Japan's Financial Bubble of The 1990's - Summary

Overview/ Abstract

After Japans defeat in World War II, the nation rose out of its ashes to become one of the worlds fastest growing, and biggest, economies, in an era known as the economic miracle. That topic is beyond the scope of this paper, but can briefly be described as greatly helped by foreign (especially American) investment and efficient market regulation. A trend seen in the mid to late 1980s was that, due to various factors caused by the expanding economy, credit became increasingly easy to obtain by the general public, with many people taking risky loans to invest in properties, driving prices to unsustainably high levels. The bubble burst around 1990, when property values plummeted and did not recover until the late 2000s. In this paper I will be investigating the immediate aftermath of the crisis, including the measures taken by the government to alleviate the problem, and the impact on major world economies. To set the context, I will also briefly present the background and c auses of the crisis.

Background

Having avoided the economic crisis seen in the rest of the Western world by the Arab oil crisis in the 1970s,[1] Japan emerged in the early 1980s as one of the worlds strongest and most stable economic powers. In the 1980s, the Japanese government sought to liberalize the currency to world trade, including appreciating the yen against the US dollar to alleviate a trade imbalance.[2] However, the continued expansion of the economy and stability of the financial sector may have masked some inherent flaws in the governments policy of financial liberalization. Thomas F. Cargill, an American economist at the University of Nevada, Reno, points out several fundamental problems in the policies. One flaw he noted was that the policies that the Japanese government implemented, which were modeled after similar programs in the rest of the Western world, did not suit a government-regulated economy.[3]

Another problem that directly contributed to the asset bubble was that because of the close ties between corporations and the banking system in Japan, loans directly went into real estate, the returns of which went back into the banks assets, which allowed for more loans.[4] This circular trend contributed to the inflation of the real estate bubble. These, coupled with the fact that it simply became easier to obtain credit from banks due to government deregulation policies,[5] meant that property values were being driven artificially high. According to figure 1 (see appendix), urban property values in Japan peaked at around March 1991, then declined drastically and continued to drop until 2007. This trend reflects the general condition of the economic and financial market (figures 2-3, appendix), supporting the idea of banks directly influencing asset prices. Also, in his research, Daniel I. Okimoto of Stanford University finds that the appreciation of the yen against the US dollar after 1985 was a factor leading to economic stagnation, and impeded in efforts to relieve the problem.[6]

One trend that directly contributed to the inflation of the bubble was excessive speculation. Even as experts believed that asset prices were growing to an unsustainable level, a sense of crowd mentality continued to attract investors.[7]Okimoto also argues[8] that excessive savings by the Japanese people, stemming from long-standing government regulatory policy, was a cause of the influx of purchases, both directly and indirectly, the indirect reason being that the high levels of savings made it easier for banks to grant large and risky loans.

Characteristics of the loans and real estate development

Japanese economist YoshiyukiIwamoto described the banking systems process of lending money directly to real estate investment as a magic wand,[9] in that banks fed money to real estate firms as an easy way to make money from the increasing values. However, like the aforementioned authors, he notes a cycling trend of banks making money from real estate, and real estate firms making money from investing bank loans. Around that time, a third major financial institution emerged: the non-banking institution (NB).[10] They were funded by banks, and could lend money in the same manner as a normal bank. NBs were often turned to when normal banks rejected a loan application as too risky; as a result they were called roundabout loans.[11] This scheme of lending became so large-scale that Iwamoto described the atmosphere as customers flocking to NBs in droves to apply for loans in an attempt to snatch whatever available land there was:

In many cases, the prospective customer showed a map to the bank staff and pointed out the area where the property was located. It could be anywhere- deep in the mountains, in a river bed that was dry at this season but would soon be covered with water, a hilly place full of rocks that would require days of bulldozing, or in very damp or windy locations.[12]

Another interesting characteristic of the loaning game was the ratio of collateral (the amount of the loan over the value of collateral, i.e. the asset that the loan is being used to purchase). The norm in the mid 1980s was around 50-60 percent.[13] However, as the bubble expanded and land values grew at an increasing rate, the collateral ratio soon rose to 100 percent, with some NBs offering up to 120 percent.

The bursting of the bubble, and its immediate effects

The first sign of a bursting of the asset bubble was the Japanese governments decision to increase interest rates in May 1989, apparently to curb inflation,[14] however Australian economist S. JavedMaswood pointed out that aside from artificially high land prices, there were few signs of inflation in the Japanese economy. He notes another economists suggestion that the government intentionally wanted to lower asset prices as owning property was becoming unaffordable to many workers in the service sector.[15] In 1990, in response to the Iraqi invasion of Kuwait and the resulting uncertainty in world oil supplies (which impacted Japan more than most nations due to its heavy reliance on imported oil), the government raised interest rates again to curb risky loaning practices to brace for potentially unstable economic conditions as a result of the oil situation.[16] During the height of the bubble, interest rates were as low as 2.5 percent. In 1991, that had increased to 6 perce nt.[17] Unlike the Great Depression, in which the economy crashed suddenly and rapidly, the crisis in Japan in the early 1990s caused a more gradual decline of the economy that lasted over a decade. Cargill notes a series of business cycles- periods in which the economy went through recession but appeared to recover soon after.[18] He identifies three cycles, the first being from the economic peak in 1991 to that of May 1997, with the low point being in October 1993.[19]

Effect on financial institutions

Perhaps not surprisingly, one of the first measures taken by the major financial institutions of Japan was to change their lending behavior, which was a major cause of the asset price bubble from the onset. In 1990, after the stock market index was visibly in great decline, banks took on a more conservative approach to loans, instead of aggressively pursuing them without regard to risk or profitability, as seen in the years leading up to the crash.[20] The Bank for International Settlements published an article written by HiroshiNakaso in 2001 highlighting the financial effects of the market crash. In that article, Nakaso lists four stages of difficulties encountered by the major banks, by focusing on three major banks that failed in the 1990s:[21]

1. Risk-sensitive market participants and large depositors became more selective and reluctant to do business with the troubled banks. As a result, higher risk premiums were charged to these banks []

2. As information about the troubled banks spread to the market, providers of funds in the market also started to avoid placing long-term deposits with these banks. Thus, the average maturities of deposits with the troubled banks grew shorter over time []

3. As their problems became more widely known, even retail depositors began losing confidence in the banks and started withdrawing their deposits []

4. When the liquid assets for sale were exhausted and funding in the interbank market became unsustainable, the banks gave up their attempt to continue business on their own []

As a result, out of the 21 major financial institutions in Japan in 1990, only 14 still existed in 2000- the rest being merged, consolidated into larger entities, or simply dissolved.[22] The stock market never regained the peak levels from the 1980s, and continued to decline until well into the 2000s.

Response of the government

Even as the situation worsened through the decade, the Japanese government was initially slow to react. The crisis was initially viewed as a temporary setback to long-term financial and economic prosperity.[23] Finally, in 1991, the Minister of Finance was forced to recognize the failures of ten small banks, and sought for a major bank to assume the assets and liabilities of the failed institutions.[24] However, Cargill noted that this measure was simply to mask the inherent problems within the Japanese financial system, and for the majority of financial workers, life went on as normal.[25] The poor performances of loans issued by banks were only reported as a compilation of all banks, as opposed to by individual banks, and even that was only started in 1992.[26]

Meanwhile, the Japanese government continued to manage the economy in a similar way to the post-war era (which brought about the economic miracle). In contrast to many other Western powers, which focused on deregulating their industries as a response to economic stagnation in the 1970s, Japans economy was still going by its interventionist policies.[27]Maswood responds by noting the inefficiencies of such government-regulated policies. By shielding certain industries from the basic fundamentals of supply and demand, it was ensured that those industries would not remain competitive in the world market. This he credits as being the inhibitor to economic recovery in the 1990s.[28] He does acknowledge several arguments against deregulation, mostly involving it being a long-term policy that distracts from the short-term goal of economic recovery; however, he maintains that the effect of regulation on Japans role in the world market outweighs the potential short-term drawbacks.[29 ]

In 1995, a Deregulatory Committee was set up, which was renamed the Regulatory Reform Committee in 1999.[30]Maswood notes that the name change was significant in that it implied that the government was willing to relax its controls over the economy, as opposed to simply and completely removing them.[31] This is reflected in the policies of the committee: they were simply modifications of the old regulatory system and were still quite different from the deregulated economies of many other Western nations.[32] Still, the reforms met opposition from bureaucratic parties, who were threatened with having their spheres of influence reduced. This opposition further limited the effectiveness of regulatory reforms.[33]

Conclusion

The Japanese asset bubble of the late 1980s was caused by various parties. Financial institutions are to blame for being overly liberal with their lending policies, which, coupled with their close involvement in the real estate market, caused a spiraling effect in which loans and asset prices pushed each other to unsustainably high levels. Investors were too quick to take high-risk loans and put them into real estate, driven by the crowd mentality, even though some may have been aware of the dangers of the inflation of the bubble. The government did not help the situation by lowering interest rates, and its policy of encouraging savings only added to the amount of capital being invested into the bubble. The government should also be held responsible for being slow to react to the crisis, and not implementing major deregulatory reforms as seen in the rest of the Western world, which lifted them out of economic stagnation in the 1970s. As a result, the Japanese economy was s low to recover from the crisis of the early 1990s, and GDP growth has yet to return to pre-crisis levels.

