a new playing field in which the players from everywhere can try their chance. A nation shall have clear vision, strategy and proper regulatory system to benefit from LPG and to alleviate the adverse effect. In the new environment the powerful, dynamic and strategically proactive will be winners and the weak or those do not effectively respond will be losers. This is true of nations, firms and individuals. There is also the first mover advantage as has been demonstrated by China. LPG provide a lot of scope for unholy nexus between big business and politicians and bureaucrats. This may lead to indiscriminate and socially harmful liberalisation. This is particularly so in respect of countries which are not democratic or where democracy is weak. Public vigilance has a great role in protecting the genuine national and local interests. It has been encouraging to note that in several countries, including India, agitations by publics are influencing government policy formulations to protect social and national interests. This trend has to become more pronounced.
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The impact of LPG is very diverse. However, one impact on the market place is very conspicuous. When the liberalisation was ushered in, one prominent Indian Industrialist stated: All these days we had to go to the politicians and bureaucrats with folded hands and bent knees for licences and permits, but hereafter will have to go to the consumer with folded hands and bent knees. This has come true to a large extent.
REFERENCES
1. World Bank, World Development Report, 1997, p. 19. 2. Ibid., p. 21. 3. Ibid., p. 22. 4. R.A. Musgrave, The Theory of Public Finance, Kogakusha Ltd., Tokyo, 1959, p. 3. 5. R.A. Musgrave and P.B. Musgrave, Public Finance in Theory and Practice, McGrawHill Kogakusha Ltd., Tokyo, 1976, p. 5. 6. Ibid. 7. World Bank, World Development Report, 1997. 8. John Naisbitt, The Global Paradox, NicholasBrealy Publishing, London, 1994. 9. Ibid. 10. John Naisbitt and Patricia Aburdane, Megatrends 2000, Avon Books, New York, 1990, p. 91. 11. Cited by Naisbitt and Aburdane, ibid., p. 91. 12. Swaminathan S. Anklesaria Aiyar, Peristroika for India, background paper presented at a Seminar under the auspices of Project for Economic Education, New Delhi, April 21, 1990 ( The text of the Paper was published by Forum of Free Enterprise, Mumbai). 13. Ibid., p. 91. 14. Oleg Bogomolov, The Changing Image of Socialism, Social Science, Vol.XXI, No.3, 1990, pp. 84-85. 15. Cited by Aiyar, op.cit., p. 2. 16. The data regarding FDI are taken mostly from the World Investment Reports of UNCTAD. 17. Elliot Berg, Privatisation: Development a Pragmatic Approach, Economic Impact, 1987/1, pp. 6-7. 18. World Bank, World Development Report 1987, World Bank, Washington D.C., 1987, p. 67. 19. Samuel Paul, Privatisation and the Public Sector, Finance and Development, December, 1985, p. 42.
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Two Decades of LPG
20. Alexander Polyukhov, Everything for Sale, New Times, October 2-8, 1990, p. 31. 21. Ibid. p. 32. 22. John Naisbitt and Patricia Aburdene, Megatrends 2000, Avon Books, New York, 1990, p. 162. 23. Ibid., p. 160. 24. The information about PTA given here is drawn from WTO, World Trade Report, 2011. 25. Data pertaining to PTAs are from WTO, World Trade Report, 2011. 26. Peter F. Drucker, Management Challenges for the 21st Century, Harper Business, New York, 1999. 27. Peter F. Ducker, The New Realities, Mandrin, London, 1990. 28. Deepak Nayyar, Globalisation: The Past in our Present, Presidential Address at the78th Annual Conference of Indian Economic Association, Chandigarh, December, 28-30, 1995. 29. The explanation of these four points given below is drawn from Deepak Nayyar, ibid. 30. UNCTAD, Human Development Report, 1999. 31. Philip Kotler, Marketing Management, Prentice Hall of India, New Delhi, 1994, p. 429. 32. Kenchi Ohmae, The Borderless World, Fontana, London,1991. 33. The statics related to trade are from various issues of World Banks World Development Report and UNCTADs World Trade Report (either directly reproduced or computed). 34. Thomas L. Friedman, The World is Flat, The New York, The Penguin Group, 2005. 35. The statistics of FDI are from UNCTADs World Investment Report (various issues). 36. John Naisbitt, op.cit., 186. 37. BRIC is an acronym for Brazil, Russia, India and China, used for the first time by the global consultant firm Goldman Sachs (GS) in 2001. Later in 2005, GS introduced the concept of the Next Eleven (N-11), with a view to identifying those countries that could potentially have a BRIC-like impact in rivaling the G7. Their main common ground - and the reason for their selection - was that they were the next set of large-population countries beyond the BRIC. The N-11 is a very diverse grouping that includes Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam. The BRIC is now modified as BRICS adding South Africa also to it. 38. Cited in Thomas L. Friedmans Hot, Flat and Crowded, The Penguin group, New York, 2008.
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39. Harold L. Sirkin, James W. Hemerling and Arindam K. Bhattacharya, Globality: Competing with Every One for Everything, Headline Publishing Group, London, 2008. 40. Ibid., p. 7. 41. Ibid., p. 7. 42. Ibid., p. 3. 43. UNCTAD, World Investment Report 2010. 44. Ibid. 45. Muchkund Dubey, Implementation Issues in the WTO, The Hindu, September 10, 2001. 46. Ibid. 47. Ibid. 48. Ibid.
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Government Intervention in the Economy through the Ages

