Lessons from liberalization: The case of India

Aneesa Ismail, Fordham University


This study looks at the theoretical and empirical basis on which many developing countries are undergoing the process of liberalization i.e. the transition from an inward oriented to an outward oriented growth strategy. The success of the reforms and the support for them will depend on the supply response these changes generate which in turn depend on a number of other factors which check growth. Restrictive domestic regulations, inefficient public enterprises, investor skepticism regarding reforms and inadequate institutional, infrastructural, managerial and entrepreneurial capacity in the reforming country are some of the factors which can hurt the process. Thus policy formulation regarding the economic tools to be used will ultimately depend on country specific conditions necessitating country specific studies.^ India which is classified as strongly inward oriented, has become aware that productivity, output and employment performance over the past thirty years has not been commensurate with the resources invested. The trade sector has not played a key role in the policy formulation import competition. To correct this deficiency in its economic policy there have been significant changes in the domestic and trade policy of India since 1977 and more specifically since 1985. Though these changes are regarded as mild by international standards, they are considered major milestones in Indian economic policy.^ A simple model linking growth, trade and industrial output is developed and estimated as single equations through OLS and is based on the simultaneous equations model developed by Salvatore (1983). With this model we have examined (a) the role of domestic factors (b) the role of exports and imports and (c) the impact of liberalization from 1977 to 1989. The Wu-Hausman test found the OLS model to be consistent.^ The results show that domestic factors play a more important role in the Indian economy and liberalization has had a positive effect on growth. An important finding of the study relates to the different roles played by exports and imports in the Indian economy necessitating a different policy approach than that followed by Korea for example. ^

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Recommended Citation

Ismail, Aneesa, "Lessons from liberalization: The case of India" (1993). ETD Collection for Fordham University. AAI9313763.