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Sanchi Shaante Lady Shri Ram College, Delhi University

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Sanchi Shaante

Lady Shri Ram College, Delhi University

Nay, be a Columbus to whole new continents and worlds within you, opening new channels, not of trade, but of thought.”
- Henry David Thoreau

Let us suppose there are 2 ways of reaching one destination and let that destination be Ecoland. You are a trader who wants to sell silk to the free and prosperous dwellers of Ecoland. Most other traders are taking the first way – the road is a little rough in places and the fear of being looted by bandits is real, but they walk towards the checkpoint where they are all taxed equally and allowed entry. You are told you will be treated differently, even preferentially, because you are not free and prosperous. Thanking Ecolanders for their generosity, you take the second path. The road is rough, the bandits are at your heels but you manage to reach the checkpoint. The man at the checkpoint looks at the rolls of silk you are carrying and asks you if the silk was spun in the same place as the silkworms came from. You say no, silkworms are bred in a village adjacent to yours and the silk was spun in your village. He frowns and asks you how you have added value to the silk to make it more exquisite. You say you haven’t because you don’t have the embroidery machines. His frown deepens. He asks you if you provide 4 course meals, health insurance and tickets to local football matches to all employees. You say no. He denies you entry. You protest vehemently but he holds his ground. Dejected and angry, you head to the traders community centre in your village to tell the other traders suggest your experience. You suggest they establish trade links with neighboring villages instead of relying on Ecoland but the traders vote your proposal down in unison- the land of the free and prosperous holds exponential promise, they say. A few years later, you take the same path to Ecoland in hopes that the situation has changed. The road is rough and the bandits are at your heels. You reach the checkpoint and you are asked the same questions. You sigh in exasperation and ask the frowning man why there is a need to have a second road at all. He scratches his head in confusion before smiling and saying “to make you free and prosperous.” Extrapolating from this story, there is an immediate necessity to de-clutter the international trade regime from what I term Institutional Layerism – the systematic and continuous creation of international trade instruments with the prima facie aim of facilitating trade and trade led growth, but which in effect hinder trade because of their structural design. The Generalized System of Preferences (GSP) is one such institution. The GSP framework was premised upon the belief that preferential tariffs increase exports and speed up economic development in developing countries. Despite the best intentions at its conception, the GSP’s obstructionist nature makes it grossly incapable of supporting trade in developing countries.

The need to establish a new world international trade policy offering tariff concessions to imports from low income countries on a non-reciprocal and non-discriminatory tenet was first discussed at the I U.N Conference on Trade and Development (UNCTAD) in 1964. Developing countries were voicing the need for a preferential tariff system to develop their infant industries (Graham 1998). Subsequently, the II U.N Conference on Trade and Development (UNCTAD) in 1968 established a preferential tariff system for low income countries with the aim of increasing their export earnings, promoting industrialization and speeding up economic growth. The Generalized System of Preferences (GSP) extended these tariff preferences to certain semi-manufactured and manufactured articles while applying Most Favoured Nation (MFN) duties on imports of other countries. This new trade “Marshall Plan” for low income countries was rooted in the idea of ‘trade for aid’, with the aim of supporting development, exports led growth and competitiveness, reduction of poverty and integration of developing economies in the international trade regime. The tariff arrangements within the GSP were to facilitate export diversification and thereon, free the beneficiaries from depending upon primary goods for trade. There is, however, a deep chasm between the GSP that was envisaged and the de facto GSP.

The GSP must be critiqued in context of its trade effects and systematic faults. The complexity of rules and the inbuilt provisions that restrict access to preferential tariffs have reduced the effectiveness of the GSP schemes as trade creating instruments. Firstly, Rules of Origin provisions, administrative regulations and compliance to technical standards impose undue costs on exporters in developing countries. Secondly, many low technology products which are of export interest to developing countries, built by unskilled/ semi-skilled workers, are excluded from most GST schemes. A case in point is the African Growth and Opportunity Act (AGOA) which was signed into US Law as Title 1 of the US Trade and Development Act on 18th May, 2000. This act offers increased preferential access for African exports to the United States of America. Mattoo, Roy and Subramanian (2002) found that barriers like restricted product coverage and the ‘yarn forward’ rule for textiles and apparel prevented a nearly fivefold impact on African exports. Since the production emphasis of GSPs is on manufactured products, primary products like semi processed agrarian goods that are of export interest to developing countries are excluded.

