Professor Bharat Karnad Explains The Quad, Defence Modernisation, Afghanistan’s Future & Self Reliance

 

US-China rivalry drives the retreat of market economics

Gideon Rachman in The FT 

Old ideas are like old clothes — wait long enough and they will come back into fashion. Thirty years ago, “industrial policy” was about as fashionable as a bowler hat. But now governments all over the world, from Washington to Beijing and New Delhi to London, are rediscovering the joy of subsidies and singing the praises of economic self-reliance and “strategic” investment. 

The significance of this development goes well beyond economics. The international embrace of free markets and globalisation in the 1990s went hand in hand with declining geopolitical tension. The cold war was over and governments were competing to attract investment rather than to dominate territory. 

Now the resurgence of geopolitical rivalry is driving the new fashion for state intervention in the economy. As trust declines between the US and China, so each has begun to see reliance on the other for any vital commodity — whether semiconductors or rare-earth minerals — as a dangerous vulnerability. Domestic production and security of supply are the new watchwords. 

As the economic and industrial struggle intensifies, the US has banned the exports of key technologies to China and pushed to repatriate supply chains. It is also moving towards direct state-funding of semiconductor manufacturing. For its part, China has adopted a “dual circulation” economy policy that emphasises domestic demand and the achievement of “major breakthroughs in key technologies”. The government of Xi Jinping is also tightening state control over the tech sector. 

The logic of an arms race is setting in, as each side justifies its moves towards protectionism as a response to actions by the other side. In Washington, the US-China Strategic Competition Act, currently wending its way through Congress, accuses China of pursuing “state-led mercantilist economic policies” and industrial espionage. The announcement in 2015 of Beijing’s “Made in China 2025” industrial strategy is often cited as a turning point. In Beijing, by contrast, it is argued that a fading America has turned against globalisation in an effort to block China’s rise. President Xi has said the backlash against globalisation in the west means China must become more self-reliant. 

The new emphasis on industrial strategy is not confined to the US and China. In India, Narendra Modi’s government is promoting a policy of Atmanirbhar Bharat (self-reliant India), which encourages domestic production of key commodities. The EU published a paper on industrial strategy last year, which is seen as part of a drive towards strategic autonomy and less reliance on the outside world. Ursula von der Leyen, European Commission president, has called for Europe to have “mastery and ownership of key technologies”. 

Even a Conservative administration in Britain is turning away from the laissez-faire economics championed by former prime minister Margaret Thatcher, and seeking to protect strategic industries. The government is reviewing whether to block the sale of Arm, a UK chipmaker, to Nvidia, a US company. The UK government has also bought a controlling stake in a failing satellite business, OneWeb. 

Covid-19 has strengthened the fashion for industrial policy. The domestic production of vaccines is increasingly seen as a vital national interest. Even as they decry “vaccine nationalism” elsewhere, many governments have moved to restrict exports and to build up domestic suppliers. The lessons about national resilience learnt from the pandemic may now be applied to other areas, from energy to food supplies. 

In the US, national security arguments for industrial policy are meshing with the wider backlash against globalisation and free trade. Joe Biden’s rhetoric is frankly protectionist. The president proclaimed to Congress: “All the investments in the American jobs plan will be guided by one principle: Buy American.” 

In an article last year, Jake Sullivan, Mr Biden’s national security adviser, urged the security establishment to “move beyond the prevailing neoliberal economic philosophy of the past 40 years” and to accept that “industrial policy is deeply American”. The US, he argued, will continue to lose ground to China on key technologies such as 5G and solar panels, “if Washington continues to rely so heavily on private sector research and development”. 

Many of these arguments will sound like common sense to voters. Protectionism and state intervention often does. But free-market economists are aghast. Swaminathan Aiyar, a prominent commentator in India, laments the return of the failed ideas of the past, arguing that: “Self sufficiency was what Nehru and Indira Gandhi tried in the 1960s and 1970s. It was a horrible and terrible flop.” Adam Posen, president of the Peterson Institute for International Economics in Washington, recently decried “America’s self-defeating economic retreat”, arguing that policies aimed at propping up chosen industries or regions usually end in costly failure. 

