MBA605_Business Environment and Regulatory Framework (1)

Global Environment 245 countries. China was host to more than 2.8 lakh of the affiliates according to the WIR 2011 (i.e., about one-third of the total and more than two-thirds of them in developing countries) compared to about 2200 in India. [Figures of foreign investment and MNCs quoted in this unit are mostly from different World Investment Reports.] Definition and Meaning As the concept of multinationality has several dimensions, there is no single universally agreed definition of the term multinational corporation. According to an ILO Report, “the essential nature of the multinational enterprises lies in the fact that its managerial headquarters are located in one country (referred to for convenience as the “home country”) while the enterprise carries out operations in a number of other countries as well (“host countries”). Among the various benchmarks sometimes used to define ‘multinationality’ are that the company in question must:  Produce (rather than just distribute) abroad as well as in the headquarter’s country.  Operate in a certain minimum number of nations (e.g., six).  Derive some minimum percentage of its income from foreign operations (e.g., 25 per cent).  Have a certain minimum ratio of foreign to total number of employees, or of foreign total value of assets.  Possess a management team with geocentric orientations.  Directly control foreign investments (as opposed simply to holding shares in foreign companies). As the UNCTAD’s World Investment Report 1999 observes, transnational corporations (TNCs) establish, under the common governance of their headquarters, international production systems in which factors of production move, to a greater or lesser extent, among units located in different countries. These systems increasingly cover a variety of activities, ranging from research and development (R&D) to manufacturing to service functions such as accounting, advertising, marketing and training, dispersed over host-country locations and integrated to produce final CU IDOL SELF LEARNING MATERIAL (SLM)

246 Business Environment and Regulatory Framework goods or services. They are also increasingly being established, especially in developed countries, through mergers between existing firms from different countries or the acquisition of existing enterprises in countries by firms from others. Universe of MNCs The general image of MNCs is of giant enterprises. True, the MNC sector is dominated by very large corporations. However, the universe of MNCs is very diverse, and includes a growing number of small and medium-sized enterprises. The growth in the number and size of MNCs from developing countries has been phenomenal. Now, well over one-fifth of the total number of Fortune 500 companies are Chinese. [The Fortune Global 500 is an annual ranking of the top 500 companies worldwide as measured by revenue, compiled and published by the Fortune magazine of USA.] China had 119 companies in 2019 Fortune 500 list compared to 121 of USA. If the 10 Fortune 500 of Taiwan is also included, China has more than that of USA. In 2019, three of the top 5 Fortune 500 firms were Chinese. There are a large number of public sector enterprises in the list of MNCs; many of them are Fortune 500 too. For example, four of the seven Indian Fortune 500 in the 2018 list were State- owned enterprises. MNCs of the US are more focused, i.e., they confine their business to one industry or product category. In fact, several American MNCs which attempted diversification, mostly by the acquisitions route, reverted to focus, after bitter experiences with the diversification. Compared with the US MNCs, most European companies have a much broader product line. Japanese companies, generally, have product lines that are much too broad. Of the top ten corporation in the US, only one (General Electric) is a classic conglomerate, while in Japan, eight are conglomerates and only two are not (Toyota Motor and Nippon Telegraph & Telephone). Similarly, the Korean corporations are far too diversified. Recent trends indicate that the diversified corporations have many odds against them and the focus strategy is more successful. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 247 Economic Clout of MNCs The global liberalisation has paved the way for fast expansion and growth of the MNCs, and their role in the economy in general and in the business sector in particular has been on the increase. TNCs have been playing an increasing role in the global economy. Their role in all categories of economies – developed and developing, capitalist and communist/socialist – has been growing fast as reflected by the increase in their:  Investment/fixed capital formation  Foreign assets  International production  Production linkages  International employment  Global trade  R&D The value added of all foreign affiliates of MNCs as a percentage of world GDP has almost doubled from about 5 per cent in 1990 to nearly 10 per cent recently. Between 1990 and 2016, while the world GDP increased three-fold, the sales of Financial Assets of MNCs registered a seven fold increase. In 2018, Global Fortune (the world’s 500 largest companies by revenue) generated $32.7 trillion in revenues and $2.15 trillion in profits in 2018. Together, the Fortune Global 500 companies employed more than 69 million people worldwide and were represented by 34 countries. The economic clout of the MNCs is indicated by the fact that the GDP of nearly 90 of the countries is smaller than the value of the annual sales turnover of the largest multinational giant Walmart. The annual revenue of Walmart is larger than the SDP (State Domestic Product) of every Indian State. CU IDOL SELF LEARNING MATERIAL (SLM)

248 Business Environment and Regulatory Framework Walmart employs more than about 2 million people across the world: this is more than the total population of many countries. In 2016, it generated a profit of about $ 13 billion. Merits of MNCs MNCs have advantages and disadvantages. As the Preface to the ILO Report on Multinational Enterprises and Social Policy observes, “For some, the multinational companies are an invaluable dynamic force and instrument for wider distribution of capital, technology and employment; for others, they are monsters which our present institutions, national or international, cannot adequately control, a law to themselves with no reasonable concept, the public interest or social policy can accept.” The important arguments in favour of and against the MNCs are mentioned below. MNCs, it is claimed, help the host countries in the following ways: 1. MNCs help increase the investment level and thereby the income and employment in host country. 2. The transnational corporations have become vehicles for the transfer technology, especially to the developing countries. 3. They also kindle a managerial revolution in the host countries through professional management and the employment of highly sophisticated management techniques. 4. The MNCs enable the host countries to increase their exports and decrease their import requirements. 5. They work to equalise the cost of factors of production around the world. 6. MNCs provide an efficient means of integrating national economies. 7. The enormous resources of the multinational enterprises enable them to have very efficient research and development systems. Thus, they make a commendable contribution to inventions and innovations. 8. MNCs also stimulate domestic enterprise because to support their own operations, the MNCs may encourage and assist domestic suppliers. 9. MNCs help increase competition and break domestic monopolies. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 249 Demerits of MNCs MNCs have, however, been subject to a number of criticisms, like those mentioned below. 1. As Leonard Gomes points out, the MNC’s technology is designed for worldwide profit maximisation, not the development needs of poor countries, in particular employment needs and relative factor scarcities in these countries. In general, it is asserted, the imported technologies are not adapted to: (a) the consumption needs, (b) the size of domestic markets, (c) resource availabilities and (d) stage of development of many of the LDCs. 2. Through their power and flexibility, MNCs can evade or undermine national economic autonomy and control, and their activities may be inimical to the national interests of particular countries. 3. MNCs may destroy competition and acquire monopoly powers. 4. The tremendous power of the global corporations poses the risk that they may threaten the sovereignty of the nations in which they do business. On political involvement, MNCs have been accused on occasion of: supporting repressive regimes; paying bribes to secure political influence; not respecting human rights; paying protection money to terrorist groups; and, destabilising national governments of which they do not approve. 5. MNCs retard growth of employment in the home country. 6. The transnational corporations cause fast depletion of some of the non-renewable natural resources in the host country. They have also been accused of the following environmental problems: polluting the environment; not paying compensation for the environmental damages; causing harmful changes in the local living conditions; and, paying little regard to the risks of accidents causing major environmental catastrophes. 7. The transfer pricing enables MNCs to avoid taxes by manipulating prices on intra- company transactions. 8. The MNCs have been criticised for their business strategies and practices in the host countries. They undermine local cultures and traditions, change the consumption habits CU IDOL SELF LEARNING MATERIAL (SLM)

250 Business Environment and Regulatory Framework for their benefit against the long-term interests of the local community, promote conspicuous consumption, dump harmful products in the developing countries etc. Perspective Future holds out an enormous scope for the growth of MNCs. The changes in the economic environment in a large number of countries indicate this. For instance, the number of bilateral treaties that promote and/or protect FDI has increased markedly in recent times. A United Nation’s Report described several developments that points to a rapidly changing context for economic growth, along with a growing role for transnational corporations in that process. These include: 1. Increasing emphasis on market forces and a growing role for the private sector in nearly all developing countries. 2. Rapidly changing technologies that are transforming the nature of organisation and location of international production. 3. The globalisation of firms and industries. 4. The rise of services to constitute the largest single sector in the world economy. 5. Regional economic integration, which involve both the world’s largest economies as well as selected developing countries. Code of Conduct It is widely felt that there must be a code of conduct to guide and regulate the MNCs. According to the Brandt Commission, the principal elements of an international regime for investment should include: 1. A framework to allow developing countries as well as transnational corporations to benefit from direct investments on terms contractually agreed upon. Home countries should not restrict investment or the transfer of technology abroad, and should desist from other restrictive practices such as export controls or market, not restrict current transfers such as profits, royalties and dividends, or the repatriation of capital, so long as CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 251 they are on terms which were agreed when the investment was originally approved or subsequently negotiated. 2. Legislation promoted and coordinated in home and host countries to regulate the activities of transnational corporations in such matters as ethical behaviour, disclosure of information, restrictive business practices, cartels, anti-competitive practices and labour standards. International codes and guidelines are a useful step in that direction. 3. Cooperation by Governments in their tax policies to monitor transfer pricing and to eliminate the resort to tax havens. 4. Fiscal and other incentives and policies towards foreign investment to be harmonised among host developing countries, particularly at regional and sub-regional levels, to avoid the undermining of the tax base and competitive positions of host countries. 5. An international procedure for discussions and consultations on measures affecting direct investment and the activities of transnational corporations. MNCs and India Comparatively, very little foreign investment had taken place until the beginning of the 1990s mainly due to the dominant role assigned to the public sector in the industrial policy and the restrictive Government policy towards foreign investment. Some multinationals, Coca Cola and IBM, even left India in the late 1970s as the Government conditions were unacceptable to them. However, since the economic liberalisation ushered in 1991, many multinationals in different lines of business have entered the Indian market. A number of multinational which were in India prior to this have expanded their business. The MNC’s presence in the Indian business has been expanding rapidly. It is also noteworthy that many Indian corporate have become multinationals. Some of them are among the top ones in their respective industries. CU IDOL SELF LEARNING MATERIAL (SLM)

