Current trend of protectionism and it effects in India as a developing nation
Title: Current trend of protectionism and it effects in India as a developing nation
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Table of Contents
TOC o “1-3” h z u HYPERLINK l “_Toc395524780” Chapter 1: Introduction PAGEREF _Toc395524780 h 3
HYPERLINK l “_Toc395524781” Advantages of Protectionism PAGEREF _Toc395524781 h 4
HYPERLINK l “_Toc395524782” Disadvantages of Protectionism PAGEREF _Toc395524782 h 4
HYPERLINK l “_Toc395524783” Research Hypothesis PAGEREF _Toc395524783 h 5
HYPERLINK l “_Toc395524784” Importance of the study PAGEREF _Toc395524784 h 5
HYPERLINK l “_Toc395524785” Research Motivation PAGEREF _Toc395524785 h 5
HYPERLINK l “_Toc395524786” Research methodology PAGEREF _Toc395524786 h 6
HYPERLINK l “_Toc395524787” Chapter 2: Literature Review PAGEREF _Toc395524787 h 8
HYPERLINK l “_Toc395524788” Chapter 3: Research methodology PAGEREF _Toc395524788 h 19
HYPERLINK l “_Toc395524789” Introduction PAGEREF _Toc395524789 h 19
HYPERLINK l “_Toc395524790” Research design PAGEREF _Toc395524790 h 20
HYPERLINK l “_Toc395524791” Hypothesis PAGEREF _Toc395524791 h 22
HYPERLINK l “_Toc395524792” Population PAGEREF _Toc395524792 h 22
HYPERLINK l “_Toc395524793” Population validity PAGEREF _Toc395524793 h 23
HYPERLINK l “_Toc395524794” Sample PAGEREF _Toc395524794 h 23
HYPERLINK l “_Toc395524795” Sampling instrument PAGEREF _Toc395524795 h 24
HYPERLINK l “_Toc395524796” Simple random sampling methods PAGEREF _Toc395524796 h 24
HYPERLINK l “_Toc395524797” Data collection method PAGEREF _Toc395524797 h 24
HYPERLINK l “_Toc395524798” Questionnaires PAGEREF _Toc395524798 h 25
HYPERLINK l “_Toc395524799” Construction Questionnaire by the Researcher PAGEREF _Toc395524799 h 26
HYPERLINK l “_Toc395524800” Data processing PAGEREF _Toc395524800 h 28
HYPERLINK l “_Toc395524801” Data analysis technique PAGEREF _Toc395524801 h 28
Chapter 1: Introduction
According Jagdish, MIT Press to protectionism refers to the policies that are made and set by a specific countries’ government with the aim of protecting the local industries from competition by the foreign companies. These policies are usually made in the sector of trade. Alan (2004) explains that, trade refers to the process of exchanging goods for money or with anything else with value. Protectionism does not take within a country; it takes place between countries, and thus the importance of studying International trade. Arbache, Dickerson, and Green (2004) add that, international trade refers to selling of products for money across the borders of several countries. Barriers of trade can be divided into qualitative and quantitative. Quantitative barriers are measurable, and they include quotas, tariffs, subsidies, limitations and exchange control. Qualitative barriers are very hard to because they are regulations that are made by the government to make free trade difficult. The regulations can be direct or indirect. Example is competition policy and quality standards (Douglas, 2011). The research seeks to investigate the current trend in protectionism and whether it has any impact on the trade and growth in the developing nations with India as a case study.
According to Went (2000) tariff on the manufactured goods has considerably reduced over the years as is (UNCTAD). The tariffs are known to have declined between 1996 and 2006 in the developed and the developing economies. The developing economies are the BRICs, which Russia, China, South Africa, India and Brazil. India will be chosen for the study because of it rich history in protectionism. However, the emerging market share increased from 5% in 1990 to 14% in 2006, with that of the developed nations declining. Important to note, even with the decline of the tariffs, the developing nations have been putting high tariffs on the manufactured products (Smith, 2001).
