Tuesday, November 23, 1999

Free Trade Protects Environment

A version of this paper "Free Trade Protects Environment" appeared in The Asian Wall Street Journal on 23 November 1999 and The Wall Street Journal Europe on 26 November 1999.

Are economic and environmental goals really in conflict with each other? Or can the market, which has proved its ability to meet economic interests of the consumers most efficiently, now meet the environmental preferences of the people as successfully? These are some of the basic issues that the participants at the WTO Ministerial Meeting at Seattle will have to try and answer.

The battle lines are being drawn up. While developing countries like India are strongly opposed to any linkage between trade and environment, many of the developed countries are pressing for a working group to look into the relationship between these two areas.

However, trade and environment need not be mutually exclusive. Nor need the interests of one be balanced against those of the other. Free trade and an open market, with defined property rights, can be the best friend of the environment.

Over the past few decades, multilateral environmental agreements (MEAs) have increasingly addressed transboundary health and environmental problems, and sought to relate these to international trade and economic activities.

Likewise, international trade has generated concern about impacts on the environment, locally and globally. Although, there is no agreement on trade and environment at WTO, a Committee on Trade and Environment (CTE) has been discussing many of these issues.

It seems that the most fundamental reason some parties want to link trade and environment is the apparently effective and binding dispute settlement mechanism under WTO. And that is clearly the reason other parties are adamantly opposed to such a linkage. First, it may be argued that in view of the existence of wide range of environmental agreements, it would be better to equip them with WTO like dispute settlement mechanisms. Secondly, the issue may be superfluous if other mechanisms are developed to harness the efficiency of the marketplace to produce environmental goods.

However, long before in 1973, the Convention on International Trade in Endangered Species (CITES) sought to regulate and restrict trade that some argued could adversely affect specific species and their environment.

The Montreal Protocol, set down rules on manufacturing and trade in ozone depleting substances (ODS). A special multilateral fund was set up to help promote non-ODS technologies. The Kyoto Protocol seeks to regulate emission from domestic energy production, and promote foreign investment in projects which reduce greenhouse gas (GHGs) emissions.

The Basel Convention is aimed at restricting and eliminating transboundary shipment of hazardous waste. The Convention on Prior Informed Consent for Trade in Dangerous Chemicals focuses on the risks posed by international trade in such chemicals.

Clearly, there are quite a few areas where the interests of trade and environment overlap. And this can cause problems. For instance under the GATT, rules of trade applies to products. Expert opinion is divided on whether wastes that are potentially hazardous can be termed “products” within the meaning of GATT.

The potential for conflict between environmental goals and trade was also recognised at the United Nations Conference on Environment and Development (UNCED) in 1992. The Agenda 21, seeks to make trade and environmental policies mutually supportive. It also acknowledged that the environmental standards valid for developed countries may have unwarranted social and economic costs for developing countries.

The Global Environment Facility (GEF) was the fallout of the 1992 Rio Conference. It set up funds to mitigate some of these socio-economic costs in pursuing the goals of the Convention on Bio-diversity (CBD), the Convention on Climate Change (CCC), and others.

Today, the developed countries are pressing for greater discussion on environment with the aim of creating an environmental agreement under WTO. The developing countries, like India, are clearly against any such linkage between trade and environment, and consider the attempt of the developed countries to relate the two as protectionist.

Likewise, the developed world interprets sustainable development to mean maintaining the status quo, and thus focus attention on climate change, ozone hole, extinction of species, and similar broad issues. Developing countries believe different issues should be covered by sustainable development - poverty, inequity, disease and mortality.

Much of the time, discussions boil down to political negotiations to strike a deal between the environmental and trade goals on the one hand, the political and economic costs on the other hand, and who will bear which costs. Needless to say, without the discipline of market forces, the efficiency of allocation and utilisation of economic and environmental resources is greatly undermined. Often defeating the very objective.

There are two basic flaws to this line of thinking. One, it presumes that economic and environmental goals necessarily conflict with each other. This ignores the fact that environmental degradation is primarily the result of the “tragedy of the commons”, where the incentive to define property rights and restrict access to the resource in concern are lacking. Therefore, there are no mechanisms to internalise the so-called externalities on economic grounds.