252 Business Environment and Regulatory Framework 9.4 World Trade Organisation (WTO) There are a number of international organisations sponsored by the United Nations system, designed to assist the socio-economic development, particularly of developing countries, and to promote international monetary stability, orderly development of global trade and intergovernmental cooperation to serve the common goods. The influence of these organisations on the national economic policies and international economic and business transactions is, indeed, very profound. This unit gives a brief description of these organisations. The Bretton Woods Conference and IMF, World Bank and WTO The Bretton Woods Conference, officially known as the United Nations Monetary and Financial Conference, held from July 1 to 22, 1944, in Bretton Woods, New Hampshire, USA, which was attended by delegates, from 44 nations, proposed the establishment of three institutions:  International Monetary Fund (IMF) to help establish international monetary stability, to promote orderly development of international trade and economic growth and to provide financial assistance to countries with balance of payments problems.  International Bank for Reconstruction and Development (IBRD) – World Bank – to provide financial assistance for the reconstruction (particularly of countries whose economies are ravaged by the World War II) and economic development of countries.  International Trade Organisation (ITO) to promote global trade by facilitating free and transparent trade. Thus, the Bretton Woods Conference led to some concrete measures to address three sets of severe economic problems emerged from the collapse of the gold standard and became more serious by the impacts of the Great Depression and World War II. The IMF and World Bank were established in 1946 and they have come to be known as the Bretton Woods Twins. However, the ITO charter was never ratified because of objections that its enforcement provisions would interfere with the autonomy of domestic policy making of member countries. Instead the General Agreement on Tariffs and Trade (GATT) which had been drawn up only as an interim agreement to fill the gap until the ITO charter was ratified, became the CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 253 framework for international trading system, took effect on January 1, 1948. With effect from January 1, 1995, the World Trade Organisation (WTO) came into being, replacing the GATT, and thus the original proposal to establish a strong international trade organisation materialised about five decades after the Bretton Woods Conference. GATT and WTO Following the UR Agreement, GATT was converted into a formal international organisation called World Trade Organisation (WTO) with effect from January 1, 1995. The situation, after the coming into effect of WTO, replacing the GATT, may be described as the GATT is dead, long live the GATT. Under the old system, there were two GATTs: (i) GATT the Agreement, — the agreement between contracting parties (governments) setting out the rules for conducting international trade; (ii) GATT the Organisation — an international organisation created to facilitate discussions and administration related to the Agreement (ad hoc, though, continued to exist until the establishment of the WTO). GATT the organisation, ceased to exist with the establishment of WTO; GATT the agreement, which always dealt with (and still does) trade in goods, continues to exist, in amended form, as part of the WTO alongside two new agreements, viz., General Agreement on Trade in Services (GATS) and General Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs). The old text is now called ‘GATT 1947’ and the updated version is called ‘GATT 1994’. In short, the WTO is GATT plus a lot more. The WTO is a more powerful body with enlarged functions than the GATT and is envisaged to play a major role in the world economic affairs. Figure 9.1 depicts the important difference between GATT and WTO. GATT WTO GATT was ad hoc and provisional. WTO and its agreements are permanent. GATT had contracting parties. WTO has members. GATT system allowed existing domestic legislation to WTO does not permit this. continue even if it violated a GATT agreement. GATT was less powerful, dispute settlement system WTO is more powerful than GATT, dispute was slow and less efficient, its ruling could be easily settlement mechanism is faster and more blocked. efficient, very difficult to block the rulings. Fig. 9.1: Difference between GATT and WTO CU IDOL SELF LEARNING MATERIAL (SLM)

254 Business Environment and Regulatory Framework Objectives and Principles of WTO The WTO agreements have three main objectives: 1. To help trade flow as freely as possible. 2. To achieve further liberalisation gradually through negotiation. 3. To set up an impartial means of settling disputes. A number of simple, fundamental principles run throughout all the WTO agreements. They are the foundation of the multilateral trading system. They include: 1. Non-discrimination (‘most-favoured-nation’ treatment and ‘national’ treatment). 2. Freer trade, predictable policies, encouraging competition. 3. Extra provisions for less developed countries. These are described under the objectives of GATT above. Functions of WTO The WTO seeks to achieve its overriding objective of helping trade flow smoothly, freely and predictably by: 1. Administering trade agreements 2. Acting as a forum for trade negotiations 3. Settling trade disputes 4. Reviewing national trade policies 5. Building the trade capacity of developing economies 6. Cooperating with other international organisations WTO Agreements The WTO endeavours to ensure that trade is as fair as possible and as free as practicable by negotiating rules and abiding by them. The WTO’s rules — the agreements — are the result of negotiations between the members. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 255 General Agreement on Trade in Goods: Trade in goods was the concentration of GATT until the Uruguay Round negotiations. From 1947 to 1994, GATT was the forum for negotiating lower customs duty rates and other trade barriers. Since 1995, the updated GATT has become the WTO’s umbrella agreement for trade in goods. It has annexes dealing with specific sectors such as agriculture and textiles, and with specific issues such as state trading, product standards, subsidies and actions taken against dumping. General Agreement on Trade in Services (GATS): The General Agreement on Trade in Services which extends multilateral rules and disciplines to services and provides for liberalisation of trade in services, including education, financial services, telecommunications, transport, audio-visual, tourism and professional services as well as movement of workers. This will have both favourable and unfavourable effects as in liberalisation in other cases. Trade Related Investment Measures (TRIMs): Another important area of WTO agreement pertains to TRIMs. TRIM refers to certain conditions or restrictions imposed by a government in respect of foreign investment in the country. TRIMs were widely employed by developing countries. The Agreement on TRIMs provides that no contracting party shall apply any TRIM which is inconsistent with the WTO Articles. A number of TRIMs were employed in India prior to the liberalisation ushered in 1991 and many of them have been phased out since then. Trade Related Aspects of Intellectual Property Rights (TRIPs): One of the most controversial outcomes of the UR is the Agreement on Trade Related Aspects of Intellectual Property Rights. Intellectual Property Rights may be defined as “information with a commercial value”. IPRs have been characterised as a composite of “ideas, inventions and creative expression” plus the “public willingness to bestow the status of property” on them and give their owners the “right to exclude others from access to or use of protected subject matter.” CU IDOL SELF LEARNING MATERIAL (SLM)

256 Business Environment and Regulatory Framework Under the WTO, TRIPs covers seven intellectual properties: 1. Copyright and related rights 2. Trade marks 3. Geographical indications 4. Industrial designs 5. Patents 6. Layout designs (topographics) of integrated circuits 7. Undisclosed information The TRIPs Agreement provides for legal protection of IPRs. Countries need to take effective measures for protection of IPRs. The Patent protection stipulations brought in by the UR and implemented by the WTO has come in for scathing criticism in the developing countries because it harms the interests of the developing countries and benefits the MNCs with technological might. The Indian Patents Act was amended to make it WTO compliant. Now, we have both product and process patent compared to only process patent in the past, very adversely affecting the Indian pharmaceutical industry. The patent period now is 20 years compared to 14 earlier. There is a strong feeling that the more stringent patent regulation provides opportunity for multinationals to exploit the market, charging exorbitant prices, making the plight of poor patients more miserable. Dispute Settlement: The WTO’s procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for enforcing the rules and therefore for ensuring that trade flows smoothly. Countries bring disputes to the WTO if they think their rights under the agreements are being infringed. Judgements by specially-appointed independent experts are based on interpretations of the agreements and individual countries’ commitments. Policy Review: The Trade Policy Review Mechanism’s purpose is to improve transparency, to create a greater understanding of the policies that countries are adopting, and to assess their impact. Many members also see the reviews as constructive feedback on their policies. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 257 Evaluation of WTO WTO has come to play a very important role in the global, and thereby, national economies. National economic policies are significantly influenced by the principles, policies and agreements of WTO. Because of this, there are severe criticisms against WTO, particularly in the developing countries. In fact, WTO has both positive and negative impacts. The growing acceptance of GATT/WTO, despite the shortcomings, is evinced by the increase in the number of member countries. When the GATT was signed in 1947, only 23 nations were party to it. The Uruguay Round was signed in 1994 by 125 national governments. The membership of the WTO stood at 164 at the beginning of 2020 accounting for about 98 per cent of the global trade. Besides, there are many observer government eager to become members (“accede to” the WTO) – observers must start accession negotiations within five years of becoming observers. Impact of WTO Impact of WTO on the economy is similar to the impact of liberalisation of foreign investment and trade. Liberalisation of trade in goods has paved the way for more liberalisation of trade in goods, The implication of this is that consumers and business firms can source from the preferred source anywhere in the world. Competition in the goods market has the following effects:  Increases consumer choice  Puts downward pressure on price  Quality improvement  Better service including pre- and after-sales services. Import competing industries face severe competition necessitating:  Efficiency and quality improvements  Cost reduction  Improvement of services CU IDOL SELF LEARNING MATERIAL (SLM)

