Indians' contribution to the US

Indians account for 38% of doctors in the US, 36% of scientists at Nasa, and 34% of employees at Microsoft, 28% at IBM and 17% at Intel, Prospect reports, quoting The Times of India, 11/3/8.

The Elephant and the Dragon

I'm just back from the Adelaide Festival of Ideas, which was great. The 24-hour flight and 8 1/2-hour time difference are still killers though. I participated in a discussion about the future of India and China on my first evening at the festival, which was rebroadcast on ABC's programme The National Interest. I also gave a talk about my book, and participated in a panel discussion called People without Borders.

Apart from jetlag, one reason I haven't updated my blog for a while is that the Adelaide Hilton, where the Festival were very kindly putting me up, charges an outrageously expensive $25 for 2 hours' wireless internet access. So my internet time was tightly rationed, which was really tough for an internet junkie like me.

Start viewing global diaspora as a brain bank

I have been interviewed by The Hindu about Immigrants. We talked about a range of topics, but in particular we focused on what developing countries that suffer an exodus of highly skilled workers should do. Read the interview here

Net profit

A fascinating article in this week's Economist explains how mobile phones can help promote development. The spread of mobile phones has allowed fishermen in the Indian region of Kerala to call while at sea to find out where their catch will fetch the highest price.

This more efficient market benefited everyone. Fishermen's profits rose by 8% on average and consumer prices fell by 4% on average. Higher profits meant the phones typically paid for themselves within two months. And the benefits are enduring, rather than one-off.

EU fails to mend its protectionist ways

Anti-dumping duties, which unfairly penalise imports that are deemed too cheap, are one of the most pernicious protectionist devices. After all, we ought to be cheering if the cost of imports falls, because it makes the money in our pocket stretch further, not taxing consumers in order to try to prop up less efficient domestic producers.

The good news is that governments' use of anti-dumping has halved over the past four years.

The bad news is that two villains have yet to mend their ways. Despite Peter Mandelson's pledge to reform the EU's protectionist anti-dumping laws, Brussels launched more anti-dumping cases in the first half of this year than in the first half of 2005, as did India. Those two are now the world's biggest anti-dumping users.

For more details, see the Global Trade Protection Report 2006 by Cliff Stevenson of antidumpingpublishing.com

Indians have reason to cheer

India's drinkers should raise a glass to Peter Mandelson.

Indians who love Scotch whisky, French wine or Spanish sherry have long had to pay through the nose - or make do with watered down local equivalents - because their government imposes punitive taxes and duties that can raise the price of foreign tipples by as much as 300%.

But Europe's trade commissioner is riding to the rescue: he plans to challenge India's discriminatory taxes on wines and spirits at the WTO.

If the EU wins, he will be the toast of town among Mumbai's champagne-starved stockbrokers. And at least officials at the commerce ministry in Delhi will be able to drown their sorrows with a fine Scotch.

America alone is not to blame for Doha collapse

The world's trade negotiators cannot seem to agree on much these days, but on one thing there is near-unanimity: the United States is responsible for the collapse of the WTO's Doha Round.

Peter Mandelson, the EU's trade commissioner, told the FT:

“If the US continues to demand dollar-for-dollar compensation in market access [cutting agricultural tariffs] for reducing domestic support, no one in the developing world will ever buy that and the EU will not either.”

Kamal Nath, India's fork-tongued commerce minister, said of the US:

“Everybody put something on the table except one country who said ‘we can’t see anything on the table’.”

This is nonsense. Whenever negotiations fail, all sides must take some of the blame. And the US, for good reasons and bad, is guilty mainly of being too ambitious to free up world trade - which is meant to be what the WTO is about.

For sure, America's agricultural subsidies are harmful and wasteful, but the US was prepared to slash them if other countries were willing to lower their farm tariffs, thereby giving its farmers access to new export markets. Multilateral trade negotiations are never pretty, but they have the potential to harness exporters' interests to overcome the lobbying power of producers that fear foreign competition.

But the likes of Nath were not interested in a meaningful Doha agreement; they just wanted to entrench India's farm and manufacturing protectionism, which hobbles the country rather than helping it. India's new-found success, after all, is in the IT sector, which the government has not yet got round to "protect".   

The flexibility that the EU and India wanted the US to show was a willingness to settle for the status quo rather than pursue the benefits of freer trade. The main culprits for Doha's failure are those who refused to budge on freeing trade, not those who set their aim too high. We may all come to pay the price for their cowardice.

The sceptics are wrong: Freeing trade has boosted growth in China and India

In a comment on my recent post on the contribution of trade liberalisation to Asia's success, Jim takes issue with my contention that

China and India are very powerful examples of the benefits of liberalisation: before they started their reforms, growth was slow, but as they have opened up their economies, growth has accelerated.

He argues that growth speeded up before they opened up, and that their growth since they opened up is not due to freer trade.

Jim makes three specific counter-claims:

1. 'Both India and China grew strongly through the 1980s, well before any significant trade liberalisation.'
2. 'While they did eventually liberalise significantly and kept growing, the evidence that the trade opening caused the growth is pretty thin.'
3. 'China is at best middling in terms of trade openness in comparison to other developing countries.'

