Winning the battle, losing the war in the global trading arena

After 50 years of patient progress and some hard negotiations, the international community has achieved its objective of a rules-based multilateral trading system. The World Trade Organisation (WTO) was established in the year 1995. But the question remains, is it enough to ensure a free and fair trade regime? The answer is ‘No’.

To establish a fairer and freer trade regime, countries need to adhere to certain basic principles. Evidence shows that things are not moving as per the fundamental requirements of the multilateral trading system. Even two of the biggest champions of free trade: the United States and Japan are often unable to rise above their narrow parochial interests. For example, Japanese restrictions on Chinese farm products and US threats to protect the domestic steel industry are a flagrant violation of the spirit of multilateralism.

These are only few of the increasing number of trade battles in the recent past, which have both a positive and negative impact on the trading system. Positive to show that there is a rules-based system, but negative to indicate that there are problems between the trading countries. Some of these are extraneous.

Growing trade disputes
Domestic political compulsions rather than the requirements of the multilateral trading system are guiding the international trade policy of many member nations. An ever-increasing number of trade disputes and frequent unilateral trade sanctions are testimony to this fact. Apart from a few, like the US-European Union banana dispute and the Chile-EU swordfish dispute, hardly any dispute has been settled amicably. Though the latest news in the banana case is that there are problems in that settlement also.

Moreover, in some of the adjudicated cases, the country concerned has not implemented the WTO rulings. This is what happened in the case of the shrimp-turtle dispute. The panel report on the US’s implementation of WTO rulings in this case has been delayed, reportedly due to serious disagreement between the three panelists. In June, Japan slapped emergency curbs on Chinese exports in a bid to shore up support from the farm lobby ahead of the national elections.

The demand for import curbs in Japan is spreading fast to other domestic sectors as well. Japan’s largest bicycle industry group, the Japan Bicycle Association, was seen lobbying the Ministry of International Trade and Industry to impose emergency curbs on bicycles imported from China. China retaliated by issuing new restrictions on imports of Japanese automobiles.

US President George W Bush, on the US steel industry’s plea for government relief, ordered the US International Trade Commission (ITC) to conduct a thorough investigation into the steel business under Section 201 of the 1974 trade law. The probe will determine whether the problems faced by troubled American steelmakers are caused by “unfair trade practices”. Those targeted include the steel industry of India and the EU. The witch-hunt could lead to unilateral trade sanctions against any steel exporter to the US. All this, in spite of the fact that the US is one of the most vocal protagonists of trade liberalisation.

The US system of sharing the spoils of anti-dumping and safeguard actions with the complaining companies takes the cake. It is currently at the top of the agenda of the WTO’s dispute settlement system. The EU and eight other countries: Australia, Brazil, Chile, Indonesia, Japan, South Korea, Thailand and India have asked for a panel to be set up.

Developing countries’ role
Many developing countries have also started using several trade-distorting measures of a different nature. For example, during the 1990s there was a significant rise in anti-dumping cases initiated by developing countries like India. In 1992-93, India initiated only two anti-dumping cases, but this number went up to 26 in 2000-01. Between 1992 and 2000, India initiated 89 anti-dumping cases, the highest by any country. Following India’s liberalisation of consumer goods imports, many affected firms in the consumer goods sector are howling for anti-dumping action. Their chorus has been strengthened by tall promises made by politicians that they will be protected from cheaper imports. Clearly, the loss will be the consumer’s and the economy’s.

These trade measures are not only against the poor, but one poor country is doing it against another. For example, Bangladesh imposed an import ban on Indian rice as it had a bumper harvest. Even in the case of disputes for which compromise solutions have been negotiated, the true beneficiaries are not producers but big multinational marketing companies who are acting as intermediaries between producers and consumers.

In the EU-US banana dispute, which was settled recently, big marketing companies like Chiquita of the US and Noboa of Ecuador were the major beneficiaries. Poor farmers of Latin America and Africa were left out.

This trend is portentuous and against the basic spirit of WTO. Its importance is increasingly being undermined by the narrow intentions of many countries whose sectoral lobbies are successful. If a country like Japan, which has a substantial trade surplus, cannot adhere to the basics of the multilateral trading system, how can poor countries be expected to resist the cries for protection at home?

WHEN Thiru Murasoli Maran talks to Robert Zoellick this week, the best thing he can do is be positive. He should say `Yes’ to a new round of trade talks at the WTO, not because of hard sell by the US and EU in their door-to-door sales push for the round in the world’s capitals, not because other key developing countries such as Brazil, Mexico and South Africa, and even China, favour a new round, but because it is the best thing for India to move forward the implementation concerns in the current context.

No one is under any illusion that the bargaining by national delegations at the WTO is as tough as any in Chandni Chowk and India needs to be ready to give as well as to take. But this is not something it can do standing at the Red Fort.

It's not clear at the moment, what issues will be on the table for the November Ministerial. Some of the most contentious issues are already there in the 'built-in' agenda, notably agriculture and implementation.

But without an agreement on a broader overall package, the arduous but ultimately beneficial process of hammering out trade-offs cannot even begin. Negotiators should never compromise key national interests.

As far as the US is concerned, not all issue areas are up for barter. On anti-dumping and TRIPs, the US position might as well be set in stone. The domestic corporate lobbies are too strong for the US administration to engage in negotiations.

The US is also very unlikely to reduce its high tariffs on clothing and textiles on which so many jobs depend. In the area of TRIPs due to all the noise on public health, the US will not go hammer and tongs after countries, which are failing in implementation.

In its turn, India should dig in its heels on linkages between trade and labour standards. Such a linkage would undermine India's key advantage in international trade, its plentiful labour force.

The protectionist motivations for the linkage are barely disguised by US unions who are happy to flex their political muscle through Democrats in a finely balanced Congress.

If India and other developing countries give in on this issue, they will be abandoning millions of their own people for the sake of a few thousand jobs in the southern United States.

In this resistance movement, governments have the support of some of the world's most respected US-based trade economists: Jagdish Bhagwati, Jeffrey Sachs, T N Srinivasan, Arvind Panagariya, and many others.

If any more proof of the legitimacy of that position is needed, it can be found in the TWIN-SAL statement of 1999.

In the run up to Seattle, 103 people from all over the world signed on to the Third World Intellectuals and NGOs Statement Against Linkage (TWIN-SAL). The statement called for the Linkage between trade and labour standards to be buried. Two years on, experience has only fortified their arguments.

Of course, Zoellick faces a precarious position at home on introducing labour standards into the WTO framework. Most Democrats, and a number of Republicans, have stated this as the price of their support for the President's fast track (trade promotion) authority.

But a handful of Democrats do understand developing countries' objections. A clear and reasoned rejection of the linkage by India will help strengthen Zoellick's bargaining position when he returns home to face Congress.

The US and India share common ground in several areas. On agriculture, both countries would like to see the EU reduce its enormous subsidies to farmers.

On tariffs, too, they both have an interest in seeing their trading partners reduce their dirty tariffs. On environment too, both India and US share the same concerns.

Many in the US are becoming as suspicious as India that rules would be another form of protectionism.

Resistance may be called for on labour standards, but in other areas India should be taking a positive approach. EU leaders have been liberal with their rhetoric on making the new round of trade talks a 'Development Round'.

If that's the case, then let India turn its list of action areas into a Development Agenda. It should, after all, be the developing countries that define this 'development', that others are so happy to talk about.

A real Development Agenda would prioritise implementation, reform TRIPs and make Special and Differential treatment and technical assistance operative realities.

It would also include a genuine approach to the movement of labour. If developed countries are really committed to the multilateral trading system and getting the developing countries on board, then accepting a Development Agenda is their only option.