Tennenbaum (2000) tariffs may not be representative of the protectionism in the right percentage because; ablest to make an increment in tariffs with a large percentage because they are part of the World Trade Organization agreements which disallow them to do so. So, Non-tariff barriers become the best measure of protectionism in developing countries. Example of these types of barriers is the export barriers. The government may decide to make production cheaper for the local producers so that it can protect them from foreign company’s competition. In short, Non-tariff barriers are the barriers set to safeguard the local companies by the government though they are not easily quantified.
Advantages of Protectionism
Beyer, Rojas, and Vergara (1999) give the first advantage of protectionism for developing countries is that, it leads to securing the employment positions for the residents. When goods from the foreign countries are taxed highly, then the local companies will do well-leading to employment security for many within the industries.
The second advantage is that, the local companies will produce more; this will lead to increased revenues. Increased revenues for the local industries are good for the economy of the country because, it translates to better living standards for everyone in the country (Moses, 2002).
Disadvantages of ProtectionismAccording to Tennenbaum (2000), the first disadvantage is that, Protectionism is not best for developing countries because, when it is allowed, a country will levy high taxes to imported goods, leading to high living standards which do not favor the poor citizens. It is because; even the local companies will higher their prices because of the increased importation cost, making live expensive within the developing countries.
The second disadvantage is that it will lead to a heightened level of poverty because of the high unemployment levels (Jagdish, MIT Press). This is especially to the exporting country because they will not have a chance to sell what they have to the foreign market, which will lead to reduced profitability and a possible closure of the company. The end product is that the employees will lose their jobs.
Research HypothesisThis research is designed to identify and evaluate the current trend of protectionism and highlight possible effects of growth and trade of developing countries with India as a case study.
Importance of the studyTo identify and evaluate the current trends of protectionism.
To determine the existence of protectionism in India.
To find out the underlying economic and political conditions which inform protectionism in the developing countries?
To determine the effects of the current trend on the growth and trend of developing countries with India as a case study.
Research MotivationProtectionism was strongly embraced before the Crisis of 1930’s which was culminated by the 2008 and the introduction of WTO, but things changed (Chul et al., 2012). Most of the countries are embracing free trade. Most of the economists indicate that the most-likely period for a country to embrace barriers is during such crisis, yet most countries were not seen to do so. The economist point out on the advantages and disadvantages of barriers at such a time. There those countries that embraced the policies during the 1930 have to safeguard their economies from the crisis. The result was countries that had problems with their balance of payment and loss of more jobs. Most countries thereafter did not embrace this strategy, and to be keen the developing countries. India was one which sought for help from IMF to settle their debts, but out of the rules IMF had set from the study they had done, India had to embrace free trade (David, Wyn, & Peter, 2001).
The aspect of how protectionism brought in many misfortunes and key to India; is the motivation to investigating its current trend and if it has any effects to the developing nations, with India as the focus. Protectionism can be good or bad to the developing nations depending on why they are embracing it. When embracing protectionism, the exporting country, and the importing country usually get benefits and demerits as well. It is important for the practicing nations to know how to practice it while at the same time securing the employment of its citizens and relations with other countries.
Research methodologyBhattacharyya (2006) explains that, research design is the most-central part of a research because it gives a direction on how and where a research will be conducted. This particular study will embrace the cross-sectional study design, which refers to the collection of data from the target respondents once. The target respondents in this particular study will be from India that is among the developing countries. The research is meant to highlight the current trend in protectionism and whether it has any impact on the trade and growth in the developing nations, with India as a case study. The research will be quantitative, and that means a sample population will be used to infer to general population of the target destination (Khan, 2008).
