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.

The Buddha Speaks on Swadeshi and the RSS

In Hindi

You’ll Find an Unicorn Before You Find a Free Market

Syed Bakhtiyar Kazmi in The Dawn

THE realisation that conventional economic wisdom, seeped in the myth of the free market, will be extremely antagonistic towards any solution based on protectionism and planned industrialisation, stipulates a bit of digression.

Scope limitation: the discussion here under is based on pure common sense sans any political bearing, with the simple objective of discussing alternative options for economic growth; those who know it all already need not read any further.

Whilst conspiracy theories may explain the ‘why’, it is indeed mind-boggling ‘how’ the world was sold an idea, ie free markets, which has nothing to do with reality. Essentially, you need the long arm of the government to even enforce the rules of the market, including breaking cartels for countering undesirable social outcomes.

My personal favourite from the net is, “You’ll find a unicorn before you find a free market”!

Perfect competition in free markets, even in theory, inevitably eventually results in an oligopoly or monopoly, as in the case of Coke and Pepsi.

More to the point, how many genuinely believe that any domestic cola manufacturer has any chance of ever taking market share from Coke and Pepsi in Pakistan; and this has nothing to do with quality or free markets!

Capturing the market for coloured aerated water has only to do with deep pockets!

This example is easily applicable to our case study, the imported can opener. To recap my observations in another article, because of free markets, Pakistan had started importing can openers which were cheaper and shinier than the domestically manufactured can opener. However, with the rupee depreciating, the Pakistani can opener might have become cheaper, but the domestic facilities have closed down and we probably have lost the skills to manufacture a can opener during this time.

At this point, foreign manufacturers will go to any lengths to scuttle any new initiative for the domestic manufacturing of can openers; dumping and price war are just the tip of the iceberg. The home country of our foreign manufacturer of can openers may probably even oppose Pakistan in the UN Security Council, just to apply pressure to protect their manufacturer’s interests!

Is that voluntary trade?

Here the free market proponents argue that voluntary trade is beneficial for both parties. They argue that purchasing, say, a Coke, demonstrates that the purchaser values a fizzy drink more than the money in his pocket, and hence should have the right, and the choice, to spend his money as he wants.

There is nothing wrong with that statement. However, no person, with even a tiny bit of common sense, is expected to borrow every day to drink a Coke, if he cannot afford to pay back that debt.

In the case of a nation, government is the repository of common sense of the populace; so how does borrowing in dollars to pay for Cokes every day for 207 million people make any sense? How is getting burdened with external debt mutually beneficial trade?

And here we come to comparative advantage theory which basically argues that nations should only produce and export items where they have a comparative advantage. Notwithstanding that most developing nations can only have a comparative advantage in raw materials or basic manufacture, let us for a minute be practical.

Under this fantastic ‘all else being held constant two-nation-two-products comparative advantage’ theory, Portuguese winemakers would be re­­quired to stop making wine, since London’s winemakers have some sort of advantage over them. But why would Portuguese winemakers, who can still make cheaper wine, and perhaps better tasting wine, stop producing wine, which they can easily sell in Portugal, and start making cloth when they are clueless about the cloth trade ab initio?

The Portuguese government could force them out of the wine business, but then we really are not talking about a free market, are we? And where is the guarantee that after a few years, when the last of the Portuguese winemaker has passed away, London winemakers will not suddenly start charging double? After all it is a free market. Portugal both now pays double and borrows to drink wine, or it does not drink wine since it cannot afford it. What in your opinion should Portugal do?

Here the free trade theory argues that free floating currency will increase the competitiveness of Portuguese wine; but the last winemaker is already dead!

As in our can opener example, we have forgotten how to make can openers; the problem is that if all our food is in cans, then we will be forced to borrow and buy more expensive can openers.

But the music will eventually stop! It always does. So where do we get the can openers from?

