HVK Archives: Who is bashing whom?
Who is bashing whom? - The Economic Times
S Venkitaramanan
()
4 September 1996
Title : Who is bashing whom?
Author : S Venkitaramanan
Publication : The Economic Times
Date : September 4, 1996
In her famous book "Who is bashing whom?" Ms Laura Tyson,
currently chairperson of the US President's Council of
Economic Advisers, pleaded forcefully for a conscious
policy of government aid to encourage US high tech
industries. She pointed out how free trade was just a
text-book myth; the world over had gone over to a regime
of managed trade. She advocated forcefully a policy of
government support to US-based and US-owned high tech
industry. Although an economist of high credentials, Ms
Tyson does not obviously advocate leaving everything to
the market.
Unfortunately, "free market" purists seem to have the
upper hand in India. One entrepreneur recently tried to
represent to the powers that be that their perverse
tariff policies - lower tariffs for output and higher
tariffs for raw materials - combined with free imports
were leading to negative protection and that he had
shifted to trading. He urged that government adhere to
Raja Chelliah's policy paradigm of lower tariffs for raw
materials and higher tariffs for final output. He was
dismissed as an economic illiterate. Government seems
committed not to have any kind of gradation in tariffs as
you go up in value addition. The message seems to be
"uniform tariff is what theory prescribes and uniform
tariff is what you will get". The grey (and not so grey)
eminences, Drs Vijay Joshi and IMD Little of Oxford, have
given their imprimatur to this theory in their latest
review of India's economic reform. They pour ridicule on
those administrators of India who recite the
"orthodoxies" of yesterday which seemed in favour of such
a graded tariff structure.
Economists are known for divergent views, at different
times and sometimes simultaneously on the same subject.
Truth is obviously fuzzy. But, it is refreshing, though
confusing, to know that some experts on fiscal economics
are in favour of the Chelliah School and point out that
the theory of optimum tariff structure does not
necessarily come out always in favour of uniform tariffs.
Even the long-term fiscal policy put forward in 1986
advocated graded tariffs for a time. Indeed, there was
the famous prodigy in the history of economic thought,
Frank Ramsay who in his short but productive life, had
put forward a theorem on this subject justifying non-
uniform tariffs, under certain circumstances. It is
rather unfortunate that economic administrators in charge
propel India in the direction of de-industrialisation,
preaching doctrines, which are not universally valid.
Let us see where the currently fashionable doctrines
would lead us if extended to the automobile industry.
India, like other industrialising nations, has had to
start with screw driver technology, importing spare parts
and components to assemble a car. There is no harm in
this. That was how many countries which are. now
successful started. If government, however, allows free
import of cars and lays down a tariff structure which
permits cars to come at low tariffs and at the same time
puts a high tariff on raw materials/ components, all
fledgling car manufacturers, including even multinational
giants, will howl. No multinational will set up a car
industry in India faced by a perverse tariff structure.
Surely, what is sauce for the auto goose is sauce for the
electronics or other gander also. A well-known computer
multinational who had set up an assembly plant in
Bangalore is reported to have decided to import and sell
computers instead of going on to backward integration.
This is because there is negative protection for
computers produced in India. Thus goes down one more
industry at the altar of a perverse tariff structure.
Ms Laura Tyson has pointed out how in 1970 Japan decided
to develop its semiconductor industry following an
entirely different path. At that time, Japan closed its
semi-conductor market to indiscriminate imports.
Peculiarly but logically, it also forbade foreign direct
investment in the industry. It set itself the task of
developing solely Japanese capability. Of course, Japan
could do this because it has had a long tradition of such
reverse engineering. What is important is that it was
not market forces which enabled Japan to develop its
current awesome capability in the semi-conductor
industry. It was a combination of quotas, protectionism
and direct government support. Soon came a time when the
boot was on the other leg and the United States had to
beg Japan not to flood the US market with semi-conductor
exports. This history of global semiconductor industry
and the related trade dispute has many lessons for us.
But, one lesson stands out above all. The visible hand
of government was needed to push Japan into the major
league. Indeed, as a retort, the so-called market-
friendly US government itself had to set up the SEMATECH,
a semi-conductor industry coordinating entity to push the
US forward into the frontier of the industry.
So too, in Europe, there was a conscious government
policy to encourage local electronics industries, whether
through tariffs or quotas or a combination of tariff and
non-tariffs barriers. There was a time when France had
what is known as the Poitier rule. All video recorders
exported by Japan to France had to come through an
airport at Poitier at quite some distance from Paris and
all instruction books had to be completed in French.
What tariffs and quotas could not do was accomplished by
customs delays. The Japanese industry got the message
and set up video recorder manufacturing in France.
What is even.more important is the implementation of what
was earlier known as phased manufacturing in India and
local content rules in other countries. Even today, the
European Union persists in enforcing such local content
rules on its own procurement. Many restrictions and
taxes were imposed on industries which do not meet severe
local content rules. That is to say, it is not enough to
manufacture in an assembly operation in Europe; the
content of goods used in the manufacture should be
predominantly of European origin. It is another matter
EU did not succeed in developing the kind of
countervailing and dominating presence which Japan did.
Ms Laura Tyson appears to blame this on Europe's casual
approach to foreign direct investment allowing all and
sundry to come in and not encourage its own home-grown
entrepreneurs. A lesson for India!
Protagonists of unabashed liberalisation and perverse
tariff structures today dominate many bureaucratic
niches. They do not realise the harm that such policies
can do to India's economy. They put forward the doctrine
of comparative advantage not realising that the history
of nations shows that the theory of comparative advantage
which is in text-books is not of much practical value.
This is especially so because of the manner in which new
industries are built today. Increasing returns have
become the order of the day. First comers have
advantages which followers do not have and they also try
to block new competition as Boeing did to Air Bus. The
story of France and Germany, which promoted Air Bus,
Korea which promoted its electronics, Japan which
promoted semiconductors, shows the irrelevance of pure
theory. France, Germany, and UK to some extent, promoted
Air Bus Industries through a massive government
intervention although they had no 'comparative advantage'
in the sense of either raw materials or factor
endowments. Of course, as you may have guessed,
economists have a theory to meet this challenge, viz.,
the theory of strategic trace.
All that I wish to emphasise is that there is grave
danger of India being de-industrialised if policy-makers
do not grapple with the damage that mindless policies
such as perverse tariff structure can do. Especially is
this important when global dumping is rampant. China is
particularly a specialised predator when it comes to
dumping.
The damage that policies such as perverse tariffs and
free imports can do to industrialisation is serious,
although it may not be immediately obvious. Consumers
who get imported goods off the shelf may not realise how
many industries have gone under. Job's are at stake and
a de-industrialising India cannot be a society at peace
with itself. Policy-makers should bestir themselves
before current resentment turns to sullen shock and new
investments take a knock.
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