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Business News/ Opinion / Online-views/  It’s time for Indimerica now
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It’s time for Indimerica now

A new working paper published by US National Bureau of Economic Research says India is set to replace China as the dominant periphery country

China’s gravitating from the periphery of the global monetary system to the centre will leave a vacuum, a vacancy waiting for India to step in. Photo: Ramesh Pathania/MintPremium
China’s gravitating from the periphery of the global monetary system to the centre will leave a vacuum, a vacancy waiting for India to step in. Photo: Ramesh Pathania/Mint

Just a few days before Prime Minister Narendra Modi’s visit to the US, a new working paper by three economists—Michael Dooley, Peter Garber and David Folkerts-Landau—published by the US National Bureau of Economic Research (NBER) says that “India is poised to replace China as the dominant periphery country." By ‘periphery’ they mean developing country, in contrast to developed economies, which are taken to be the centre of the world economy. Historian Niall Ferguson had coined a new term ‘Chimerica’ to describe the symbiotic economic relationship between China and the US. Is it then time for Indimerica now?

Dooley, Garber and Folkerts-Landau are famous for their Bretton Woods II theory. In 2003, at a time when many were crying hoarse about the balance of payments imbalances being built up as a result of huge US current account deficits and corresponding Chinese surpluses, these economists propounded an audacious new thesis that argued the imbalances were not only sustainable, but were the drivers of growth in emerging markets.

They said that during the days of the Bretton Woods international monetary system in the mid-20th century, Europe and Japan maintained undervalued currencies and controls on capital movements and built up foreign exchange reserves by their exports to the US, while the US maintained open markets for their imports. Their paper argued that once these economies finished their reconstruction and joined the economic centre, Asia became the new periphery, with China at its hub. Therefore, they said the old Bretton Woods system was far from dead and they dubbed the new arrangement, with America and China as its two poles, as Bretton Woods II.

The financial crisis pushed the Bretton Woods II thesis into the background. After all, it was debt-fuelled US consumption that lay at the heart of the disaster. But Messrs Dooley, Garber and Folkerts-Landau stuck to their guns, arguing in a 2009 paper that the crisis was only “a temporary breakdown in the plumbing".

Their new paper, published this month, is titled ‘The Revised Bretton Woods System’s First Decade’. It reiterates their old arguments, claims that events have transpired more or less as they predicted and that the Bretton Woods II system has survived the crisis and is alive and well.

But a change is in the offing. The paper says, “In the remarkable policy shift emerging from the Third Plenum in November 2013, Chinese authorities stated the intention of reversing the policies that in effect established China’s role in Bretton Woods II. They also have expressed a view that the exchange rate is near equilibrium and the export-driven development policy is near its end." The Chinese now want to give greater emphasis to domestic consumption as the driver of growth. Also, Chinese wages are going up and foreign investors are looking at cheaper locations to set up their plants.

That is where India comes in. India’s growth so far has been very different from the East Asian model. India is a net importer of capital, with a large current account deficit. Manufacturing is a small component of its economy. Domestic consumption, rather than export or investment, accounts for the major share of Indian gross domestic product (GDP) growth. True, Dooley, Garber and Folkerts-Landau point to the boom years between 2002 and 2007, when the current account/GDP ratio averaged zero, when export growth was at par with China’s and when foreign direct investment (FDI) picked up. But their hope that India’s future is likely to be very different lies with the current government.

Consider the Chinese development model. It pursued an export-led development strategy and overcame protectionist tendencies in developed countries by inviting FDI to take advantage of its low labour costs, thereby appealing to the interests of foreign capital, which responded by ensuring that their markets remained open to imports from China. It spent huge amounts to make its infrastructure world-class and ensured clearances in days in order to attract foreign investment.

Now consider—as Messrs Dooley, Garber and Folkerts-Landau do—the Bharatiya Janata Party (BJP) election manifesto that calls for making India a hub for labour-intensive manufacturing. It lays out a vision for developing infrastructure to facilitate trade and commerce and it calls for reducing the current account deficit by increasing exports. International manufacturing regions are to be set up and FDI is to be welcomed in all sectors, except in retail trade.

Of course, as the paper says, a political manifesto is merely a wish list and everything depends on implementation. But didn’t Prime Minister Modi make an impassioned appeal from the ramparts of the Red Fort to foreign investors to ‘Come, make in India’? Has he not been focused on getting investment from Japan and China? On 25 September, before leaving for the US, Modi is set to unveil a raft of proposals designed to get foreign companies to set up shop and make the country a manufacturing powerhouse.

To be sure, there is much to be done on the ground, ranging from sorting out the mess in the energy, power and telecom sectors to drastic changes in labour and land laws. But after a long time, India now has political stability, thanks to the BJP’s huge mandate. The government can, if it wants to, force a sea change in India’s development model, bringing it more in conformity with the East Asian one. The task is going to be far from easy, but China’s gravitating from the periphery of the global monetary system to the centre will leave a vacuum, a vacancy waiting for India to step in. If the right policies are pursued, it would mean, as Dooley, Garber and Folkerts-Landau underline, “India is readying itself to take up China’s role as the next large periphery in the revived Bretton Woods system." That is the message Modi should take to US investors.

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Published: 16 Sep 2014, 12:17 PM IST
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