The Prime Minister at a recent conference revealed his dream of a single currency for South Asia. Adopting the spirit in which the PM’s statement was made, let us lay out a road map for achieving a common currency by the end of this decade. The first step in this process is the granting of MFN status by Pakistan to India and the signing of a framework agreement for the formation of SAFTA. This can be achieved during 2004 if Pakistan follows the precedent established by the USA in rechristening MFN as Permanent Normal Trading Status before granting it to China some years ago. The likely conclusion of a Comprehensive Cooperation agreement between India & Sri Lanka in 2004 covering Services, FDI and temporary migration of professionals will improve the atmosphere further. An Indo-Bangladesh FTA is then a possibility by 2005 with Sri Lanka convincing Bangladesh about the asymmetric benefits that have accrued to it from the FTA, as demonstrated by a SANEI research study. This will allow the formation of SAFTA by 2006 as these countries (SL,Bd) convince Pakistan of how much it has to gain and how little to loose (as any gains to India are at the cost of Japan and other exporters). Though not an essential next step, it would be helpful if SAFTA is followed in 2007 by a comprehensive co-operation agreement under the newly created SAFTA to include services, FDI and skilled migration.
2008 will see three preparatory steps (am I dreaming?): (a) the formation of a S Asian currency fund for mutual aid in case of a BOP crisis in any country. (b) An agreement for harmonization of monetary and exchange rate management policies. (c) Removal of all restrictions on capital flows within the region. The final pre-requisite can then be completed in 2009 by the formation of a Customs Union with a common uniform external tariff of 5% to 10%. The common currency (S. Asian Rupee/Rupiah/Taka) can then be adopted/introduced in 2010-11.
Will this be of benefit to the people of S. Asia? Without any doubt! Is this sequence of events possible? Yes, if the five members of the Security Council decide that it is in their own interests and make this clear to every country in S. Asia. Is it likely? No.
Notes and Comments on Indian economy, Global economic issues, India's International relations and National Security.
Pages
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Thursday, December 18, 2003
Monday, December 15, 2003
China's Growth
Economics Editor
Financial Times, London
Dear Martin:
I really enjoyed reading your very interesting and though provoking article (FT 12/9/03) on China’s growth. However I have some questions and comments on some of the points that you raised.
1. Bad policies (policy distortions) lower the rate of growth. Therefore when these policies are reversed (distorting policy corrected) we would normally expect the growth rate to revert to the normal level. It does not follow that if a country (any country) can grow fast even with a number of bad policies the reversal/correction of these policies will allow it to grow even faster. In fact the inverse is as if not more likely; if the bad/wrong policies are not corrected, the rate of growth will eventually fall, perhaps even collapse and the only way to sustain growth at anywhere near the high levels is to undertake the reform. For instance rising tariff protection may allow an economy to grow faster for a certain period of time, but this higher growth cannot be sustained indefinitely as tariffs spiral upwards. Eventually the growth must decline unless the tariff rise is stopped and reversed.
2. Your point about NPA’s in China being possibly twice the officially acknowledged percentage of 23% of GDP is very pertinent. So is the fact that 60% of loans are to State-owned enterprises. Recall that about five years ago NPA’s were officially declared to be about 25%, while perceptive observers like Nicholas Lardy asserted that they were actually about 50%. This was followed by the setting up of Asset reconstruction agency to which all most of the NPA’s were transferred and the balance sheets of the banks cleaned up. Five years latter we seem to be back where we started. Thus China seems to be accumulating NPA’s at between 5% and 10% per annum.
If 60% of the declared NPA’s and 100% of the undeclared ones are to SOEs and provincial governments then 80% of the actual NPA’s of 46% of GDP are from SOE and provincial governments. You also noted that the private sector has little access to bank finance. Given the status of the private sector in China, its high rate of growth and its relative profitability I would not be surprised if the NPA’s from this sector are close to the global norm of 5%. In other words they contribute less than 0.5% to 1% of GDP to the overall NPAs [5%*(15% to 27%)]. Thus virtually the entire NPAs are really arising from the SOEs and provincial governments. If NPAs are defined as loans that cannot be repaid because of adverse changes in market conditions than it is a misnomer to call these NPAs, as they were given with the prior knowledge that they cannot or will not be repaid (or alternatively the probability of repayment is very low). Thus they are really subsidies to the SOEs and provincial governments and indirectly to exporters who are supplied inputs by SOEs and other facilities by provincial governments.
Putting these two sets of facts together leads to the conclusion that since 1990 the Chinese government has been subsidizing exports by an amount equal to 5% to 10% of GDP per year. Though this has probably accelerated the growth of exports as well as that of the economy, it cannot be sustained indefinitely. Growth will eventually slow down unless the subsidy policy is reversed.
3. You also note the remarkable fact that 50% of total gross exports are by foreign owned companies. But aren’t these foreign owned enterprises globally competitive? Yes the enterprises producing labor intensive goods for export our certainly globally competitive today. But that does not mean they did not and do not receive a subsidy. Firstly provincial governments have provided them one time (variable) subsidy by providing them with all their requirements of land, infrastructure facilities etc. no matter what the cost to ensure that the perspective foreign investor chooses their province. The second channel for subsidy is the urban facilities and civic amenities and utilities under the control of the municipalities. Finally intermediate inputs produced by the SOEs can and are supplied to potential exporters at prices that are lower than the landed cost (before tariffs) of globally traded equivalents. It is quite likely however that the 50% of exports by non-foreign invested enterprises and particularly exports of capital and skill/technology intensive goods receive the bulk of the continuing/revenue subsidies (as against one time capital subsidies).
