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.

Interesting readings

One of the important mistakes that India is making, in terms of integration into the world economy, is in visa rules. A key element of progress there is the new `Visa on Demand' program, which has now been expanded. The list of lucky countries now stands at: Japan, Singapore, Finland, Luxembourg, New Zealand, Cambodia, Laos, Vietnam and Philippines. This needs to now cover the G-20 countries. Another big frontier is setting up convenient access to work visas in order to support the burgeoning need for skilled foreigners who are needed in the Indian labour force.

Russell K. Nieli on the power of meritocracy as seen in Caltech. The IITs are similar to Caltech in two respects: No concern for how `well rounded' the background of an applicant is, and no concern in the admissions process for parentage or donations. The IITs do care about caste to some extent in the admissions process, while Caltech cares about nothing other than brainpower.

Materials of the 2010 Neemrana conference organised by NCAER, NBER and ICRIER.

Sigh. Building a clean environment is hard!

Materials from the recent IGIDR finance conference.

Annie Lowrey on Slate on the role of prizes in public funding for research.

Mobis Philipose on competition against Nifty options at NSE by Nifty options at SGX, and on the problem of transaction taxes and exchange competition.

A household survey by CMIE tells us something about how ordinary households see the debate about the Bimal Jalan committee.

Sindhu Bhattacharya has an article in DNA about foreign airlines who are being prevented from operating in India. We need a treaty framework that would render such things unlawful.

A. D. Miller in the Guardian on why Western authors like Mother Russia.

Interesting developments in the freedom of speech.

I guess they noticed that if you take the first word on every seventeenth page, it spells out "Death to the Shah". That's nothing, I have a blog that is banned in China!

A great story about how grain and oil led to the collapse of the USSR. By Yegor Gaidar.

Joe Keohane on boston.com on the odd feature of forecasting: The guy who gets the huge event right is often likely to fare badly in ordinary times.

Lant Pritchett says that the notion of an `ethics code' for economists is a silly idea.

Three new papers

The first is an entry titled India which is forthcoming in Elseviers Encyclopaedia of Financial Globalisation, edited by Gerard Caprio. It's our attempt at a bird's eye view of what is known, and not known, about India's financial globalisation.

The second is a treatment of exchange rates and monetary policy and inflation. There are two well understood phenomena: the `exchange rate passthrough' (or how prices in India go up when the rupee depreciates) and the `monetary policy transmission' (or how prices in India go down when RBI raises rates). This paper views these two in a unified fashion. The main finding is that the channel through which monetary tightening influences domestic prices is mainly through the consequent exchange rate appreciation.

The third is about explaining the process of firms becoming multinationals. The conventional story told (the Helpman-Melitz-Yeaple model) is one where firms self-select themselves to become MNCs, where more efficient firms export and the most efficient firms become MNCs. This story is well suited for manufacturing, where costs of transportation are important, where it's efficient for an Indian firm to make widgets in the UK so as to avoid the costs of transportation of shipping to the UK. But this story does not help us think about services which are `weightless'. We think we have a story which helps us understand MNCs in services, and when we go test this with data for Indian software companies, it seems to work. Our approach yields the opposite prediction: that less productive software companies are more likely to become MNCs.

Our stock of papers is at: http://macrofinance.nipfp.org.in/papers.html.

Watch me talk about inflation today

Link

Economics seminar announcements in Delhi

Please see http://delhi-econ-seminars.blogspot.com

If you are in the NCR region and like to get announcements of economics seminars in the region, this would be a useful one-stop source. You can subscribe to these announcements through twitter, RSS, email, etc.

If you are in the NCR region and have organised a seminar or a conference of interest to serious academic and policy economics, please get in touch with Anurodh Sharma of NIPFP who can put up a posting with your announcement. 

Excitement in electronic payments

by Viral Shah.

Frictionless payments are an important contributor to India's growth story. Cash is costly for everyone in the system: for the central banker, banks, businesses, and individuals. Yet, we are far away from a mass adoption of electronic payments.