Secondly, rather than looking at this basic problem, the strategy adopted so far has been to provide funds to make alternative technological quick-fixes accessible. This approach is a repeat of the old discredited system of foreign aid and technology transfers, and cannot be expected to perform any differently. Because of lack of clarity on the first point, it attempts to bypass the normal trade route, and considers the disciplining influence of the price signal under the market mechanism avoidable.

For instance, much of the funds under GEF dealing with CBD in India seeks to wean people away from the natural resources around them by providing them alternative sources of income and sustenance. Instead of creating the institutions under which the economic potential of local resources can be harnessed by the people themselves, and therefore develop a stake in those resources, they are being subsidised out of their own surroundings.

Such an approach is clearly unsustainable without perpetual outside support. Apart from loss of local culture and knowledge bases, this approach tells the people that the so-called resources are actually of no value. No resources, environmental or economic, can be protected and conserved under such an incentive structure.

If we are really concerned about environmental degradation, then it is time we realised that free trade and open market are the best friends of the environment. Voluntary exchange at a marketplace is not a zero-sum game. Free trade is a win-win, for both the participants otherwise they would agree to trade. Competition in the marketplace provides the incentive to producers to continually enhance their competitive advantage by improving their products at lower prices. On the other side, this process improves productivity and therefore the purchasing power of the consumers. Consequently, consumers can afford a wider range and better quality of products.

Environmental quality is no different from all other products in the marketplace. Improvement in environmental quality is a value-added product that becomes affordable as one goes up the economic ladder. Rather than restricting trade and seeking to put environmental resources outside the scope of the marketplace, we ought to strive to bring these resources under the discipline of the marketplace. Rather than restricting consumption, under the belief that resources are scarce, we ought to try and bring all these resources under the institution of property rights. Then we will discover that more we consume, the more there is to consume.

Rather than market failure, it is the failure to bring environmental resources under the economic laws of the marketplace that is at the root of all environmental problems. If we concerned about our environment, we must embrace the market.

Monday, November 1, 1999

India is that sacred land of cultural union which never sent anyone back

My article titled "India is that sacred land of cultural union which never sent anyone back" was published in November 1999.

"India is that sacred land of cultural union which never sent anyone back", the Prime Minister quoted this line from Tagore, live on national television recently, on the occasion of the release of a special CD containing recitals and songs by the poet himself. It is ironic that the same Prime Minister also wants a "national debate" on whether any foreign-born person should be allowed to hold highest political offices in the land.

One does not know whether the PM has lately read that poem of Tagore from Gitanjali (1910). Because just prior to the lines which the PM quoted, the poet says "hethai arya, hetha anarya, hethai dravir o chiin, shok, hun dal, pathan o moghoul, ek dehe holo leen". That is the Indian civilisation has successfully assimilated the aryans, the non-aryans, the dravidians, the chineese, the shaks, the huns, the pathans, the moghuls. The CD has the poet himself reciting these famous lines.

The poet ends this stirring poem by inviting all - the aryans and the non-aryans, the hindus and the muslims, the English and the christians, the brahmins and the untouchables - to join hands and together fulfill the promise of this holy union. Of course, the poet did not foresee the Italian!

While Tagore represents the very best strands of Indian heritage, like all cultures, the Indian heritage also has some very dark shades. And true to the latter, like their predecessors at the battlefield of Kurushetra, the political gladiators of today often seek to put up a Shikhandi to hide their real motives. Bereft of any other achievements, the issue of Sonia Gandhi's foreign origin is clearly aimed at camouflaging their own failures.

The Sonia factor

If Sonia is a dumb doll, as the critics say, who cannot say a word without a written script before her, how can she get elected, leave alone help her party to victory, and then hope to become the PM?

This debate truly reflects the status of the political leadership in the country today. The pretenders to the throne are mortally scared and incapable of fighting politically the "mere housewife", and "the political novice", despite decades of real politick behind them!