Works Cited

Okimoto, Daniel. Causes of Japan's Economic Stagnation. Stanford, 1999. (accessed March 15, 2011).

Cargill, Thomas F., and TakayukiSakamoto. Japan Since 1980. New York: Cambridge University Press, 2008.

Iwamoto, Yoshiyuki. Japan on the Upswing: Why the Bubble Burst and Japan's Economic Renewal. New York: Algora Publishing, 2006.

Maswood, S. Javed. Japan in Crisis. New York: Palgrave Macmillan, 2002.

Nakaso, Hiroshi. The Financial Crisis in Japan During the 1990s: How the Bank of Japan Responded and the Lessons Learnt. Bank for International Settlements Papers (October 2001): 36. /publ/bppdf/bispap06.pdf (accessed March 12, 2011).

Friedman, Benjamin. Japan Now and the United States Then: Lessons from the Parallels. Japan's Financial Crisis and Its Parallels to U.S. Experience (2000): 37.

[1] Thomas F. Cargill and TakayukiSakamoto, Japan Since 1980 (New York: Cambridge University Press, 2008), 11.

[2] Ibid, 14

[3] Ibid, 84

[4] Ibid, 87

[5] Ibid, 90

[6] Daniel Okimoto, Causes of Japan's Economic Stagnation (Stanford, 1999) (accessed March 15, 2011).

[7]Cargill, 98

[8]Okimoto

[9]YoshiyukiIwamoto, Japan on the Upswing: Why the Bubble Burst and Japan's Economic Renewal (New York: Algora Publishing, 2006), 12.

[10] Ibid, 9

[11] Ibid, 16

[12] Ibid

[13] Ibid, 17

[14] S. JavedMaswood, Japan in Crisis (New York: Palgrave Macmillan, 2002), 20.

[15] Ibid

[16] Ibid, 21

[17] Ibid

[18]Cargill, 101

[19] Ibid, 102

[20]HiroshiNakaso, The Financial Crisis in Japan During the 1990s: How the Bank of Japan Responded and the Lessons Learnt, Bank for International Settlements Papers (October 2001): 36, /publ/bppdf/bispap06.pdf (accessed March 5, 2011).

[21] Ibid, 37

[22] Benjamin Friedman, Japan Now and the United States Then: Lessons from the Parallels, Japan's Financial Crisis and Its Parallels to U.S. Experience (2000): 37.

[23]Cargill, 105

[24] Ibid

[25] Ibid, 106

[26] Ibid

[27]Maswood, 88

[28] Ibid, 89-90

[29] Ibid, 91

[30] Ibid, 93-94

[31] Ibid

[32] Ibid

[33] Ibid, 96

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How The Crisis in Japan is Going to Affect You

Call it globalization, call it the domino effect, call it whatever you want. But it is here and it is here to stay. In a way it is true that globalization does affect the whole world. A crisis in Saudi Arabia is likely to be felt in Sweden too. The world economy is no longer a collection of separate economies. All economies are now inter-linked, inter-connected and inter-dependent. There is no looking back.

Now Japan is a very important country in the international perspective. Until recently, Japan was the second-largest economy in the world. It is hard to imagine that a small country like Japan, a bunch of small islands, can have the second largest economy and can beat countries like India, Germany, South Africa, Russia and others.

The earthquakes and tsunamis have affected the country a lot. The worst problem remains the one at Fukushima. The entire plant had to be closed down due to radiation leaks which had reached the levels of Chernobyl.

It is important to understand that the Japanese economy relies on its abundant industries. It is a highly industrialized economy that supplies to both domestic and export markets. Now it is impossible to have a highly industrialized economy like Japan depending on conventional fossil fuel energy sources. It needs to look at more unconventional sources of energy which is cheap and is non-polluting. Nuclear power fits the bill.

It is tragic that the plant at Fukushima was hit. Fukushima was a big plant and it provided electricity to quite a large area of Japan. The entire plant, consisting of so many reactors had to just shut down because of excessive radiation leak.

As a result, many industries had to shut down so many units. Factories have been shut down either because there is no power or because the factories themselves have been destroyed in either earthquakes or tsunamis.

So how is it going to affect you?

Planning to buy that Toyota Camry? Or a Nissan X-trail? Or any Japanese vehicle for that matter? You can book your car but be assured that youll get your car after a really long time. Did your Japanese car just break down? Chances are that it will remain that way for quite a while because spare parts may not be available in the market that easily for sometime. Factories in Japan are shut down due to power shortages. Your car and its parts are stuck in the long line. But you never know, it might be worth the wait.

Want to buy that Sony Handycam? You might find that the prices of Japanese brands may just skyrocket because there are very few pieces left and it is unlikely that more units of that product will come from Japan for sometime to come. DVD Players, Television sets, Laptops, MP3 players, Handycams, Cellphones, Cameras, Speakers and other electronics from Japan wont be available. Looks like youll have to adjust with a Samsung than a Sony.

Looking for a new loan? Boy, youre in for a real tough time.

First of all, the world is reeling from the after-effects of a major recession. Banks are still very reluctant about giving loans to people. Japans financial sector was considered a really strong one. Now since the whole thing blew over, there is very little money left with Japan. To make matters worse, seismologists have predicted that the earthquakes in Japan are going to continue for a year. For a whole year, the Japanese economy will be trying to somehow repair the damages with the money it has. Japanese banks are no longer able to loan more money. There is very little money left in Japan. How can they possibly give more loans?

So you see, the crisis in Japan has affected you somewhere. Let us hope that the situation calms down in Japan and it comes back to normal.

Copyright 2011 AshwathKomath

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Special & Differential Treatment in World Trade Organization

The provisions include, things like, longer time periods for implementing Agreements, commitments or measures to increase trading opportunities for developing countries.[1] Such provisions are referred to as special and differential treatment provisions.

The special provisions of the WTO include: Relaxation of time periods for implementing Agreements and commitments, Specific measures to increase and promote the trade of developing countries, provisions making it mandatory for all the WTO members to safeguard the trade interests of developing countries, possible support to help the developing countries in building the infrastructure for WTO work, handling disputes, and implementing technical standards, and provisions related to Least-Developed country (LDC) Members.[2]

While there are 6 billion people in this world today, the wealthy part of the world, the developed world, contains no more than 15% of the worlds population. The rest of the world which falls under brackets such as less developed countries or least developed countries or alternatively, developing countries or under-developed countries, and comprises of 85% of the worlds population, existing in a state of near minimum subsistence. The world therefore faces a divide known as the developmental gap which refers to the discrepancy between the living standards of these wealthy and developed countries on one hand, and less developed countries with relatively poorer economies on the other hand. Interestingly, it has been observed in the recent past that the standards of living in the developed world keep getting better while the poorest of countries struggle to make any progress; further widening this development gap.)[3] This results in an even more unequal world with unequal means of livelihood.

However, while there are developed economies which include some of the wealthiest countries of the world and other economies which have struggled to grow, most countries fall in the category of the developing world with economies in constant growth, at however differential rates, yet full of promise to grow further. It has been observed by economists that the reason behind the success of under-developed economies robust growth has been their success in implementing outward-oriented reforms that have enabled them to integrate rapidly into the global economic and financial system.[4]

It is an acceptable fact that today no developing country can play a significant role in the global trading system without the presence of trans-national countries within its borders. It has also been observed that the model that promises maximum returns to these developing economies is not one of extreme protectionism but a model that balances protection and liberalization. This does not mean that protectionism as a policy has failed miserably, but in turn highlights the importance of liberalization with planned discrimination and safeguards to ensure the development of local industries. The basic intention is to help the developing country in question to integrate with the global economy and let it benefit from whatever it is that is a distinctive characteristic of that country vis--vis its competitors. Once the country has a firm footing in the international market, the country is able to make use of such stability and guide itself to a future of growth and let its econom y flourish.

Approximately two-thirds of the 150 member states that constitute the World Trade Organization (WTO) are developing countries. The number of developing countries in the WTO is ever increasing and so is their participation. Considering the vast majority, it comes as no surprise that the interests of these developing countries lie at the core of the organizations policies. [5]

Now the question arises, what exactly are developing countries, and who makes the distinction between a developed and a developing country? Moreover, what purpose does this distinction serve? While there is no universally accepted definition of a developing country, the World Bank, the International Monetary Fund and the United Nations use different yardsticks to determine the development status of a country. There is, however, no official list of developing countries. The practice has been that such status is self determined.[6] The member countries of the WTO announce their own status at the WTO as either developing or developed. However, this status can be challenged by other member countries as there are several benefits and rights that are reserved at the WTO for developing countries. These benefits may include longer transitional periods before a developing country may be expected to comply with global norms, or the provision of technical assistance to developing count ries which may not be provided to developed nations. [7]

Such are the needs of a developing country; leniency and planned protection in order to ensure that the developing economy can compete internationally with other countries, some of them developed economies, and establish a firm foundation in this global economy and as a result tread the path of growth and economic success.

