Introduction

This paper tries to capture the essence of trade policy reforms in emerging economies from past three decades, concentrating how trade grew and the liberalization policies of the economy came into effect. The paper would draw attention to the political economy, stating examples from the developing nations, and how they have conditioned their economic scenarios through the politics involved within. This application is envisioned to throw some light on the outlook for extending the liberalization in current scenarios of the developing economies, where the ‘Washington Consensus[1]‘ draws more cynicism than in past decades, and to the period where the drive of liberalization had decelerated. The paper would focus on the following issues: Is extended liberalization and allowing FDI’s[2] & FII’s[3] essential for trade. Moreover, what are the problems it faces in implementation? Like politics and its loop with domestic reforms and the liberalization policy implementation through trade consultations and agreements with the stakeholders, keeping the focus on political aspect of unanimous liberalization.

The first part of the paper draws flavor from the international view on liberalization policies including the arguments circling the FDI’s & FII’s. The next part reviews the political economy of trade policy reforms, focusing on the factors influencing it, in comparison across developing economies. Finally, concluding with the lessons learnt from the past policies and the direction for impending liberalization policies in the developing economies.

Background

The momentum of liberalization and structural reforms has slowed as compared to the era of Washington Consensus since late nineties. Governments are more suspicious and protective for the idea of further liberalization, and there have been comparatively little reforms in inland trade-related policies and bodies to support external liberalization to enhance competition (Wacziarg, 2007-08). In the developed world, agricultural protectionism endures, with a new idea of isolationism directed towards China (Harling, 1983). We could witness in the era, that the developed economies have no progressive liberalization policies as compared to the era of Regan and Thatcher or the amalgamation of the European Union (EU) in 1980, where the EU economies are stressed from the ‘reform-lassitude’ after their consent to form the European Union (Craig, et al., 2007). These are the adopted norms for the developing nations including the BRICS[4], ASEAN[5], and Latin American economies. They all have put their efforts to boost trade backed by FII and FDI liberalization ( (Sauvant, 2005) (Kurihara, 2012)).

Many economists have found links between globalization, liberalization, growth and poverty, stating that globalization leads to inequality within and across the emerging economies (Alesina & Rodrik, 1994). Moreover, for these economies, sudden liberalization has dampening effect internally. It became a consensus that liberalization could only work if developing economies receive aid, more flexible global trade policies (Hoekstra & Koopmann, 2012). This would help the developing nations to promote small scale and upcoming industries. However, there have been diversified opinions over liberalization policies of trade and to give perfect political conditions for it to breed to success. Protectionism policy interpolation has been predominantly futile across the emerging world (Ezeani, 2013).

The empirical evidence provided by the OECD[6], and NBER (Feenstra, et al., 1997)[7] shows that the countries with closed economies and restrictive trade policies grow slower than the one with open economy and liberal trade polices. Moreover, the World Bank and Maddison (2000) showed substantial increase in GDP-to-Trade ratio and the real per-capita for the “globalizing-developing-economies[8]” as compared to the economies with protectionist globalization policy (World Bank; Maddison, 2002b). This is evident that these globalization policies have helped in reducing poverty, increasing literacy, infant mortality and even life expectancy of its citizens (Sachs & Warner, 2004). Through the market-oriented policies, the new globalizes (Asia notably Sri Lanka and India, parts of Europe (Central and South), Latin American countries like Chile) have harvested its benefits, and helped in reducing the income per capita and wealth gap with the developed economies (Abubakar, 2010). This has tremendously reduced poverty, political chaos, macro-economic volatility, property rights and government intervention on the global scale (Kefela, 2011). The economies that have high protectionist policies saw uneven growth and development (Srinivasan, 1996). Many of these protectionist economies have maladaptive or failed states run by malicious personnel, and not ‘triggered’ by globalization policies (Henderson, 2004).

