Coronavirus – Economic Issues

Economic liberalisation and its faults

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How the Covid-19 brought into focus the faults of economic liberalisation.

The article describes the problems economic liberalisation has created. Covid-19 has exposed these problems even as developed countries faced shortages of masks and ventilators. The focus is on China’s dominance as a manufacturing hub and its implication for the world and India.

Background of the end of the ‘Licence Raj’ in India

  • Manmohan Singh’s 1991-92 Budget speech marked the beginning of the end of the ‘Licence Raj’ in India.
  • The Budget also announced the reduction of import duties and paved the way for foreign-manufactured goods to flow into India.
  • Following this, most of the manufacturing sector was opened up to foreign direct investment.
  • India’s industrial policy was virtually junked, and policymakers and the political leadership became contemptuous of the idea of self-reliance.

Shifting of the base in developing countries

  • In the late 1980s, transnational corporations started shifting the production base to smaller companies in developing countries, especially Asia.
  • The reason for this shift was cheap labour and raw materials.
  • Developed countries supported the move because shifting the polluting and labour-intensive industries suited them as long as ownership remained with their companies.
  • Development of global supply chains: The world witnessed the development of global supply chains in many products starting with garments.

The dominance of China in the global supply chain is at the root of trade war between the US and China. The outbreak of Covid-19 has added it a new dimension and has forced many countries to reframe their trade policies. And India is no different. This makes it an important topic for UPSC. A question can be framed from an impact angle or the US-China trade war angle.

The emergence of China as a global manufacturing hub

  • Though many developing countries participated in the global production/value/supply
  • The substantial value addition in developing countries happened in a few production hubs, of which China emerged to be a major one.
  • Decentralised to localised production: Manufacturing shifted from a decentralised production system spread across different counties to just a few locations.
  • The countries like China defied the logic of supply/value chains ensuring substantial value addition for themselves.
  • They even carried out backward integration and thus emerged as global manufacturing hubs for certain products.
  • In the case of health products, China became the global supplier of active pharmaceutical ingredients (API), personal protective equipment (PPE), and medical devices diagnostics.

What were the implications of China’s dominance in a fight against Covid-19?

  • China’s dominance has major implications for the  COVID-19 outbreak.
  • The resultant loss of manufacturing base has affected the ability of many governments, including of developed countries, to put up an effective response to the crisis.
  • The U.K. Prime Minister asked the country’s manufacturers to produce ventilators in order to provide care for critical COVID-19 patients.
  • Similarly, the U.S. President invoked the Defense Production Act of 1950 to ramp up N95 mask production.
  • Under this legislation, the U.S. President can direct U.S. manufacturers to produce goods according to the directions of the government.
  • Similarly, the French Health Minister stated that the country may nationalise vaccine companies if necessary.
  • Spain nationalised all its private hospitals.
  • Israel and Chile issued compulsory licences to ensure that medicines are affordable.
  • Lack of preparedness and dependence: This exposes the poor state of preparedness and dependence on imports for essential goods required to meet the challenge of any major disease outbreak.
  • This shows that what is good for the company may not be good the country in all circumstances.
  • So, the overwhelming objective of private sector-led economic growth has proved to be disastrous.

Pay attention to the impact on India. The following two points are very important.

How economic liberalisation affected India’s ability?

  • In India, economic liberalisation has damaged the government’s capacity in two ways.
  • 1. It incapacitated the government to respond to emergencies based on credible information.
  • The dismantling of the ‘Licence Raj’ resulted in the elimination of channels of information for the government, which is crucial to make informed policy choices.
  • For example, it took the government several meetings to determine the production capacity of various pharmaceutical companies.
  • Similarly, there were difficulties in finding out India’s production capacity of PPE, medical devices and diagnostics.
  • 2. The logic and policies of economic liberalisation seriously undermined the manufacturing capabilities of health products in India.
  • The short-sighted policy measures, with the objective of enhancing profitability of the private sector, allowed the import of raw materials from the cheapest sources and resulted in the debasing of the API industry, especially in essential medicine.
  • According to a report of the Confederation of Indian Industry (CII), nearly 70% of India’s API import is from China.
  • The CII report lists nearly 58 API where the dependence is 90% to 100%.
  • The disruption in the supply of API due to the COVID-19 outbreak has impacted the production of not only medicines required for COVID-19 patients, but also of other essential medicines in India.
  • As a cost-effective producer of medicines, the world is looking to India for supply, but it cannot deliver due to its dependence on China.
  • This dependence has also forced India to impose export restrictions on select medicines.
  • Similar dependence exists with regard to PPE, medical devices and diagnostic kits.
  • The 100% dependence on Reagents, an important chemical component for testing, is limiting the capacity of the government from expanding testing because the cost of each test is ₹4,500.
  • Dangers of dependence: In the name of economic efficiency, India allowed unconditional imports of these products and never took note of the dangers of dependency.

Loss of jobs and poor working conditions

  • Destruction of manufacturing base: Global supply/production chains destroyed the manufacturing base in developed and developing countries.
  • That also resulted in the loss of jobs and poor working conditions in these sectors.
  • Developing countries were asked to ease their labour protection laws to facilitate global production and supply chains popularly known as global value chains.
  • As a result, people were forced to work in precarious working conditions without any social security net.
  • This created an unorganised army of labourers and is preventing many developing country governments from effectively offering relief.

Conclusion

A virus has made us rethink our obsession with the economic efficiency theory. It implores us to put in place an industrial policy to maintain core capacity in health products so that we can face the next crisis more decisively.

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Monika Bansal
5 months ago

these so called communist and socialist need to take a chill… these idiot already has damaged to our economy and our societal development… i don’t know in which world these moron lives… they think that “Poverty is reason to celebrate..”…. now the crisis has arrived … so they are just talking nonsense… because they know post-COVID no one is going to give them DAMM….!!!!

Shivendra Kumar Pandey
5 months ago
Reply to  Monika Bansal

bhot khoob kaha…

Parth Verma
Editor
5 months ago
Reply to  Monika Bansal

Dear Monika. This is an Edutech platform catering to UPSC Civil Services Preparation and hence we request you to avoid these kinds of comments here. There are various other forums which could be used to express these views. This is not the one. Thanks

Rahul Chandra
5 months ago
Reply to  Parth Verma

LOL what a reply Parth 😀

Rahul Chandra
5 months ago
Reply to  Monika Bansal

d