Without special provisions for such economies the developed world, which already dominates international trade, can easily exploit a poorer nation owing to a better bargaining position and better sustainability of economy. Keeping this mind, the researcher thus concludes that special provisions have to be made for the developing countries and the least developed countries to enable them to a platform which gives them better access to international markets while protecting their own interests. This also safeguards them from harsh policies and treaties with better off nations which might favor the rich countries who dominate world trade and its governing organizations and are able to heavily influence policy decisions at international forums. Such policies or treaties might otherwise have the tendency to significantly deter economic growth of developing countries due to the sensitive nature of their economies. Moreover, incentives and benefits provided to these countries can i n fact boost this economic growth further.

The standard development arguments for special and differential treatment are two fold. First , it is argued, it is developmentally undesirable for some countries to follow policies that are sensible for others. The agreement on agriculture for example, has a core objective the removal of the substantial OECD distortions that have led to higher agricultural output that can be justified economically.[8]

The other argument is that parts of the new trade agenda are developmentally desirable, but the opportunity cost of implementation at this stage is too high.[9]This is because it is expensive in terms of finance, human resources, or governmental/judicial attention. At the same time, the cost to the world trade system of non implementation is trivial (because the countrys share of relevant trade is so miniscule.[10]

To grasp the need for special and differential treatment , the researcher has taken into consideration the need for such treatment with respect to international trade. International trade plays a significant role in the development of a countrys economy and engines its economic growth. It is this international trade that has led to major economic advancement over the past five decades or so, and the process of globalization and the increased accessibility of markets have only aided this process. We live in a world of specialization and inter-dependence. Every country seeks to maximize their profits by playing to their strengths and marketing their products and services in which they hold an edge over their competitors. International trade has therefore become an/ indisputable fact and the dilemma today is not whether to trade or not, but instead how to trade. [11]

As a consequence of a liberal outlook and ready access to global markets, nations are able to compete and market their products globally by increasing their economic efficiency to meet their aim of accumulation of wealth. It cannot be denied that there exists an underlying link between trade and development. It is widely believed that while trade may cause increased inequalities, in the long run trade forms an important source of income and is useful in reducing poverty. [12] Therefore, it has been globally understood that trade is an essential part of a wider process of a countrys development.

It has been recognized worldwide that trade is an essential contributor to a countrys national income and has a major role to play in its development. This is the reason why developing countries are offered better trading opportunities to help them integrate with the international trade.

While discussing the special and differential treatment of third world countries , it becomes quintessential to mention the india-ec case. In april 2004, the wto appellate body issued a report which allowed a developed country to apply different tariffs to products originating in different generalized system of preferences (GSP) beneficiaries, it was subject to the said requirement that identical tariff is applied to the products of all similarly situated developing country members with the development, financial and trade needs to which the differential tariff treatment is intended to respond. India brought forward this case against the European Communities challenging their discriminatory tariff preferences.[13]

Research Questions. What are the various provisions for special and differential treatment in the WTO? 2. What are the reasons for special and differential treatment in the WTO? 3. What does the India-EC case deal with?

Various Provisions for Special & Differential Treatment in the WTO. The WTO Secretariat has made several compilations of the special and differential provisions and their use.

The ambit of special and differential treatment consists of 145 specific provisions spread across the different Multilateral Agreements on Trade in Goods; the General Agreement on Trade in Services; The Agreement on Trade-Related Aspects of Intellectual Property; the Understanding on Rules and Procedures Governing the Settlement of Disputes; and various Ministerial Decisions. Of the 145 provisions, 107 were adopted at the conclusion of the Uruguay Round, and 22 apply to leastdeveloped country Members only. [14] The said provisions referred to : actions developing countries might undertake via exemptions from disciplines otherwise applying to the membership generally; exemptions from commitments otherwise applying to Members in general; a comparatively low level of commitment for the developing countries as compared to the developed countries and membership in general.

The phases of development of the special treatment of the third world countries can be studied in the form of four phases. The first phase starts from the forming of the GATT in 1948 till the beginning of the Tokyo Round in 1973. The second phase refers to the Tokyo Round itself, from 1973 to 1979. The third phase dates from the end of the Tokyo Round to the end of the Uruguay Round, that is from 1979 to 1995. The fourth phase starts from the end of the Uruguay Round until the present.[15] The analysis that follows distinguishes five arguments that have been advanced for Special &Differential treatment. The five categories are stated as follows: 1. Special and differential treatment is an acquired political right. 2. Developing countries ought to enjoy privileged access to the markets of their trading partners, particularly the developed countries. 3. Developing countries ought to have the right to restrict imports to a greater degree than developed countries 4. Developing countries ought to be allowed additional freedom in order to subsidize exports. 5. Developing countries ought to be allowed flexibility in lieu of the application of certain WTO rules, or in order to postpone the application of rules as stated by WTO.[16]

Chapter-2Reasons For Special And Differential Treatment In The WTO The concept of this differential treatment stems from the understanding that many policies that may be implemented with the focus on a developed economy could possibly have ill effects on a poorer economy. Policies which might make sense for one nation might not have the same consequences in another economy. Or in other words, different economies may have different characteristics and needs. For example, a policy which might be initiated to counter the excessive subsidies in rich countries, say in the agriculture sector, can easily restrict the support that could be provided to a poor country for its agriculture and thereby have unwanted results. To elaborate the example, the Agreement on Agriculture has provisions for the removal of certain subsidies which had led to higher agricultural output that that could be justified economically and therefore the agreement focused, as one of its core objectives, on the removal of these subsidies. But the case with developing and least developed countries is such that they suffer from neglect and have been unable to benefit as much from these subsidies. These poor economies still have lower agricultural production than it should be[17] If instruments to remove the subsidies were to be introduced, their economies would further suffer.

Therefore, such policies must bear in mind the sensitive nature of the economies that the policy is likely to affect. This can be done by categorizing the countries, as done under the WTO, into developed and developing economies and implementing these policies according to the needs of the country and the expected consequences of the policy.

But the concept of such special and differential treatment has faced certain criticism as well. This is predominantly based on the root of this concept. Such leniency is justified on the basis that certain laws applicable to all nations may have an element of exploitation and anti-development. By relaxing such laws when the country under question is a developing country, unfair treatment is doled out to other countries which do not have the privileged tag of being developing. There also exists a lapse in the system vis--vis the criteria that a country must meet in order to be eligible for privileges. As per the current system, a country may decide its own status as either developing or developed. This may lead to paradoxical situations where a country which may not require certain privileges may be put at a discriminatory advantage over other countries by the grant of these privileges. Moreover, if there are laws which have the tendency of being exploitive or harsh, they sho uld be removed as a whole. Furthermore, there needs to be a clear understanding of the distinction between laws which may be negotiable and those which must be binding on all the countries[18]

While the weaknesses in the capacities of developing countries forms the basic reason for the continuous of such differential treatment, such benefits should only be made available to the countries which are low income countries and those which may need help to become integrated into the international trade system, or in other words, which are in dire need for trade opportunities. [19]

This results in a paradoxical situation. What about those nations which may fall under the tag of developing countries, but in effect be high-income nations? Unless some differentiation is made between these countries, it is not possible to frame an efficient and fair system of special and differential treatment.

Although the introduction of special provisions for developing countries in the WTO policies would benefit the developing countries without affecting the developed countries too much, the counter argument to this lenient treatment is that the opportunity cost that the implementation of these provisions pose to other nations. Many countries are of the opinion that while developmentally these might be desirable, but the opportunity cost to the trade system is massive as compared to the insignificant contribution some of these least developed and developing countries would make to the international trading system. If one was to subscribe to this view, then it would be of more desirable outcome to introduce these provisions at a later stage when the country is in a position to contribute to the international trade system more significantly in return and in the meantime find better avenues which promise greater returns with regard to the attention, finance and human resources tha t are required for implementation of the special benefits. [20]

Chapter-3India EC Case Since the inception of the WTO in 1995, India has been involved in 33 disputes at the WTO. It has initiated cased against other countries 16 times and has faced complaints against itself 17 times. India is amongst the most frequent users of the WTO dispute resolution system from among the developing country members. Amongst the more recent disputes, India was involved in a dispute with the EU where it contested the tariff concessions granted by the members of the European Communities (EC) to twelve developing countries under its Generalized System of Preferences (GSP). The ground for this dispute was Indias belief that under the WTO structure, discrimination could only be made in favor of least developed and developing countries. Contrary to this, in December 2001, the EC had launched its GSP scheme which had provisions for five different preferential tariff preferences. The effect of this arrangement was that twelve countries received greater tariff reductions as compared t o countries like India which created undue difficulties for Indias exports to the EC and took away the benefits given to India under the most favored nation policy. [21]

Conclusion Special and Differential Treatment at the WTO: It is the privileged treatment offered to developing nations at the WTO based on the understanding that needs of these countries are substantially different from those of developed nations. This principle allows a certain degree of discrimination in favor of developing countries.

The India-EU Dispute: In India contested the European Communities Generalized System of Preferences wherein distinction was made between beneficiary countries and twelve countries were granted greater tariff concessions owing to the five different preferential tariff preferences.

The researcher concludes the draft with the mentioning of the relevance of the special and differential treatment for developing and least developed countries. It is essential for these countries to receive such benefits as their resources and services are not comparable to developed countries and such treatment provides an impetus to such countries to produce and prosper.

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Special Economic Zone: A Boon For Indian Economy

It is a trade capacity development tool, with a goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. By offering privileged terms, Special Economic Zones attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure.

