'PM Needs Reality Check'

At 40,000 copies and ticking, his In Defence of Globalisation proved a runaway bestseller even before The Economist called it "the standard general-interest reference on global economic integration". The world's foremost authority on trade, Nobel contender and Columbia University legend Jagdish N Bhagwati also conceptualised India's economic reforms, a fact conceded by close friend Manmohan Singh. In a free-wheeling conversation with Paromita Shastri, he reaffirms his faith in India and warns against the dangers stale ideas still pose to reforms.

You argue that when properly governed, globalisation is the most powerful force for social good. How do you explain that to Indians?

I say that with with good policies and mechanisms in place, basically globalisation is a good force and we can improve upon it. This is different from saying, as your PM says, globalisation needs a human face. That's political jargon. It already has a human face, and you can add to that face. The anti-globalisation school is saying that it is setting us behind on social issues, the social outcomes of economic consequences (of globalisation), which are of concern to the common citizen, like women's equality, child labour, environment, labour standards in rich countries, nature of democracy.

My conclusion is that even on these issues, globalisation can have better outcomes. It's not as if you need major surgery to give it a human face or something. For instance, child labour is getting reduced since farmers are getting more prosperous. That's not only because they now have more money but also because they are getting virtuous. Lots of studies have been done to show that sending your children to school offers a high rate of economic return associated with children--that's a clear argument. Those who oppose globalisation say that parents will always be wicked (and not send children to school).

So when you're thinking of managing globalisation, this is important. If you want to reduce child labour even faster, you have to design supplementary policies. A government can aid and abet globalisation so that the poor are not affected or it can throw sand into the gears. You can use microcredit and other such institutions to help the very poor. This is a surprise to the World Bank-wallahs but it's nothing new to Indians.

Does India's opposition to globalisation stem partly from the fact that it coincided with our own liberalisation which took away protection and hit jobs?

Conventional post-war view was pro-protection and closed markets. We were open to begin with but moved to closed economy later. A lot of economists including myself were in favour of protection at that time. Nehru was very open to ideas, it was a blank slate on which you could write. Unfortunately, we gave him wrong advice.

It's said about Indian economists that they did the most harm with the best of intentions..

Yes, that's exactly it. People like Sen and I couldn't even go abroad because of forex problems. So we realised our basic objectives had been completely sabotaged. The result was that for two and a half decades you had a two per cent per capita income growth. There was no way you could create the huge number of jobs required. Panditji was modern in outlook, even Rajiv was . That's why I admire somebody like Narasimha Rao. They could have just gotten over the foreign exchange crisis and say let's get back to normal. But they stayed with it and that was important. Samuelson was once asked how often does science change. He said, "With every funeral." I was one of the few to get off the bus early, even Singh did. But some people are still on the bus. We have so much human capital invested in the wrong ideas.

Do you think we're still very protectionist and we're still hastening slowly?

It (protection) is the highest in the world! But today many more industrialists are more interested in the international markets, they are providing a countervailing force. Learning by doing, as it were. China is already internationally integrated and the effect of that on its polity is showing up in a big way. Their one-child policy has now led to a shortage of labour, so even the labour standards are improving. Frankly, even I didn't expect it to happen so fast but double-digit growth for two decades has a tremendous impact. If we had started then, our poverty would have been seriously dented. If you were to pick out only one country that had good policies and some industrialisation that could have taken the world by storm, we were it. And we failed.

My fundamental optimism comes from the fact that we're still pushing. Our PM knows where to go, that's a great asset. No, we're not too late. There's greater confidence among the business community, there's a sea change in attitude. We're on the cusp of real change. The main momentum belongs to the reformists.

What should be our strategy in global trade? Are we ready to open up agriculture?

We've been stuck too long in the food-import mode. We have never thought of ourselves as those who can break into world markets and use external competition to improve ourselves. Agricultural nations, the Cairns group, are very clear that they want open markets. We don't know where we really are. We've gone with the G-22 many of whom are in Cairns group, so they're also pushing for open markets. Studies by Professor Arvind Panagariya say that we can take advantage of the world prices as they start rising with subsidies getting cut. Anyway, we have such high bound tariffs as opposed to applied tariffs, that we have much scope for raising tariffs if anything goes wrong or we can't handle the political fallouts. So we should become energetic members of the Cairns group and start preparing our farmers.

What are our other comparative advantages?

Modern services, where the demonstration effect has already changed our attitude from export pessimism to export optimism. Infosys' Nandan Nilekani says that we can do everything. I shut him up because that kind of talk scares everybody. But he's right. In terms of sheer technical competence, we certainly can. But we must emphasise our education and training. Get more engineering schools. Even medical services. Our doctors are highly prized abroad for their skill and for their ability to take care of patients. Doctors in the US don't even talk to the patients beyond the bare minimum because of legal liabilities.

How do you advise we fight the non-tariff trade barrier issues like labour standards and environment? Do we accept them because it also cleans up our system?