She, a "foreigner", is hardly responsible for the state of the nation, fifty years after our "tryst with destiny" when the country was in the able hands of the native born. Particularly in the last eight years the country has had the privilege of being led by people from different regions and with diverse backgrounds and vast experiences.

The Indian Voter

Much more importantly, behind this veneer of concern for the future of the country in hands of one "foreign born", the true sovereign in any democracy - the demos, the voting citizens - is being subjected to an ultimate insult. What these self-proclaimed champions of national self-respect are saying is that the voters are politically too dumb, emotionally too naive and therefore prone to being swayed by just one inexperienced foreigner.

This is the same voter who has single handedly ensured that since the general elections of 1971, not one ruling party or coalition returned to power at the Centre but once, and that was in 1984 in the aftermath of the assassination of Indira Gandhi.

Not very surprising, since statistics at the election commission show that legislators in India have one of the lowest re-election rates among world's major democracies. Barely a third survive battle of the ballot, and return to the hallowed precincts of the Parliament. Illiterate and undernourished the voter may be, but in political savvy they are second to none. It is the leadership that has constantly failed to get the message that the electorate has been sending - either deliver or you will be delivered.

Today, this gap has widened to such an extent that the political leadership is desperately trying to clutch at any straw that might help them tide over the electoral battle, and enable them to once again settle down to self-serving, rapacious ways till the next elections. Like the issue of Ram temple earlier, Sonia's foreign origin has come handy when no other visible issue could be found.

Leader in a Democracy

Apart from the obviously obnoxious racist underpinnings of the foreign-born debate, there is another equally important question. Should those aspiring to hold high offices need to have a certain level of experience and expertise so as to tackle the enormous "complexities" of governance that any leader of such a large and diverse country would face? Rajiv Gandhi was sworn in as Prime Minister in 1984, when he was not even a Member of Parliament, and had only spent about a couple of years as an office bearer of the party. Nevertheless the country overwhelmingly endorsed this inexperienced man in the general elections of 1984. Just as it decisively rejected him the next time he went to seek a mandate from the people in 1989. His five years of experience as Prime Minister did not impress the voters!!

A democracy is different from all elite forms of government - be it the Ram Rajya, the benign and benevolent dictatorship, or the socialistic dictatorship of the proletariat. The members of the Constituent Assembly had after prolonged debates, accepted the idea of universal adult franchise irrespective of social, educational or economic status. It was felt that although many voters may be materially deprived, illiterate and driven by many passions, nevertheless, still possessed the basic wisdom and therefore, fully capable of participating in the political processes, and shaping the destiny of the nation.

By demanding a qualification for holding political office, we are rejecting this most fundamental principle of adult franchise. And this franchise does not end with casting of the ballot alone. It includes the right to contest in elections, win the support of ones fellow countrymen, get elected, and hold an office where possible, at every level of government. Indeed, it may be argued that the present "complexities" of governance are a creation precisely to deprive the proverbial common man a say in the affairs of the state although it affects him the most.

Opposition to the Congress Party

Opposition to the Congress can be on many counts. It was the socialistic pattern of development followed by Nehru that is responsible for perpetuating our poverty and laid the seeds of corruption by institutionalising controls over the marketplace. Indira Gandhi sought to subvert the democratic process itself, and contributed significantly to lumpenisation of politics. Rajiv Gandhi frittered away the unprecedented parliamentary majority and goodwill of his fellow countrymen in only three years by gross insensitivity and ineptitude.

Likewise, opposition to Sonia could be wide ranging: her policies, her actions, her inexperience, her dependence on the coterie, her attempt to sideline mass leaders and undermine second rung leadership and concentrate all powers in her hands like her mother-in-law, and so on.

Ideological common ground

But, no doubt the Congress is changing. It was the Congress that initiated the steps towards economic reforms, howsoever reluctantly and surreptitiously that may be. And the opposition has changed too. Given an opportunity, it walks the road to reform, however slow that may be, while continuing to talk of a return to the old socialist moorings. This shows the enormous ideological common ground that exists, cutting across all party lines. This also explains the reason for the apparent animosity between parties and leaders. Unable to provide a broad alternative vision, the political actors have to stoop to the lowest levels in order to highlight their differences with the rest.

