Shyam Saran, Business Standard
The 2007-08 global financial crisis continues to alter the world’s economic scenario, argues the writer in the first instalment of a two-part series
The investment and export-led growth model that marked the emergence, successively, of the east Asian, south-east Asian and Chinese economies, is being questioned in the light of developments since the global financial and economic crisis (hereafter called the Crisis) that erupted in 2007-08 but whose consequences continue to alter the international economic landscape. This crisis was unprecedented in that it arose at the very epicentre of the world market, the nerve centre of the world financial networks and comprising the most advanced, affluent and influential countries. These countries, had collectively evolved the legal infrastructure, set the standards and norms underlying international trade and investment and dominated the global economic architecture over the past two centuries or more. Such entrenched systems take a long time to change but change may be accelerated by unexpected and far-reaching crises.
The emergence of east Asian, south-east Asian and Chinese economies, took place in a global economic landscape dominated by the mature economies of the trans-Atlantic zone. It is also the post-World War II expanding markets in this zone, joined subsequently by Japan, and the flow of capital and technology from the zone which made the investment and export-led growth model a viable choice for the emerging economies. These countries also enjoyed a high rate of domestic savings, relatively cheap but increasingly skilled labour and local entrepreneurship supported by the state. Although this is debatable, some analysts argue that having relatively authoritarian regimes in these emerging countries at least during the initial period of high growth would have also helped. For most of the post World War II period, world trade has risen at a rate twice as fast as global gross domestic product (GDP) growth, as barriers to trade flows have progressively diminished. There has also been a remarkable increase in capital flows emanating from the developed countries, which have promoted and enabled export-led growth in developing countries. Typically, foreign investment has involved the setting up of local processing or manufacturing units for generating exports back to the home country or other markets. The setting up of complex regional and global supply chains by international multinational companies, has reinforced this trend.
Although a latecomer, India has, since its economic reform and liberalisation programme began in the early 1990s, shifted its stress to investment and exports as key drivers of growth. This enabled the Indian economy to gravitate to a much higher growth trajectory almost double of the pre-reform years. The country has been less successful in integrating itself into value supply chains and this has become a major constraint on its exports. It remains a mostly domestic demand-driven economy.
So what has changed since the Crisis and what are some of the enduring features of the emerging global economic landscape?
The Crisis has transformed and is still transforming the global economic architecture. Some of the earlier trends are being reinforced, such as the shift of global economic activity from the trans-Atlantic to the trans-Pacific, both in terms of proportion of global trade but also investment flows. What has not changed much is the continuing domination of the global financial markets by the West, which continues to mediate even the flows generated by emerging countries. Neither has there been much change in the West determining the legal norms, standards and regulatory frameworks, which govern inter-state economic activity. More importantly, the West, but in particular the United States, continues to be the chief source and repository of innovative technologies. As growth becomes increasingly driven by technology and knowledge in general, the West will continue to enjoy pole position in the global economy. These factors will change at a slower pace unless there is a virtual collapse of Western economies but this is unlikely. These enduring factors need to be kept in mind as we try and fashion an appropriate economic strategy for India.
There are several changes that are apparent and will have significant impact on India. According to the World Trade Organisation (WTO), trade grew by six per cent per annum between 1990-2008 while world GDP grew by about three per cent per annum. Since 2008, this long-term trend has been broken as global trade has been rising at the same rate or even slower than global GDP. The trade slowdown is visible even in China. The recent devaluation of the Chinese yuan has been triggered by the fear of losing share in a diminishing market. India’s exports have declined over seven consecutive months. They have remained flat at about $300 billion a year over the past four years. Even services’ exports have remained sluggish. It is unlikely that the target of $900 billion for goods and services exports will be reached by 2019, since it would require 15 per cent growth year-on-year from now. Rising exports are not likely to emerge as a significant growth driver in the near future without major policy interventions. The importance of the domestic market as a growth driver may even increase in salience.
The story is similar with respect to cross-border capital flows, which have yet to pick up from the steep decline in the post-Crisis period. While India has been a modest recipient of foreign direct investment and international portfolio investment, we are witnessing more Indian firms investing outside the country than foreign firms investing in India. This, too, goes against the east Asian model.
China’s emergence as a top-ranking exporter of goods in the past three decades and more was associated with a remarkably favourable international economic environment up until the Crisis. There was an open and expanding market for its goods in the major advanced markets and a sustained flow of external capital to enable investment-led growth. The international economic environment post-Crisis is no longer as benign and India today confronts a relatively stagnant but much more competitive global market.
In the post World War II period, the overall trend was towards creating an open, transparent and rule-based multilateral trade regime. In the early years, the differentiation between developed and developing countries was taken as a basic principle, with relatively greater responsibilities and commitments falling on the former. However, since at least the Uruguay Round in the early 1990s, the focus began to shift towards reciprocity as the guiding principle and the exclusive focus on goods trade and tariff regimes also began to give way to, including services and some non-tariff provisions, as part of what is now the WTO regime. Furthermore, the basic principle of Single Undertaking, that is, all parts of the trade regime must be accepted by WTO members with no partial agreements, has also been diluted. Even among WTO members there are plurilateral initiatives underway such as the Trade in Services Agreement (TISA) and the Information Technology Agreement (ITA-2). India’s non-participation in these sectoral regimes requires a careful rethink. The WTO permits limited bilateral and regional free trade arrangements despite the latter diminishing its role as the premier multilateral forum for universal rule setting . It is becoming increasingly a forum for settling trade disputes. This trend began before the Crisis. It is being reinforced post-Crisis. Despite its commitment to the WTO and multilateral processes, India itself has concluded bilateral and regional trade agreements. It has also conceded the inclusion of services and a few other areas in its Comprehensive Partnership agreements with a select group of countries. Acknowledging this trend and evolving a coordinated strategy to deal with it has become an urgent necessity.
