Indian negotiators need to ride the crest of the global structural changes, expanding trade in sectors that promote symmetric coupling with the West and encourage slow decoupling where asymmetric ties exist.
The Doha Development Round has to end during 2010 with a stocktaking exercise scheduled earlier. Negotiating strategies based on widely accepted theories, such as trade and division of labour, are more likely to protect India's interests in the long run.
The old division of labour was intensively studied by Adam Smith, David Ricardo, and Karl Marx. Smith's 1776 treatise made the first major attempt to examine the potential for the complex division of labour. Smith argued that artisan skills were being replaced by a division of labour in which the production process was segregated into compartments, each one performing different tasks, with varying rates of wages (and profits).
Productivity gains were the result of specialisation in one single function. Using pin-making as an example, Smith explained that by dividing the production and assigning different tasks to different workers, each worker develops to the fullest extent the special skills required to complete a task.
The New International division of Labour theory (NIDL) developed by Frobel and others, is a theory of international mobility of capital and multinational subdivision of production. First, goods can be produced at lower costs due to availability of a large pool of low-wage workers in the low-income countries.
Second, progress in manufacturing technology, modernisation of communications, and advances in transportation have permitted an international vertical fragmentation of production in which firms undertake different phases of production in different nations.
Moreover, decomposition of production processes has allowed production of subcomponents and assembly activities requiring lower skill levels to be performed in less developed nations. Third, capital has become footloose and now is available internationally to kick-start production in locations that are most likely to lead to maximisation of profit.
As a result, production has shifted from traditional locations in high-income to low-income countries, which has made the less developed nations more “dependent” on the developed West.
Trade theories explain dependency from a different position. Dependency in orthodox economic relations means non-equalisation of factor and commodity prices across nations, also called nonestablishment of the Law of One Price (LOOP).
As argued by Balassa, this occurs because free trade has the potential to equalise the prices of tradable's only, not non-exportable untradables (e.g. services).
Moreover, free trade in technology and services is unlikely to result in factor price equalisation because factor endowment ratios are far apart and specialisation (e.g. labour-intensive goods production in poor nations) without factor price equalisation will happen.
New trade theories also support continuation of the dependent relationship. Inter industry trade based on comparative or complementary advantage takes place between dissimilar economies while intra-industry trade based on competitive advantage occurs between similar (high-income) economies.
Trade between the low- and high-income nations is predominantly of inter-industry variety leading to a dependent relationship, as opposed to trade driven by equalisation among high-income nations.
Accordingly, trade and division of labour theories indicate a dependent economic relationship between the high- and lowincome nations — a win lose situation called asymmetric coupling.
During the last 20 years, however, the dependent relationship has undergone a paradigm shift leading to symmetric coupling or a win-win relationship. Symmetric coupling is partly explained by India's rise as a major outsourcing centre. This has happened due to the convergence of several fortuitous events, however.
As described by the NIDL theory modernisation of manufacturing technology permitted different components of manufactured products to be split and done in several geographical locations. One aspect was the splitting up of service components and outsourcing of services to India.
During the late 1990s the West made large investments in information technology to overcome the Y2K scare and a collateral benefit of the intense research effort was increased outsourcing of services.
Furthermore, India was fortuitously placed 12 hours away from the West — while the West slept, India worked — leading to unimaginable increases in firm productivity.
Finally, in the 1990s higher technical education in India was opened to the private sector and large numbers of engineering colleges were established, resulting in the generation of "foot soldiers" to work in the software industry.
Globalisation of services has led to increased incomes and employment in India. Earlier the advantage of high service sector wages could only be enjoyed by physical migration to the high-income countries.
Now with “time and space contraction” software professionals are able to participate in the high-wage service sectors of developed nations and get paid high wages without having to actually move to high-income countries.
High wages earned by the software professionals, in turn, has led to market demand for products similar to developed nations, thus, increasing intra-industry trade leading to asymmetric coupling.
At the same time, decoupling of cycles of output, consumption, and investment is also happening. Ayhan Kose and others (2008) have found convergence between the business cycles of America and Europe; similarly the business cycles of India and China are increasingly getting aligned.
Decoupling, David Rhodes and Daniel Stelter assert, is leading to a two speed world — in which US, Europe, Japan, and Russia are experiencing a “structurally-subdued growth” while India, China and Brazil are approaching their “original trend-growth paths”.
Accordingly, a deep structural shift is occurring in the world and the slow forward movement in the Doha Development Round is a manifestation of the tectonic changes.
Indian negotiators have the opportunity to ride on the crest of the global structural changes if they are able to expand trade in sectors that promote symmetric coupling with the West and encourage slow decoupling where asymmetric trade and investment relationships exist.
Posted by D C Srivastava , Jt. General Manager at Ordnance Factory, Tiruchirappalli | 26 Apr, 2010
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