The Political Economy of Self-delusion
India's
stand at the WTO Ministerial Meeting at Hong Kong was not just a betrayal
of other developing countries – it suggests that the government has
not understood the real interests of the Indian people either.
The Indian Commerce Minister,
Shri Kamal Nath, was one of the first to celebrate the deal that was
arrived at on the final day of the WTO's Hong Kong Ministerial Meeting.
He claimed that the hastily patched up agreement addressed all of India's
concerns, and suggested that many of the areas where India has ''aggressive
interests'' had been resolved in a manner that was satisfactory from
an Indian perspective.
Clearly, such enthusiasm could not have come from the result of negotiations
on agriculture, where the final declaration was almost identical to
the July 2004 package that had been so heavily criticised until the
previous week by the same Commerce Minister. The paltry offer of removing
export subsidies by 2013 and the apparent concession with respect to
subsidies on cotton, amount to almost nothing, and the way they are
phrased are likely to involve almost no benefits for most developing
countries. Indeed, the result in the agriculture negotiations is clearly
failure from almost every developing country standpoint.
So the positive reaction of Indian negotiators must have come from the
other important elements of the declaration, those relating to services
and non-agricultural market access (hereafter NAMA). In fact, it is
precisely with respect to services that India has been a ''demandeur''
in the WTO, with explicitly declared ''aggressive interests'' in terms
of forcing countries to liberalise in certain areas of services.
The General Agreement on Trade in Services (GATS) categorises services
according to their mode of delivery, which is cross-cutting between
different sectors and even activities. It allows for individual member
countries to specify both the extent and the pace of liberalisation
in all of the modes, and operates on a ''request-offer'' basis, whereby
members make requests for opening up to other members and make offers
on liberalising their own regulations. These offers can be vertical
(that is, confined to particular sectors) or horizontal (that is across
sectors within a particular mode).
Thus far, developed countries have been especially keen on pushing for
liberalisation under Mode 3, which relates to allowing foreign commercial
presence for the supply of services. They are especially keen on allowing
their multinational companies to open subsidiaries or branches elsewhere
so as to benefit from their competitive advantage in activities such
as banking, insurance and other financial services, in retail trade,
as well as in utilities such as water supply and electricity distribution.
Most of their requests and offers thus far have essentially been in
this mode. Some other interests of developed countries relate to Mode
2 (consumption abroad, which occurs when the consumer travels to partake
of the service delivery, as occurs in tourism or foreign travel for
purposes of education or health services).
The Government of India has recently been particularly keen on emphasising
opening up and more market access for its services exports according
to Mode 1 (which relates to cross-border supply, that is activities
which do not involve the cross-border movement of either the supplier
or the consumer, but can be delivered through other means, such as a
number of IT-enabled services) and Mode 4 (which covers the movement
of ''natural persons'', that is short-term migration of people for the
delivery of a specific service). The recent boom in software services
and the expansion of IT-enabled services including offshore Business
Process Outsourcing which have increased substantially both in terms
of foreign exchange revenues and incomes generated from these activities,
in India have been the source of great optimism in this area.
This is why in the WTO negotiations, India became a great votary of
''Annex C'' of the draft declaration, which was roundly condemned by
most developing countries. It was in fact this ''offensive interest''
of India that led to it joining the developed countries in pushing for
Annex C to be adopted. This created some degree of distrust and dissension
in the ranks of developing countries, and was one of the reasons why
their various much-publicised groupings were ultimately so ineffective
in affecting the outcome of the negotiations.
It is certainly true that Annex C makes some concessions to the demands
of India and other countries for whom services exports is seen to be
an area of potential export expansion in future. Thus, it emphasises
that commitments under Mode 1 should include removal of existing requirements
of commercial presence, which had hitherto militated against developing
country suppliers who find it difficult and expensive to establish companies
abroad in the country where the service is being supplied. It also says
that there should be new or improved commitments in Mode 4 on the categories
of Contractual Services Suppliers, Independent Professionals and Others,
again delinked from commercial presence, to reflect inter alia removal
or substantial reduction of economic needs tests. Both of these had
been demands of several developing countries, including India, and to
that extent it could be argued that these inclusions represent some
success for this particular position.