258 Business Environment and Regulatory Framework  R&D and innovation Firms which will not be able to survive the competition will be vanished. India’s gain from the trade liberalisation will be much less than that of many other developing countries, such as the South East Asian economies and China, because India’s share in the world trade is very low (less than one per cent) and her foreign trade-GDP ratio is very low. Benefits of WTO GATTI WTO has made significant achievements in reducing the tariff and non-tariff barriers to trade. Developing countries too have been benefiting significantly out it. 1. The liberalisation of investments has been fostering economic growth of a number of countries. 2. The liberalisation of trade and investment has been resulting in increase in competition, efficiency of resource utilisation, improvement in quality and productivity, and fall in prices and acceleration of economic development. 3. WTO provides a forum for multilateral discussion of economic relations between nations. 4. It has a system in place to settle trade disputes between nations. 5. WTO has a mechanism to deal with violation of trade agreements. 6. WTO does considerable research related to global trade and disseminates a wealth of information. Drawbacks/Criticisms (WTO and Developing Countries/India) As mentioned above, the WTO has been subjected to a number of criticisms. Important drawbacks/criticisms include the following: 1. Negotiations and decision-making in the WTO are dominated by the developed countries. 2. Many developing countries do not have the financial and knowledge resources to effectively participate in the WTO discussions and negations. 3. Because of the dependence of developing countries on the developed ones, the developed countries are able to resort to arms-twisting tactics. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 259 4. Many of the policy liberalisations are done without considering the vulnerability of the developing countries and the possible adverse effect on them. 5. The WTO has not been successful in imposing the organisation’s disciplines on the developed countries. The developing countries have, in general, been getting a raw deal from the WTO. It may also be noted that it has become a trend to blame WTO even for matters for which it is not responsible. It is necessary that the developing countries do their homework properly before they go to the negotiating table, stand united to protect their common interests, and formulate and implement strategies to combat the threats, and to take advantage of the opportunities of the emerging world order. 9.5 International Monetary Fund (IMF) The International Monetary Fund (IMF), which was established on December 27, 1945 with 29 countries began financial operations on March 1, 1947. It seeks to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. For an introductory background of IMF, see the subsection The Bretton Woods Conference and IMF, World Bank and WTO under 9.4 (WTO). Membership in the IMF is open to every country that controls its foreign relations and is able and prepared to fulfill the obligations of membership. Membership of Fund is a prerequisite for membership in the World Bank (IBRD) and close working relationships exist between the two organisation, as well as between the Fund and the WTO and the Bank for International Settlements (BIS). The resources of the IMF come from two sources, viz., (i) Subscription by members, and (ii) Borrowings CU IDOL SELF LEARNING MATERIAL (SLM)

260 Business Environment and Regulatory Framework Primary Aims The primary aims of IMF are: 1. Promote international monetary cooperation; 2. Facilitate the expansion and balanced growth of international trade; 3. Promote exchange stability; 4. Assist in the establishment of a multilateral system of payments; and 5. Make resources available (with adequate safeguards) to members experiencing balance- of-payments difficulties. Purposes The IMF’s statutory purposes include promoting the balanced expansion of world trade, the stability of exchange rates, the avoidance of competitive currency devaluations, and the orderly correction of a country’s balance-of-payments problems. According to Articles of Agreement, the purposes of the International Monetary Fund are: 1. To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. 2. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. 3. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. 4. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. 5. To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 261 correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. 6. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article. To serve these purposes, the IMF:  Monitors economic and financial developments and policies, in member countries and at the global level, and gives policy advice to its members based on its more than fifty years of experience.  Lends to member countries with balance of payments problems, not just to provide temporary financing but to support adjustment and reform policies aimed at correcting the underlying problems.  Provides the governments and central banks of its member countries with technical assistance and training in its areas of expertise. The IMF focuses mainly on a country’s macroeconomic policies — i.e., policies relating to the government’s budget, the management of money and credit, and the exchange rate — and financial sector policies, including the regulation and supervision of banks and other financial institutions. In addition, the IMF pays due attention to structural policies that affect macroeconomic performance — including labour market policies that affect employment and wage behaviour. The IMF advises each member on how its policies in these areas may be improved to allow the more effective pursuit of goals such as high employment, low inflation, and sustainable economic growth — i.e, growth that can be sustained. The IMF provides technical assistance in areas within its core mandate — namely, macroeconomic policy, monetary and foreign exchange policy and systems, fiscal policy and management, external debt and macroeconomic statistics. The IMF provides technical assistance in three broad areas: (i) designing and implementing fiscal and monetary policies; (ii) drafting and reviewing economic and financial legislation, CU IDOL SELF LEARNING MATERIAL (SLM)

262 Business Environment and Regulatory Framework regulations, and procedures, thereby helping to resolve difficulties that often lie at the heart of macroeconomic imbalances; and (iii) institution and capacity building, such as in central banks, treasuries, tax and customs departments, and statistical services. Financing Facilities and Policies A main function of the IMF is to provide loans to countries experiencing balance-of- payments problems so that they can restore conditions for sustainable economic growth. The financial assistance provided by the IMF enables countries to rebuild their international reserves, stabilise their currencies, and continue paying for imports without having to impose trade restrictions or capital controls. Unlike development banks, the IMF does not lend for specific projects. A glimpse of important IMF’s financial facilities are given below. These facilities may be modified or new schemes of assistance may be introduced at any time it is deemed appropriate. Hence, the official website IMF may be searched to get latest information. Concessional and Non-concessional Lending: Over the years, the IMF has developed a number of loan instruments, or “facilities,” that are tailored to address the specific circumstances of its diverse membership. Low-income countries may borrow at a concessional interest rate through certain facilities specially designed for them. Conditionality When the IMF provides financial support to member countries, it must ensure that the members pursue policies that will improve or eliminate their external payments’ problems. The explicit commitment that members make to implement corrective measures in return for the IMF’s support is known as “conditionality.” Fund conditionality requirements, linking the financial assistance to the adoption of economic adjustments policies by members, seek to ensure that the member’s policies are adequate to achieve a viable balance-of-payments position over a reasonable period. This commitment also ensures that members are able to repay the IMF in a timely manner, which in turn allows the IMF’s limited pool of financial resources to be made available to other members with balance-of-payments problems. IMF financing, and the important role it plays in helping a CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 263 country secure other financing, enables the country to adjust in an orderly way without resorting to measures that would harm its own or other countries’ prosperity. Criticisms of Conditionality: Criticisms have been levelled from several corners on the fund conditionality. One important criticism is that the conditionalities endanger the nation’s sovereignty. A common criticism is that many a time IMF’s conditionalities are inappropriate or ridiculous which create further problems for the borrowers Special Drawing Right (SDR) The special drawing right (SDR) is an international reserve asset introduced by the IMF in 1969 (under the First Amendment to its Articles of Agreement) out of concern among IMF members that the stock, and prospective growth, of international reserves might not be sufficient to support the expansion of world trade. The main reserve assets were gold and US dollars, and members did not want global reserves to depend on gold production, with its inherent uncertainties, and continuing US balance of payments deficits, which would be needed to provide continuing growth in US dollar reserves. The SDR was introduced as a supplementary reserve asset, which the IMF could “allocate” periodically to members when the need arose, and cancel, as necessary. In short, the SDR is an interest-bearing international reserve asset created to supplement other official reserve assets of member countries and can be exchanged for freely usable currencies. Special Drawing Right (SDR) is regarded as an international unit of account. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. The SDR value is set daily using a basket of major currencies: US Dollar, Euro, Japanese Yen, Pound Sterling and the Chinese Renminbi. 9.6 World Bank For an introductory background of World Bank, see the subsection The Bretton Woods Conference and IMF, World Bank and WTO under 9.4 (WTO). CU IDOL SELF LEARNING MATERIAL (SLM)