Two Decades of LPG

TWO DECADES OF LPG

Dr. Francis Cherunilam

MUMBAI NEW DELHI

First Edition : 2012

Branch Offices New Delhi Nagpur Bengaluru Hyderabad Chennai Pune

Ahmedabad Ernakulam Bhubaneswar Indore Kolkata Guwahati DTP by Printed at

Two Decades of LPG

Dr. Francis Cherunilam

Government Intervention in the Economy through the Ages

GOVERNMENT INTERVENTION IN THE ECONOMY THROUGH THE AGES

GROWTH OF STATE IN MARKET ECONOMIES

Government Intervention in the Economy through the Ages

Two Decades of LPG

Government Intervention in the Economy through the Ages

RATIONALE AND SCOPE OF STATE INTERVENTION

Two Decades of LPG

Coordinating private activity Fostering markets Cluster initiatives

ECONOMIC ROLES OF GOVERNMENT

Government Intervention in the Economy through the Ages

Two Decades of LPG

Policies and Guidelines

Promotional and Development Organisations

Laws and Other Regulations

Ways of State Intervention in the Economy

Government Intervention in the Economy through the Ages

Courtesy: World Bank, World Development Report, 1997.

Two Decades of LPG

Government Intervention in the Economy through the Ages

TRENDS IN POLITICAL/ECONOMIC PHILOSOPHIES/OUTLOOK

Two Decades of LPG

Government Intervention in the Economy through the Ages

Two Decades of LPG

Government Intervention in the Economy through the Ages

Two Decades of LPG

THE GLOBAL LPG WAVE

Economic Reforms in Communist Countries

Government Intervention in the Economy through the Ages

Two Decades of LPG

Government Intervention in the Economy through the Ages

Two Decades of LPG

Government Intervention in the Economy through the Ages

Two Decades of LPG

Government Intervention in the Economy through the Ages

Two Decades of LPG

Government Intervention in the Economy through the Ages

Economic Reforms in Developing Countries

Two Decades of LPG

Government Intervention in the Economy through the Ages

Multilateral Trade Negotiations

Two Decades of LPG

Liberalisation of trade in goods and services

Liberalisation of international investments

Provides monopoly power to owners of intellectual property

Increases competition from foreign goods/services

Facilitates global sourcing

Opportunity for Indian firms to export

Increases foreign investment and competition from foreign firms

Facilitates joint ventures and technology acquisition

Facilitates foreign investment by Indian firms (including joint ventures)

Threat to domestic firms