The real tragedy of our democracy is that despite an apparently vibrant and diverse polity, a large political space has remained unexplored. Hardly any one think that the idea of less government, faster reforms, accelerated development is politically viable, economically sensible and electorally saleable an option.

This narrow vision has also helped us escape some of the distinct political possibilities. Congress may not win, and people may through the exercise of their democratic rights reject Sonia and her party. Even if the party emerges as a major political player, out of sheer political necessity it may have to decide on someone as politically insignificant as I. K. Gujral in order to be able to form a government with the support of others. Or even if the party wins, Sonia could opt to stay out of the PM's office and help Congressmen rediscover the art of leadership and good governance.

Politics of Exclusion

Instead we have the issue of political exclusivity. For a diverse and pluralistic society such as India, any attempt to draw boundaries to exclude some will logically lead to ever-narrower boundaries, and could ultimately end in a tragic fragmentation. The tragedy of the Balkans should be fresh in our minds.

Moreover, will the line end at geographic or biological boundaries? What about the influence of foreign ideas and religions? What about the linguistic and ethnic diversity that might be engulfed in this game of drawing boundaries? What about exclusion on caste lines? What about the different historical experiences?

A maratha leader today has raised the banner of revolt in the Congress party against the "foreign hand". But just a couple of hundred years ago, marauding hordes of marathas used to periodically descend on Bengal and Bihar to loot and pilfer. So traumatic that it has left permanent marks on Bengali folklore and even children's rhymes. Do we really need to relive the tragedies of the past? Or should we accept that the only lesson we can draw from history is not to repeat the same mistakes.

Future at Stake

By raising the issue of Sonia's foreign birth, we are putting at stake much more than the futures of the Congress party and its leader. At stake is the future of our civilisation, our identity itself. Will we rise to our best point, as Tagore had hoped, and continue to assimilate all in our fold, or discard the poet and accept the politics of exclusion and travel on the road to 'where the world is indeed broken up into narrow domestic walls'.

There cannot be a starker choice. It is time we saw through this game of political brinkmanship. There are times when the domestic hand turns out to be much more insidious than a foreign one.

Taking Advantage of E-commerce

Liberty Institute Briefing Paper on Trade and Development "Taking Advantage of E-commerce" was published in November 1999.

The world e-commerce transaction is said to have touched $500 billion this year according to one estimate (including goods sold and purchased over the internet). There are over 2 million people whose jobs are now dependent on it. And this is just the beginning.

India with a substantial presence in the computer software segment, and a large well-trained manpower, has the potential to gain significantly from e-commerce. However, there are serious bottlenecks. With barely one million PCs and 15 million telephones in India, India needs radical policy reforms in many areas if she is to take advantage of this emerging area of e-commerce. On the other hand, e-commerce has the potential of freeing the Indian economy and her people from the restrictive influence of the state.

1. How can India benefit from e-commerce?

A. India has shown itself to be competitive in information technology and in services. E-commerce dealing in intangibles combines these two together. Solving Y2K bugs was an excellent example of e-commerce. India can be confident of doing well in the service side of e-commerce. After software, e-commerce is likely to be the next wave of information technology business. If India is not actively involved, its famed software industry will become a historical relic.

B. By eradicating the disability of geography, e-commerce allows service providers to compete directly on labour costs and other factors like time difference. India's labour prices are extremely competitive against any Western country. And few third world countries have India's lead in information based services. India is also nicely placed between east Asia, Europe and the Americas to tap time zone difference. Already, Indians work on projects for US companies while the latter sleep.

C. E-commerce greatly reduces transaction costs and overcomes infrastructure failures. For Indian companies, especially small companies, who have a hard time with overhead costs and overcoming infrastructural bottlenecks, e-commerce is a cheap way to become a global market player.

D. E-commerce gives India an opportunity to rebuild a large portion of its economy without the red tape and regulation that strangled its manufacturing sector during the past 50 years. India's software industry has shown how well information based industries can do if the government is not involved. E-commerce could expand that lesson to many other sectors of business including retailing.