If this commitment is hollow, then let India's positive engagement reveal it for what it is.

Competition law should have special provision to check cartels

In what amounts to a slap in the face for the Monopolies and Restrictive Trade Practices Commission (MRTPC), India's cement cartel, aka the Cement Manufacturers Association, has just hiked prices by almost 20 percent, the highest one-off hike in recent times. The cement companies are already under investigation for their anti-competitive behaviour by the Commission. 

This latest hike in prices proves that the current regime is helpless in cracking such pernicious cartels. The proposed new competition law, which has just been cleared by the Cabinet, may check this to some extent, but much more is required if cartels are to be checked. 

As India liberalises and relaxes it control over market forces, the chances of market abuses also increase. The most heinous of all these abuses are those perpetrated by cartels. What is required, therefore, is a targeted strategy backed by complementary legal provisions. Due to lack of such a strategy and legal provisions, it is not surprising that the existing Indian competition authority, the MRTPC, in its history of 30-odd years, has booked very few cartels in the domestic market, let alone in the global market. 

The adverse effects of cartels or collusive agreements vary in degree depending on the nature of the companies involved. It is the hard core cartels, i.e. agreements by competitors to fix prices, restrict output, submit collusive tenders and/or divide or share markets, that are the cause of immediate concern for governments the world over. While developed countries are taking steps in this regard, the developing world is lagging behind, with the negative effects that it entails.

In this era of fast-globalising markets, the internationalisation of cartel behaviour cannot be ignored. International cartels operating in product markets such as bulk vitamins, citric acid and graphite electrodes, to name just a few, have been broken in the recent past by some developed countries, including the US, Canada and the European Union. However, the extent of the damage caused by the cartels through their subsidiaries/suppliers on developing countries has not been assessed, nor has there been any initiative on the part of the developing world to deal with such cases. 

Lessons can be learnt from the cases where competition authorities in developed countries have managed to prevent or crack hard core cartels. Success requires the following: proactive role on the part of the competition authority; application of per se rule; high level of fines; criminal liability (for individuals); protection for whistleblowers; leniency programme for the firms willing to cooperate in the proceedings; and co-operation among countries (and probably an international watchdog) in case of global cartels.

The existing regime under Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 is far from ‘proactive’. Second, even where the Director General has initiated an investigation it has either not been encouraged (and perhaps discouraged) by the Commission or it has found its hands tied by the provisions/interpretation of the Act. The end result has been nil. This drawback is one of the main reasons for India to go in for a new set-up. 

Viewing the difficulties in obtaining evidence and proving a cartel on the one hand, and its gravity on the other, the new competition law should be as preventive as possible. A per se rule, which considers certain trade practices as inherently anti-competitive and injurious to the public without any need to determine whether it has actually affected market competition, is a step in the right direction. Although the draft competition Bill has such a provision, its scope is too narrow. According to the draft Bill, only agreements that cause an adverse effect on competition are prohibited per se. 

Accused firms able to prove that there was no "appreciably adverse effect on competition" would escape penalties even if the agreement had been entered into with the purpose of restricting competition. To make the law a more effective deterrent, it should be strengthened to include anti-competitive purpose in addition to result. 

To prevent cartel behaviour, the competition authority relies on access to information that is difficult to come by. It needs to have ‘carrot’ like protection for whistleblowers and leniency for firms cooperating with the investigation to balance the ‘stick’ of fines and prison terms. This has been an effective combination in many countries. The infamous vitamin cartel broken by the US antitrust agency is a perfect example in which Rhone-Poulenc, one of the carteling members, supplied much of the evidence and escaped punishment while the other conspirators had to pay huge fines.

Unfortunately, there is no mention of protection or leniency in the draft Bill. More so, the structure of fines given under the draft Bill has painted all types of conduct with the same brush. On one hand fines could be harsh for abuse of dominance and vertical agreements, while on the other, they may be less for serious abuses like cartels. Fines are capped at 10 percent of the average turnover for the last three years even though price-fixing and other activities can enhance profit margins exponentially.

To be an effective deterrent, fines on cartels should be much higher than the gains from them. They should be at least three times the proven loss or damage due to the impugned agreement. The law can be given more muscle by providing for criminal liability in the form of fines or imprisonment. This is followed in many countries including Canada, US, France, Germany and has recently been introduced in the UK. Mexico has an interesting provision that provides for a fine for enterprises of up to 375,000 times the minimum general wage prevailing in Mexico City, and 7,500 times for individuals.

Last but not least, to effectively control, break and punish international cartels, merely having an extra-territorial jurisdiction, as in the MRTP Act or the draft Bill, may not be enough. Countries have to cooperate with each other. Normally, this cooperation would take place under a bilateral agreement between governments, leaving it up to the competition authorities to actively pursue links. Here too, the proactive role of the authority is a sine qua non for success. Another possibility would be an international arrangement making cooperation 'mandatory' as well as providing for a watchdog.

The draft Bill, therefore, needs to be revisited, or else India risks ending up with yet another ineffective law.

Need for clearer norms on IPR in new competition Bill

Apart from parallel imports (covered in our previous article) another area where the Competition Bill has failed to use the flexibility provided by TRIPs (Trade Related Intellectual Property Rights) is “compulsory licensing.” The agreement vide Article 31 allows compulsory licensing under certain conditions. One of them is to control anti-competitive practices by IPR owners.

Most importantly, even the licensee is allowed to export the protected product, which otherwise is meant predominantly for supply in the domestic market. This could be highly relevant to certain sectors in India, namely, the pharmaceutical sector, which would be able to export drugs to countries with national health emergencies.

Another condition for grant of compulsory licensing and where the competition authority has a role is in case of “refusal to deal”. An example of how a compulsory license can be based on “refusal to deal” is provided by a 1995 decision of the European Court of Justice in the Magill case. The Court held that Radio Telefis Eireann (RTE) and Independent Television Publications Limited (ITP), who were the only sources of basic information on programme scheduling, could not rely on national copyright provisions to refuse to provide that information to third parties. The Court opined that such a refusal constituted the exercise of an IPR beyond its specific subject matter and, thus, an abuse of a dominant position under Article 86 of the Treaty of Rome.

Even though the US patent law does not provide for compulsory licenses, this is probably the country with the richest experience in the granting of compulsory licenses to remedy anti-competitive practices. According to one study more than 100 such licenses have been granted. 

The provisions of compulsory licensing should be used with utmost caution else it would have a negative impact on investment in R&D, evolution of new technologies etc. But the provisions should not remain unimplemented either, should the need arise. Interestingly, a statistical study by Scherer relating to 70 companies showed no negative effect on R&D in companies subject to compulsory licenses but, on the contrary, showed a marked rise in their R&D relative to those of comparable size not subject to such licenses.

That said, before any government can act on Article 31 of the TRIPs Agreement to grant a compulsory license, it has to follow due administrative or judicial process. A competent authority has first to determine that the anti-competitive practice is prevalent before the government can grant a license to others. Again the best-suited authority here would, of course, be the competition authority and hence this needs to be reflected in the new competition law.

But our draft Bill only says that for the purpose of determining whether enterprise enjoys a dominant position, the authority would take into account inter alia “technical advantages enjoyed by the firm, which could include patents, know-how and copyright.”

Tackling IPR excuses through the new competition law 

India risks throwing away its right to regulate the abuses of intellectual property rights (IPRs), if the new Competition Bill is adopted in its present form. International law under the controversial World Trade Organisation (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) allows governments to enforce access to vital technologies for the nation at affordable costs to people.

