• Exports accounted for about 25 percent of U.S.

economic
growth in the 1990s. In the future, participation in the global
economy will be even more critical to economic growth. Ninety-six
percent of the world’s consumers live outside the United States.
U.S. producers must be able to reach those consumers to expand
the U.S. economy and to create jobs.
• Lowering barriers to trade by even one-third will boost global
economic welfare by as much as $613 billion, with gains to the U.S.
economy of $177 billion a year. To the typical American family of
four, that means an additional $2,500 a year.
• The benefits of liberalized trade are apparent from our past
trade agreements. The North American Free Trade Agreement
(NAFTA) and the World Trade Organization (WTO) agreements
increased U.S. gross domestic product (GDP) by $40 billion to $60
billion a year. When that is combined with lower prices on imported
products, the average American family gained $1,000 to $1,300 a
year from these two agreements.
• About 97 percent of exporters are small or medium-sized
companies, which create three out of four new jobs. Those
companies account for 30 percent of all U.S. merchandise exports.

Trade liberalization spurs growth in overseas markets for

American-made products and generates opportunities for
American workers by creating new and higherpaying jobs.

• Ten percent of all U.S. jobs (approximately 12 million) depend

on exports. One in five factory jobs depend on international trade.
Jobs that depend on trade generally pay about 13 to 18 percent
more than the average U.S. wage.
 • Trade creates U.S. job growth. Every $1 billion in exports of
manufactured goods creates an estimated 15,000 new jobs; two to
three times that number of additional jobs are created to support the
new exportdriven products and personnel.
• U.S. plants that export increase employment 2 to 4 percent
faster annually than plants that do not export. Exporting plants also
are less likely to go out of business.

Restricting trade stifles economic growth, slows the creation of

high-paying jobs, and harms consumers by driving up prices for
goods and services.

01 December 2006

Liberalization

Each time we update Boeing's Current Market Outlook, and

really just about every time I deliver a presentation on the
road, I talk about the concept of "liberalization."

And simply put, liberalization in this context refers to the

phenomenon of commercial aviation around the world
moving from being highly regulated to a more open and
competitive marketplace.

Earlier this year an important study came out, taking a look

at the economic impact of liberalization. And I've been
meaning to share it with you and talk a bit about what it
means for our business.

Over the past 25 years, three main forces have radically

changed the airline industry: the regulatory environment,
airplane/aerospace capabilities, and airline
strategies/business models.

First, changes to government regulations have been critical

in shaping the airline industry. Since the deregulation of the
U.S. market in 1978, we've seen a dramatic shift in
domestic and international markets. And we've also seen
increased liberalization - even "open skies" - in international
markets. This freer market access has had the effect of
intensifying airline competition and causing airlines to focus
more on what passengers want.

Second, airplane capability has reshaped airline networks.

Today, airlines have a much greater selection of airplane
types, with capacity and range combinations to meet
competitive market demands.

And finally, this combination of changing regulation and

improved airplane capabilities has shaped airline strategies
and business models. The events of the recent down cycle
accelerated the effects of these factors.

All of these forces will continue to drive our industry's

evolution.

You can find out a lot more inside the study that I
mentioned, The Economic Impact of Air Service
Liberalization. It was conducted by a well-respected and
credible third-party expert, InterVISTAS Consulting, and
takes a look at the benefits of liberalization for the
commercial aviation industry as well as for national
economies.

Liberalizing air transportation directly affects economies by

increasing flight frequencies and business and leisure traffic.
And this increased travel demand drives GDP, jobs, travel,
tourism, and exports.

Now, what about the effect of this growth on the

environment? Well, as I've mentioned here in the blog
before, it's important to understand that commercial
aviation is one of the more efficient means of transportation.
Enormous strides have been made by the aviation industry
in reducing fuel consumption and the release of CO2 - about
70% since the jet age began. In fact, flying from point A to
point B has less environmental impact than going by car or
even high-speed train.

Boeing was one of the co-sponsors of the study. We took

part because nobody had ever formally studied the issue in
this manner. Before now, there was no hard data to support
the conventional wisdom that liberalizing air travel had
tangible economic benefits.
Although Airbus did not take part in the study, it's important
to point out that both companies will benefit from
liberalization since it so clearly leads to growth in air travel
and the need for really good, efficient airplanes.

