Liberalisation and It’s Effect on Inequality in Developing Countries-a Case Study on India

There are both positive and negative aspects to liberalisation policies.Liberalisation policies are no less important than any other kind of economic policies, and so it can only be healthy that what was formerly an obscure and technocratic process has moved to centrestage politically. What’s more, economic development and the alleviation of poverty are now key political priorities in further liberalisation. Hence inorder to check for the effectiveness of liberalisation policies in developing countries it is important to measure it from the point of view of how it has reduced levels of inequality. If liberalisation has so far had no impact on inequality within countries, for good or bad, it has become received wisdom that inequality between countries has increased. Yet the overall pattern is less easy to sum up. Within different country groups there have been varying patterns of either increasing or decreasing inequality.Hence a case study is taken on India and with the help of convergence hypothesis using log linear and linear regression techniques divergence is proved.Liberalisation since 1991 has had no major impact on reducing the level of inequality between Indian states. 1.1ANOVERVIEW There are both positive and negative aspects to liberalisation policies.Liberalisation policies are no less important than any other kind of economic policies, and so it can only be healthy that what was formerly an obscure and technocratic process has moved to centrestage politically. What’s more, economic development and the alleviation of poverty are now key political priorities in further liberalisation. World trade has been growing since the end of the Second World War, and becoming steadily more significant, with imports and exports expanding faster than global economic output. The ideal of freer trade was part of the Bretton Woods vision – John Maynard Keynes, one of the main architects of the new institutions, had originally hoped to create a world trade authority alongside the International Monetary Fund and World Bank. This internationalist vision, combined with a steady (and continuing) decline in transportation costs, fuelled export growth through a succession of rounds of trade talks. The last of these, the Uruguay Round, created as a legacy the permanent World Trade Organisation, launched on 1 January 1995 in order to make the process of continuing liberalisation less ad hoc, more institutionalised. During the post-war years, the ratio of exports to GDP, measuring the importance of trade, has therefore risen significantly for the world as a whole and for a majority of individual countries. These increasing trade links are one of the most important aspects of globalisation, especially since 1980. In the 1980s, world GDP grew by an average 4.5% a year and merchandise exports 15.2% a year, while the corresponding figures for the 1990s were 4.2% and 14.1%. The share of developing countries in world merchandise exports has climbed from a tenth by value in 1970 to approaching a third of the total. Yet after half a century of trade liberalisation it is clear that desperate poverty is still widespread and income inequality between and within countries unacceptably high. The key questions, then, are whether trade does indeed boost economic growth and development; if so, whether it can alleviate poverty, and whether or not it has exacerbated inequality. There is controversy about each of these aspects. The overwhelming majority of economic research does find a positive link between trade and growth: more open countries on average experience faster growth than less open ones. This is absolutely in accord with economic theory. Freer trade will boost consumer welfare directly by increasing choice and reducing prices. It will allow more people to exploit their productive potential. It will also limit the scope for arbitrary changes in domestic economic policies or for policies built around the demands of specific interest groups. Importantly, according to modern growth theory, it also enhances the flow of ideas, technology and investment across borders. It is hard to see how any developing country could now hope to get access to new technologies without opening up to international tradeandinvestment. Still, trade is clearly one of the essential ingredients in economic growth, which in turn does indeed help alleviate poverty. Growth has not been especially propoor (although the reduction of inflation in macroeconomic stabilisations clearly does help the poor the most). But nor has it been pro-rich. Income distribution within developing countries has been little changed by growth, so the poor become better offinabsoluteterms. Although the number of people living in absolute poverty (on less than $1 a day) has remained unchanged at about 1.2 billion between 1987 and the present, this is a somewhat reduced proportion (24% versus 28.3%) of the world’s population, which expanded by 815m over the same period. This level of absolute poverty is unacceptable, of course, and hence the need for a development focus in future trade negotiations. What developing countries need from trade is the scope to export more labour-intensive products, as that will raise the demand for those products, made by the least skilled and poorest workers, and hence wage rates. With poverty in rural areas the most desperate, that puts a high priority on opening up the highly-protected rich country agricultural markets. There is certainly an urgent need to gear trade (and other) policies towards raising the lowest incomes. If liberalisation has so far had no impact on inequality within countries, for good or bad, it has become received wisdom that inequality between countries has increased. Yet the overall pattern is less easy to sum up. Within different country groups there have been varying patterns of either increasing or decreasing inequality. The experience within the rich country group has clearly been that increased trade links through free trade arrangements like the EU and EFTA do lead to an upward convergence in levels of averageincome. 1.2CASE STUDY ON INDIA LIBERALISATION IN INDIA The Indian government headed by P.V. Narsimha Rao adopted the policy of economic liberalisation in 1991 with the aim of bringing prosperity to the country. Since then foreign investment worth billions of US$ has been made in the country but all this has only resulted into more poverty. The rural poverty has increased from 32 percent to 40 percent, and in States like Bihar, Maharashtra, Karnataka and UP, the poor have become poorer. The re The economic liberalisation policy has only helped the rich, who already had the infrastructure and resources, to corner huge sums of money without creating more job opportunities. The employment level has, therefore, gone down during all these years of liberalisation. Thousands of industrial units are lying closed, rendering millions of workers jobless. The new ventures are all going for very high tech projects, having a high degree of automation requiring minimal labour requirement. Every entrepreneur wishes to work with least labour component. As a result of all this the overall employment scenario has become very grim. No wonder, then, that the forces of nationalism in India are against those who favour liberalisation. India has an annual GDP of $300 billion, vast natural resources, and as many highly educated, skilled middleclass citizens as the total US population. For almost half a century, India's GDP grew by an average of less than 4 percent a year. Taiwan's GDP grew by an annual 8 percent during the same period, and South Korea's by 9 percent. Foreign direct investment in China, the world's largest Communist country, is now running at $37 billion a year, in India the figure is $2 billion. In India, the share of unemployed within the labour force is gradually on the rise, from 4.3 percent in 1991 to 5.5 percent in 1995. In the last two years, unemployment definitely must have gone up as the labour content of production has been declining. With employment opportunities stagnating and simultaneous growth in population, unemployment would naturally rise steadily. The Planning Commission of India has estimated that the labour force between the ages of 15 and 59 years would rise from 294.6 million in 1992 to 393.02 million in 2007. Creating jobs for them would really be a