264 Business Environment and Regulatory Framework The World Bank Group, originated as a result of the Bretton Woods Conference of 1944, is one of the world’s largest sources of development assistance and it has extended assistance to more than 100 developing economies, bringing a mix of finance and ideas to improve living standards and eliminate the worst forms of poverty. For each of its clients, the Bank works with government agencies, non-governmental organisations, and the private sector to formulate assistance strategies. The World Bank Group consists of five closely associated institutions, each institution playing a distinct role in the mission to fight poverty and improve living standards for people in the developing world. The term World Bank refers specifically to two of the five, The International Bank for Reconstruction and Development (IBRD) and The International Development Association (IDA). The other institutions are The International Finance Corporation (IFC), The Multilateral Investment Guarantee Agency (MIGA) and The International Centre for Settlement of Investment Disputes (ICSID). While all five specialise in different aspects of development, they use their comparative advantages to work collaboratively toward the same overarching goal—poverty reduction. The IBRD, whose capital is subscribed by its member countries, finances its lending operation primarily form its own borrowings in the world capital markets. A substantial contribution to the Bank’s resources also comes from its retained earnings and the flow of repayments on its loans. IBRD loans generally have a grace period of five years and are repayable over twenty years, or less. They are directed toward developing countries at more advanced stages of economic and social growth. The interest rate the IBRD charges on its loans is calculated in accordance with a guideline related to its cost of borrowing. Mission The mission of the Bank is to:  Fight poverty with passion and professionalism for lasting results.  Help people help themselves and their environment by providing resources, sharing knowledge, building capacity, and forging partnerships in the public and private sectors. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 265  Be an excellent institution able to attract, excite, and nurture diverse and committed staff with exceptional skills who know how to listen and learn. The principles of the Bank: client-centered, working in partnership, accountable for quality results, dedicated to financial integrity and cost-effectiveness, inspired and innovative. Purposes The purposes of the Bank, as laid down in its Articles of Agreement, are:  To assist in the reconstruction and development of the territories of the members, by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the reconversion of productive facilities to peace-time needs, and the encouragement of the development of productive facilities and resources in less developed countries.  To promote private foreign investment by means of guarantees or participation in loans and other investments made by private investors, and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital funds raised by it and other resources.  To promote the long-range balanced growth of international trade and the maintenance of equilibrium in the balance of payments, by encouraging international investment of the productive resources of members, thereby assisting in raising productivity, the standards of living and conditions of labour in their territories. Orientations The main focus is on helping the poorest people and the poorest countries, but for all its clients, the Bank emphasises the need for:  Investing in people, particularly through basic health and education.  Focusing on social development, inclusion, governance and institution-building as key elements of poverty reduction. CU IDOL SELF LEARNING MATERIAL (SLM)

266 Business Environment and Regulatory Framework  Strengthening the ability of the governments to deliver quality services, efficiently and transparently.  Protecting the environment.  Supporting and encouraging private business development.  Promoting reforms to create a stable macroeconomic environment, conducive to investment and long-term planning. Through its loans, policy advice and technical assistance, the World Bank supports a broad range of programmes aimed at reducing poverty and improving living standards in the developing world. The global fight against poverty is aimed at ensuring that people everywhere in this world have a chance for a better life for themselves and for their children. Over the past generation, more progress has been made in reducing poverty and raising living standards than during any other period in history. World Bank Assistance to India India is one of the founder members of the IBRD and is one of the largest beneficiary of the IBRD-IDA assistance. Until China became a member of the World Bank in 1980, India was the largest beneficiary of the World Bank assistance. Now, there are a number of larger beneficiaries than India. In 1997, the total World Bank assistance to India amounted to about five per cent of the total Bank assistance. Over the years, the roles of the World Bank and the IDA almost reversed as regards the assistance to India. In 1974-75, of the total IBRD-IDA aid to India, IDA accounted for three- fourths and the World Bank for one-fourth. In 1998, the World Bank accounted for nearly two- thirds and the IDA about one-third of the total assistance. This decline in the share of soft loan naturally increases India’s debt burden. India’s share in the IDA’s global credit has declined over the years. Until 1979-80, IDA’s aid to India accounted for, on an average, about 40 per cent of its total aid. Thereafter, there was decline in this share. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 267 Apart from the resource crunch IDA has been facing, China’s entry into the World Bank has seriously affected the fund flow to India. Although the World Bank assistance to India is very large in absolute terms, the per capita assistance has been low. India, with about a third of the world’s poor needs a substantial increase in the concessional finance to accelerate the programmes of poverty alleviation and economic development. Since 1947, the World Bank has funded over 12,000 development projects, via traditional loans, interest-free credits and grants. India is the largest IBRD client of the World Bank. As of mid-September 2018, total World Bank assistance stood at $27.2 billion representing 104 projects, of which IBRD’ share was $18.1 billion (52 projects) and of IDA $9.0 billion (46 projects). 9.7 Evaluation of IMF-World Bank The contribution made by IMF and World Bank in helping the member countries in different ways is commendable. Studies show that the projects assisted by the World Bank group could make significant impact in the respective countries. IMF has played an important role in providing international liquidity and in the structural adjustment programmes. There is, however, a wide gap between the aspirations and achievements. A criticism often made is that these institutions, which are dominated by the developed countries, have not been paying adequate attention to the needs of the developing countries. The objective of the Bretton Woods Conference was to establish a global monetary and financial system to promote stable exchange rates, foster the The objective of the Bretton Woods Conference was to establish a global monetary and financial system to promote stable exchange rates, foster the growth of world trade, and international movement of capital in the desired directions. At the time of the establishment of these institutions, most of the developing countries were colonies and, therefore, not represented at the Bretton Woods. The major concern of these institution was, naturally, the major problems of the main participants, i.e., the developed countries, and “...there was an almost inevitable lack of concern for the interests of developing CU IDOL SELF LEARNING MATERIAL (SLM)

268 Business Environment and Regulatory Framework countries.” Even after the developing countries have far outnumbered the developed ones in the total membership of these institutions, the dominance of the developed countries continues because of the voting system which gives clear control to the large contributors. However, as the South Commission observes, concern for developing countries was not completely absent; the mandate of the World Bank included the provision of development assistance. But in the early post-war years, financing the reconstruction of war-devastated Europe and Japan received much more attention than the crying development needs of the developing countries. The view that in the international management of balance-of-payments disequilibria, there should be pressure to adjust on both surplus countries and deficit countries, rather than only on those in deficit, was also ignored. Again, only very little could be done by the IMF in solving the international liquidity problem of the developing countries in comparison with those of the developed countries. The situation for the developing countries is quite different. Due to their poor economic conditions, the relative burden of their payments deficit is much more than that of the absolute burden; the absolute deficit itself has been huge. Not only that the commercial borrowing capability of these nations are limited, the accessibility has also been limited because of their poor creditworthiness. It may be recalled here that, in the early 1990s when India’s foreign exchange reserves position became very critical, the sources of short-term commercial borrowings dried up due to the fall in the credit rating. To make matters worse, because of the poor credit ratings, the developing countries have had to pay an average rate of interest which was about four times the rate applied to the developed countries on commercial borrowings. One of the important problems of the developing countries is the increase in the debt service due to the payment commitments of the past debt. There has been a transfer of large amounts of funds from the developing countries to the creditors as debt service. This has not been compensated by an increased flow from the IMF to the developing countries. During certain periods, IMF was actually withdrawing funds from the developing countries. The Bretton Woods institutions thus failed many developing countries at their times of great need.” CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 269 Nobel economist Joseph Stiglitz very categorically observes that a half century after its founding, it is clear that the IMF has failed in its mission. It has not done what it was supposed to do — provide funds for countries facing an economic downturn, to enable the country to restore itself to close to full employment. One problem as far as the proper functioning of the IMF has been that it has not had any control over the rich nations. It could not, therefore, avert the breakdown of the Bretton Woods monetary system. It has been rightly observed that “the World Bank is no closer to meeting its mandate, either. It was established to borrow the savings of the rich nations and to lend them to poor nations — to finance sound development projects and programmes, particularly where private investment failed or was inadequate. In fact, it has done little to recycle global surpluses to deficit nations.” Only a small portion of the total World Bank assistance is in the form of soft loans (IDA credits). The IDA now represent only 30 per cent of the World Bank lending. The major part of the World Bank lending to many developing countries like India is on commercial terms. This is one of the reasons for the increase in their debt-service problem. In short, the quantity and composition of World Bank lending is clearly inadequate for the challenges it faces in developing countries. Some of the failures of IMF-World Bank have been highlighted above. One should at the same time recognise the useful role they have played all these years by extending different types of assistance to the different categories of countries. The increase in the membership of these institutions is a clear evidence of their utility. Although the communists in the past had described these institutions as organs of capitalist imperialism, several communist countries have become members of these institutions, and recently, all the states of the former Soviet Union and East European countries have become members. It is also pointed out that so far the Bretton Woods Institutions have often focused more on the means of development — GNP growth — and tended to exclude human beings from their calculations. They will need to refocus their work on human development if they are to make a constructive contribution in the future. CU IDOL SELF LEARNING MATERIAL (SLM)