'State of the Economy: India and the World' by S Gurumurthy

Trump has a point about globalisation

Larry Elliott in The Guardian

The president’s belief that the nation state can cure economic ills is not without merit


  

‘The stupendous growth posted by China over the past four decades has been the result of doing the opposite of what the globalisation textbooks recommend.’ Photograph: AFP/Getty Images


Once every three years the International Monetary Fund and the World Bank hold their annual meetings out of town. Instead of schlepping over to Washington, the gathering of finance ministers and central bank governors is hosted by a member state. Ever since the 2000 meeting in Prague was besieged by anti-globalisation rioters, the away fixtures have tended to be held in places that are hard to get to or where the regime tends to take a dim view of protest: Singapore, Turkey, Peru.

This year’s meeting will take place in a couple of weeks on the Indonesian island of Bali, where the IMF and the World Bank can be reasonably confident that the meetings will not be disrupted. At least not from the outside. The real threat no longer comes from balaclava-wearing anarchists throwing Molotov cocktails but from within. Donald Trump is now the one throwing the petrol bombs and for multilateral organisations like the IMF and World Bank, that poses a much bigger threat.

The US president put it this way in his speech to the United Nations on Tuesday: “We reject the ideology of globalism and we embrace the doctrine of patriotism.” For decades, the message from the IMF has been that breaking down the barriers to trade, allowing capital to move unhindered across borders and constraining the ability of governments to regulate multinational corporations was the way to prosperity. Now the most powerful man on the planet is saying something different: that the only way to remedy the economic and social ills caused by globalisation is through the nation state. Trump’s speech was mocked by fellow world leaders, but the truth is that he’s not a lone voice.

The world’s other big economic superpower – China – has never given up on the nation state. Xi Jinping likes to use the language of globalisation to make a contrast with Trump’s protectionism, but the stupendous growth posted by China over the past four decades has been the result of doing the opposite of what the globalisation textbooks recommend. The measures traditionally frowned upon by the IMF – state-run industries, subsidies, capital controls – have been central to Beijing’s managed capitalism. China has certainly not closed itself off from the global economy but has engaged on its own terms. When the communist regime wanted to move people out of the fields and into factories it did so through the mechanism of an undervalued currency, which made Chinese exports highly competitive. When the party decided that it wanted to move into more sophisticated, higher-tech manufacturing, it insisted that foreign companies wishing to invest in China share their intellectual property.

This sort of approach isn’t new. It was the way most western countries operated in the decades after the second world war, when capital controls, managed immigration and a cautious approach to removing trade barriers were seen as necessary if governments were to meet public demands for full employment and rising living standards. The US and the EU now say that China is not playing fair because it has been prospering with an economic strategy that is supposed not to work. There is some irony in this.

The idea that the nation state would wither away was based on three separate arguments. The first was that the barriers to the global free movement of goods, services, people and money were economically inefficient and that removing them would lead to higher levels of growth. This has not been the case. Growth has been weaker and less evenly shared.

The second was that governments couldn’t resist globalisation even if they wanted to. This was broadly the view once adopted by Bill Clinton and Tony Blair, and now kept alive by Emmanuel Macron. The message to displaced workers was that the power of the market was – rather like a hurricane or a blizzard – an irresistible force of nature. This has always been a dubious argument because there is no such thing as a pure free market. Globalisation has been shaped by political decisions, which for the past four decades have favoured the interests of capital over labour.
Finally, it was argued that the trans-national nature of modern capitalism made the nation state obsolete. Put simply, if economics was increasingly global then politics had to go global, too. There is clearly something in this because financial markets impose constraints on individual governments and it would be preferable for there to be a form of global governance pushing for stability and prosperity for all. The problem is that to the extent such an institutional mechanism exists, it has been captured by the globalists. That is as true of the EU as it is of the IMF.

So while the nation state is far from perfect, it is where an alternative to the current failed model will inevitably begin. Increasingly, voters are looking to the one form of government where they do have a say to provide economic security. And if the mainstream parties are not prepared to offer what these voters want – a decently paid job, properly funded public services and controls on immigration – then they will look elsewhere for parties or movements that will. This has proved to be a particular problem for the parties of the centre left – the Democrats in the US, New Labour in Britain, the SDP in Germany – that signed up to the idea that globalisation was an unstoppable force.