2. Few will oppose e-commerce at the WTO. But they will propose regulatory mechanisms that could throttle the business before it starts or, worse, provide means for countries to put up barriers to e-commerce across borders.

A) The European Union has proposed an international regulatory body for e-commerce. But this could easily become hostage to politics, parochial national concerns and rivalries. A multilateral body would tend to seek the lowest common denominator among its members and this is likely to be the most restrictive measure.

B) Countries will try to bring in taxes and tariff systems that mimic those in normal physical trading. This would automatically rob e-commerce of much of the speed and flexibility that is its advantage. It would also bring in an enormous amount of national government regulation that would suffocate e-commerce development.

3. What India should support about e-commerce?

A) It should oppose international regulation. Self-regulation is probably the best way. In other words, beyond a basic legal framework establishing the authenticity of electronic signatures, contracts and so on. Let the market generate the credit rating and security measures in the form of private firms. These themselves will be forms of e-commerce which Indian companies can profit from.

B) There are two types of e-commerce. One is the business of intangible services and products. These should be declared tariff and tax-free. This would encourage such business and remove a major government headache on how to regulate this. The other type of e-commerce will result in the movement of a tangible product or good from one hand to another. India should consider at least introducing a tax and tariff holiday in such services for a few years, if not a total ban altogether. Taxes could perhaps be shifted to consumption rather than transaction based means.

C) India should reassure other third world countries about the importance of e-commerce and the fact all countries will benefit greatly from allowing free trade in cyberspace.

However, to take advantage of this new technology, a new mindset is necessary. First, it would be necessary to realise that the industry grew precisely because the state failed to realise the potential of software and therefore, did not place the kind of obstacles that other sectors of the economy had to go through. But now the state is planning to step in. While it talks of promoting the IT sector, it now seeks to impose a 49% ceiling on foreign investment in e-commerce ventures. Clearly the state has failed to understand that e-commerce operates in a borderless world. A cap on foreign investment will severely handicap the Indian operations right at the dawn of this new era.

E-commerce is a very good example of brain drain in the other direction. Foreign companies setting up in India a range of e-services, data communication, backroom activity, ticketing, data processing, call services, has the potential for a lot of employment, and income. Let us not close this window of opportunity on ourselves.

International Trade and Child Labour: The role of the market

Liberty Institute Briefing Paper on Trade and Development "International Trade and Child Labour: The role of the market" was published in November 1999.

Social and labour conditions have become a highly charged subject, particularly after attempts to link trade and social conditions under the auspices of the WTO. On the one hand, lower labour conditions, including the use of child labour is said to give economic advantage to some countries, and therefore there is a demand for protection in some other countries. On the other hand, these poor labour conditions are said to be the fallout of market reforms and free trade, and therefore there is a demand for restricting trade. No doubt child labour provides an emotive shield for a range of other agendas.

However, rather than a restrictive linkage between trade and child labour, historical experience clearly shows that an open market and free trade are the best instruments for improving the labour conditions, including elimination of child labour.

The Problem

Estimates of child labour in India range from 17.5 million to 200 million. The enormity of the situation is well known to social activists, governmental and intergovernmental agencies. In this regard, many well-meaning initiatives have also been undertaken. The Indian agenda is to end child labour in hazardous industries by the year 2000 and all child labour by the year 2010. But how serious are we? And what can the international community do to help the process?

The existence of child labour is a part of our everyday reality. In spite of restrictions in most nations, children continue to work. This has been so throughout history. Indeed, children as an integral part of the family have always worked, and will continue to work for various reasons, as they do currently even in the developed countries. However, the situation in developing countries needs special attention. A holistic analysis of the contemporary society and choices before the children and their families needs to be undertaken.

The Causes

Policy planners agree that a significant reason for child labour is poverty. Though children are not paid well, they nonetheless contribute to the family income. They are often prompted to work by the parents. Lack of schooling opportunities is a contributing factor. But the reasons are also social and cultural. Many children work because it is an accepted norm within the social structure. Acceptance of such traditional factors as expecting the lower castes or classes to perform manual labour leads children of these classes and castes into manual work at an early age. Rapid migration to the urban areas has further aggravated the situation. However, much of child labour today exists either in the informal or the illegal sector. The laxity of officials in enforcing existing labour restrictions perpetuates child labour. The hard fact is that in developing countries, subsistence and survival takes primacy over anything else.

