India's Economic Condition

I've always thought of India as a country with a vast and impressive cultural environment. Its history is full of triumphs and discoveries. In ancient times, India was neck and neck with the Greeks when it came to advancements in medicine, astronomy, and mathematics. But the west soon advanced beyond the abilities of the east, leaving India as an emerging market, rather than a developed one.

However, India is one of the world's fastest growing economies. In the years leading up to the worldwide economic crisis, India was growing at a rate of about 9-10%. Unfortunately, 2008 led to booming inflation and slowed growth. Though the inflation has slowed considerably since then, so too has the economic growth, now at a rate of around 7.5%.

India has worked hard to improve its economic conditions. In the 1990's it developed a number of economic liberalization policies which encouraged significant amounts of foreign direct investment. In 2001 India became a part of BRIC (now BRICS), under the idea that Brazil, Russia, India and China were destined to be the next major providers of manufactured goods for the world. India also established the BRICS Economic Research group, allowing the member countries to bring their heads together and help each other move beyond the emerging and developing phases.

It seems to me that India has an excellent economic strategy. The country has reached out to other countries in similar economic straits, knowing that economic isolation is the last thing that will help the country grow. India understands the importance of research and development, prompting it to bring the BRICS countries together in their research, because the more minds focused on a project, the further along it will get. Where China has primarily been a location for cheap, unskilled labor, India has provided labor forces in the service and technology industries, through outsourcing from countries like the United States.

Like China, India is an enormously large country with a massive population. Many Indians leave the country for education elsewhere, but it seems as though enough return to prevent fatal brain drain.

Looking back on what I've learned about the history of India, I believe that the obstacle which threw it off it's course of advancement was the Imperial takeover by Britain. Though I'm sure Britain brought a great deal of western style development to India, it also interfered with India's eastern development. I can't help but wonder where India would be today had it not been colonized by Great Britain.

The developed countries of the world just can't seem to avoid sticking their noses into the business of less developed countries, can they? I don't deny that there is knowledge that could benefit emerging economies like India, but sharing that knowledge is seldom the goal of interference. Each country believes that they are acting in their own best interest, and that they should be. Perhaps it's true, that self-serving economic decisions provide the best engine for a country's growth. But I don't really believe that. And as I've said before, there are a number of different ways to act in one's own self-interest.

Far too often, developed countries believe that there is nothing that they can learn from countries that are less developed. But that's just another example of arrogance and shortsightedness. It comes back to the idea of comparative advantage. No one country can possibly have the absolute advantage in all areas, especially when you consider how widespread are industries have become. But if one country is highly efficient at a specific industry, yet needs to focus on a different one, because that's where their comparative advantage lies, isn't it in everyone's best interest to teach another country how to be as efficient as possible in that first industry?

Too many countries want to have a finger in every pie. Why can't they acknowledge that it simply doesn't make economic sense, and spread the wealth of knowledge with the rest of the world. If every country is able to produce whatever it is that they produce in the cheapest and most effective way possible, doesn't that make life better for everyone?

India has shown that it knows that it can't do everything itself. Being a part of BRICS, reaching out for foreign direct investment, these are ways of improving the country's overall productivity. India has the right idea, and I look forward to seeing it advance as years go by.

The European Union

There's no denying that I'm an idealist. I believe that the world can be so much better than it is. And despite all sorts of evidence to the contrary, I believe that people have it in them to do what's best, not just for themselves but for the world as well.

In a lot of ways the EU represents some of the first steps towards that ideal. Different countries working together, coming together to act as a single unit. 27 countries joined together to integrate the continent. How could that not be a good thing?  And certainly a number of the countries involved have benefited greatly. It's made travel and trade within Europe easier for everyone. But not everyone's a winner.

http://edition.cnn.com/2011/BUSINESS/06/19/europe.debt.explainer/index.html

This image shows government debt as a percentage of annual GDP as of 2010. Some of the countries have debt that is more than 100% of their annual GDP, while for others it's less than 40%. For the 16 countries that are part of the eurozone, the lack of an national currency has caused some serious problems. These are still individual nations, with individual economic difficulties, and some of the so-called benefits have actually increased these difficulties for some countries. Greece, for instance, with its massive amount of debt and high inflation, just can't keep up with the some of the rest of the European Union.