Thirdly, GSP donors negate the principle of non-reciprocity by imposing side conditions pertaining to human rights and labour standards which are more restrictive than internationally recognized core labour rights. Such side conditions impose de facto reciprocity conditions on low income countries. Fourthly, preference margins and other GSP conditions are not binding and granting countries may alter conditions at will. In the absence of GATT’s legal constraints, protectionist measures by granting countries dampen the export led growth that was envisaged at GSP’s conception. Finally, preference margins of GSP beneficiaries decline in the long run because continuous trade liberalization of other industries, sectors and markets decrease their competitive advantage vis-à-vis non-GSP beneficiaries (Alexandraki and Lankes,2004).

While GSP was instituted to target low income countries, its design is more suited to higher income beneficiaries who are more industrialized and have better administrative institutions and infrastructure. Countries with such capacities are better able to comply with Rules of Origin provisions and are more equipped in meeting labour standards set by granting countries. Also, beneficiaries with better capacities will be less dependent on GSP exports and will be able to withstand shocks better. Herz and Wagner (2010)’s use the standard gravity model of bilateral trade to conclude that the overall effect of the GSP on the exports of beneficiary countries is negative. While exports of low income countries see a spurt in the short run, the medium-to-ling term effect is negative. Interestingly, they find that exports of GSP granting countries increase in the short run. This can be explained by the value addition requirements GSP granting countries demand from their beneficiaries. It is likely that low income countries import intermediate input factors from granting countries that use GSP provisions to strengthen their own export standing.

Ozden and Reinhardt (2004) highlight the underachieving nature of the GSP regime and its deviance from the core principles that led to its establishment in 1968. Their empirical findings indicate that countries that drop out of GSP programs move towards liberal policies faster as opposed to countries that remain on the GSP. Moreover, preferences may have restricted to sectors where developing countries do not have a comparative advantage, resulting in resources being misallocated. Countries having a distinct comparative advantage would have inevitably undertaken structural reforms to leverage on such an advantage. However, preferences may have stalled or delayed such reforms which would not be in the interest of beneficiary countries in the long run. While preferences can be altered at will of the granting countries, bound MFN tariffs cannot be altered at will. The MFN treatment is rooted certainty and stability while the non-guaranteed nature of GSP undermines any potential benefits to developing countries. To that end, I argue that the interests of developing countries would be served much better by the reciprocity based Most Favoured Nation clause as opposed to GSP preferences. While the former can be used as an obstructionist tool selectively, the latter has been designed as an obstructionist tool.


  1. Clarke, Don P. Trade versus Aid Distribution of Third World Development Assistance. Economic Development and Cultural Change, July,1991

  2. Graham, Thomas. The U.S. Generalized System of Preferences for Developing Countries: International Innovation and the Art of the Possible. 1978.

  3. Herz, Bernhard & Marco Wagner. The Dark Side of the Generalized System of Preferences. German Council of Economic Experts, Working Paper 02/2010. February 2010

  4. Katerina Alexandraki and Hans Peter Lankes. The Impact of Preference Erosion on Middle-Income Developing Countries. IMF Working Paper WP/04/169. September, 2004.

  5. Mason, Amy. The Degeneralization of the Generalized System of Preferences (GSP): Questioning the Legitimacy of the U.S. GSP Duke Law Journal, Vol. 54, No. 2 (Nov., 2004).

  6. Mattoo Aaditya, Devesh Roy, and Arvind Subramanian. The Africa Growth and Opportunity Act and Its Rules of Origin: Generosity Undermined? IMF Working Paper WP/02/xx. September 2002.

  7. Ozden, Caglar & Eric Reinhardt. The perversity of preferences: GSP and developing country trade policies, 1976–2000. World Bank. 2004.

  8. UNCTAD, 2005. Generalized System of Preferences List of Beneficiaries. United Nations Conference on Trade and Development, Geneva.

