Globalisation is dying; India needs sound industrial policy
PremiumIndia’s trade policies must be guided by a sound industrial policy, rather than trade policy controlling industry as it has been happening.
The fairy tale of free market globalization, in which money, goods, and knowledge flow freely around the world unimpeded by national boundaries, which was spun into economics science in the past 40 years, has been exposed for what it was. In this tale, national governments ceded their powers of governance to international bodies that set the rules of the game. In this tale of globalization, the size of the global pie has increased as expected. However, the power game behind the numbers has also been revealed.
Patterns of games are fixed, as they always are, by those in power. By the principle of cumulative causation, which is a natural law of societal governance, those who have more wealth, knowledge and power than others can accumulate even more because they have the power to fix the rules. Thus, inequalities will increase both within and among nations, as they have. The winners who benefit the most from the game urge others to continue with it. Until they begin to lose, that is, when they walk off the field with the ball.
The game of free trade and flows of money was already winding down when the US found its economic power slipping to China—which the US alleged was winning by cheating. Global supply chains of manufactured goods were broken by constraints during the global covid lock-down. The global trade game has been brought to a halt by the US, so as to sanction Russia for the Ukraine War. These sanctions have disrupted global flows of fuel and food. Citizens of poorer countries in the global South and East are suffering the most from yet another power struggle in the West.
Writers of the fairy tale of ‘free trade’ are mostly naïve economists who believe politics and power struggles—global as well as domestic—can be stripped out of their economic models. A power struggle has been underway within the discipline of economics too between trade and industrial economists: an ideological war which free trade economists were winning so far. ‘Industrial policy’, which was banned by Washington Consensus economics, is now back on the scene. It had never gone away, says Dani Rodrik, president of the International Economic Association and author of Straight Talk on Trade: Ideas for a Sane World Economy. ‘Friend shoring’ is just another name of the game.
Free trade economists’ version of good trade policies is unidirectional: the reduction of tariffs towards zero. They measure the success of trade policies by the volume of international trade in a country’s economy. In their playbook, government policies to increase domestic production and make competition among domestic producers (and with foreign producers) fairer, by adjusting tariffs and correcting inverted duties, etc, are labelled “protectionist"—a very bad word. When some leaders in the United Progressive Alliance government realized in 2010 that India’s manufacturing sector and employment were not growing fast enough, they woke up to the need for policies to nurture the growth of domestic manufacturing. However, ideology forbade the use of the name ‘industrial policy’. The policies had to be camouflaged as “innovation" or “manufacturing" policies.
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Industrial policy is now back in the open. It had never gone away even in the US, Rodrik says. The US government has always supported the growth of its defence and technological industries with large subsidies and preferential treatment. It sanctioned Chinese tech companies when they became too large and competitive for US comfort. And, with the CHIPS Act, the US will subsidize domestic production of chips. The new paradigm of economic policies, which current disruptions of the global economy is compelling all countries to adopt, can be called “productivism", Rodrik says. This is a more positive term than protectionism. India needs ‘productive’ economic policies to increase domestic manufacturing (and not only of the labour-intensive kind) for the defence of its national sovereignty and resilience in its economic growth.
China and India, the two largest ‘emerging’ economies in the world, entered the mainstream of global trade at roughly the same time around 1990, with economies of similar sizes. By 2010, when the need for a manufacturing policy for India was realized, the Chinese economy was already six times larger than India’s, its manufacturing sector 12 times larger and its capital goods (and machine tools) sector 50 times larger. The ‘depth’ of Indian manufacturing was as much, or even more, than China’s back in 1990. Indian producers of power equipment, commercial vehicles, machine tools, etc, were as competent or more than Chinese companies. They had built capabilities with technology legally transferred by foreign companies under ‘phased manufacturing programmes’ guided by India’s industrial policies. However, such phased manufacturing programmes were explicitly banned under the World Trade Organization (WTO) regime post 1990. India complied with its new global rules.
China managed industry and trade its own way. It was often accused of stealing technology. Yet, China received ten times more foreign direct investment than India, with more Western (and Japanese) companies investing there. The Chinese learned fast and increased depth in their industries. Trade between China and India has grown: it exceeds $125 billion. But while India exports $28 billion, it imports $97 billion, including a lot of electronic products, power equipment and machine tools. The skewed composition of India-China trade reveals the vulnerability of the Indian economy vis-à-vis a strategic competitor.
The economic paradigm that free trade is the only way has passed away. The myth of fair governance of the global economy by institutions controlled by Western powers has been exposed. While sizes of global supply chains have increased, important technologies are controlled by only a few countries, which have the power to set the rules of the game and impose their own standards in social and environmental matters to protect their own farmers and producers.
Paradigms in economic science are changing on many dimensions. India must build more depth into its economy, not just increase its size. Therefore, India’s trade policies must be guided by a sound industrial policy, rather than trade policy controlling industry, which has been the paradigm of policymaking since the 1990s’ liberalization of the Indian economy. ‘Productivism’ is the new game in global economics. Atmanirbhar should be India’s way to build its competitive strengths.
Arun Maira is former member, Planning Commission
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