In India, Special Economic Zones are being established in an attempt to deal with infrastructural deficiencies, procedural complexities, bureaucratic hassles and barriers raised by monetary, trade, fiscal, taxation, tariff and labour policies. Since country-wide development of the infrastructure is expensive and implementation of structural reforms would require time, ( Special Economic Zones/Export Processing Zones) are being established as industrial enclaves for expediting the process of industrialization.

One of the earliest and most famous Special Economic Zone was founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s.

Government of India in April 2000 announced the introduction of Special Economic Zones policy in the country. As of 2007, more than 500 Special Economic Zones have been proposed, 220 of which have already been created. This has raised the concern of the World Bank, which questions the sustainability of such a large number of Special Economic Zones.

Tracing Indian economic reforms In India several attempts have been made to liberalize the system of economic management. In 1980s, the Indian Government focused on reorganizing low-efficient state-run enterprises and partial disinvestment, relaxing the control on private enterprises and foreign capital, introducing competitive mechanisms, reducing protection for domestic industries, promoting and importing advanced technological equipment from abroad etc.

In 1991, the reformed trade and industrial policy eliminated licensing requirements for private domestic and foreign investment in certain industries and relaxed the restrictions under the Monopolies and Restrictive Trade Practices Act on expansion, diversification, mergers and acquisitions by large firms and industrial houses. Special Economic Zones came in pursuance of this export led growth strategy.

Special Economic Zones were announced by the Government of India in April 2000 as a part of the Export-Import policy of India. The government realized the need to enhance foreign investment, promote exports from the country and at the same time provide a level playing to the domestic enterprises, while ensuring manufacturers to be competitive globally.

The Special Economic Zones as announced by the Government of India in 2000 were deemed to be foreign territory for the purposes of trade operations, duties and tariffs. These zones were to provide an internationally competitive and hassle free environment for exports. Units were allowed be set up in Special Economic Zone for manufacture of goods and rendering of services. All import/export operations of the Special Economic Zone units were on self-certification basis. Anything could be imported duty free but sales in the Domestic Tariff Area by Special Economic Zone units were subject to payment of full Custom Duty and as per import policy in force. Further Offshore banking units were being allowed to be set up in the Special Economic Zones. The policy provided for setting up of Special Economic Zones in the public, private, joint sector or by State Governments.

On 31st August 2004 the Department of Commerce announced the Foreign Trade Policy 2004-2009 to create an appropriate institutional framework and policy environment for facilitation and growth of external trade. The basic objective of this policy was to double India's share of global merchandise trade by 2009 and make exports an effective instrument of economic growth and employment generation. The Special Economic Zone Act, 2005 and the Special Economic Zone Rules, 2006 were introduced under this policy, to regulate and promote the development of these industrial enclaves.

The Act designated the Special Economic Zones a duty free enclave to be treated as foreign territory only for trade operations and duties and tariffs. Under the Act, no license is required for import and no routine examination is to be conducted by the custom authorities of the export/import cargo. To aid backward and forward integration of the economy, the Act provides exemptions to Special Economic Zone units and Special Economic Zone developers from all indirect taxes, including basic customs duty, countervailing duty, education cess, and direct taxes while at the same time domestic sales are subject to full customs duty and import policy in force. The Act provided the freedom to subcontract. It also permitted manufacturing, trading and service activities in the Special Economic Zones.

India and China : Whether on a Level Platform Success stories of large and small developing countries can be explained by the growth of world trade and opening up of these economies with market based deregulation. But from any in-depth scrutiny one finds that the reform package under the broad heading of "liberalization" is very different from country to country. There is no standard recipe of a "reform package". A lot of factors influence the performance of Special Economic Zones in a country e.g. economic history, location, industries, state policy etc. Since India has adopted the idea of the special economic zones from China it becomes pertinent to study the history of economic development in India and China.

China's success can be ascribed largely because of its effective population control. In the pre-reform days, both in China and India top priority was given to equity, removing poverty and increasing the social aspects of standards of living. This, however, was attempted in China under a total state-controlled economy and in India with the public sector playing a dominant role along with the market forces. Both the economies adopted a strategy of import substitution and heavy industry growth. China over time, realized that maintaining high standards of living becomes difficult unless efficiency in the use of resources is increased. Its attempt to maintain equity through forced saving and administered directives resulted in social unrest, which came to a breaking point after the controversial Cultural Revolution. The key objective of present reform in China is to bring incentives back in the economy by increasing the role of the market with minimum changes in their political i nstitutions. This is defined in China as an experiment in a socialistic market economy.

In India, heavy import substitution lead to increased inefficiency in production and generation of surplus for maintaining the tempo of equity measures as a result social development became impossible. This led to heavy borrowing, culminating in a balance of payments crisis. To meet the crisis, this new economic policy in India was initiated.

China's success in attracting foreign direct investment and becoming one of the top exporting countries of the world hinged on the careful implementation of its Special Economic Zone policy. Size, location, flexible labour laws and stable policies were the factors primarily responsible for making Chinese Special Economic Zones attractive to foreign investors. In India, the fiscal concessions being offered to developers and units are the primary driving force.

Chinese government started building Special Economic Zones way back in 1979. The idea behind the Special Economic Zones was to experiment with liberal policies in certain ear-marked regions while insulating the rest of the economy from their influence. The government identified huge tracts of land, near the coastal region, and started building mega cities with all required infrastructure. Stringent labour laws applicable in China were relaxed in these regions and foreign investment was encouraged by offering concessions and promising of stability.

In 1980 four Special Economic Zones namely, Shenzhen, Zhuhai, Shantou and Xiamen were opened up. In 1984, fourteen coastal cities were opened up as a further step. In 1985, three delta areas along the Yangtze River and Pearl River and in the southern part of Fujian province as well as several other places were opened up. In the following years, Hainan Island, Pudong New Area in Shanghai, five big cities along the Yangtze River, eighteen provincial capitals and a part of inland and border cities were opened up. These zones were created initially as experimental stations to adjust and watch their operations vis--vis open market interactions.

Though India had a head-start in the direction by building its first export processing zone in 1969 with certain minimum infrastructure and fiscal sops, it could not muster enough political will to build full-fledged Special Economic Zones with foreign territory status in the matters of international trade till the turn of the century. As opposed to five mega Special Economic Zones built by the Chinese government (the largest being Shenzhen built over 49,500 hectares), India opened its doors to private players and allowed sector-specific Special Economic Zones to develop on just 10 hectares of land. As a result, more than 500 Special Economic Zones have been proposed, 220 of which have already been created. The economies of scale, which seems to have worked so well in China by reducing production costs, may not have the same effect in the Indian Special Economic Zone s.

In China, the government chose the location for Special Economic Zone s with a lot of thought with all five located near the coastal region. This made it easier for the Special Economic Zone units to export their products and import inputs. In India, Special Economic Zones are being built all over the country, wherever land can be acquired by the developers. This has also led to allegations of land-grabbing and conversion of productive agricultural land by developers. As a result, Centre has made it mandatory that all proposals should have a certificate from the state governments notifying that the land being used is non-agricultural for at least 90%.

Flexibility in labour laws, which played an important role in attracting foreign investors, is absent in the Indian Special Economic Zones. This is one of the prices India has to pay for the advantages of a federal democratic government. India has, however, tried to make up for all the disadvantages by offering attractive fiscal sops. Tax holidays for Special Economic Zones in India are longer and steeper than those given by China. This had given rise to some dissent from the finance ministry which had complained that the fiscal loss would be immense. In fact the scheme has generated a difference of opinion between the Finance and Commerce Ministries. While the former is voicing its concerns about possible revenue loss from the tax privileges for the Special Economic Zones, the latter is stoutly defending the policy with statistics suggesting minimal losses and highlighting eventual gains in terms of employment and revenues

Reserve Bank of India has also expressed its concerns about the revenue losses and the uneven pattern of development. Reserve Bank of India insisted on factoring the revenue implications of the taxation benefits. The revenue loss for the Government in providing incentives may be justified only if the Special Economic Zone units ensure forward and backward linkages with the domestic economy. Also, as resources are being diverted from the less developed, growth will not be uniform.

One of the most basic difference between the Special Economic Zone model adopted in China and India is that the Chinese Special Economic Zone initiative is government driven, whereas Indian Special Economic Zones are driven by private sector . In China , the State acquires the land and develops the required infrastructure, while private enterprises are invited to set up units. Under such a system, land continues to be under the ownership of the State. In India, however, private entities are being involved in developing the Special Economic Zone infrastructure. As a result, Land is being acquired by the State and handed over to private developers.

Current Controversy The Economic Survey of 2006-07 highlighted the fact that Special Economic Zone s are testing grounds for the implementation of liberal market economy principles. At the same the survey emphasized on some apprehensions against the Special Economic Zones: Generation of little new activity as there may be relocation of industries to take advantage of tax concessions, Revenue loss, Large-scale land acquisition by the developers, may lead to displacement of farmers with meager compensation, Acquisition of prime agricultural land, having serious implications for food security, Misuse of land by the developers for real estate and Uneven growth aggravating regional inequalities.

The Survey also mentioned that many of these apprehensions, however, could be addressed through appropriate policies and safeguards. A major controversy surrounding the implementation of the Special Economic Zone scheme has been the ruthless manner adopted for acquiring land. News reports highlighted protests across the country against acquisition of lands for the purpose of establishing Special Economic Zones. The "SEZ No More" campaign gained momentum after the bloody chapter in Nandigram.

