The Hindu Business Line : Openness for efficiency

Competition, whether between domestic firms or with foreign enterprises, helps promote technical efficiency, by the selection of the best method of production of all the alternatives available and also economic efficiency, by operating at the right scale of production that ensures the minimisation of average cost of production, says Bhanoji Rao.

INTERNATIONAL Trade Statistics, brought out annually by the World Trade Organisation, are not just for the specialists; they are also for the general public with an interest in global trade and international comparative indicators. In general, the publication for each year has data for that year and a couple of years preceding. For longer periods, the data are brief and in summary form.

An important summary tabulation gives the value of world merchandise trade and the shares of major regions for select years from 1948. From the volume for 2003, one would find that world merchandise exports grew from $58 billion in 1948 to $6,272 billion in 2002 — an increase of 108 times. Comparing 1948 and 2002, the trends in percentage shares for the key regions reveal the losers and winners.

The losers are: North America, down from 27.3 to 15.1; Latin America, down from 12.3 to 5.6; and Africa, 7.3 to 2.2. The winners are Western Europe, up from 31.5 to 42.4; and Asia, 13.6 to 25.8.

Within Asia, the major players and trends in shares are as follows: Japan, up from 0.4 to 6.6; China, 0.9 to 5.2; India, down from 2.2 to 0.8 and the six East Asian traders up from 3.0 to 9.6. The six East Asian traders are Hong Kong, South Korea, Malaysia, Singapore, Taiwan and Thailand.

Of the overall share of 25.8 in 2002, Japan, China and the six traders account for the major chunk of 21.4. Through trade, the eight economies achieved high standards of living for the people, wealth for the economies and, of course, an international stature which, in contemporary times, has not much to do with demography or geography.

Within Asia, there are some interesting bumps and jumps in export shares in recent years. For instance, the share of Japan fell from 9.9 in 1993 to 6.6 in 2002. China's share was just around 1 per cent, even in 1983; it rose to 2.5 in 1993 and 5.2 in 2002. The share of the six EA traders rose from 3.4 in 1973 to 5.8 in 1983 and 9.7 in 1993, with a marginal decline to 9.6 in 2002.

Winners and losers in terms of world export shares point to the fact that relatively high or growing export shares are nobody's birthright or monopoly. Behind them are a whole lot of complex processes which boil down to three types of infrastructure that are essential for economic activity, in general, and exporting, in particular: Policy infrastructure, human and social infrastructure and physical infrastructure.

It is not as if trade and exchange rate policy alone matter. They are, no doubt, directly important for trade, but one must have, in tandem, the right monetary and fiscal policy parameters as well as enabling labour market policies.

For instance, fiscal incentives or negative interest rates must not be the life-support systems for export firms. Real interest rate should reflect the scarcity of capital. In addition, it should encourage savings or, at the very least, not penalise the saver, unless the economy is so mature that there is no need for any incentive to save.

A critical component of human and social infrastructure is a sizeable, hard-working, efficient and innovation-minded work-force. An economy must not expect to ride for too long on labour-intensive exports. It must move on to skill-intensive, and R&D- and innovation-driven exports.

Another important component is an efficient governance system, preferably IT-driven, with the least politicking when it comes to hard economic decision-making and with absolutely zero corruption, resulting, of course, from zero tolerance for corruption.

Consider, for instance, the movement of documents relevant to shipping goods in a container. If there are informal payments to ensure the smooth transmittal of the documents from one officer to another, and every exporter is happy paying, it makes sense to publicly declare how much in total has to be paid to, say, a common good fund and thus achieve transparency and accountability plus be free from corruption in one stroke.

Needless to say, human and social infrastructure would include a sound legal system and speed in dispensation of justice.

Finally, there is the vital significance of physical infrastructure to overall economic performance and exporting.

Even today, when practically every literate politician is speaking about the inevitability of globalisation and free trade, there are some in politics as well as bureaucracy and academia who continue to doubt the efficacy of export orientation and openness, not only openness to trade but also to investment and ideas.

As Prof Anne Krueger of Stanford (now First Deputy Managing Director of the IMF) wrote in her May 1990 article in the American Economic Review, "export orientation imposes a discipline and set of constraints on all economic policies that prevent the adoption of very many measures severely antithetical to growth".

Just imagine, for a minute, that in early 1950, we made it clear to the producers concerned that any India-made car has to serve the global market, at the most after a decade. The makers would have kept changing designs and introduced user-friendly innovations such as power steering, power locks, power windows and more. By about 1970, there would have been many in the world driving India-made cars. Why did that not happen?

Innovation, on the one hand, and monopoly and domestic market orientation, on the other, are a rare combination — as rare as a combination of benevolence and dictatorship. Yet, not impossible. Monopolies and oligopolies in some East Asian nations, for instance, have done well both in innovation and in exports. This, however, is an exception, not the rule. In contrast, real competition means innovation for the sake of survival.

Competition could be simply between domestic firms, but it is best if it is between domestic and foreign enterprises. That helps promote technical efficiency, by the selection of the best method of production of all alternatives currently available and also economic efficiency, by operating at the right scale of production that ensures the minimisation of the average cost of production.

For long, patriotism was misconstrued as protection of inefficient industries. There is the mature variant of patriotism that comes only in subtle and often silent forms. It is the satisfaction of seeing Indian products sold and used abroad.

(The author, formerly with the National University of Singapore and the World Bank, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam. He can be reached at bhanoji@gmail.com)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Foreign forays

Mergers and machismo — Are takeover chiefs acting rationally?

Openness for efficiency

A future without oil

New system makes the grade — Assessing IAS officers

OTC drugs

Cash transaction tax