Sovereign Wealth Funds- A Challenge for India

Sakshi Verma

Indian reserves have been increasing steadily over the last few years. Following the economic superpowers of the world like Norway, France and China, India is all set to further its role as a global player by venturing into Sovereign Wealth Funds (SWF), thanks to an estimated surplus of Rs. 2,50,000 crores in its balance of payments. Though the idea was also proposed back in 2008, it was rejected due to the heavy fiscal and current account deficits. The SWF are intended to help secure the energy assets overseas, as the country’s demand is expanding and is expected to double by 2030. Also, with this fund, the government is expected to acquire assets to ensure supply of fertilizers in India. On one hand, this decision has gathered vehement opposition but on the other, eminent economists, RBI spokespersons etc. have encouraged the move.

Sovereign Wealth funds are state owned investment funds or entities established from balance of payments, official foreign exchange operations. They are part of a country’s foreign exchange reserves that have been separated to invest in global equity, infrastructure, commodities and other financial instruments. Normally, if not invested, these reserves would increase at paltry rates. SWFs are a way to improve the country’s finances as well as hedge against future crises. Some countries like United Arabs Emirates have created SWFs to diversify their revenue streams. The country extracts revenues majorly through oil exports. UAE sets aside some portion of this revenue in the form of SWF to invest in other assets and also to hedge against any oil crisis.

However, a growing number of funds are turning to alternative investments, such as private equity, which are not accessible to most retail investors. The International Monetary Fund reports that sovereign wealth funds have a higher degree of risk than traditional investment portfolios, holding large stakes in the often-volatile emerging markets.

They have been broadly categorized as:

Savings Fund- to create wealth over longer term so as to meet future needs. For commodity exporting countries, savings funds help to convert non-renewable assets (such as oil) into financial assets for the benefit of present and future generations.

Stabilizing Funds- created by countries which have natural resources in abundance, in order to provide budgetary support and insulate themselves from volatile international commodity prices.

Pension Reserve Funds- to finance public pensions.

While there are a number of reasons why countries around the world establish SWFs, the unsaid rule which dictates their creation is the existence of excessive surpluses in the coffers of the initiating nation. Since India’s debt is shrinking, the government wants to make hay while the sun is shining. But this plan accompanies dozens of apprehensions igniting debates all over the nation. There is an amalgamation of criticism and appreciation for sovereign wealth funds. History is fraught with examples of consequences of these funds, both positive and negative. On the positive end, these funds have helped the Western banks CitiGroup, Merrill Lynch, UBS and Morgan Stanley, to overcome the struggle they faced as a consequence of mortgage crisis during 2006-2008. Sovereign Funds are also major holders of government debt and are now being actively courted by European governments to aid in solving the Euro zone debt crisis. Sovereign Wealth Funds act as overseas investment and savings vehicles – which may affect economic growth by lowering inflation and restraining exchange rate appreciation.

Assume a situation of an increase in the money supply in the economy (for any reason). The possible two mechanisms that could be responsible for the resultant increase in inflation are: increasing domestic demand or a rise in money deposits.

Now, when there is excess money supply in the economy, unless the majority of this money is not spent on locally produced goods and services, this will boost domestic demand and could cause the economy to heat up if it does not have enough capacity to meet the extra demand. Also, money inflow causing a rise in money deposits in the local banking system might trigger an increase in the credit supply. Instead of converting these inflows into the local currency and spending them, a portion may be kept in as foreign currency and invested abroad using the Sovereign Fund. In this way the fund may reduce the impact on domestic demand from inflows of money – and so limit the feed to inflation in the short term.

Usually, the influx of foreign currency is used to buy domestic currency, and exchange rates bid up. By investing into the sovereign funds, the pressure for appreciation is mitigated because the demand for the domestic currency is depressed (demand replaces investment). Funds also provide a system for allocating government funds and in doing so may increase transparency of a government’s financial policy and reduce corruption. Moreover, being a store of wealth it also enables the investors, in times of crisis, to provide the government with loans at cheaper rates than they would otherwise have.