4. I agree with you that as the efficiency of foreign invested enterprises and domestic private enterprises is higher than that of SOEs the overall efficiency is likely to rise as their share in total production rises given their higher growth rate. It is however questionable whether better allocation of investment will lead to massively improved performance. The rate of growth of the Chinese economy has been on a down trend since the mid-nineties. Better allocation will be needed to keep the growth rate from decelerating further.
5. There is another time bomb that you have not noted in your article. The worsening of China’s income distribution during the period of high growth is quite remarkable. Though part of the worsening can be attributed to the unsustainable flattening of the income distribution during the Maoist period, the income distribution is now much worse than it was prior to this flattening. It can be argued that an artificial, policy induced suppression of real unskilled wages in manufacturing has so far sustained the almost incredible growth of labor intensive exports. None of the high growth economies that you have indicated as models for China’s future growth possibilities had either a worsening income distribution or a constant real wage rate over decades. On the contrary, real wages of manufacturing labor grew at a faster rate in these economies than in most other economies of the world. The assumption of unlimited supply of labor, the 300 million workers over the next 2 &1/2 decades (mentioned in your article) at constant real wages, will not materialize. If the present trend continues, well before the end of these 2.5 decades, the income distribution will become so bad that the poor will rise in social revolt.
Arvind Virmani
Financial Times, London
Dear Martin:
I really enjoyed reading your very interesting and though provoking article (FT 12/9/03) on China’s growth. However I have some questions and comments on some of the points that you raised.
1. Bad policies (policy distortions) lower the rate of growth. Therefore when these policies are reversed (distorting policy corrected) we would normally expect the growth rate to revert to the normal level. It does not follow that if a country (any country) can grow fast even with a number of bad policies the reversal/correction of these policies will allow it to grow even faster. In fact the inverse is as if not more likely; if the bad/wrong policies are not corrected, the rate of growth will eventually fall, perhaps even collapse and the only way to sustain growth at anywhere near the high levels is to undertake the reform. For instance rising tariff protection may allow an economy to grow faster for a certain period of time, but this higher growth cannot be sustained indefinitely as tariffs spiral upwards. Eventually the growth must decline unless the tariff rise is stopped and reversed.
2. Your point about NPA’s in China being possibly twice the officially acknowledged percentage of 23% of GDP is very pertinent. So is the fact that 60% of loans are to State-owned enterprises. Recall that about five years ago NPA’s were officially declared to be about 25%, while perceptive observers like Nicholas Lardy asserted that they were actually about 50%. This was followed by the setting up of Asset reconstruction agency to which all most of the NPA’s were transferred and the balance sheets of the banks cleaned up. Five years latter we seem to be back where we started. Thus China seems to be accumulating NPA’s at between 5% and 10% per annum.
If 60% of the declared NPA’s and 100% of the undeclared ones are to SOEs and provincial governments then 80% of the actual NPA’s of 46% of GDP are from SOE and provincial governments. You also noted that the private sector has little access to bank finance. Given the status of the private sector in China, its high rate of growth and its relative profitability I would not be surprised if the NPA’s from this sector are close to the global norm of 5%. In other words they contribute less than 0.5% to 1% of GDP to the overall NPAs [5%*(15% to 27%)]. Thus virtually the entire NPAs are really arising from the SOEs and provincial governments. If NPAs are defined as loans that cannot be repaid because of adverse changes in market conditions than it is a misnomer to call these NPAs, as they were given with the prior knowledge that they cannot or will not be repaid (or alternatively the probability of repayment is very low). Thus they are really subsidies to the SOEs and provincial governments and indirectly to exporters who are supplied inputs by SOEs and other facilities by provincial governments.
Putting these two sets of facts together leads to the conclusion that since 1990 the Chinese government has been subsidizing exports by an amount equal to 5% to 10% of GDP per year. Though this has probably accelerated the growth of exports as well as that of the economy, it cannot be sustained indefinitely. Growth will eventually slow down unless the subsidy policy is reversed.
3. You also note the remarkable fact that 50% of total gross exports are by foreign owned companies. But aren’t these foreign owned enterprises globally competitive? Yes the enterprises producing labor intensive goods for export our certainly globally competitive today. But that does not mean they did not and do not receive a subsidy. Firstly provincial governments have provided them one time (variable) subsidy by providing them with all their requirements of land, infrastructure facilities etc. no matter what the cost to ensure that the perspective foreign investor chooses their province. The second channel for subsidy is the urban facilities and civic amenities and utilities under the control of the municipalities. Finally intermediate inputs produced by the SOEs can and are supplied to potential exporters at prices that are lower than the landed cost (before tariffs) of globally traded equivalents. It is quite likely however that the 50% of exports by non-foreign invested enterprises and particularly exports of capital and skill/technology intensive goods receive the bulk of the continuing/revenue subsidies (as against one time capital subsidies).
4. I agree with you that as the efficiency of foreign invested enterprises and domestic private enterprises is higher than that of SOEs the overall efficiency is likely to rise as their share in total production rises given their higher growth rate. It is however questionable whether better allocation of investment will lead to massively improved performance. The rate of growth of the Chinese economy has been on a down trend since the mid-nineties. Better allocation will be needed to keep the growth rate from decelerating further.
