T C A Srinivasa-Raghavan: Parties and golf, yes. But exports?

OKONOMOS/ Exports of countries rise between 6 & 10% for each additional consulate set up abroad

It is not often these days that the Foreign Service hears the music of the heavens. But here are a few bars that might cheer it up.

It turns out that diplomats are useful, after all. Andrew K Rose, a professor at the Haas School of Business at Berkeley, decided to find out if diplomats did any good at all.

So he asked, as only a business economist can, "Is the presence of foreign missions systematically linked to a country's exports?" And guess what he found.

"Holding other factors constant, exports seems to rise between 6 and 10 per cent for each additional consulate". And he "finds evidence that the creation of an embassy has a substantially larger impact on exports than additional consulates."

But then comes the asynchronous coda. "Are the benefits from trade creation sufficient to justify any reasonable fraction of the costs of the Foreign Service?"

He may well ask. The US Foreign Service, it seems, will soak up $ 5.7 billion this year. The Indian Foreign Service's budget, in contrast, is more modest, a mere Rs 3,640 crore (or around $ 850 million) in 2004-05.

Rose has a point. In the old days, apart from representing the sovereign, embassies were set up to gather information about the host country. But now there are other sources, including the TV channels and newspapers, on which even intelligence agencies rely.

Also, in the old days, because communications were slow, the ambassador had a lot of autonomy. But with the arrival of the Morse code in the mid-19th century, even that started to diminish. Today, even high-ranking ambassadors are mere couriers, taking orders from the bosses back home.

Nor, says Rose, do "Consular affairs "" passports, visas, and the like "" justify the expense and prestige of a Foreign Service." Whence his question: why do we have these drones feeding and fattening at the trough?

"One answer increasingly given," he says, "is that the Foreign Service promotes exports".

"Ambassadors, commercial attaches, and other members of the diplomatic corps are said to pay a key role in developing and maintaining export markets."

Is this true or self-serving nonsense?

Rose's effort to find out has resulted in a very interesting paper*. The foreign secretary should have it circulated amongst all officers, not to mention make it compulsory reading at the Indian Foreign Service training school. It might rid them of the persecution complex (especially vis-à-vis the IAS) that they acquire early on in their careers.

The paper is a bit technical, what with econometrics and all that. But the results are plain and "show strong evidence of a non-linear effect of the number of foreign missions on exports. The establishment of a first foreign mission is associated with a substantial effect on trade."

There is, of course, the problem of reverse causality, that is, did more trade cause an embassy to created or was it the other way round? It is hard to find out but there is some truth in it.

The Germans, for instance, want to set up a consulate in Bangalore but the government is saying no. India permits consulates only in the old presidency towns.

Mexico, by the way, maintains an embassy and 42 consulates inside the US. The Netherlands and Switzerland each maintain 27 foreign missions to the US.

There is a major weakness in the paper, however. It doesn't examine the east Asian and Chinese experience. Exports from these parts have been tidal in nature but without much help from the diplomats, most of whom don't know much English, and are, therefore, severely handicapped.

The real takeway, for me at least, is that depending on the size of the host country, there may well be an optimal number of consulates that a country should have. This is because Rose finds that "additional consulates have a much smaller export effect, of the order of 5 to 11 per cent. Even this effect seems to fall as consulates are added."

There is a diminhsing utility thing at work here. But India, one can safely venture, is very far from that point. The Ministry of External Affairs should ask RIS (Research and Information System for the Non-Aligned and Other Developing Countries) to do some research based on Rose's methodology.

*The Foreign Service and Foreign Trade: Embassies as Export Promotion, NBER Working Paper No. 11111