Marc Brazeau of Blogonaut requested us to respond to the weekly economy question that he poses to bloggers:

Given the collapse of the WTO talks in Cancun, what do you feel is the most strategic next step for the G21 countries?

He has posted all the responses here. Here is the complete response we sent him:

I am happy that the G-21 nations are willing to take unified, structured and long-term approach to trade negotiations. But I dont share the view of some observers that the breakdown of Cancun trade talks was a good thing. From all that I have heard or read, there was more on the table from the developing countries perspective, than there ever was before..And multilateral negotiations work much better for developing nations with less economic muscle than does bilateral negotiations which is what the Western countries may prefer.

The widespread discomfort in G21 countries about the Singapore issues are uncalled for. Singapore issues are about negotiation in four different areas- Transparencies in Government Procurement, Competition Policy, Trade Facilitation and Foreign investment. Does anyone really think that greater transparency in government procurement in any country is not in the best interests of its citizens?

The massive bureaucracy associated with the complex government procurement in India had spawned even bigger corruption, shoddy quality of goods and greasy family owned firms that are doing all they can to subvert trade reform. Similarly, as the numbers will testify, facilitation of trade and increasing foreign investment have been serving both India and China increasingly well and have been serving them much better than the earlier era of protectionism did. We are benefiting from foreign direct investment while our bureaucrats and politicians are still mouthing the shibboleths from a previous era.

I think it is in our best interests to make government procurement more transparent, to open the doors to easier trade and investment regulations. That strategy can become dangerous and destructive only when the objective relationship between industry and government (or the party in power in some instances) gets corrupted. In order to fight that, G21 countries need to put into place independent infrastructure, strong capital markets, regulatory mechanisms and redressal forums with teeth, not close their doors to reform.

What everyone is really scared about is competition, i.e. market access. And to a certain extent it might even be justified in certain scenarios. But the real cost of subsidies and / or high tariff to protect domestic industry are really paid for by common men who bear the brunt of higher cost of delivered goods. It is not fair. As we are finding out in Asia, if the governments can unshackle themselves from the influences of the subsidized, then a policy of incremental/gradual market access works reasonably well.

This course of action is especially important because I am convinced that the breakdown of trade talks will harm the developing economies much more than it will harm the developed economies in the West and Japan.

Which brings us to the subject of agricultural subsidies in Western economies. Agricultural subsidies are really a complex, greasy tale of entrenched political influence and votes rather than that of genuine good will; it is as true of USA as it is of Japan or India. The election in USA is round the corner and I dont see the current crop of US politicians going out of their way to enter trade talks again. The French farmers are rather glad that negotiations broke down. What with the cumbersome decision making process of EU; I dont think we would see anything happen for the few years.

G21 is right now, a highly disparate group of nations with very different needs, political systems and priorities. Using the next two years to find common points of interest and building a strategy around them is important. What countries discuss on international trade talks are decided upon much earlier and are influenced as much by the voters and the general needs of the economy as by the back rooms of the senates, the editorial pages of newspapers, and the talking points the various lobbying groups. G21 should seriously try to invest in influencing policy in USA, Japan and EU before they get into the next round of trade talks. It is an effort that is going to take money, energy and intellect, but it could prove very worthwhile.

But the G21 also needs to get rid of its hang up over Singapore issues. We can use the intervening few years to make our markets more competitive, procurement more transparent and foreign investment much easier. There is no reason why we can not approach the two things together. If we do, we may find that by the time the next round of trade talks comes up, we are in a much stronger position to negotiate than we now are.

India's Manufacturing Sector on the Move?

Rajesh Jain has picked up an interesting piece from the WSJ on Indian car manufacturing. The article is optimistic, and I would like to believe the optimism is justified, but progress in manufacturing is likely to be, as we have already seen, slower than in areas like IT services. Still, the Bharat Forge project appears to be working.