5. There is another time bomb that you have not noted in your article. The worsening of China’s income distribution during the period of high growth is quite remarkable. Though part of the worsening can be attributed to the unsustainable flattening of the income distribution during the Maoist period, the income distribution is now much worse than it was prior to this flattening. It can be argued that an artificial, policy induced suppression of real unskilled wages in manufacturing has so far sustained the almost incredible growth of labor intensive exports. None of the high growth economies that you have indicated as models for China’s future growth possibilities had either a worsening income distribution or a constant real wage rate over decades. On the contrary, real wages of manufacturing labor grew at a faster rate in these economies than in most other economies of the world. The assumption of unlimited supply of labor, the 300 million workers over the next 2 &1/2 decades (mentioned in your article) at constant real wages, will not materialize. If the present trend continues, well before the end of these 2.5 decades, the income distribution will become so bad that the poor will rise in social revolt.
Arvind Virmani
Monday, October 20, 2003
FTA Agreement With Thailand
The free trade agreement with Thailand has to be viewed in the background of the ‘look East policy’ initiated by India in the early nineties and deepened and widened over the last five years. With minor fluctuations and diversions India has actively pursued since the 1990 a policy of establishing closer economic and political relations with ASEAN. The attitudes of different member countries of ASEAN towards India have however changed at a different pace. Singapore was the first country to recognise the benefits to ASEAN of closer ties with India. It has been actively pursuing FDI opportunities in India since the new reforms and helped India in getting the status of dialogue partner and member of the ASEAN security forum. The “ASIAN crisis” of 1997-1998 has accelerated the transformation of other ASEAN country’s attitude towards India-ASEAN co-operation. The earlier resistance of Malaysia has mellowed with the recognition that it faces much greater competition from China as a destination for FDI (and particularly export-oriented FDI). This was brilliantly encapsulated in a statement by the Singapore Prime minister at an earlier ASEAN summit that, ASEAN was like the body of a plane with China as one wing. Without India as the other wing ASEAN could not fly and would crash. Malaysia’s recognition of India’s prowess in software and IT enabled services has also contributed to the change in mindset towards India as a potential contributor to the growth of modern service exports from Malaysia.
Thailand’s approach to closer ties with India has also evolved. The first major breakthrough was the establishment of BIMSTEC in 1997 (BISTEC in June, addition of Myanmar in December & change to BIMSTEC). Thailand’s Deputy Prime Minister and DG WTO (designate) reportedly played a major role in this initiative. Mr Thaksin Shinwatra who become PM of Thailand after the Thai elections in January 2001 has also taken a very positive approach to Indo-Thai and Indo-ASEAN relations. The India-Thai FTA agreement is a culmination of this process. Thailand’s recognition of the benefit of ties with India has also facilitated the signing of India-ASEAN framework agreement for establishment of FTA by 2011 (2016 for new ASEAN & Philippines)). Because the India-Thai agreement has a faster schedule of tariff reductions than the India-ASEAN FTA it will act as a precursor and trial blazer for the latter. It will help demonstrate to apprehensive countries such as the Philippines the minimal costs and clear benefits of greater opening to India. The signing of these two agreements will also (incidentally),
(a) Put pressure on Bangladesh to accelerate formation of an India-Bangladesh FTA/PTA (which is currently under discussion in Dacca),
(b) Revive efforts for greater co-operation within the BIMSTEC framework (for instance on establishing road-rail-waterway links between India and Thailand through Myanmar and Bangladesh).
(c) Provide greater flexibility to India in multilateral negotiations under the ages of the WTO.
Over the 23 years since 1980 Thailand’s GDP has grown at an average of 6.1% per annum 0.4% points faster than India’s GDP growth rate of 5.6% per annum. This made Thailand the fourth fastest growing economy in the world relative to India, which was at ninth position during this period. Hidden behind this average is the fact that the position has changed considerably since the Asian crisis. Pre-crisis for almost three decades the Thai economy was either the second or third fastest growing economy in the world, a remarkable achievement. India therefore has a lot to learn from closer interaction with Thailand. Its ranking has, however, deteriorated sharply since the crises. In terms of 10 year moving averages it fell to 7th position in 1998, 11th in 1999, 14th in 2000, 22nd in 2001 and 28th in 2002. India’s ranking in contrast was 12th in 1997, 2001 and 2002 with a temporary worsening during 1998 to 2000. India’s attraction to Thailand as a trading partner has therefore increased. Thailand along with Indonesia and China is one of the closest competitors of India in World trade. Contrary to popular conception, this means that in purely economic terms the trade creation effect of the FTA are likely to be greater than the trade diversion effects. In other words both countries will benefit from the FTA in terms of peoples welfare. The flip side of this consumer benefit is the fact that selected industries such as SUVs will face intense competition from Thailand and will have to adjust and adapt to this competition. Research at ICRIER has shown that Indian industry is quite capable of doing this through specialisation and increased intra-industry trade.