Jeremy Corbyn certainly does not accept the idea that the state is obsolete as an economic actor. The plan is to build a different sort of economy from the bottom up – locally and nationally. That’s not going to be easy but beats the current, failed, top-down approach.

Swadeshi Muslims in The Grand Indian Narrative

Rajiv Malhotra

An Economist's Guide to Debating Bhakts

A cheat-sheet for an intellectual argument with the Right. Warning—it's not pithy or witty enough for social media

SHAILESH CHITNIS in Outlook India

 

June 2004, deep in the heart of George Bush's presidency, the Onion, a satirical magazine, ran a story on how America's liberals were suffering from outrage fatigue. The article explained that liberals were overwhelmed with stories of abuses of civil liberties, unchecked military aggression and policies that ran roughshod over the environment. Most liberals were just exhausted from protesting and had decided to take a break. They couldn't sustain their anger anymore. 

Like any good satire, it was funny because it was close to the truth.

India's liberals probably feel the same today. From the mundane to the sublime, every facet of our society is now a cultural battleground. Each week is a new fight, from the meat we eat to the size of our nationalism. The prevalence of social media has only served to amplify differences and harden opinions. If you can't say it in a witty sentence that neatly fits in a Tweet or a Facebook post, it's probably not worth saying.

I've frequently thought of engaging with people who are ardent BJP supporters. But the thought of defending against charges of being a Congress agent or a closet Pakistan supporter (the horror!) makes me keep my opinions to myself.

But what if there was a genuine discussion? What if you were able to get more than 140 characters across? Here's an attempt at imagining an intellectual argument to four assertions frequently trotted out by the right.

(BS = Bhakt says)

[BS]: India needs a strong, authoritarian leader to develop faster. Look at what Singapore and China has achieved.

The idea that a benevolent autocrat can transform a chaotic country into a disciplined economic engine is very seductive. Unfortunately it has no basis in fact. Data shows that autocracy is a gamble, the country could be governed by a Lee Kuan Yew or a Mugabe.

The economist William Easterly has shown that the chances for the latter scenario are much higher. He measured countries that had experienced big growth success and failure over a forty year period. Easterly found that the probability of sustained high growth under an autocracy are only 10 per cent, it's more likely that the country implodes or experiences sluggish growth. Democracy doesn't yield spectacular gains either, but it does limit the chances of total failures. Human fallibility assures that more centralised societies will have more volatile performances.

Given our history with leaders who experienced total power, we are better-off taking our chances in an imperfect democracy than a perfect autocracy.

[BS]: The minorities (i.e. Muslims) have been coddled for too long

This is an easy claim to refute. Successive government and independent agencies have found that the socio-economic indicators of Muslims are the lowest among all groups, only marginally better than SC/STs. The poverty rate among urban Muslims is 38 per cent compared to national average of 23 per cent. Only 24 per cent of Muslims complete high school, against a national average of 43 per cent.

It's not just human development indicators. A recent study found that even though Muslims constitute 13 per cent of the population, only 2.6 per
cent are senior executives at BSE 500 companies. And in the last 2 years, Muslims got only 2 per cent of the priority loans from public sector banks. What the statistics mask is that the dismal state of Muslims in India isn't a recent phenomenon. It reflects a steady decline since the country's independence relative to all other groups.

In light of these numbers, it's entirely fair to ask why aren't the country's Muslims angrier?

[BS]: Why can't they just respect the wishes of the majority?

This argument rests on the utilitarian idea of the greatest good for the greatest number of people. If a certain policy brings happiness to 80 per cent of the population, but leaves the rest 20 per cent worse-off, surely the society as a whole is better off. But this view isn't compatible with protecting everyone's rights.