The global trade regime has been moving away from a focus on tariffs and border measures to behind the border issues, in particular, standards, regulations and norms relating to labour, health, intellectual property rights and the environment. Keeping some of these issues out of the WTO has not led to their exclusion from bilateral and regional trade agreements. It is the tariff prism through which India continues to frame trade related issues and this influences its negotiating strategies. India has joined bilateral or regional trade agreements for defensive objectives, mainly to preserve market share or to preventing trade diversion rather than as instruments to preserve trade and investment. Business in India has itself not been an active player in shaping negotiations on Free Trade Agreements (FTA) because of this defensive mindset. Indian negotiators achieved success in phasing out textile quotas in a 10-year time frame, but the textile industry in India made no effort to use the transition period to upgrade the technological standards and scale of operations to be able to compete in a highly competitive market. An opportunity created by negotiators was lost by lack of follow-up.
Adapting to the demands of advanced markets
To prevent being pushed to the margins of the global economy, Indian industry needs to benchmark itself against the best in the world, argues the writer in the concluding instalment of the series
There are now two mega regional trade agreements under negotiation and India is excluded from them. These are theTrans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP). If and when concluded, TPP and T-TIP together will constitute 60 per cent of global gross domestic product and 40 per cent of global trade. Both are largely about establishing common standards, achieving regulatory coherence and harmonisation of procedures. Even if there is a delay in concluding the agreements, the trend towards their establishment in trade relations will continue. Once the two mega-deals become a reality, attempts to introduce their provisions into the World Trade Organization (WTO) are inevitable.
India is a participant in the ongoing negotiations on a Regional Cooperative Economic Partnership (RCEP), which brings together the 10 Asean countries along with six partners – Australia, China, India, Japan, Korea and New Zealand. These negotiations exclude labour, intellectual property rights and environmental standards and regulatory measures. But several of the RCEPpartners are also participating in the TPP, including Japan, Malaysia, Singapore and Vietnam. They will undoubtedly try to migrate the features of the TPP into RCEP.
India has bilateral Comprehensive Economic Cooperation agreements with Japan and Singapore and is close to concluding one with Australia. These countries’ participation in the TPP will have implications for the competitiveness of our goods and services in these markets.
The conclusion, therefore, is inescapable: to maintain and promote India’s exports to its major markets, its goods and services will have to conform to the higher standards laid down by them. This is especially so in the current phase of a slow growth in global trade, making competitiveness a key factor.
There cannot be complacency on grounds that we are a large and expanding domestic market, which does not require adherence to international standards. The globalisation of the Indian market and consumer choices now available generate preference for higher quality imports. Whether it is Make in India or Make for India, for domestic consumption or for export, conforming to international standards and best practices has become imperative. This also requires the strengthening and capacity building of our regulatory authorities and their compliance mechanisms so that they enjoy the reputation of a Reserve Bank of India or Securities and Exchange Board of India. A public/private partnership to achieve this is overdue.
One of the significant changes in the structure of global trade has been the emergence of regional and global supply chains through which overall trade has expanded. Countries have to become participants in these supply chains to become active and major players in global trade and investment. Modern infrastructure, transport facilities and efficient trade facilitation are indispensable. So is rigorous quality control. India has mostly been bypassed by these chains, which have become even more important as instruments for generating trade post the 2007-08 global financial and economic crisis. In this context, the WTO’s Trade Facilitation Agreement would help India’s participation in supply chains.
Technology and innovation have become the key drivers of modern economic growth and trade. Technological innovation is necessary to increase India’s limited export basket. Technological innovation requires advanced skills. Most of India’s highly skilled personnel are not in India but abroad, or if they remain in India, they are likely to be found deployed in the research and development centres of multinational companies in places like Bengaluru or Hyderabad. Unless we create a favourable ecosystem to generate and harness the skills that a knowledge society demands, we are likely to fall behind the front-ranking nations of the world. There are compulsions of ensuring inclusiveness in a highly unequal society. However, inclusion should be pursued by raising standards encompassing progressively larger sections of the population rather than by lowering standards to accommodate them. This is admittedly more challenging but necessary. Creating and maintaining islands of excellence can only be a temporary palliative.
India currently accounts for less than two per cent of global trade. Its negotiating clout is limited. If its negotiating posture is out of sync with the overall trends referred to, there is a danger of the country getting consigned to the margins of the emerging global economic and trade architecture.
Membership of the Asia-Pacific Economic Cooperation (APEC), could be a step towards reorienting our trade structure. APEC works through establishing benchmarks and sharing best practices among members on a voluntary basis. The corporate sector plays a more significant role in this body. Therefore membership would be of value in exposing India’s corporate sector to evolving international norms and standards and establishing mutually beneficial collaboration with its counterparts. APEC is soon to embark on a study of a potential Asia-Pacific Free Trade Area proposed by China. This may, in future, subsume the TPP. This is all the more reason for India to be part of APEC sooner rather than later.
India’s large and expanding market, its demographic profile and the quality of its high-end labour are important assets that could be leveraged in pursuit of a more salient and active role in the emerging regional and global economic architecture. But this requires a carefully crafted strategy. China has successfully done so to access both markets and technology. India should learn lessons from its willingness to accept and adapt to the demands of advanced markets, creating a critical mass of interdependencies which is, in turn, being leveraged for geopolitical advantage.