Thursday, August 16, 2007

Globalization

The following is a reproduction of a discussion I had with my friend. The essay is my reaction to India Unbound, a book by Gurcharan Das.

--------------------------------------------------------------------

This essay is very long. I hope I don't bore you with it. Probably, if we have a discussion, in future, I'll concentrate on one or few aspects. Also, probably, I could have split it into a number of essays.

Let me have a shot at a reaction to India Unbound. Again, let me first give some general remarks, then go into details.

Zeroth, let me say that I liked it and would be reading it in more detail, again. It is one of a series of books I am planning to read to make sense of the Indian political and economic scene. If you have more ideas of books like that, I'll be happy to try them.

I'm interested in globalization, the few books which I've read are: Making Globalization Work by Joseph Stiglitz , In Defense of Globalization by Jagdish Bhagwati and Development as Freedom by Amartya Sen. I've also read a lot of Noam Chomsky's work on markets and globalization.

India Unbound talks about two things. a) Nehruvian socialism b) The neoliberal reforms of 1991.

First, let me make a few observations. The whole book is written in an entertaining, anecdotal form. While anecdotal evidence is useful, it's dangerous, at least in principle, because you can sort of validate any theory on the basis of anecdotes. There are a lot of endnotes, and I plan on going through them in detail.

Next, the book concentrates on the manufacturing / knowledge-based sector generally. There's very little, almost no mention of the agricultural sector. This is significant. It's a reflection of Das's background which is mostly in the manufacturing sector and management. While the manufacturing sector is important, it's very important to have a perspective of what's happenning in the agricultural sector which employs 600 million people with another 200 million indirectly affected by it. In view of this, I find the book having a very narrow perspective. In coming to a decision between "socialism" and "capitalism" (I'll explain the quotes in a second), it's quite important to have view of all the implications.

The dominant theme throughout the book is one of "freedom". I agree with that, in principle. For instance, in his book Development as Freedom, Amartya Sen argues that (I'm oversimplifying a bit here), freedom can be thought of as both the end and the means to development. To take a concrete case, consider one of the areas in which Sen has written about extensively, famines. He points out that there has been no substantial famine in any country which has a multiparty democracy and a relatively free press, like post-independence India. But, for example, during Mao's Great Leap Forward in the 1960s, communist China experienced massive famine, killing 10-15 million people. There is, in my view a very good case to be made for increasing the freedom of people in the world.

Let me make a few comments about "socialism" and "capitalism".

Socialism is a broad theory. The main element of socialism is control by the people, both in the political and the economic sphere. The relevant principle for economics is "workers control of the workplace". The principle is simple (we may argue whether it's right or wrong), "the people who are involved in production ought to own it".

Now, there are different approaches to socialism. They can be broadly classified as "statist" or "non-statist", depending upon how important the role of the state is.

"Nehruvian socialism" was a statist approach to socialism. We can ask ourselves if it fulfilled the aim of having worker control of the workplace. In my view, it largely failed in this task. The industry was controlled by bureaucrats, not the workers. That's an important distinction.

Capitalism is also very broad. The idea is that people should be free to choose and the decisions on production are to be made through a market mechanism based on supply and demand.

There are many issues regarding capitalism, but we can say that the two of the dominant issues are that of corporations and importance and fairness of the market. I'll give you my view.

What exactly is a corporation? Well, corporations are basically dictatorships, with a more or less hierarchical structure with orders going from top to down. There is, broadly, a worker class and a management class and these are hierarchical structures. The exclusive goal of the corporations is to have large, growing, sustainable profits for its shareholders. That's fine, but we have to be clear about what it is. Corporations are not accountable to anyone else except its shareholders. For example, if Coca-Cola sets up a plant somewhere, it's not accountable to the local people, but only to its board of directors. That's the basic setup. How fair it is, we can argue.

A related issue is the market mechanism. There are many critiques of markets. I find, in India Uncut and many of the other blogs a feeling that "markets know best" and freedom means cutting down on govt. power while encouraging private enterprise. I'd urge you to read the books of Joseph Stiglitz, Nobel Prize winner and former chief economist of the World Bank, on what he calls "market fundamentalism". His main contribution is "information theory of economics", where he shows that, under conditions of imperfect information, (that is, always), markets don't lead to efficiency. Markets will produce too little of some things, like basic research, and too much of others, like pollution.

For example, just look at the main innovations of the American economy, to name a few, internet, communication, airlines, drugs, biotech. Let's take the internet. As you know, the internet was basically a product of the publicly funded Pentagon system. It was basically set up in the 1960s and there was important research, mainly in universities till about mid 1990s when it was handed over to the private sector. Since then, its character has changed (whether for the good or not, we can argue). Earlier, the buzzword was "information superhighway", now it's "e-commerce".