When labour and environmental standards are sought to be included in FTAs and in WTO, the intention is often protectionist; and even when it is altruistic, it can lead to protectionism in fact. I therefore strongly believe that we must continue to oppose the advancing of better standards by including them in the WTO, in particular. Here, the world's greatest trade union leader, President Lula of Brazil, is with us whereas John Sweeney, president of AFL-CIO, a man who leads only less than 10% of American labour force in the private sector, is on much weaker ground.

Yes, we need to address our standards. But we do not need to do that by inviting protection against our exports. One Sunita Narain, with her splendid Center for Science and Environment, is worth more than a bunch of Western lobbies pushing their own agendas largely because they are worried about competing with countries with lower standards.We have a democratic system, with nearly 3 million NGOs that are advancing our social agendas continually.

Your disregard for bilaterals and FTAs is well-known. Do you feel India should go for the big ones like with the US and Japan?

When everyone is being sinful, it's hard to practice virtue. The EU started the craze for Preferential Trade Agreements (beyond the legitimate "core" countries, now 25 in number). The US followed, in 1980s and under USTR Robert Zoellick, with a vengeance. Asia then finally collapsed. We are simply the last among the nations to follow suit.

The results have been deplorable for the world trading system. I was the first one to sound the alarm in 1990 and was greeted as a knee-jerk multilateralist. Professors Panagariya and TN Srinivasan also provided important analytical support. Now, virtually everyone is in my corner! The World Bank, which has excellent trade economists such as Bernard Hoekman and our own Aditya Mattoo, has just written a report that highlights these downsides. In the Report that the expert group appointed by WTO DG Supachai on the future of the WTO, where I am a member, there is a forthright chapter on the Erosion of Non-discrimination which also writes pointedly about the downside of the proliferating PTAs.

As for India, it is important to remember that if we do PTAs, we can be hurt badly by what economists call trade diversion. When we cut tariffs preferentially on imports from partner countries in a PTA and have high external tariffs on nonmembers, the risk is high that we will divert trade, to our detriment, from lower-cost non-members suppliers to higher-cost partner-country suppliers. India's external (MFN) tariffs are still an average of 20 per cent on manufactures: that poses a serious danger of trade diversion. It is important that we seriously reduce these tariffs as the Kelkar Committee recommended. The Doha Round offers us an excellent opportunity to do this in the context of reciprocal trade concessions.

Indian democracy or "functional anarchy" is often blamed by our governments for most of their inaction. Is that a valid excuse?

We now have a lot of scholarly work that strongly suggests that the combination of democracy ("political freedom') and significant reliance on markets ("economic freedom" is a powerful producer of economic prosperity. I argued this proposition a decade ago in my Rajiv Gandhi Golden Jubilee Memorial Lecture on Democracy and Development. And I have argued in my book In Defense of Globalisation, published by Oxford this March, that prosperity in turn advances social agendas including poverty amelioration reduced child labour, women's equality etc.

If governments take the wrong course, this need not be put down to democracy. Sure enough, it can slow down reforms because political obstacles have to be surmounted. But democracy is an institution that allows mistakes to be debated and reversed. As happened in India. The ferment of dissenting ideas which provided the intellectual case for reforms would not have been possible in an authoritarian regime.

Instead of infrastructure, the government is investing huge sums of money in rural jobs, food etc. Should it not just go for growth?

In infrastructure, we need accelerated change. And such spending creates a risk here. In the budget, defence spending has gone up and money is being spent on programmes that haven't worked traditionally. The job programme is just a transfer payment. The Congress party didn't come to power making any real promises as far as I can see because they were themselves surprised by the results.So why do they have to go and spend money on these promises? It's worrisome. Good politicians never keep promises.The electoral results were not about neglect of the poor, but just that people have done well and they want more and faster.You need some institutional change here.For instance, because we carried on with small sector reservation, we are now nowhere in textiles.

Assuming India proceeds systematically on infrastructure and social sectors (through FDI/aid and budget financing), can it get a steady average seven-per-cent plus growth?

The 90s' reforms were both more transparent and significant than what had been attempted in the 1980s; they also led to sustained growth which the "borrowing" or debt-led growth could not sustain. Now, the PM has been given a second innings. There are still important reforms which need to be carried out. The huge numbers of loss-making enterprises need to be taken out of the public sector where they have failed to perform. Linked to this is the need for labour reforms: unless labour rights are balanced by labour duties (such as the need to accept discipline and the ability to lay off workers when an enterprise is making sustained losses), investment cannot produce maximum returns. Infrastructure bottlenecks have to be attacked, trade barriers to be brought down: the backlog is staggering.

The PM has a grasp of what needs to be done, and an ambition to do it. But the danger points are many. First, unlike in 1991, when he had a clearer mandate to go down the reform route, he does not have it this time around. Take an analogy. Bush 43 (George W) burdened himself with Cheney, Rumsfeld etc. who were the "unsatisfied conservative hawks" from the first Iraq war under Bush 41 (Papa Bush) ; and he blundered his way into the second Iraq war.

Now, unlike Singh 1991, Singh 2004 has to contend with the "dissatisfied socialist hawks" imposed on him; they have returned from the political wilderness and whom he must put up with when in fact, I am sure, he wants to put them in their place instead! He thus has Trojan horses at all levels: around Mrs Gandhi, in the Planning Commission, in the Cabinet, etc. That they will pose a serious difficulty is very likely.

