Economic Relations in a Global Context
By: Shri Pinak Ranjan Chakravarty, Special Secretary Ministry of External Affairs
Venue: Coimbatore
Date: Nov 04, 2013
It is a pleasure to have the opportunity to speak here this evening. I would like to thank CII, Coimbatore and PGM Institute of Management for making this event possible. This is my first visit to Coimbatore and my first impression is extremely positive. The roads are good and clean. Traffic is reasonably disciplined and there are no traffic jams. Coimbatore has been called the Manchester of the East, an analogy that is an imposition of Western industrial hegemony. I have, therefore, suggested that Oxford should be called the Nalanda of the West. We tend to forget that Takshashila and Nalanda Universities pre-date all Western universities.
Speaking to Businesspersons and Students is always a challenge because the former have a reservoir of practical business experience and the latter are more up to date with contemporary knowledge. I shall, nevertheless, attempt to address the subject in a manner that I thought will be useful to this audience. I will dwell on the historical beginnings of trade among peoples and empires and proceed to another epoch that accelerated international trade and economic relations, coming finally to contemporary developments in global economic relations. Along the way I will also touch upon India’s economic diplomacy.
There have been several stages or epochs in the development of economic relations among peoples, nations and regions. Indeed, early humans traded with neighbouring communities, who in turn traded with other neighbours in an ever expanding circle of contacts. There is documented and archaeological evidence of trade between settled river valley civilizations – Indus valley seals discovered in Mesopotamia for example and later sea-borne trade between Rome and South Indian kingdoms. The Periplus of the Erythraean Sea, an account of an anonymous seafaring sailor, mentions maritime trade between south Indian ports and Rome via the Red Sea ports. In fact Pliny the Elder wrote complaining about the drain of gold and silver, to pay for the silks and exotic merchandise from India to satisfy the demand of the Roman elite. It seems India’s insatiable appetite for gold has still not been fulfilled. The initial trade routes were overland. The invasion of India by Alexander of Macedon opened up the land route to Europe, though trade between India and Persia pre-dates Alexander’s campaign in north-west India. The maritime route to India opens after the conquest of Egypt by Rome via the Red Sea ports. With the decline of Rome, the Arabs took over the maritime trade to India and we inherit the word monsoon (an anglicized corruption of the Arabic word Mausam, literary season) - the seasonal winds that the Arab seafarers utilized to sail to Indian shores. It is worth noting that most trade in ancient times was via overland routes, for example the Silk Route. Maritime trade followed overland trade routes. Both overland and maritime trade was the initial stages towards globalization of trade and economic relations among peoples. With the voyages of Christopher Columbus and Vasco da Gama, the maritime routes were opened up for European inroads into the old and new world, ushering in the first steps towards globalization via imperial ventures.
Globalization is a word that is increasingly heard in our contemporary discourse on a variety of issues, be they economic, communications, health and a host of other subjects. In economic terms, globalization has meant that economies of all nations around the globe are linked and consequently, we cannot isolate ourselves from global trends. We are, as it were, sailing the in the same boat. The Information Technology revolution has connected us globally in a manner that had not been foreseen before. Today we are dealing with issues like global eavesdropping via data mining by the USA’s intelligence agencies through coercive legal measures on the major IT companies based in the USA. This means that we swim or sink together. Historically speaking, the main features of the global economy, as we know it now, took shape during the Industrial Revolution. The Industrial Revolution started the systematic application of science to technology, which has characterized modern economic growth. With Britain leading the way, diffusion of British technology gave a major impetus to the industrialization efforts in both Europe and British overseas territories. The Industrial Revolution helped develop linkages between the European and overseas economies in complementary development patterns that transmitted changes in the nature of economic growth in developed countries overseas. During this period, Government investment, government demand and government finance played a leading role. Institutions alone were not sufficient by themselves to engender economic development. Long cycles in economic growth, capital formation, migration and institution-building, linked to economic cycles in developed countries, came to mark the history of economic development in the nineteenth century, with the most critical policy areas being international trade, agriculture and investment. This led to the inevitable need to develop economic relations with countries across the world. The Industrial Revolution created technologies that drastically lowered the cost of long distance transport. This facilitated import of food and raw materials into Europe from overseas territories. The invention of the steamship and introduction of refrigerated shipping drastically decreased the cost of bulk transport over long distances. These innovations enabled the emergence ofa new pattern of international division of labor and complementary international specialization in trade and production. Food and raw materialsfrom resource-abundant countries were exchanged for manufactures firstly from European andthen the United States. Geographical expansion of international trade, international migration and capital movements into overseas territories greatly accelerated. The Industrial Revolution accentuated economic differentiation among nations. The ratio of the per capita income of the average most advanced country to the per capita income of the average least advanced traditionalsociety, was about 2.8 to 1 in the immediate pre-Industrial Revolution era (in 1960 US dollars adjusted for purchasing power parity differences). By 1913, this ratio had almostquadrupled to10.4 to 1. By 1950it had mushroomed to 18 to 1.This increased differentiation ultimately led to the bifurcation of the world into developed industrial countries and developing countries which became suppliers of raw-material and agricultural-staple.
