Globalization is Both Dead and Alive

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Quantum superposition does not apply to microscopic particles alone. It applies to human socio-political-economic reality as well. The election of Modi in India in 2014, Brexit in the United Kingdom (UK) in 2016, and the coming to the presidency of Donald Trump in the United States (US) also in 2016 has revealed what would happen to how countries engage with each other when the existing paradigm of international engagement fashioned by the elites is closely experienced and observed by the electorate. The multitude of possibilities in history which can simultaneously exist until – in the realm of human affairs – observation, experience and understanding of a circumstance by the people can collapse all such possibilities into a specific outcome is reminiscent of physicist Erwin Schrodinger’s thought experiment about a cat that is simultaneously both dead and alive. What was contemplated about the condition of Schrodinger’s cat is also applicable to globalization.

If the rise and the formation of nation-states began with the Renaissance and culminated in the post-colonial world order in the 20th century of democratic republics, the economic globalization since then has established firmly the regime of nations trading with each other based on their comparative advantage: even though a nation is entirely capable of producing a good or service on its own, the narrative of Ricardian comparative advantage put into place a global trading system where the nation would still import the same goods or services from another nation which can produce them more efficiently – displacing the importing nation’s domestic industry. For nearly two centuries this worked well for all the countries which were first movers during the Industrial Revolution that swept through Britain, Europe and America in the 18th and 19th centuries.

As living standards improved and wages rose in the West, comparative advantage had shifted to the newly developing post-colonial countries after the end of the Cold War which promised cheap labor and less legal hurdles governing labor, environment, and production. Goods and services began being imported by developed countries in the West from these newly developing countries, particularly China and India, displacing local employment in the developed countries. The comparative advantage of technological innovation in the West has also been gradually eroded as technologies invented in the West began to diffuse at an ever faster rate around the world seeking access to markets more than benefiting from the intellectual property.

The West has become the consumer of production in the rest of the world while the newly developing countries have been slow to consume what they produced thereby not creating their domestic markets as quickly as the West had hoped for. The Western consumer, therefore, is sharing the brunt of the burden of consumption to not only increase the gross domestic product (GDP) of the West but also the GDPs of the developing countries. This is the economic paradigm we have been living in since the beginning of the implementation of the neo-liberal thought in the late 1970s and 1980s in America and Britain.

Just as old global systems die a slow death as new systems replace them upon popular demand – the old and new systems being both dead (or non-existent) and alive simultaneously – presenting alternative historical possibilities at the same time, so it is with the state of the existing paradigm of globalization which has become obsolete and is dying, being replaced by a new system that is focused on the development of the domestic markets in the various nations of the world. The developing countries want to live like the people in the West and the people in the West, in their desire not to lose their way of life as the developing countries catch up, want their industries and jobs back.

The issue here is not globalization but its “how.” We need better globalization. In contrast to the current mode of globalization, companies should globalize by setting up in other countries and serve the local markets by hiring locally and producing locally to create local jobs and markets. This will lead to economic development. The trade model of exporting from one country to another – even though the importing country is perfectly capable of producing the good or service by itself – based on comparative advantage is obsolete. Prices, in this new mode of globalization, in the short to medium run may vary from country to country for the same product or service, but in the long run there will be convergence. America which had set up the current mode of globalization is now, under Trump, working to change the “how.” China is a mercantilist and a neo-colonial globalizer.

The emerging new paradigm continues to belong to the global corporations which have their origins in colonial companies such as the British East India Company, but this time global corporations are also emerging from the developing countries wanting reciprocal access to developed country markets. The post-modern multinationals are restructuring globalization to produce locally and, most importantly, sustainably around the world. They intend to make globally, in most of the countries around the world, including their own, for the people of those countries, creating local jobs and cultivating local markets for global living standards to converge.

Global development is the next frontier and global corporations are embarking upon it to do it locally, globally and sustainably because the organization of business, global homogenization of laws governing businesses, and technology can make production in any country as efficient as in any other country around the world, minimizing the arbitrage of comparative advantage.

The cat of globalization is both dead and alive.

Should India Grant China Market Economy Status?

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China was acceded to the World Trade Organization (WTO) on December 11, 2001. The 15-year mark of the accession in the year 2016 is of considerable importance to China because it is seeking the market economy status (MES) from a majority of WTO member countries after obtaining which applying the WTO’s anti-dumping rules against China by importers from China becomes more difficult.

In international trade, a country is said to be engaging in dumping if its export prices are less than the domestic prices for a product or service. Under the WTO accession agreement of China, a period of 15 years from the date of China’s accession was allowed during which countries importing Chinese goods and services typically used prices in a third country which is a market economy – or normal prices – to determine by how much Chinese export prices were lower than the normal prices – also known as dumping margin – in order to ascertain if China’s exporters were indeed engaging in dumping.

