Vocal about production, performance and productivity rather than protection – The Gold Standard

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Couple of days ago, my friend Niranjan had told me about his long-form article coming up with two other distinguished Indians. In effect, a formidable trio of thinkers, opinion-makers and writers has penned this article on the ‘Being Open’ to the world imperative for India. Very broadly put, it is a useful and needed message. We should not lose sight of the need for India to remain open, no matter how nuanced it may need to become. At a very broad level, the principle remains valid, even though it has and will undergo contextual modifications.

As I began preparing this post, my son and came to the dining table questioning why it was so difficult to impose gun control laws in the United States of America. There ensued a brief discussion. My response was that ‘the right to bear arms’ might have been enshrined in the U.S. Constitution at a time when it was still a relatively rural society with concern for human and animal trespassing, theft of property, etc. Now, it is a densely populated urban society with social contracts and structures frayed or lost. Shock absorbers have greatly diminshed sponginess or lost their ability to cushion stresses. As human minds become more stressed, the ready availability of guns is a risk to their own and others’ lives. In other words, ‘the right to bear arms’ had a context.

It is not that the ‘pro-gun’ lobby is not aware of this. But, we often feign ignorance of reason or inability to recognise contextual policies and practices, when our short-term interests trump our reasoning instincts. Or, simply persistence of familiar habits wins over reason. Oftentimes.

This digression turned out to be longer than I intended. The point is that context is very important for socio-political and economic policies. Openness to trade and investment from abroad is one of them.

Free trade and fair trade do go together. One without the other is simply not feasible. The arguments made by some economists, using elegant theoretical models, that even unilateral free trade could be beneficial, were mostly ideological than pragmatic or realistic or even useful.

The authors make four arguments as to why India needs to remain open. It is relatively small country in the global context. Two, higher taxes on imports mean higher taxes on exports. Three, reduction in global trade also presents an opportunity and, implicitly, that they cannot be grabbed unless India remains open. Four, labour surplus India should try to take advantage of labour-intensive industries moving away from China and, again, the implicit argument is that it cannot do so unless it remains open.

These are mostly sound and familiar arguments. In fact, the fifth argument – which they make but not number it as such – comes after the four. That is, India still needs foreign exchange. It has a trade and current account deficit (even if it magically finds a way to stop gold imports) and it has to pay for them in foreign exchange. It has to earn those foreign exchange. To do so, one needs foreign investment and export earnings. Both require India to remain open. In other words, being open remains a necessity for India, to a good extent.

This columnist had learnt from reading Ha-Joon Chang and listening to Professor Robert C. Allen that today’s economically developed countries did not become so by practising free trade and open economy. They had huge tariff walls and non-tariff walls too. I had written about it in one of my columns in Mint. Ha-Joon Chang’s book, ‘Kicking away the ladder’ is recommended.

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Ha-Joon Chang’s simple point is that the developed nations kicked away the ladder of protectionism that they practised on their way up and demanded that other nations open their markets for the exports of developed countries,since the latter had now developed capacities and had saturated their domestic markets.

The important thing to note is that today’s economically developed countries not just practise restricted and protected trade but they also did well on providing good education, created a single national market and created good physical infrastructure. The problem with protectionists is that they cherry-pick evidence that suits them but ignore that policies work in concert.

Take China for example. Their scant regard for reciprocal obligations or commitments to multilateral organisations is well documented. A very recent story traces the rise of Huawei to the fall of Nortel in Canada. But, China not just favoured its own enterprises and erected tariff and non-tariff barriers against imports. It had also invested heavily in primary education. Read James Tooley’s ‘The Beautiful Tree’ to get an idea of it. It had created world-class infrastructure and, three, its lead over India in science and technology publications and citations would take at least two generations for India to bridge, if not longer. Its economic growth in the last twelve to fourteen years might have been debt-led but in the previous quarter century, it was led by investment and productivity growth.

The second thing that a policy of restricted trade needs – if it has to stand a chance of succeeding – is internal performance benchmarks. Without holding domestic producers to account for productivity and performance, import substitution becomes a recipe for sloppiness, sloth, costly and inefficient production.

East Asia may have reduced tariff rates substantially because they were mostly small, open economies. Of course, they took the lead of Japan which had growth through exports. The reasons for Japan doing so are as much historical and contextual as ideological, if not more.

Post-WW II, its domestic economy destroyed, it had no choice but to rely on export growth. High import tariff alone would not have enabled it to create domestic investments. It needed to export and imports had to be less costly so that exports won’t be costly. America, which bailed Japan out, post-WW II, would have also wanted competitively priced goods from Japan and not costly ones, in return for all the investment support it provided. Smaller East Asian countries took their cue from Japan because, on the face of it, the strategy succeeded. The strategy required a growing importing economy to absorb Japan’s exports. America provided that market.

While all of these have had their own contribution to the famed East Asian openness, with Japan leading and showing the way, it is also true that they had erected intelligent non-tariff barriers. They offered subsidies, subsidised credit and engaged in infant industry protection. But, that is not the whole story. First, infant industry protection was not maintained into dotage. There were clear expiry dates. Second, they demanded performance from the companies that they supported.