Moreover, it was evident from the Doha Development Agenda that the developing nations advocated for one-sided liberalization policy, in which they backed the labor-intensive exports should be protected, opposing the contrary views of the developed nations (Ezeani, 2013). However, World Bank stated that developing economies with protectionist policies harm itself more than the developed economy’s trade barriers, where poorest would reap the benefits if the agricultural-trade-liberalization occurs in the developing economies (Ingco & Nash, 2004). Lastly in nineteenth century, the evidence that the industrial policies for emerging industries, in the developed economies are mixed. American and German successes of these industries are debatable whereas, mixed results in Japan, Korea and Taiwan, and not existent in the Hong Kong and Singapore, where “free trade” policy is in play. Moreover, strong national auto industry policies failed in Malaysia and Indonesia (IMD, 1993).

However, there exists some evidence in Northeast Asian economies that protectionist policies of infant industries lead to high social and growth ROR[9]. In addition, Southeast Asian economies like China has experienced noticeable growth through foreign investment-led exports, which was the result of low tariffs and internal investment[10]. Possibly, different issues namely civil and macroeconomic steadiness, land ownership rights, education and infrastructure could have played much more prominent role in East Asian Success. The protectionist policies for small and budding industries in Latin American and African economies poses severe threat to their respective economies. Moreover, the continued support provide the base for red-tapism and corruption. Besides, this makes the monitoring and administering system inefficient.

The Political Economy of Trade

The legislations for an economic restructuring in trade is more inclined towards distribution and wealth creation, both in global and domestic political scenario. The diversion from protectionist to liberalization or vice-versa initiates redistribution among ‘rural & urban areas’, ‘primary, secondary and tertiary sector’, and even classes[11] in these industries. These diversions in the short-run are troubling for the emerging economies with political variability, dishonest influentials, wide gap in income, and generally frail institutions. This makes the liberalization policies to face cluttered and destructive politics. Therefore, in this section we discuss the factors affecting policy reforms for trade liberalization.

Crises leading to reforms

It has been witnessed that many economic reforms are the political response surrounded to cater to the unanticipated macroeconomic crises of the economy such as hyperinflation, devaluation in currency, trade shocks or even imbalances in balance of trade.  These are the situations where government takes on the opportunity, which would not be possible in normal circumstances for e.g. the following countries opened up for world trade: Chile (1973-74), Sri Lanka (1977), Australia (1983-84), New Zealand (1983-84) Mexico (1986), Brazil (1990), Argentina (1990), South Africa (1990), Soviet Union (1990), and India (1991) (Williamson & Haggard, 1994). However, these can be deemed both ways, that is, having negative or positive effect of it on the global economies, as different governments undertake varied responses for similar shocks, which could be witnessed during the period of Great Depression (1930)[12] and the oil-price shock in 1970s (Frum, 2000). In addition, there is no assurance that these reforms would be stable or would deliver stability in the economy, which could be seen from the reforms in East and Central Europe and the reforms in Russia and former Soviet Union (Drazen & Grilli, 1993). Nevertheless, steady and sizeable reforms could be witnessed from the East Asian reforms, and not using crises as the activating mechanism (Balcerowicz, 1995).

Interest Groups

The follower of Adam Smith believes that the free trade policy is more advantageous than the protectionist as it could lead to organized rest-seeking and demand protectionism (Olson M, 1974). This leads to imbalances, as most of the costs are a huge burden to the smaller and budding producers. Furthermore, in emerging economies during 1930 till 1970, the politicians, bureaucrats, employers and unions have lobbied and protected their economic and personal interests where the India’s license raj is the biggest example, which was overthrown through liberalizing reforms in 1991[13]. It can also be witnessed in Russian coalition with nomenklatura, Crimea-Ukraine and other parts of the USSR[14].