Let me make a general statement. Markets, by themselves, don't produce enough of basic research. For example, just look at India. Where were the main centres of excellence in the past? - IIT, IISc, ISI. They are relatively autonomous institutions, but are funded by the govt. There are many other centres of learning, like NIIT, Aptech. What's your view of them? I'd like to hear them.

Some more examples. We hear a lot about R&D in American drug companies. First, a huge amount of investment is through the publicly-funded university system. Next, we can look at what it has produced. Keep in mind that R&D in drug companies is huge. We can look at the different products which have come out in the past 10 years. I don't have an accessible source for this, this is coming from memory from Making Globalization Work . The large majority of products are the so-called "lifestyle products", like Viagra or skin lotions or stuff like that. There are very few products for important diseases like cholera or malaria or other things. Again, I'm not saying that the system is useless, but we have to be clear about what it is and whether this is what we want it to be. The overwhelming majority of patents are for slightly different molecules which some other company has not patented.

Summarizing, in my view, the role of the govt. is not just to keep law and order etc, but an active interference is required for markets to function well. Like building infrastructure, like roads and universities. Like education and health. It also has its seamier side, like US govt. interfering in Iraq to protect its oil. In fact, the American system is basically a "state capitalist" system. Again, we can argue as to whether these kinds of interferences are ethical or effective or whatever, but its clear (to me) that they are required and expected.

For example, you might have done macro-eco? Remember Keynesian economics? Keynes' contribution was in periods of slow growth or recession, the govt. can stimulate the economy my massive intervention. Stiglitz places Keynes' contribution as the most important in the history of capitalism.

Let's get back to India Unbound.

India's Human Development Index places it at 126th in the world, comparable to sub-Saharan Africa. In view of this, we can safely claim that a) was a failure.

Let's look at b). "Neoliberalism". Let's take the 1991 reforms in India. In India Unbound, Das gives an anecdotal view of the role of Chidambaram, Narasimha Rao and Manmohan Singh. I still know very little of the background, but, in my view, the reforms were mainly a product of the "structural adjustment" programs of the World Bank and IMF. Manmohan Singh etc. were only responding to the pressures of the institutions due to the financial crisis. Thus, the reforms only lasted for 2-3 years and haven't been pursued very strongly after that. (We can see that in the current govt., when Manmohan Singh is the PM).

Anyway, it's a fine point. We can agree, I think, that the role of these financial institutions was at least as important as Manmohan Singh etc.

This raises a few questions: (The questions are arranged in decreasing order of my knowledge about them. I still need to know a lot about all of them).

a) What's the history of neoliberal reforms around the world? What was the role of the World Bank etc. in this? Do the western countries follow these rules?
b) The "Asian Tigers", in South East Asia. What was their strategy in their period of growth in the 1980s? Was it comparable to neoliberalism?
c) What about China? What's going on there?

Let me address these questions.

a) First, let's look at the theory of neoliberalism. The "structural adjustment" programs, also called the "Washington Consensus" - namely the consensus between, World Bank, IMF and US Treasury dept. (that's what it is - the US dominates these institutions). What do these entail?

In a "free" market, there are basically two kinds of freedom, freedom of movement of labour and freedom of movement of capital. Neoliberalism refers mainly to free movement of capital, not labour. In fact, as the US is passing more and more draconian immigration laws, freedom of labour is severely restricted. Let's look at the Washington Consensus policies.

The main measures are fiscal conservatism, namely, less govt. expenditure in many areas. Also, it involves privatization of many public-sector industries. It involves the strategy of export promotion instead of "import substitution". It involves cutting down or eliminating tariffs. Let's look at what liberalization theory says.

According to theory, the economy will be a dynamic one, with jobs continously being created and destroyed. The economy will move from low wage/low-productivity jobs to high wage/high productivity jobs. There will be both import and export of the same commodity, for example, rice. India both imports and exports rice depending upon where the market is.

The country as a whole will benefit (in theory), but there will be some losers. The losers being the unskilled and low-wage workers. This is what the theory says. How ethical it is, we can argue.

For example, Stiglitz points out, that in most developing countries, unemployment rates are very high. The "dynamic" economy, when it destroys jobs, the workers don't move on to high-productivity/high-wage jobs, but simply add to the unemployed force.

In theory, even a moderate liberalization of labour would have many times the impact than the liberalization of capital. But, since the big capital countries tilt the playing field to their own liking, it's capital liberalization which is being implemented.

That's the theory, what's the practice?

My main source on this is Making Globalization Work. In the book, Stiglitz says this: With globalization, development is possible, but not inevitable. Most economists agree that the Washington Consensus policies have failed.

Why did he say that? Let's look at the history. I'll concentrate on four areas: Latin America and Central America, East Asia, Russia after the fall of the Berlin Wall and India.

i) Latin America and Central America are the areas where the Washington Consensus policies were tried extensively. I'll mix up politics and economics in this, because, in my view, they're both important in this and I feel that they're two aspects of the same thing.