Can India become a hot spot for auto-parts manufacturing? Until recently that idea seemed far-fetched. After all, the country isn't known for either world-class manufacturing know-how or cost competitiveness. But one company, Bharat Forge Ltd., is starting to change that. The auto-parts maker is jump-starting its operations -- and the country's auto-parts industry -- with a novel approach for India: applying the brainpower and skill of the country's more than two million engineers to the manufacturing sector.

By improving the quality of its parts through better design while restructuring its finances to keep labor costs in check, Bharat Forge is able to go after global customers who would not have taken it seriously just a few years ago. It's fast becoming a supplier to auto makers like Ford Motor Co., General Motors Corp. and Toyota Motor Corp., which have to cut their own expenses amid an increasingly competitive market by obtaining cheaper parts abroad.' Bharat Forge "stands out as an example of restructuring," says Ashish Gupta, an analyst with CLSA Asia-Pacific Markets in Bombay. "They are simultaneously improving the range and the quality of their products and cutting costs to improve the economics of their business." With a focus back on auto parts, Bharat Forge has set out to modernize the way it does business, which has, in turn, allowed it to venture into markets abroad. Key to this approach has been making better use of India's abundance of skilled but low-cost engineers to improve products. "It was all based on leveraging the high-quality human capital that is India's main competitive advantage," says Mr. Kalyani. Bharat Forge has merged "blue-collar workers and our white-collar workers and [has] everyone working on the floor of the plant," says Mr. Kalyani. "We also put more high-quality [workers] on the shop floor." Having designers and production people work together has allowed the company to improve both the speed and the quality of production, he adds.
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Meantime sales of PC's in India are on the rise, a 26% increase year on year:

On the back of buoyant consumption by industry verticals and corporates, personal computer sales during the first quarter ended June 30, 2003 crossed 640,000 units, a growth of 26 per cent over the year-ago period, according to the Manufacturing Association of Information Technology. The improved business sentiment in the market has also led to the upward revision of the hardware association's first-half sales projections to over 14.2 lakh (1.42 million) units from 12.1 lakh (1.21 million) units estimated earlier. However, the share of assembled PCs comprising the lesser-known regional brands and unbranded systems rose to 65 per cent of the PC sales during the April-June quarter, with the MNC brands accounting for 19 per cent, while the Indian brands cornered the remaining 16 per cent.

According to MAIT's quarterly review, the buoyant IT consumption witnessed in 2002-03 continued undiminished in the first quarter of this year as the PC sales crossed 640,000 units."With robust growth prospects, the IT market is expected to grow at 18 per cent in 2003-04 over the previous year to cross 27 lakh (2.7 million) units," it said. MAIT attributed the strong growth of PC sales in Q1 to increased IT consumption by industry verticals and corporate sectors like telecom, banking and financial services, manufacturing and IT enabled services.

During the quarter, Notebooks and Laptops posted 8 per cent growth over the corresponding quarter as sales touched 14,784 units, MAIT said, adding servers registered 25 per cent increase year on year at 28,046 units. Smaller towns accounted for 37 per cent of the total PC sales, while the top four cities accounted for 46 per cent of the total sales.Commenting on the performance, Vinnie Mehta, executive director, MAIT, said, "The growing proportion of assembled and unorganised PC market is of immense concern to us and to ensure that IT reaches the grass root levels in India, there is a pressing need to bring down the prices of IT products."
Source: Rediff.com
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This last point is one which I am sure Rajesh, with his 50 dollar thin client terminal idea, would strongly endorse. In fact just today he has posted on ICT3 Quarterly's 'wheel of increasing Indian IT penetration'. According to roundtable participant DB Phatak:

Here is a 'teacher's dream' - that the next 500 million users hopefully in next five years are to come from these (the developing) countries. The Indian population figure suggests that we should have a share of at least 100 million users, which means that penetration should be 20 million desktops per year over the next five years. Last two years published figures by various agencies including Skoch, suggests that we are in the ballpark of 2 million desktops per year being sold. So clearly, we need a big drive...In my opinion drivers could be of two types, one is a price driver, so if somehow industry can come together, solution developers, system integrators and make the total cost of ownership of any acceptable solution to one-fourth of what it is today, then I get 4 x advantages. Simultaneously, if the end-user - government, industry, banks, financial sector, educations institutions - quadruples their investment in IT, remember, in developed world the level of IT investment is 3.5% of their overall budgets is on IT. In India the percentage is very small. So four times is an essential investment, if you do that you get a 16x advantage, what we desire is a 10x advantage.
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Rogoff on the Indian Economy


In an interview with the Business Standard, outgoing IMF Chief economist Ken Rogoff explains the thinking behind recent fund statements. The costs of accumulating reserves, the future problems with the fiscal deficit, and the need to open-up trade and establish improved financial market supervision. By-and-large I agree.

Holding foreign exchange reserves was India’s choice, but it was difficult to understand the phenomenal accretion since 2002 end, said Kenneth Rogoff, chief economist, International Monetary Fund. India’s foreign exchange reserves rose 25 per cent since January 2003 to touch $ 88 billion now. "Till the end of 2002, we could understand what happened. India and other Asian countries said the reserves accumulation was for insurance, which was a reasonable explanation," he told Business Standard.

But since the beginning of 2003, it was more than just insurance; there had been dramatic savings and holding such huge foreign exchange reserves was expensive, Rogoff said. "How to allocate the reserves is another issue that crops up," he said. This, according to him, has both political and economic risks. While econom name? Coinsciencelike my last name? Coinscience

Kingshuk sent an interesting rejoinder on my post here on the disinvestment of HPCL. I thought those are quite interesting and valid arguments. So I have posted them below:

Firstly, the whole idea of privatization is to get government off industry

Thats one motivation but perhaps not the primary one. One major motivation highlighted by the government was to bring in enough money through privatisation to fund the some of the infrastructure projects that this government had undertaken, for example the National Highway project . Of course for a variety of reasons the disinvestment ministry is far from its original target and most of the funds thus raised is now largely used to fund the huge budget deficit.

I was talking more from my perspective. I believe that the government has no business running a business. And my comment reflected that. But it is good to know of the National Highway project.

The bureacrats must be feeling very pleased with themselves. They have hit two birds with one stone. It helps them towards meeting their disinvestment target for this year and also meets the Supreme Court directive.

I think you are attributing wrong motivation to the wrong group. The idea behind the proposed merger between HPCL and ONGC is

1. Not to meet disinvestment target
2. Privatise
and the author of this proposal are not the bureacrats.

The idea is to retain control over HPCL. The author is Petroleum minister Ram Naik .

If you had been following the disinvestment saga for the last few years you would notice the recurring scene of the ministers refusing to give up control of companies it used to have control over. Petroleum minister Ram Naik had been fighting disinvestment proposal of HPCL/BPCL tooth and nail for a long time and had proposed the option of ONGC bidding for HPCL/BPCL earlier -- only to be shot down by the PM when Arun Shourie threatened to resign over this. HPCL (and BPCL) due to its retail nature had always been an extremely potent political carrot to have for a minister. Giving out petrol pump licenses to favoured people had been a common practice. It came out recently when the PM cancelled ALL licenses doled out last year when the press realized and highlighted that almost all the licensees were relatives of local BJP strongmen

Overall I agree with what you say. Better not do it now. If they win they should do it in the next term..

Update: Brad has a nice response to the following post here.

I did not want to start out here with something not nice . But here it is.

