The economist Arvind Panagariya recently wrote an article titled “Giving up on the world?”, a critique of the Atmanirbhar Bharat initiative for committing the cardinal sin of “import substitution”. Prof. Panagariya is a student of Dr Jagdish Bhagwati, who was called the God of Free Trade and is a major champion of the World Trade Organization (WTO). Alan Greenspan was the God of Money, as the Chairman of the US Fed.
The Gods that failed: Greenspan’s reputation died in the Global Financial Crisis of 2008-09, when he admitted in his mea culpa before the US Congress: “This crisis, however, has turned out to be much broader than anything I could have imagined. ... Those of us who looked to the self-interest of lending institutions to protect shareholder’s equity—myself especially—are in a state of shocked disbelief. … The whole intellectual edifice, however, collapsed.” He added in front of the US Congress: “I still do not fully understand why it happened.” Even now no one understands why what happened in 2008 happened and whether it would not occur again.
With the God of Money discredited in 2008, let us come to the God of Free Trade, Prof. Bhagwati.
The USTR has written a long article in Foreign Affairs magazine where he says that the national interest of the US and domestic jobs will prevail over the WTO. China has been declared a non-market economy by the US and EU trade representatives. Western democracies are finally waking up to China, a Marxist state with an export-obsessed economy, skilfully exploiting the WTO. So much for free trade.
In my view, the future paradigm is a return to a more traditional world trade in place of the failed free trade combined with free money paradigm, with its super-globalised supply chains. That is precisely why Prime Minister Narendra Modi has shifted the economic paradigm to Atmanirbhar—self-reliance. I view self-reliance not merely as a useful consequence of economic policy, but as a fundamental goal; 2008 and 2020 give us ample reasons.
I will focus on three main points below in response to Prof. Panagariya: the vast surplus labour situation in India, the global trade outlook and the need for strategic technological know-how. 1. Surplus labour in India Prof. Panagariya writes: “Once we recognise that the notion that we can add to GDP by simply replacing imports by domestic output is a fallacy ...” In my village, many farmers have purchased rice planters, made in Japan; the nail clipper I bought recently at the local store was made in South Korea and the hair trimmer made in China. Five unemployed engineering graduates approached me for jobs. Can you see the organic connection?
If I am unemployed, I would prefer to cook my own meal than to eat out at an expensive restaurant—I am doing “import substitution” here. Yes, that can lower GDP—the restaurant does not get to book my purchase—but I also don’t go into debt to pay for that meal. When economists argue “import substitution cannot add to GDP”, they ignore the debt involved in consuming without producing. Most rural districts in India run a substantial “trade deficit” with the rest of the world. They buy various value-added goods, and try to pay for these “imports” (both foreign and domestic) with agricultural commodities.
They pay for their purchases with: a) migration of rural labour to urban areas to earn a wage income; b) farmers going into debt; c) farmers selling their land; d) government transfers of resources to rural areas. These are not sustainable solutions to the underlying trade deficit rural areas face. The reality is there is a vast pool of surplus labour in India. The US, the largest economy in the world, has a labour surplus too. We can now recognise why Prof. Panagariya’s argument does not apply: When our own labour is idle, we must focus on using our labour to produce the very goods that we consume (i.e import substitution). Only that can create GDP without creating debt, particularly external debt, which I deal with in section 2.
To produce our own consumer goods, we need to import capital goods at first; today we import a lot of consumer goods. I will come to capital goods and know-how in section 3. 2. US trade deficits and debt-based global monetary system: The external debt leads to my second argument, the state of the global trading system. This is where my preface is important. The present globalisation regime (also known as the Washington Consensus) faces serious challenges due to the role of the US dollar, and the unwillingness and inability of the US to run even higher trade deficits to “fund” this system.
Here is how the process has worked: The US has to import more than it exports, in order to provide the rest of the world the dollars it needs to trade with each other. So when, say, India and Nigeria trade with each other, that trade is settled in US dollars, and those US dollars originally arose due to the US importing more than it exported. Those deficits have another effect on the global monetary system: They become dollar reserves in the banking system around the world and those reserves get multiplied into dollar loans by global money center banks and shadow banks, particularly banks not under the regulation of the US Fed itself.
These dollar liabilities, which both emerging nations and companies outside the US have, have led to the situation where ever larger quantities of dollars are required to save the global financial system from the persistent “dollar shortage”—a direct consequence of the monetary multiplier. This system is fundamentally fragile. My last section focuses on resilience. 3. Importance of technological know-how and resilience: I mentioned capital goods (machine tools and the critical production know-how) in section 1 and right now, India imports most of them. Longer term, India importing goods that need sophisticated know-how (including most capital goods) while exporting commodities and simpler finished goods will keep us permanently in a low-to-medium income trap, Mexico being a classic example.
The know-how required to build an MRI machine or a semiconductor fab is not easily acquired and requires decades of painstaking work. We need to invest resources in producing that know-how, and that investment today will seem like import substitution, so wasteful—after all, MRI machines can be readily imported, therefore why not just import them? In this case, there is serious “path-dependence” in GDP—the lack of investment in serious know-how today will impede our economy greatly 10-15 years from now. Even if the R&D investment in acquiring the knowledge already acquired elsewhere is not “optimal for GDP” today, our future prosperity depends on it. Self-reliance builds resilience in the economic system and helps achieve fairness in employment and social policy. We need global trade, built on a strong foundation of self-reliance.
Sridhar Vembu
CEO, Zoho Corp
(Tweets @svembu)