Let's first concentrate on South America. Let's take Argentina, one of the cases which Stiglitz discusses in his book.

Argentina was one of the poster children of the IMF. The IMF gives grades to countries as to many factors like credit worthiness, macroeconomic health etc. Argentina was an A+ student. It carried out "structural adjustment" programs extensively. The result of these policies was that it went deep into debt. It kept on falling into a deeper and deeper debt crisis and then finally its new president just said - NO. It just refused to pay its debt. That was the biggest default in IMF history.

With the default and the rolling back of many of the structural adjustment programs and massive state intervention in the economy, Argentina did something no-one expected it to do. It grew. It grew 7-10 percent, a very healthy growth rate, comparable to India and China.

Let's look at Central America - Guatemala, Nicaragua, Haiti, Honduras, Mexico. I'll be talking generally here, but I'll go into details on any country if you want.

Just imagine, what kind of image do you have of these countries? I'd think, an absolute symbol of destruction. The first four countries have been so systematically destroyed that there's little hope of recovery. Mexico is a somewhat different case.

For instance, around 60% of Haitian children are suffering from malnutrition and probable brain damage. It's the poorest country in the hemisphere. Similarly, Nicaragua, the second poorest country in the hemisphere.

The result of these policies is that there have been left-of-centre governments throughout Latin America. People have become disenchanted with IMF policies. Latin America once constituted 80% of IMF's clients. Now it's less than 1%.

b) Let's look at Russia. Russia was the object of "shock-therapy", which is a sudden transition to a market economy from communism. Let's look at what happenned.

The few years after the fall of the Berlin Wall were a catastrophe for ordinary Russians. Incomes fell 40%. Poverty rose 10 times. Inflation and unemployment soared. There were a huge number of oligarchs created, with massive capital flight from the country. You might have read about Roman Abramovich, the Russian oil tycoon who purchased the Chelsea football club and a number of county estates in the UK. The IMF lent more money, it all flew out.

Nobody wants to go back to the repressive communist regime, but the Russians are asking, what kind of economy is this?

ii) Next, let's look at East Asia. In East Asia, there are very strict controls on speculative capital and capital flow. In Singapore, there's the death penalty for capital flight. That takes care of that.

What was the strategy of the East Asian "tigers"?

I'm still learning about Japan, Korea, Taiwan etc. But it's clear that the states intervened massively in the economy. First, as Sen notes in his book, the conditions before the economic "miracle" were already there. These countries had very high literacy rates (primary education was extremely important) and social welfare programs. In these countries, Sen notes, development came first, then growth. These countries had a well-developed population which was ready to be put into manufacturing high-tech goods. In contrast, we can see what India's literacy and health standards are. Also, there are many studies of Japan, where the Japanese MITI (Ministry of Trade and Industry) worked very closely with the industries and ignored many market rules (for example Japan always runs a trade surplus, which means that there is a corresponding trade deficit somewhere in the world). I'm still studying this, but it's clear that Japan and the other tigers ignored market rules and had massive state intervention.

You might have read about the East Asian financial crisis. It was again due to IMF policies. As Stiglitz notes in his book, these countries already have a very high savings percentage. (Like Korea saves around 30% of its GDP, China 40%). They already had the resources and the citizens could spend money to stimulate the economy. But instead, they borrowed money from the IMF (and crucially other private investors) and freed up capital flow. For a while there was boom, then sentiment changed and massive capital flight took place.

iii) India: Let's look at what India is. A large majority of India is involved in agricultural sector. This is where Das's book is very weak, as I mentioned. Note that liberalization theory says that the unskilled, low-wage workers would be hardest hit. In theory, these people can be compensated, because the country as a whole benefits. But in practice, this seldom occurs.

I'm still studying the effect of liberalization on Indian agriculture. It's by no means pretty. Let me illustrate one of the main issues which you may have heard about.

The EU and US have massive subsidies for domestic farmers. In the US, a big share of the subsidies goes to the large agricultural corporations, which is a form of "corporate welfare". Despite these huge subsidies, farmers are leaving agriculture. One European farmer quits every minute. There's that old joke that it's better to be a cow in Europe than a farmer in India, because a cow gets a $2 subsidy per day. 70% of India lives under $2 a day.

These subsidies are a big reason why the agricultural market is unfair. You might have read that India and Brazil had made this one of the main issues in the WTO negotiations.

The effects of neoliberal policies are still being studied, but the World Bank estimates that there would be massive rural-to-urban migration.

http://www.zmag.org/sustainers/content/2007-07/08sharma.cfm

I don't know how balanced or accurate this is, but you can look at that.