However, Annex C has a significant negative implication – and was strongly
opposed by so many developing countries - because it implicitly changes
the very structure of GATS, which had hitherto been based on voluntary
unilateral commitments or bilateral requests and offers in the various
modes. The Hong Kong Declaration says that ''the request-offer negotiations
should also be pursued on a plurilateral basis… Any Member or group
of Members may present requests or collective requests to other Members
in any specific sector or mode of supply, identifying their objectives
for the negotiations in that sector or mode of supply… Members to whom
such requests have been made shall consider such requests
This is the real prize that the major developed countries had hoped
for in Hong Kong: a change in the negotiating modalities in services.
This will now allow them new instruments to pressurise developing countries
to open up their key services sub-sectors under Mode 3 of commercial
presence.
The newly proposed ''plurilateral'' approach, which will incorporate
the sectoral and modal approaches, is being presented as only one alternative
open to member countries. But it is quite clear that is now set not
just to add another option but actually to replace the bilateral request-offer
approach as the main negotiating method. In fact the Hong Kong Declaration
says the plurilateral requests should be submitted to other members
by 28 February 2006.
It is not surprising that several multinational service-providing companies,
who have been actively lobbying for just such an outcome, and whose
representatives were present even in Hong Kong, have already expressed
delight at the outcome of the deal. It is evident that they are already
preparing themselves and their governments to launch a first round of
plurilateral negotiations involving many key sub-sectors, especially
in finance, retail trade and areas like water provision. So developing
countries will have to brace themselves for an almost immediate consequence
in terms of greater pressure to open up various domestic services sectors
to the commercial presence of large foreign firms.
Yet the Indian government obviously felt that even this very significant
and potentially dangerous concession was worth making, simply to ensure
greater liberalisation by other (developed) countries in Modes 1 and
4. This is based on the notion that India's competitive position in
terms of supplying professional and skilled labour through Modes 1 and
4 is now so strong that it justifies the aggressively liberalising stand
that India has taken in the service negotiations. The problem is that
this initial premise itself may be a mistaken one.
The problem is not only one of class interests and the relatively small
proportion of Indians who would benefit from such opening up in other
countries. This is certainly true, of course: while the absolute number
of skilled Indian workers appears to be large, in general the Indian
workforce suffers from very substantial skill deficit and the vast majority
of our workers are very poorly educated by international standards.
Yet the government could argue with some justification that even this
small minority can play a role in generating both more domestic economic
activity and more foreign exchange, besides which the expansion of such
service activities could go some way in dealing with the still large
problem of educated unemployment in India.
The real issue, though, is somewhat different. The government's negotiating
position has been based on the assumption that the cross-border expansion
of such service provision rests on the offers of liberalisation under
Modes 1 and 4 made by various other (developed) countries. But it is
important to remember that the huge expansion of short-term economic
migration as well as the boom in cross-border supply have already occurred
without any such explicit liberalisation. While the expansion of such
service provision has certainly been enabled by new technology, it has
been fundamentally driven by demand – that is, by the labour market
conditions and workforce requirements of receiving countries.
That is why most labour migration from India, as from the rest of South
Asia, is still to the oil exporting countries of West Asia. That is
why the more recent wave of H-1B visa holders to the US has reflected
the needs of US companies. That is why Indian teachers, doctors and
nurses are now staffing the public education and health systems of Canada
and the United Kingdom. If this is the case, then it is likely that
such forces will continue to drive possibilities of short-term economic
migration irrespective of any liberalisation under GATS, because the
receiving economies require it.
Conversely, if the domestic social or political backlash against such
migration – whether directly as Mode 4 or indirectly as Mode 1 – is
strong enough, governments will take steps to control it no matter what
the GATS requirements are. So pushing for further liberalisation under
GATS is both unnecessary and ineffective as far as the possibilities
for Indian workers are concerned.
In any case – there is a deeper question: is such movement of Indian
workers necessarily good for the economy? It is interesting to see how
discussions of ''brain drain'' have completely disappeared from the
Indian policy landscape, and how the outward movement of skilled labour
is now almost always regarded as unequivocally good. Yet the problems
remains a real one, and it operates in may ways that affect not only
the quality of life within India, but also the relative payments to
particular workers.
Consider these recent trends. There are reports from across the country
of animals dying because of the massive shortage of veterinarians, many
of whom have migrated in response to increased demand from the West.