Ideology Driven

It is challenging to measure the effect on climate of ideologies of government or the stakeholders in the policy framework (Goldstein & Keohane, 1993). However, some of the post-colonial political ideologies of the emerging economies could be witnessed from the policies like import substitution and foreign aid for building the foundation of the economy. These ideas were overthrown from the influential ideologies of the Washington Consensus¹, which advocated the neo-classical framework concentrating on open markets having outward focus and negating the idea of aid to the developing nations. However, this era have seen bend towards further liberalization of trade and FII’s and FDI’s, moreover, economies like India defending the policies like food security (2013)[15] and land acquisition (2014)[16] leading to increase (World Bank, 2002a)in foreign aid.

Institutions and Stakeholders

Institutions and Stakeholders are the major link in the politics where policy framework loops businesses and society. Institutions form a major part in implementation and in reaching out to the beneficiaries in the domestic market. That is mirrored in the multidimensional, provincial and bilateral global trade treaties. In this era, the trade policies are amalgamated through the participation of executives, legislatures and judiciary, and are also influenced from the WTO mission in Geneva and involvement of non-government organizations, such as, businesses, trade unions, Not-for-profit organizations, non-government organizations, foreign aid providers and the country’s think tank (World Bank, 2002a). However, the two big emerging economies India and China still is struggling with low per capita income with anemic organizations, moreover, the World Bank indicators for business ease, points out lager gaps in policy framework amongst the emerging economies, and high red-tape cost for the organizations, however, India and China have huge capacity to absorb strong bilateral trade policies (World Bank, 2002a).

Conclusion

It is evident from the economies that have implemented liberalized trade policies have led to new open-economic stakeholders constellations to counter conventional protectionism ideology where open trade policy ideology supports stronger institution involvement who are able to have a say for the framework of these policies. Moreover, it has been observed that China and other in East Asian countries have walked over these frameworks without having to encounter the problem of marco-economic crises. Moreover, it has been observed that the developing countries with open- trade policies have robust institutions and are further globally unified as compared to the countries with closed economic policies. However, the only expectation to this is India and China where liberalization has been integrated to their economic roots but still have fragile institutions.

The economies, which are labor abundant like in eastern and southern Asia fits the profile of integration between globalization and liberalization of trade and reaping its benefits as compared to the less integrated economies. Resource lavish economies in the regions of Souther America, Africa, UAE, Russia and former USSR¹⁴ are now exploiting the liberalization of trade policies in the development of their own economies, but their political economy is challenging: their predatory governments and interest groups are more inclined towards rent seeking behavior.

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[1] Washington consensus – Williamson, J. 1993, “Democracy and the “Washington consensus””, World Development, vol. 21, no. 8, pp. 1329-1336.

[2] FDI        – Foreign Direct Investment

[3] FII         – Foreign Indirect Investment

[4] BRICS – Brazil, Russia, India, China, South Africa

[5] ASEAN – Association of South-East Asian Nations (1970 – 80)

[6] OECD   – Organization of Economic Cooperation and Development (1970 – 80)

Online Source : http://stats.oecd.org/Index.aspx?DataSetCode=EO08_VINTAGE

[7] NBER    – National Bureau of Economic Research

[8] Globalizing-developing-economies – a term given by the World Bank to the developing economies, which adopted the globalization policies.

[9] ROR      – Rate of Return

[10] Comparison of Bound and Applied Tariffs | WTO | Source: http://www.ers.usda.gov/media/919839/aer796g_002.pdf

[11] Here classes refers to “Infrastructure owners”, “educated & skilled workers”, and “semi- and unskilled workers”

[12] John A. Garraty, The Great Depression (1986)

[13] Indian Budget (1991) by Dr. Manmohan Singh, then finance minister, Source: http://indiabudget.nic.in/bspeech/bs199192.pdf

[14] USSR – Union of Soviet Socialist Republics

[15] The National Food Security Bill, 2013 Receives the Assent of the President, Published in the Gazette of India as Act No. 20 of 2013

[16] Gazette Notification of coming into force of the Act. Government of India.

Source:http://dolr.nic.in/dolr/downloads/pdfs/Right%20to%20FC%26T%20in%20LAR%26RA%202013%20Gazette%20Notification%20.pdf