And I'm feeling more liberated just talking about how it

helps both of us!

and the positive benefits that flow from it.

Can economic liberalization address the governance crisis?

Many believe that the economic

liberalisation process initiated in 1991 There is no substitute
would somehow find answers to our to good governance
governance crisis. Economic reforms, characterised by liberty
while they are necessary, are by no to all citizens, self-
means sufficient to resolve our national
governing institutions,
dilemmas. Even if the role of the state is
empowerment of
redefined with sharper role in a
narrower area, an efficient and just people and
state in a free society is a vital stakeholders, rule of
precondition for economic growth and law and institutional
human happiness. Even in a liberalised safeguards against
economic environment, the state still abuse of authority.
has the duty to discharge vital
responsibilities. Public order, crime
investigation, speedy justice, good quality school education
accessible to all children, universal primary healthcare, maintenance
of minimal standards of sanitation and civic amenities, and building of
vital infrastructure like roads and facilitating economic growth through
other infrastructure development like power and ports - all these are
the legitimate functions of the state irrespective of the economic
system we choose.

This situation is further complicated as these critical sovereign areas

of state function are witnessing abuse of power. In the earlier days of
the license-quota-permit raj, economic patronage of state was
abused for personal gain. Since 1991 the role of Indian state in
licensing and other related economic activities has been on the
decline. The state has a wide latitude in areas of sovereign
functioning like public order, crime control, administration justice,
crime investigation and related matters, in the absence of effective
institutional checks against abuse of authority. No matter how much
we limit the role of state, these are vital areas which will always will
be within the state sphere and when conditions for good governance
are not fulfilled, abuse of power in these areas becomes the norm.

Over the past several years there is mounting evidence of such a

phenomenon resulting in increased criminalisation of politics, greater
politicisation of crime investigation, and increasing nexus between
political class, state agencies and organised criminal gangs and
operators. In effect such abuse of power in the critical areas of state
functioning leads to complete lawlessness and undermines the firm
foundations of our society and civilisation. A rogue state whose
legitimacy is in question, whose appetite for ill-gotten funds is
uncontrollable, and whose actions are not accountable to the people
will continue to use the limited economic decision making power
under its control for private gain and personal ends at the cost of
public good and economic growth.

In fact, it is this failure that explains in a large measure the limited

success of economic reforms. In the absence of good governance,
economic reform in itself will lead to modest growth at best for some
period and the fruits of reform will be transient and self-limiting.
Inadequate human development and the failure of our delivery
systems have led to appallingly low levels of literacy and skills, poor
health coverage and hopelessly inadequate infrastructure. The vast
majority of Indians are thus left outside the pale of the productive
process of the nation. Besides, even with economic liberalisation the
state will continue to play an important role to ensure fair competition.