Daniel Davies had an interesting and provocative post about Cancun in Crooked Timber. Dr. Brad De long responded to it in his weblog. He ended by saying:

But given the magnitude of the potential for government failure we have just witnessed in action, one has to have second thoughts about Davies's position as well. He phrases it as the noble and high-minded "ability of democratically elected governments to set the terms on which the ownership of the means of production is decided." But, in India at least, aren't we really talking about the ability of a Muslim-hating National Hinduist Party government to use its power over the economy to reward its friends, punish its enemies, and enrich its servants? You can be for the Singapore investment agenda. You can be against the Singapore investment agenda. But you are not allowed to be against it on the grounds that it is blocking the realization of a free society of associated producers.

I have a problem with this statement at various levels. Let me preface my comment by saying that I have a huge amount of respect for Brad's intellect. He obviously knows a lot more economics than I would ever learn in a lifetime and he obviously reads a lot more in a week than many would in a year. Having said that, let also say that I feel that his statement is sloppily argued and even more sloppily presented.

Firstly, I am assuming that by National Hinduist Party, Brad means the BJP. The central government in India is not a BJP government. BJP happens to be the majority partner in a coalition government of over 30 partners in which their ability to maneuver at will is constrained in various significant and insignificant ways by its coalition partners. BJP however happens to be the dominant party. But if I am not mistaken, they contribute less than half of the coalition total strength in the parliament. They had not so far been able to keep one of their central electoral promises, building that temple in Ayodhya, largely due to the intransigence of their partners. But for what it is worth, The Economist too presents the Indian government as the Hindu nationalist government, which is pretty much the bible for Western thinkers.

I also do not understand who precisely are the servants. I suspect that it is simply hyperbole. But since I do not know, I would let that pass.

Let us instead talk about a country which has a well documented record of uprooting democratically elected governments all the way from Iran to Chile, which has embraced repressive, dictatorial governments, which even recently seems to have used arguments offered by faked documentation (among other things) to get into a war where many people are dying every day, where there still are huge injustices some of which gets discovered and are corrected, while some others are relegated undiscovered to the dustbin of history.

Injustice is not exactly an Indian monopoly. By applying the same logic we can argue that trade really puts money into the hands of a country which is generally against democracy, which supports governments only when it suits them and tries to subvert governments when it does not. Should we now say that this is a democracy hating, lieing government that rewards its allies, punishes its opponents and blah blah blah?

But I will not. I will not because I have taken the trouble to learn something about this country and know its people. My understanding of USA is now a lot more nuanced for me to take such simplistic pot shots.

But for the sake of arguments, let us work on the basis of the statement that Brad made. Obviously, there is the specter of governmental corruption in India. But the industry in India (barring some prominent exceptions) is largely independent of serious political affiliation. Except for bribes that would directly benefit the ministers and/or their sidekicks, economic liberalization does not benefit BJP in a bigger way than it does other entities. In fact, BJPs political backbone is the small traders. They are the people who are getting hart the most by the increasing international trade. The geography that has benefited the most from the trade is the region over which BJP does not have any direct sway i.e. Karnataka and Andhra Pradesh. Obviously, trade touched everyone and the satellite townships like Gurgaon, Noida and Faridabad surrounding Delhi has benefited much. But in general, Northern India, which is the heart of BJP support base has not benefited anywhere near as much as the Southern states where BJP does not have any muscle.

I also do not see how Brad's logic extrapolates to the overall tenor of the argument that he was responding to. It does not seem to address that at all. And why single out India? Honestly, that puzzles me. Has he spoken out against trade with China because of Tienanmen Square/ Tibetans/ human rights/ because of the general status of Muslims in Sinkiang? Why are we suddenly suffering from such bouts of purity with respect to India?

There is so much that is logically, structurally wrong with that sentence as an answer to the original argument that I dont know where to start. I wrote this long rant largely because it touched me in the raw. I guess it touched me in the raw because the BJP is indeed a nasty piece of work. Its leadership is full of terrible, Neanderthal men whom the Vajpayees think that they are exploiting to stay in power. And India will pay a price one day. It would have taken generations to have really gotten over partition. And now we have Godha.

