Category Archives: International Trade

India and America: Come, meet Mum | The Economist

ADMIRE Barack Obama’s endurance on January 26th, when he becomes the first American president to be guest of honour at India’s annual Republic Day parade in Delhi. For two long hours he will inhale the capital’s smog as he and India’s prime minister, Narendra Modi, review a procession of military hardware, trick-motorcycle riders and troupes of dancers. A chilly winter morning on Rajpath, New Delhi’s main ceremonial boulevard, can be an eternity.

Mr Obama is coming to India on a three-day trip to improve an already strong bond with the country’s barrel-chested leader. He will become the only sitting American president to visit India twice, and he arrives barely four months after Mr Modi went to Washington. The two men also got together on the sidelines of an Asian summit in Myanmar in November.

via India and America: Come, meet Mum | The Economist.

via India and America: Come, meet Mum | The Economist.


The Politics of Economic Stupidity by Joseph E. Stiglitz – Project Syndicate

In 2014, the world economy remained stuck in the same rut that it has been in since emerging from the 2008 global financial crisis. Despite seemingly strong government action in Europe and the United States, both economies suffered deep and prolonged downturns. The gap between where they are and where they most likely would have been had the crisis not erupted is huge. In Europe, it increased over the course of the year.

Developing countries fared better, but even there the news was grim. The most successful of these economies, having based their growth on exports, continued to expand in the wake of the financial crisis, even as their export markets struggled. But their performance, too, began to diminish significantly in 2014.

In 1992, Bill Clinton based his successful campaign for the US presidency on a simple slogan: “It’s the economy, stupid.” From today’s perspective, things then do not seem so bad; the typical American household’s income is now lower. But we can take inspiration from Clinton’s effort. The malaise afflicting today’s global economy might be best reflected in two simple slogans: “It’s the politics, stupid” and “Demand, demand, demand.”

via The Politics of Economic Stupidity by Joseph E. Stiglitz – Project Syndicate.

via The Politics of Economic Stupidity by Joseph E. Stiglitz – Project Syndicate.

This is mind-blowing: You have to pay Switzerland to lend it money – The Washington Post

Swiss bonds are the new Swiss banks.

Both, you see, are super-safe places to park your money, so much so that people are willing to pay to keep it there. Now think about this for a minute. It shouldn’t be true. Borrowers usually have to pay lenders, not the other way around, to borrow money. That’s something we like to call “interest.” But it’s not true in the topsy-turvy world we live in today, where investors are lining up to pay the Swiss government for the privilege of lending it money for ten years. Or, in finance-speak, bond yields are negative.

This isn’t really new, though, so much as Europe’s new normal. As the Financial Times points out, €1.2 trillion, or $1.4 trillion, of eurozone debt has negative yields that mean lenders are paying borrowers. But what it is new is just how long people are willing to pay governments to borrow. At first, they only did so for 1-or-2-year bonds. Then, in a sign of how dysfunctional Europe’s economy still is, investors started paying Germany to borrow for five or six years. But now, as you can see above, Switzerland has beaten everyone else to be the first to have negative ten year borrowing costs, at -0.2 percent. And by “first,” I mean in history. This has never happened before.

via This is mind-blowing: You have to pay Switzerland to lend it money – The Washington Post.

via This is mind-blowing: You have to pay Switzerland to lend it money – The Washington Post.

Internationalization of India: Of Trade and Connectivity

India Day Parade an event for PHD’s & Politici...

India Day Parade an event for PHD’s & Politicians? Open Letter to Editors of all Indian News Papers in USA (Photo credit: davemakkar)

India Gate

India Gate (Photo credit: aroris)

Why should low-level of connectedness to the world should be a concern to Indian policymakers? Let’s start with ,traditional computable general equilibrium models (CGE) which peg the benefits of complete merchandise trade liberalization at about 0.5% of GDP, more advanced models with a consideration to all policy levers would shoot the number by a high margin. Also accounting for benefits from economies of scale , product and service differentiation, increased competition , normalizing risk, and generating and diffusing knowledge should push the potential gains well past 1% of global GDP, to 2-3%, or maybe more. Also, foreign direct investment offers an avenue for internationalizing even the provision of some “nontradables” ,  and there are substantial gains available from increasing the cross-border mobility of capital, information and people as well.Two decades of reform aimed at opening up the economy have roughly tripled India’s indicators of trade exposure, compared to our past, there has been a significant progress in this regard. That’s the good news. But the bad news is that India still ranks quite poorly in terms of many measures of the intensity of cross-border integration. In terms of measures of inward FDI stock as a percentage of GDP, India still figures in the bottom 10% of the countries. On Information Technology connectivity front India does a bit better, all thanks to Internet but India does substantially worse in terms of trade in publications and print material, intensity of short-run tourist flows and medium-run university students.

