Economist’s Column Trade Liberalisation of India

Economist Column Trade liberalisation in India

The essence of trade liberalisation rests on the principle of revealed comparative advantage. The basic idea is to follow a pattern of production in accordance with relative prices which, in turn, will ensure an optimal allocation of resources including labour and capital between countries worldwide. The advocates of trade liberalisation are those who ardently believe in free trade. With the fall of erstwhile Soviet Bloc and ending of Cold War, economic policies and development strategies in much of the developing world are now framed by the Washington consensus. The bottomline of the said consensus is the belief that market knows the best and therefore, there should be lesser and lesser interference in market mechanism and more openness to trade, investment and financial flows. Reduced government intervention means rolling back the government in every sphere. Trade liberalisation should be viewed in this overall backdrop. The implications of trade liberalisation in particular and economic reform measures in general are mainly two-fold. First it implies shifting of resources from the non-traded goods sector to the traded goods sector and within the latter from the import-competing activities to export activities. Secondly, there is also to be a shifting of resources from the public to private sector. Trade reforms unleashed in India since 1991 principally aim at increasing the openness of the economy. The advocates of liberalisation argue that it would increase competition between firms and thereby and augment efficiency. This comparison is confusing, as it is not clear how can competition among unequal economic agents increase efficiency. The notion of "efficiency", as studied from the micro angle from the object of minimizing cost, completely ignores the right of the state as evidence in the post World War II era suggests. But the most significant is the total neglect of macroeconomic perspective. Trade not only bridges the gap between aggregate demand and supply in the domestic economy, but also has an important influence on aggregate output, employment, income distribution and capital flows. One hardly comes across a success story of trade liberalisation in recent time, which has led to output and employment growth and fairer distribution of income. It is fashionable these days to cite the example of East Asian economies. However, it should be borne in mind that success of these economics lie in strategic intervention by the state in trade, industries and financial sector. On the other hand, their recent debacle indicates how dangerous too much dependence on trade and foreign capital flows for domestic economic growth can be for these economics. After all, free trade is no panacea for all the ills, which a developing economy is afflicted with. Without curing the ailment, trade liberalisation may aggravate it, as market has no answer to macroeconomic distortions, disorders and disparities.