Under Section 15 of China’s accession protocol to the WTO, after 15 years from the date of accession, WTO member countries importing from China can no longer use prices in a third – market economy – country to determine dumping margins. After completion of 15 years from the date of accession of China to the WTO, Section 15 of the accession protocol automatically expires. This, however, does not mean that China automatically attains the status of a market economy with all of the WTO members despite China contesting in the WTO that the expiry of Section 15 entitles it to MES. It simply implies that dumping margins can no longer be calculated as if Section 15 applies. Chinese domestic prices have to used as “normal prices”.

The WTO has no law that specifies whether a country is a market economy and it is up to its member countries’ national laws to establish criteria by which to recognize their trading partners as market economies. The biggest prize China seeks is to be accorded MES by the United States (US) and the European Union (EU). India, China’s neighbor, also has a bone in the fight because it is a rapidly expanding market economy on an even keel with China’s gross domestic product (GDP) growth rate which can be adversely affected by any unfair trade on China’s part as India’s trade relationship with China is asymmetrical with India not having many investments in China and also not exporting much to China. In fact, India, which maintains a trade deficit with China, has so far imposed the highest number of anti-dumping duties against it.

India’s approach to granting non-market economies (NMEs) MES is based, under Indian law, on criteria similar to those used by the US: free currency convertibility; wages determined by labor market; openness to foreign investments; government ownership or control over means of production, allocation of resources and price; and output decisions of enterprises. The US considers that China does not meet the conditions required from a market economy, in particular the one related to currency convertibility. In 2011, the US observed that “China seems to be embracing state capitalism more strongly each year, rather than continuing to move towards the economic reform goals that originally drove its pursuit of WTO membership.”

It must be noted here that despite 80 member countries of the WTO already according China MES because they either export to China or are dependent on China’s investments in their economies, based on criteria set in national laws it is highly unlikely that large economies such as the US, EU, Japan, and India will grant China MES without trade defenses. The experience of Australia, which granted China MES in 2005 because China is a major export destination for Australia, has not been fair due to dumping by China. Also, amid a surge of investment by China, Australia is moving to protect its strategic industries and assets.

China has thus far traded market access for technology and has been a large importer of natural resources to produce semi-finished and finished goods for export amassing very large foreign exchange reserves. It has, by many accounts, not complied with several of its WTO accession commitments. For MES from the major countries of the world, China must stick to its commitment to becoming an open and free market and must trade fairly with its trading partners. It is high time in China’s evolution that it does so if globalization is to be better.

Jobless Growth in India and What To Do About It

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The strong economic recovery of India after the disappointing two years of sluggish growth before the 2014 election has not been encouraging on the jobs front. As of December 2016 India’s unemployment rate stands at 5.98% according to the statistics released by the Bombay Stock Exchange (BSE) and the Center for Monitoring Indian Economy (CMIE). The unemployment rate has ticked up by 1% since 2013 despite the economic recovery. The employment elasticity of economic growth has been low because employment has not increased as much as expected with the rising economic growth. This condition of “jobless recovery” or “jobless growth” – terms coined by economist Nick Perna in the early 1990s – where the macroeconomy experiences growth while maintaining or decreasing employment has become a challenge for India.

More than 50% of those employed in India work in the agricultural sector and unemployment in this sector has been low compared to urban unemployment which has been high. In urban areas, many of those employed work in the non-farm sectors of industry and services. It is clear that India has not been able to create as many non-farm jobs as are necessary to keep pace with the addition of about 1 million new entrants into the labor market every month or about 12 million per year. Over the next decade India has to create nearly 120 million new jobs if it is to reap the demographic dividend of countless young people when compared to the aging populations of the Group of Seven (G7) countries and China and Russia.

The inability to create employment at a rate that is commensurate with growth can, in fact, be depressing the growth rate because those unemployed will not be able to contribute to consumption, holding back economic growth and precluding India from achieving a higher rate of growth notwithstanding the fact that India’s growth rate, on a relative basis, is the highest in the world today. In short, jobless growth is putting a lid on India’s ability to achieve its full economic potential.

Jobless growth has two primary causes: labor-displacing technology and structural change in the economy – both of which appear to be at play in the Indian economy. Labor-displacing technology employs fewer workers to produce the same output while structural change renders workers obsolete because the new economic structure requires a new set of skills to be employed and employment during structural change will remain depressed until workers are trained or retrained to take up jobs in the new economy.