Instead of taking advantage of this, the new draft Bill retreats to an out-dated and potentially damaging position on IPRs that amounts to legitimising monopoly exploitation. The same is the position in the existing competition law: the Monopolies & Restrictive Practices Act. Our mandarins feel that these issues can be dealt with through the route of ‘notifications’, virtually giving them law-making powers, and thus subject to ‘influence’. The country cannot afford this route, because it relies too much on bureaucracy rather than on informed debate in the legislature, and civil society. If the Bill is not suitably improved, we may end up as a loser in the new global economy.

Even though the exercise of IPRs is extensively regulated through laws, competition law provides an extra tier of regulation to ensure that the exclusivity granted by IPR laws is not misused to proliferate anti-competitive behaviour. The TRIPs agreement recognises this fact.

IPR protection drives forward innovation in the market by providing incentives for firms to compete with new products and processes. But there is a risk that the exclusive right that a patent gives to an innovator will lead to abuse of market power. A successful IPR regime strikes a balance between protecting consumers from exploitation, ensuring adequate access to and use of the innovation in the economy while encouraging firms to invest in research and development.

Whatever its faults—the Agreement is widely considered to be deeply flawed—TRIPs does try to achieve a degree of balance between protecting consumers and protecting innovators. Articles 6, 31 and 40 of the Agreement, providing for parallel imports, compulsory licensing and control of anti-competitive practices respectively, are some of the tools to attain the said balance. However, the onus lies on the member states to use such provisions by building them into their national laws.

Article 6 of TRIPs recognises the possibility of legally admitting parallel imports, the use or sale of licensed goods outside the territory in which they have been licensed. This is based on the principle of “exhaustion of rights” which means that once the right holder has authorised the release of the IPR, they are considered to have ‘exhausted’. The IPR owner has no right to control the use or resale of goods that he has put on the market or has allowed the licensee to market. The inventor is rewarded through the first sale or distribution of the product, while subsequent sales ensure the spread of the technology making intellectual property work “to mutual advantage of producers and users of technological knowledge” (Article 7) in a global economy.

Parallel imports reduce prices and increase consumer welfare by enhancing competition. However, to be certain that society benefits from this window in TRIPs, the legality needs to be stated clearly within the national competition law. Surprisingly, the draft competition Bill does not contain any such provision.

Firms generally block parallel imports through licensing arrangements with their retailers and distributors. Legal experts around the world are also advising their clients to write special clauses into licensing arrangements should they want to prevent parallel imports. Such advices are set to proliferate as firms become more conscious of the issue. From a legal standpoint, it is not clear whether these restrictive licensing arrangements fall within the purview of the exclusive rights granted under IPR laws or whether they should be considered as anti-competitive practices. The TRIPs agreement does not provide much insight on the matter and this lack of clarity at the international level is forcing countries to develop their own strategies vis-a-vis parallel imports. 

For instance, Japan permits parallel imports unless contract provisions explicitly bar them. The United States follows a similar practice, however, discouraging other countries in this regard. Australia has recently recognised the international exhaustion principle. The position of the European Union (EU) is somewhat different. Although it recognises ‘regional’ exhaustion, i.e., parallel imports within the EU countries, it is still to come out openly on ’international’ exhaustion. However, few judicial decisions in individual countries of the EU, such as Davidoff and Levi vs. Tesco in the United Kingdom, have recognised the international exhaustion principle. Due to pressures from such members, the European Commission is reconsidering the matter seriously. 

TRIPs provides scope for the issue to be resolved at the national level in Article 40. This allows members to specify, in their legislation, licensing practices or conditions that may, in particular cases, have an adverse effect on competition and constitute abuse of IPR. It further allows members to adopt appropriate measures to prevent or control such practices in the light of relevant laws and regulations of that member.

The national competition authority is the ideal body to weigh up the competitive effects of a licensing agreement. But for it to do so, carefully drafted provisions have to be inserted into the national competition law. Yet India’s new Competition Bill disregards the potentially harmful use of exclusive IPRs, focusing entirely on the protection of the owner.

The draft Bill seems to legitimise all efforts to exploit IPR, more to the detriment of the public interest. The Bill prohibits the authority from restricting a right-holder to impose reasonable conditions on the licensee (which may include disallowing parallel importation) for the purpose of protecting or exploiting such IPRs. In a sense, it infers that IPR laws override competition law, where as it should be the other way round.

Who won the banana dispute? 

Last month, the eight-year old EC-US banana dispute came to a swift end with the signing of a bilateral agreement between the two parties. Under the new agreements, big marketing companies like Chiquita of USA and Noboa of Ecuador will get licenses to export bananas to the European Union (EU).

The surprising thing about this trade dispute is that neither the EU nor the US produces bananas. The trade dispute dates back to 1993 when the national markets of the EU countries were merged to form a common market for bananas. The US alleged that the system favoured growers in EU territories and former European colonies in the Caribbean over Latin American producers and US marketing companies such as Chiquita brands and Dole Food Co.

Under the agreement, the EC will scrap its contentious ‘first-come first-served’ import system, strongly opposed by Washington, most Latin American countries and Chiquita, which recently sued the Commission for $525 million in damages it claimed to have suffered as a result of EU import restrictions. The system will be replaced by a tariff-only regime to be implemented by 2006. From July 2001, the licenses will be allotted according to a historical reference period of 1994-1996 but a share of the EU market will still be guaranteed for African, Caribbean and Pacific origin bananas.

Ecuador, the world’s largest banana exporter, initially reacted strongly to this accord. It alleged that the EC-US accord contravened global trade rules. Ecuadorian officials threatened to take the dispute back to the World Trade Organisation (WTO) if the EC didn’t amend its proposals. But on April 30, the EC and Ecuador announced they had reached an agreement to resolve the impasse over the EC’s proposed banana import regime, bringing an end to the longstanding dispute over bananas in the WTO.

The EC-Ecuador agreement provides Ecuadorian producers with a sizeable part of the 17 per cent of the market reserved for newcomers. In return, the dispute settlement body (DSB) of the WTO will eventually withdraw the authorisation Ecuador has to impose trade sanctions against the EC. This whole episode demonstrates the lobbying power held by the intermediaries involved in export of bananas to the EU. The US government has not acted in national interest: it is a well-known fact the US does not produce bananas. The US has acted at the behest of Chiquita Brands International. 

The agreement means that Chiquita will be able to buy cheap bananas from poor farmers in Africa/ Latin America and reap huge profits selling them in the European market. Ecuador also acted more in the interests of major banana exporting companies like Noboa and Costa Trading rather than its farmers. 

Not only have the farmers’ interests been overlooked, the agreement also exposes a fundamental flaw in the operation of the DSB. In spite of the authorisation that Ecuador was given to levy sanctions amounting to $201.6million, including the right to suspend concessions under the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS), it signed on to an unfavourable treaty without ever exercising this power. 

The cost of sanctions may be higher for the developing country imposing them than for the target country of the sanctions. Losing the Ecuadorian market has a negligible impact on the European economy, but European markets are vital for Ecuador’s exporters. Sanctions have little chance of bringing about the desired change in trade policy. This imbalance means that winning a dispute before the DSB can be meaningless for developing countries, leaving them unable to defend their trade rights. 

Ecuador was well aware of the risks it was taking in pursuing a dispute settlement case at the WTO. It was difficult for Ecuador as a small developing country with severe economic problems to resist major pressure from the US and the EC on the banana issue. Under the new scheme, the only Ecuadorian company to retain access to its license is Noboa, and it is still unclear whether another politically important operator, Costa Trading, will be able to export bananas into the EC market.
 

US anti-trust authorities have recently brought to light a global conspiracy of leading drug manufacturers in the vitamins market to fix prices, allocate markets, supply contracts and sales volume, and engage in bid-rigging. The cartel controlled the most popular vitamins, including vitamins A, C and Betacarotene, over a nine-year period from 1990 to 1999. 