Since, developing Special Economic Zones involves massive displacement of farmers, it is essential that a systematic approach should be followed for ensuring balance of interests. Consequently, state governments have been advised that in land acquisition for Special Economic Zones, first priority should be for acquisition of waste and barren land and if necessary single crop agricultural land. If perforce a portion of double-cropped agricultural land has to be acquired to meet the minimum area requirements, especially for multi-product Special Economic Zone, the same should not exceed 10 % of the total land required for the Special Economic Zone

The government has also announced the new National Policy on Rehabilitation and Resettlement 2007. This policy would provide land-for-land compensation for acquisition of land for development purposes, including Special Economic Zones, and employment to at least one person from each affected family. A National Rehabilitation Commission would be set up by the Central Government, which would be duly empowered to exercise independent oversight over the rehabilitation and resettlement of the affected families. Further, wage employment would be provided to the willing affected persons in the construction work in the project. The policy also ensures housing benefits including houses to the landless affected families in both rural and urban areas.

Adequate provisions have been made for financial support to the affected families for construction of cattle sheds, shops, working sheds; transportation costs, temporary and transitional accommodation, comprehensive infrastructural facilities and amenities in the resettlement area including education, health care, drinking water, roads, electricity, sanitation, religious activities, cattle grazing, and other community resources.

The benefits expressed in monetary terms have been linked to the Consumer Price Index, and the same shall also be revised suitably at appropriate intervals. Special provision has been made for providing life-time monthly pension to the vulnerable persons, such as the disabled, destitute, orphans, widows, unmarried girls, abandoned women, or persons above 50 years of age (who are not provided or cannot immediately be provided with alternative livelihood).

A strong grievance redressal mechanism has been prescribed, which includes standing R&R Committees at the district level, R&R Committees at the project level, and an Ombudsman duly empowered in this regard. The R&R Committees shall have representatives from the affected families including women, voluntary organizations, Panchayats, local elected representatives, etc. Provision has also been made for post-implementation social audits of the rehabilitation and resettlement schemes and plans.

For effective monitoring of the progress of implementation of R&R plans, provisions have been made for a National Monitoring Committee, a National Monitoring Cell, mandatory information sharing by the States and Union Territories with the National Monitoring Cell, and Oversight Committees in the Ministries/Departments concerned for each major project.

For ensuring transparency, provision has been made for mandatory dissemination of information on displacement, rehabilitation and resettlement, with names of the affected persons and details of the rehabilitation packages. Such information shall be placed in the public domain on the Internet as well as shared with the concerned Gram Sabhas and Panchayats by the project authorities. This policy aims at striking a balance between the need for land for development purposes and protecting the interests of land owners and other displaced people.

Conclusion A study conducted by Aradhna Aggarwal on the Impact of Special Economic Zones on Employment, Poverty and Human Development indicated, that Employment generation, both direct and indirect, has thus far been the most important channel, through which Special Economic Zones have impacted on human development and poverty reduction in India. However, the role of Special Economic Zone s in human capital formation and as an engine for promoting new knowledge, technologies and innovations through technology transfers and technology creation appears to be relatively limited. With new generation Special Economic Zones emerging, the scope of human capital formation and technology upgrading effects will widen. It is therefore important for the government to play a pro active role in strengthening these effects.

For the contribution of Special Economic Zones to various aspects of human development to be realized, it is important to forge linkages between the domestic economy and Special Economic Zones. Systematic efforts need to be made to help zone units forge links with the outside units. Also, the effects of Special Economic Zones are contingent upon the success of these zones in attracting investment, in particular, Foreign Direct Investment. A comprehensive policy framework is required to attain this. The government has to ensure that strategies are developed in a timely manner to strengthen the opportunities that are likely to emerge, protect interests of the Special Economic Zones workers, and forge linkages between Special Economic Zones and the domestic economy. Such a regulated and monitored approach is the only means of attaining the actual potential of these Special Economic Zones.

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Shaw Capital Management Headlines : Korea Braces For ?green Finance? Era

/www/news/biz/2010/12/283_49962.html

By Kim Jae-kyoung

Staff Reporter

08-11-2009 20:36

Green Finance: Future of Korean Economy

This is the first in a six-part series of articles on the nations vision to become a green economic power in the global community and the recent developments of green finance in Korea to support the vision. ? Ed.

The global economic crisis triggered by the U.S. subprime mortgage meltdown is steering the global economy in a new direction, forcing many countries around the world to follow a new growth paradigm, green growth.

For sustainable growth, governments in major countries have come up with green initiatives to get the upper hand in the new area, which they believe will determine the future of their economies.

In line with the global trend, South Korea has also unveiled its ambitious vision to become a green economic power by shifting its growth paradigm to an environment-friendly and energy efficient one.

President Lee Myung-bak said the government will promote low carbon and green growth as the nations new vision, abandoning its 60-year long manufacturing-based and export-oriented approach.

Green growth is a new national development paradigm that nurtures new engines and creates jobs with green technology and clean energy, he added.

In July, the Presidential Council on Green Growth introduced a five-year plan in its briefing to President Lee at Cheong Wa Dae.

According to the council, the country should invest 107 trillion won ($87 billion) over the next five years to foster green technologies, in order to make Korea one of the worlds top seven green economic powers by 2020.

It said the investment is forecast to create some 1.8 million jobs and help related industries emerge as future growth engines for the economy. It estimated that the economic effects from this will range from 182 trillion won to 206 trillion won.

Low carbon, green growth is not a matter of choice, but a matter of destiny. The issue is how fast the country can transform into a green economy. To that end, the first thing to do is to channel more money into green businesses.

In that regard, the country should first foster green finance ? financial activities that support green growth and mitigate environmental degradation. Its role is particularly important in the initial stages as it can not only drive growth, but also prevent bubbles by weeding out disqualified companies.

In a global economic forum on green finance held in June in Seoul, Takejiro Sueyoshi, special advisor to UNEP in the Asia Pacific region, stressed its importance. If financing does not change, the economy wont change. To change the economy, we need to change finance, he said.

We face a variety of global issues, such as climate change, ecosystem degradation and water scarcity. To end such destructive investment and promote environment-friendly investment, we need to change the flow of money, he added.

Green Finance in Korea

Although the Lee administration has placed a top priority on green growth, the country is taking just baby steps in green finance compared with other advanced countries. Its plan to promote green finance took shape only early this year.

In April, local financial companies ? banks, insurers and securities firms ? and the government jointly formed the Green Finance Council to develop a key finance agenda and establish a network linking businesses and finance.

The council is a regular dialogue channel consisting of 50 key people both from the government and private sector.

In June, the Financial Services Commission (FSC) also announced its plan to build up a database featuring how companies work for the initiative of an eco-friendly world as well as making firms proactively announce environment-related information.

In line with the governments low carbon, green growth initiative, local banks and insurers have introduced a wide variety of green finance products

Kookmin Bank, the nations largest lender, established the Renewable Energy Private Equity Fund worth 330 billion won with the government and allocated 750 billion won to invest in low-carbon, green growth industries.

Shinhan Bank also started to give prime interest rates to environment-friendly companies from April this year. The State-run Korea Development Bank and Export-Import Bank of Korea (Eximbank) have planned to invest 1 trillion won and 840 billion won in the industry this year, respectively.

Woori, Hana, Korea Exchange Bank and Industrial Bank of Korea have also introduced various financial products and set up funds to nurture green industries.

Financial firms can contribute to the eco-friendly world by lending money to companies seeking low-carbon businesses, KIF economist Lee Yoon-seok said.

Such a trend could take root in the not-so-distant future, both at home and abroad. Our financial companies need to be prepared for the imminent change, he said.

Experts said that in order to promote green finance, Korea should tackle numerous challenges.

Koreas green finance is faced with many challenges, such as poor regulatory system on the environment, insufficient human resources and underdeveloped products, Korea Capital Market Institute (KCMI) senior research fellow Noh Hee-jin said.

For example, Korea is lacking in fiduciary and lenders liability on environment, corporate environmental disclosure rules and green certification programs. Also, the country is in need of experts who can integrate environmental issues with finance, he added.

World Moving Toward Green Finance

In the global scene, green finance has been rapidly growing. Advanced countries, such as the U.S. and Europe, have driven growth of carbon market through emission trading, carbon funds and other mechanisms after the Kyoto Protocol.

According to World Bank and KCMI, global emission trading markets are expected to grow to $150 billion in 2010 from approximately $64 billion in 2007.

Advanced countries have developed diverse financial services for the emission trading market, such as carbon funds, carbon asset management, emission trading insurance and carbon banks. Currently, there are over 30 carbon funds around the world with assets under management of $2.5 billion.

Financial firms in those countries are offering a wider spectrum of green finance products ? mortgages and car loans in retail finance; fiscal and eco funds in asset management, project finance and venture capital in investment finance and auto insurance and carbon insurance in the insurance industry.

By country, in the U.S., socially responsible investing (SRI) reached $2.71 trillion at the end of last year, up from $639 billion at the end of 1995. In European Union (EU), the SRI rose by eight-fold to $2.66 trillion in 2007 from 2002.