The good news is that India is still a developing country and has opportunities to invest to develop all three of its economic sectors – agriculture, industry, and services – and the country has a growing middle class comprising of millions of young and educated workers who will not only consume more but are also capable of paying for the care of the retiring and elderly if India were to institute a system of social safety net for the poor and the aging through the tax system as the United States had done after the Great Depression and during the Great Society initiative in the 1960s.

To escape from jobless growth India needs to (a) focus on mechanization and more scientific research in agriculture to make its agricultural sector more efficient and productive to continue to be able to feed what will be the world’s largest population by 2050; (b) become competitive in manufacturing while fending off dumping by the state-subsidized Chinese manufacturers; (c) revamp the energy sector to transform the sector into using renewable energy sources for a pollution-free and healthy environment; (d) further develop its information technology sector, an untapped market in India, to stay current and to innovate amidst the wave of innovations coming out of Silicon Valley in the United States which are applying computer science across industries to disrupt the existing value chains; (e) significantly revamp the infrastructure to achieve developed country standards along the lines of the Golden Quadrilateral and Diamond Quadrilateral projects; and (f) institute a culture of sanitation and beautify the country in a manner that is becoming of India.

India, most importantly, as Gandhi suggested and practised to disrupt the colonial model of globalization, must adopt a trade regime of quasi-autarky (or economic self-sufficiency) to disrupt the existing neo-liberal trade regime which has increased income disparity in all countries since the 1970s. India must lead and embrace the new globalization where all global corporations would be welcome in India only if they invest locally, produce locally, and create local employment to access the vast and growing Indian consumer market. Trade would then be limited to any natural resources which India does not already possess.

Nothing short of transformation is needed for India until 2050 beginning now, because this is what is necessary if investors, both Indian and foreign, are to go long on India.

Will There Be a Banking Crisis in India?

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Indian banks are creaking with non-performing assets (NPAs) which are typically defined as loans made by a financial institution on which interest or principal payment is past overdue for more than 90 days. This problem has gotten progressively worse in the past 5 years in most public sector banks (PSBs) in India, where, by one estimate, a total of at least INR 3.6 trillion needs to be infused into the PSBs to clean up their balance sheets, with the gross NPAs constituting, on average, 10% of the total assets of a PSB.

While private sector banks carry the risk of failing if they do not conduct their business soundly, PSBs carry the moral hazard of government guarantee against failure. In this sense, PSBs can never fail because of the guarantee that the government will provide the required cash infusion to prevent the PSBs from failing, with the tax payer bearing the losses due to the NPAs. The issue then becomes one of resolving this moral hazard to avert market failure.

There are two approaches to the problem of the resolution of NPAs on the balance sheets of PSBs: one, to prevent the NPAs and if not preventable, two, once the NPAs reach worrisome levels because they could not be prevented, the PSBs can be rescued with tax payer funds on the condition that the rescued funds would be paid back to the government by the financial institutions after they return to normal health or from the management of the NPAs by the government.

Preventing NPAs requires thorough due diligence of the borrower on the part of PSBs when lending to ensure that the moral hazard presented by the PSBs is not being taken advantage of by the borrower who could take out a loan with the intent of defaulting on it from the outset which is difficult to prove. PSB bankers in India often face pressure from the business lobby and politicians to lend despite due diligence concerns. The government must set up checks and balances so that loan quality is not compromised by nepotism and corruption.

Ex post accumulation of NPAs, which poses systemic threat to the financial system as is the situation now, despite arguments that the PSBs are the best judges of their lending and that, therefore, they should resolve their own bad loans, a “bad bank” as done by Sweden in 1991-’92 should be established by the government and the NPAs must be transferred to the bad bank at a discounted price. The bad bank must then resolve the NPAs either by (a) liquidating the collateral assets; or (b) strategically restructuring the debt by converting their loans to equity and taking a stake in the firm to oversee its management (along the lines of the private equity model); or (c) restructuring the loan terms so that the borrower can service the loan. The proceeds from the resolution of NPAs will all flow to the government and the tax payer expense of resolving the NPAs would then at least be neutralized.

Most importantly, because the institutions being bailed out are banks which come under the regulatory authority of the Reserve Bank of India (RBI), the RBI can infuse the required funds into the PSBs directly rather than the government by increasing the money supply and set up the bad bank.

Sustainable credit growth is an important factor in the growth of any free market economy. Unsustainable credit in countries such as Italy, China and India could, in the best case, hamper economic growth and, in the worst case, result in a systemic crisis such as bank failure spreading across many banks in the economy which have a high percentage of NPAs. If the problem of the growing menace of NPAs in India’s PSBs is not resolved in a timely manner, both PSB asset growth and economic growth in India could be adversely affected as PSBs provide credit to businesses, small and large, which is the lifeblood of the Indian economy.