270 Business Environment and Regulatory Framework As Stiglitz points out, “development is about transforming societies, improving the lives of the poor, enabling everyone to have a chance at success and access to health care and education. This sort of development won’t happen if only a few people dictate the policies a country must follow. Making sure that democratic decisions are made means ensuring that a broad range of economists, officials, and experts from developing countries are actively involved in the debate. It also means that there must be broad participation that goes well beyond the experts and politicians. Developing countries must take charge of their own futures. But we in the West cannot escape our responsibilities.” 9.8 Trade Blocs/RTAs An important dynamics of the global business environment is the proliferation of trade blocs or other economic integration schemes known by such names as Regional Integration Agreement/Arrangement (RIA) or Regional Trade Agreement (RTA), designed to achieve various economic, social and political purposes. Meaning The term economic integration is a general term which covers several kinds of arrangements by which two or more countries come together for joint efforts to promote economic development or other causes. The term Trade Bloc or RTA, which is one of the forms of economic integration, is commonly used to refer to the type of arrangement that removes artificial trade barriers, like tariffs and quantitative restrictions, between the integrating economies. A well integrated regional integration scheme is expected to give a boost to business and economic growth within the region (i.e., the countries encompassing the integration scheme) because:  There will be the free flow of trade (unrestricted trade in goods and services).  Free movement of factors of production – labour, capital and technology.  Freedom to choose the optimum location (within the region) for business activities.  Freedom to source any input – capital goods/technology, raw materials, parts/ components, finance, human resource from the best source within the region.  Economies of scale associated with the expansion of the market. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 271 Rationale and Objectives The motivation to form trading blocs may vary from region to region and from country to country. Nevertheless, as Shiells suggests, the following motivations seem to play a key role in the formation of trading blocs. 1. To obtain economic benefits from achieving a more efficient production structure by exploiting economies of scale through spreading fixed costs over larger regional markets, increased economic growth from foreign direct investment, learning from experience etc. 2. To pursue non-economic objectives such as strengthening political ties and managing migration flows. 3. To ensure increased security of market access for smaller countries by forming regional trading blocs with larger countries. 4. To improve members’ bargaining strength in multilateral trade negotiations or to protest against the slow pace of trade negotiations. 5. To promote regional infant industries which cannot be viable without a protected regional market. 6. Finally, to prevent further damage to their trading strength due to further trade diversion from third countries. Growing Regionalism and Intra-regional Trade Regional integration schemes tend to increase intra-regional trade. There has, in fact, been a fast growth of the intra-regional trade. Some people view world trade as consisting broadly of intra-regional trade and inter-regional trade. There has also been talks of regionalisation versus globalisation of world trade. The increase in the number of RTAs has been very rapid particularly since the early 1990s. There has been a worldwide trend towards forming new regional arrangements and strengthening the existing ones. CU IDOL SELF LEARNING MATERIAL (SLM)

272 Business Environment and Regulatory Framework Inspired by the European Economic Community (EEC) – now known as the European Union (EU) – a large number of regional integration schemes have been formed by countries across the world crisscrossing regions and development levels. According to WTO data, in the beginning of 2019, there were 469 notified RTAs in force. Majority of them (254) were Free Trade Agreements (FTAs), 150 were Economic Integration Agreements and 18 Customs Union. The international trading system now is characterised by an increasingly complex network of preferential trade regimes. RIAs have been concluded among high-income countries, among low- income countries, and, between high-income and developing countries. There has also been a rise in cross-regional agreements and the proliferation of interlinked (overlapping) agreements. All major countries are involved in cross-regional integration agreements – a large number of countries are now a party to two or more RTAs. In fact, many countries belong to more than one RIA. Mexico, an interesting example, in early 2003 was a participant in 13 FTAs, ten of which contained provisions on trade in services, and was engaged in negotiations with a number of other countries. Forms of Integration There are different forms of economic integration and they reflect different levels of integration. There are different degrees or levels of economic integration. The important forms of integration and their important characteristics are depicted in Figure 9.2. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 273 Fig. 9.2: Characteristics of Integration Schemes (Reproduced from Francis Cherunilam, International Business, PHI Learning, New Delhi) 9.9 Some Important Integration Schemes A bird’s eye view of some important integration schemes are given below. European Union The European Union (EU) is by far the most advanced and long standing economic integration scheme. The EU evolved through different phases starting with six member nations in 1957 and reaching 28 nations in 2013. In the past, it was known as the European Economic Community (EEC)/European Common Market. Its metamorphosis into the EC represents significant economic integration measures mentioned against Economic Union in Figure 9.2. The 28 members of EU countries were Belgium, France, Federal Republic of Germany, Italy, Luxembourg, Netherlands, Denmark, Ireland and the United Kingdom, Greece, Spain, Portugal, Austria, Finland, Sweden, Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovakia, Romania and Croatia. CU IDOL SELF LEARNING MATERIAL (SLM)

274 Business Environment and Regulatory Framework EU – Economic Significance and Setbacks: The prominent objective of the EU has been to create a very large and highly competitive economy that can stand in good stead with USA, Japan etc., and now, of course with emerging economies like China, India and South East Asian. In 2014, the EU was slightly larger than the US economy, but in 2015 with a GDP of $16.2 trillion, it was slightly smaller than the US. (The relative country sizes can vary year to year because of variations in exchange rates and differences in GDP growth rates). A very conspicuous milestone in the development of the EU was the introduction of a common currency – the Euro – which is now the currency of majority (but not all) of the member nations of the Union. Accounting for about 22 per cent of the global GDP, it is a market of an estimated 510 million consumers (about 7 per cent of the world population) compared to 312 million of the US. The EU accounts for around one-third of the global merchandise trade. About two-thirds of EU countries’ total trade is done with other EU countries. The objective of bringing into being a large economy has been achieved. The economic unification of the region has been expected to produce great benefits to the member nations. The European Commission observes that, as a result of the integration of the economies, and the resultant market expansion, companies have expanded their operations. The competition has brought prices down and given consumers more choice. However, all has not been well with the EU. Not only that the expectations of economic growth, employment generation, increase in welfare and economic stability have not been realised but also conditions have deteriorated in several respects. Renowned economist Joseph Stiglitz observes that large parts of Europe face a lost decade, with GDP per capita lower than it was before the global financial crisis (2008). The EU suffered a setback with the decision of British citizens to exit the EU (known as Brexit), expressed through the referendum of June 23, 2016. The victory of the pro-Brexit Conservative Party in the 2019 General Election to the UK Parliament is expected to expedite the Brexit. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 275 The Brexit is just one of the reflections of the growing dissatisfaction people of EU nations which have economic, social, demographic and political dimensions. Indo-EU/UK Economic Linkages: The EU as a large economy, accounting for well over one-fifth of the global GDP, nearly one-third of the global trade a major source and destination of FDI, is very important to India – the 5th largest economy (3rd largest in PPP terms). India with a population equivalent to the combined population of developed countries and more than two-and- a half times the population of the EU has emerged as the fastest growing economy in the world. The share of India’s trade with EU and UK has been declining due to the geographical diversification of our trade. In 2017-18, only 18 per cent of our exports went to this bloc and we did only 10 per cent of our imports from there. In 1960-61, the EU accounted for more than one- third of our trade. The major reason for the sharp decline in India’s share of trade with the EU is the steep decline of UK as India’s trade partner. Within EU, in 2017-18, UK was the major destination of Indian exports, followed by Germany, Netherlands and Belgium. However, the UK was only our fourth largest EU source of imports. The major sources were Germany, Francis and Belgium. India has a positive trade balance in the trade with EU. We also have a trade surplus with UK. The Brexit would affect the world economy and Indian economy. There are many processes involved to reconfigure the business models as UK had been as a sort of hub for European operations. In fact, countries like Switzerland that is outside the EU have maintained access to European market and vice versa. The Brexit may make it possible to negotiate mutually beneficial free trade agreement that had become impossible under EU. It can open up new opportunities for India. It may not make a great difference for Indian companies. But if Indian companies relocate to another one as the new gateway to the EU it might strain bilateral economic prospects. CU IDOL SELF LEARNING MATERIAL (SLM)