The same is likely to be true for other health professionals. Even when
the labour does not move, service relocation and off-shoring (which
is Mode 1 delivery) have pushed up wage rates for particular occupations
making for a very skewed and undesirable incentive structure. The number
of science post-graduates has plummeted, and there are hardly any takers
for research positions in science, because the income stream from management
and financial sector professional occupations is so much higher that
educated youth are no longer attracted to science as a career.
This is hardly the way that society can be built for the future, yet
our policy makers and trade negotiators are actively encouraging precisely
these tendencies. So much so that they are willing to give up on absolutely
critical matters such as the livelihood of our farmers so as to push
for more of this!
The other area which most developing countries see as a major loss out
of Hong Kong, and on which our own government is so complacent, relates
to NAMA, or protection for domestic production of non-agricultural goods.
It was already evident in July 2004 that the Indian government did not
see the NAMA negotiations as much of a threat and were willing to make
substantial concessions in this area. However, even the July 2004 package
did not go as far in terms of forcing tariff reductions onto developing
countries as the current agreement does.
Already, because of shifts from quantitative restrictions to tariffs,
tariff bindings and progressive tariff reduction requirements, many
developing countries have been experiencing deindustrialisation. The
NAMA agreement will now force even more tariff reduction by developing
countries, so that it may be difficult soon in some countries to find
any material-producing sector that is internationally competitive and
will survive!
The worst changes in the NAMA draft relate to the nature of the formula
that is to be used for educing tariffs. earlier developing countries
had argued for a linear and average reduction for developing countries
and a ''Swiss'' formula for developed countries. A Swiss formula essentially
aims for progressive harmonisation, by making the required tariff reduction
larger, the higher is the initial level of tariff. For obvious reasons,
developing countries have higher levels of industrial tariffs than developed
countries, who anyway use many more non-tariff barriers to protect their
own producers.
The Hong Kong Declaration actually states that ''we agree to a Swiss
formula'' for tariff reduction although the precise nature of the formula
is to be worked out. Further, this is to be adopted on a line-by-line
(individual product) basis, rather than as an average reduction. This
will definitely will result in the loss of policy space and flexibility
for developing country governments to protect their own industries.
In fact, several African Ministers have already said that this approach
will entail very substantial deindustrialisation.
All that remains is to argue about the size of the coefficients that
are to be used for different groups of countries. Very high coefficients
will be required to protect local industries, but most developing countries
will not have the capacity to negotiate such high levels. Some simple
calculations suggest that to maintain their policy space, most developing
countries will require a coefficient of about 290. But this is unlikely
to be anywhere near being achieved – for example, the EU has offered
the developing world a coefficient of 15, compared to a coefficient
of 5-10 for developed countries.
Another matter of concern is that the Declaration also says that that
applied rates will be used as the basis for treating unbound tariffs,
by adopting a "non-linear mark-up approach to establish base rates
for commencing tariff reductions." This is a very drastic treatment
of unbound tariffs that will ultimately result in low bound tariffs
on previously unbound items.
And what of India? The Commerce Ministry has argued in the recent past
that there is no reason to be worried about such a NAMA outcome because
these reductions all pertain to bound tariffs. Since our current tariff
levels are well below our bound rates in most product lines, this will
not affect actual tariff levels at all. However, this is a very sort-sighted
view, since it completely disregards the possibility of international
prices of manufactured goods falling from their present levels in the
near of medium term future. If that were to happen (and it is not at
all an unlikely possibility for several goods, given the rapid capacity
creation in manufacturing internationally) then the current bound tariffs
would already be too low, and further reductions in them would decimate
domestic producers of those goods.
It is precisely this same mistake that was made by Indian negotiators
during the Uruguay Round, when they did not anticipate price falls in
agricultural trade and so actually specified zero bound tariff levels
for many important crops. By the end of the 1990s the Indian government
was then forced to go begging to Geneva to renegotiate the bound tariff
levels of agricultural goods. It is extraordinary to see that so little
can be learnt from one's own experience. Clearly, as far as NAMA goes,
trade negotiators in most other developing countries are actually more
clear-sighted than those in India.
But is the self-delusion of the Indian trade negotiators simply a case
of misplaced optimism and the triumph of hope over experience, or does
it reflect more worrying underlying tendencies? The more depressing
possibility is that, despite all the verbiage to the contrary, those
who agreed to the Hong Kong deal were not really concerned with the
interests of the vast majority of Indians, and concentrated on the possibilities
for material betterment of a small elite. Let us hope, for the sake
of Indian democracy, that the latter is not true.