The Brexit referendum in the United Kingdom and the presidential race in the United States have shown, among other things, that public distrust of global integration is on the rise. That distrust could derail new trade agreements currently in the works, and prevent future ones from being initiated.
The danger implied by this scenario should not be underestimated. Isolationism and protectionism, if taken too far, would break the trade-based economic engine that has delivered peace and prosperity to the world for decades.
It is difficult for countries – developed and developing alike – to craft trade policies that deliver benefits to all of their people. But just because managing the effects of globalization is difficult does not mean we should throw our hands up and quit.
In the developing world, trade has delivered high growth and technological progress. According to the World Bank, since 1990 trade has helped to halve the number of people living in extreme poverty. But these gains, while impressive, are not necessarily permanent. If high-income countries close themselves – and their consumers – off from global markets, the world’s poorest people will suffer the most.
Trade thrives in an open environment of willing participants acting in good faith and governed by clear rules. Short of this, the forces of globalization can turn cooperation into conflict. That’s why policymakers should focus on four areas.
First, countries should dismantle protectionist measures (unless immediate livelihood concerns are there) they have in place, and make a firm commitment not to implement policies that distort global markets.
Second, countries should come together to update the international rules governing trade to account for changing economic conditions, and effectively implement negotiated agreements.
Third, individual countries and institutions such as the World Trade Organization should work together to eliminate barriers that increase trade costs. In particular, they must abolish agricultural subsidies, remove restrictions on trade in services, improve connectivity, facilitate cross-border trade and investment, and increase trade finance.
Finally, and most important, wealthy countries should support developing countries’ efforts to integrate themselves further into the global economy. Given trade’s record of reducing poverty, this is a moral imperative; it is also indispensable for peace and stability.
To be sure, trade must deliver for all countries and for all people, from factory workers suffering plant closures in Europe or the United States to subsistence farmers trapped in informal economies in Africa and South Asia.
But those who suggest that trade is a zero-sum game are simply avoiding the hard questions: Who should bear the painful dislocation costs from trade and new technologies? What policies will enable dislocated people to pursue new opportunities? How can countries maintain productivity-led growth in an age of frequent and sudden disruption?
The challenges of global integration are not new, but nor can they be ignored. Policymakers should mind the lessons of economic history. Above all, they should bear in mind that even during past periods of rapid technological change, far more people benefited from free and open trade than from protectionist barriers.
No country in today’s world can seal itself off from foreign goods, services, capital, ideas, or people. Instead leaders should foster more commerce to include more people. They can do so by adopting international rules to manage openness and interdependency; establishing stronger social safety nets; investing in innovation, education and skills-training, and infrastructure; and creating a more conducive regulatory environment for businesses and entrepreneurs to foster stronger and more inclusive growth.
No country can deliver long-term prosperity to its people on its own. Closer international cooperation and economic integration is the only way forward.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.