Good Intentions and Tragic Outcomes

Past experience has shown that where governments implemented a policy of banning child labour under international influence, severe negative and unintended consequences followed. In Bangladesh, for example, a boycott of garments made by child labour caused 50,000 children to loose their jobs. These children then took up even lower paid jobs in other industries, or other demeaning jobs, some even being pushed into prostitution. Clearly, a focus on particular export sectors may lead to an effective political campaign, but does very little to address the real issue. Most children who work do not belong to such sectors but are spread across the spctrum from agriculture to small-scale manufacturing to informal trade and services. An immediate abolition of child labour appears neither practical nor even desirable.

Good intentions are never a sufficient condition for improving social and economic realities. It will be a tragedy if, as a result of well-meaning but hurried policies aimed at prohibiting child labour, children are further victimised because the policies fail to take into consideration context-specific situations of the developing economies.

Human Rights and the Rights of the Child

Recent efforts to link international trade with child labour are also fraught with negative consequences. Is it fair to link trade with child labour? Is this a trade-related agenda? Is the demand a result of an alliance between the "protectionist" lobbying groups who want to safeguard their economic interests, and the short-sighted "morally driven" human rights groups? One can easily condemn one group and applaud the other, but that would lead us nowhere.

What is important is that this issue, like any other violations of human rights, must be treated in their specific economic, political and social context. The approach must be sensitive to the needs of the working children and their families. So it becomes important not to equate child labour with child abuse.

The Self-Inflicted Wounds

The complete eradication of child labour is a noble goal. As with many other issues of rights abuse, there are two ways of looking at the possible solutions. One is the positivistic way, to rely and emphasize the legal and administrative measures, including economic sanctions. The other is the holistic way, to seek to bring about change through creating a suitable environment and a capacity for sustained effort. Solving the problem requires raising public awareness and fostering public demand for change. The problem of child labour simply cannot be wished away by fiats and dictats.

The Indian government has committed itself to face the challenge. However, it can no longer ignore its own role in promoting policies that have stymied economic opportunities for vast majority of our people and perpetuated socio-economic disparities.

For instance, an inflationary monetary policy and efforts to protect domestic industry, distorted the market, stifled economic growth, induced economic inefficiencies, reduced employment and economic opportunities, and led to politicisation of labour. Consequently, under political patronage organised labour has all but priced India labour out of competition. This is best seen in the fact that economic growth in recent years has hardly led to creation of jobs in the organised sector. As a result, barely 15% of Indian workforce is in organised sectors of the economy, and over a half of that are in bloated public sectors and various quasi-governmental organisations. Most of the remaining workforce has been pushed to the margins of economy and subsistence. Is it any surprise then that so many Indian families continue to depend on their children's contribution to make two ends meet?

Role of the Market

No society in history has been able to develop without the labour of their children. At the dawn of industrial revolution, over 95% of children had to work. In less than two hundred years, today's developed and industrialised countries broke away from thousands of years of human history and made child labour mostly redundant by substantial gains in productivity and incomes. In recent decades, some of the newly industrialised countries compressed this process in to a single generation.

Rather than learning from these recent experiences, most developing countries, like India, pursued policies that prolonged the historical process and agony of their children. Clearly, domestic economic reforms must be expanded and accelerated if we are to avoid wasting our most precious resource, our children.

The international community must aid the process of all round development by encouraging free trade, promoting economic prosperity and economic development, and thereby helping developing nations to eliminate child labour forever. Deep-rooted socio-economic problems cannot be done away by legislation alone, by state intervention, or by international economic sanctions.

The need is to create a situation whereby children in developing countries will no longer have to work, where it would be worthwhile for them to attend school, where the parent’s income alone will be sufficient to provide for the children. We should not need the WTO to tell us to reform if we are really concerned about improving the lot of our own people.

