The Economic and Social Impacts to India and Its Citizens from Inward Foreign Direct Investment



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10.4: Limitations of the research


While the strengths and the justifications for the thesis are outlined in the Introduction (see section 1.3), this section will explore the limitations of this research project. One limitation is the lack of corporate perspective or ‘corporate voice’ in the empirical findings. The range of economic and social costs and benefits to India and its citizens from FDI is determined here by stakeholders’ perceptions as well as documentary and policy analysis, however, the perceptions and perspectives from the TNCs operating in India are missing. As stated in the Methodology (section 5.7) the initial research strategy intended for interviews with TNCs in India to explore how their investments have helped or harmed local communities and economies. However, I was unable to obtain interviews with TNCs. I was able to access business associations but it was explained to me that TNCs had their own associations through which they work and lobby. These associations are usually located in the host country of the TNC. Thus, the US India Business Council is located in the United States. By speaking with TNCs, I was hoping to obtain data regarding CSR activities and the corporate perceptions of how they are contributing to India’s development. One way to compensate for lack of interviews with TNCs would be to access and analyse TNC corporate and CSR reports and include this analysis in the empirical findings. Future research could benefit from adding this perspective to the research design.

One reason corporate and CSR reports were not included in the empirical findings here is due to lack of available space. This leads to another limitation of this research project: the scope and variables analysed here are rather wide and expansive. Future research projects investigating these issues may benefit from narrowing the scope and tightening the number of variables examined. For example, a project could concentrate solely on working conditions or wages within one or two specific sectors. In having a more narrow scope, the project would have more specific conclusions which could lead to more specific policy recommendations. This thesis, on the other hand, investigated social and economic costs and advantages in general and this was done intentionally as I wanted to gain an overall perspective or picture. The benefits of a broad perspective are that it can lead to a wide range of implications for social welfare and social policies. However the wide ranging scope produced a breadth and volume of data that, at times, felt unmanageable. The amount of data gathered in India essentially curtailed the ability to include a corporate perspective or analysis of corporate reports. An alternative to this research design would be to delve deeper into fewer variables.

The final section in this chapter will address the wider implications of this research project to other developing countries.

10.5: Policy recommendations


As explained in the Methodology Chapter (section 5.3) case studies are driven by a curiosity towards a problem, examination of the problem and a framework of possible solutions (Baxter and Jack, 2008). The essential problem investigated here is corporate harm derived from FDI to developing contexts and possible solutions include policies that can serve to mitigate disadvantages and maximise benefits. Also, as explored in the Methodology, this thesis is an intrinsic case study as it focuses solely on India in the empirical analysis. However, it does have elements of an instrumental case study (Stake, 1995; Silverman, 2007; Berg, 2007) as the intent is to provide insight into the larger issues of the costs and benefits of FDI to developing countries. Given this, what are the lessons learned from this research that can serve as policy recommendations for India as well as other developing countries? I will relay the main lessons learned here in the form of policy recommendations.

One of the main perceptions reported by respondents is that India now has a very successful and competitive domestic business class. There were varying opinions as to how much this was derived from competition with and spillovers from FDI. However, one factor clearly involved in the building of its domestic business industry is the way in which India implemented economic liberalisation. India undertook a gradual liberalisation, opening sectors slowly and raising ceiling caps in a steady and measured manner. It was explained by several participants that India opened its markets “at the right time” when the domestic business class was capable of engaging in competition with TNCs. Although respondents heavily criticised the Indian government’s ability to implement effective policies, the ‘gradualism’ (Rao and Dhar, 2011b) of its liberalisation clearly succeeded in enabling certain domestic businesses and sectors to ‘catch up’ and become the competitive global businesses they are today. This gradual approach was very different to the ‘shock doctrine’ employed in other developing countries in Latin America (Klein, 2001) where everything was liberalised at once, all controls removed which led to major financial crises in several of these countries (Stiglitz, 2002). Thus, the first recommendation underscores the need for gradualism in economic liberalisation. Similarly, a further recommendation stresses the importance of sequencing and pacing when opening to global markets. Several respondents stated India had often failed in this regard and opened sectors without ensuring the appropriate safety nets and regulatory frameworks were in place. However, to India’s credit, its capital controls have remained largely intact and this greatly insulated its financial sector from the more devastating impacts of the global financial crisis of 2008 (Rodrik, 2011). Thus, learning from India’s mistakes and successes in regard to its liberalisation programme advances the recommendation to give considerable forethought and attention to matters of sequencing and pacing.