Some of these countries have required substantial bailouts from the EU in order to keep from going under. But if policy was adjusted to lower their inflation, it would harm those countries that have been successful with the euro.

The European Union is a giant leap forward towards a completely integrated international economy. Europe has bravely gone ahead of the rest of the world in uniting governments and economies. But what would happen if the European Union continued to spread? Already we've seen that a common currency can't protect countries from problems with debt and inflation. In addition, Great Britain's refusal to adopt the euro is just one example of how countries may fear that joining the EU or the eurozone will cost them their national sovereignty. Can anyone picture the United States giving up the dollar for the euro? No, the U.S. would surely insist that the American dollar be the international standard.

In fact, let's look at the United States. The U.S. is a single country, with a single overall government and the FDIC overseeing the economic issues for all of the states, yet each state retains its own government. But is the U.S. really an example of a successful economic system? Some states are on the verge of bankruptcy, and the country as a whole is facing massive debt.

The idealist in me wants to believe that if it were only possible for the entire world to band together under a single currency with an outside economic monitor half the world's problems would be solved. Peace would about, debts would be repaid, the international recession would end. Sadly, I'm also a realist. I don't believe that such a thing is possible, certainly not anytime soon. And ultimately, who's to say that the problems the EU is currently facing wouldn't explode one thousand-fold if the results were replicated world-wide.

Still, though the European Union has been around for over 50 years, in economic terms it's still a baby. They're still working the kinks out of the system. These next few years are crucial ones to watch, to see how the EU deals with the economic crises in Greece, Italy, Spain and elsewhere. Maybe they'll come up with a brilliant solution, and the European Union will become the strongest economic force in the world. Or maybe they'll flounder, and have to take some sort of drastic measures just to stay standing. But either way, the world will be watching, and hopefully learning.

I don't believe that we can have a successful international economy until the world is truly integrated in more ways than just financially, and we're still a ways away from even that. The European Union is an example we can look to. They are pioneers in globalization, and its important that the rest of the world realizes that. The world is changing faster every year, and I believe that without some sort of international unity everything will fall apart. We'll see another Great Depression or another World War. And because the world is more interdependent than it ever has been before, the effects will be so much more devastating. Please, let us learn from the mistakes of our past, and the mistakes of our present, so that we may have a future.

Import Substitution

When I consider import substitution, the main thing that occurs to me is that this idea has been around for a long time. Mercantilism was based on a lot of the same basic concepts: mainly, export without much importing, and do for yourselves within the country, don't rely on trade. But what also remains true is that while import substitution and trade policies like may have short-term benefits, in the long run they are always damaging to the countries that enact them.

The problem with import substitution is in its most basic assumption. In order to replace imports with domestically produced items, a country has to have the resources available to do so. On the simplest level, one of the reasons we have trade is that not all countries have the same raw materials available. The United States, for example, isn't going to have the best luck growing its own coffee plants. It can be done. There are species of coffee plants that don't need have such limited requirements for growth. The this is, they generally don't make the best tasting coffee. And that brings me to the next issue of import substitution: quality.

It's all very well for a country to say it's going to make what it needs itself, and perhaps only import those few raw materials that just aren't available within its borders. However, different countries have varying levels of technology available to them. They can only create within their own limits. And without competition from more advanced countries, the technological advancement is much slower.

There is a reason that the theory of comparative advantage replaced mercantilism. Why should a country waste its labor and capital resources manufacturing inferior products? If that capital is instead invested into those industries in which the country has a comparative advantage, jobs will be created in those industries.