As tensions rise between China, the US and other major powers, it is understandable that these countries will look at the security implications of key technologies. But claims by politicians that industrial policy will also produce better-paying jobs and a more productive economy deserve to be treated with deep scepticism. Sometimes ideas go out of fashion for a reason.

Does the WTO help a poor nation become rich? Economic History in Small Doses 4

 Girish Menon*

Today, when we look at the world that we live in, we find that Huawei (a Chinese technology company) is being subjected to a systematic campaign of defamation and discrimination among the US led group of developed countries. And the WTO watches on helplessly. Yet, in its “WhatWe Stand For” page the WTO (The World Trade Organisation) states it’s first principle as:

Non-discrimination

A country should not discriminate between its trading partners and it should not discriminate between its own and foreign products, services or nationals.

The question this article attempts to explore is whether the WTO’s purpose is compatible with the desire of developing countries to join the ranks of the developed world.

 Let’s start with India and it’s Hindustan Motors (HM) company. Today HM’s cars are as ubiquitous as the dodo. Till the early 1990s it was so popular that it even enabled G D Birla to get a seat in heaven**. Ever since the Narasimha Rao government was forced to open up the Indian economy, after the economic crisis of the late1980s, HM has entered the books of Indian corporate history. The Indian government failed to protect HM because of the non-discrimination clause of the WTO and today there is no Indian car manufacturer visible on the horizon while her roads are choked with foreign brands.

The globalisation rhetoric dictates that countries stick to what they are already good at (theory of comparative advantage). Stated bluntly, this means that poor countries are supposed to continue with their current engagement in low-productivity activities. But their engagement in those activities is exactly what makes them poor. If they wish to leave poverty behind they have do the more difficult things that bring them higher incomes. And the WTO’s non-discrimination principle stops them from improving their earning capabilities.

 Today Toyota is the leading global brand in car manufacturing. It took Toyota more than 30 years of protection and subsidies to become competitive at the lower end of the car market. It was a good 60 years before it became one of the leading car makers in the world. It took nearly 100 years from the days of Henry VII for Britain to catch up with the Low Countries in woollen manufacturing. It took the US 130 years to develop its economy enough to feel confident about doing away with tariffs. Without such long time horizons, Japan might still be mainly exporting silk, Britain wool and the US cotton.

Unfortunately, poor countries are not allowed to adopt such time frames for developing their industries. The non-discrimination clause of the WTO demands that poor countries compete immediately with more advanced foreign producers, leading to the demise of their domestic firms before they can acquire new capabilities.

Like any other investment, investment in capability building is fraught with risk and does not guarantee success. Some countries make it and some don’t. And even the most successful countries will bungle things in certain areas.

However, economic development without investment in enhancing productive capabilities is a near impossibility.

 

* Adapted and simplified by the author from Ha Joon Chang's Bad Samaritans - The Guilty Secrets of Rich Nations & The Threat to Global Prosperity

 

** When GD Birla died his secretary tried to get him a seat in Vaikuntha. The Dwarapalaka (gatekeeper) asked the secretary to state the reason why GD should be let into heaven.

The secretary: ‘GD is one of the biggest industrialists in India’.

Dwarapalaka: ‘Usually that involves doing acts which are not acceptable here. This is Vaikuntha; not some unquestioning tax haven for moneybags! Please let me know what he has done in the name of God’

The secretary: ‘GD has established many Birla temples all over India’

Dwarapalaka: ‘Birla is worshipped in these temples. Not good enough!’

The secretary: ‘GD is the owner of Hindustan Motors’

Dwarapalaka: ‘I am confused. How is that a case for entering heaven?’

The secretary: ‘Because whenever someone gets into an Ambassador car he says “Oh God” and whenever someone reaches her destination she says “Thank God”.

Dwarapalaka: That has definitely advanced the cause of God. Please ask him to come in’

This anecdote was first narrated by the late Sharu Rangnekar. It has been modified by the author.