Another lesson learned here, albeit largely from India’s mistakes serves to negate the hypothesis of ‘trickle-down’ economics. Although neoliberal economists argue the opposite, the evidence obtained here is that while economic growth may occur, this does not assure pro-poor growth will occur. In fact, as one respondent stated, “We now know wealth trickles up.” India has achieved high rates of GDP growth but the majority of its population are not benefitting from this economic growth. The recommendation that follows is to pursue pro-poor economic growth not ‘trickle-down’ growth. In doing this, three recommendations are derived from Ghosh’s (2011) comparison of poverty reduction in India and China. First, policy makers need to ensure economic growth is not associated with growing inequalities and that the benefits of growth are reaching and helping the poor. Secondly, policy makers must ensure economic growth enables and facilitates the structural transformation of the workforce from unproductive segments of the agriculture sector to productive, organised and decent non-agriculture employment. Thirdly, states must intervene with markets in a way to ensure the provision of basic needs and access to universal social services.

This leads to a fourth recommendation to prioritise the development of social welfare programmes. As explored, this issue resonated with most, if not all respondents that India was failing to provide appropriate social protection and welfare for its citizens. In neglecting to do so, it has effectively marginalised the majority of its citizens from productive market participation. The exclusion of the majority from productive work is calling into question the sustainability of India’s current growth model. An important policy recommendation is to implement a basic package of social security to its entire workforce, both formal and informal. It also must create active labour markets with public institutions that are effective in providing human capital development for its citizens. In particular, the substandard quality of employment and skills training services, basic elementary education and public health services are in need of remedy. If these provisions are implemented then labour laws could be simplified, rationalised and consolidated to better protect workers while providing increased flexibility for business. I will describe each of these recommendations briefly.

First, it is recommended that India provide a basic package of universal social protection to workers. Provisions should include unemployment insurance. As identified by one participant, the unemployment provisions currently provided to the small minority of formal workers (assuming the employer does not ignore the law as is often the case) is well below the international average of three weeks. Therefore it is recommended that all workers, both formal and informal, receive at least three weeks of unemployment insurance. Second, workplace compensation is needed against sickness, injury and death. Thirdly, old age pension is recommended and fourthly, health insurance needs to be provided. The responsibilities of these provisions need to be fairly distributed between the employers, the government and the employee. A national fund for social security is recommended and the government should liaise closely with business and trade unions in the establishment of social security programs. Elite policy stakeholders identified that India’s current social security is fragmented, not implemented efficiently and leaking away through corruption. In order to correct for the fragmentation and inefficiency; legal, financial and administrative coordination needs to be constructed to implement an inclusive and effective institution for social protection. A monitoring system to ensure accountability and regulation must be administered to freeze corruption.

Participants also discussed the need for active labour markets in India. Part of ensuring active labour markets entails provision of employment services to provide support for finding employment and supporting workers when he/she loses a job or are in need of transitioning to new employment. The long term goal is to reduce the informal work sector altogether and have an employment service that can assist workers with entry into skilled productive employment and/or facilitate the transition of workers from skilled labour employment to other employment opportunities for skilled productive employment. Employment services should facilitate skills training by aligning participants with relevant training and education facilities as well as provide counselling and information to service users concerning labour markets and how to obtain employment matched to his/her skill level.