But the idea of investment in SWFs has ignited apprehensions too, about the political and economic dominance of foreign nations over the domestic financial institutions. This fear could also lead to investment protectionism, potentially damaging the global economy by restricting valuable investment dollars. Commentators and policymakers are concerned that SWFs as arms of their governments might be used by foreign governments to advance self-interests at the expense of the interests of developing domestic countries like ours. The potential actions most frequently mentioned are transfers of technology and explicit or implicit threats to disinvest if the country pursues policies at odds with the investor’s interests. As witnessed during the global financial crisis, sovereign wealth funds from West Asia, China, Singapore and Norway suffered huge losses on their investments in Western banks and private equity funds. In addition to the fear of the increasing clout of foreign nations, transparency in accounts is a rabble rousing aspect. IMF after a recent survey found that nearly one fifth of the top 20 SWFs are not accountable to their domestic legislation.

For proper regulation and functioning, certain guidelines have been laid by the IMF which are to be adhered to on all accounts. Most importantly, the foreign exchange reserves of the country should be sufficient to meet its import demands for 3-4 months. As reported by the Business Week, India’s coverage amounts to 14 months. In addition, as per the Greenspan-Guidotti rule proposed by former Fed chief Alan Greenspan, the countries should hold enough financial reserves so that the reserves and short-term external debt are in equal proportion. Data released by the department of economic affairs showed that India's total external debt at the beginning of 2011-12 was $306.1 billion. The short-term debt grew by $13.1 billion 20.1 per cent to $78.1 billion during the period under review. Short-term debt accounted for 23.3 per cent of India's total external debt, while the remaining (76.7 per cent) was long-term debt. The ratio of short-term external debt to foreign exchange reserves was 26.3 per cent at Dec 31, 2011 as compared to 21.3 per cent at March 31, 2011. India's foreign exchange reserves provided a cover of 99.6 per cent of the country's total external debt at the beginning of fiscal 2011-12, while it declined to 88.6 per cent by the end of the third quarter. Thus, India is unambiguously secure by a large margin, in both the aspects.

Associated Chambers Of Commerce and Industry (ASSOCHAM) say India is the only BRIC country bereft of SWF. According to secretary general D.S. Rawat, if India’s GDP is to grow at 8%, then many sectors will have to grow at a higher rate and SWF will play a crucial role in that. Countries like Norway, Kuwait and Abu Dhabi with largest SWFs in the world, derive their revenues from oil and other non-renewable resources. To hedge themselves against the oil related risks and mitigate their financial risks, these countries reduce their long-term dependence on oil prices by investing in non-oil assets. Drawing a parallel he says, SWFs in oil and gas, coal and infrastructure sectors, will benefit the nation as India is a net importer of these commodities and their demand is likely to increase in the future. They are viable and will abate the consequences of risks related to international commodity prices, thus helping in reducing inflation.

However, Mr. Rawat also pointed out, that quick decision-making and transparency should be built-in features of India’s SWF. Given ubiquitous and deeply entrenched corruption in the Indian legislation, it is feared that crores would be cornered into individual pockets and the actual motive would remain engraved only on papers.

SWF’s have helped some nations prosper and have degenerated some. India has to travel a long way to achieve the ultimate goal. If stringent measures to combat corruption and enhance transparency are undertaken, not only will the decision safeguard our position in the world, it will also extenuate the incessantly surging inflation and prices of foreign currencies. Otherwise, these funds may prove to be catabolic for the Indian economy. Political will is a bigger imperative than the bulk of money to activate the funds in order to benefit the nation and not just a few resourceful individuals.


  1. www.assocham.org

  2. http://ibnlive.in.com/news/indias-external-debt-rises-to-335-billion/244299-3.html

  3. http://www.thehindubusinessline.com/industry-and-economy/article1709912.ece?homepage=true

