Analyze the different phases in the evolutionary process of foreign trade regime for a developing country.
Foreign Trade Regimes and Economic Development:
JN Bhagwati and A Krueger, in their comparative analysis of the impact of foreign trade regimes and economic development in a number of countries, defined a set of analytical phases with reference to the EXIM Policy of a country. There are five phases which are as follows:
Phase I: It might start in response to an unsustainable balance of payments deficit and characterized by the systematic and significant imposition of Quantitative Restrictions (QR). Controls are generally maintained and often intensified.
Phase II: It is characterized by continued reliance tip on quantitative restrictions and generally increased restrictiveness of the entire control system. It is distinguished by two additional and related aspects of the QR system. (i) The detailed workings of the control system become increasingly complex and (ii) Price measures are adopted to address the functioning of the control system.
These two characteristics of phase II arise from dissatisfaction with the results of an undifferentiated system. Price measures are introduced to both exports and imports. Rebate schemes, import replenishment schemes, special credits for exporters, and a variety of other devices may be instituted for exports. Price measures are also adopted to absorb part of the excess demand for imports. The evident aspects of the price situation in phase II are: (i) The exchange parity is overlaid by tariffs and subsidies, levied in lieu of formal parity change. (2) domestic currency is overvalued at the current parity plus trade tariffs and subsidies, implying a premium on imports.
Phase III: Attempts are made to systematize the changes introduced during the previous phase. It may consist of a mere “tidying-up” operation to eliminate the differential incentive effects caused by diverse premiums on different imports alternatively The tidying-up operation may replace the existing tariffs and export subsidies with a formal parity change. On the other hand, Phase III may take the form of a devaluation cum liberalization package. This package may have a gross devaluation large enough to leave a net devaluation despite the removal of trade tariffs and subsidies and measures of import liberalization.
Phase IV: The emergence of the phase IV leads due to the continued liberalization in phase III. There will be consistent decline in QR and import tariffs.
Phase V: When the exchange regime is virtually liberalized the transition into phase V occurs. There will be full convertibility on current account and quantitative restrictions will not be employed as a means of regulating the balance of payments. Phase V is a total alternative to the QR regimes of phases I and II. Since independence, the application of these phases to the EXIM policies of India would help to understand the policy developments in a proper perspective.