In about 10-15 years more than 400 milliion people in India would be migrating to urban centres. You can imagine the slums in Delhi and Bombay. Now imagine them being much worse. Around 40-60% of people in states like Tamil Nadu, Andhra etc. would be migrating to urban centres because they can't live on subsistence agriculture any more. You might have read about the farmer suicides in Andhra. More than 25,000 farmers have committed suicide in India, since 1997.

These are things which are also part of globalization. We should be looking at them too when we talk about India's growth and "superpower" status. Globalization has many possibilities, but we must be aware of its implications.

11 comments:

Karan Vaswani said...

Hmmm... first of all, people who really believe in amrkets do not support agricultural subsidies of the kind you are referring to. By the way, those subsidies are in fact a legacy of Keynesian thinking -- just research the origins of farm subsidies in the U.S. in the 1930s and Europe after WW2 and you'll see what I mean...

Karan Vaswani said...

Oh, and about research, I couldn't let that uncritically repeated nonsense about the central role of public funding stand, so...

You might conceivably be aware of the fact that publicly funded research was almost nonexistent in the nineteenth and early twentieth century??? Nevertheless, this was an era of tremendous innovation: the Jacquard loom, the battery, gas lighting, steam-powered locomotives, pasteurization, the arc lamp, the tin can, the spectroscope, various kinds of photography, the stethoscope, modern matches, the microphone, the typewriter, the sewing machine, the wrench, the propellor, the revolver, rubber vulcanization, the modern bicycle, the stapler, the grain elevator, antisceptics, the dental chair, the safety pin, the gyroscope, the manned glider, rayon, the rotary washing machine, the internal combustion engine, the machine gun, man-made plastics, dynamite, barbed wire, the telephone, the phonograph, various cinematic technologies, the modern seismograph, the metal detector, the fountain pen, the cash register, the automobile, the motorcycle, radar, the gramophone, contact lenses, drinking straws, the vacuum flask, the zipper, the vacuum cleaner, the safety razor, the air conditioner, the polygraph machine, neon light, crayons, the airplane, windshield wipers, teabags, the tracor, sonar, the helicopter, cellophane, the bra, the pop-up toaster, short-wave radio, the arc welder, the band-aid, the dynamic loudspeaker, liquid-fueled rockets, quartz crystal watches, the aerosol can, the iron lung, penicillin, bubble gum, the photocopier, the jet engine, the ballpoint pen, teflon, the electron microscope.... All of the above were invented between 1800 and 1940, with little or no public funding, by either self-funded individuals, corporations, or privately endowed / funded university laboratories (this was well before the federal government in the U.S. started funding university research). So let's not talk rubbish. Even today, private funding of research remains far more capital efficient than public funding, and far more productive of discoveries and inventions that have some actual utility; most government funded research in the U.S. produces nothing of real economic value, but the sheer scale of investment guarantees a few high-profile successes. The reason the private sector doesn't invest as much in basic R&D now as they should is precisely BECAUSE the government is doing it; let's not confuse cause and effect. If you've studied economics, surely you've heard of the notion of "crowding out"? I quote: "The negative effects on long-term economic growth that occur when private fixed investments are crowded out can be moderated if the government uses its deficit to finance productive investment. The situation is made worse, of course, if the government wastes borrowed money." Most government research spending is tremendously wasteful. The technological and economic RoI on research investments was actually much higher in the era before publicly funded research.

Anand said...

Karan:

Thanks for your comments. You make many points, I'll reply to some of them.

i) My point in mentioning Keynes (that is - govt. role in economy) was precisely to say that the so-called "capitalist" countries are really state-capitalist, in which states play a massive role in the economy (or in particular sectors).

We can argue whether its good or bad, but we must be clear about the real world. We could have an academic discussion on whether these subsidies are good or not, as said by people who "really believe in markets", but that's not the point. Given that these subsidies are still in place, what should be our position on agricultural liberalization?

ii) Let's talk about the present. Let me, for the moment, concentrate on your statement:

Even today, private funding of research remains far more capital efficient than public funding, and far more productive of discoveries and inventions that have some actual utility; most government funded research in the U.S. produces nothing of real economic value, but the sheer scale of investment guarantees a few high-profile successes.

First, let me clarify what I'm saying and what I'm not. I'm not saying that private research has no role to play. I'm not saying that public research is good in everything. The issues are:

a) What role does public funding have to play? Is it inefficient? Is it even necessary?
b) What should be the extent of funding? And in what areas?

Both of these points are illustrated by the health sector, which seems to be the point you're making.

You say that private sector is more efficient and public sector is wasteful and has produced nothing of significance.

Can you quantify this? Or are these just slogans?

I totally disagree with them.

To clarify, I'm talking here about the basic healthcare.

Let me take a few illustrations:

a) The health situation in the US:
The US has one of the most privatized healthcare in the world. It also happens to be the most expensive and the least efficient (in terms of healthcare for all) among industrialized nations. The US has the worst infant mortality rate and one of the largest proportion of uninsured people (in the developed world).