SRI, also known as sustainable investing, socially-conscious or ethical investing, describes an investment strategy which seeks to maximize both financial return and social good.

In Canada, the government provides tax benefits for those purchasing hybrid cars or low carbon-emission cars. In Australia, banks introduced green mortgages ? those buying houses run by renewable energy can get these loans at favorable rates.

In the Netherlands, the government introduced Green Fund Plan in 1995 and successfully changed its economic structure by nurturing green finance. For example, the government offers a 1.2 percent capital gains tax exemption for banks providing money for green industries.

Lying Ahead

Market experts said that green finance can be a great alternative for Korea to turn the current turmoil into opportunities and become an economic leader in the global community.

At a recent international conference in Seoul, World Bank Senior Vice President Justin Lin said that Asias fourth-largest economy needs to invest more in low-carbon and green growth sectors to achieve a sustainable growth.

South Korea should turn the current global slump into a golden opportunity to become one of the worlds leading economies by promoting renewable energy, and other environmentally friendly and high growth industries, he said

In the early 1990s, both Japan and China introduced massive stimulus measures. But Japan has fallen into deeper recession, while China has become the worlds fastest growing economy. If Korea takes advantage of the current crisis, it will emerge as a more advanced country when the global economy returns to normal, he added.

In order to achieve a fast transition, concerted efforts from the government and financial sector are essential.

Banks should make more efforts to develop more products and improve infrastructure by establishing system for analyzing and assessing businesses, Korea Institute of Finance economist Ku Jeong-han said.

The government should also provide more tax benefits for banks offering green finance products to channel more money into the business, he added. At the same time, the country should make more efforts to catch up with other countries in the rapidly-growing global carbon market.

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Special & Differential Treatment in World Trade Organization

The provisions include, things like, longer time periods for implementing Agreements, commitments or measures to increase trading opportunities for developing countries.[1] Such provisions are referred to as special and differential treatment provisions.

The special provisions of the WTO include: Relaxation of time periods for implementing Agreements and commitments, Specific measures to increase and promote the trade of developing countries, provisions making it mandatory for all the WTO members to safeguard the trade interests of developing countries, possible support to help the developing countries in building the infrastructure for WTO work, handling disputes, and implementing technical standards, and provisions related to Least-Developed country (LDC) Members.[2]

While there are 6 billion people in this world today, the wealthy part of the world, the developed world, contains no more than 15% of the worlds population. The rest of the world which falls under brackets such as less developed countries or least developed countries or alternatively, developing countries or under-developed countries, and comprises of 85% of the worlds population, existing in a state of near minimum subsistence. The world therefore faces a divide known as the developmental gap which refers to the discrepancy between the living standards of these wealthy and developed countries on one hand, and less developed countries with relatively poorer economies on the other hand. Interestingly, it has been observed in the recent past that the standards of living in the developed world keep getting better while the poorest of countries struggle to make any progress; further widening this development gap.)[3] This results in an even more unequal world with unequal means of livelihood.

However, while there are developed economies which include some of the wealthiest countries of the world and other economies which have struggled to grow, most countries fall in the category of the developing world with economies in constant growth, at however differential rates, yet full of promise to grow further. It has been observed by economists that the reason behind the success of under-developed economies robust growth has been their success in implementing outward-oriented reforms that have enabled them to integrate rapidly into the global economic and financial system.[4]

It is an acceptable fact that today no developing country can play a significant role in the global trading system without the presence of trans-national countries within its borders. It has also been observed that the model that promises maximum returns to these developing economies is not one of extreme protectionism but a model that balances protection and liberalization. This does not mean that protectionism as a policy has failed miserably, but in turn highlights the importance of liberalization with planned discrimination and safeguards to ensure the development of local industries. The basic intention is to help the developing country in question to integrate with the global economy and let it benefit from whatever it is that is a distinctive characteristic of that country vis--vis its competitors. Once the country has a firm footing in the international market, the country is able to make use of such stability and guide itself to a future of growth and let its econom y flourish.

Approximately two-thirds of the 150 member states that constitute the World Trade Organization (WTO) are developing countries. The number of developing countries in the WTO is ever increasing and so is their participation. Considering the vast majority, it comes as no surprise that the interests of these developing countries lie at the core of the organizations policies. [5]

Now the question arises, what exactly are developing countries, and who makes the distinction between a developed and a developing country? Moreover, what purpose does this distinction serve? While there is no universally accepted definition of a developing country, the World Bank, the International Monetary Fund and the United Nations use different yardsticks to determine the development status of a country. There is, however, no official list of developing countries. The practice has been that such status is self determined.[6] The member countries of the WTO announce their own status at the WTO as either developing or developed. However, this status can be challenged by other member countries as there are several benefits and rights that are reserved at the WTO for developing countries. These benefits may include longer transitional periods before a developing country may be expected to comply with global norms, or the provision of technical assistance to developing count ries which may not be provided to developed nations. [7]

Such are the needs of a developing country; leniency and planned protection in order to ensure that the developing economy can compete internationally with other countries, some of them developed economies, and establish a firm foundation in this global economy and as a result tread the path of growth and economic success.

Without special provisions for such economies the developed world, which already dominates international trade, can easily exploit a poorer nation owing to a better bargaining position and better sustainability of economy. Keeping this mind, the researcher thus concludes that special provisions have to be made for the developing countries and the least developed countries to enable them to a platform which gives them better access to international markets while protecting their own interests. This also safeguards them from harsh policies and treaties with better off nations which might favor the rich countries who dominate world trade and its governing organizations and are able to heavily influence policy decisions at international forums. Such policies or treaties might otherwise have the tendency to significantly deter economic growth of developing countries due to the sensitive nature of their economies. Moreover, incentives and benefits provided to these countries can i n fact boost this economic growth further.

The standard development arguments for special and differential treatment are two fold. First , it is argued, it is developmentally undesirable for some countries to follow policies that are sensible for others. The agreement on agriculture for example, has a core objective the removal of the substantial OECD distortions that have led to higher agricultural output that can be justified economically.[8]

The other argument is that parts of the new trade agenda are developmentally desirable, but the opportunity cost of implementation at this stage is too high.[9]This is because it is expensive in terms of finance, human resources, or governmental/judicial attention. At the same time, the cost to the world trade system of non implementation is trivial (because the countrys share of relevant trade is so miniscule.[10]

To grasp the need for special and differential treatment , the researcher has taken into consideration the need for such treatment with respect to international trade. International trade plays a significant role in the development of a countrys economy and engines its economic growth. It is this international trade that has led to major economic advancement over the past five decades or so, and the process of globalization and the increased accessibility of markets have only aided this process. We live in a world of specialization and inter-dependence. Every country seeks to maximize their profits by playing to their strengths and marketing their products and services in which they hold an edge over their competitors. International trade has therefore become an/ indisputable fact and the dilemma today is not whether to trade or not, but instead how to trade. [11]

As a consequence of a liberal outlook and ready access to global markets, nations are able to compete and market their products globally by increasing their economic efficiency to meet their aim of accumulation of wealth. It cannot be denied that there exists an underlying link between trade and development. It is widely believed that while trade may cause increased inequalities, in the long run trade forms an important source of income and is useful in reducing poverty. [12] Therefore, it has been globally understood that trade is an essential part of a wider process of a countrys development.

It has been recognized worldwide that trade is an essential contributor to a countrys national income and has a major role to play in its development. This is the reason why developing countries are offered better trading opportunities to help them integrate with the international trade.

While discussing the special and differential treatment of third world countries , it becomes quintessential to mention the india-ec case. In april 2004, the wto appellate body issued a report which allowed a developed country to apply different tariffs to products originating in different generalized system of preferences (GSP) beneficiaries, it was subject to the said requirement that identical tariff is applied to the products of all similarly situated developing country members with the development, financial and trade needs to which the differential tariff treatment is intended to respond. India brought forward this case against the European Communities challenging their discriminatory tariff preferences.[13]

Research Questions. What are the various provisions for special and differential treatment in the WTO? 2. What are the reasons for special and differential treatment in the WTO? 3. What does the India-EC case deal with?

Various Provisions for Special & Differential Treatment in the WTO. The WTO Secretariat has made several compilations of the special and differential provisions and their use.

The ambit of special and differential treatment consists of 145 specific provisions spread across the different Multilateral Agreements on Trade in Goods; the General Agreement on Trade in Services; The Agreement on Trade-Related Aspects of Intellectual Property; the Understanding on Rules and Procedures Governing the Settlement of Disputes; and various Ministerial Decisions. Of the 145 provisions, 107 were adopted at the conclusion of the Uruguay Round, and 22 apply to leastdeveloped country Members only. [14] The said provisions referred to : actions developing countries might undertake via exemptions from disciplines otherwise applying to the membership generally; exemptions from commitments otherwise applying to Members in general; a comparatively low level of commitment for the developing countries as compared to the developed countries and membership in general.