Thailand’s approach to closer ties with India has also evolved. The first major breakthrough was the establishment of BIMSTEC in 1997 (BISTEC in June, addition of Myanmar in December & change to BIMSTEC). Thailand’s Deputy Prime Minister and DG WTO (designate) reportedly played a major role in this initiative. Mr Thaksin Shinwatra who become PM of Thailand after the Thai elections in January 2001 has also taken a very positive approach to Indo-Thai and Indo-ASEAN relations. The India-Thai FTA agreement is a culmination of this process. Thailand’s recognition of the benefit of ties with India has also facilitated the signing of India-ASEAN framework agreement for establishment of FTA by 2011 (2016 for new ASEAN & Philippines)). Because the India-Thai agreement has a faster schedule of tariff reductions than the India-ASEAN FTA it will act as a precursor and trial blazer for the latter. It will help demonstrate to apprehensive countries such as the Philippines the minimal costs and clear benefits of greater opening to India. The signing of these two agreements will also (incidentally),
(a) Put pressure on Bangladesh to accelerate formation of an India-Bangladesh FTA/PTA (which is currently under discussion in Dacca),
(b) Revive efforts for greater co-operation within the BIMSTEC framework (for instance on establishing road-rail-waterway links between India and Thailand through Myanmar and Bangladesh).
(c) Provide greater flexibility to India in multilateral negotiations under the ages of the WTO.
Over the 23 years since 1980 Thailand’s GDP has grown at an average of 6.1% per annum 0.4% points faster than India’s GDP growth rate of 5.6% per annum. This made Thailand the fourth fastest growing economy in the world relative to India, which was at ninth position during this period. Hidden behind this average is the fact that the position has changed considerably since the Asian crisis. Pre-crisis for almost three decades the Thai economy was either the second or third fastest growing economy in the world, a remarkable achievement. India therefore has a lot to learn from closer interaction with Thailand. Its ranking has, however, deteriorated sharply since the crises. In terms of 10 year moving averages it fell to 7th position in 1998, 11th in 1999, 14th in 2000, 22nd in 2001 and 28th in 2002. India’s ranking in contrast was 12th in 1997, 2001 and 2002 with a temporary worsening during 1998 to 2000. India’s attraction to Thailand as a trading partner has therefore increased. Thailand along with Indonesia and China is one of the closest competitors of India in World trade. Contrary to popular conception, this means that in purely economic terms the trade creation effect of the FTA are likely to be greater than the trade diversion effects. In other words both countries will benefit from the FTA in terms of peoples welfare. The flip side of this consumer benefit is the fact that selected industries such as SUVs will face intense competition from Thailand and will have to adjust and adapt to this competition. Research at ICRIER has shown that Indian industry is quite capable of doing this through specialisation and increased intra-industry trade.
Thursday, August 28, 2003
WTO Negotiations: The role of Economics and Politics
The issues of interest to India in the context of the WTO negotiations can be apportioned into three broad categories. (a) Implementation issues, (b) Singapore issues (c) Market access. The focus of the current seminar is on the Market access issues. A number of developments have taken place at the WTO over the past week or two, such as the USA-EU joint proposal on Agriculture and the counter-proposal by India and other emerging economies, the paper on proposed modalities for non-agricultural market access and the Chairman’s draft Cancun ministerial text.
Let me start by making a few general remarks on the economics and politics of negotiations and touch on the two topics not covered by this seminar, before saying a few words on the topics of this seminar. Economic theory and empirical analysis as understood and accepted by academics in the USA, EU and other market economies, says that removal of controls, restrictions and obstacles to Imports will by and large lead to an increase in the welfare of both the importing and the exporting countries. Then why is it that each country ignores what its own academics are telling it with respect to policy reforms and focuses mostly on the import restrictions imposed by other countries on its export items (whether these are goods, services or factors)? The answer is politics. In every country, politics imposes a cost on the nation as a whole while benefiting some sub-set of individuals. The geopolitics of negotiations is motivated by a desire to transfer some of the national costs of policy distortions onto other countries, while retaining as much of the benefits for sub-groups within the country. A good example of this is the multi-fibre agreement (MFA).
One implication of this strategic approach to multilateral economic rules is that economic analysis must drive our (autonomous) reforms in the external sector irrespective of what happens (or does not happen) at WTO. That is, liberalisation is beneficial to the country and must continue independently at the pace and timing of our choice. Economic analysis also provides us with the true costs and benefits to our citizens, of specific policy changes. This forms the basis of our evaluation of what policy changes we should be willing to concede in the negotiations (those having a higher benefit to us in any case) and which changes we should resist conceding (those that have higher cost). The public position that we take at the negotiation need not however lay all this out publicly for other countries. In the tactics and strategy of negotiations, politics/geo-politics will inevitably play a substantial role.
Implementation Issues
There are three implementation issues of interest to the Indian government. These are special and differential treatment with respect to Anti-dumping, Geographical Indicators and Traditional knowledge and related issues of bio-piracy. We at ICRIER have been doing research on all three issues and Working papers on these issues can be found on our web site.
Singapore Issues
The four Singapore issues are, Transparency in Government Procurement, Competition Policy, Trade Facilitation and Foreign investment. From the economic perspective it is quite clear that Indian citizens will benefit, either as consumers, taxpayers or recipients of public services in India if there is enhanced competition and greater transparency in government procurement. In the case of ‘transparency in government procurement’, the interests of the government (no matter which party is in power) will differ from that of the public, the latter will gain from greater transparency while the former will loose. Similarly in the case of competition policy the interests of the monopoly (and oligopoly) producers, whether public or private sector, will be diametrically opposite of that of consumers. Greater competition and transparency are therefore clearly in the economic interests of the general public but can be thwarted by the political clout of vested interests. It does not however follow that allowing these two issue to be integrated into the WTO framework is of unalloyed benefit to us. It is quite consistent to argue for accelerated reforms on the one hand while taking a tough stand in the negotiations.