276 Business Environment and Regulatory Framework North American Free Trade Agreement (NAFTA) The NAFTA had its origin in the Canada-US Free Trade Agreement which became effective on January 1, 1989. Mexico became a member of it with effect from January 1, 1994. NAFTA could further expand substantially by adding more countries in the future. NAFTA has, in fact, been perceived to expand by pulling together North, Central and South America. However, US President Ronald Trump stated that the US will pullback from NAFTA. NAFTA covers the following areas: 1. Market access: Tariff and non-tariff barriers, rules of origin and governmental procurement. 2. Trade rules: Safeguards, subsidies, countervailing and anti-dumping duties, health and safety standards. 3. Services: Provides for the same safeguards for trade in services (consulting, engineering, software etc.) that exist for trade in goods. 4. Investment: Establishes investment rules governing minority interests, portfolio investment, real property and majority-owned or controlled investments from the NAFTA countries; in addition, NAFTA coverage extends to investments made by any company incorporated in a NAFTA country, regardless of country of origin. 5. Intellectual property: All three countries pledge to provide adequate and effective protection and enforcement of intellectual property rights, while ensuring that enforcement measures do not themselves become barriers to legitimate trade. 6. Dispute settlement: Provides a dispute settlement process that will be followed instead of countries taking unilateral action against an offending party. Evaluation of NAFTA A very significant feature of the NAFTA is that, while most free trade agreements have provisions only for the trade liberalisation, it includes labour standards and environmental standards. The inclusion of the labour standards resulted from the pressure of the labour lobby which feared that the US and Canada would lose jobs to Mexico as a result of Mexico’s cheaper wages, poor working conditions, and lax environmental enforcement. Similarly, the inclusion of CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 277 the environmental standards resulted from the pressure of the environmental lobby which pushed for an upgrade of environmental standards in Mexico and the strengthening of compliance. The trade between the US-Canada and the US-Mexico is substantial and has been rising fast. The two-way trading relationship between the United States and Canada is the largest in the world. Mexico replaced Japan as the second-largest market for US exports, while remaining as the third most important supplier to the US market after Canada and Japan. There have been very divergent views on the potential benefits and harmful effects of NAFTA on its members. Many feared that there would be an exodus of jobs to the substantially low-wage Mexico from the US and Canada, while the other school maintained that there would be substantial job creation in the US and Canada because of the huge increase in demand for US and Canadian goods and services in Mexico following the trade liberalisation. Many Mexicans feared that fierce competition from the US firms would seriously damage the Mexican industry and economy, while many others maintained that liberalisation and competition will increase the competitiveness of the Mexican industry. The real impact of NAFTA on US employment is not clear. But, according to some estimates, millions of jobs were created in the US since NAFTA was created. Foreign investment in Mexico has risen substantially since the Agreement. Companies from outside NAFTA have been making large investment in Mexico to gain a free entry to the huge NAFTA market. NAFTA has been resulting in a lot of trade diversion. There is strong view in the US that NAFTA has been resulting in job losses in the US to Mexicans, and it has been hurting the US industry. It is such a strong belief that prompted Ronald Trump to come up against NAFTA (and also against other Free Trade Agreements (FTAs) involving USA. CU IDOL SELF LEARNING MATERIAL (SLM)

278 Business Environment and Regulatory Framework Economic Integration/Cooperation Involving India SAARC/SAPTA/SAFTA The South Asian Association for Regional Cooperation (SAARC) involving seven countries, namely, India, Bangladesh, Pakistan, Nepal, Bhutan, Sri Lanka and Maldives, was formally launched in December 1985. The birth of SAARC was a logical response to the problems facing the region. The Secretariat of the Association is at Kathmandu, Nepal. The member countries of SAARC have many common features and problems which are characteristic of the developing countries. There are a number of areas which offer scope for development through mutual help and cooperation. Some such areas have already been identified and some follow-up has been made by making organisational arrangements to forge greater cooperation and interdependence among the people of the region in meteorology, health, civil aviation, shipping, agriculture, communication and renewable sources of energy. SAARC countries are characterised by low per capita income and high population density. Objectives The fundamental goal of SAARC is to accelerate economic and social development through optimum utilisation of their human and material resources. A SAARC Preferential Trading Arrangement (SAPTA) came into effect from December 7, 1995. It was intended to develop SAPTA into a South Asian Free Trade Area (SAFTA). The SAFTA agreement came into force on January 1, 2006. Objectives of SAFTA The objectives of SAFTA are to promote and enhance mutual trade and economic cooperation among Contracting States by, inter alia: (a) Eliminating barriers to trade in, and facilitating the cross-border movement of goods between the territories of the Contracting States; (b) Promoting conditions of fair competition in the free trade area, and ensuring equitable benefits to all Contracting States, taking into account their respective levels and pattern of economic development; CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 279 (c) Creating effective mechanism for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and (d) Establishing a framework for further regional cooperation to expand and enhance the mutual benefits of this Agreement. SAFTA’s main provisions called for the gradual reduction of tariffs and other trade barriers between the members, with some tariffs being removed immediately and others over periods of several years. SAFTA aimed at eventual duty-free access for a vast range of manufactured goods and commodities traded between the signatories. ASEAN-India Free Trade Area (AIFTA) The Association of South-East Asian Nations (ASEAN) was established on August 8, 1967 by five founding members – Indonesia, Malaysia, Philippines, Singapore and Thailand – with the objective of furthering their economic, socio-cultural, political and security integration and development. Another five nations became members of ASEAN between 1984 and 1999. Except Vietnam, the members who joined later are economically much poorer and weaker than the original five. ASEAN has a comprehensive development agenda. ASEAN and India Although India has nearly doubled the combined population of ASEAN nations, her GDP is only about two-thirds of the ASEAN. The average per capita income of ASEAN is much higher than that of India. Some countries like Myanmar, Lao and Cambodia have lower per capita income than India and the city-State Singapore and Brunei have very high per capita incomes. ASEAN is much more globally integrated by trade than India. While the value of the merchandise trade of India is equivalent to little more than one-third of the GDP, it is much more than 100 per cent for the ASEAN. The fast increase in population and fairly good economic growth make the ASEAN a highly prospective market for India to look east. In fact, several Indian companies have been expanding their business in this region by acquisitions, greenfield enterprises and trade. CU IDOL SELF LEARNING MATERIAL (SLM)

280 Business Environment and Regulatory Framework The ASEAN countries have almost similar agro-climatic conditions as those of some States like Kerala and grow crops like rubber, pepper, tea, coffee etc. which are among the mainstay of Kerala economy. Not only that Kerala has to compete with these countries in the international market for these products, but also it is feared that the trade liberalisation by the free trade agreement will cause a surge in their imports to India. Moreover, the palm oil import from ASEAN is a major threat to the coconut economy of Kerala. Compared to India, old ASEAN countries who compete with India on certain agricultural crops have produced large quantities of plantation commodities (black pepper, natural rubber, coffee and, to a lesser extent, tea.). The production of plantation crops in ASEAN is mostly for the world market as their domestic market is very small. ASEAN, therefore views India, large and growing market as a vent for their surplus. This poses a threat to India which has a lower productivity of many of these products. But at the same, it needs to be appreciated that imports of certain goods would help ease the supply position and moderate prices in India. The ASEAN accounts for about one-tenth of India’s foreign trade. However, India’s trade with countries like Brunei, Cambodia, Lao, Myanmar, Philippines and Vietnam is very negligible. Among the ASEAN, Singapore is the major trade partner of India. Other important trade partners are Malaysia, Indonesia and Thailand. The increase in the bilateral trade between India and ASEAN has been characterised by an increase in India’s trade deficit with the ASEAN. But, this deficit is much lower than India’s deficit with China. Within ASEAN, bulk of the trade deficit was with old ASEAN and they account for the lion’s share of India’s trade with the Association. AIFTA A Free Trade Agreement between ASEAN and India, known as ASEAN-India Free Trade Area (AIFTA), came into effect from January 1, 2010. The ASEAN-India Free Trade Area (AIFTA) seeks to significantly reduce the trade barriers; it does not completely eliminate tariff barriers as it should be expected of a true free trade area. Many fear that the AIFTA will have very destructive effects on Indian economy, particularly on the agricultural sector. However, it is also felt the Agreement will have beneficial effects. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 281 The benefits from the trade liberalisation due to the Agreement will depend to a considerable effect on the present tariff structures and other trade barriers in the parties to the Agreement and the extent to which liberalisation will take place. Indo-Lanka Free Trade Agreement According to the Bilateral Free Trade Area Agreement signed by India and Sri Lanka on December 28, 1998, a large number of items will be eligible for duty free trade. India has offered to permit as much as 1000 items on zero duty from Sri Lanka and Sri Lanka will allow duty free imports of 900 items from India. The main objectives of this Free Trade Agreement, according to its Preamble, are the following: 1. To promote, through the expansion of trade, the harmonious development of the economic relations between India and Sri Lanka. 2. To provide fair conditions of competition for trade between India and Sri Lanka. 3. In the implementation of this agreement, both the countries would pay due regard to the principle of reciprocity. 4. To contribute, in this way, by the removal of barriers to trade to the harmonious development and expansion of world trade. The agreement also provides for safeguard measures under which, if any product, which is the subject of preferential treatment, is imported into the territory of a contracting party in such a manner or in such quantities as to cause or threaten to cause serious injury in the importing country to the agreement, the importing country with prior consultations except in critical circumstances suspend provisionally without discrimination the preferential treatment accorded under the agreement. The contracting parties are also free to apply their domestic legislation to restrict imports in cases where prices are influenced by unfair trade practices like subsidies or dumping. This agreement would have long-term consequences as other members might try to “multilateralise” it within the SAARC region by demanding similar preferential treatment within the trading arrangement bloc. CU IDOL SELF LEARNING MATERIAL (SLM)