But unfortunately that had nothing to do with what Daniel Davies was saying. Brad used a loaded statement to make a flippant response. Unfortunately, he has a wide readership including me that takes what he says seriously. If it were the National Review, I would not have bothered.

Outsource Roundup

Two items in the press today: Price Waterhouse and Boeing.

One Little Noticed Consequence


In all the heat generated over the collapse of the talks at Cancun, one, apparently minor, consequence does not appear to have received the attention it may deserve: the expiry of the so-called 'peace clause'.

Can any of these failures be addressed and the Doha round be revived? Some countries are more optimistic than others. The G21, for instance, left Cancún determined to stick together and fight another day. Brazil, in particular, is convinced that sooner or later rich countries will be forced to reform their outrageous farm policies. One weapon it points to is the expiration of the “peace clause”.

As part of the trade round before Doha, the Uruguay round, countries pledged not to file formal WTO complaints over the dumping of farm products as long as each country stuck to its (limited) farm-trade commitments. That peace clause runs out at the end of this year. The ensuing flood of disputes, claim some Brazilians, will at last force the Americans and Europeans to negotiate seriously on farm trade.
Source: The Economist
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Indian agriculture Rajnath Singh seems to follow this interpretation:

Speaking to mediapersons at his office, Singh, however, ruled out any review of the move to phase out quantitative restrictions on imports. Other means were available to the country to curb the import of any item hurting domestic interests, he pointed out. The minister said the peace clause was slated to lapse in December this year and there was little chance of its revival after the collapse of the Cancun negotiations. "This, in a way, will benefit India", he maintained. Elaborating on the provision, he explained that in case any country tried to export its goods to India below domestic prices, it would be possible to impose counter-veiling duty to offset the price advantage. Singh expressed doubts over the true intentions of developed countries such as the US and the European Union (EU) in pushing their trade agenda. "It seems the US did not want any progress at the (Cancun) talks in view of the Presidential elections due in November 2004. It wanted a holiday from reforms to continue with its high farm subsidies till the polls", he said.
Source: Business Standard
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My big worry is that, while Singh is probably right that the initial US horizon is the 2004 election, things can change and move so much during the next year that what began as a tactical retreat can turn into a wholesale rejection of the multilateral process. In this sense, let's hope the ending of the truce doesn't turn into the declaration of the war. My feeling, for what it's worth, is that here in Europe while the issue of agricultural dumping is no great deal, the issue of subsidies to the farmers is. The possibility of anyone outside the EU being systematically able to sell to us at competitive prices anytime soon seems just about zero.

75% Drop in US H1B visas in 2002


No time to comment on this right now, but it is very interesting and important. I will try and pick up some comments in the US press later.

The number of H1B visas, issued to workers in the technology industry in the US, dropped nearly 75 per cent from 2001 to 2002, according to a new department of homeland security (DHS) report. The H1B visa programme, which allows foreigners to work in the US for up to six years, has enabled thousands of Indians to take up well-paying jobs in the country’s high-tech sector, especially in Silicon Valley. The number of H1B visas for initial employment fell from 105,692 in 2001 to 27,199 in 2002, the San Jose Mercury News, quoting the report, said.

The percentage of H1B visas issued to technical workers also declined from 52.5 per cent in 2001 to 26.3 per cent in 2002, the paper said. The news comes as the annual limit on the number of visas is set to be lowered from October 1. Of late, the visa programme has attracted much criticism in view of the high unemployment rates in the US with the opponents arguing that US workers are losing jobs because companies are hiring less-expensive foreign workers. The paper said Intel saw a 60 per cent drop from 2000 to 2002 in the number of new H1B visa workers it sponsored. Tracy Koon, Intel’s corporate affairs director, said the decline was due to the economic slowdown, adding that Intel used H-1B visas to hire scientists with master’s degrees and doctorates.
Source: Business Standard
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