Since the eighties most of Asia to the East of us has successfully used the FDI-Export model to generate growth rates rarely seen before in history (the only exceptions being Japan and S. Korea). First the NICs (Singapore, Taiwan, Hong Kong), then the ASEAN 3 (Thailand, Malaysia and Indonesia) and most recently China and Vietnam have used FDI to accelerate their rate of growth of manufactured exports as well as the overall growth rate of the economy. At the beginning of a new century India is poised to receive and benefit from an influx of export oriented FDI if (I re-emphasise if) we recognise the advantages of FDI and modify some critical domestic policies to facilitate it. A recent ICRIER working paper shows how FDI-export linkage has started to work in India against all odds. Reduction in the transaction costs of trade and the removal of the remaining barriers to FDI is therefore in our own economic interests. This is something that we as a nation should do irrespective of what happens at the WTO. It does not follow, however, that bringing this issue into the WTO would add to our advantage in any way.
From the perspective of politics/geo-politics therefore, it is quite rational for India to concede to others on any of the Singapore issues if and only if we gain concessions and benefits in other areas. In other words we must use these as counters to bargain for what would not be available to us otherwise. It should be remembered however that these bargains are sometimes informal, on the sidelines of the formal negotiations or a meeting another capital.
Market Access
Non-agriculture Market Access
As you all know India has reduced its ‘peak’ tariff rate from about 150% in 1991-2 to 25% in 2003-4. As per the budget announcement of the Finance Minister in 2002-3 this should come down to 20% next year (2004-5). In addition two groups of non-agriculture items, automobiles and alcohol (liquor) have tariff rates exceeding this peak. Despite this reduction over a decade, our tariffs remain the highest in the world. In fact if we do not continue the process of reduction beyond 2004-5, our peak tariffs will be four times that of ASEAN. An inter-ministerial expert group that I chaired a few years ago, therefore recommended that the peak rates be brought down to 10% some time after 2004-5. We also recommended that the tariff on automobiles should not exceed two times the peak, and on alcohol three times the peak. A subsequent Working paper in the Planning Commission goes even further by recommending a peak tariff rate of 10% by 2006-7 (with automobile tariffs at 20%) and a uniform tariff rate of 5% by 2011-12.
Research at ICRIER has shown that the tariff rationalisation and reduction that has taken place since 1991-2 has improved the competitiveness of Indian Industry. One aspect of this is an increase in intra-industry trade across most sub-sectors of industry. Thus each sub-sector is giving up the production of some items and importing them while at the same time exporting more of the items that it is competitive in. This move towards specialisation and exploitation of comparative advantage has improved the competitiveness of Indian industry.
At ICRIER we are also doing research (funded by the ministry of Industry) to find out the potential effects of further tariff reductions on Indian manufacturing. Preliminary results show that even sharp tariff reduction to 10% or 5% has few adverse effects. Tariff reductions, along with resultant changes in exchange rates raise the net exports (exports – imports) in a majority of manufacturing sub-sectors and the overall net exports of the manufacturing sector. Not only is there little to fear from further tariff reductions, these reductions will prove beneficial to industry.
WTO Negotiations on Agriculture
Agriculture is an area where the economic arguments of rich countries are very weak (because of high subsidies) while those of poor countries are relatively strong. It is quite clear that many countries in the EU and to a lesser extent the USA are hostage to agriculture producers who constitute a small fraction of their population. On our side a large proportion of the population is dependent on agriculture, lives in rural areas, is very poor and less educated and has little access to up to date and relevant knowledge. This puts their lively hood and sometimes even their survival at risk from exogenous shocks. Over the last few years we have also raised the import duties on a number of agricultural products above the peak rate. These must in the interest of economic efficiency, eventually be brought down to the peak rate, with an intermediate step of two times the peak rate. In the meanwhile, we should carry out a thorough de-control and reform of the agriculture, agro-processing and food retail sectors (as detailed in a Planning commission working paper).
As far as the WTO negotiations are concerned, however, offence is the best form of defence. We should marshal the global NGOs to expose the hypocrisy of the rich countries vis-à-vis free trade and verbal concern for the poor (while giving subsidies to rich farmers that destroy poor agriculturists jobs).
WTO Negotiations on Services
The USA activated the GATS when it perceived that its comparative advantage was shifting from manufacturing to services. At that time the USA and other OECD countries opened up their service sector to cross-border imports (Mode 1), while we had some justification for taking a cautious approach to an area in which the rich countries appeared to have an increasing comparative advantage. More by accident than by design ur position has been completely transformed since then. At the beginning of the 21st century, India is poised to become the largest developing country exporter of Service in the World by the end of the decade. What is needed is a change in our mind set, by transiting from a defensive to an activist posture. We must lock-in ‘free trade in services’ under mode 1, against the emerging threat from the new protectionists in the rich countries, the ‘unions of white collar workers.’ This also requires that we be more forthcoming with respect to opening sectors in mode 1 where we have been excessively defensive. We must trade in greater access for FDI from the rich countries under mode 3 against clear and transparent rules for ‘temporary migration,’ of skilled and semi-skilled personnel from India to these countries under mode 4. The focus of the latter (mode 4) must be on facilitation of cross-border export of services under mode 4, not on the export of labour per say.
The request-offer mode that is currently in process may not however give much scope for progress from our new pro-active perspective, in either of these two areas. In that case we may have to explore a bilateral approach with USA and the EU.
