The Hindu Business Line : A case for good protectionism

THE defeat of the NDA Government and the victory of the Congress(I) supported by the Left is one more symptom of the growing worldwide backlash against globalisation. White- collar workers in industrial countries are loosing their jobs to the cheaplabour of India and China. Services, such as research, are now being outsourced because scientists in the developing countries are cheaper.

On the other hand, workers in the developing countries are finding that their wages are stagnant while inequality is rising. The belief was that free trade leads to efficient production and also forces domestic government to reduce corruption. This provides relief to the people. Else businessmen would have to pay money to local thugs and politicians to avoid trouble.

Government officers would have to be bribed to run normal business. For instance, a boiler inspector can shut down a plant for 15 days on frivolous grounds. The money paid to politicians and officers by the businessman adds to the cost of production and raises the cost of his produce say, cloth to Rs 25 a metre instead of Rs 20. The cost of production of similar cloth in other countries having good governance, however, remains low because they do not have to bribe politicians and officers.

The cost of other inputs, such as cotton, machines and chemicals, remains the same in all countries because of free trade. Cloth produced in another country can conquer Indian markets if the cost of production in that "clean" country is Rs 20 and is Rs 25 in "corrupt" India. Textile mills in India will have to down shutters.

Ultimately, politicians will have to reduce the money they extract from the businessmen failing which they will be killing the goose that lays golden eggs. The same applies to inefficient businessmen.

Globalisation will force the Indian businessman to install latest looms in order to survive. This will provide good and cheap cloth to the Indian people. Globalisation, indeed, begets clean governance and efficient production.

The difficulty, however, is that free trade also works in the labour market. Say, India and another country both have clean governments and the cost of production of cloth in both countries is Rs 20 a metre. The wage rate in the other country is Rs 80 per day.

The Indian businessman will not be able to pay more than this rate to his workers as otherwise his cost of production will increase and he will be priced out of the market. The country paying lowest wages wins in free trade. Free trade leads to equalisation of wages rates to their global lowest levels. This decline in wages nullifies the benefits from good governance and efficient production. No wonder workers in the industrial countries are opposing free trade and outsourcing. Software programmers are finding their wage rate declining as technology makes it possible to transfer huge amounts of data at the click of the mouse.

The wage rates in most developing countries are also stagnant. Workers in East Asian countries are seeing their wage rates decline due to competition from the less paid Chinese workers. Free trade works as a two-edged sword.

On the one hand, it leads to clean governance and efficient production but on the other it leads to lowering of wage rates to their global minimum. What is the solution to this problem? How can the benefits of free trade be secured while creating higher wages for the workers?

Protectionism enables domestic prices to remain higher than the global prices. Such higher prices can be used to support corruption, inefficient production or higher wages. The solution comes from using protection not for corruption or inefficient production but for higher wages. Suppose India were to impose an additional tax of Rs 5 per metre on cloth imports . The price of cloth in the Indian market wouldbecome Rs 25 instead of Rs 20 earlier.

This margin can be taken away by corrupt politicians and officers, or used to maintain inefficient production in obsolete mills, or to raise wages of the workers. The ability lies in avoiding the first two uses and promoting the third. If the government establishes, say, a system to trap corrupt politicians and officers, promotes domestic competition to avoid inefficient production, and implements policies that lead to higher wages, then this protectionism becomes pro-people.

Free trade is necessarily anti-people because it leads to low wages even if it provides good governance and efficient production. Protectionism can possibly be pro-people if applied correctly. What about exports, though? It is possible to prevent cheap imports by imposing tariffs. But how will exports be made if the domestic wage rates are high?

The solution is to use the receipts from import taxes to provide export subsidies to labour-intensive products. The higher cost due to high wages can be neutralised by the subsidies. It is clear that free trade will not lead to the welfare of the people anywhere in the world. Protectionism makes it possible to secure people's welfare but only if applied correctly. But bad protectionism that supports corruption is worse than free trade. The challenge is to embrace good protectionism.

(The author, a freelance writer, can be contacted at: bharatj@nda.vsnl.net.in)