Joe Studwell had written extensively on these in his two books, ‘Asian Godfathers’ and ‘How Asia works?’. I had summarised the learning from his book, for one of my columns in Mint, in April 2019:

It is not that Northeast Asian economies got everything right. Cronyism was there. Tariffs were used to protect domestic industry and additional concessions were offered. Banks were nationalized and loans were directed. However, the emphasis on infant industry protection went hand in hand with external benchmarking through export performance. There were special privileges for local businesses, but there was accountability for export performance. That is how scale, productivity, efficiency and rapid economic growth were achieved. Studwell repeatedly says that Korea punished non-performers more than helping performers, citing that as the crucial difference between the economic transformation of Korea and that of, say, the Philippines and Malaysia. [Link]

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He repeatedly points to the contrast between Southeast Asia and Northeast Asia. The latter did far better on economic performance and the policy building blocks. The latter did not engage in premature financial liberalisation and had also undertaken genuine and far-reaching economic reforms. These were documented in his earlier work, ‘The Asian Godfathers’ and I had written about it in a column as far back as in 2007, for Mint.

So, when, with the benefit of hindsight, we criticise India’s import substitution policies of the Fifties and Sixties (which, by the way, were not unique to India), we should be clear about the causes of the failure. It is not just the nature of such policies but the failure to see through the consequences of such a policy. There was no external benchmarking and hence, performance and productivity slipped. In the aggregate, India’s competitiveness continued to slip. That is why despite nominal depreciation of the Indian rupee against foreign hard currencies, India was never really competitive in real terms. Nominal depreciation and inflation played catch up and continue to do so.

Recently, Srinivas Thiruvadanthai brought to my attention an extremely well-written and important paper titled, ‘From Produce and Protect to Promoting Private Industry: The Indian State’s Role in Creating a Domestic Software Industry’ written in July 2018 by Dinsha Mistree of the Stanford Law School. Reading the paper must be made mandatory for civil servants in India. It is a ready reckoner on how to wreck development of capabilities and how to kill economic opportunity, activity and, consequently, economic growth.

The paper does not make a case for import substitution policies. In fact, protectionism can take the form of ‘produce and protect’ or ‘promote’. If anything, the paper indirectly roots for the latter. I would add ‘promote and perform’ should be the mantra of ‘Atma Nirbhar’. That is, promote domestic industry but demand performance. In the case of the software industry, ‘performance’ was automatic because it catered to the foreign market. Hence, they were competing with global providers of such services.

Among the many interesting anecdotes that are liberally sprinkled in this delightful and brief paper, one is that of Seshagiri, the bureaucrat in the Department of Electronics boasting that the DoE broke 26 rules to enable a satellite link for Texas Instruments so that code could be written in Bangalore. If India were to turn the current growth crisis and economic stasis into an opportunity, one needs bureaucrats who would break rules to make things happen rather than those who cite rules to stop and stall. Perhaps, the so-called vigilance departments, then, had better perspectives.

Unsurprisingly, the paper makes the case for strong political leadership and backing that Shri. Narasimha Rao and Shri. Rajiv Gandhi provided. Importantly, IBM comes out looking good in this paper. If true, then it also holds lessons on being open to foreign investment that India still needs. But, openness to investment and openness to trade must go together. Yet, there is both room and need for nuance. Openness cannot be an ideological imperative.

While this is all history, may be, there is an opportunity to learn from it and now apply it. A specific situation has arisen. ‘BusinessLine’ reports:

The manufacturing hub of Morbi known for its tiles and timepieces is making a big play to become the toy factory to the Mattels, LEGOs and Hamleys of the world. It aspires to replace Chinese supplies and become the new playground for multinational toy giants. [Link]

The manufacturers are not only confident of cost but also of quality that the world toymakers might demand. They are also talking to LG, Hitachi and Samsung on consumer durables. Good for them. They have written to the Prime Minister, the article says, for support. If so, it is an opportunity to render assistance (not necessarily protection), consistent with WTO obligations, but do so with clearly spelt out expectations of export performance and also with sunset clauses for such support. Such an approach combines ‘protect’ with ‘performance’. It is consistent with ‘Atma Nirbhar’.

The CPB Netherlands Bureau for Economic Analysis publishes a monthly World Trade Monitor. But, due to the covid crisis, the last one was published in April and the next one is due later this month. World Trade is contracting. Boosting exports is about grabbing and gaining market share at the expense of others because the global trade pie is not growing. The challenge is even harder than in normal times and calls for greater attention to and emphasis on productivity and performance rather than protection alone.

Indian political and bureaucratic leadership have their task cut out and it is very encouraging to note that the government is going ahead with the negotiations to conclude a trade and investment agreement with the European Union. At a micro level, it is encouraging to see that the ban on TikTok is seeing Indian app. producers gaining in market share.

The article in Bloombergquint has this all-important message for India’s private sector in general:

“India’s entrepreneurs didn’t lack talent, they were just short on ambition,” Bhat said. “The combined effect of the coronavirus lockdown and the app ban presents a never-before, never-again opportunity.”

In fact, as much as we exhort and advise governments on what to do and what not to do, the target segment that we, the opinion-writers, must target is the private sector – the private players.

‘Far Eastern Economic Review’ had quoted the Philippine author, Francisco Sionil Jose in December 2004:

We are poor because our elites have no sense of nation.

So, India should be vocal about performance, production and productivity rather than protection. This is how I would reinterpret the learned writers’ title, ‘India should be vocal about global’

[Postscript: This blog post is neither a response nor a rejoinder to the article by Dr. Kelkar, Dr. Mashelkar and Dr. Rajadhyaksha. Dr. Nageswaran has sought to train his lens on another aspect of the malady and has complemented the three doctors.]

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