The section that follows has discussions and theories on protectionism and trade liberalization as well as the current trend and how they relate to the developing countries. It is a secondary source of data that helps the researcher to determine what has been done in the field previously. It is helpful in determining what has been done, and what is best for the researcher to research on. The secondary information is helpful in that; it will help make comparisons with the primary data (Kothari C. R., 2006). The comparison helps to know if there is any consistency in the area under investigation or if the theories hold.
Chapter 2: Literature ReviewAccording to the observations of historical events, protectionist policies and measures seem the most-favorable option for countries during periods of economic and financial crisis. The first event under observation was the financial crisis which took place during 1929 (Douglas, 2011). During this particular period, most governments opted for the protectionist measures in a bid to protect the industries in their economies from the possible effects of the Great Depression. A portion of the measures were quantitative, and they included increasing import tariffs among others. Economics (2009) gives the insight that, these policies of protectionism led to reduced trade by a percentage of 66 in between the year 1929 and 1933. The countries that were involved in were left with deteriorating economies, something that led to the growth of globalization. Ever since, the economists have been on the run to promote free trade, and most of them are the anti-protectionism from the effects that were witnessed from the actions that were taken by the governments of different countries in 1929 because of the financial crisis.
There are various reasons why countries may opt for protectionism. The first reason is the pressures from producer-oriented groups in the specific countries that they exist. The pressure that is mounted to by these types of groups is meant to secure the groups from intensive competition by foreign companies. The pressure group is usually determined to influence the policies in order they could be in their favor (Eddy, 2005).
Edwards (1992) adds a second reason protectionism could be opted for is because of the government’s decision. The government could make such kinds of decisions when it realizes that it is the only means of protecting national interests. The government may realize that it has depended on other countries very much, and that could be one of the reasons it decides to embrace this as a measure. The other reasons which can make the government take such actions is because of the decision to improve the balance of payments, or because of the plan to increase exports in a bid to grow the economy and lead to a more stable country.
Most of the developing countries had a history of embracing protection measures, but that is since changing. Examples of such countries are Mexico, Chile, Botswana, Ghana, China, and India. Before India becomes a member of World Trade Organization (WTO) which regulates the protectionism, it was charging very high percentage in import tariffs. That was before it introduced its trade reforms in 1991; it was charging 80 percent on the import tariffs, but thereafter they reduced to about 30% (Hakim & Mustapha). Even though it is important to note that, the developing countries can raise their tariffs to a higher percentage compared to the developed countries in relation to the agreement stipulated in the WTO, without them breaking any clause of the agreement. With India as an example, it is reported that its percentage rate on tariffs furthers reduced from the previous 30% to 15%, and they could increase to all high rate of 50% any time they felt like, and still not violate the agreement of WTO (Jagdish, MIT Press).
An explanation as to why more of the developing countries are no longer after protectionism is because of negative effects it has on their economies. Kankesu (2002) elaborates the first reason the developing countries are not supporting the idea of protectionism is because of the idea of poor economic performance. Most of the developing countries have suffered sluggish economic growth and a continuous decline in productivity. Some of the policies under protectionism are commonly known as the macro policies which made the debt level to increase and the external environment. The developing nations thought of this as a solution to ending the scenario and increasing productivity (Alan, 2004).
Petia and Amit (2010) elucidate the other reason the developing countries are opting for free trade is because of access to information. In current times, technology, and specifically internet access avails information on what is happening globally and in the international market. The citizens of these developing countries get to realize the gaps in pricing between their countries and the international market. They realize that sometimes, the products in their countries are more expensive than those in the international market, and then they opt to buy from those other countries. In other words, the consumers want to increase the power to buy with the little that they have, and with information, they will go where such desire will be actualized.
Rudiger (1992) adds another reason the developing countries have opted for free trade is because of the research which was conducted by World Bank, and the empirical evidence they got. The research was a comparison of strategies of inward looking trade and outward-looking strategies. The research indicates that, there were problems with the inward looking strategies, and the outward-looking strategies were a success. It is these lessons that led the World Bank to put trade liberalization as a condition for those countries which were in need of money.