The contrast is even more dramatic when we compare the US and Cuba.

(Source is WHO infant mortality and health figures)

b) Let's get closer home. India has the sixth most privatized healthcare in the world and one of the lowest levels of public healthcare expenditure. You can see the result. In Human Development Index, India is comparable to or lower than sub-Saharan Africa. 40% of Indian children suffer from malnutrition. A variety of quacks have mushroomed around India to take advantage of lack of health facilities. (It's the same story in education by the way).

c) China and India had roughly the same level in 1947. Till around 1979, the gap in lifespan between India and China increased to 15 years (in favour of China). In 1979, economic reforms were initiated by the Chinese govt. Although they were helpful in some ways, they also took the retrograde step of dismantling public health services and everyone had to buy private insurance. The gap has been more than halved in the years since then. (the source is Development as Freedom by Amartya Sen).

Slogans are all very well, but we live in the real world. The private companies may be important in some places, but they cannot help in things like this, because the poor have no purchasing power. India does have good health services for the rich, for example.

More comments welcome.

Karan Vaswani said...

1. Ah, now we're getting down to brass tacks! I agree that government intervention exists everywhere, although you must admit that the degree of intervention varies a great deal. France and Singapore, for example, follow much more interventionist policies than the U.S. and Hong Kong. My point was that we should encourage less intervention all around, and go for a global free trade regime, rather than the messy bilateral and regional ones we currently have, which tend to produce trade diversion (I believe Jagdish Bhagwati is one of the most eloquent defenders of this point of view). Clearly I'm not in favor of an asymmetrical situation of the sort that the British imposed on India in the early nineteenth century, in which one partner is protectionist and the other is not. The best real-world remedy is clear enough: countervailing (anti-dumping) duties, of the sort the U.S. has itself used so successfully in the past. We should quantify exactly how much the subsidies reduce the prices of the commodities in question (this has already been done), and then slap on tariffs that are exactly equal to this amount, to make it clear that we are animated by a desire for reciprocity, not by protectionism per se. More importantly, we should persuade most other countries to do the same, so that the U.S. subsidies essentially become a wealth transfer to importing countries, and have no bearing on American export competitiveness or on world prices. In such a scenario, the subsidies would actually benefit us, because they would be free money FOR US. ;) The U.S. itself has done this quite successfully with Japan and China in the past. Trade is not, however, the only frontier for liberalization, and so, even as we pursue reciprocity on the trade front, we must, at the same time, embrace market-based reforms of our domestic agriculture, which have nothing to do with the trade distortions you've mentioned. If there's an animus against letting the likes of Monsanto (seeds and other inputs) and Wal-Mart (supply chains) entrench themselves in India, fine; let domestic firms lead the process instead. But let's get on with it. And we should also liberalize trade with the many countries that do not have such subsidies -- there are dozens of them, some of which also happen to have a comparative advantage in certain agricultural commodities even without subsidies. This may still hurt Indian producers of agricultural commodities where we do not enjoy comparative advantage over other producer countries (there are many such commodities), but that's fine with me.
2. I completely agree that the U.S. health care industry provides terrible value for money in every way, and I have had several first hand experiences of this while living in the U.S. The problem, however, has relatively little to do with private provision of healthcare (i.e. private hospitals and clinics, doctors and nurses) per se or privately-led research; it is mostly a problem created by the private insurance industry. Incidentally, I totally agree that insurance in general (and not just health insurance) is an area in which private sector performance is poor if not carefully regulated. Economists have researched market failures in the insurance industry in depth, and I have no quarrel with their conclusions. Frankly, I also share the consensus view that access to health care and education is a major determinant of long-term productivity and competitiveness, and that providing these things has a multiplier effect in other areas of the economy. Of course it is a major, major problem (and a terrible shame) if early malnutrition has permanent effects on a child's later development, or lack of access to primary education produces a lifelong illiterate. Personally, though, I would rather tackle these problems through vouchers than through public service providers. Not for ideological reasons, but because, certainly in education, vouchers have been proven to be more effective (not only for primary and secondary schools, but also for higher education, where U.S. federal student aid is essentially a voucher system, albeit one which increasingly has, unfortunately, too high a loan component and too low a grant component) -- providing schools are given total autonomy and more than one local school exists, so that competition can occur. I do realize that in rural India the second condition does not currently hold true, even remotely. But I do believe that this is more likely to change through autonomous private schools than through more investments in government schools. In other words, the government should fund consumers, not providers. Let the providers compete among themselves for the consumers' (government-provided) money. Eventually, as incomes rise, with means-tested vouchers, less and less government investment in education will be needed. And you will have a flourishing, competing (rather than monopolistic) school sector. Incidentally, these ideas obviously aren't mine, but Milton Friedman's; a lengthy discussion of how to apply them (or not) to India took place on the Indian Economy Blog a few months ago, if you want to read it and assess the in-depth arguments yourself.