The philosopher John Rawls proposed a fairer way to decide on justice and rights. He suggested that before deciding any rules, members of a society stand behind a veil of ignorance. Behind this veil no one knows their class, gender, race, wealth, religion or any other detail that gives them a hint of their place in society. The laws that this group decides will, by its very nature, be just and equal. Since no one knows their position in society once the veil is lifted, they'd want to make sure they were protected.

Rawls' veil is a thought experiment of course, but it does seek to illustrate the fallacy of using majority to determine rights.

[BS]: Reform takes time; it'll take time to see the results

On this issue, the Bhakt has a point. The pass-through benefits from structural reforms take time. India's growth rate surged in the 80s, with the loosening of a few regulations. But the big reforms of the 90s didn't lead to a corresponding burst of growth in that decade.

The economist, Arvind Virmani, has found a J-shaped growth curve. Following structural reforms, growth initially falls and then begins to rise. In the 90s, the removal of import restrictions and currency volatility were a shock to the protected industries, resulting in lower productivity. As firms learned to cope and then benefit from the new technologies, output improved dramatically from the 2000s.

But as we complete two years of the Modi government, we have yet to witness any meaningful reforms — no GST bill, no significant disinvestment of PSUs and no major labour market reforms. We aren't at the bottom of any J-curve, nor should we expect a growth spurt a few years later.

[You ask] While on the economy, it's a good idea to pose the paradox of BJPs economic ideology. Narendra Modi is a self-professed free-marketer, who believes in less government. Free markets are open; open to capital, open to ideas. And yet, the RSS continues to espouse the glories of Swadeshi economics that seeks Indian solutions to Indian problems. How can Mr. Modi reconcile such opposing views?
Now observe how the BJP defenders try to square their love of the "Gujarat model" with their fealty to the RSS.

If you have made it this far without being called sickular, AAP-tard or any such pejorative, stop and congratulate your Bhakt. You are speaking with a right-wing supporter who is respectful and is confident in their views. A rare species. May their tribe grow.

Next, pinch yourself to interrupt your musings. A discussion like this can only happen in your imagination.

Practise swadeshi, save the rupee

By Kingshuk Nag in the Times of India

The only way to save the rupee and to prevent its free fall is to start practising swadeshi all over again. Yes, you read it correctly. As a nation we are living beyond our means and you can’t continue doing so unless we want India to crash (and not the rupee alone). That is exactly what is happening: the crash of the rupee is a symptom of the problems that ail the economy. Although sarkari economists et al are trying to explain away the problem by changes in the Fed rates in the US and a revival in the US economy this is a very shallow explanation. Just because the Indonesian rupiah, the South African rand and the Brazilian real have been competing with the rupee in depreciating against the US dollar, there is no reason to wish away our problems.

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Also read

Gresham’s Law in Present day India

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Next time you bite corn produced in Australia, oranges raised in California and apples from god knows where, think deeply whether as a nation we can afford this. Maybe middle class and upper middle class consumers can afford these imported fruits at an individual level, but certainly not as a nation. When India’s foreign exchange earnings are not enough to cover our imports, it is a no-brainer that we cannot. Stopping such imports and also of other edibles like cheese is not going to make any one worse off. The question that we should ask ourselves is: cannot good quality fruits be grown in the country that we have to spend precious foreign exchange to import them?

In the good old days, students used to travel abroad for higher studies after they completed their MA to take admission in PhD and other such programs in top universities. The learning in these top universities would be far superior to what could be had in high institutions in the country. But things have changed in the last two decades: these days you can find  parents sending their children abroad to do their undergraduate degrees. Why? This is possibly because it has become a fad to send children abroad. Parents say that they have the money so they will send their children abroad. While this may be true, the fact of the matter is that as a nation we cannot afford precious foreign exchange to spend on children studying at the undergraduate level and doing basic technical courses. A pertinent question to ask is whether the education infrastructure is so poor that there are no colleges in the country to impart a basic degree. So the issue is why this fad for a foreign education?  