Agricultural Trade Can Change the Poverty Ridden Face of Indian Countryside

Liberty Institute Briefing Paper on Trade and Development "Agricultural Trade Can Change the Poverty Ridden Face of Indian Countryside" was published in November 1999

For fifty years India has followed the most restrictive policy regarding agriculture. The result has been that while in 1947, 85% of Indians depended on agriculture which contributed to over 70% of Indian GDP, today the corresponding figures are 70% and 35% respectively. Not surprisingly the face of Indian agriculture we are most familiar with is one of abject poverty.

Ironically, the much promoted India industry under the tutelage of the state while capturing a large chunk of the GDP has remained highly uncompetitive internationally, but Indian agriculture continues to enjoy competitive advantage in many crops despite years of neglect and denial of access to international markets. Opening up trade in agricultural products provides a tremendous opportunity to improve the lot of the farmers in developing countries and consumers around the world.

1. On Exports: Studies show India is export competitive in a number of agricultural products. These include cereals like rice, wheat, maize and sorghum; fruits like banana, grape, lichee and mango; vegetables and tubers like onions, potatoes and tomatoes. India is also competitive in processed foods like tomato paste and mushrooms.

2. On imports: India's domestic agricultural market has been largely protected by quantitative restrictions until now. Because of obligations under the Uruguay round of the GATT these quantitative restrictions are being removed. India's market will open to agricultural imports. Protection will have to come via tariffs. Most of India's tariffs on agricultural imports are very high, between 100 to 150 per cent. It agreed to zero tariffs in some dairy products and rice because at the time it was experiencing a scarcity in those products. Today, it is in surplus so there is a call for renegotiating these tariffs.

What these two issues mean. First, India has great potential as an agricultural exporter. Second, it has little to worry about agricultural imports because it has high tariffs and most market priced agricultural imports will not be able to compete against cheaper Indian products. In fact, Indian agricultural prices are almost all well below world prices. The question of being flooded by imports simply does not arise.

What is the real danger at Seattle? The real danger in Seattle is the problem of export subsidies. If a country subsidizes its agricultural exports it will be able to undercut Indian farm exports no matter how competitive they are. If a country subsidizes its agricultural exports it will be able to flood Indian markets, no matter how cheaply Indian agricultural products are at home.

The European Union is the main country guilty of using massive export subsidies to sell huge agricultural surpluses it generates, the surpluses themselves being the result of input subsidies and protectionism. The US, too, provides some export subsidies and provides quite high degree of protection to some domestic corps. A third agricultural bloc, the Cairns group of agricultural exporters does not use export subsidies at all. The fourth bloc consists of protectionist countries like Japan and China which do not import or export. India used to be in the fourth bloc, but is now moving into the economic position of the Cairns group.

India's key concern should then be export subsidies. If India is to open up on either the import or export front in farm goods, world agricultural trade must be free of export subsidies. Preferably it should be free of input subsidies as well. Because of India's artificially low domestic prices for agriculture, Indian farmers actually receive a net negative subsidy from the government. Consequently, Indian consumers are left with perpetual scarcities, lack of variety and poor quality of agricultural produce.

What about food security? India's present policy of forcing farmers to sell at artificially low prices provides a major negative incentive. It also ensures they never have enough capital to invest in their farms. One result can be seen in the terribly low productivity levels of Indian farmers.

It may be politically and socially necessary to maintain these artificially low prices, but these prices must be compensated with incentives for farmers to grow more and means for them to invest more. If not, productivity will eventually fall behind population growth. The answer to this is to let them export their surpluses. Farmers repeatedly have had harvests of crops greater than the country's domestic needs. These have often gone to waste.

The present policies designed to promote food security do little more than ruin Indian farming in the long term.

Other related agricultural issues India needs to take up at WTO:

• Ensuring phytosanitary measures are not used as hidden trade barriers to keep out Indian farm exports.