Related to employment services is the need to increase skills training programs in India. Elite policy stakeholders heeded the need to upgrade the skill levels of the majority of those in need of transition out of agriculture and those occupied in the unproductive and informal realm of the service sector. The National Commission for Enterprises in the Unorganised Sector commissioned a report in 2009 titled: Skill Formation and Employment Assurance in the Unorganised Sector. The Commission set forth comprehensive recommendations for creating a skill development and training program that concentrates on Vocational Education and Training for informal sector workers with low levels of skill. The report also contains suggestions for entitlements for unorganised workers to receive training placements to provide them with marketable skills. It is recommended here that the government ensure the recommendations in the report are implemented fully and effectively.

The research literature (see section 4.4) as well as my interviews explicated that women must carry more of the family burden during economic hardships (see section 9.2). Therefore the government needs to address the problem of unpaid labour and devise effective schemes and the social infrastructure to help redistribute the responsibility. Universal childcare is greatly needed to address women’s increased unpaid non-market work and to help provide healthy development for children (Hirway and Prabhu, 2011). Also, as Hirway and Prabhu (2011) argue, separate employment targets and skills training should be provided for women to ensure their employment is not sacrificed due to gender discrimination.

Effective provision of public education and health care are essential for human capital development. Elite policy stakeholders and the research literature made clear that India is failing in many social indicators that are a direct result of inefficient public education and health system. The Right to Free and Compulsory Education Act (RTE) was implemented in 2010 and, on paper, appears to be thorough, inclusive and a step in right direction (Kohli, 2012; Hirway and Prabhu, 2011; Setalvad, 2013). RTE guarantees free and compulsory education for all children between the ages of 6 and 14 years of age (Setalvad, 2013). However, as Kohli (2012) argues, the quality of implementation is uneven across India. The Act needs to be effectively implemented with regulatory and monitoring systems to ensure schools in both rural and urban areas are functioning productively and efficiently. There must be a comprehensive curriculum evaluation of the content of education as well as regulations and monitoring to ensure safe and appropriate building infrastructure has taken place. One respondent in this sample reported that schools were being built in rural areas to abide by RTE but are lacking electricity, running water, free lunches and toilets. Naturally, as a result, parents were not sending their children to these unsafe and appalling facilities. The funding of education needs to be effectively supervised by the central government with subsidies provided to poorer states to guarantee that all states receive equal budgets. As explored (section 4.3.3.4 and 9.6) inequality between states is very problematic and RTE must ensure that poorer states are not left behind. The availability of properly trained teachers, an appropriate ratio of student to teacher ratio as well as the provision of quality textbooks is a necessity. Also as Hirway and Prabhu (2011) and Setalvad (2013) emphasise, there must be an accountability mechanism to prevent children from being pulled out of school for work.

The central government must also increase its funding for public healthcare and ensure that quality basic healthcare is provided and available to all its citizens. Ghosh (2011) argues that the inadequate contribution of the government has meant that 85 per cent of total health expenditures are out- of- pocket. Central government spending on health alone hovers around .1 per cent of the GDP which is one of the lowest amongst developing countries (Ghosh, 2011). Dreze and Sen (2011) argue that the prospects of constructing an efficient and inclusive public healthcare system in India will be challenged by powerful commercial insurance companies. India has one of the most privatised healthcare systems in the world and with India’s level of extreme poverty, this is unacceptable. Efficient healthcare is essential for a productive workforce and instrumental in human capital development. India needs a basic provision for healthcare for all of its citizens. Certain states in India, such as Tamil Nadu, Kerala and Himachal Pradesh, are providing efficient public healthcare and education for their citizens and the systems developed and implemented within these states could be used as a template for a national healthcare system.

Elite policy stakeholders discussed the need for labour reform, however, participants stressed this should not occur without prior implementation of social security provisions. With the effective implementation of universal social protection coupled with active labour markets, labour laws could be amended to better protect workers while providing more flexibility for employers. In other words, as Nagaraj (2005) observes, income security could replace job security for workers. Participants described India’s labour laws as complex, outdated and ineffective. There is a need to simplify, rationalise and consolidate them. This should be done with close collaboration between the government, trade unions, labour law experts and business (Sharma, 2006; Nagaraj, 2005). A key aspect to labour law reform is not only implementing social security but also transforming the informal sector into an organised and formal work sector. Participants explained that job protection within Indian labour law was needed because there are very few formal and organised jobs. As Sharma (2006) stresses, the informal sector must be properly regulated to create more organised conditions such as higher productivity, decent working conditions and better wages. Interviews with participants made clear that labour laws are being blatantly ignored with the implicit consent of the government. Therefore there must be effective implementation of labour laws and a system accountable to ensure enforcement. Labour unions and civil society need to ensure accountability and make it politically unacceptable to ignore labour laws and entitlement to labour and social protection.