Therefore mere economic liberalisation in itself is not a panacea to

resolve our governance crisis. There is no substitute to good
governance characterised by liberty to all citizens, self-governing
institutions, empowerment of people and stakeholders, rule of law
and institutional safeguards against abuse of authority.
Import Liberalization and Productivity Growth in Indian
Manufacturing Industries in the 1990s
Bishwanath Goldar and Anita Kumari
Abstract: In the post-reform period, there has been a notable decrease in the
growth rate
of total factor productivity (TFP) in Indian manufacturing. The econometric
analysis
presented in the paper indicates that the deceleration in productivity growth
should not be
attributed to import liberalization. Rather, the reduction in effective
protection to
industries appears to have had a favourable effect on productivity growth in
Indian
industries. It seems the explanation for the fall in the growth rate of
productivity may lie
partly in gestation lags in investment projects (there was a step up in
investment activity
in Indian industries following the reforms) and in a slow down in
agricultural growth in
the 1990s.
1
Import Liberalization and Productivity Growth in Indian
Manufacturing Industries in the 1990s
Bishwanath Goldar and Anita Kumari
Institute of Economic Growth, Delhi
1. Introduction
Since 1991, India has undertaken a major economic reforms programme.
Under the
programme, significant and far-reaching changes have been made in
industrial and trade
policy. Import liberalization has been a principal component of the economic
reforms
undertaken. Tariff rates have been brought down considerably and
quantitative
restrictions on imports have been removed or relaxed. These reforms in
import policy,
along with complementary changes in industrial policy, technology import
policy and
foreign direct investment policy, were aimed at making the Indian industry
more
efficient, technologically up-to-date and competitive, with the expectation
that efficiency
improvement, technological upgradation, and enhancement of
competitiveness would
enable Indian industry achieve rapid growth. Given that the main object of
import
liberalization was to improve industrial productivity, it is appropriate to ask
how far has
import liberalization contributed to the better productivity performance of
Indian industry
in the post-reform period. The present paper addresses this issue.
In the paper, estimates of total factor productivity (TFP) growth are
presented for
Indian manufacturing and major industry groups for the period 1981-82 to
1997-98. The
object is to compare the growth rate in TFP in Indian industries in the 1990s,
i.e. the postreform
period, with that in the 1980s. This is followed by an econometric analysis
of
inter-temporal and inter-industry variations in productivity growth rates,
aimed at
assessing the effect of import liberalization on productivity growth in Indian
industries in
the 1990s.
2. Effect of Import Liberalization on Industrial Productivity
There are reasons to expect a favourable effect of import liberalization on
industrial
productivity. This is expected to occur through several channels: (a) Import
liberalization
will provide to industrial firms greater and cheaper access to imported
capital goods and
intermediate goods (embodying advanced technology), which will enable the
firms
improve their productivity performance; (b) Greater availability of imported
intermediate
goods will enable the firms to exploit better the productivity enhancing
potential of
imported technology; (c) The increased competitive pressure on industrial
units in a
liberalized import regime will force them to be more efficient in the use of
resources
(which can be achieved through better organization of production, improved
managerial
2
efficiency, more effective utilization of labour, better capacity utilization,
etc.); (d) The
increased competitive pressure coupled with expanded opportunities for
importing
technology and capital goods will bring greater technological dynamism in
industrial
firms; (e) As the competitive business environment forces inefficient firms
to close
down, the average level of efficiency of various industries should improve;
(f) Greater
access to imported inputs and a more realistic exchange rate associated with
a liberalized
trade regime would enable industrial firms compete more effectively in
export markets.
This would allow them to increase their sales and reap economies of scale
with
concomitant gains in productivity.
Evidently, there are persuasive theoretical arguments for contemplating a
positive
effect of import liberalization on industrial productivity. However, this view
or
hypothesis does not have a strong empirical support. There have been a
number of
empirical studies for developing countries, including the countries of Asia,
in which
econometric models have been estimated to assess the effect of import
liberalization on
industrial productivity. Some of them have found a significant favourable
effect of
import liberalization on industrial productivity. But, some have found no
significant
effect, while some others have found an adverse effect of import
liberalization on
industrial productivity. Thus, on the whole, the empirical evidence on the
relationship
between import liberalization and industrial productivity in developing
countries is mixed
and no definite conclusion can be drawn.
As regards Indian industry, there are two recent studies, which have
examined the
effect of economic reforms on industrial productivity. These are by Krishna
and Mitra
(1998) and Balakrishnan, Pushpangadan and Suresh Babu (2000). Both
studies have
used firm- level data taken from Centre for Monitoring Indian Economy
(CMIE) database.
Also, there is similarity in the method of econometric analysis applied in the
two studies.
But, the studies come up with conflicting results. Krishna and Mitra find
evidence of a
significant favourable effect of reforms on indus trial productivity.
Balakrishanan et al.,
on the other hand, find an adverse effect of economic reforms on industrial
productivity.
One serious limitation of both studies is that they have not used explicit
trade
liberalization variables in the econometric model estimated. Rather, a
dummy variable
approach has been taken to distinguish between the pre- and post-reform
periods.
This study differs from the studies undertaken by Krishna and Mitra (1998)
and
Balakrishnan, et al. (2000) in several respects. The analysis of productivity
is undertaken
at the industry- level rather than at the firm- level. The source of data is also
different.
More important, an attempt is made here to incorporate explicitly variables
representing
trade liberalization in the econometric model estimated.