The historic transformation with the end of the two World Wars in the 19th century, ushered in an era of unprecedented sustained economic growth, in both developed and developing countries. Popularly known as the "The Golden Era of Economic Development", it saw the introduction of the Bretton Woods System and just like the Industrial Revolution, saw major beneficiaries of the strong-growth impetus originating from the developed countries. This was also the period of de-colonization and the emergence of independent countries, mainly in Asia and then Africa. Development programmes in these newly independent countries, including India, gave a fillip to global trade and establishment of new economic linkages between nations through aid and technical development programmes. As mentioned before, technological advances in transportation, like air travel conquered distances and made travel easier and reduced time from days, weeks and months to hours. Formal and informal international institutions have been created since the aftermath of the Great Depression of the 1930s, to manage the challenges arising from ever closer global economic integration. The Bretton Woods institutions like the IMF and the World Bank since 1944, the G7 (later G8) since the 1970s, the GATT and its successor, the WTO, since the 1990s are all part and parcel of this global economic governance system. The outbreak of the global economic and financial crisis in 2008 has now placed the G20 at the centre of global economic governance.
Contemporary patterns of economic globalization have been strongly associated with the reframing of the relationship between states and markets. Although the global economy as a single entity is by no means as highly integrated as the most robust national economies, the trends point unambiguously towards intensifying integration within and across regions. Patterns of contemporary economic globalization, have woven strong and enduring webs across the world's major regions, such that their economic fate is intimately connected. Levels of inter-regional trade are largely unprecedented, whilst the form which trade takes has changed considerably. Multilateral institutions have become increasingly important sites through which economic globalization is contested, by weaker states and by the agencies of transnational civil society. The G7/8 states and representatives of global capital have found themselves on many occasions at odds with collective decisions or rule making. Moreover, the political dynamics of multilateral institutions tend to soften great power control, for instance through consensual modes of decision making, such that they are never merely tools of dominant states and particular social groupings. Alongside these global institutions, there also exist a parallel set of regional bodies, from APEC to the EU, which represent an additional attempt to shift the terms of engagement with global market forces.
Over the past few decades, the most salient feature of the global economy has been the growing importance of the Emerging Market Economies (EMEs) and the ever-deepening integration of these economies into the global economic system. There have been significant changes to the pattern of trade and investment, notably the increasing role of major emerging markets (especially Brazil, China and India), shifts in the organization and structure of global production, including the increasing tradability of services and shifts in the type of products traded especially the rising share of commodities. A shift toward more market-based and outwardly oriented development on the part of the EMEs has enabled hundreds of millions of people across the emerging world to become integrated into the global economy for the first time. There has been a quadrupling of the global volume of trade in goods between 1980 and 2003 – twice the rate of growth in global GDP. There has been an even more dramatic rise in investment, with the global stock of outward FDI increasing from $ 550 billion in 1980 to almost $ 19 trillion at the end of 2009.
While there has been a rapid expansion in trade and investment, growth has not been uniform. Developed countries still account for the lion’s share of trade and investment, but the most rapidly growing suppliers of exports have been emerging markets including much of Asia, but also less widely recognized successes in Africa, South America and Central and Eastern Europe. Today, international investment reflects the growing recognition of the role investment has come to play in international economic development. Today, the world sees BRICS countries as the leading sources of FDI, accounting for 52% of global FDI flows, with India a significant contributor, underlying the slow but gradual shift of economic power from West to the East.
Inexorably, economic interests have increasingly become the prime mover of India's international relations. Hence, economic diplomacy has assumed immense significance and is today the primary focus in the work of Indian diplomats. In the Indian case, the first real attempts at economic diplomacy after independence, were during the early 1970s, following the oil crisis precipitated by price manipulation of the commodity by the OPEC countries. However, the new paradigm of Indian diplomacy followed naturally from the economic reforms in 1991, with India rebranding itself as a semi open economy which essentially translated into India being a viable and profitable investment destination capable of offering high quality exports in certain niche sectors including petrochemicals and textiles. As multilateral economic diplomacy heightened with this influx and the establishment of the WTO, it led to a broadening of international discussions on areas within the aegis of economic diplomacy. Lines of Credit (LOC's) became more important that Lines of Control. The LOCs helped to promote India's political, economic and strategic interests abroad. Enhancing trade and investments also became a critical component of this policy. The reforms initiated in 1991 and more recent efforts have had a significant impact on India’s external relations.
