Export as a Growth Engine

Praxis Business School

Assignment No. 1

Export as a Engine of Growth

A report

Submitted to

Prof. Prabal Sen

In partial fulfillment of the requirements of the course

MTP

On 28-02-08

By

Amit Kumar

Anupam Agrawal

Avadhut Kaluskar

Shashank Vyas

Table of content

Export as a Growth Engine

Prologue

Talking about the topic two most important words come to one’s mind i.e. Growth and Export, so we would like to define these two important words before moving deep in to the topic.

Export - The exchange of products and/or services with or without the use of money.

Trade- Occurred since the time of the Stone Age when people exchanged goods and commodities by means of barter trade. Trade has expanded at an accelerating rate since the end of World War II. Statistics show that over the past 55 years’ time between 1950 and 2004, global trade increased 145 times at a rate of 2.6% per year.

Globalization plays a critical role in the future of successful businesses. It’s a fact that companies engaged in international business are more stable, achieve higher growth rates, and pay higher wages. Exports are vital to the state’s economic health as well. The benefits of exporting extend beyond the obvious advantage of profit earnings.

Two important factors are regarded as the main contributors to an upward trend of the global trade growth:

o Advances in transportation, communication and information technologies that helped facilitating trade, reducing transaction and transportation costs, and increasing economy of speed and efficiency which lead to an increase in trade.

o Improvements in trading environment of negotiation and formation of multilateral, regional and bilateral trade agreements which reduced tariff, non-tariff barriers, and trading costs; increased competitiveness; and expanded trade.

Recall the formula for gross domestic product, C + I + G + (Ex – Im). The expression (Ex – Im) equals net exports, which may be either positive or negative. If net exports are positive, the nation’s GDP increases. If they are negative, GDP decreases.

Export Theory

Classical economists Adam Smith and David Ricardo emphasised the importance of International trade for a country’s economic growth. They argued that a country could benefit considerably if it specialised in a certain commodity or product and then exported it to the foreign countries that lacked this commodity.

However, there are several shortcomings of the this classical theory

o The theory does not incorporate a perspective on the consequences of the deteriorating terms of trade, which became a central trade issue between the developed and developing nations.

o Secondly, it is not always possible to spot in advance a country’s comparative advantage.

Empirical Model

Here is a mathematical model which tries to explain the relationship between Export and Economic growth and the effect of exports on non –export sector. This model assumes economy to be divided into two vertically integrated Export (X) and Non Export (N) sectors. Externalities generated by Export for Non Export sector are incorporated by assuming:

N =f (Kn, Ln, X)

Where Kn and Ln are capital and labour employed in non-export sector.

Taking GDP (Y) to be a sum of X and N, the estimated equation is:

Ry a (I/Y) bRl c (X /Y) Rx dRx

Where I/Y= rate of investment

X/Y = share of exports in GDP.

Ry, Rl, Rx are rate of growth of GDP, workforce and exports respectively.

Special Economic Zones- Engine for Growth

Evolution:

India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000.

The main objectives of the SEZ Act are:

o Generation of additional economic activity

o Promotion of exports of goods and services

o Promotion of investment from domestic and foreign sources

o Creation of employment opportunities

o Development of infrastructure facilities

SEZ Approval Status

Consequent upon the SEZ Rules coming into effect w.e.f. 10th February, 2006, Twenty-one meetings of the Board of Approvals have since been held. During these meetings, formal approval has been granted to 439 SEZ proposals. There are 138 valid in-principle approvals. Out of the 439 formal approvals, 195 SEZs have been notified.

Current investment and employment:

• • Investment: Rs. 67347 crore
  • Employment: 61015 persons

Exports from the functioning SEZs during the last three years are as under: Exhibit- 1

From the graph below any one easily make out the impact on SEZ on export.

Comment

SEZs, especially if one or two successful examples emerge, could yet play a significant role as policymakers increasingly follow a more export-led development strategy to accelerate economic growth.

Myths regarding export as a growth engine

Till now we have been discussing the positive facts about trade as a growth engine but as every coin has a flip side export too have some negative aspects.

Jobless, rather than job creating

Import sectors leads to job loss and dislocation in the economy. On an ex-ante basis, the net impact of trade on poverty reduction is indeterminate and it will depend on the relative size of the export sector and the import competing sector in a country’s economy.

Ruthless, rather than poverty reducing

Subsidies given by developed countries raise domestic prices of agricultural goods; they encourage farmers to produce more. The surplus production is then dumped into the international market at a cheaper price. Again subsidies are used to cover the difference between domestic prices and international prices. Excess supply and dumping of agricultural goods drive down their prices in the international markets. The farmers of developing countries suffer from such undercutting not only by losing markets in third export markets but these cheap imports also threaten their domestic production base. This can potentially have disastrous implications for the vulnerable section of the population in developing countries.

No significant gains

The potential to gain from services trade liberalization has been constrained by the fact that so far services had been liberalized dominantly in sectors of primary interest to developed countries like telecommunications and banks and insurance sectors. Movement of labour, which probably holds maximum promise for developing countries, is still very much restricted.

Today, many different barriers constrain the movement of individuals. The most obvious barriers are explicit quotas or economic needs tests. Many formalities (for example, to obtain a visa) make red tape related to FDI seem trivial by comparison.

Conclusion

Thus given this lopsided nature of the multilateral trade regime, it is not surprising that trade liberalization has not resulted in any significant reduction in poverty in developing countries. Instead there is overwhelming evidence that inequality across the world has gone up. Against this backdrop, it is not very difficult to understand why the current WTO trade talks have run into problems. Taking advantage of this, many developing countries are now looking trading relations among themselves just to avoid the frustration with the multilateral trading system. Such South-South RTAs may emerge as a possible alternative as they allow developing countries to expand their markets without having to accept lopsided treaties.

Facts and Figure

Goldman Sachs has lowered the GDP growth forecast to 7.8 per cent from 8 per cent for the year. The report, however, says the Indian economy remains largely on course on account of its structural strength. Adding to fears that exports growth will slow down due to appreciation of rupee and a global slump, the report said shipments will nearly halve, with software, textiles and apparels, gems and jewellery sectors being the worst hit.

The robust overall growth of export sector of Indian economy led to secondary growth of the following economic parameters

• India’s economy grew at 9.3% in quarter April-June and it was driven by manufacturing, construction and services sector and agriculture sector
• GDP factor for the first quarter of 2007-08 was at Rs 7, 23, 132 crore, registering a growth rate of 9.3% over the corresponding quarter of previous year.
• India’s FOREX reserves (excluding Gold and SDRs) stood at $219.75 billion at the end of July ‘ 07
• The annual inflation rate was 4.45% for the week ended July 28, 2007
• India’s Balance of Payments is expected to remain comfortable
• Merchandise Exports recorded strong growth
• According to reports, productivity growth rate of Indian economy is estimated to be around 8% and above until 2020

Bibliography:

www.sezindia.nic.in

www.rediff.com/money/2007/aug/18guest.htm

www.ibef.org/artdisplay.aspx?cat_id=561&art_id=13294

www.thehindubusinessline.com/2003/09/04/stories/2003090400030800.htm

www.google.com

www.wikipedia.com

www.ieo.org/AboutIEO.html

Exhibit- 1

— Projected exports from all SEZs for 2007-08: Rs. 67088 crore