The conspiracy led to artificial increases in prices for hundreds of food, beverage and medicine makers and has inflated the profits of these companies. Investigations done by US authorities revealed that the colluding companies acted as if they were working for a single corporation, known as ‘Vitamin Inc’ and reaped huge profits from the high prices.

The drug companies were also subjected to private civil suits for damages suffered by their customers, mainly food and drug businesses. Under the out-of-court settlement reached in November 1999, seven firms involved in the price-fixing of vitamins agreed to pay $1.05 billion to companies they supplied to. The costs of the conspiracy were passed on to consumers via intermediate producers of bread, milk, cereals and juices all of which use bulk vitamins. Consumers are being compensated by the cartel indirectly through a $107 million contribution to charity. Another $107 million will go to whole- salers and distributors, and state governments in the US will recover $30 million as reimbursement for the extra cost of foods they purchased for hospitals, prisons and other institutions.

Despite the international exposure of the cartel, no action has been taken in India. The Monopolies and Restrictive Trade Practices Commission tends to wait for complaints from consumers or businesses before launching an investigation. Questions surrounding the vitamin cartel in India must be answered. Does or did the international cartel operate in India? Who took part, where and over what period of time? Were subsidiaries of these companies in India involved in these cartels? How can antitrust laws be enforced in an international case like this?

We had begun a campaign for the investigation of the cartel in India. Letters were written to the subsidiaries of these companies in India or their head offices abroad, requesting information. They were asked whether they have been selling these bulk vitamins in India, either through direct sales or by way of exports. If yes, they were asked to provide figures on the extent of overcharging and sales levels. It was clearly stated in the letter that if the companies opined that they had not indulged in a similar activity in India, they should furnish a written undertaking to this effect. Despite numerous letters and reminders, the response was disappointing.

Keeping this in view, it can be said that unless and until a proper strategy is decided to uncover this cartel in India, no substantial results can be achieved. The strategy includes drafting a new competition law for future scams. It has been rightly said by former Assistant Attorney General Joel I Klein, head of the US Justice Department’s antitrust division: “The vitamin cartel is the most pervasive and harmful criminal antitrust conspiracy ever uncovered. The criminal conduct of these companies hurt the pocketbook of virtually every American consumer—anyone who took a vitamin, drank a glass of milk, or had a bowl of cereal.”

WTO: Institutionalising double standards

THE HISTORY of international economic policy making is replete with instances of double standards. The Bretton Woods institutions are a prime example. 

It now appears the World Trade Organisation might soon overtake the Bretton Woods institutions in institutionalising double standards. 

The WTO was supposed to be established with the objective of promoting free and fair trade and fostering competition. However, one of its agreements, namely, Trade Related Aspects of Intellectual Property Rights Agreement, which provides monopoly rights to the patent holder for a period of 20 years, is diametrically the opposite of what WTO envisaged as its objective. 

Yet this agreement is very much a part of the WTO and the member countries — whether rich or poor, capable or incapable — are obliged to comply with its requirements. 

Another example of anti-competitive practice permitted (or not banned) by the WTO is that of export cartels. As a matter of fact all the major trading countries have statutes that provide some form of competition law protection or immunity to export cartels. 

Essentially, these laws authorise firms to collaborate to engage in anti-competitive behaviour in foreign markets, at the expense of other countries’ consumers and producers, in a manner that would be unlawful if undertaken at home. 

The WTO is about opening up markets for goods and services across the world. It does not envisage a system wherein market opening would be a one-way street, i.e., one side fully opening its market and the other side creating barriers to entry for goods and services from the other end. 

However, this is precisely what is happening. Whereas the South has opened up its market to the extent possible, the North has made use of various `legal loopholes’ within the WTO to create further barriers for the entry of the goods and services from the South. 

The tariff distortionary practices being followed by the developed countries including dirty tarrification and maintaining of tariff peaks. Tariff escalation and tariff dispersion are becoming hurdles for the industrial development of the South. 

As if this was not enough, developing countries trying to industrialise are facing increasing barriers to their exportable products as they fail to satisfy the technical regulations considered mandatory by the importing country. 

Further, developed countries are trying to bring in a host of non-trade issues within the WTO. Some of the major ones include labour standards and environmental standards. 

Applying labour standards to developing countries and applying environmental standards for the developing countries and dumping of domestically prohibited goods and toxic substances in their market by developed countries with absolute impunity are likely to become some of the features of so called `global system of equity and justice’ in the days to come. 

In the context of double standards, the Agreement on Textile and clothing is an agreement deserving particular mention. Developed countries, which authored the WTO Agreement have utilised a technical loophole in this Agreement to delay the integration of items under the quota system. 

Under the Agreement, importing countries are free to decide which products to integrate at each of the four stages of integration. 

As the Agreement defines the percentage of integration in volume terms, importing (developed) countries have `fulfilled’ their obligation by first integrating those products into the Agreement which are of least export significance for the developed countries. 

This phenomenon has robbed the developing countries of market access opportunities. The weaker members of the WTO are not capable of implementing their commitments under the WTO not because they are not willing to fulfil them, but because they lack resources and capacity for the same. 

However, developed countries are not implementing their parts of the commitments or are implementing the commitments in a dishonest manner despite the fact that they have both the capacity and resources to fully and faithfully implement them. 

The examples highlighted above are testimony to the fact that developed countries have been using and will continue to use the WTO as a platform for legalising their double standards. 

Prior to establishment of the WTO, double standards were enforced through unilateral measures. Now these practices have not only been legalised but also been institutionalised! If this tendency continues unabated, the faith of developing countries in the multilateral system will fall further. 

This does not augur well for the multilateral trading system  once lost, it might be impossible to restore faith of the developing countries. 

South Africa deserves full support in pharma battle

A case currently being considered in South Africa has profound implications for consumers in India and worldwide. The South African government stands accused by 39 pharma companies of infringing WTO rules on intellectual property rights (IPR) and contravening its own Constitution by allowing AIDS patients to get cheaper medicines than they could under the patent regime.

The companies are objecting to a proposed amendment to the Medicines Act in 1997. The amendment would allow imports of generic life-saving AIDS drugs, known as 'parallel imports', and compulsory licensing of patented drugs. This would make the drugs available at a fraction of the cost that has been charged by MNCs.

The case, which opened in Pretoria few weeks ago, has been suspended until April 18 to allow pharmaceutical companies to prepare information about access to AIDS medicines. Drug are competing with each other to lower prices on AIDS drugs, but are sticking to their guns on the issue of patents. In a landmark statement, Bristol Myers Squibb, announced that it would supply drugs to target countries at below cost price in an effort to cut generic manufacturers of their patented medicines out of the market. They have pledged not to let patents stand in the way of access to the life-saving medicines. But governments are waiting to see whether the offer is genuine.

Global support for the South African government's position has been strong. The case opened to worldwide demonstrations against pharma companies. They are seen as putting the sanctity of patents before the sanctity of life. International bodies have also come out in support. The World Health Organisation has also affirmed its support. The European Parliament has also passed an emergency resolution calling on the companies to drop the suit. Oxfam, the British charity, has been the most active in the campaign "Cut the cost", launched on February 14.

Medicines sans Frontier, the French NGO, too has launched a signature campaign "Drop the Case". It has entered into a contract with Cipla, the Indian drug manufacturer, to supply the AIDS drugs at a low price of $350a year, a fraction of the price being demanded by big MNCs. Cipla is manufacturing these drugs in India without violating the agreement, because India has not yet changed its patent regime to allow product patents, having already reverse engineered the process to make the AIDS 'drug cocktail'

Price reductions are welcome to AIDS sufferers but disguise what is really at stake in this case: developing country right to protect the health of their citizens over the long term. WTO rules on IPRs, contained in the TRIPs agreement, allow countries to protect themselves from abusive practices by IP owners. Under the provisions, countries can uphold laws necessary to protect public health and nutrition and promote public interest in vital development sectors. The amendment opposed by the South African government falls within these provisions.