With this shift in the global economy to other markets along with a deeper integration of all countries in the world economy, there has been a rise in the number of regional trading blocs and new alignments being drawn up, as countries compete with one another to derive maximum benefits from economic development. The landscape of trade negotiations is evolving rapidly, with a number of regional and bilateral trade agreements negotiations taking place around the world. The recent trading blocs that are occupying the front pages are: The Trans-Pacific Partnership (TPP), which is a proposed multilateral trade agreement between 12 countries in the Asia-Pacific region. The agreement aims to deepen regional economic integration in the Asia-Pacific, create jobs, and foster closer trade and investment ties. The twelve TPP members account for 38% of the world GDP and about 25% of the global trade. Significantly, both China and India are not members of the TPP. India will have to examine carefully and weigh the pros or cons of considering whether it should join the TPP negotiations. The Regional Comprehensive Economic Partnership (RCEP) is a grouping between the 10 countries of ASEAN and its 6 partners in Asia-Pacific. It includes three of the largest economies in the world - China, India and Japan and represents 49% of the world's population and accounts for 30% of global GDP. It also accounts for 29% of world trade and 26% of world foreign direct investment (FDI) inflows. The Transatlantic Trade and Investment Partnership (TTIP) is also another trade agreement that is presently being negotiated between the European Union and the United States. It aims at removing trade barriers in a wide range of economic sectors to make it easier to buy and sell goods and services between the EU and the US. The EU and Canada are separately negotiating a trade agreement.
Keeping pace with the changes in the global economy, India too made a radical break in 1991 from its past policies of inward orientation and started a process of opening up to trade and foreign investment. The growth response emerged a decade later as the cumulative impact of the gradual reforms began to be felt on the investment environment. India has assumed a leading role among these emerging economies and achieved impressive rates of growth in the last two decades, though there is slowing down of the economy and the growth rate has gone down to about 5 %. The 21st century is often proclaimed to be the Asian century, with India hoping to be one of the lead players managing its transition from a low income developing country to a middle income one. Economic historians have assessed that India and China were the world’s leading economies in the 17th century. Hence, if the cycle of history leads to India and China becoming the world’s leading economies, the two countries would be reclaiming their erstwhile position in the economic hierarchy of the world. In this changing world of interconnectivity and interdependency, with various global players striving to influence the outcome of economic relationships, economic diplomacy has assumed immense significance and poses new challenges to diplomats around the world. The focus of our economic diplomacy has shifted towards the need to protect and promote our economic and commercial interests abroad and to exploit the opportunities thrown up by the fast integrating world. Bilateral Free Trade and Investment Promotion Agreements, Multilateral Trade Negotiations, technology transfer, diversification of export markets, promotion of foreign direct investment, reforms of the international economic and financial infrastructure, promoting energy security through diversification and acquisition of oil and gas resources, and accessing scarce raw material assets have become important components of our economic diplomacy strategy.
The key question now is whether today’s global economic governance is in tune with a world where challenges have become truly global in many aspects, an evolution which the global financial crisis has only accelerated. Barely four years after the outbreak of the global economic and financial crisis, there remains imponderables that make it difficult to make any predictions. You will, therefore, not be surprised if my answer today remains tentative, since all I can say is that it is too early to tell. There is genuine shock and disbelief about America’s political system, which despite all its checks and balances, could carry both the American economy and the global economy to the very edge of a financial precipice.
Looking through the prism of the emerging economies, the Indian economy, like the rest of the world, post the financial crisis, is also facing serious challenges such as high inflation, slowdown in investment and growth, a rising current account deficit and an exchange rate which is under pressure. Of course, this particular outcome was not preordained or caused only by the global slowdown. This financial crisis has a brought a significant change in global economic governance and therefore the nature of economic diplomacy. This in turn means that the traditional approach towards economic diplomacy underpinned by working within isolated silos of foreign relations, or trade and commerce, must be restructured, to reflect a more strategic and deep approach.
Going forward, there are challenges - some old, some new. Adjustments will be required in developed industrialized countries too - and not just the deficit countries. Indeed that is happening in the countries of the Eurozone. There has to be recognition on all sides that global rebalancing in terms of the composition of activity and growth and in terms of global capital flows is necessary. India believes that strengthening of global economic relations in critical to ward off protectionist trends that knee-jerk politics makes attractive in the short term.
The leading Emerging economies have to provide leadership, commensurate with their growing importance in the global system, in rebalancing demand and increasing currency flexibility. If the Emerging Economies lead together, with mutually supportive actions, better outcomes can be achieved than any of them acting on its own. The stability of the global economic system depends upon democratic functioning and decision making with the Emerging Economies playing a larger role.