Panagariya's new book makes a timely case for free trade amid trade wars

Free Trade and Prosperity 

How Openness Helps Developing Countries Grow Richer and Combat Poverty  

Arvind Panagariya 

Oxford University Press 

327  pages; Rs 695 

Arvind Panagariya's new book is to be welcomed whole-heartedly for two reasons. First, the subject is one of the most important of our times. A world of Donald Trump and America First, attacks on the World Trade Organization, and statements in favour of mercantilism needs a counter-view. Second, the author is one of our most illustrious economists and a world-class academic, having served with distinction as the first vice-chairman of the NITI Aayog for three years of the Modi government.      

Free Trade and Prosperity: How Openness Helps Developing Countries Grow Richer and Combat Poverty is a systematic analysis and unabashed argument for free trade. As Dr Panagariya says in his introduction, while arguments for free trade have often been made for the developed world, his book has the developing world as its focus. He deals systematically with all the arguments against free trade and addresses successively the relationship between free trade and growth, poverty and inequality. A wealth of empirical data shows that higher rates of growth are strongly correlated with free trade, or at least freer trade. The systematic alleviation of poverty is not directly connected with free trade but is directly connected with growth. And he shows that inequality is more connected with other factors -- levels of primary education and health in particular -- than with free trade.    

Dr Panagariya then deals with the Asian Tigers (South Korea, Taiwan, Hong Kong and Singapore) before turning to India and China. In each case, he shows how the opening of the economy is strongly correlated to more rapid economic growth. He concludes that there are no exceptions -- no exceptions -- to arguments in favour of free trade, and no arguments in favour of protection. The vehemence of the argument and the lack of qualification are unusual for an academic volume -- but are refreshingly direct as a result. As a sometime teacher of economic development, and particularly of the role that building technical capability plays in economic development, I found the book very interesting. For anyone who has ever taught economic development, with however market-oriented an outlook, one usually made an exception for infant-industry protection. In my own case, I usually accompanied an argument in favour of infant-industry protection to foster essential learning with a long quote from John Stuart Mill, the father of liberal economics:

"The only case in which, on mere principles of political economy, protecting duties can be defensible, is when they are imposed temporarily (especially in a young and rising nation) in hopes of naturalising a foreign industry, in itself perfectly suitable to the circumstances of the country... it cannot be expected that individuals should, at their own risk, or rather to their certain loss, introduce a new manufacture, and bear the burden of carrying it on until the producers have been educated up to the level of those with whom the processes are traditional. A protecting duty, continued for a reasonable time, might sometimes be the least inconvenient mode in which the nation can tax itself for the support of such an experiment."

Dr Panagariya refers to this quote somewhat testily in a footnote and then has a full chapter detailing studies that argue against infant-industry protection. Learning, he argues, can be fostered by means other than protection more effectively.

While Dr Panagariya is as pure a free trader as you can find, allowing no qualifications or exceptions, his is not an argument for complete free markets. Market failures do occur. And, when they occur, they need to be addressed through government intervention. But, protection is not one of the ways to intervene. For an academic book, there are some unusually clear villains -- Alice Amsden, Robert Wade and Dani Rodrik. And there are some clear heroes, especially his mentor, Jagdish Bhagwati.   

The strength of the book is threefold: a mastery of economic theory, a wealth of empirical evidence, and the clarity of the exposition. There is much to learn here for the academic reader and for the amateur economist. But the real strength of the book is its timeliness. It is good to remind ourselves of how far we have come as a country between 1991 and 2017. In this period, India was transformed, and Indian industry transformed with it. 

I purposely picked 2017 as the end date for this transformation, because things have gone into reverse in this last year. We have had seven rounds of tariff increases. I believe this to be a highly dangerous trend, one that has the potential to derail our progress. And we seem to be doing exactly what Dr Panagariya says we should not -- on the basis of both economic theory and empirical evidence.  

Dr Panagariya's best case is don't protect. We have started protecting. His second-best case is that if you do protect, then protect across products and the value-chain equally and modestly. We have been protecting completely variably -- with tariff rates for some goods increasing three and four times in the past 10 months, and huge variability between the lowest and highest rates. And his third-best case is that if you do protect variably, then protect the finished good, not the intermediate product. We are doing exactly the reverse -- with high tariffs on steel and none on engineering products, and much higher tariffs on fabric than on garments. Surely, we deserve a better trade policy than fourth-best.

A final comment might seem unfair to an author who has just finished a 327-page academic volume that he has worked upon on and off for over ten years: Dr Panagariya needs to immediately write a companion book on the same topic. In this new book, he needs to add one thing and subtract one thing. As I read page after page, I kept looking for learnings from his three years at the centre of government. I searched in vain, including in the chapter on India. So, Dr Panagariya needs to write another book that adds in his own learnings from three years in government, a book that includes the political economy of free trade, and how one makes sensible economic policy actually happen. And this companion book needs to be a book that everyone reads. The attacks on Messrs Wade and Rodrik are of interest to specialists, but not to the general reader. Leaving the academic rebuttals out would make for an easier book to read, where the many profound points being made do not get submerged in the arcane. The case for free trade is too important to be understood only by economists.

Speaking of economists makes one nostalgic for the great economists this government had -- Arvind Panagariya, Arvind Subramanian, and Raghuram Rajan. The importance of having world-class economists in government is critical to sound policy-making. Free Trade is dedicated to Jagdish Bhagwati, who famously remarked of the Rashtriya Swayamsevak Sangh under the previous National Democratic Alliance government in 1998, "Who are your economists? If they are economists, I am a Bharat Natyam dancer."

   

I hope that the new government that will be elected by May next year, of whatever hue, makes it a priority to employ world-leading economists to instruct policy. Until then, we have Dr Panagariya's book. It is welcome and timely for any Indian interested in our progress. It must be made required reading in the commerce ministry, the finance ministry and the PMO. We may not have the benefit of Dr Panagariya's advice on a daily basis in Delhi today, but the next best thing is to go out, buy Free Trade and Prosperity, and read it cover to cover. 

The reviewer is co-chairman of Forbes Marshall, past president of CII, and chairman of the Centre for Technology, Innovation and Economic Research (CTIER). Email: ndforbes@forbesmarshall.com