Let me start by making a few general remarks on the economics and politics of negotiations and touch on the two topics not covered by this seminar, before saying a few words on the topics of this seminar. Economic theory and empirical analysis as understood and accepted by academics in the USA, EU and other market economies, says that removal of controls, restrictions and obstacles to Imports will by and large lead to an increase in the welfare of both the importing and the exporting countries. Then why is it that each country ignores what its own academics are telling it with respect to policy reforms and focuses mostly on the import restrictions imposed by other countries on its export items (whether these are goods, services or factors)? The answer is politics. In every country, politics imposes a cost on the nation as a whole while benefiting some sub-set of individuals. The geopolitics of negotiations is motivated by a desire to transfer some of the national costs of policy distortions onto other countries, while retaining as much of the benefits for sub-groups within the country. A good example of this is the multi-fibre agreement (MFA).
One implication of this strategic approach to multilateral economic rules is that economic analysis must drive our (autonomous) reforms in the external sector irrespective of what happens (or does not happen) at WTO. That is, liberalisation is beneficial to the country and must continue independently at the pace and timing of our choice. Economic analysis also provides us with the true costs and benefits to our citizens, of specific policy changes. This forms the basis of our evaluation of what policy changes we should be willing to concede in the negotiations (those having a higher benefit to us in any case) and which changes we should resist conceding (those that have higher cost). The public position that we take at the negotiation need not however lay all this out publicly for other countries. In the tactics and strategy of negotiations, politics/geo-politics will inevitably play a substantial role.
Implementation Issues
There are three implementation issues of interest to the Indian government. These are special and differential treatment with respect to Anti-dumping, Geographical Indicators and Traditional knowledge and related issues of bio-piracy. We at ICRIER have been doing research on all three issues and Working papers on these issues can be found on our web site.
Singapore Issues
The four Singapore issues are, Transparency in Government Procurement, Competition Policy, Trade Facilitation and Foreign investment. From the economic perspective it is quite clear that Indian citizens will benefit, either as consumers, taxpayers or recipients of public services in India if there is enhanced competition and greater transparency in government procurement. In the case of ‘transparency in government procurement’, the interests of the government (no matter which party is in power) will differ from that of the public, the latter will gain from greater transparency while the former will loose. Similarly in the case of competition policy the interests of the monopoly (and oligopoly) producers, whether public or private sector, will be diametrically opposite of that of consumers. Greater competition and transparency are therefore clearly in the economic interests of the general public but can be thwarted by the political clout of vested interests. It does not however follow that allowing these two issue to be integrated into the WTO framework is of unalloyed benefit to us. It is quite consistent to argue for accelerated reforms on the one hand while taking a tough stand in the negotiations.
Since the eighties most of Asia to the East of us has successfully used the FDI-Export model to generate growth rates rarely seen before in history (the only exceptions being Japan and S. Korea). First the NICs (Singapore, Taiwan, Hong Kong), then the ASEAN 3 (Thailand, Malaysia and Indonesia) and most recently China and Vietnam have used FDI to accelerate their rate of growth of manufactured exports as well as the overall growth rate of the economy. At the beginning of a new century India is poised to receive and benefit from an influx of export oriented FDI if (I re-emphasise if) we recognise the advantages of FDI and modify some critical domestic policies to facilitate it. A recent ICRIER working paper shows how FDI-export linkage has started to work in India against all odds. Reduction in the transaction costs of trade and the removal of the remaining barriers to FDI is therefore in our own economic interests. This is something that we as a nation should do irrespective of what happens at the WTO. It does not follow, however, that bringing this issue into the WTO would add to our advantage in any way.
From the perspective of politics/geo-politics therefore, it is quite rational for India to concede to others on any of the Singapore issues if and only if we gain concessions and benefits in other areas. In other words we must use these as counters to bargain for what would not be available to us otherwise. It should be remembered however that these bargains are sometimes informal, on the sidelines of the formal negotiations or a meeting another capital.
Market Access
Non-agriculture Market Access
As you all know India has reduced its ‘peak’ tariff rate from about 150% in 1991-2 to 25% in 2003-4. As per the budget announcement of the Finance Minister in 2002-3 this should come down to 20% next year (2004-5). In addition two groups of non-agriculture items, automobiles and alcohol (liquor) have tariff rates exceeding this peak. Despite this reduction over a decade, our tariffs remain the highest in the world. In fact if we do not continue the process of reduction beyond 2004-5, our peak tariffs will be four times that of ASEAN. An inter-ministerial expert group that I chaired a few years ago, therefore recommended that the peak rates be brought down to 10% some time after 2004-5. We also recommended that the tariff on automobiles should not exceed two times the peak, and on alcohol three times the peak. A subsequent Working paper in the Planning Commission goes even further by recommending a peak tariff rate of 10% by 2006-7 (with automobile tariffs at 20%) and a uniform tariff rate of 5% by 2011-12.
Research at ICRIER has shown that the tariff rationalisation and reduction that has taken place since 1991-2 has improved the competitiveness of Indian Industry. One aspect of this is an increase in intra-industry trade across most sub-sectors of industry. Thus each sub-sector is giving up the production of some items and importing them while at the same time exporting more of the items that it is competitive in. This move towards specialisation and exploitation of comparative advantage has improved the competitiveness of Indian industry.
At ICRIER we are also doing research (funded by the ministry of Industry) to find out the potential effects of further tariff reductions on Indian manufacturing. Preliminary results show that even sharp tariff reduction to 10% or 5% has few adverse effects. Tariff reductions, along with resultant changes in exchange rates raise the net exports (exports – imports) in a majority of manufacturing sub-sectors and the overall net exports of the manufacturing sector. Not only is there little to fear from further tariff reductions, these reductions will prove beneficial to industry.
