New Delhi: Investments in the rural economy and scaling up manufacturing are essential for India to meet the demand for jobs from a dramatic surge in working age population, according to Paul Krugman, who won the Nobel Prize in economics in 2008 for his work on international trade theory. In an interview during a visit to India for the News18 Rising India Summit, Krugman spoke about the trends in global economy, protectionism and the challenges facing Asia’s third-largest economy. Edited excerpts:
What do you think will define the world economy over the next couple of years?
We have a had a very good run for about five years of solid recovery in the advanced world and continued growth in emerging markets. The problem now is whether we can engineer a soft landing from all of that growth. The US has to slow down probably from 2.5% economic growth to 1.5%, Europe has a little further to go but needs to slow down. Can we do that without hitting some kind of bump in the road?
What I worry about is that we don’t have very much by way of shock absorbers. Interest rates are zero in Europe and 150 basis points in the US. If there is some kind of credit crisis or some kind of bubble that bursts, we don’t have a very good response. The predictable part of the story is the levelling-off of what has been pretty good growth. The unpredictable part is, what if we hit a bump in the road? Nobody knows how we respond.
Many economies including the US are cutting down corporate tax rates to stimulate investments. India too is doing so gradually. Do you think this will add jobs and help in lowering inequality or will it only benefit the business class?
I approve of reducing the headline rate. The US had a headline rate of 35% until last fall, which was high by international standards. The effective rate was about 15% and it was very uneven as some companies could exploit some loopholes that others could not.
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What we should have had was a tax reform that simultaneously lowered the headline rate and raised the effective rate. Some of the European countries have done that but the US has not. My guess is that when all is said and done, the economic impact of all of this is going to be less than what the advocates (of tax cuts) think. Investments will not go up very much. The very early indications from the US is that orders for new equipment have not moved up at all. Tax cuts are probably not going to matter much at all. There are a lot of things that impact corporate strategy and tax rates are quite a way down the list. We might see some shift in where profits are reported. We know that there is a lot of phantom income in the world economy. The US may see some improvement in its investment and income positions just because some companies chose to realize their profits in the US but that is an accounting effect, not real.
India’s strength in manufacturing is low cost. Do you think low level of value addition is a constraint in the manufacturing sector’s potential to stimulate growth?
For a long time, that was China’s story. While discussing globalization, I would like to mention Bangladesh. It is a low productivity country with many disadvantages. Bangladesh’s productivity looked like it is 30% below China’s. But it has low costs because of a large workforce. It was not long ago that people used to talk about a Malthusian crisis and famine in Bangladesh. But its per capita GDP has gone up largely thanks to its ability for low cost manufacturing and exports.
India is richer and is further up the value chain. There are clearly a lot of things that India could be manufacturing. That is why India probably needs to move more into manufacturing. Service export, not necessarily the service sector as a whole, disproportionately employs highly educated, high skilled people. You need to create jobs for hundreds of millions of people who are going to need jobs that do not require those skills. Manufacturing is a natural place to employ people.
India has got to move millions of people off the land into some kind of regular job, and manufacturing probably fits the bill. Also, the answer to the employment requirement of developing nations with a large rural population lies in investing in rural areas and partly, in migration.
But there are other markets in Asia, besides China, offering low cost production.
It is a big world. Every time we say there is no room for more players, it turns out that there is room for more players. China is becoming increasingly high cost. Wages are rising in China and it is rapidly losing ground to Bangladesh in apparels. As China moves further up in the chain into more sophisticated products, more opportunities will open up. The idea that the world has run out of opportunities for exports has turned out to be wrong.
What are your thoughts on rising trade barriers and the US government’s controversial proposal for a 25% tariff on steel imports?
In the end, the total number of US jobs will remain the same regardless of what is done to the import tariffs. The immediate impact of the (25%) tariff that the US is currently proposing on steel is that it will destroy a few jobs. Some jobs may be gained in steel but some may be lost in automobiles (the downstream value added industry using steel, which will bear higher cost of imported steel). President Trump has a vision that a manufacturing-centered economy can be recreated but tariffs are not going to do that. The long term decline in manufacturing has only very slightly to do with trade deficits and tariffs will not probably do very much on trade deficit.
Is deployment of artificial intelligence and automation in manufacturing a cause for worry for India with a growing working age population?
Use of artificial intelligence is mostly not so much of a worry as far as total employment is concerned but we do worry that some particular jobs may be displaced. There seems to be distant competition between jobs in India’s service exports and artificial intelligence.
For example, interpretation of medical data can either be offshored to a highly trained medical expert in India who is paid a third of the wage of a comparable person in the US, or you can have a machine learning ecosystem in cyberspace to do it.