You ask me about the increased spending on "special sectors" as leading to faster growth. Part of this is certainly extra spending in the agricultural sector which is included in the CMP and in the latest budget. But it is not clear at all that this spending will create more prosperity rather than waste. I was inclined to be complacent until I read the splendid essay by Shankar Acharya, no foe of the reformers, who was alarmed that this government had good men and bad ideas, that the CMP was a repository of several ideas that had been tried and discarded in the past. If this is so, then the social and agricultural spending will lead to less growth, more waste, and more cynicism.

These socialist hawks will also likely hold up privatisation. When the PM talks of his government doing privatisation on a non-ideological basis, no one can disagree. But it suggests that he believes that those who have wanted privatisation for at least two decades were ideological when, in fact, they were asking for privatisation on the pragmatic ground that it had not worked.

And we who asked for it, including Arun Shourie, were keenly aware that the public sector inefficiency hurt our economic prospects but also hurt the comon man more than it hurt the elites. For instance, when power supply broke down, the elite had their own generators and could continue sleeping comfortably; but the common man with his little Usha fan had no such option.

Indeed, this lack of comprehension that the so-called "neoliberal reforms" are good both for prosperity and for socially progressive outcomes, is so widespread that it needs constant correction.In reviewing a recent book of Amartya Sen where the alleged pre-occupation with direct foreign investment was denounced as elitist preoccupation with frills instead of with problems of poverty, I noted that the common man got his caffeine from Coca Cola whereas the likes of Sen got it from their Espresso coffees! Or that elites who traveled by car were unlikely to appreciate that privatisation of buses was a great blow for the common man if it led to improvement in bus transportation: a fact that was brought home to me when I traveled three hours a day between Motibagh and Delhi University by bus for over a year before I got a Fiat car!

In fact, unless the socialist hawks are kept at bay, there is real danger that the PM's second innings will fall short. He needs this "reality check" as he is going to run into people who flatter him and his government even as it takes bad decisions. The World Bank president was praising the new Government and the CMP in a fulsome fashion. But this is a man who needs India's vote for a third term. Let me say: caveat emptor! India's true friends are not these self-interested "all-is-great" know-nothings but the many informed Indians, both at home and abroad, whose love for India is manifested by writings that warn truthfully of pitfalls and problems in the manner that the PM himself has taught us through his own example.

You gave the ideas for the first phase of reforms. What ideas are you giving now to Dr Singh?

It was actually this book that Padma and I did (Bhagwati & Desai, India: Planning for Industrialisation) that for the first time gave a coherent, complete account of why we failed. And you know once when Dr Singh was in New York as finance minister with Montek Ahluwalia and another senior secretary, also a Sikh, and they had called a small dinner for some businesspeople. And when Padma and I entered, Dr Singh said "if we had done whatever you had said early and not now, then we wouldn't be having this dinner". That was nice of him. So I have not been an adviser in that sense really. And now, it's like carrying coal to Newcastle -- Dr Singh knows the road ahead. And I think he's settling in yet, though he's managing the political compulsions much better than I had thought. I think the only way you can help them is by telling them the truth. And right now, they really need to worry about the budget.

Have you discussed the Bhagwati tax on the Indians abroad?

That's a good idea. I have to tell him that.

You studied economics because that was the only way a developing country student could hope to change things in his country. Are you happy with the dent you've made in economic/trade policy? Would you ever want to join Indian policy-making?

I've been lucky to have an enormous impact on India's economic course. This luck has been partly because, while a scholar can provide ideas, these must be translated into action. And it was my double good fortune to have my friend of 50 years since Cambridge be given the opportunity to translate them into reality. I have also had the opportunity to shape thinking about trade policy of developing countries more generally, and to be adviser to GATT, WTO and the UN on globalisation where I have been fortunate to get to work with Kofi Annan, a truly great man. I'm keeping touch with India continually. Whatever I can contribute to our nation's progress, I try to work for, along with many others abroad. Distance does not matter today; geography, I often say, is history now.

You talked about Stiglitz changing after he got the Prize. How do you propose to react when you get it?

That is a big "when"! I am often asked, were you disappointed not to get the Nobel this year? And I say: "if I said I was not, you would not believe it, would you?" And when asked whether I might not get it at all, I joke that Mahatma Gandhi deserved it but did not get it either, so perhaps I will then be the second deserving Gujarati not to get it!

More seriously, I've had considerable success influencing policy over the last four decades of my career. Indian reforms, thinking on PTAs, much else. I have often succeeded by writing for economists and writing for the public. There is little doubt however that the Prize increases your clout. It should help, particularly in the developing countries where a Nobel Prize works like magic, dulling senses and exposing the public to rubbish masquerading as wisdom. I urge my good friend Stiglitz to make sure that he does not wind up using his Prize as a weapon of mass destruction. I hope to avoid that mistake!

Professor Bhagwati, thank you so much. It was a real pleasure and honour.