The topics of protectionism and free trade have not just started the other day. This topic is one which got the attention long time ago by Classical economists such as David Ricardo. David Ricardo focused on the concept of comparative advantage, and the work and findings were anti-protectionism (Smith, 2001). The explanations are made with the help of two economies (standing for two different countries) with two different sectors each. The results indicate that each of the economies achieves higher productivity if it specializes in those two particular sectors it has as compared to undertaking work in many sectors.
Ever since Ricardo did this work, there has been a series of research from many other researchers to find a relationship between rather liberalization of trade with growth. Rodriguez and Rodrick (2000) explain that, even though the available empirical evidence as provided in most literature is not subject a variety of tests, the main findings from most of them is that tariffs do not increase the welfare of any particular economy; trade liberalization is the only way to enhance the economies. The second study was based on the results as found in the IMF world economic Outlook which had its focus of trade in agriculture. The research realized that there were three effects. Trade protectionism leads to increased taxes and costs to the consumers. The second effect is that it leads to a trend of decline in efficiency because the allocation of the resources is not used in the areas where the country has the expertise. The third effect is that, protectionism could interfere with balance of payments and fiscals and make exports very difficulty (Tennenbaum, 2000). When a country imposes these policies, the other governments retaliate; they develop protectionism measures, and exports decline because they translate to be expensive in those particular countries making it very difficult for the government to make balance of payments. The study further indicates that the world’s income would increase by a tune of USD 128 billion if protectionism were not to be welcome by any country all over the world.
Went (2000) indicates that, financial liberalization has been the other topic under light perhaps because of Asia crisis in the 1990s. Financial liberalization may of great use to a country and it can lead to more investments and general growth of the economy. However, this will only be true if, the country has an enabling environment in terms of the policies that they have crafted. According to Kose et al,. (2006), financial liberalization can be of assistance through leading to better institutions in terms of better governance practices and better-macroeconomic discipline. Evaluating the economic effects of financial liberalization is difficult in most times because the effects keep varying over time.
As illustrates at the start of the literature review, crisis is the major causes for countries to impose protective measures in order to safeguard their economies, and the industries in their economies as well. It is reported that the current economic crisis in the late 2000 has been felt in the developing countries. The economic crisis has led to feverish growth of economies in the developing countries, and it is perceived that the policy makers may give into the political pressures in order to protect their industries from intensive completion of the foreign companies as well as assure citizens of jobs (Beyer, Rojas, & Vergara, 1999). As reported by World Bank and the Center for Economic Policy Research trade barriers have been discovered, even though they are minimal, and they meet the criterion of WTO. The report they gave shows that this situation is not assured to remain at that particular way, and there is possibility that it can escalate in the future.
According to other sources, there is a continuous increase of protectionism in the developing countries such as India because of the global financial crisis which has led to the economic slowdown for quite a while. According to Arbache, Dickerson, and Green (2004) the source argues that in 2009, the data collected for seven months on protectionism shows 186 incidences of restrictions for trade. The trend is recorded to have affected the number of imports made by 0.9% and the global trade by 2.95 in the year 2009. The report gives that protectionism measures implemented by India and other developing countries. The measures specific to each country as the research indicates are listed below.
The measures are since taken at the peak in 2008. India is a country under investigation in this particular study. Because of this particular crisis, India increased their restrictions without any notification. The most-common restrictions in India at that time are the certification that was to be gotten for the new products. Korean companies were investing heavily in India, but ever since the tedious process of getting documentation, most of them opted out (Beyer, Rojas, & Vergara, 1999).
Tennenbaum (2000) explains that the other developing nation to take this action is China. China is the single country with largest percentage of rare earth materials in the world, standing at 95% of the total elements in the earth. Due to this particular crisis, they cited these particular elements as a national element which would be used for strategic reasons, and thus they imposed restrictions on the way they could be used. The reason that they gave to the world was that they were protecting the environment, a reason that was to please, and not the truth. The restrictions included that; no company would import the products of oil from China without it being state owned with the permission of the respective government or with licensing to prove their case. The other restriction was promoting the Chinese founded companies because it offered them a fair deal in the areas ranging from safety, technology and labeling regulations.