WTO Negotiations on Agriculture
Agriculture is an area where the economic arguments of rich countries are very weak (because of high subsidies) while those of poor countries are relatively strong. It is quite clear that many countries in the EU and to a lesser extent the USA are hostage to agriculture producers who constitute a small fraction of their population. On our side a large proportion of the population is dependent on agriculture, lives in rural areas, is very poor and less educated and has little access to up to date and relevant knowledge. This puts their lively hood and sometimes even their survival at risk from exogenous shocks. Over the last few years we have also raised the import duties on a number of agricultural products above the peak rate. These must in the interest of economic efficiency, eventually be brought down to the peak rate, with an intermediate step of two times the peak rate. In the meanwhile, we should carry out a thorough de-control and reform of the agriculture, agro-processing and food retail sectors (as detailed in a Planning commission working paper).
As far as the WTO negotiations are concerned, however, offence is the best form of defence. We should marshal the global NGOs to expose the hypocrisy of the rich countries vis-à-vis free trade and verbal concern for the poor (while giving subsidies to rich farmers that destroy poor agriculturists jobs).
WTO Negotiations on Services
The USA activated the GATS when it perceived that its comparative advantage was shifting from manufacturing to services. At that time the USA and other OECD countries opened up their service sector to cross-border imports (Mode 1), while we had some justification for taking a cautious approach to an area in which the rich countries appeared to have an increasing comparative advantage. More by accident than by design ur position has been completely transformed since then. At the beginning of the 21st century, India is poised to become the largest developing country exporter of Service in the World by the end of the decade. What is needed is a change in our mind set, by transiting from a defensive to an activist posture. We must lock-in ‘free trade in services’ under mode 1, against the emerging threat from the new protectionists in the rich countries, the ‘unions of white collar workers.’ This also requires that we be more forthcoming with respect to opening sectors in mode 1 where we have been excessively defensive. We must trade in greater access for FDI from the rich countries under mode 3 against clear and transparent rules for ‘temporary migration,’ of skilled and semi-skilled personnel from India to these countries under mode 4. The focus of the latter (mode 4) must be on facilitation of cross-border export of services under mode 4, not on the export of labour per say.
The request-offer mode that is currently in process may not however give much scope for progress from our new pro-active perspective, in either of these two areas. In that case we may have to explore a bilateral approach with USA and the EU.
Sunday, March 30, 2003
Exports as an Engine of Growth
Introduction
The Minister of Commerce and Industry opened his speech by re-iterating the goal of increasing India’s share of merchandise trade to 1% of global levels by 2007 (“up from the level of 0.67”). He followed this up by taking head on the question of “whether we need an annual EXIM policy?” The most noteworthy aspect of the Exim policy was the identification of service exports and special economic zones as, “engines of growth.”
Growth Performance & Target
In the fiscal year 2002-03 till February 2003, exports are reported to have grown by 16.8% in US dollar terms, over the corresponding period of the previous year, a noteworthy achievement. This achievement comes however on the back of negligible growth the previous year (2001-2). Thus the level of exports during this period is only about 17% over the exports in 2000-1. In an earlier study (India’s BOP crises and external Reform) we have shown that during the eighties and nineties India’s export growth exceeded world growth, as a result of which our share of world exports rose from 0.42% in 1980 to 0.67% in 1999. Even if our export growth exceeds that of Asia, which it did during the nineties, and given the trend rate of economic reforms, our export share is unlikely to exceed 0.8 % of world exports by 2009. There was nothing in the EXIM policy (or the Budget) that denotes an acceleration of trend rate of reform.
Engine of Growth
One of the most interesting things in the EXIM policy is the assertion that, “Exports can act as the motive power of growth for a rapidly developing Indian economy.” This is perhaps the closest any official document of the government of India has come to recognising, Exports as an Engine of Economic growth and the minister is to be commended for bringing this to the attention of the nation. This fact has been well known to S. E. Asian and E. Asian countries, including China, for many decades and they have fully exploited it to achieve high growth rates over the past two to four decades.
The minister has identified two sub-engines of growth, namely service exports and Special Economic Zones (SEZ). We are in full agreement with him about the important role that these can play in propelling growth of exports. Sadly however there is little in the EXIM policy that will ensure that this happens, particularly in the case of Special Economic Zones.
Special Export Zones
As is by now well known India’s exports of labour intensive manufactures (as well as the employment in such production for export) are a fraction of those from China. We can identify SSI reservation, Labour laws and procedures and bureaucratic control mentality as factors that have discouraged FDI in such export-oriented manufactures. Special Economic Zones provide an area where we could minimise or eliminate such handicaps. Unless this is done Special Economic Zones cannot attract sufficient FDI to act as engines of growth for the economy. Though we cannot fault the EXIM policy per se for not doing anything about these matters, unless the Minister of Commerce and Industry can convince his cabinet colleagues about the importance of these reforms, the promise of Special Economic Zones engine of growth will not be fulfilled.
Service Exports
In our view service exports can play an important role in accelerating economic growth. The extension of zero duty imports of, ‘consumables, office and professional equipment, spares and furniture….’ to the service sector can act as positive (short term) signals to encourage export of services. By themselves, however, it is unlikely that they will propel service exports to the point that they begin to act as engines of growth for the economy as whole. For this to happen we need a change in our mind set with respect to the global rules of Service trade from that of protection from imports and external forces to looking at the world in terms of the opportunity for service exports. Our research has identified a number of internal and external policies that need to be liberalised if India is to become a major exporter of Services.