  4. knowledge.wharton.upenn.edu

  5. www.business-standard.com

  6. www.window2india.com

  7. www.deccanherald.com

China & India: A Macroeconomic Comparison

Raj Hans

Department of East Asian Studies, University of Delhi

China and India will exercise increasing influence in international affairs in the coming decades. As prominent members of the G-20, their influence will be manifest in the global economy, in global politics, and in the global security environment. Each country’s role on the world stage will also be affected by the progress that it makes and by the competition and cooperation that develops between them.
This is a comparative assessment of their prospects in this period in macroeconomic growth. Economic growth in China and India has become a particular focus of attention of the entire world. In recent decades, growth in both countries has exceeded expectations. Between 1980 and 2008, China recorded an average annual GDP growth of 9 percent, while India’s growth during the same period was about 6 percent. Both countries face the challenge of sustaining such high rates of growth.
An anthology published by the World Bank (Winters and Yusef, 2007)1 provides several analytic models for assessing developments in the Chinese and Indian economies and their impact on global markets through 2020. In addition to providing forecasts of the two countries’ economic growth, this book analyzes what would occur if China were to grow at an annual average rate of 6.6 percent, and India at 5.5 percent, through 2020. Several essays explore other facets of China and India’s growth, including effects on the geographical location of global industry, changes in the international financial system, effects on the global environment, and the relationship between growth and governments.
A paper from the International Monetary Fund (Rodrik and Subramanian, 2004)2 estimates India’s annual GDP growth during the 2020–2025 periods using a growth-accounting model based on inputs of capital and labor and increases in factor productivity. Rodrik and Subramanian acknowledge that their estimates may be low if India succeeds in expanding and improving its educational system. They note that India’s productivity growth has benefited from its stock of highly educated people, although they do not provide much supporting evidence. They also acknowledge that their growth forecasts rely on continuation of effective economic and social reforms in India. Rodrik and Subramanian also contend that, unlike China, India already has strong economic and political institutions, so that further reform need not be burdensome. Instead, they suggest that India “has done the really hard work of building good economic and political institutions—a stable democratic polity, reasonable rule of law, and protection of property rights,” concluding that “countries with good institutions do not in general experience large declines in growth.”

As previously noted, not all of the authors agree with this judgment. Some of the other studies contend that the effectiveness of India’s institutions leaves much to be desired (e.g., Poddar and Yi, 2007)3. The forecasts made by the international organizations’ studies showing a marked advantage in China’s expected growth relative to India’s may plausibly be attributed to China’s more prominent role in international trade and investment markets relative to India. As a consequence, one might expect international organizations to be particularly cognizant of and sensitive to this in their estimates of the two economies’ growth over the next 15 years, resulting in the relatively buoyant forecasts for China.

In turn, these assumptions and the selectivity of their focus affect the inputs to the analytic models that the authors use in generating their respective forecasts. In the process, the forecasts ignore cyclical fluctuations around long-term trend estimates. They ignore the possibility of major shocks such as political disturbances, natural disasters, or military conflict and, on the optimistic side of the spectrum, the possibility of a major technological jump that might trigger a new wave of innovation in either China or India.

Figure 1 below shows the five contrasting GDP growth pairings between China and India in 2020–2025 under the five contrasting scenarios.

Figure 1

Figure 2 shows the GDPs for India and China in 2025 in terms of market exchange rates (Figure 2) and Purchasing Power Parity (PPP) conversion rates (Figure 3). As Figures 2 and 3 indicate, only in the scenario in which high growth in India is paired with low China growth does India’s GDP approach China’s. In the four other scenarios, China’s predominance is decisive. This outcome is the same whether conversions are calculated with market exchange rates or PPP rates.

Figure 2

Figure 3

Turning to a more qualitative aspect of the China-India assessment, the table below distills from the meta-analysis our judgment about the advantages and disadvantages of China and India in their respective institutional and other circumstances. Whether and to what extent the factors listed in the following table will enable India to move closer to, or ahead of, China after 2025 is worthy of separate consideration.

China and India have taken quite different paths in pursuit of their economic development. China has emphasized the expansion of labor-intensive manufacturing, while India has charted a path from agriculture to high-end services with a limited increase in the manufacturing sector. In sum, the wide range of the estimates reflects both the assumptions and behavioral dispositions of the forecasters, the issues they focus on as well as those they ignore, and the deep uncertainties that surround forecasts over the next decade-and-a-half.


1Dancing With Giants: China, India, And the Global Economy, World Bank Publications, 2007 - 272 pages

2From Hindu Growth to Productivity Surge: The Mystery of the Indian Growth Transition; Dani Rodrik and Arvind Subramanian, IMF working paper, 2004

3India's Rising Growth Potential, Tushar Poddar and Eva Yi, 2007
Diminishing Relevance of WTO: Structural or Functional?

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