The mystery of whether developing countries need to embrace protectionism or free trade should be answered by comparison of the advantages each has over the other. Trade can lead to reduced poverty levels in the developing countries through economic growth. The study that was done in the recent past across 70 countries for a period of 30 years shows that; the countries that had abandoned protectionism for free trade had an increase in income growth, as a result of incremental income (Morone, 2003). The study realized the trend that, all the countries which joined WTO during that particular period lowered their barriers that is that quantitative ones. Example of the barriers reduced includes tariffs and the percentage of taxes. This was the same case in India where the percentage of import taxes went all the way from 80 to 60 after they embraced reforms in 1991. Later on when they became members of WTO, the trend of decreasing the percentage has been continuous until the recent announcement of 15% in the year 2009.
Due to trade liberalization India was able to improve its productivity and led to increasing in efficiency in the way they conducted operations. Trade liberalization opened up for competition which resulted to the Indian companies looking for means to remain competitive from the foreign companies (Petia & Amit, 2010). That way, the citizens of India can access quality products and services at friendly prices because of the healthy competition taking place.
Trade liberalization is full of advantages to the developing countries. The other advantage of lowering tariffs in the developing countries like India is that, they enable them to access better technologies, and inputs necessary in operating some of the companies in their economies at a cheap price (Smith, 2001). Example was when India decided to come up with a reform in the year 1991. The reform was aimed at trading big, and it gave them a chance to enjoy inputs that they would not have enjoyed previously. The report points out that; the inputs that were imported to India were new ones, or rather inputs that they had not imported before. To the amazement of the world, when India embraced the policy, its imports were doubled within a very short period. Some of these inputs were essential of producing new products, better products or increasing the number of products produced previously because of a shortage. This again led to more and better productivity of the Indian companies something which would not have been possible if they still adopted those Protectionism policies. Thus an indication that, protection measures for the developing countries has more bad than good on the contrary of what most people could think (Rudiger, 1992).
Most-developing countries have a high level of poverty as compared to the developed countries. It is good in that case to know if trade and growth have any impact on the level of poverty, and especially to India that according to statistics is among the poor countries in the world. The poverty in India in accordance to World Bank statistics in 2012 was 21.9%, a very high percentage compared to the developed nations. Even though, it is imperative to not that since they adopted the reforms in 1991, the poverty levels have been going down, and indication that free trade is the best idea for developing countries. The statistics according to World Bank show that, the ratio of poverty percentage of the population decreased continuously from 45.3% in 1994, to 37.2% in 2005, to 29.8% in 201, and to the latest percentage in 2012 standing at 21.9%. This can explain the system well that, trade leads to economic growth of a country, which then leads to the creation of employment, and later the levels of poverty are reduced, something proven through the reduced level of dependency (Arbache, Dickerson, & Green, 2004).
It is clear that, even though India enjoyed the fruits of liberalization; it was not out of choice that they opted to adopt the concept of free trade after they realized the need of borrowing some money in the International Monetary Fund (IMF). Moses (2002) elaborates that; IMF would not allow them the money without them trading protectionism for free trade because of the study they had previously conducted as illustrated at some point in this literature. The companies that were evidenced to have got the benefits of a free trade in terms of increased productivity were the Indian companies. So far, no material to support foreign companies getting any improvements in India as a result of the reforms in 1991.
The government of India usually before 1991 carried out the operations of the country as if it was able to survive without help from any other country or any other source, but they were wrong. In 1980’s liberalization was deeply taking root in most countries across the globe, and this led macroeconomic imbalances (Fiscal and balance of payments) for them (Went, 2000). Another global event which made it difficult for India to operate on its own was the increase in oil prices as a result of Gulf war that was unpredicted. This undermined the operations of India, and because of their increased debt and sluggish economy growth, they sought for immediate funding from IMF in 1991.
