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India: A Hub for Globalization

Is India really ready to play a central role in the global economy?

March 24, 2005

Is India really ready to play a central role in the global economy?

Mindset is a difficult concept, even more so when we speak of the mindset of the nation.

But it does seem that there are times in the life of nations when they feel confident that they can take on the world, that they are capable of meeting any challenge, achieving any dream.

If properly channeled, such a spirit can be an enormous aid to growth. In fact, some sociologists argue that such a spirit is critical to the kind of explosive growth that we saw in Japan in the 1950s and 1960s, in Korea in the 1970s — and in China today.

It is the spirit that moved South Korea from having a per capita income on par with India’s to joining the ranks of the OECD in just four decades. It is the spirit that built a sleek futuristic city in Pudong, Shanghai out of an area that was largely farmland just a decade ago.

And it is the spirit that is currently building the New Delhi Metro to world standards and on time. It is the spirit that asks “why not?” — instead of “why”.

One reason such a mindset is important is that it creates an intolerance for laziness, for shoddy products, for open corruption — and for the usual excuses.

When people have a strong conviction that they can achieve the possibilities of the future, it makes them less tolerant of impediments in their way.

There, is however, another reason why such a mindset can be important today. It gives a country the confidence to open itself up to the world, to take advantage of outside opportunities no matter where they arise.

It allows the country to use the cheapest resources, no matter where they are produced, to hire the best people, no matter where they were born — and to face the fiercest competition, no matter what its origin.

Such confidence is necessary if India is to become a hub for the global economy.

Clearly, some segments of Indian society possess this mindset. But do we have it as a collective — and, if not, what do we need to do?

In some ways, India is well prepared to be a hub. We are a multi-cultural, multi-ethnic society with a vibrant democracy and a free press that readily exposes our shortcomings.

The highest elected office of the country is open to anyone who consciously opts for Indian citizenship, not just to those who are unthinkingly born into it. All this reflects a willingness to assimilate and work with that which is foreign in the broadest sense of the term.

However, as an economy we are still not as open to foreign goods and services, labor or knowledge as we should be.

India’s GDP accounted for 1.6% of world GDP in 2003, but its trade accounted for only 0.94% of world trade.

The country also holds the dubious record of instigating the maximum number of anti-dumping cases under the WTO in the period between 1995 and 2003.

India’s capital account is still closed. It still places restrictions on foreign entry and participation in various areas of the economy, even those that have little implication for national defense.

And it still is extremely wary of advice that may be associated with a foreign hand.

Why is India so closed? The facile explanation is that we still remember the colonial experience, that some Indians see the process of opening up as a new colonialism, by foreign multinationals, foisted upon them by a fifth column of neo-liberal Indian economists.

Yet, there is a big difference between a monopolist colonial power and multinationals — and that is competition. Competition keeps any single multinational from getting overly powerful, either economically or politically.

There is no credible evidence that foreign firms have conspired together to exploit India, or that they have misbehaved any more than similarly placed Indian firms — though I do not want to imply that individually they have all been without blemish.

And in that most revealing of markets, the Indian marriage market, getting a job in a multinational has always been seen as a plus — almost on par with being in the Indian Administrative Service. This would not have been the case if multinationals were suspected of dark and dire deeds.

My sense is that the reason India has not been open reflects other fears than dislike or mistrust of the foreigner.
This is — in some ways — good news, for it would be far harder to become a hub for globalization if India were intrinsically xenophobic. But what else could explain how closed India is?

One explanation is the lack of confidence of our entrepreneurs. Until recently, our entrepreneurs — shielded by protection against domestic and foreign entry — felt they simply could not compete against foreign firms. Protection not only renders the beneficiaries lazy and inefficient, it also gives them less incentive to rectify distortions and inefficiencies in the system.

Our corporations could not care less that finance was so costly during the License Permit Raj — because the costs could be passed on to consumers. But when talk turned to liberalization, they argued they could not compete against foreigners who had access to much cheaper finance.

And they are not unique in such complaints. An analysis of attitudes towards competition across the world shows that entrepreneurs are far more likely to oppose liberalization when their financial system is relatively underdeveloped.

Two factors have been particularly important, I believe, in helping Indians break out of this vicious cycle.

In this cycle, the lack of competition bred corporate indifference towards the efficient provision of factors like power and finance, which in turn reinforced resistance towards liberalization.

First, companies like Infosys, TCS, and Wipro showed that it was possible for Indian firms to compete effectively on the world stage and that the profits from doing so were enormous. Second, creeping liberalization, initiated by crisis — but then gaining a momentum of its own — forced competition on the rest.

When challenged to improve productivity, Indian firms found that, despite the inefficiencies of the system, there were unique sources of Indian comparative advantage, even in manufacturing.

A few years ago, we Indians feared Chinese imports would swamp the motorcycle market. Today, I see that Bajaj Auto sells over a million motorcycles and expects to export 160,000 units this year. All in all, our corporations have come a long way — and many are ready to make India a hub for globalization.

If so, what still keeps India a relatively closed economy? One reason is the politician, aided or abetted by the bureaucrat. Why is that? Well, foreigners are much harder to control. They also do not vote, so they are an appealing lot to discriminate against.

But India is not special in this regard. Just remember Scandinavian politicians resisting the takeover of their banks by other European banks. Or, French politicians creating national champions — or U.S. politicians complaining about outsourcing.

Politicians the world over — with a few notable exceptions — find it convenient to rail against openness.

But politicians do not act in a vacuum. They are particularly effective when they cater to strong constituencies. With large corporations becoming more open-minded, so to speak, could it be the people who are against competition?

On average, and with the caveat that cross-country comparisons are fraught with difficulty, the answer is no. Amongst all countries surveyed in the World Values Survey, Indians and Chinese are amongst the most pro-competition. But averages conceal some important patterns.

Across countries and correcting for other factors, richer people are typically more strongly for competition. In India, they are not. Indian farmers and agricultural workers, especially those who are not owners, tend to be against competition.

This constitutes yet another powerful political constituency against competition in India. But even here, there is reason for hope.

First, more and more of India’s young are reaching working and voting age. They are unencumbered with the baggage of the past and sending more of their kind into parliament.

Perhaps more important, education — and more generally, the spread of skills — makes people more tolerant of competition. Human capital equips people with a chance in a more competitive world. India is no exception here.

So a second reason for hope that people’s attitudes will change is that, as the population becomes better educated and more skilled, we will be more tolerant of competition in general — and openness in particular.

Competition will mean more volatility. The best way to prepare people for volatility is to let them experience increasing amounts of it. India has too much preservation — and too little creation or destruction.

Increased corporate flexibility will inevitably force individuals to bear losses — for example, workers who lose their jobs as the economy changes. That is why we should make it easier for the worker to be able to learn new skills — all the more important to invest in education.

Finally, people will be far more willing to accept competition if they are given time to adjust — and if they are convinced the government will use that time to improve their ability to compete.

A time-bound phasing-in of competition and a phasing-out of protections and subsidies may find far greater acceptance than shock treatment.

To conclude then, the stars are well aligned for India to become a hub of globalization, but it is still some distance from that goal.

The vote of confidence foreign investors are giving India should not induce any complacency — they are betting on potential, not reality. It is up to India to turn that potential into reality.

Adapted from Raghuram Rajan