To me, import substitution feels a lot like a small child at the playground who says to his friends, "I don't need you, I can have fun all by myself." A limited comparison, I know, but it's true all the same. I think it represents the crippling shortsightedness of most people. People tend to act in their own self-interest. But there are a lot of different ways to improve one's condition. That's the whole point of comparative advantage. Sure, the U.S. may be more efficient at producing both cotton and wine than the U.K, but if the U.S. does nothing but produce and export, and the U.K. does nothing but import, eventually the U.K. is going to run our of capital with which to purchase both wine and cotton. The U.S. loses because it runs out of outside customers, and is producing more than its own people need, and the U.K. loses because its people have no jobs and the country has no money. That's import substitution. Every country in the world wants to run a trade surplus, all of the time. Why wouldn't they? Who doesn't want to be making more money than they're spending. But it's not a sustainable reality.

It's true that import substitution has benefited countries in certain situations for a limited time, for example, Japan after World War II. But it makes sense for an injured country to curl into a corner and lick its wounds after a situation like that. And now Japan is one of the dominating forces in the international economy.

Trade policy has to be flexible. A country needs to be able to respond to the world as it changes. Blindly adopting a policy of import substitution will bring a country's economy down. In the BRICS countries import substitution was briefly helpful, but sticking with those policies for too long inevitably led to damage. Economic development requires competition, true access to the factors of supply and demand, and most importantly, international interaction. Without these things economies with stagnate. Too many trade policies are created for short-term benefits. If countries don't start taking a much longer view the world is never going to truly move forward.

Tires and Chicken Feet

Tires and chicken feet.  

Two items I would never even have thought of together. And yet, a trade war between the U.S. and China has created a closer relationship between the two than I think anyone could have imagined.

In 2009, President Obama imposed 35% tariffs on tires imported from China. He did this at the request of the United Steelworkers union, which also represents American tire workers. Shortly thereafter, China imposed tariffs ranging from 43.1% to 105.4% on chicken feet imported from the U.S. The main result, as far as I can tell, was increased prices for both Chinese and American consumers.

The labor union may have wanted the tariffs, but the Tire Industry Association did not. The tariffs did lessen imports from China, but rather than increasing American production, tire imports came in from new countries instead. This article, Obama's Half-Truth On China Tire Tariffs, from Forbes, tells of increased imports from Canada, South Korea and Japan, to name a few. Not only did the tariff not protect American jobs, it actually cost them. Before the tariff, the tire industry employed about 55,000 people. By 2010, that number had dropped to 51,600. And that's only half the insanity.

There is not a huge market for chicken feet in the U.S. Most Americans are uninterested in them as a food, unlike many Chinese who see them as a delicacy. So U.S. chicken farmers sell them to China, among other countries. But China claimed that the chicken feet were being dumped into their markets, and responded with anti-dumping tariffs. Never mind that chicken feet sell for more on the Chinese market than they do domestically. 

I really don't understand trade wars. It seems to me that no matter what angle you look at this crazy situation from, no one was actually helped by the protectionist actions on either side. And, as usual, it was the individual consumer who took the brunt of things, with higher prices all around.

If a new tire manufacturer opened in the U.S., and was able to sell tires at a lower cost than their competitors, well, that would just be capitalism at work. But if the tires are from another country, they're a threat to our very way of life! I thought that capitalism was supposed to be our way of life. I may be something of an idealist (or even a lot of an idealist), but I really dislike hypocrisy. I don't really know whether the members of our government believe we live in a truly capitalist society, but I would guess that many Americans would say we do, and almost all economists would say that we don't. I know that there is likely no such thing as a pure system of any kind, but I think that in general, we choose to ignore that reality.

It seems to me that when politicians make decisions about trade, like the U.S.'s about tire or China's about chicken feet, they either don't have or are refusing to look at all of the pieces. I'm simply an M.B.A. candidate, taking my very first class in Global Economics, and this kind of behavior seems so clearly harmful to me. I'm sure that government officials have people far better educated than I who can tell them the likely long-term effects of these decisions. Do they just choose not to listen? Is the immediate support of groups like the United Steelworkers union more important than any long term damage to the national economy? If that last one is true, than we really are in trouble as a society. I can't even begin to imagine how to start fixing things.

