Tuesday, April 17, 2012

Pankaj Ghemawat on India and globalisation

I had blogged here about Pankaj Ghemawat's views on globalisation. In this interview, he outlines that India has a long way to go before being completely integrating into the world economy. I found his analysis of the extent of globalisation (as against the notion of the world being "flat") interesting:
"The world is flat notion is the idea that borders don't matter and that international integration is close to complete.

And one of the points I have made in my work is that when you actually look at the things that could happen across borders or within borders, look at the cross border component as the percentage of the total, the result is much closer to what I think is 10 per cent globalization or semi-globalization rather than 100 per cent globalization.

So, if you think of the people flows, only three per cent of the world's population is accounted for first generation immigrants, these are long-term people flows.

If you think of short-term people flows, the percentage of students studying in countries other than the ones they are citizens of is only two per cent. If you want to think about information flows, the percentage of phone calling minutes that cross national boundaries is only two per cent of all calling minutes.

Even when you turn to something like the Internet, estimates are that less than 20 per cent of the bits transmitted over the Internet actually cross national borders at any point in their journey. And, finally, when you talk about money, foreign direct investment represented about nine per cent of all the money invested in the world last year.

So, it's hard to reconcile those kind of data with the notion of the world is flat.

It's hard to reconcile with just our personal experience. If you talk to any business person about whether it is easy to do business abroad, in a flat world it would be just like doing business at home, but that's clearly not the case."
 Highlighting the reason for the limited integration of India into world trade, he opined:

The causes are multiple, ranging to historical reasons to the Licence Raj. I remember when I was doing a study for CII with Mike Porter on Indian competitiveness in the 1990s; we had more that one industrialist tell us 'look we have a huge protected domestic market, so why bother with exports'.

That is a problem.

There are some structural issues, such as the conditions of the ports, in particular, and the general state of Indian infrastructure. One of the reasons why software has managed to defy some of these general trends is because they don't have to rely on Indian ports. Most of the barriers are geographical and artificial ones, for example our failure to improve our infrastructure.

Then there are other natural geographic barriers, it's better to call them political barriers.

India has very poor trade connectivity with its neighbours. When you run a cross country regression that sort of tries to predict how much a country should trade with each other based on proximity and compare Indian results with the results for the world at large, the biggest deviation from the cross country relationship are the top country regression plan is the fact that India trades much less with Pakistan than any normal model would predict.

Unfortunately, if you look at our neigbours, this is one of the key structural differences between China and India; China is part of the East Asian production workshop.

India, in contrast, is surrounded by countries that either because we have political tensions with them or because of their internal dysfunctions simply aren't that attractive as trading partners. The breadth of Indian trade interactions is actually quite high but regional numbers are not very high. Most parts of the world that have progressed have progressed with much closer regional integration than what Saarc currently exhibits.

There are multiple reasons for India's low global trade but, at least, some of the reasons have got to do with things we can change.

We can't change who India's neighbours are but we can change how bad the infrastructure is, we can change the incentives to expand overseas and we can do a lot more things that would connect India to the world."
Realising the benefits of globalisation would require a combination of effective domestic state policy, increased integration and infrastructure development. The case for India benefitting from international trade has to be propelled by a strong domestic state-led policy of infrastructure growth within the boundaries of its international commitments.

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