Developing countries cannot rely on occasional acts of generosity by pharma companies under pressure from public opinion. They should defend their rights, upheld by international agreements, to implement laws safeguarding access to medicines. The South African government deserves the full support of all right thinking people in the world.

Spreading the world's wealth, equitably 

Clare Short, the British government's international development minister needs to be congratulated for her bold initiative in publishing the second white paper on globalisation and development. The latest one: "Eliminating World Poverty: making Globalisation Work for the Poor" reflects the seriousness about helping the poor. 

One may not agree with all what it says. However, one can certainly question other rich governments if they too are as serious in trying to tackle poverty. All the rich countries have resolved halving world poverty by 2015 through their club: the OECD. But how many are putting forward even the semblance of a road map? 

Inherently, the paper posits itself in what some would define as a neo-liberal approach, i.e. markets are the panacea. Indeed globalisation is here to stay, and as many will also agree, if poverty has to be reduced, opportunities have to be enlarged. Opportunities cannot be expanded if the internal resources of a poor country are not enough. Thus the paper's advocacy for openness in trade and investment is reasonable, as evidence shows. Often, it is not as simple, because one needs various other external and internal factors in place for globalisation and liberalisation to be truly helpful. 

Problems arise when proper governance structures are not in place. For example, openness indeed helped the East Asian countries to progress far, but the lack of effective regulatory systems created the adverse conditions that lead to a downturn. Whether it was independent financial regulation or an effective competition policy, the market was at the mercy of rent-seeking forces. There are so many externalities, too, which the paper does not attack as boldly. For example, it does point out leakages and distortion due to corruption, and makes a promise that legislations will be enacted in the UK. What it doesn't speak about is the secrecy laws in the Swiss banking system or other off-shore banks, which provide a 'congenial' atmosphere for corrupt leaders in the poor countries to park their wealth. Not only that, it hasn't criticised even the UK banks, who were only recently exposed for having parked the deposed Nigerian dictator Abacha's illgotten wealth. 

Studies in India have shown categorically that liberalisation has helped increase the basket, and where there were good safety nets in place, poverty numbers have actually come down. This is, ofcourse, on a disaggregated basis, i.e. among few states in India. If one takes the whole country, the laggards would also pull down well doing states. Reduction in poverty has been due to increased employment in labour- intensive sectors, thus the terms of trade have to be more favourable to such sectors. That has not been as clearly spelt out in the white paper. 

In the section on trade, it has said that the UK will support an open and a rules-based trading system, and work to promote equitable rules and an effective voice for developing countries. Indeed the rules-based international trading system is a double-edged sword, working both in favour or and against the interest of developing countries. By and large the rules-based system protect the poor countries from being bullied by the rich. How ever some of the rules harm the poor. For example, sanitary and phytosanitary standards are so stringent that poor countries cannot comply with them. But what brings joy is that the UK government recognises the role of civil society in the process of development, as not only the vehicle for voices of the poor, but also as watchdogs. 

Consumer movement and power reforms

DEAR Prime Minister, in a recent statement you have said: "We have failed to achieve the power generation target and prevent power thefts and have not made enough efforts to deal with the crisis." 

Earlier in your Musings from Kumarakom you had inter alia called, "{for} radical development reforms, which should encompass, besides economic reforms, administrative and judicial reforms. The most important component of these reforms is to fix transparent accountability at all levels and increase people’s involvement in monitoring the functioning of all agencies that impact on development. People must be empowered to not only demand results, but also to actively participate in the attainment of results." 

When you meet the power ministers of our states on 3 March, it will be useful to address the issue of involving the consumers and their organisations in the movement for reforms in the power sector for the following reasons: Firstly, the new electricity regulatory laws have recognised the role of consumer organisations to represent consumers before the authorities. 

Secondly, electric power is a basic need and inherently essential for a dignified living. Thirdly, consumers are ready and willing to pay little more for a consistent supply of power, if they are assured of it meeting the benchmarks of quantity and quality. 

However to be able to get people to accept the reforms, the government has to address two major apprehensions: that prices will (not) be raised beyond the paying capacity of the ordinary consumer; and the board employees will (not) be sacked. 

Other than these, there are two macro factors, which need to be borne in mind: the lack of people’s involvement in the reform process; and poor communication by the government(s) of the need for reforms. 

Let’s take the example of Andhra Pradesh, which has a very dynamic chief minister, the electricity rates were raised by over 120 per cent at one go. That led to severe unrest, agitation and social disarray. 

Genuine consumer organisations were not even invited for the consultations. The required public notice or a public hearing was also not done. The government had to backtrack. 

As a contrary experience, here let’s take the example of a well managed situation, that in Rajasthan. The electricity board has been split into five companies about seven months ago. 

The government advertised that not a single job will be affected, and also assured consumers that prices will not be raised arbitrarily. Not a day’s strike took place. 

Now the three distribution companies have proposed hikes of 15-17 per cent. Public notices have been issued and public hearings have been organised all over the state, and the whole exercise has been publicised widely. 

We at CUTS have done some homework and intervened in this exercise, with the goal of getting several commitments from the companies, which will benefit the consumers both in the short term and the long term. 

We have also pushed the electricity board into developing a citizen’s charter and organised several surveys and meetings. We were able to do all this, because we have created a large network of over 300 (and growing) rural and urban consumer organisations in Rajasthan, with whom we work on several issues. 

You have confessed that not enough efforts have been made, and you have also recognised that people must be empowered to not only demand results, but also to actively participate in the process. 

Therefore, the catharsis must begin by resourcing the consumer movement, and building their capacities to intervene in the regulatory process, mobilise, function as an intelligent watchdog, and act as a bridge between the people and the government. 

If finding the money is a problem, a cess on electricity bills can be levied and put into a consumer fund, as is happening in other countries. As we all know, electricity is one of the most crucial inputs in socio-economic development. Therefore, we cannot procrastinate. 

WTO and Centre-State relations -- 
Proactive stand could make a difference

PUNJAB is again in the news -- this time, for a different reason. Punjabi farmers have been raising a hue and cry about the impact of the World Trade Organisation (WTO) Agreement on Agriculture (AoA) on their livelihoods. 

A member of Parliament from Punjab, Mr Jagmeet Singh Brar, recently held a rally in Ludhiana and painted a bleak picture of Punjab's agricultural future. He attributed it to the WTO's AoA, and wanted the State's farmers to fight tooth and nail to get their due share of labour. It is a different matter that Indian agriculture, in general, suffers due to policies that have no relationship with the WTO or trade liberalisation. 

Further, there are differences within the party Mr Brar represents. The President of the Punjab Pradesh Congress Committee, Capt Amarinder Singh, thinks the WTO AoA will benefit Punjab's farmers, though it may take a few years to realise the gains. However, according to Mr Brar, by the time the gains accrue, the State's agriculture and small-scale industries would almost entirely be in the hands of multinational corporations, and the farmers would become `slave labour' on their own lands. 

This may be an exaggeration, but it reflects the basic weakness of the Indian polity -- the inflexible nature of Centre-State relations. According to the Constitution, India is a Union of States (Article 1). The logic is that the States precede the Union as, without the States, the Centre simply does not exist. 

However, when it comes to the devolution of power from the Centre to the States, the situation is exactly the reverse. Substantial powers rest with the Centre, while the States have only residuary functions. 