Unintentional Barriers to Trade

I am definitely not any sort of expert on politics. I don't know a whole lot about the details that make our government run, and I know even less about any other country's government. That being said, I think that politics are the most hazardous unintentional barrier to trade in this country.

Politics and trade are strongly interconnected. It's the government, after all, that makes the policies regarding trade, and creates trade agreements with other countries. Politics are sometimes used deliberately to influence trade, and trade is frequently used to influence politics. With all of that going on, it's hard to separate the two, no matter what country you look at. I think the United States, however, has some unusual circumstances that create a whole new set of problems.

The political system is the U.S. is, to put it simply, a mess. The bipartisan arrangement means that the country is fighting against itself every 4 or 8 years. What one group wants to create, the other wants to destroy, and vice versa. In the time of the Great Depression, the Republicans supported protectionism, while the Democrats prefer free trade. Today the reverse is true. Democrats support protectionism, because the labor unions believe it protects jobs, and the Democrats support the labor unions. Furthermore, for the past 20 years, each election has flip-flopped which party held the Presidency. The last time the same party held the office for two different presidents was when the elder George Bush followed Ronald Reagan. What we end up with is trade policy that advocates one idea being passed by one President, only to have it be overturned or limited by new policies when the next group takes power.


The other problem that leads politics to threaten trade is that human beings have the attention spans of mayflies. If a new law or policy doesn't fix something immediately, it must not be any good. This perspective holds true for individuals, and is only amplified when the cause is taken up by companies, large groups and their lobbyists. Take NAFTA, for example. NAFTA was ratified in 1993, just barely 20 years ago, and it's already being attacked from all sides. Some say that it was a horrible idea from the get-go, and has only made things worse for the U.S. Others say it might be a good start, but it simply hasn't done enough. But while 20 years may seem like a long time, economically it's barely an instant. The European Union began its development with the Treaty of Rome, in 1957, almost 40 years before NAFTA came along, and it continues to be adapted and adjusted it to this day.


My point is that people, be they individuals or political forces, don't want to give these sorts of things enough time. I can understand why time is a difficult force for a President. You have at most eight years in which to make your mark on the country, and likely you'll only be judged on what happens when you're actually in office, never mind if the bill you passed causes huge economic growth 15 years later. But that's just part of what's wrong with out political system.


When trade policy is constantly leaning first one way and then another, it never really has a chance to make a proper impact. I think the political squabbling in this country is as much to blame for our current economic situation as anything else, though I certainly don't have anything concrete on which to base that. If I was able to create a policy to lessen the damage the politics do to trade in the United States, it would be something that prevented any trade policy from being messed with for a certain amount of time (barring emergencies like war and such). If the government was forced to give a policy a chance before throwing barriers down in front of it, it might actually improve things. Even if the policy turned out to have problems, time would give us a chance to learn from it, and maybe the next policy would do better. Right now, the political parties support different types of trade for political reasons. But if trade law actually had a chance to do what it's meant to, and people could really look at and analyze the results, the government might start passing laws for no better reason than to help improve the nation's welfare. Imagine that.

What's the Matter With the Automobile?

The Big Three automakers, GM, Chrysler and Ford, controlled the U.S. car market for a number of years. With their near monopoly on automobile sales they decided what cars the American public would drive, and how much they would pay for them. Having this sort of economic power also led to a great deal of political power. The Big Three are a big force on Capitol Hill, with their lobbyists pushing for whatever policies will best protect them. It has also been suggested, at the very least, that the Big Three have used their political clout to derail projects such as electric cars, bio fuels, and anything else that might threaten their hold on the American automobile industry.

