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Friday, January 28, 2011

Globalisation: the glass is half empty

One of the many fascinating facts that you see in Economic History and Modern India: Redefining the Link by Tirthankar Roy (Journal of Economic Perspectives, Summer 2002) is about India's trade/GDP ratio. The trade/GDP ratio rose dramatically from 1 to 2 per cent in 1800 to 20 per cent in 1914.

By 1970, the trade/GDP ratio had dropped to 8 per cent. It was only in the mid 1990s, the trade/GDP ratio had got back to the 20 per cent value seen in 1914.

Most people in India today are not aware of the pre-War world, where goods and services flowed freely across the boundary, when people in India diversified their portfolios across the globe, travelled freely within the British Empire, etc.

After the War, there was a big push worldwide to reduce trade barriers. Governments, then, made the call that agriculture was not worth fighting for (since it was a fading share of world GDP but a large number of votes), and focused on manufacturing. By and large, this worked. Trade in manufacturing is pretty free worldwide.

But world GDP shifted away from manufacturing. Today, world GDP is dominated by services. World GDP is now 5.8% agriculture, 30.8% manufacturing and 63.4% services.

Crudely speaking, if we have full free trade in goods, but zero trade in agriculture or services, then 69% of World GDP is submerged in autarky.

Over the last 20 years, manufacturing trade liberalisation has continued, but the share of services in world GDP has risen. I suspect that overall, this has made the world less hospitable to trade.

An interesting article on voxEU by Sebastien Miroudot, Jehan Sauvage and Ben Shepherd points out that in the aggregate, the costs of trade have dropped sharply for goods from 1995 onwards, but not for services.

We need to work harder on removing a variety of barriers to trade in goods. But we need to work much harder on removing the barriers to trade in services. I don't actively follow the WTO process, but my sense is that there is too much of a focus in the WTO process upon goods, and upon agriculture, while not enough attention is being paid to trade in services.

In this sense, the globalisation project is far from done. By and large, the world has done well on removing barriers to the movement of goods and capital (though India is as yet a laggard on both fronts). The two great frontiers are now trade in services and the movement of people. Given the huge footprint of services in world GDP, it is not even the case that we are exposing the world economy to as much global competition as was the case a few decades ago, when manufacturing was a big part of world trade and there was a lot of trade in it.


  1. Aren't barriers to services by definition harder to erect (or remove) than barriers in goods? Some services are by nature very easy to cross natural borders. Think of IT call centers, journal copy-editing, medical transcription etc. These will be hard for governments to interfere with anyways.

    OTOH, services like haircuts, babysitters, nurses etc. are very hard to push across borders irrespective of government policy.

    Maybe that explains why not much reduction in cost-of-service-trades happens. The ones that are easy are already done, whereas the other ones are really difficult.

  2. My 0.02$
    The extent of trading barrier or the absence of it, can be well ascertained by History and Markets :) of 1810-1880 :D

    European mills were by and large supplied cotton from the Southern American states since the late 18th century, with Indian cotton catching up by 1810.
    But I suspect, in the absence of Suez Canal,the Indian cotton's supply was not "just-in-time" enough to be considered for the mills seriously.
    By this time, the agricultural crop prices after a multi decade depression (since 1770's) was improving. But well, taxation was so high, and credit system in the then India so primitive, that usury was a thriving business. By 1855-1860 when American Civil War, started, Confederates to raise mony, started selling cotton bonds in Europe with cotton as its underlying. Well,due to many reasons though, it was seen highly attractive in the beginning,but investors soon, found it too risky,for which the yield went up.To support the prices, Confederates started regulating and finally banning the export of cotton.Since 1859, cotton supply from US increasingly came under pressure, but now the final nail was stuck. To ensure better supply, Indian farmers were tapped. East Ind.Co. started financing local moneylenders, easy credit,incentives for cotton farming and an insatiable appetite for cotton(in the absence of mainstream supply), got the prices of cotton soaring.500% in 3 years, Bombay Gazette, brought out an article in 1864,asking what would prevent India from taking the place of US in cotton market?.

    But then, the war got over in 1865, cotton supplies resumed from US, the EIC had fuelled a huge credit bubble, tax increased, sahukars understanding the riskiness of their subprime credit, raised the interest rates.
    And well, in 1875 a peasant rebellion broke out in the Deccan.

    In hindsight all because, of one paper whose underlying was cotton. :)

    P.S: Apologies for such a lengthy comment

  3. Ajay,

    You are absolutely right. In the research I have done for my forthcoming book on the Indian services industry, it is quite clear that trade in services just hasn't received the attention it deserves. So much so that most national accounting doesn't even have a classification where exports of goods and services are at the same level (this includes India). Often it is put under Invisibles or some such thing.

    Most services are not tradable across countries. But in the last two decades India has been at the forefront of this huge trend of offshore services. The responsibility of getting WTO to focus on things like Service Visas rests with India.


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