Anand said...

Karan:

Your comments are again very general for me. That's perhaps unavoidable, since we're talking about a general topic. Let me just respond to 1.

I'm not an economist and I haven't read any books on economics as such. I have read In Defence of Globalization by Bhagwati. Personally, I was pretty shocked by some of the statements he made in the book, but perhaps I'm a bit biased.

About your comments about bilateral treaties vs multilateral WTO, I tend to agree. The bilateral treaties are a major undermining of the global system, imperfect as it is. Unfortunately, the US is one of the biggest culprits in this.

We should quantify exactly how much the subsidies reduce the prices of the commodities in question (this has already been done), and then slap on tariffs that are exactly equal to this amount, to make it clear that we are animated by a desire for reciprocity, not by protectionism per se. More importantly, we should persuade most other countries to do the same

The tariffs would be pretty big, I'm guessing? I've heard of "non-trade distorting subsidies", which feel very suspicious.

So what you seem to be advocating in the short term is a sort of protectionist regime with a global cooperation between countries, with a global framework for negotiating treaties. Perfect!

It sure doesn't seem like liberalizing agriculture to me. In fact, that's precisely the demand of the so-called "anti-globalization" movement, which say: democratize the globalization, both inter-country and intra-country.

About 2. Can you give some link for the Milton Friedman discussion? It seems very vague to me. I'm glad that we agree on many of the points, but we don't agree on the diagnosis of the problem.

Karan Vaswani said...

1. It's true that the U.S. is one of the biggest culprits in undermining multilateral treaties in favor of bilateral ones. Obviously, they are doing this because they feel they can do more arm-twisting in bilateral negotiations. They are not to be blamed for this. There are obviously powerful agricultural and industry lobbies in the U.S. that are fully aware that free trade would hurt them because of their higher cost structure (i.e. labor costs) relative to developing countries. Most U.S. industries are also technologically far behind Germany, Japan and even Korea, both because these countries have had late entrant advantages (they were able to invest in more advanced technologies from scratch, rather than transitioning from legacy facilities) and because these non-U.S. companies have been more aggressive in investing retained earnings (which has much to do with different ownership arrangements). So the U.S. is losing the "war" on both fronts simultaneously: technology and capital intensive production is more efficient in other developed countries, while labor-intensive production is moving to developing countries. Managed trade is their temporary expedient for trying to slow down the erosion of their competitive position. India, on this front, particularly under Kamal Nath, has followed an excellent policy of insisting on reciprocity and multi-lateral agreements, and allying on the Doha Round with other countries such as Brazil and China so that the arm-twisting is less effective. On this, we will win -- the Doha Round will not fail. The U.S.'s main leverage in these negotiations is the size of its domestic market, and the fact that so many countries have export-oriented economies that are highly dependent on access to U.S. consumers. This is gradually changing, eroding the U.S.'s arm-twisting abilities in the long-term.

2. No, I'm not advocating a global protectionist regime. I'm advocating judicious use of protectionist threats as a negotiating tactic to actually liberalize markets. And we are actually already doing this. Our game is more subtle, as we are offering concessions in one area, in return for U.S. concessions in another -- the same game the U.S. has played for decades, by the way. I am troubled by this, because I prefer commensurate and coextensive liberalization, rather than this sort of approach, which involves "picking winners." But unfortunately, because of comparative advantage, the importance of each sector differs from country to country, especially those with smaller, less diversified national economies. Obviously major auto exporters care more about automotive tariffs than, say, tariffs on imported beef. And so these kinds of deals are done. I don't like them because they tend to emphasize conservation, by which I mean preserving existing industries in exchange for liberalizing in areas where a country is not particularly active. This tends to perpetuate existing patterns of investment and employment in these countries, rather than exposing them to the "creative destruction" that is the real benefit of free trade. Many countries potentially have comparative advantages in areas they have not historically been active in, but they are so concerned to preserve existing sectors that they mortgage away those new areas in return for beneficial trade arrangements for existing sectors. This is one of the greatest tragedies of managed trade, as opposed to free trade.

2. I would prefer not to use the word "democratize" in this context. What the anti-globalization forces want, in a nutshell, is for market mechanisms to be subservient to the will of the popular majority. That is why they use the word "democratize." They have a vision whereby voters can and should somehow set limits to the free operations of markets whenever they believe that those markets are not acting in their particular interests at a particular point of time. This is certainly not my position. I don't want markets to be "accountable" to voters; in practice, this would mean that they were no longer markets at all. :) I am simply saying that inter-country trade must be based on reciprocal liberalization, with the long-term objective of keeping trade as free and unmanaged as possible. Tariffs are necessary only as a retaliatory measure when someone else refuses to liberalize, as other countries' policies are obviously not entirely within our control. Within your borders (i.e. in intra-country trade), on the other hand, you have full ability to liberalize, which is what I am recommending.

