Home/ News / India/  Growth of value chains will be hurt by trade war: World Bank’s Aaditya Mattoo

NEW DELHI : NEW DELHI: Aaditya Mattoo is the co-author of a World Bank Development Report (WDR) 2020 onGlobal value chains (GVCs) and its role in powering a surge of international trade after 1990. In India on a short visit, Mattoo, the World Bank’s Chief Economist for East Asia and Pacific Region, spoke of the impact of the US-China trade war on GVCs, the lessons India could learn from countries like Bangladesh and Vietnam and why automation and artificial intelligence need not necessarily lead to job losses. Edited excerpts from an interview.

What is the impact of the US-China trade war on GVCs?

To a limited extent it is conceivable that a trade war between the US and China would divert trade to Vietnam or India. But that is myopic because the increase in policy uncertainty will eventually end up hurting everybody. Global value chains often require investments in relationships and the willingness to make those investments is diminished by uncertainty. Some estimates suggest that the positive short-term benefits of trade diversion for India will be outweighed by the negative investment-inhibiting effects – which could lead to a decline in GDP by close to 1 percentage point and push another 7 million people into poverty. But trade wars are not inevitable. A large country like India has the capacity to change the face of international trade and of international cooperation. On the one hand, it can help deepen traditional trade cooperation by defining an agenda that incorporates the legitimate concerns that the US has about China, because of subsidies and state owned enterprises (SOEs) that are distorting trade. On the other hand, it can continue to participate imaginatively and boldly in initiating international cooperation beyond trade in areas like taxation. That wider cooperation would help resource mobilization by governments in a globalized world where capital and skills are mobile. That would enable rich country governments help their workers adjust to international cooperation, and poor country government build the hard and soft infrastructure needed to engage in trade. That needs India to be not a reluctant participant in trade negotiations but a leader that redefines and shapes the narrative around trade and cooperation.

India has just chosen to sit out of the Regional Comprehensive Economic Partnership. How does this impact India’s chances of wanting to be part of GVCs?

I think the biggest impediments to India’s participation in GVCs are its domestic impediments -- distortions of its land, labour, capital markets, the weakness of its logistics chain and also its relatively restrictive trade policy in goods and services. A trade agreement is a way of accelerating domestic reforms and securing access to foreign markets. It is not necessary – a lot of these reforms can be implemented unilaterally. There are estimates that suggest that thanks to RCEP India could see an increase in exports by 7 %, and an increase in its GDP by 1% if it joined RCEP. This has to be compared with the cost of being left out. But it’s hard for me to judge what precisely was on the table in RCEP. What I can say unquestionably is that India’s own reforms would have provided a big boost to GVC participation and also that those reforms are necessary to benefit from any agreement whether its regional or multilateral.

So what are these steps that India should take?

India has already taken important steps –steps to improve its logistics services, improving the hard infrastructure and a lot of regulatory reforms. In the labour market you are aware of the rigidities which make it hard for firms to grow. In most countries, large firms dominate exports and trade, while in India we see relative stunting, that firms are not growing. In India, only 10% of firms employ more than 500 people – in China more than 30%. Land reforms are crucial, they also have distortionary effects on capital markets. Trade policies in India are in one sense going in reverse. From 2012 the share of exports of goods and services in GDP has declined from 25% to 20%. Services reform too will enhance India’s participation in both goods value chains and services value chains. Past reforms – in telecom, finance, transport – has delivered benefits, including for manufacturing productivity, but reform is incomplete. Services like retail are important for development. Retailers often invest in logistics value chains. Restrictions in business services like accounting and legal services increase transactions costs for the whole economy. Those reforms are a priority.

The World Bank has produced an “Ease of doing business (EODB)" list in which India has jumped many places. How do you square that jump in the ranks with what you have just said – that India still needs lots of reforms?

Ease of doing business says how many days it takes for me to get a license, how many days does it take for me to do A,B or C. There are also indicators that look at explicit policy; for example, whether foreigners can enter and own firms in sectors like retail or insurance. But between the ease of doing business procedural story and the explicit policies story, falls the shadow of regulatory discretion. The regulator decides whether to award a license, whether to award a particular right to entry – that is an area which is very hard to shine the light on. But my sense is that that is an area where there are big imperfections that need to be addressed.

So for businesses what does it mean when it is said that India has moved up many notches in the EODB rankings?

As I said, the improvements are unquestionably there – a lot of procedures that were time consuming have been streamlined. And that must be recognised and must be valued. But finally the proof of the pudding is in the eating – whether people are investing, when the value chains are moving away from China, whether they are coming to India. And I think that’s where the fundamentals matter. A lot influences your comparative advantages – whether it is easy for me to employ people, pay them an efficient and fair wage and be productive and profitable. And when I produce, is it easy for me to move products, and to bring imported inputs in without having to haggle with customs or whether I can export out to destinations which give me relatively liberal access. Those are the kind of things, if you break it up, if you look at that value chain of importing to export, which should influence the domestic reform agenda.

What are the lessons that India can learn from countries like Bangladesh and Vietnam because the report highlights these countries as successes?

Bangladesh shows that it is sometimes a blessing not to be able to do everything. The fact that they did not have a major domestic textile industry to protect meant that they were able to allow cloth to be imported and focus on doing what they were really good at – cutting and stitching. In India’s case the need to protect the domestic textile industry has become a handicap for the domestic apparel industry. Bangladesh has 7% of the world’s apparel industry. It has reduced poverty from more than 44% to less than 10%. But Bangladesh is not an entirely positive story because its GVC participation is relatively stagnant. It has been doing the same thing for the past 30 years. And this is where Vietnam is interesting. Vietnam has seen progression. It has moved from apparel to electronics to progressively more and more sophisticated participation by endogenously improving their skills and moulding their dynamic comparative advantage.

You have said that Artificial Intelligence/ automation need not be feared, it will not necessarily mean constricting employment rather it can lead to employment creation. Can you explain this?

The industries that have seen the greatest robotification are those that have seen the fastest growth in demand for imports from developing countries. It has always been true that human ingenuity does not just find ways to make human beings redundant. It also finds new tasks for human beings to do. But I don’t think thats a reason to be complacent. I like to think of this as a race between two prices – one is the real wage in China, the other is the price of a robot. If real wage increases faster than the price of robot falls, then a company in China when it faces rising wages in China will move its production out to Vietnam, Bangladesh and hopefully India. But if the price of robot falls faster, then that company will not move in response to an increase in real wages, it will buy a robot. There is no doubt that the price of robots is falling and there is no doubt that the real wages are rising. There is a narrow window in between. It’s not a window of complacency, it’s a window of urgency and you need to find a way in which you implement reforms and take advantage of it.

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Updated: 04 Dec 2019, 03:56 PM IST
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