Further research shows that, not all people across the divide within a country which embraces trade liberalization enjoy its benefits. That again illustrates that, as much as poverty in the developing countries will be minimized, this method does not give any assurance that it will be eliminated. Petia and Amit (2010) explains that, when the government of India embraced free trade out of the measures set by the IMF, poverty declined in a few select areas. Even though, prices of commodities went down, and there was a variety to choose from, there was an issue with the way resources went to different ends. Results indicate that Indians working in protected industries or areas around protected companies suffered most when others were enjoying. The reason is that; they had their salaries, wages and most-other privileges slashed. No more employment opportunities would be availed to the people of the area within which the companies operated as a result of stiff competition from the foreign companies. What made it worse is that, the labor laws in India did not give them a chance to move on to other companies benefiting from the 1991 trade reforms.
Information that, employees working in companies which were previously protected and not favored by the trade reforms yet they could not relocate led many researchers to study other reasons that would cause people not to relocate to companies that are favored by the economic situation of the country. Some of the researchers hold that labor market regulation is among the key factors which affect the employment of these new people searching for work. They argue that, the regulations have been made in such a way that it makes expensive for the companies to fire the employees in case they want to. That hinders them from getting the employees, which then contributes to them not moving to these strategic locations to seek for employment. There other researchers report that, they realize that some of the people who lose jobs in the companies which wide up because of an end in protectionism do meet the requirements being sought after by the companies in a free trade scenario (Arbache, Dickerson, & Green, 2004). Some of the previously employed people may lack the education and experience which would usher them in the companies doing well because of the economy without barriers. The other reason from researchers is that these jobs may require those involved to relocate, and moving may be costly, not only in monetary terms, but also in social terms because it requires separation from the loved ones. Trending of loved ones for a job that requires an individual to go far away may be difficult, and they may opt to stay unemployed. These issues can be properly tackled if the government comes up with appropriate policies and measures.
Finally, are the theoretical arguments from researchers on trade liberalization regarding the developing countries? The first argument is that, trade liberalization is the only way that, the companies in the developing countries will realize increased productivity. They argue that, when the developing countries adopt reforms from protectionism, the likely event is that, resources will be reallocated from the less productive to more productive companies (Beyer, Rojas, & Vergara, 1999). In turn, there will be increased productivity as a result of competition. The companies will manage to reach their peak by reducing on the management slack, and focusing on what they do best.
Kankesu (2002) clarifies that, the other theoretical argument is that, these companies will be in a position to getter better technologies that they did not have before. The essence of technologies is that, they will help in technical efficiency. Notable is that, not all of the theories are supportive of trade liberalization. These contrary theories argue that, trade liberalization may lead the developing countries into sectors that are not economically good for growth. They also hold that; trade liberalization cannot be workable unless the government comes up with additional policies.
Chapter 3: Research methodologyIntroductionResearch methodology is a chapter which is dedicated to illustrating the design, the method of collecting data, the population used in the research and other relevant topics in relation to the research. This chapter will give the users of the information on the particular method of study, and why it was preferred over other possible means. The chapter will explain the methods that the researcher has used to collect data from the target respondents. The researcher will give the advantages and the disadvantages of using that as a means of collecting data as compared to other possible data collection method. The researcher will then defend the essence of using such method of data collection for the study. Just as an iceberg, the study is aimed to give light to the current trend in protectionism and to know if it impacts trade and growth in the developing nations (Sharan, 2009).
The better part of this particular section in the researcher research is that it is given systematically to give the process of conducting a primary research assuming that, the user of the information does not understand. It will also elaborate the different types of research, and then narrow down to one which is the center of research, so that the information can be easily understood. The findings can only be understood better with proper knowledge of the research methodology; research design, the population, the sample, and how the stat