The Right to Information Act was implemented in 2005 and grants the right to citizens to request and obtain information from a public authority. Private companies, however, are not within the ambit of the policy. However, as Dreze and Sen (2011) argue, the public must be able to act as watchdogs for the abuse of corporate power. Therefore it is recommended that the Right to Information Act be revised to allow for citizens to gain access to information concerning corporate funding for political parties, CSR activities and compliance with environmental and labour standards. Also one participant (RS, Org. 11) highlighted that business members are institutionalised within government ministries where policies are constructed and there is constant delegation from business to the government in policy making issues. She explained that the records of those meetings are very vague and there is no transparency as to what is discussed in those meetings. A further recommendation is that clear and transparent records be made available to the public concerning consultations of policy matters between business and the government.

A recommendation for developing countries in general is to implement strategic and selective investment policies whenever possible. As such policies often make demands of foreign investors, for example sourcing requirements, they are often challenged by the WTO, and thus, the recommendation is prefaced with ‘when possible’. However, while TNCs and IGOs place constraints on the ability to implement strategic and selective policies, the rise of this global governance power has not surpassed the nation state’s ability to define the role for TNCs in the overall development strategy and to restrict and monitor the entry of TNCs into domestic markets in adhering to the overall development strategy (Chang, 2003). Nor has the state’s ability to regulate TNC behaviour to try and mitigate harm and promote positive spillovers been absolved as some narratives of globalisation contest (Gilpin, 2001). In other words, the presence and involvement of TNCs in host countries does not have to be ‘all or nothing’ as it would be a mistake for a developing country to universally apply liberal FDI policies across all sectors (Chang, 2003, p.269). The majority of respondents of both human rights and liberal market orientations stressed that the key to benefitting from FDI is to manage how and on what terms it is received. Quality not quantity was emphasised as important. However, development prescriptions and IGOs often advance arguments that developing countries must be accommodating to TNCs (Stopford, 1994) and that investors choose host locations based on the amount of freedom provided in the regulatory framework and will not abide by selective policies (Chang, 2003). However, as Lall (1997, p.408) concludes:

On the empirical side, considerable evidence has been accumulated to show that selective interventions can be of vital significance for accelerating and deepening the process of industrial development, and that, under certain conditions, governments can and do intervene effectively.

However, Chang and Grabel (2004) warn that selective policies have not worked for all countries. They link policy failure with the absence of appropriate mechanisms for accountability and oversight. Therefore it is recommended that policy makers establish performance targets and monitor the performance of TNCs to ensure they are abiding by the selective conditionalities set forth.

The final recommendation delivered here is one of the OECD’s (2002, p.23) findings in Foreign Direct Investment for Development: Maximizing Benefits and Minimizing Costs:

Countries generally should not base their development strategies on the benefits of FDI. Inward FDI should be seen as a valuable supplement to local efforts rather than a main source of growth.

Most respondents indicated that the Indian government was following a misguided notion that FDI would solve its development problems. However, as illustrated throughout the empirical chapters, FDI has served as a catalyst for both India’s strengths and weaknesses. FDI certainly has not solved India’s development problems and is not likely to do so for other developing countries. Developing countries should assume full responsibility for social and economic developments and, only then, cautiously proceed to use and exploit TNCs to extract resources for development purposes. Foreign direct investment may help development endeavours but only when developing countries regulate FDI in order to exploit and gain from TNCs in equal measure to the profit TNCs have exploited and gained from them. While global institutions of power may add to the difficulty in achieving this reciprocity, it is the hope here that such challenge is not insurmountable with considerable forethought and planning.




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