Anand said...

Karan:

I'll address your points on trade here. Also, could you provide more info./links on how the Indian Economy Blog discussed Milton Friedman's voucher system for education and health?

A few general comments first.

a)About long-term vision: Long term vision has many aspects and people differ on their views on how to see them. It would not be easy to develop a shared vision of how the trade system should be, given our different viewpoints. A sensible aim, I think, is to discuss our vision with the reasons in support, but not harp too much on it.

b)About multi-dimensionality of economics: Most of the aspects of economics are multi-dimensional. Like trade has issues of sovereignty, freedom, accountability, fairness, growth, inequality.

These are not easy matters. One-size fits-all wouldn't work very well. A sensible approach, I think, is that we must listen to/empower different sections of the economy as to their views on the various aspects. They'll not be right on everything (since these issues are multi-dimensional), but we should acknowledge them.

For example, if the corporate managers say, India still has barriers in higher education, we should listen to them, since higher education directly concerns the corporate and industrial sector and they often have detailed studies of it from their perspective.

Similarly, if reporters like P. Sainath intensively study the agrarian crisis, we should listen to them. They may have an ideology which we don't like, but they give info which is invaluable.

c)Intellectual and moral rigour: We tend to focus on and look in a nuanced way at our own position, while we tend to uni-dimensionalize and stereotype others.

For example: When we were discussing privatization of health, you said that we must look at the nuance, and the problem is really the private insurance, not privatization per se, while I was trying to say, oh, it's all privatization to me.

I'm sure you can point out the same kinds of biases which I have.

The best way to understand these things, I feel, is to recognize that people are coming from different standpoints and try to appreciate their nuances. On the other hand, approximations as to the positions are necessary, because that's the way things get done. Again, if we are to have a fair hearing and approximation, we must try to ensure some sort of parity and empowerment to different sectors.

1. "Anti-globalization" is a misleading term. I prefer the term "Global Justice Movement" (GJM). Again, it's multi-dimensional. I think we agree that there are powerful lobbies in the US which are against cutting subsidies in agriculture.

However, that isn't the only or even the main concern of the GJM. For example, why do you believe the Indian trade representatives are responsive to the interests of the general population and not of the lobbies?

We can look at the nuance. Who are the people who negotiate at the WTO? What organizations do they represent? What background do they have? Who funds them? The answers are not hard to find.

Moreover, who are the ones who are interviewed in the media? Have you seen anyone from say, the Indian Railways Labour Union on a TV interview?

As a broad conclusion, we may say that, the negotiations would reflect the interests of the negotiators. So it is the task of the rural sector, for example, to impress their voice over the negotiations. It is this sentiment/message which we must keep in mind when we think of GJM or anti-globalization.

In India, that has been successful to a degree. I see that success as the clear message which India, Brazil etc. have sent that the talks would continue failing until the US and EU eliminate their farm subsidies.

2. You say we use the threat of protectionism as a negotiating tactic. Fine. But India has already opened up its agricultural sector, right? Shouldn't we be addressing the unfairness in this a lot more? How many critiques of this have you heard in the media? Allow me to generalize here. Isn't the main thrust in the media trying to liberalize more sectors in the economy rather than facing the unfairness in the liberalization of the agricultural sector?

I don't mean to say other sectors like IT, manufacturing etc. are not important. But if we dismiss the poor rural labourers because they don't understand free trade, we also dismiss their legitimate concerns. We should interview them, send more reporters there, talk to their organizations, empower them, not shun them, as the tendencies in Indian media are.

As regards "free trade", it's largely a matter of naming. We both agree that the current system is not free, nor is it likely to be in the near future. We could have a long-term vision of what trade should be, but I'm more interested in the present. And I think our positions are closer than the naming would indicate. As it should, I believe, if we're honest about the facts.

3. This is a general long-term position. You say "free trade" is inconsistent with "democracy" (as defined by you). Maybe (I don't think it is).

You say:
I am simply saying that inter-country trade must be based on reciprocal liberalization, with the long-term objective of keeping trade as free and unmanaged as possible.

As always, the question should be asked: who gets to decide that the trade is "free"? Is "unmanaged" a euphemism for disempowering the people and empowering the capital-rich institutions?

I've already tried to make the point that the terms in economics are not value-neutral nor unidimensional. People have different ideas about the same term. So a simple principle which we could follow is to take the sentiments of everyone who's affected by the changes into account.

We can ask the question: do the current institutions reflect this principle? Are they moving in this direction?

Take the IMF and World Bank. Do they, by any strech of imagination, reflect transparency, accountability and honesty? Isn't their reform or dismantling a much more urgent concern of proponents of "free trade"?