• Support use of biotechnology in agriculture. Bans on genetically modified food are based on romantic notions of nature, not science. They are affordable in countries with too much food, but not in developing countries with food scarcity

It has been calculated that if protectionist barriers were to be halved around the world in agricultural trade, the world would be richer by $ 400 billion. India is in an excellent position to get a portion of that money, enriching its farmers, and benefiting its consumers, if it pushes hard for free trade in this area. It need not fear imports. It should embrace exports. It should fight, more than anything else, export subsidies in this sector.

Costs of Protectionism:How Indian Consumers & Workers Lost Out

Liberty Institute Briefing Paper on Trade and Development titled Costs of Protectionism:How Indian Consumers & Workers Lost Out was published in November 1999

In 1947, India's share of the world trade was 1.5%.
In 1998, it was estimated to be 0.8%.
Per capita income in 1998 was approximately $400 ($900 under PPP)
Indian Economic Philosophy for the Past 50 years
• National self-sufficiency
• Import substitution
• Trade is a zero-sum game
Basic rationale for restricting trade:
• Protecting domestic manufacturers
• Encouraging domestic manufacturing and employment
• Ensuring quality and safety for the benefit of consumers
• Promoting indigenous growth of knowledge and technology
Consequences of protectionism:
• High price, low quality
• Low levels of competition
• Technological stagnation
• Knowhow dependent on policy of subsidies
• Smaller market, lower volumes
• Perpetual Scarcity
Loss to consumers - Choice, Price, Quality, Access
Characteristics of the Protected Domestic Market:
Organised sector -
o Entry barrier (licence and permit raj or rule, now being partly dismantled)
o Higher fiscal and regulatory costs of operating in the formal market (while tariffs and taxes may be falling, regulatory, legal and transaction costs are increasing)
Growth of small / informal and even illegal sectors (particularly in established manufacturing areas) (fly-by-night operators)
o Policies induce companies to stay small!!
o Fewer people are employed, minimal benefits accrue to communities
o Companies avoid regulatory costs incurred by those that play by the rules
o - Low quality
o - Low price
o - High transaction costs for consumers
Rise of vested interests
• Formal sectors - seek legal protection
• Informal sectors - seek administrative collusion
• Illegal sectors - seek continuation of protectionist policies to ensure their own high profits
Consequences of distorting trade -
• International Trade: Smuggling
• Domestics market: Black-market
• International relations: Political tension is common among countries that do not trade. (India and Pakistan barely trades, and are permanently under the cloud of war.)
• Social level:
- Loss of respect for laws
- Creation of established channels of smuggling, black marketing and racketeering
- Use of these same channels for many other more insidious activities (terrorism)
• Economic level:
- Economic inefficiency
- Flouting of economic regulations - loss to exchequer
• Environmental level:
- Environmental inefficiency / degradation
- Flouting of environment regulations, free riding
Trade Restriction is a Negative Sum Game
• Consumers lose out on better quality, lower prices and low transaction costs associated with brand products.
• Manufacturers lose out by failing to capture larger markets with better share, having less opportunities to innovate or introduce new products Traders lose out on account of small size of the market
• Service sector lose out for similar reasons
• Workers lose out as there are fewer jobs on offer
Required Policy Direction:
If the interest of consumers are to be paramount, and since all parties in an economy are also consumers in their private capacities, then policies must reflect the following objectives.
• Free trade
• Elimination of tariffs
• Reduction of regulatory costs
• Unrestrained imports (even second hand goods or waste products)
Economic consequences of Free Trade:
• Advantages of economies of scale
• A more dynamic and competitive domestic economy
• Inflow of new innovations and technology
• Economic efficiency will boost environmental quality
• Realisation that domestic manufacturing are not the prime source of employment
• More employment in the area of trade and services outside the organised sectors
• Substantial investments are attracted to open and expanding markets
• Free trade is a positive sum game.
• Producers compete to improve their products at lower prices
• Consumers have a wide range of choices.
• A competitive market economy improves the social and environmental conditions.
• Free trade is fair trade
Consumer is truly the King in an open market. Greater the choice, the more powerful the consumer becomes.
In contrast, creating protectionist barriers, at the international and domestic levels, have led to high cost and inefficient economy, where the consumer has become the pauper.