The phases of development of the special treatment of the third world countries can be studied in the form of four phases. The first phase starts from the forming of the GATT in 1948 till the beginning of the Tokyo Round in 1973. The second phase refers to the Tokyo Round itself, from 1973 to 1979. The third phase dates from the end of the Tokyo Round to the end of the Uruguay Round, that is from 1979 to 1995. The fourth phase starts from the end of the Uruguay Round until the present.[15] The analysis that follows distinguishes five arguments that have been advanced for Special &Differential treatment. The five categories are stated as follows: 1. Special and differential treatment is an acquired political right. 2. Developing countries ought to enjoy privileged access to the markets of their trading partners, particularly the developed countries. 3. Developing countries ought to have the right to restrict imports to a greater degree than developed countries 4. Developing countries ought to be allowed additional freedom in order to subsidize exports. 5. Developing countries ought to be allowed flexibility in lieu of the application of certain WTO rules, or in order to postpone the application of rules as stated by WTO.[16]

Chapter-2Reasons For Special And Differential Treatment In The WTO The concept of this differential treatment stems from the understanding that many policies that may be implemented with the focus on a developed economy could possibly have ill effects on a poorer economy. Policies which might make sense for one nation might not have the same consequences in another economy. Or in other words, different economies may have different characteristics and needs. For example, a policy which might be initiated to counter the excessive subsidies in rich countries, say in the agriculture sector, can easily restrict the support that could be provided to a poor country for its agriculture and thereby have unwanted results. To elaborate the example, the Agreement on Agriculture has provisions for the removal of certain subsidies which had led to higher agricultural output that that could be justified economically and therefore the agreement focused, as one of its core objectives, on the removal of these subsidies. But the case with developing and least developed countries is such that they suffer from neglect and have been unable to benefit as much from these subsidies. These poor economies still have lower agricultural production than it should be[17] If instruments to remove the subsidies were to be introduced, their economies would further suffer.

Therefore, such policies must bear in mind the sensitive nature of the economies that the policy is likely to affect. This can be done by categorizing the countries, as done under the WTO, into developed and developing economies and implementing these policies according to the needs of the country and the expected consequences of the policy.

But the concept of such special and differential treatment has faced certain criticism as well. This is predominantly based on the root of this concept. Such leniency is justified on the basis that certain laws applicable to all nations may have an element of exploitation and anti-development. By relaxing such laws when the country under question is a developing country, unfair treatment is doled out to other countries which do not have the privileged tag of being developing. There also exists a lapse in the system vis--vis the criteria that a country must meet in order to be eligible for privileges. As per the current system, a country may decide its own status as either developing or developed. This may lead to paradoxical situations where a country which may not require certain privileges may be put at a discriminatory advantage over other countries by the grant of these privileges. Moreover, if there are laws which have the tendency of being exploitive or harsh, they sho uld be removed as a whole. Furthermore, there needs to be a clear understanding of the distinction between laws which may be negotiable and those which must be binding on all the countries[18]

While the weaknesses in the capacities of developing countries forms the basic reason for the continuous of such differential treatment, such benefits should only be made available to the countries which are low income countries and those which may need help to become integrated into the international trade system, or in other words, which are in dire need for trade opportunities. [19]

This results in a paradoxical situation. What about those nations which may fall under the tag of developing countries, but in effect be high-income nations? Unless some differentiation is made between these countries, it is not possible to frame an efficient and fair system of special and differential treatment.

Although the introduction of special provisions for developing countries in the WTO policies would benefit the developing countries without affecting the developed countries too much, the counter argument to this lenient treatment is that the opportunity cost that the implementation of these provisions pose to other nations. Many countries are of the opinion that while developmentally these might be desirable, but the opportunity cost to the trade system is massive as compared to the insignificant contribution some of these least developed and developing countries would make to the international trading system. If one was to subscribe to this view, then it would be of more desirable outcome to introduce these provisions at a later stage when the country is in a position to contribute to the international trade system more significantly in return and in the meantime find better avenues which promise greater returns with regard to the attention, finance and human resources tha t are required for implementation of the special benefits. [20]

Chapter-3India EC Case Since the inception of the WTO in 1995, India has been involved in 33 disputes at the WTO. It has initiated cased against other countries 16 times and has faced complaints against itself 17 times. India is amongst the most frequent users of the WTO dispute resolution system from among the developing country members. Amongst the more recent disputes, India was involved in a dispute with the EU where it contested the tariff concessions granted by the members of the European Communities (EC) to twelve developing countries under its Generalized System of Preferences (GSP). The ground for this dispute was Indias belief that under the WTO structure, discrimination could only be made in favor of least developed and developing countries. Contrary to this, in December 2001, the EC had launched its GSP scheme which had provisions for five different preferential tariff preferences. The effect of this arrangement was that twelve countries received greater tariff reductions as compared t o countries like India which created undue difficulties for Indias exports to the EC and took away the benefits given to India under the most favored nation policy. [21]

Conclusion Special and Differential Treatment at the WTO: It is the privileged treatment offered to developing nations at the WTO based on the understanding that needs of these countries are substantially different from those of developed nations. This principle allows a certain degree of discrimination in favor of developing countries.

The India-EU Dispute: In India contested the European Communities Generalized System of Preferences wherein distinction was made between beneficiary countries and twelve countries were granted greater tariff concessions owing to the five different preferential tariff preferences.

The researcher concludes the draft with the mentioning of the relevance of the special and differential treatment for developing and least developed countries. It is essential for these countries to receive such benefits as their resources and services are not comparable to developed countries and such treatment provides an impetus to such countries to produce and prosper.

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Special Economic Zone: A Boon For Indian Economy

It is a trade capacity development tool, with a goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. By offering privileged terms, Special Economic Zones attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure.

In India, Special Economic Zones are being established in an attempt to deal with infrastructural deficiencies, procedural complexities, bureaucratic hassles and barriers raised by monetary, trade, fiscal, taxation, tariff and labour policies. Since country-wide development of the infrastructure is expensive and implementation of structural reforms would require time, ( Special Economic Zones/Export Processing Zones) are being established as industrial enclaves for expediting the process of industrialization.

One of the earliest and most famous Special Economic Zone was founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s.

Government of India in April 2000 announced the introduction of Special Economic Zones policy in the country. As of 2007, more than 500 Special Economic Zones have been proposed, 220 of which have already been created. This has raised the concern of the World Bank, which questions the sustainability of such a large number of Special Economic Zones.

Tracing Indian economic reforms In India several attempts have been made to liberalize the system of economic management. In 1980s, the Indian Government focused on reorganizing low-efficient state-run enterprises and partial disinvestment, relaxing the control on private enterprises and foreign capital, introducing competitive mechanisms, reducing protection for domestic industries, promoting and importing advanced technological equipment from abroad etc.

In 1991, the reformed trade and industrial policy eliminated licensing requirements for private domestic and foreign investment in certain industries and relaxed the restrictions under the Monopolies and Restrictive Trade Practices Act on expansion, diversification, mergers and acquisitions by large firms and industrial houses. Special Economic Zones came in pursuance of this export led growth strategy.

Special Economic Zones were announced by the Government of India in April 2000 as a part of the Export-Import policy of India. The government realized the need to enhance foreign investment, promote exports from the country and at the same time provide a level playing to the domestic enterprises, while ensuring manufacturers to be competitive globally.

The Special Economic Zones as announced by the Government of India in 2000 were deemed to be foreign territory for the purposes of trade operations, duties and tariffs. These zones were to provide an internationally competitive and hassle free environment for exports. Units were allowed be set up in Special Economic Zone for manufacture of goods and rendering of services. All import/export operations of the Special Economic Zone units were on self-certification basis. Anything could be imported duty free but sales in the Domestic Tariff Area by Special Economic Zone units were subject to payment of full Custom Duty and as per import policy in force. Further Offshore banking units were being allowed to be set up in the Special Economic Zones. The policy provided for setting up of Special Economic Zones in the public, private, joint sector or by State Governments.

On 31st August 2004 the Department of Commerce announced the Foreign Trade Policy 2004-2009 to create an appropriate institutional framework and policy environment for facilitation and growth of external trade. The basic objective of this policy was to double India's share of global merchandise trade by 2009 and make exports an effective instrument of economic growth and employment generation. The Special Economic Zone Act, 2005 and the Special Economic Zone Rules, 2006 were introduced under this policy, to regulate and promote the development of these industrial enclaves.

The Act designated the Special Economic Zones a duty free enclave to be treated as foreign territory only for trade operations and duties and tariffs. Under the Act, no license is required for import and no routine examination is to be conducted by the custom authorities of the export/import cargo. To aid backward and forward integration of the economy, the Act provides exemptions to Special Economic Zone units and Special Economic Zone developers from all indirect taxes, including basic customs duty, countervailing duty, education cess, and direct taxes while at the same time domestic sales are subject to full customs duty and import policy in force. The Act provided the freedom to subcontract. It also permitted manufacturing, trading and service activities in the Special Economic Zones.

India and China : Whether on a Level Platform Success stories of large and small developing countries can be explained by the growth of world trade and opening up of these economies with market based deregulation. But from any in-depth scrutiny one finds that the reform package under the broad heading of "liberalization" is very different from country to country. There is no standard recipe of a "reform package". A lot of factors influence the performance of Special Economic Zones in a country e.g. economic history, location, industries, state policy etc. Since India has adopted the idea of the special economic zones from China it becomes pertinent to study the history of economic development in India and China.

