R Ravimohan: Topsy-turvy world

Restrictive policies are a barrier to harmonious development

US imposes steel tariff to protect domestic industry. The US protests against jobs being exported overseas. The US will fight its elections this time around on concerns of national security. The US backs off on agreements it entered into on environment. US companies lead the list of accounting and management malpractices, in a Western dominated phenomenon.

India wants greater market access. India wants to invest abroad. Indian GDP growth is the fastest or the second fastest in the world. India will fight elections on an economic agenda.

Ironically the turning point of economic truism seems to be coinciding with a geo-political renaissance. The superior economic prowess of the US seems to be imploding under its own weight. The accelerated and unequal global balance in economic parity to my mind is behind all of these tectonic changes that are happening. Let me elaborate.

The whole issue of jobs being off-shored is clearly determined by the huge labour market arbitrage. US-originated arguments of unfair wage levels in foreign countries are unsustainable as the parity between economic levels and wages in countries like India can be easily established. Here again the economic disparity is the root cause of the wage disparity.

However, the economic structure of markets in each country has evolved in consonance with the wage levels, sustaining the stability of these systems. Is not the whole edifice of the purchasing power parity built on this fundamental dictum?

Given the unshakeable viability of the differences in cost structures of different economies, it is but natural that with the advent of enabling technology, jobs will fly to lower wage cost centres. Indeed, this trend is likely to consolidate further and deepen the divide in the markets as well.

For instance, cost and sale prices of shoes made in China, are about a tenth of what they are in the US. Mostly the cost differential comes from the wage disparity. Businesses have taken advantage of this differential by sourcing shoes from China and selling them at huge arbitraged margins in the US.

In the long run, these margins would have to narrow. Given the human desire to create value, the cost structures will tend to get pushed downward, towards lower wage-centric systems.

Also the inability of these populations to afford any higher wages will mean that they remain closer to where they are now. Wages in higher cost systems like the US and Europe would have to move down. Does that mean a deflation in such countries? That is another story for another day.

However, for the moment it is safe to conclude that the jobs will move to lower cost centres and can be attributed to the economic disparity between countries like the US and countries like India and China.

The other manifestation of the same malady is the imposition of protective duties on steel products. Fearing job losses in the steel industry, as a result of cheaper imported steel from countries with lower wages, the US imposed an import duty of 30 per cent.

What triggered the global competition is of course the technological advancement in the lower wage countries which combined with lower cost of labour, gave them a competitive edge. The systems with lower cost structures are able to afford and catch up on technological advancement.

Superior economic prowess therefore no longer ensures technological superiority as both the differential between cost of technological advancements and its affordability have narrowed to breachable levels. Telecom, pharmaceutical, automobile and software industries will witness India's advances on a global paradigm in the next few years.

The whole system of global sourcing quota in respect of garments evolved as a result again of the basic wage arbitrage. However the Western countries were smart to detect the advent of this trend early on and they were able to control the global development of the fabric assemblers by dividing and ruling them.

The lack of communication and information systems and limited understanding of global trade limited the ability of the fabric exporters from developing countries such as India to desist the formation of the global quota system. Thus was born the abominable system of allocating quotas which effectively let the buying countries dictate market structure.

Mercifully the system will vanish in 2005, again indicating free market forces have perhaps the most powerful influence on economics. Advent of the Internet has indeed made it possible to generate global awareness and debates on many of these issues. That certainly augurs well for market forces.

Hopefully the threat of intervention by dictums of the mighty has abated, but the possibility of it rearing its ugly head can not be ruled out. Therefore for poorer countries like India, vigilance on this score is extremely important.

When economics turn against the market giants like the US, it tends to fall back on geo-politics. Geo-politics of weakening its currency which is the global reserve of wealth, failed attempts to bully China to alter its foreign currency policy, garnering natural resources around the globe, derailing the evolution of global standards of prudential banking supervision suggested by BIS, blatant violation of WTO covenants in protecting domestic markets, nonchalant spurning of commitment to international accords on climatic changes such as Kyoto protocol, strategic use of the most-favoured-nation status and by extension, global war on terrorism can all be linked to desire to maintain economic dominance and superiority in the world. It is a legitimate objective of the most powerful nation in the world.

The question is one of sustainability and the risk of not paying heed to underlying fundamentals and recognising that powerful changes in technology and globalisation have rendered some of the traditional tools of competitive advantages ineffective.

The geo-political fallout could be social. However, undeniably there is a strong ingredient of the economic superiority of the US versus the rest of the world with a simmering discontent of envy, a sense of being exploited and unfairness. The petro-dollar riches may be a contentious source of some of the economic disparity. The display of military might be born out of the confluence of superior technology aided by superior economic resource availability.

The fact that the primary concern in the US at a time they are going to election is national and personal security of its citizen, whereas our politicians want to project bijli, sadak and pani in addition to roti, kapada aur makan, is a telling sign of the altered equations. The crux is economics. The nub is the wage arbitrage. Recognising it and harnessing it for a harmonious global development is the only viable solution.

That will mean more inclusive policies from the developed nations such as the US, and more corroborative trade policies from developing nations like India. That will also address in some time the vexation of reducing disparity in economic conditions globally. Finding the dynamic balance in that paradigm will be much easier and more sustainable than the current system of fractionalism and brute force.