However you would not have seen any economist or politician who waxes eloquent on TV holding forth on the rupee speak anything about all this. Most of their conversation revolves around the tight monetary policy of the RBI and the decline in growth impetus, etc This misses the real issue. The fact of the matter is that the process of liberalization that was kick-started in 1991 is so lopsided that it promoted the culture of consumption without any breaks. (Editor's comment - i.e. the Kerala model, but Kerala has the advantage of foreign remittances to pay for the consumption culture.) True, before liberalization the economy was in shackles and the consumption in the country was artificially restricted. This was by way of import curbs and by the process of licensing. Thus things like washing machines were treated as luxuries although in reality it was a great boon for families especially those with working women. 

Liberalization provided a great opportunity to break the shackles and set up a modern, efficient manufacturing base in India. Well that really did not happen adequately. Had that happened India would have become a major exporter of manufactured goods that would have been enough to take care of India’s import requirements (of which oil imports is a major component). But India continued to be an exporter of raw material. For example till the ban in exports of iron ore, the country was exporting iron ore to China. A country which is focused on its growth (like China is) would have instead tried to manufacture steel from this iron ore which could have been exported instead. This would have resulted in more foreign exchange earnings. But India had no such strategy in place.

Instead of exporting manufactured goods, India has become an importer of raw materials. A good example is coal that is imported into the country for fuelling thermal power stations. This is in spite of the fact that India sits on reserves of billions of tons of coal reserves. India spent $18 billion in coal imports in the last fiscal year 2012-13. This is by no account a small sum.

But while exports did not go up, imports of not only coal and petroleum products (valued at $169.25 billion in the last fiscal year) but other consumer goods also went up.

World class manufacturing facilities did not come up in India due to many reasons. But primarily the culprit is the policy paralysis in the country for many years that resulted in inadequate infrastructural facilities whether it was electricity generation, port facilities or proper roads. Bureaucratic hassles and widespread corruption in granting permissions played a none-too-insignificant role in this process. 

Entrepreneurs finding a bleak scenario soon realized that realty was a booming sector where large profits could be made without much hassles. As a result entrepreneurs of all hues and colors turned to realty. This includes top names in the Indian corporate sector. Even many IT companies started dabbling in real estate. With politicians joining in the game, realty became the name of the game. Thus the high growth evidenced in the country in the period 2000-2009 and especially between the years 2005-2008, is nothing but an indication of the rapid growth in the real estate sector that led to bourgeoning cities (never mind the poor infrastructure). But the increase in the growth of the realty sector is an artificial growth that may add to national income yet doing nothing to increase India’s exports. A huge middle class, which has earned moolah through direct speculation in realty or by working in companies whose profits have soared due to their investments in real estate, started feeling empowered. And this empowerment was reflected through increased consumption. This has led to spiralling imports. It may not be out of place that India’s savings rate has plummeted in the last five years. From 36.9 per cent in fiscal year 2007-08, it tumbled to 30.8 in 2012-13 and is expected to go down to 30 per cent by the end of fiscal year 2013-14.

The rupee may have tumbled in the last two weeks, but the signals were there for anybody to see for the last few months. In the last fiscal year India’s imports of gold soared to $50 billion. This was not due to the proclivity of the Indian consumers to own the yellow metal. Rather it was a signal from the market that the rupee could not be trusted to hold its value. Gold was being imported, because people preferred to hold their savings in the form of the yellow metal than in the form of the Indian rupee in banks or investments.

Whether it is an individual, household or a nation, nobody can live beyond their means. You have to cut the coat according to the cloth that you have. Thus there is no other way for India and as Indians we have to learn to live within our means. The time has come to reduce to zero the imports of inessentials and restrict the imports to the essentials. The control raj came with a lot of ills, but independence also comes with responsibilities. From 1991 to 2013, the pendulum has swung from one extreme to the other. It is time to restore balance in our lives, think in terms of age old concepts like import substitution and check the rampant spread of this consumerist culture. Otherwise doomsday is not far away.