China's success can be ascribed largely because of its effective population control. In the pre-reform days, both in China and India top priority was given to equity, removing poverty and increasing the social aspects of standards of living. This, however, was attempted in China under a total state-controlled economy and in India with the public sector playing a dominant role along with the market forces. Both the economies adopted a strategy of import substitution and heavy industry growth. China over time, realized that maintaining high standards of living becomes difficult unless efficiency in the use of resources is increased. Its attempt to maintain equity through forced saving and administered directives resulted in social unrest, which came to a breaking point after the controversial Cultural Revolution. The key objective of present reform in China is to bring incentives back in the economy by increasing the role of the market with minimum changes in their political i nstitutions. This is defined in China as an experiment in a socialistic market economy.

In India, heavy import substitution lead to increased inefficiency in production and generation of surplus for maintaining the tempo of equity measures as a result social development became impossible. This led to heavy borrowing, culminating in a balance of payments crisis. To meet the crisis, this new economic policy in India was initiated.

China's success in attracting foreign direct investment and becoming one of the top exporting countries of the world hinged on the careful implementation of its Special Economic Zone policy. Size, location, flexible labour laws and stable policies were the factors primarily responsible for making Chinese Special Economic Zones attractive to foreign investors. In India, the fiscal concessions being offered to developers and units are the primary driving force.

Chinese government started building Special Economic Zones way back in 1979. The idea behind the Special Economic Zones was to experiment with liberal policies in certain ear-marked regions while insulating the rest of the economy from their influence. The government identified huge tracts of land, near the coastal region, and started building mega cities with all required infrastructure. Stringent labour laws applicable in China were relaxed in these regions and foreign investment was encouraged by offering concessions and promising of stability.

In 1980 four Special Economic Zones namely, Shenzhen, Zhuhai, Shantou and Xiamen were opened up. In 1984, fourteen coastal cities were opened up as a further step. In 1985, three delta areas along the Yangtze River and Pearl River and in the southern part of Fujian province as well as several other places were opened up. In the following years, Hainan Island, Pudong New Area in Shanghai, five big cities along the Yangtze River, eighteen provincial capitals and a part of inland and border cities were opened up. These zones were created initially as experimental stations to adjust and watch their operations vis--vis open market interactions.

Though India had a head-start in the direction by building its first export processing zone in 1969 with certain minimum infrastructure and fiscal sops, it could not muster enough political will to build full-fledged Special Economic Zones with foreign territory status in the matters of international trade till the turn of the century. As opposed to five mega Special Economic Zones built by the Chinese government (the largest being Shenzhen built over 49,500 hectares), India opened its doors to private players and allowed sector-specific Special Economic Zones to develop on just 10 hectares of land. As a result, more than 500 Special Economic Zones have been proposed, 220 of which have already been created. The economies of scale, which seems to have worked so well in China by reducing production costs, may not have the same effect in the Indian Special Economic Zone s.

In China, the government chose the location for Special Economic Zone s with a lot of thought with all five located near the coastal region. This made it easier for the Special Economic Zone units to export their products and import inputs. In India, Special Economic Zones are being built all over the country, wherever land can be acquired by the developers. This has also led to allegations of land-grabbing and conversion of productive agricultural land by developers. As a result, Centre has made it mandatory that all proposals should have a certificate from the state governments notifying that the land being used is non-agricultural for at least 90%.

Flexibility in labour laws, which played an important role in attracting foreign investors, is absent in the Indian Special Economic Zones. This is one of the prices India has to pay for the advantages of a federal democratic government. India has, however, tried to make up for all the disadvantages by offering attractive fiscal sops. Tax holidays for Special Economic Zones in India are longer and steeper than those given by China. This had given rise to some dissent from the finance ministry which had complained that the fiscal loss would be immense. In fact the scheme has generated a difference of opinion between the Finance and Commerce Ministries. While the former is voicing its concerns about possible revenue loss from the tax privileges for the Special Economic Zones, the latter is stoutly defending the policy with statistics suggesting minimal losses and highlighting eventual gains in terms of employment and revenues

Reserve Bank of India has also expressed its concerns about the revenue losses and the uneven pattern of development. Reserve Bank of India insisted on factoring the revenue implications of the taxation benefits. The revenue loss for the Government in providing incentives may be justified only if the Special Economic Zone units ensure forward and backward linkages with the domestic economy. Also, as resources are being diverted from the less developed, growth will not be uniform.

One of the most basic difference between the Special Economic Zone model adopted in China and India is that the Chinese Special Economic Zone initiative is government driven, whereas Indian Special Economic Zones are driven by private sector . In China , the State acquires the land and develops the required infrastructure, while private enterprises are invited to set up units. Under such a system, land continues to be under the ownership of the State. In India, however, private entities are being involved in developing the Special Economic Zone infrastructure. As a result, Land is being acquired by the State and handed over to private developers.

Current Controversy The Economic Survey of 2006-07 highlighted the fact that Special Economic Zone s are testing grounds for the implementation of liberal market economy principles. At the same the survey emphasized on some apprehensions against the Special Economic Zones: Generation of little new activity as there may be relocation of industries to take advantage of tax concessions, Revenue loss, Large-scale land acquisition by the developers, may lead to displacement of farmers with meager compensation, Acquisition of prime agricultural land, having serious implications for food security, Misuse of land by the developers for real estate and Uneven growth aggravating regional inequalities.

The Survey also mentioned that many of these apprehensions, however, could be addressed through appropriate policies and safeguards. A major controversy surrounding the implementation of the Special Economic Zone scheme has been the ruthless manner adopted for acquiring land. News reports highlighted protests across the country against acquisition of lands for the purpose of establishing Special Economic Zones. The "SEZ No More" campaign gained momentum after the bloody chapter in Nandigram.

Since, developing Special Economic Zones involves massive displacement of farmers, it is essential that a systematic approach should be followed for ensuring balance of interests. Consequently, state governments have been advised that in land acquisition for Special Economic Zones, first priority should be for acquisition of waste and barren land and if necessary single crop agricultural land. If perforce a portion of double-cropped agricultural land has to be acquired to meet the minimum area requirements, especially for multi-product Special Economic Zone, the same should not exceed 10 % of the total land required for the Special Economic Zone

The government has also announced the new National Policy on Rehabilitation and Resettlement 2007. This policy would provide land-for-land compensation for acquisition of land for development purposes, including Special Economic Zones, and employment to at least one person from each affected family. A National Rehabilitation Commission would be set up by the Central Government, which would be duly empowered to exercise independent oversight over the rehabilitation and resettlement of the affected families. Further, wage employment would be provided to the willing affected persons in the construction work in the project. The policy also ensures housing benefits including houses to the landless affected families in both rural and urban areas.

Adequate provisions have been made for financial support to the affected families for construction of cattle sheds, shops, working sheds; transportation costs, temporary and transitional accommodation, comprehensive infrastructural facilities and amenities in the resettlement area including education, health care, drinking water, roads, electricity, sanitation, religious activities, cattle grazing, and other community resources.

The benefits expressed in monetary terms have been linked to the Consumer Price Index, and the same shall also be revised suitably at appropriate intervals. Special provision has been made for providing life-time monthly pension to the vulnerable persons, such as the disabled, destitute, orphans, widows, unmarried girls, abandoned women, or persons above 50 years of age (who are not provided or cannot immediately be provided with alternative livelihood).

A strong grievance redressal mechanism has been prescribed, which includes standing R&R Committees at the district level, R&R Committees at the project level, and an Ombudsman duly empowered in this regard. The R&R Committees shall have representatives from the affected families including women, voluntary organizations, Panchayats, local elected representatives, etc. Provision has also been made for post-implementation social audits of the rehabilitation and resettlement schemes and plans.

For effective monitoring of the progress of implementation of R&R plans, provisions have been made for a National Monitoring Committee, a National Monitoring Cell, mandatory information sharing by the States and Union Territories with the National Monitoring Cell, and Oversight Committees in the Ministries/Departments concerned for each major project.

For ensuring transparency, provision has been made for mandatory dissemination of information on displacement, rehabilitation and resettlement, with names of the affected persons and details of the rehabilitation packages. Such information shall be placed in the public domain on the Internet as well as shared with the concerned Gram Sabhas and Panchayats by the project authorities. This policy aims at striking a balance between the need for land for development purposes and protecting the interests of land owners and other displaced people.

Conclusion A study conducted by Aradhna Aggarwal on the Impact of Special Economic Zones on Employment, Poverty and Human Development indicated, that Employment generation, both direct and indirect, has thus far been the most important channel, through which Special Economic Zones have impacted on human development and poverty reduction in India. However, the role of Special Economic Zone s in human capital formation and as an engine for promoting new knowledge, technologies and innovations through technology transfers and technology creation appears to be relatively limited. With new generation Special Economic Zones emerging, the scope of human capital formation and technology upgrading effects will widen. It is therefore important for the government to play a pro active role in strengthening these effects.

For the contribution of Special Economic Zones to various aspects of human development to be realized, it is important to forge linkages between the domestic economy and Special Economic Zones. Systematic efforts need to be made to help zone units forge links with the outside units. Also, the effects of Special Economic Zones are contingent upon the success of these zones in attracting investment, in particular, Foreign Direct Investment. A comprehensive policy framework is required to attain this. The government has to ensure that strategies are developed in a timely manner to strengthen the opportunities that are likely to emerge, protect interests of the Special Economic Zones workers, and forge linkages between Special Economic Zones and the domestic economy. Such a regulated and monitored approach is the only means of attaining the actual potential of these Special Economic Zones.

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