by Sukrit Sabhlok

Created on: February 24, 2007   Last Updated: May 29, 2010

Did Taiwan invent the computer? The answer is no. But how then is it that a large chunk of computer components are made in Taiwan? The reason is its policy of importing large amounts of the latest technology at the cheapest possible price, and then letting its domestic industries attempt to copy and produce what they have imported. The consequence of maintaining a free trade policy has been that Taiwan is one of Asia's success stories.

Other Asian countries have not been so open-minded. The technological gap between India and developed nations such as the United States is extremely large. Ranging from agriculture to industry, from bureaucracy to retail stores, the difference in the use of technology between the developed world and India has become so vast that it will be difficult for India to catch up with the advanced countries.

Zero tariffs are desirable to reduce distortions in an economy. Alternatively, tariff rates should be uniform across the economy. Differing tariff rates can produce major distortions. For instance, low tariffs on capital goods could be expected to shift prices for producers in favour of capital goods. Instead of promoting labor intensity, capital intensive goods would be produced. For developing nations this would result in depressed exports, as the comparative advantage in cheap labour would be lost. Equally bad would be subsidies provided to "infant" capital-intensive industries. The net result will always be an inefficient utilisation of labor and capital.

A vital point to be kept in mind is that removing one of many distortions may not increase efficiency or overall welfare. In fact, social welfare might decline. It is crucial, therefore, that an overall reform process is set up. This would include inter-linked microeconomic reforms, and no single ministry would start the reform process alone. It is essential to evaluate each reform carefully in the overall context before proceeding.

One can illustrate the importance of technology by considering the output of two different farmers; one using a bullock-driven plough and the other, a tractor. The farmer who is sitting on the tractor ploughs a greater area, produces more and - even if he sells at a lower rate per unit than the farmer who uses a plough bullock - makes more money in a year's work than the former. The possibility of the farmer who uses the tractor becoming the owner of two tractors is high, whereas the possibility of the farmer who uses a bullock cart being able to

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