The Seventh Schedule of the Constitution lays down the items that are exclusively under the jurisdiction of the Union Government (the Union list), and the State governments (the State list). Further, there is a concurrent list, items in which are the joint responsibility of the Centre and the States. 

Now, consider an international treaty, such as the agreement establishing the World Trade Organisation. On the face of it, this is an external affairs issue. Entry 14 of the Union list categorically lays down: ``Entering into treaties and agreements with foreign countries, and implementing of treaties, agreements and conventions with foreign countries.'' 

Thus, entering into treaties with foreign countries and implementing decisions taken in international organisations is the Government's prerogative. It is legitimate for the Central Government to enter into the WTO Agreement. Of concern is that the subject of many WTO agreements falls directly under the States. Agriculture is one of them. Matters relating to agriculture, by virtue of the Constitution, rest with the States. Whether it is land use, land tenure or land improvement, it is the State governments that are the sole decision-making and implementing authorities. 

However, in the changing context of the multilateral trading system under the WTO's aegis, the State governments' decisions on agriculture are subject to India's international commitments and obligations. This is where the problem arises. 

During the Uruguay Round of multilateral trade negotiations under the General Agreement on Tariffs and Trade, the then government neither consulted with the States nor solicited their opinion. The State governments actually did not realise the implications of the WTO agreements. 

The shortsightedness of the Centre and the States is not difficult to explain. This is how the Indian polity works. Everybody has egos, and the State governments are under the impression that they have no business to enter into the Centre's territory. This is despite the fact that there is no dearth of experts on Centre-State relations. Thus, the Punjab situation was inevitable. 

It is another matter of concern that there was no discussion on the issues and implications of the WTO agreements with the general public, which was kept completely in the dark while the mandarins negotiated and finalised agreements that would seriously affect the lives of the people. It would have been expected that both the positive and negative fallout of such arrangements would have been stated clearly and made the subject of public debate. 

Further, most members of Parliament are quite ignorant on WTO issues. Barring a few interested ones, all of them have little knowledge, which is more dangerous than no knowledge. There is a special parliamentary committee on trade issues. But most of its members show no interest in attending the meetings of this committee. 

Coming back to the WTO AoA and the Centre-State relations, there is considerable scope for taking advantage of the Agreement and giving people an escape route from their poverty. However, for that to happen, the decision-makers will have to take the following steps. 

First, implement land reforms, including security of land tenure, in the right spirit. This will motivate the farmers to produce quality products at lower costs, without depending on state dole. 
Second, diversify agriculture towards producing high-value export-oriented crops, without any compromise on food security concerns. To glibly state that food security will be achieved with the opening up of agricultural trade is not correct. One can achieve food security and become a major player in the international market for agricultural goods as well. 

Third, take positive steps towards becoming a major exporter of agricultural goods in the international market. Rather than reacting to what others are doing, it is better to be pro-active.
Fourth, diversify the manufacturing base into agro-based products manufactured in rural areas. This will not only provide mass employment but also stem rural-urban migration. 

And, for all these to happen, there has to be a re-assessment of Centre-State relations. When it comes to purely economic issues, it is the citizen-consumers who are affected. The grassroots implications of such issues need to be seriously examined. 

Thus, the very mechanism of Centre-State relations needs to be changed. The world is shrinking, and any future international treaty will have faster trickle-down effects. The WTO AoA is one such instance. 

Further, it will not be sufficient to involve State governments in taking decisions on international treaties. Non-governmental organisations (NGOs), which often have a better understanding of the ground realities and are more concerned about the welfare of the common man, will have to be involved in the consultation process. This will not only give legitimacy to the decisions but there will also be less stress when implementation concerns unfold. Again, the Central Government must be pro-active in its approach to international issues rather than taking all-knowing, reactive decisions. 

The Centre, in association with the State governments, should develop a consultation process involving NGOs and members of the public to make them aware of the positive features of WTO agreements, the gains for the poor, if any, and the steps needed to insulate the latter from short-term shocks. And better late than never! 

Notwithstanding the Gujarat tragedy, which will certainly set back its and the nation’s progress on many fronts, the way our states are approaching the issue of welfare expenditure leaves much to be desired. One doesn’t need to be an economist to understand that along with growth, investment in social sectors is an imperative in our campaign to eradicate poverty. The Economic Times’ Intelligence Group’s report (For the states it’s a question of survival, definitely not welfare, 5 February), shows that in view of the increasing salary and debt servicing bill, states are cutting down on welfare budget. Twenty-six major states have allocated just about 21p.c. of their aggregate budgetary expenses on three welfare heads: education, healthcare and housing in 2000-01, which is 1.75 p.c. lower than the revised estimates of the previous year, what to speak about the inflation and the crucial need to actually increase the outlay. 

Rich countries spend nearly 30p.c. of their budget on these welfare heads: USA-31.7p.c., Japan-31.2p.c.Canada-26.8%. As absolute figures the amounts will be staggering compared to what we spend in India. But even developing countries like Thailand spend high (29.9p.c.) and Korea (26.5p.c.). 

On the other, the Prime Minister’s economic advisory council has rightly attacked government expenditure (on salaries etc), irrational railway tariffs etc. I am plainly surprised about the lack of any mention of how to buttress welfare expenditure, or even to tackle the huge leakage, at least in the newspaper reports and editorials.  It has also been bold to suggest that our average tariff rates should be brought down to 12 p.c. by 2005, but on the other it has been more political by proposing that tariffs should be raised to the bound levels in commodities, imports of  which are now being liberalised due to removal of QRs.

“It is not just ironic, it is tragic, that economists come out with policies just like politicians which have perpetuated poverty in the country”, said the noted economist Prof Jagdish Bhagwati in a recent lecture at Chandigarh. “Target poverty rather than mere growth”.

The debate whether growth is sufficient for poverty reduction was reflected in the controversy surrounding the World Bank’s World Development Report, 2000-01, when its principal architect Ravi Kanbur resigned. Indeed there are several other factors which help the poor in a growing economy. On the contrary we can also have jobless growth as has been witnessed in many countries which have grown but have not benefited the poor. For example, studies done in Latin America on the impact of trade liberalisation during the decade of 1980s, wage differentials between skilled and unskilled labour had widened over time. One possible reason for this is the rigid social structures, which do not allow the poor to travel upwards. 

On the other hand studies done in  East Asia showed diminishing wage dispersion between skilled and unskilled labour during the decade of 1960s and 1970s. One of the reasons for this was steadily increasing investments in social sectors and land reforms. Social safety nets were put in place quite effectively. Besides social integration was also accelerated, resulting in the empowerment of the poor. Indeed policy makers also pursued openness of their economies, which expanded opportunities for the people to increase their incomes.

Whether  growth has a positive effect on poverty, two World Bank economists: David Dollar and Aart Kraay in a seminal paper: “Growth is Good for the Poor”, have shown that income of the poor rises one-for-one with overall growth. In a study on the relationship between growth and poverty, which looked at data in 80 countries over the last four decades, they found that in an economic crisis the poor do not suffer disproportionately. The impact is certainly greater if social safety nets are weak. Thus their findings also support the line that growth on its own cannot lead to poverty reduction. They conclude that a policy package has to be in place for growth to impact poverty positively, such as private property rights; fiscal discipline; rule of law; macroeconomic stability and openness to trade. 

On fiscal discipline the central government has now enacted the Fiscal Responsibility Act, and we hope that they will follow the letter and spirit to ensure a curb on profligacy, which has been the cause of many of our economic woes. On macroeconomic stability, one of the proxies as an indicator used by the authors is inflation. For quite some time, we have been enjoying a single-digit inflation, but that now seems to be reaching the higher number. Rule of law is fairly good compared to many of the developing countries. However, our rigid social structures resulting from the pernicious caste system are dissolving at a much slower rate than required. Often it is the lower castes, which bear the brunt of being poor, quite disproportionately. 