In 2008, when the recession hit, a lot of that changed. The economic crunch hit the Big Three a lot harder than it did their international competitors. So much so that GM and Chrysler both requested government bailouts for fear of bankruptcy. Some claim that it was the higher cost of wages, benefits and pension plans that created the economic gap between the Big Three and other companies like Nissan, Toyota and Honda. Is that true? Would the Big Three have been just fine if it weren't for the healthcare obligations they had? They may wish to encourage that assessment, but I just can't agree.

It's true that other countries may simply offer less in the way of healthcare benefits, while still others offer nationalized healthcare. But the money for those programs still needs to come from somewhere. If it isn't provided directly by the businesses, it is provided indirectly, through taxes. Taxes on businesses increase their costs per car, just like healthcare costs do, and taxes on individuals reduce their spending power, requiring lower prices for businesses to maintain a profit.

I think it's telling that of the Big Three, Ford did not require a government bailout, though it did take advantage of available loans. What made them different, and gave them the advantage over GM and Chrysler when the economic crunch hit? I believe that Ford had, and still has, a more flexible management strategy, and that is what allowed it to survive that changing times. This article, from MSNBC, talks about all of the changes Ford is making to increase its worldwide appeal, and expand its market:
http://www.msnbc.msn.com/id/43391595/ns/business-autos/t/new-strategy-ford-aims-top/#.T-tA4bX3qo0

Chrysler and GM, like many companies with a long history, were more set in their ways. They weren't able to respond quickly enough to the changing times. In addition, they had put too much focus into growing quickly, building plants that they later had to abandon. I saw the dangers of this firsthand when Starbucks, where I worked for almost a decade, was making the same mistake. Numerous stores were closed, and the company had to reevaluate its operating strategy. Flexibility in times of crisis in a necessity. 


One place where I do see a problem for the Big Three that is not faced by their international competitors, is with labor unions. I'm sure there are some places where labor unions provide important aid to their constituents. I have never belonged to a union, so I lack a direct connection to how they work. In fact, most of what I know about labor unions probably came from the movie, The Pajama Game. But one of the problems the Big Three faced was related to agreements they had made with labor unions during a healthier economy, that they were unable to make changes to that reflected the changing times. As I said before, flexibility is essential, and the labor unions prevented the Big Three from making some of the changes that might have helped them. Labor unions are supposed to help the labor force, and if they hold a company to a course that will cause its own destruction, that just leads to all those people losing their jobs.


Of course, it's impossible to say what might have been. Would the companies have survived without bailouts? Would the country have survived if the Big Three did not? It would all be so much easier if there was a magical crystal ball we could look at, that could tell us exactly what would happen given each decision we made. But I guess that would be cheating, I suppose. Certainly impossible, in any case. I can't help but wonder what the biggest threat to capitalism is; labor unions, government, or maybe capitalism itself.

Openness

How open to openness am I?

Overall, extremely. Increased imports and exports between nations have so many positive effects. Countries that trade with one another are more likely to have an understanding of each others' cultures. A positive trading relationship helps deter, in some cases, a dangerous martial one. International trade helps spread technology throughout the world, rather than leaving it locked up and limited to a single country's use. And, of course, importing and exporting means that consumers are often able to choose the best quality product at the best price, just as companies are able to obtain parts or raw materials with the same benefits.

However, one concern I have about openness is that it seems to rely on a capitalistic economic structure. Not that a country has to be capitalist to participate, but the way imports and exports are managed throughout the world seems to be with a capitalist approach. Does that alienate those countries who are not capitalist? I worry that even when a non-capitalist country has a high level of openness, the very facts of the process could lead to the development of resentment. The United States is already an object of a great deal of hatred. Do other countries see international trade as a way for the U.S. to force capitalism and democracy on the rest of the world?

I don't have an answer to that, of course. I don't know what other governments are thinking. I may be completely off base. But the U.S. has gone to war with a number of countries with which it also trades. Often people ascribe these wars to greediness on the part of the U.S., a desire to obtain its imports at a lesser cost. Thinking about openness makes me wonder about these things. It's impossible to look at trade without considering the political ramifications. Nothing exists in a vacuum. How do all of these pieces fit together?