Padma Vibushan Jagdish Bhagwati, one of the leading international trade economists and University Professor at Columbia University, was recently in Chennai for the golden jubilee convocation of the Indian Institute of Technology. He spared time for a Sunday drive through Chennai streets to talk to Suresh Babu, who teaches economics to IITians, about his views on the current landscape of global trade. Excerpts:
Given the current global turbulence and sluggish world trade, how important is Bric in global economy?
Bric is a very optimistic idea. It is an artificial adhoc grouping. I do not expect it to influence global trade in any significant way. Individually these countries could be occupying vital roles in global economy, but to expect them to act as a coherent group is undue optimism. I say this because it is hard to find commonalities between them. For example, each of them had a different growth path and had its share of internal problems to tackle, which are very different. India and China, the key members of the so called group are poised to get back to their respective growth trajectory, but Russia is a doubtful performer. Its presence in the group leads more to volatility than stability. More importantly, the interests of the rest of the world, especially the bigger partners in world trade, are quite different in each of these countries. Take the case of the American interests in India and China, they are vastly different. Hence, it is an arbitrary grouping. It is like bricks without mortar!
Until recently, the emerging market economies of China and India were seen as the drivers of global growth. But now, even though Asia is not at the epicentre of global turmoil, they have been hit hard. Your views on the recovery and growth prospects of these two economies.
If past performance is any indication of the future growth of these two economies, then we are to expect enhanced growth rate. Already we see signs of this in terms of higher growth of these economies vis-a-vis their Western counterparts. But to sustain this growth over time is a major challenge and depends on various factors. Despite the doses of reforms India still is ?dualistic? and has to hasten the decline in poverty. The prevalence of ?dualism? contradicts the notion of the emergence of a ?super power?. China has been able to accelerate poverty decline and that is one reason why some of the India-China comparisons are not very relevant. But the system there is politically top-heavy. India provides a lot more social space. These two countries face two different challenges to be on a higher growth path.
The issue about China depends on how is it going to deal with the increasing ?middle-class?. Surely this new class is going to demand more political and social space and if the authorities deal it the way they have been doing in the past, the consequences might be drastic. In India we see tendencies of communal/ethnic issues surfacing. These are destabilising factors for growth. How the democratic framework deals with these issues would determine the feasibility of maintaining the current style of democracy itself.
In response to the crisis, China is implementing policies that would help reduce its reliance on exports as the main growth engine and strengthen the role of domestic demand. Now other countries could also follow China?s example. What could be the consequences of this?
First of all the current crisis needs to be understood from a long-term perspective. Two years of downturn needs to be seen along side twenty years of growth. The export slowdown is a temporary phenomenon. Readjustments in the global economy would spur exports again, and we are
already witnessing these re-adjustments. Inward looking policies might be a short-term solution.
In the long run, to get back to higher rates of growth, export orientation has to be increased, and that is what history has taught us. Soon after the crisis Southeastern economies reverted back to export orientation and this helped them to get back to the growth trajectory quickly. To look inward after the crisis is a risk-averse strategy. What is more important is the need to prepare the economy for possible tsunamis like this by extending support for the poor. If all the countries follow China?s strategy then it is tantamount to rolling back the benefit of trade liberalisation and reinstating the earlier protectionist inward looking regimes.
Until recently there was some fear that trade policy is substituting development policy and now there is an expectation that the current crisis would lead to ?fair globalisation?. Your reactions.
To assume that globalisation in its current form is unfair is unjustified. There is ample evidence to show that it has spurred economic growth and other benefits, especially poverty reduction. I will cite just three.
First is the opening up of trade-in-services that has presented an opportunity for the developing countries to utilise their factor endowments. Second is the fact that there exists the aid for trade programme that was launched after the Hong Kong Ministerial Meet in 1995. This is precisely to help the developing countries improve their capabilities to compete in the era of trade liberalisation. Third issue which people often forget is the fact that the Doha Round itself is called the Doha Development Round. This is to provide ample space for the concerns of developing countries in trade negotiations. Trade liberalisation is linked to development hence trade policy should be integrated with development policy.