282 Business Environment and Regulatory Framework It is feared that the India-Sri Lanka Free Trade Agreement would very adversely affect the farmers of India as several cash crops would enter India duty free from Sri Lanka depressing their domestic prices. As India is a very large market, the Free Trade Agreement is likely to benefit Sri Lanka a lot and the benefits to India may not be much as Sri Lanka is a small market. Recently, there has been a substantial increase in the trade between India and Sri Lanka. Comprehensive Economic Partnership/Cooperation Agreements Involving India In the past, India had adopted a very cautious and guarded approach to regionalism. However, recognising that Regional and Preferential Trading Agreements (RTAs) would continue to feature prominently in world trade and given the slow nature of multilateral negotiations, India has entered into a number of Comprehensive Economic Cooperation Agreements (CECAs), like the India-Japan Comprehensive Economic Partnership Agreement, India-Malaysia Comprehensive Economic Cooperation Agreement, India-Canada CEPA, India-New Zealand FTA/CECA, India- Australia CECA and India-Korea CEPA. 9.10 Summary Foreign capital plays a very important role in the economic development, both of developed and developing nations. Encouraged by the favourable business environment fostered by the global liberalisation, the international private capital flows have been increasing rapidly with periodic downturns. Cross-border M&As have been the major driver of the recent surge in the FDI. FDI inflows to the developing countries have increased substantially in the recent decades and their share in the global FDI inflows in some of the recent years was more half of the total. The FDI outflows from developing countries too increased impressively. Recently, there has been a spurt in India’s inward FDI flows. Outflows too increased significantly. Multinational corporations (MNCs), also known by such names as international corporation, transnational corporation (TNC), global corporation (or firm, company or enterprise) etc. with their large number of foreign affiliates and a plethora of inter-firm arrangements, spans virtually all countries and economic activities. “The essential nature of the multinational enterprises lies in CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 283 the fact that its managerial headquarters are located in one country (referred to for convenience as the (“home country”) while the enterprise carries out operations in a number of other countries as well (“host countries”). MNCs have been spreading and growing across the globe, including India, very rapidly. Although the MNCs from the developed countries still dominate the scene, more and more MNCs are emerging from the developing countries including India. National economic policies, and international economic and business transactions are influenced by a number of international organisations sponsored by the United Nations system such as the IMF, World Bank, WTO etc. The World Trade Organisation (WTO) is the only global international organisation dealing with the rules of trade between nations. The WTO provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to ensure that trade flows as smoothly, predictably and freely as possible. The World Bank and IMF, the Bretton Woods twins, have complementary missions. World Bank Group works with developing countries to reduce poverty and increase shared prosperity, while the International Monetary Fund serves to stabilise the international monetary system and acts as a monitor of the world’s currencies. The World Bank Group provides financing, policy advice, and technical assistance to governments, and also focuses on strengthening the private sector in developing countries. The IMF keeps track of the economy globally and in member countries, lends to countries with balance of payments difficulties, and gives practical help to members. Membership in the IMF is a precondition to join the World Bank. The contribution made by IMF and World Bank in helping the member countries in different ways is commendable. Studies show that the projects assisted by the World Bank group could make significant impact in the respective countries. IMF has played an important role in providing international liquidity and in the structural adjustment programmes. There is, however, a wide gap between the aspirations and achievements. A criticism often made is that these CU IDOL SELF LEARNING MATERIAL (SLM)

284 Business Environment and Regulatory Framework institutions, which are dominated by the developed countries, have not been paying adequate attention to the needs of the developing countries. Business has been significantly impacted by the proliferation of regional economic integration schemes or trade blocs [also known as regional integration agreement/arrangement (RIA) or regional trade agreement (RTA)]. There are different degrees or levels of economic integration, viz., free trade area, customs union, common market, economic union and full economic integration. A notable development has been the rise in cross-regional agreements and the proliferation of interlinked (overlapping) agreements. All major countries are involved in cross-regional FTAs. The proliferation of RTAs and the increasing number of bilateral free trade agreements have meant overlapping membership for many countries. A significant share of the global trade is intra-regional. In the recent period, India has been very active in forging regional integration/cooperation agreements. 9.11 Key Words/Abbreviations 1. ASEAN: Association of South-East Asian Nations 2. AIFTA: ASEAN-India Free Trade Area 3. EU: European Union 4. EEC: European Economic Community 5. ECM: European Common Market 6. FTA: Free Trade Area 7. GATT: General Agreement on Tariffs and Trade 8. WTO: World Trade Organisation 9. IMF: International Monetary Fund 10. IPR: Intellectual Property Right 11. NAFTA: North American Free Trade Agreement CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 285 12. SAARC: South Asian Association for Regional Cooperation 13. SAPTA: SAARC Preferential Trade Arrangement 14. SAFTA: South Asian Free Trade Area 15. SD: Special Drawing Right 16. TRIPs: Trade Related Aspects of Intellectual Property Rights 17. RIA: Regional Integration Agreement/Arrangement 18. RTA: Regional Trade Agreement 9.12 Learning Activity 1. Visit the official website of European Union (europa.eu) and understand the details of the EU. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 2. Read the Annual Reports of IMF and World Bank. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 9.13 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions (i) Long Answer Questions 1. Describe the conditions necessary for attracting FDI and the global trends in FDI flows. 2. What are MNCs? Examine their benefits and dangers and the need for code of conduct for MNCs. 3. Evaluate the roles and performance of IMF and World Bank with special reference to developing countries. CU IDOL SELF LEARNING MATERIAL (SLM)

286 Business Environment and Regulatory Framework 4. Explain the objectives, principles and functions of WTO, and evaluate WTO’s performance with special reference to developing countries. 5. Explain the concept of regional integration agreements (including important types of RIAs) and give a brief account of the European Union. (ii) Short Answer Questions 1. Evaluate the advantages and disadvantages of foreign direct investment. 2. Explain the meaning of MNC and give a short description of the universe of MNCs. 3. Describe the functions of WTO and compare GATT and WTO. 4. Explain the role of World Bank in developing countries with special reference to India. 5. Write a note on ASEAN and India. B. Multiple Choice/Objective Type Questions 1. Euro is the currency of: (a) All European nations (b) All EU nations (c) Majority of the EU nations (d) All EU nations except UK 2. ASEAN stands for: (a) Association of South-East Asian Nations (b) Association of East Asian Nations (c) Asian Special Economic Area Nations (d) Asian Society for Economic and National Integration 3. SAARC is: (a) South African Association for Regional Cooperation (b) South Asian Association for Regional Cooperation (c) South American Association for Regional Cooperation (d) South Asian Association for Regional Communication CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 287 4. SDR stands for: (a) Special Development Requirement (b) Special Duty Rate (c) Special Drawing Rate (d) Special Drawing Right 5. Bretton Woods twins refer to: (a) GATT and WTO (b) World Bank and WTO (c) IMF and WTO (d) MF and World Bank Answers: 1. (c), 2. (a), 3. (b), 4. (d), 5. (d). 9.14 References Text References 1. The statistics of FDI quoted in this Unit are mostly from the World Investment Reports of UNCTAD. 2. ILO, Multinational Enterprises and Social Policy, ILO, Geneva, 1973, p. 3. 3. Roger Bennett, International Business, Addison-Wesley Longman, Delhi, 2000, p. 162. 4. ILO, op. cit., p. 444. 5. Leonard Gomes, International Economic Problems, London, Macmillan Press Ltd., 1978, pp. 131. 6. Cited by IMF Survey, July 10, 1992, pp. 227-28. 7. South Commission, The Challenge to the South, Oxford University Press, New Delhi, 1992, p. 27. 8. Joseph E. Stiglitz, Globalisation and its Discontents, Allen Lane, London, 2002. 9. Ibid.. 10. C. Shiells, ‘Regional Trading Blocs: Trade Creating or Diverting’, Finance and Development, 32(1) 1995. CU IDOL SELF LEARNING MATERIAL (SLM)

288 Business Environment and Regulatory Framework Suggested Readings 1. Government of India, Economic Survey (Annual). 2. Francis Cherunilam, International Economics, McGraw-Hill Education. 3. UNCTAD, World Investment Report (Annual). 4. UNCTAD, Trade and Development Report (Annual). 5. UNCTAD, Least Developed Countries Report (Annual). Web Resources 1. unctad.org/en/PublicationsLibrary/wir 2. https://www.wto.org/english/res 3. imf.org.  CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 10 NATURAL ENVIRONMENT - I Structure: 10.0 Learning Objectives 10.1 Introduction 10.2 Economic Development and Pollution 10.3 Increasing Pollution Levels 10.4 Changing Role of Government 10.5 Impact of Environmental Regulations on Business 10.6 Summary 10.7 Key Words/Abbreviations 10.8 Learning Activities 10.9 Unit End Questions (MCQs and Descriptive) 10.10 References 10.0 Learning Objectives After studying this unit, you will be able to:  Explain the relationship between economic growth and pollution  Get an idea of the levels and problems of pollution  Discuss the important measures of pollution control in India  Examine the impact of environmental regulations on business CU IDOL SELF LEARNING MATERIAL (SLM)

