Trade and economic growth, Macroeconomics

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Trade and Economic Growth:

For a long time, academic debate on trade liberalization and its positive effects on growth rate remained inconclusive and unsettled. But most recent studies suggest that trade liberalization contributes to growth and that trade openness is an important factor behind higher productivity and per capita income. No doubt, trade openness in India has steadily improved i.e., foreign trade as a share of GDP rose from 13.32 percent in 1990-91 to 19.28 percent in 1995-96 and again 21.8 percent in 2000-01. While exports constituted 10.1 percent of GDP and imports 11.6 percent of GDP in 2000-01, the respective shares have maintained upward trend in the subsequent periods. The financing of India's imports from its export earnings nearly reached 87 percent in the second half of 1990s, implying the dependence on other sources of foreign exchange to finance its imports declined in the post-reform period.

Nonetheless, India's experience to open up its economy and contribution of trade to growth is hardly comparable to that of export-led industrialization in East Asian countries.  In the latter case, intra regional spill-over effects mainly originated from technology transfers through direct investment from Japan; each shift in the industrial focus of the Japanese economy created market opportunities for other economies in South Korea and Taiwan. Following specialization in high-tech industries by South Korea and Taiwan, the light industries moved to Indonesia, Thailand and Philippines. Thus trade structure of East Asia remained manufacturing-centric and FDI in these countries was primarily directed to reduce technology gap. Even based on the experience of East Asian countries, it may be difficult to separate the effect of trade openness on growth from other institutional mechanisms or policy reforms. Second, trade liberalization is not sufficient for ensuring faster gird unless it is accompanied by other complementary policies such as monetary and fiscal policies and exchange rate policies. Whether exports contribute to economic growth, the outcome of a study conducted by RBI indicates that its contribution to GDP may be much lower when adjusted for import of raw materials.

"The contribution of exports adjusted for imports of raw material to their sales growth depicted a negative 0.3 percent during 1970s, which increased marginally to 1.5 percent during 1980s.  However during 1990s, exports adjusted for import of raw materials to sales growth of these industries stood at 8.4 percent. This 'was mainly due to higher exports contribution of 12 percent during 1999-0012000-01 (RBI, Report on Currency & Finance 2001-02, ch.vii, p.11). At best, we can say that due to higher annual average growth of exports in 1990s (12.9 percent) in relation to average GDP growth (6.1 percent), contribution of exports to growth in GDP increased modestly.

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