Agriculture Export Zone
The proposal in EXIM policy to involve corporates in the AEZ is a positive one. As in the other cases liberalisation of land related policies and other laws relating to agricultral produce such as the Essential Commodities act and the unification of Food related laws, rules and regulations are essential for a sustained increase in value added aggriculture and allied products.
Quantitative Restrictions
I was both pleased and dismayed to read the announcements on lifting of QRs. The removal of 69 import items and 5 export items from the restricted list is very positive feature of the EXIM policy. I am however dismayed that so many items remain on the restricted list. Such restrictions are an anachronism that must be eliminated in the next EXIM policy. All QRs on imports and exports must be eliminated, leaving only those restriction on health, safety and security grounds that are common even in OECD countries and those required by international obligations (such as on export of endangered spicies).
Transaction Costs
Any measures to reduce the very high transaction costs for importers are welcome. I, however, have a small caveat. Electronic Data Exchange (EDI) a proprietary technology, was the technology for trade about 10 or 15 years ago. It is my understanding that during the past decade the Internet has replaced EDI in up and coming e-enabled countries. The MOC may like to take another look at this alternative.
The Minister of Commerce and Industry opened his speech by re-iterating the goal of increasing India’s share of merchandise trade to 1% of global levels by 2007 (“up from the level of 0.67”). He followed this up by taking head on the question of “whether we need an annual EXIM policy?” The most noteworthy aspect of the Exim policy was the identification of service exports and special economic zones as, “engines of growth.”
Growth Performance & Target
In the fiscal year 2002-03 till February 2003, exports are reported to have grown by 16.8% in US dollar terms, over the corresponding period of the previous year, a noteworthy achievement. This achievement comes however on the back of negligible growth the previous year (2001-2). Thus the level of exports during this period is only about 17% over the exports in 2000-1. In an earlier study (India’s BOP crises and external Reform) we have shown that during the eighties and nineties India’s export growth exceeded world growth, as a result of which our share of world exports rose from 0.42% in 1980 to 0.67% in 1999. Even if our export growth exceeds that of Asia, which it did during the nineties, and given the trend rate of economic reforms, our export share is unlikely to exceed 0.8 % of world exports by 2009. There was nothing in the EXIM policy (or the Budget) that denotes an acceleration of trend rate of reform.
Engine of Growth
One of the most interesting things in the EXIM policy is the assertion that, “Exports can act as the motive power of growth for a rapidly developing Indian economy.” This is perhaps the closest any official document of the government of India has come to recognising, Exports as an Engine of Economic growth and the minister is to be commended for bringing this to the attention of the nation. This fact has been well known to S. E. Asian and E. Asian countries, including China, for many decades and they have fully exploited it to achieve high growth rates over the past two to four decades.
The minister has identified two sub-engines of growth, namely service exports and Special Economic Zones (SEZ). We are in full agreement with him about the important role that these can play in propelling growth of exports. Sadly however there is little in the EXIM policy that will ensure that this happens, particularly in the case of Special Economic Zones.
Special Export Zones
As is by now well known India’s exports of labour intensive manufactures (as well as the employment in such production for export) are a fraction of those from China. We can identify SSI reservation, Labour laws and procedures and bureaucratic control mentality as factors that have discouraged FDI in such export-oriented manufactures. Special Economic Zones provide an area where we could minimise or eliminate such handicaps. Unless this is done Special Economic Zones cannot attract sufficient FDI to act as engines of growth for the economy. Though we cannot fault the EXIM policy per se for not doing anything about these matters, unless the Minister of Commerce and Industry can convince his cabinet colleagues about the importance of these reforms, the promise of Special Economic Zones engine of growth will not be fulfilled.
Service Exports
In our view service exports can play an important role in accelerating economic growth. The extension of zero duty imports of, ‘consumables, office and professional equipment, spares and furniture….’ to the service sector can act as positive (short term) signals to encourage export of services. By themselves, however, it is unlikely that they will propel service exports to the point that they begin to act as engines of growth for the economy as whole. For this to happen we need a change in our mind set with respect to the global rules of Service trade from that of protection from imports and external forces to looking at the world in terms of the opportunity for service exports. Our research has identified a number of internal and external policies that need to be liberalised if India is to become a major exporter of Services.
Agriculture Export Zone
The proposal in EXIM policy to involve corporates in the AEZ is a positive one. As in the other cases liberalisation of land related policies and other laws relating to agricultral produce such as the Essential Commodities act and the unification of Food related laws, rules and regulations are essential for a sustained increase in value added aggriculture and allied products.
Quantitative Restrictions
I was both pleased and dismayed to read the announcements on lifting of QRs. The removal of 69 import items and 5 export items from the restricted list is very positive feature of the EXIM policy. I am however dismayed that so many items remain on the restricted list. Such restrictions are an anachronism that must be eliminated in the next EXIM policy. All QRs on imports and exports must be eliminated, leaving only those restriction on health, safety and security grounds that are common even in OECD countries and those required by international obligations (such as on export of endangered spicies).
Transaction Costs
Any measures to reduce the very high transaction costs for importers are welcome. I, however, have a small caveat. Electronic Data Exchange (EDI) a proprietary technology, was the technology for trade about 10 or 15 years ago. It is my understanding that during the past decade the Internet has replaced EDI in up and coming e-enabled countries. The MOC may like to take another look at this alternative.