290 Business Environment and Regulatory Framework 10.1 Introduction Environmental degradation resulting from indiscriminate economic development and uncontrolled consumption have become a very serious concern globally. Destruction of ecological balance seems to have become a concomitant of rapid economic growth. The environmental problems become more acute with increase in the level of industrialisation, infrastructure development, urbanisation and intensification of agricultural activities with the modern pollution- prone technology. As India’s National Environment Policy observes, the key environmental challenges that the country faces relate to the nexus of environmental degradation with poverty in its many dimensions and economic growth. These challenges are intrinsically connected with the state of environmental resources, such as land, water, air, and their flora and fauna. The proximate drivers of environmental degradation are population growth, inappropriate technology and consumption choices, and poverty, leading to changes in relations between people and ecosystems, and development activities such as intensive agriculture, polluting industry and unplanned urbanisation. However, these factors give rise to environmental degradation only through deeper causal linkages, in particular, institutional failures, resulting in lack of clarity or enforcement of rights of access and use of environmental resources, policies which provide disincentives for environmental conservation (and which may have origins in the fiscal regime), market failures (which may be linked to shortcomings in the regulatory regimes) and governance constraints. Although, generally, pollution is closely associated with the pattern, pace, process and level of economic development, the problem is very serious in many developing countries, including India, because of the obsolete and polluting technologies in use and acute lack of concern about pollution. Over the years, the problem of ecological destruction/pollution has grown alarmingly. The population explosion and the influx of ‘development’ activities will further aggravate the problem. Unfortunately, governments in India, both Central and States, have been showing a tendency to relax environmental norms. It is criticised that under the guise of Make in India, the NDA government has sacrificed interests of farmers and environment. CU IDOL SELF LEARNING MATERIAL (SLM)

Natural Environment - I 291 If effective measures are not taken to check and reverse the trend of growing ecological damages, the earth and all the inhabitants will be heading towards big disasters after disasters. Many species ecosystems have become extinct and many are on the verge. Devastating floods, earthquakes, landslides, draughts etc. are becoming more and more frequent in India and in other parts of the world. Kerala had highly devastating floods and landslides of hills and mountains in 2018 and 2019 causing many deaths and rendering thousands homeless and deprived livelihood. The Supreme Court of India has made a reference to this in its judgment ordering the demolition of four huge residential flat complexes (one had 91 apartments in 19 floors and another one had two towers of 16 floors, for example) in Cochin for violating the coastal zone regulations. Following the order of the apex court, these four flat complexes were brought down to the ground – two on January 11, 2020 and the other two on the next day – by controlled explosions using modern technology without causing any damage even to the surrounding areas, except huge heaps of concrete and steel on the sites of these buildings. It took only a few seconds to complete the demolition of each of these building complexes. This must be regarded as a landmark development because it has been convincingly proved that huge structures can be more or less safely demolished, and it is a clear and stern message to encroachers, governments (including local self-governments), peoples’ representatives in governments, politicians and officials who support encroachments. This would also encourage legal proceedings against law breakers. It is reported that, in Ernakulam district (in which Cochin is located), there are lot many cases of violations of coastal zone regulations and other regulations. Judicial interventions of this sort shall be expected to prevent (and also restore back) encroachment upon rivers, lakes and other water bodies and coastal areas causing floods and other ecological damages. Judiciary and judicial activism can, and shall, certainly play a great role in environmental protection. It may be noted here that one of the factors which prompted Government of India to enact the National Green Tribunal Act, 2010, and the establishment of the National Green Tribunal under this Act was the judicial pronouncement construing the right to healthy environment as a part of the right to life under article 21 of the Constitution. Article 21 of the Indian Constitution reads as follows: “No person shall be deprived of his life or personal liberty except according to a procedure established by law.” CU IDOL SELF LEARNING MATERIAL (SLM)

292 Business Environment and Regulatory Framework This Unit examines the causes and levels of pollution, government’s role in environmental protection and the impact environmental protection measures on business. 10.2 Economic Development and Pollution Pollution has much to do with the level of economic activities and the mode of production and pattern of consumption. As the economy grows with the help of the modern technology which causes environmental problems, the problem of pollution also becomes more serious. (The terms economic growth and development are used here as synonyms. Actually, both are not the same. Growth refers to increase in the output level whereas development also considers qualitative aspects besides growth.) Two definitions of pollution are given below: “Pollution is the introduction of contaminants into an environment that causes instability, disorder, harm or discomfort to the ecosystem, i.e., physical systems or living organisms.” Pollution is “any direct or indirect alteration of the physical, thermal, biological or radioactive properties of any part of the environment by discharging, emitting, or depositing wastes or substances so as to affect any beneficial use adversely, to cause a condition which is hazardous to public health, safety or welfare, or the animals, birds, wildlife, fish or aquatic life, or to plants.” There is a close association between the pattern, process and pace of economic growth and environmental problems. Globalisation, by accelerating certain types economic activities, causing unscrupulous exploitation of natural resources and using ecologically unfriendly technologies and operations, makes the problem more serious. Pollution is very important outcome of population explosion and massive production and consumption activities without paying due attention to the environmental damage caused by production techniques and the nature of output. Again, urbanisation which is almost a concomitant of population growth, economic growth and globalisation too causes environmental damage. CU IDOL SELF LEARNING MATERIAL (SLM)

Natural Environment - I 293 W.W. Rostow’s theory of economic growth tells us that, after a certain stage, growth will become ‘self- sustaining’. But the trends of ecological damages associated with economic growth seem to tell us that if the present style of growth is pursued for long, economic growth will become ‘self-defeating’, and not self-sustaining. For, the seeds of destruction are present in the process of growth itself. Destruction of ecological balance seems to have become a concomitant of rapid growth. The environmental problems become more acute with increase in the level of industrialisation, urbanisation and intensification of agricultural activities with the modern pollution-prone technology. Economic growth and ecological problems are so closely related that it has been said that “the affluent society is becoming an effluent society”. Alvin Toffler, in his famous Future Shock, characterises the modern industrial society as a “throwaway society”: napkins, towels, non- returnable containers, cans, toys, plastic sacks, pastry tins etc. create mounting solid disposal problems. Population explosion and modern technology have been upsetting the ecological balance. The process of economic growth has been functioning as a double-edged weapon. With one edge, it has been cutting open the way to human prosperity, but at the same time with the other edge, it has been choking off future prospects. The modern industrial technology which enhances human welfare by making available a large variety of goods and services on a massive scale also takes heavy toll of human welfare by the environmental destruction caused by it. The agro-chemicals which helped revolutionise the agriculture, besides poisoning the food crops and causing soil and water pollutions, reduce the original productive capacity of land. Although, generally pollution is closely associated with the pattern, pace, process and level of economic development, the problem is very serious in many developing countries too because of the obsolete and polluting technologies in use and acute lack of concern about pollution. The interrelationship between economic development and pollution can be best explained by highlighting the important causes/types of pollution. All major economic activities cause ecological problems. CU IDOL SELF LEARNING MATERIAL (SLM)

294 Business Environment and Regulatory Framework Population Growth and Pollution The world has been experiencing population explosion. During 1950-2011, developing countries accounted for 90 per cent of the growth in world population. World population is projected to increase from about 7.6 billion in 2017 to 9 billion by 2050. Almost the entire increase in will be in developing countries. Such a massive increase in population will aggravate the already alarming pollution. Despite the progress made by the Millennium Development Goals, nearly 900 million people in developing countries live in very congested, highly unhygienic conditions. It is among the poor that very high population growth is usually is observed. That means that the pollution problem will become more grievous in future. At the most optimistic estimate, about 150 million people in India are still below the poverty line and millions will add to this rank in future. That is the problem of pollution due to the overcrowding of people in highly polluted environment will continue to be serious in the foreseeable population, probably aggravating the problems. A major reason for the water pollution is domestic sewage. Increase in population will make the situation much more serious. Researches reveal that world food demand will surge as a result of rapid population growth, and it is projected that demand for food production will increase by 70 per cent in the world and by 100 per cent in the developing countries. To feed the increasing population, there has been an intensification and expansion of agriculture which have been causing very serious pollution, particularly of soil and water. Expansion of agriculture is an important reason for deforestation and several other ecological problems. It is pointed out that the growing demand for food and non-food biomass could lead to a gross expansion of cropland in the range of 320 to 850 million hectares by 2050. Expansion of such magnitude is simply not compatible with the imperative of sustaining the basic life-supporting services that ecosystems provide such as maintaining soil productivity, regulating water resources, sustaining forest cover or conserving biodiversity. It is pointed out that large parts of all continents are experiencing high rates of ecosystem impairment, particularly reduced soil quality, biodiversity loss, and harm to amenity and cultural heritage CU IDOL SELF LEARNING MATERIAL (SLM)