Are the corporate-globalization measures tending to oppose or support these tendencies of IMF and World Bank? Do they empower them? Do they empower the people in the various countries and sectors of the economy?

These are not easy questions. But they must be addressed.

Karan Vaswani said...

Before I forget, the sources you asked for: The best primer on the issue is probably Andrew J. Coulson's Market Education: The Unknown History. To quote from the book: "Special emphasis is placed on the relative effectiveness of government-run school systems versus markets of independent and competing schools. All of the major school reform proposals, from national curriculum standards to charter schools and vouchers, are also examined. The book does not simply point to a few good schools here or there, or to some redeeming qualities of schools, and then hope that they will magically be duplicated. Nor does it propound a single cookie-cutter definition of a 'good' education. Instead, it offers a practical way of bringing responsive and innovative schools into being on a widespread basis; schools adapted to the specific needs of the families they serve, and accessible to all, not just the wealthy." Coulson, by the way, does not favour vouchers; I find his explanations of how provision would be made for the poorest of the poor without vouchers unconvincing. But the book is otherwise quite good. I particularly commend it for its willingness to look beyond the present and learn from history (one of my degrees is in history, and I'm often struck by how unwilling social scientists are to learn from the successes and failures of the past).

The Indian Economy Blog's archive of discussions on education is here: http://indianeconomy.org/category/education/

The specific discussions I'm referring to were occasioned by a ten-part series of posts by Atanu Dey from April 30th to June 5th. I also recommend the posting from December 17th 2006, and the posting from April 9th on how lousy Indian economics textbooks are. I remember how disgusted I was by my 11th and 12th economics textbooks (they were more like propaganda, filled with the history of Indian 5 year plans, than actually explication of economics); a responder apparently had the same experience:

"The last time I studied the Indian economy was in High School - back in ‘93 or ‘94. We used some lousy text book that told us that the ‘Mixed’-model of the Indian economy was the best form of economy and how Capitalism was evil :-) I wonder if that’s the text book still used in Indian Schools. That book was enough to destroy whatever little interest I had in the field. My interest in economics was re-kindled at IIT when we used the the bible of economics - Samuelson & Nordhaus (http://www.amazon.com/Economics-Paul-Samuelson/dp/0072872055/ref=pd_bbs_sr_1/104-9003353-1459916?ie=UTF8&s=books&qid=1176350788&sr=8-1). Best… book… ever!"

For that matter, Indian textbooks in political science (another subject I studied as an undergrad) were equally abysmal. They should have just swallowed their pride and used foreign books (some of which are actually authored by Indians abroad, ironically -- such as Damodaran's book on valuation theory, which is the very best in the field); today, for example, most top Indian MBA programs use the same textbooks as American ones: Brealey-Myers for corporate finance, Libby-Libby-Short for financial accounting, William Samuelson for managerial economics, etc. There's no question that students prefer them. They need to do the same in the social sciences. The main reason they don't is ideology.

There is some rhetoric that you might be offended by. On the other hand, all the main contributors are actually trained economists or finance professionals. :)

Karan Vaswani said...

Actually, here are more responses to that effect:

Well, the undergraduate stuff, at least in Mumbai University, sucked. I became aware of the Keynesian slant much much later. Till that time, I had only heard about this person from Chicago called Milton Friedman.
Have written an entry on my blog about this.

http://nandanblogged.com/blog/2007/03/18/managing-the-house-the-other-view/

Comment by Nandan — April 12, 2007 @ 8:56 pm

An excellent though slightly technical analysis on India’s Macro economic policy is “Macroeconomics and Monetary Policy” by Ahluwalia,Reddy and Tarapore. I graduated last year from stephens econs..and I can vouch I learnt nothing of any practical use(except from Mankiw’s text). I am in Singapore now, and feel I wasted three precious years in college. How desperately we need a change..I’ll soon be working on employable charateristics of our graduates..and I’m sure I’ll find very disappointing results.

Comment by Anusha — April 18, 2007 @ 8:34 am

I agree with Prashant. A few years in little Jamaica opened my eyes to real economics. Until then, it was committing to memory and regurgitating facts concerning the various Five Year Plans, their targets and achievements and some shibboleths on the mixed economy, courtesy Dutt and Sundaram et al.

Comment by R.Sankar — April 21, 2007 @ 11:02 am

And yet, many people (Srini included), want to prevent reform of these curricula, and only allow reform in professional (technical and managerial) education. They prefer the JNU comfort zone of half truths and lack of quantitative and experimental rigour to world-class social science curricula.

Karan Vaswani said...

Might also want to read this:
http://nandanblogged.com/blog/2007/03/18/managing-the-house-the-other-view/

Karan Vaswani said...

Incidentally, a friend informed me that Milton Friedman's pioneering 1980 TV programme on vouchers is now online at http://www.ideachannel.tv/. It's episode 6 of the original Free to Choose series. I strongly suggest watching it.