On a summer vacation marked by rains and cold weather, I managed to finish reading the book, Writing on the wall by Will Hutton. I had cited a few specific paragraphs from the book in earlier columns. The book was meant to be on the subject of China, the problems that the country would face in its quest to become the world’s superpower and how the West should deal with it. But some of the chapters were devoted to Hutton’s pet subject of enlightened capitalism.
The discussion on the commitment of the US to liberal economics (market economics) should be of interest to policymakers in emerging markets who are constantly harangued on the virtues of trade liberalization, market opening, etc. The United States held its high tariffs on imports for nearly a century and oscillated between protectionism and free markets as its national interests demanded. The discussion on the inclusion of financial and telecommunication services in global trade negotiations at the instance of Citibank and Federal Express in the 1980s, makes for fascinating reading.
That is why the comment by Susan Schwab after the collapse of the trade talks in June that the positions of India and Brazil were “smoked out” betrayed not only the traditional American arrogance, but also ignorance of her own country’s history and opportunistic commitment to trade liberalization. Also, the use of the phrase, “smoked out” was exactly the same phrase used by President Bush in his speech to the US Congress after the 9/11 attacks when he promised to track down the culprits. For once, India and Brazil were right to stand down the threat of the United States and the European Union. These are empty threats.
Free movement of capital helped US banks gain access to emerging economies in Latin America in the 1980s and Asia in the 1990s. That was responsible for the Latin American debt crisis and partly so for the Asian crisis in the 1990s, for liberalization was not preceded by institutional preparation in these countries. That remains the case today in many developing countries. Capital flows look set to overwhelm many of them.
Free movement of capital has worked in reverse, too. America has benefited from capital flows from the developing world. Thanks to such inflows, interest rates in the US remained low and financed the housing boom in the early part of this decade. It would be a delightful instance of reverse justice if the housing boom were to turn into a bust and drag the economy down with it in the US, for that is, what American capital flows did to many emerging nations in the past.
At the same time, free movement of another factor of production—labour —remains anathema. Security concerns have emerged post 9/11 as a convenient fig leaf. That is why neither “insourcing” of labour nor outsourcing of jobs is accepted in the West. The lesson in all of this is that unilateral trade liberalization is an idea that exists in the economists’ lexicon and minds. It has found no currency among policymakers and does not do so even now. It is a political tool used to prise open others’ markets at the instance of domestic businesses. The discourse on liberal trade and economics continues to be marked by double standards and developing nations should not fight shy of playing the same game.
However, the crucial difference is that the US ushered in a competitive and accountable economic system internally. That helped to produce strong companies that could then demand and secure global access with some political assistance.
India, which has spearheaded the developing world’s resistance to the antics of the US and the EU on international trade negotiations, should ask itself whether it has learnt to separate negotiating tactics with what is good for the economy. In the last three years, as in many other instances, the movement towards a liberal economic order has regressed. Industry is not above blame either. Incumbents continue to block regulatory changes that would reduce barriers to entry in many sectors—whether it is in telephony or in organized retail sales. Political parties are willing partners in such endeavours for obvious reasons. India is not yet a single market for many goods and services and that would equip many businesses to operate on a continental scale. Conquering the world would then become easier.
This will surely impact the long-term economic performance of the country. It may well be the case that the economy is in line for a cyclical soft-landing due to deft demand management on the part of the Reserve Bank of India. But, the costs of actions of omission on the economy and commission otherwise, would surely be felt in the future and it remains the case that valuations on Indian stocks do not reflect these risks.
(V. Anantha Nageswaran is head, investment research, Bank Julius Baer (Singapore) Ltd. These are his personal views and do not represent those of his employer. Your comments are welcome at email@example.com)