Dollar and Kraay have also examined a number of institutions and policies which may not have a direct impact on growth but have an impact on the well-being of the poor by improving the distribution of income. The most notable among these are: government social expenditure; formal democratic institutions to enhance voice and accountability; and primary education enrollment rates. Public social expenditure showed little effect on either growth or distribution, because often these are not targeted on the poor effectively. Indeed in India, we find that targeting is poor, where often the vocal middle class gets away with moneys allocated for the benefit of the poor. Tragically political parties too shy away from attacking it. 
On the whole, if we have to continue reducing poverty in India, we need to pursue growth-oriented policies which will enable the poor to get better opportunities, and target poverty. That fact cannot be disputed. A communication strategy is required for the people to know what the government is doing, thus building up a consensus for reforms.

New mantra: Everything but arms

The European Union (EU) and the United States of America (US) pledged to work jointly towards launching a new round of multilateral negotiations. In a statement at the recently held EU-US Summit in Washington DC, USA, summarising highlights of EU-US cooperation under the new Transatlantic Agenda, they emphasised that they enjoyed the biggest trade and investment relationship in the world. Disputes concerned a small proportion of the relationship, and their resolution was a high priority. 

Elaborating its position, EU Trade Commissioner Pascal Lamy said he thought the time had come for the European Union to consider reformulating its position if a new round of multilateral trade negotiations is to be launched. Lamy argued that the failure in Seattle was due to three main factors: less developed countries’ perception that their interests were not properly taken into account; lack of responsiveness to concerns expressed via civil society in industrialised countries; and shortcomings in the WTO itself.

However, his statement ‘missed’ one important reason behind the failure to launch the so-called ‘new’ round of world trade talks at the WTO during the Seattle meeting: The contradictory position of the EU and the US on the questions of further liberalisation in trade in agriculture. While the US was for more ‘free’ trade, the EU wanted to maintain its relatively ‘rigid’ position. 

Since then the EU position on agricultural negotiations has changed a little bit: “It [the new EU positions as stated in its submission to the review committee on the WTO Agreement on Agriculture] will also facilitate broader WTO negotiations which are of interest to all WTO members”. It’s new position on trade in agriculture is relatively less stringent on the issue of market access (into the EU market) for the developing countries’ agricultural products. The trade-off could be that the EU would push for the inclusion of new issues, like investment, competition, government procurement, as well as for the inclusion of trade and the environment into the WTO in a more direct manner, while relenting on it’s position on trade in agriculture a little further (if necessary). And, this is what exactly reflected in its latest discussion paper on pushing for a new round of trade negotiations. 

However, the paper did not say much on two (out of three) issues that Lamy cited as the reasons for the failure of Seattle meeting. First, while it did talk about taking developing (particularly least developed) countries’ interests (“Everything But Arms” market access policy) but little was said about the mechanism to overcome supplyside constraints these countries are facing, and no mention was made on issues relating to tariff escalation and tariff peaks, which are seriously affecting market access potentialities of developing countries. Secondly, it did not spell out the role of the civil society organisations vis-à-vis world trade talks. 

Without going into the merits and demerits of launching a new round now (that’s another issue), it can be said that developing countries should carefully spell out its positions and put forward a proactive agenda for improving the rules-based system as a whole. That might give flexibility in stating its positions at times of need. Its useful to iterate that in the long run the developing world as a whole is going to gain from a rules-based multilateral trading system. This is despite certain setbacks, which may occur, in the short term, and they have to be tackled politically, both domestic as well as international. 

What they could do at this point of time is to clear their position on strengthening the WTO, in terms of its analytical capacity to handle large number of disputes that are coming up. Developing countries should play more pro-active roles in the rules-based trading system. And once that happen they are going to get involved with more and more disputes. Thus, there is the need to have more analytical capacity for the WTO secretariat itself to understand the human effects of trade and development. 

Is liberalisation harming consumers and the economy?

Now the revered Kanchi Shankaracharya has joined the anti-globalisation bandwagon, seeking a halt of the liberalisation process, as ‘it is having a disastrous impact on our economy’. Many would like to believe that the current process of globalisation and liberalisation is harmful to our economy because several small and medium scale factories are closing to due to cheaper import of consumer goods. The evidence does not suggest in concrete terms that it is entirely due to imports that these factories are being affected. Indeed years of  protection have left them vulnerable and the playing field is not level. But there are other factors too, which often get overlooked. However the question to be asked is if these goods are coming in, there is a growing demand. This demand is being met with goods of better quality and lower prices. As a result consumers are using the savings for other things, thus the whole economy is gaining. If indeed there was widespread unemployment and consequent reduction in purchasing power—due to the downturn--these goods would not have found a market. Unfortunately much of the facts is being overtaken by hype and over-reaction.

For all these years we have kept our markets closed to competition from abroad for several reasons. One which continues to linger on is the fear of becoming colonised once again. The East India Company syndrome continues to dominate our psyche. During those days information moved at a snail’s pace when a letter would take atleast six months to reach Europe from India. Today information can reach any remote corner of the world in split seconds, thus assuming that we are helpless is very disingenuous. The Soviet empire collapsed due to the fax machine which enabled people to send out information without being censored. The exchange helped build up international opinion and pressure on the repressive regime, leading to its collapse and replacement by a democracy.  Today internet has the power of thwarting any such design. For example, it has been used very effectively by the international civil society to ensure the demise of the OECD’s draft multilateral agreement on investment (MAI). This accord would have granted increased rights to transnational companies, and enhanced responsibilities of countries to ensure that these rights are upheld. It was literally a licence to loot.

However, in spite of the demise of the MAI, foreign direct investment  (FDI) continues to increase and some of it flows to developing countries. One of the arguments against the MAI has been whether having it will help increase FDI flows. That argument stands vindicated. The annual UNCTAD World Investment Reports points out that FDI continues to grow every year. Much of it is due to domestic regulatory changes, which have enabled FDI to come in smoothly. In India, we specialise in vacillation on our FDI policy, and where there is a clear policy other factors have a negative effect with the result FDI flows are too little for the size of our economy and our needs. 

A few weeks ago, I had pointed out in these columns about low level of FDI flows into India. In 1999, we received only about $2.17bn, as against a small country like Chile getting $9.22bn (How to grow, and reduce poverty too, December 9, 2000). Somewhat similar to our East India Company experience, in the 1970s Chile was actually under the control of the US-based giant: AT&T. Yet Chile is not afraid any longer about FDI having any type of colonising effect.  It has all the laws in place by which they manage their economy pretty well. Why is Chile pursuing FDI? Because it does not have the resources to enable it to meet their consumers’ demands and their own economy’s needs.

Even as India, we do not have those massive resources to generate the amount of electricity  that will be required to meet with demands of an increasing population, agriculture and industry. Not only electricity but several other essential infrastructural services, such as roads, water, communications etc,  will continue to degenerate unless resources are found to buttress them. If we are unable to buttress the critical basic need requirements and availability, we will not be able to reduce poverty.

If swadeshi was the way forward, we would not have landed up in the mess that we are in. Interestingly, at one of our workshops on reforms, governance and state accountability with grassroot activists, many of who have started appreciating the need for liberalisation and reforms, swadeshi was defined by them as what is ‘good for us and our country’. These people with robust common sense have realised that the protagonists of the so-called swadeshi movement are actually not rooting for the country but for some vested interests. They are convinced that reforms are necessary if they have to get out their poverty trap. For example, they are even willing to pay more for electricity, if the supply and quality is consistent. Thus to assume that liberalisation will not benefit the consumers or the economy is quite illogical. A large section of people are in favour of reforms, provide the government continues to talk to them, and in their language. Otherwise the pace of reforms will suffer and we will continue to wallow in abysmal poverty.