I'll address each in turn.

1. It is not true that China and, to a lesser extent, India did not undertake any significant trade liberalisation in the 1980s.

In the mid-1970s, all trade was centrally controlled in both countries. But starting from December 1978, China began to open up. In the 1980s:

• The central government's monopoly on foreign trade was broken.
• A large number of foreign trade corporations were established (there were over 5,000 by 1988), with trading rights also granted to big companies.
• Special economic zones and open cities were established.
• Joint ventures with 25% foreign investment were permitted, and these were granted the right to trade directly.
• Companies were allowed to keep some of the foreign currency earned through trade.
• The remninbi's artificially high official rate was devalued from 1.5 to the dollar in 1979 to 8.7 in 1991.

In short, in place of the central government's absolute control over foreign trade, a large number of companies were permitted to trade, with trade regulated through import licences and tariffs instead. Free trade it wasn't, but it was certainly a much more liberal regime than before.

India's trade liberalisation in the 1980s was more modest - by 1990 some 30% of imports, mainly capital and intermediate goods, could be imported without specific licences and import quotas were replaced with less harmful, albeit very high, tariffs - but then so too was its economic growth.

Whereas China's economy grew by an average of over 9% a year in both the 1980s and the 1990s (subject to the caveat that applies to all official Chinese statistics), India's managed only 4.8% in 1981-88.

That was an improvement on the wretched 3.2% recorded in 1965-81, but still pretty poor, especially given the rapid rise in India's population, which meant that living standards rose much more slowly than GDP.

True, India's economy boomed between 1988 and 1991 - but this growth spurt proved unsustainable and ended in financial crisis. Since the economic reforms in 1991, which ended import licensing and slashed tariffs, India's growth has averaged 5.8%.

As Arvind Panagariya quite rightly points out: 

Bradford DeLong and Dani Rodrik have argued that reforms in India cannot be credited with higher growth because the growth rate crossed the 5 percent mark in the 1980s, well before the launch of the July 1991 reforms. This is a wrong reading of the Indian experience for two reasons. First, liberalization was already under way during the 1980s and played a crucial role in stimulating growth during that decade. Second, growth in the 1980s was fragile and unsustainable. The more systematic and systemic reforms of the 1990s... gave rise to more sustainable growth.

In short, Jim's claim is incorrect. A more accurate summary of what happened in the 1980s is: "China made big steps to liberalise its trade and was rewarded with much faster economic growth, while India opened up less and enjoyed only a modest uptick in growth."

2. Trade liberalisation is clearly not the only reform that China and (to a lesser extent) India have undertaken, and it is not responsible for all their growth. But it has certainly boosted both China's and India's rate of growth.

The Ravallion/Chen article that Jim mentions says nothing about the impact of trade liberalisation on growth: it is concerned with poverty and inequality. And its findings do not contradict my contention: although some people may lose from trade liberalisation in the short term, the long-term productivity gains from freeing trade, which boosts competition and innovation, raise long-term growth, thus reducing poverty.

There is a mountain of evidence to support the belief that freeing trade promotes economic growth in developing countries. For instance:

• Studies of nine countries – Chile, Colombia, Egypt, Ghana, Israel, Korea, the Philippines, Turkey, and, yes, India – directed by Anne Krueger and Jagdish Bhagwati for the National Bureau of Economic Research in the late 1970s showed that liberalising trade led to faster economic growth.
• These findings were confirmed by studies of nineteen countries – Argentina, Brazil, Chile, Columbia, Greece, Indonesia, Israel, Korea, New Zealand, Pakistan, Peru, the Philippines, Portugal, Singapore, Spain, Sri Lanka, Turkey, Uruguay, and Yugoslavia – over four decades conducted in the early 1990s by Demetris Papageorgiou, Michael Michaely, and Armeane Choksi of the World Bank.

Just look at China:

• Since 1978, China has gone from a system where trade was wholly controlled by the central government to one where a huge number of private companies engage in foreign trade, import licenses have largely been abolished, industrial tariffs have fallen to single figures and service sectors are being opened up too.
• The volume of China's trade has risen 70-fold, trade’s share in gross domestic product has risen five-fold and the country’s share in world trade has jumped from 0.8% to 7.7%.
• Over the same period, Chinese living standards, as measured by GDP per person at purchasing power parity, have risen five-fold - and the country has witnessed the fastest fall in poverty ever recorded.

Not connected? Hardly. Indeed, Harm Zebregs finds that foreign direct investment alone boosted GDP growth by 3 percentage points a year in the 1990s, even though it accounted for only 5 percent of GDP. 

3. Whatever measure of openness you use, China is more open than most developing countries.

Its weighted average industrial tariff is less than 6%, compared with a developing-country average of 8% (bound) and 12.5% (applied).

Imports account for over a quarter of GDP, a huge figure for a such a large and populous economy.

So is China a fully open economy? Clearly not. Is it much more open than before? Yes. Is it now more open than most developing countries? Most certainly.

So I repeat:

China and India are very powerful examples of the benefits of liberalisation: before they started their reforms, growth was slow, but as they have opened up their economies, growth has accelerated.