"The brain is a
wonderful organ; it starts working the moment you get up in the morning and
does not stop until you get into the office."
-
Robert Frost (American, 1874-1963)
Word for the day
Unquiet (v)
Agitated; restless;
disordered; turbulent
(Source: Dictionary.com)
Malice towards
none
When Indian telecom industry
will become a utility service from investors' viewpoint?
Finding the balance - I
The current economic model being pursued since economic
liberalization started in 1991 is largely a distortion of the classical
Keynesian model that advocates a larger role for the private enterprise with
active state intervention during extremities of business cycle and argues
against higher savings in both private and public sector. The Keynesian model
has its genesis in the great depression and mostly found useful during larger
economic crisis.
As Chief Minister of Gujarat, the incumbent prime minister
appeared an advocate of laissez-faire or free market which entails
minimal state intervention even during crisis. He had implemented the model in
Gujarat albeit with limited success.
However, as he must have realized by now, considering the present
state of socio-economic development of various parts of the country, it is
perhaps 10-15years too early to test the laissez-faire model at the
pan-India level.
The major challenge before the government therefore is to find a
balance between the desirable laissez-faire model and the current
variant of Nehruvian socialism model.
From whatever I have heard from the government, it is planning to achieve
the balance through (a) reforming institutional framework to promote ease of
doing business; (b) materially enhancing physical infrastructure through public
investment to improve logistic support for the businesses; and (c) encouraging
entrepreneurs to invest in business ventures that will create productive jobs
for the burgeoning Indian workforce and improve trade balance of India through
export promotion and import substitution.
For executing the plan it has proposed to (a) rationalize social
sector spending to save public resources for investment; and (b) liberalize
capital controls (FDI rules) to encourage foreign investors to invest in
manufacturing facilities and services like insurance, banking, retailing etc.
This strategy has faced opposition from both political class and
civil society. Moreover, the government has not been able to make a convincing
case about its strategy. The consequent environment of stalemate and mistrust
is making financial markets jittery. It is creating doubts in minds of
financial investors as to capabilities of the government in successfully
achieving the desired balance.
Before I analyze the government positioning and likely outcome, I
find it pertinent to note the following views of my favorite central banker Bob
McTeer:
"I view the House vote today on trade-promotion authority, a
necessary prelude to an important Asian trade deal, as a test of economic
literacy. If there is anything most economists that don’t work for labor unions
tend to agree on, it is freer trade. However, even if they pass the trade
authority and ultimately some sort of trade bill, I’m not sure they will really
have passed the economic literacy test for two major reasons.
One reason is that it has become commonplace to burden new deals
that are supposed to take advantages of differences among trading partners with
provisions “to level the playing field” like environmental, labor, and other
measures. Trade is supposed to take advantage of unlevel playing fields, not
take place only after all the social engineering has taken place.
The second threat to the literacy
tests is the way the proponents and opponents frame the issue. It’s all about
jobs. Proponents talk about all the good new jobs that will be created by more
exports; opponents talk about all the good jobs lost to imports. Usually each
side doesn’t acknowledge the points made on the other side. Everybody talks to
their own choir.
I’m a proponent of freer trade, externally and internally, but
it’s not a job issue with me. The impact of freer trade—and I say freer rather
than free trade because I doubt they will come close to pure free trade—is
basically neutral on the number of net new jobs created. More exports will
create more domestic jobs; more imports will destroy more domestic jobs. The
net result is unknowable, but it is likely to be close to zero because exports
and imports tend to move together, not by coincidence, but by causal
relationship.
More exports create more domestic income and cause more foreign
money to flow into the economy. Both these things will stimulate more imports.
More of our imports will stimulate the economies of the exporting economies and
send them more of my money, both of which will stimulate more exports to them.
Again, it’s impossible to say in advance what will be the net impact on the job
count, but it’s likely to be close to zero.
While freer trade doesn’t necessarily create net new jobs, it does
make jobs count for more. Protection is inefficient. It means we are using
scarce and valuable domestic labor to produce things that we don’t have a
comparative advantage in. Freer trade would shift jobs toward our comparative
advantage and do the same for our trading partners. The world will experience
an extra expansion of income and output because the world’s labor is shifting
toward comparative advantage.
A major obstacle to economic literacy on this issue is that when
workers lose jobs to imports, it is obvious what is happening and why. The new
jobs created by exports are more invisible and aren’t necessarily attributed to
exports. Of course, there will be frictions, including some unemployment, in
shifting labor toward its comparative advantage. Some politicians probably
understand the merits of freer trade, but find it expedient to avoid counter
intuitive arguments with their constituents and demagogue instead.
My favorite quotation on the merits of free trade came from Henry
George, who pointed out that protectionists want to do to their country in
peacetime what the country’s enemies would want to do to it during war time.
That is, close its borders to trade." (NCPA)