India figures in bottom decile of the fifty countries in terms of the extent to which it encourages FDI, according to OECD‘s FDI Restrictiveness Index. So although India has opened much more in past , a lot need to be done. The big problem here is not Manufacturing as one might say , where many barriers have been eliminated, sector where foreign investment is still very much restricted is business services. Take for example the classic case of FDI in multi-brand retail. Opposition to liberalizing FDI in this sector raises concerns about employment losses, unfair competition resulting in large-scale exit of incumbent domestic retailers . Based on international evidence, we suggest that allowing entry by large international retailers into the Indian market may help tackle inflation especially in food prices. Moreover, technical know-how from foreign firms, such as warehousing technologies and distribution systems can improve supply chain efficiency in India, in particular for agricultural produce. Better linkages between demand and supply have the potential to improve the price signals that farmers receive and also serve to enhance agricultural and other exports. Similarly the foreign universities bill also turned out to be a car with square wheels. Indian tertiary education system needs  internationalisation of higher education and policy makers should put in place a policy framework to address the various concerns, if it wants to reap the benefits.

Policies explicitly aimed at boosting internationalization should be backed up with policies aimed at improving the domestic business environment. Another major challenge facing the investment flow is corruption, diverting long term commitments ( like FDI) to short term capital flows which makes it necessary for the government to tackle it. All of this should suggest that there is tremendous potential for further policy measures to increase the internationalization of the Indian economy and, more importantly, Indian welfare.

WTO and Regional Trade Agreements

“In the last years, we have seen the WTO being stuck, while regional & bilateral trade agreements gained ground, so how would you assess the role of the WTO in the upcoming decade and do you think that the WTO will need to adjust to this new environment, if so, how?”

Global trade liberalization occurs through a variety of channels and not all of them appear to be in harmony with one another. Though every major nation is now a member of the World Trade Organization (WTO) and a participant in its complex process of multilateral trade liberalization; an average WTO member also belongs to six Preferential Trade Agreements (PTAs) (World Bank, 2005). WTO is now facing growing ‘irrelevance’ in bringing multilateral trade agreements palatable to all the members on the table, amidst the growing popularity of Regional Trade Agreements (RTAs) and PTAs.

RTAs on one hand can further the process of globalization through expanding the scope of trade cooperation, whereas, on the other hand, their trade diverting effects may contribute negatively to the process of international economic integration. Their proliferation could create competing blocs, eroding the viability of Multilateral Trading System (MTS). Regional groupings like ASEAN are nothing but a reflection of spaghetti -bowl effect. With the growing number of RTAs and PTAs the WTO needs to change gears and come up as a stronger organization to prevent the harmful effects of regionalism on International Trade and MTS.

The challenge is to ensure greater coherence among PTAs and between PTAs and MTS. The prolonged Doha negotiations suggest that the interest in multilateral agreements have been seriously weakened. Such a situation offers more room for bilateral deals. DDA should be concluded sooner than later, as implementing free trade within RTA is becoming increasingly difficult. From the perspective of normative economics, countries and WTO should work towards removing domestic distortion in Agriculture Sector. An effective competition policy, with an idea to remove market imperfection is needed. There is also a need for conducting joint exercises by the relevant ministries among the partner countries to understand whether the reasons for restricting market access are genuine or not. Predatory pricing is difficult to practise; therefore, anti-dumping measures on presumptions for stopping that have to be verified. RTAs pose a potential risk to the multilateral system, which gives rise to the need for an internationally financed Advisory Centre on Regional Trading Arrangements to provide training, negotiating advice and accreditation to private providers based on an agreed analytical framework.

The world trading system is far from perfect; and many reforms and changes in rules should be under discussion. But to further the cause of trade liberalization, much remains to be done including a defence of what has already been accomplished.