Can trade sanctions eliminate child labour? 

In 1820, Charles Dickens, as a 12-year old, was forced to work in a factory because his family was in the debtors' prison. Child labour was rampant in Europe in those days. Those days it was not through sanctions or boycott of goods produced by them, that the condition of child workers could be bettered. It was only through economic development spurred by the Industrial Revolution that jobs could be created and the curse of child labour and other exploitative labour practices in Europe could be curbed. 

However, the scourge of child labour continues, more so in the poorer parts of the world, like Asia, Africa and South America. Acute and widespread poverty is the main cause for. These countries are not witnessing industrialisation. In fact, de-industrialisation is taking place. The International Labour Office (ILO) has estimated that in 1998 there were over 250 million children between the ages of five and 14 who worked as part-timers. Of these, 61 per cent are in Asia, 32 per cent in Africa and 7 per cent in Latin America. Although child labour is concentrated in Asia, the problem is most severe in Africa, where two out of every five children are engaged in some economic activity. In Africa, where the growth is substantial, the situation is compounded by the AIDS scourge, as many children have been forced into penury due to parents who died young. 

In India, one of our field surveys done in the carpet industry in Rajasthan showed that it was usually children of a large family who had to work to earn their living. A ban on carpets produced by them, in 1995, by German buyers only `helped' in throwing them out of their jobs. They turned to either begging or stealing to survive. 

Poverty is the main driving force behind parents pushing children to work. Population explosion is the other reason. It is always a large family that needs to send their children to work for survival. Even if one would like to send all of them to school, there are many problems. Are there enough proper schools? Are there enough teachers? Will the children be provided with required books and stationery? Our study showed that it would require anywhere between $12 billion to $18 billion per annum to provide functioning schools etc., for the estimated 15-140 million child workers in India. This estimate is based on providing functioning schools in the 600,000 villages with a mid-day meal. Additionally, the cost also includes an allowance as compensation for the loss of income for the poor to send their children to school. 

The government doesn't have that kind of money. These resources can be raised through aid and/or strong economic growth of 8-10 per cent. As overseas development aid is going down every year, high growth can be achieved only through increased trade and investment flows, and increased exports. Sanctions or boycotts will not only hit the economy but also worsen the condition of these children. There are laws everywhere to prevent children from going to work, especially in hazardous occupations. But, implementation is poor in developing countries, as there is often no viable alternative and little resources. 

In its annual report, `Global Economic Prospects and Developing Countries, 2001', released in December 2000, the World Bank points out: "The threat of trade sanctions or the imposition of trade barriers are likely to be excessively costly instruments for raising labour standards and even be counterproductive in some cases" . The overwhelming evidence against sanctions as an approach to child labour issues only confirms that there is need for better understanding and compassion about the issue, alongwith reduced trade barriers to help children in poor countries overcome their misery. 

How to Grow and reduce poverty too

Notwithstanding the Gujarat tragedy, which will certainly set back its and the nation’s progress on many fronts, the way our states are approaching the issue of welfare expenditure leaves much to be desired. One doesn’t need to be an economist to understand that along with growth, investment in social sectors is an imperative in our campaign to eradicate poverty. The Economic Times’ Intelligence Group’s report (For the states it’s a question of survival, definitely not welfare, 5 February), shows that in view of the increasing salary and debt servicing bill, states are cutting down on welfare budget. Twenty-six major states have allocated just about 21p.c. of their aggregate budgetary expenses on three welfare heads: education, healthcare and housing in 2000-01, which is 1.75 p.c. lower than the revised estimates of the previous year, what to speak about the inflation and the crucial need to actually increase the outlay. 

Rich countries spend nearly 30p.c. of their budget on these welfare heads: USA-31.7p.c., Japan-31.2p.c.Canada-26.8%. As absolute figures the amounts will be staggering compared to what we spend in India. But even developing countries like Thailand spend high (29.9p.c.) and Korea (26.5p.c.). 

On the other, the Prime Minister’s economic advisory council has rightly attacked government expenditure (on salaries etc), irrational railway tariffs etc. I am plainly surprised about the lack of any mention of how to buttress welfare expenditure, or even to tackle the huge leakage, at least in the newspaper reports and editorials.  It has also been bold to suggest that our average tariff rates should be brought down to 12 p.c. by 2005, but on the other it has been more political by proposing that tariffs should be raised to the bound levels in commodities, imports of  which are now being liberalised due to removal of QRs.

“It is not just ironic, it is tragic, that economists come out with policies just like politicians which have perpetuated poverty in the country”, said the noted economist Prof Jagdish Bhagwati in a recent lecture at Chandigarh. “Target poverty rather than mere growth”.

The debate whether growth is sufficient for poverty reduction was reflected in the controversy surrounding the World Bank’s World Development Report, 2000-01, when its principal architect Ravi Kanbur resigned. Indeed there are several other factors which help the poor in a growing economy. On the contrary we can also have jobless growth as has been witnessed in many countries which have grown but have not benefited the poor. For example, studies done in Latin America on the impact of trade liberalisation during the decade of 1980s, wage differentials between skilled and unskilled labour had widened over time. One possible reason for this is the rigid social structures, which do not allow the poor to travel upwards. 

On the other hand studies done in  East Asia showed diminishing wage dispersion between skilled and unskilled labour during the decade of 1960s and 1970s. One of the reasons for this was steadily increasing investments in social sectors and land reforms. Social safety nets were put in place quite effectively. Besides social integration was also accelerated, resulting in the empowerment of the poor. Indeed policy makers also pursued openness of their economies, which expanded opportunities for the people to increase their incomes.

Whether  growth has a positive effect on poverty, two World Bank economists: David Dollar and Aart Kraay in a seminal paper: “Growth is Good for the Poor”, have shown that income of the poor rises one-for-one with overall growth. In a study on the relationship between growth and poverty, which looked at data in 80 countries over the last four decades, they found that in an economic crisis the poor do not suffer disproportionately. The impact is certainly greater if social safety nets are weak. Thus their findings also support the line that growth on its own cannot lead to poverty reduction. They conclude that a policy package has to be in place for growth to impact poverty positively, such as private property rights; fiscal discipline; rule of law; macroeconomic stability and openness to trade. 

On fiscal discipline the central government has now enacted the Fiscal Responsibility Act, and we hope that they will follow the letter and spirit to ensure a curb on profligacy, which has been the cause of many of our economic woes. On macroeconomic stability, one of the proxies as an indicator used by the authors is inflation. For quite some time, we have been enjoying a single-digit inflation, but that now seems to be reaching the higher number. Rule of law is fairly good compared to many of the developing countries. However, our rigid social structures resulting from the pernicious caste system are dissolving at a much slower rate than required. Often it is the lower castes, which bear the brunt of being poor, quite disproportionately. 

Dollar and Kraay have also examined a number of institutions and policies which may not have a direct impact on growth but have an impact on the well-being of the poor by improving the distribution of income. The most notable among these are: government social expenditure; formal democratic institutions to enhance voice and accountability; and primary education enrollment rates. Public social expenditure showed little effect on either growth or distribution, because often these are not targeted on the poor effectively. Indeed in India, we find that targeting is poor, where often the vocal middle class gets away with moneys allocated for the benefit of the poor. Tragically political parties too shy away from attacking it.

On the whole, if we have to continue reducing poverty in India, we need to pursue growth-oriented policies which will enable the poor to get better opportunities, and target poverty. That fact cannot be disputed. A communication strategy is required for the people to know what the government is doing, thus building up a consensus for reforms. 

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