For electronic payments to take off, it is essential to have a bridge between the world of physical and electronic money, allowing seamless conversion between the two. Until recently, this could only be done at banks or ATMs. Various developments over the last year have greatly expanded the number of entities that can now offer such services:

1. July 2009, Cash withdrawal at point-of-sale guidelines: As a step towards enhancing customer convenience, RBI allowed cash withdrawals at point-of-sale terminals with debit cards.
2. April 2010, Report of the Inter Ministerial Group on the Delivery of Basic Financial Services using mobile phones: This group chaired by the Secretary, DIT and included, among others, representatives from Department of Financial Services, Department of Posts, Ministry of Rural Development, Planning Commission, UID Authority of India, TRAI, RBI, Department of Telecom and the Home Ministry. It suggested a nationwide payments architecture that consisted of a simple centralized account hosting platform as a national infrastructure, full interoperability among payments providers, standards based biometric point of sale terminals, and standards based mobile payments.
3. April 2010, From Exclusion to Inclusion with micropayments: The UIDAI published a strategy document on micropayments, which provides a detailed framework for biometrically authenticated transactions, as recommended by the IMG. The National Payments Corporation of India has developed an interoperability switch for Aadhaar and mobile based transactions as recommended in the IMG report. Both, Visa and Mastercard have also adopted this framework.
4. June 2010, Harnessing the India Post Network for financial inclusion: This report was jointly commissioned and produced by Department of Posts, Department of Financial Services, Department of Economic Affairs and Invest India Economic Foundation. It recommended a framework similar to that recommended by the IMG; that of a low-cost account hosting platform and cultivating a payments ecosystem by allowing partners to access its physical and electronic payments network for a fee.
5. September 2010, Financial Inclusion by Extension of Banking Services - Use of Business Correspondents (BCs): BC guidelines have existed for a while, but RBI recently relaxed the rules for the entities that can act as BCs. These new guidelines allow for-profit companies (except NBFCs) also to become BCs. This appears like a small change but it has had far-reaching consequences.

Over these two years, we have a vivid sense about electronic payments making the grade, from a vaguely posed idea for the deep future to something that is tangibly around the corner. Each of these elements appears to be small in isolation, but the link from public policy developments to outcomes is like a butterfly effect.

These developments have important ramifications for mass adoption of retail electronic payments and financial inclusion. Banks, recognizing the importance of new regulation, have partnered with telcos with retail networks. This allows for the telco to leverage its network of talk-time retailers as BC sub-agents, and to also offer mobile payments between bank accounts. A flurry of announcements has happened recently: SBI-Airtel, ICICI-Vodafone, Axis-Idea, and more will certainly follow.

As much as these announcements are exciting, they raise some worrisome questions. The biggest question is interoperability. If the country is going to have a network of a million BC outlets, shouldn't a customer of any bank be able to use any outlet, much like they can use any ATM? Shouldn't a customer of one bank-telco partnership be able to send money to a customer of another bank-telco partnership effortlessly? Network effects are essential for mass adoption of electronic payments. After all, regulations today allow a person with a debit card to withdraw cash over an interoperable network of point-of-sale terminals.

Banks and telcos are unlikely to want interoperability; to justify investments, gain customers, and want them to stick. Perhaps the regulator ought to take a firm stand on the issue. A good balance may be to ensure that the products are designed to be interoperable with some uniformity of customer experience, but offer an interoperability holiday for the first two years.

Deciphering and solving the inflation crisis

India has an inflation crisis. From 2006 onwards, the yoy rise in CPI-IW seems to have gone unhinged:

Why did this happen? We have a `Nobody killed Jessica' situation here. Sharad Pawar and D. Subbarao both insist that the problem cannot be laid on their doorstep. I would argue that it was the currency policy from 2003 onwards (large purchase of dollars with partial sterilisation) which gave us this mess, which was then compounded by repeated RBI speeches saying that inflation is not important, and RBI actions which were soft on inflation.

The weakness of macroeconomic thinking in official circles is visible, with government actions including banning exports, sending the police to raid traders and hoarders, etc. I believe there is an iron law of economic policy: across each doubling of GDP, you have to reinvent government. The trouble in India is that we are getting each doubling of GDP in a decade or less, giving a very large gap between the structures of government and the underlying conceptual frameworks, when compared with the requirements of the economy. With agriculture at only 15% of GDP, one has to think differently about the role of food in inflation as a macroeconomic phenomenon.

Getting back to stable 4% inflation is terribly important, and it's going to be hard. In recent weeks, Ila Patnaik has written four newspaper pieces which add up to an interesting perspective on inflation: 20 Dec, 25 Dec, 3 Jan, 13 Jan. And, a blog post of mine on food price volatility may also be useful.