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Shri N K Singh’s Address to the Indian Economic Association - 27 December, 2019
Following is the text of the speech of Shri N K Singh, the Chairman of the 15th Finance Commission, on ‘MULTILATERALISM – ITS DECLINE & RECOVERY’ - addressing the Indian Economic Association – Surat, today. “This is indeed a privilege and honour for me to deliver the inaugural address to the 102nd Annual Conference of the Indian Economic Association hosted by the AURO University, Surat. This prestigious association was founded in 1917 just after the First World War. Undivided India under the British rule was in economic turmoil and systematic decline. At a time when professionalism in economics had no discernible roots in India, Prof C.J. Hamilton in December 1917 convened a conclave of academic economists in Calcutta which lead to the creation of the Indian Economic Association (IEA). Thereafter, from 1918 the annual conferences held by the Indian Economic Association has fostered research and analysis relating to the socio-economic conditions in India. Eminent economists have over the years participated in this prestigious event. The Association itself has many notable achievements to its credit including purposeful seminars, workshops, international round-tables and regional conferences. Its publications and research have received national and international recognition. For my brief lecture today I have selected the broad theme of ‘Multilateralism, its Decline and Rediscovery’. In doing so I have been prompted by two considerations. First on why I believe multilateralism and globalisation are two facets of the same coin. Notwithstanding functional or analytical differences, one cannot survive without the other. Second, I do so at a juncture where both these looked to be in seminal decline. The decade which we leave behind has seen periods of high economic growth with bouts of productivity but is ending on a sombre note. It is ending on a note in which Nations have become wary of both globalisation and multilateralism. It is ending on a note where nations are becoming increasingly protectionist with an excessive nationalistic fervour, unmindful of their long term consequences. As I look back in time, what was a free world like? This is well described interestingly in a quotation by John Maynard Keynes in a work published in 1921 – “The Economic Consequences of the Peace” – Explaining Globalisation in its unmitigated form he said ‘The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality could despatch his servant to the neighbouring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. ’ Contrast to this with what Joseph Stiglitz had to say “The credibility of neoliberalism’s faith in unfettered markets as the surest road to shared prosperity is on life-support these days.” And keep it in focus of what Secretary-General of United Nations Antonio Guterres recently said ‘there is no other way to deal with global challenges than with global responses, and organised in a multilateral way.’ That was the free world we have long left behind. Notwithstanding overwhelming evidence, there is now the debate on the value of trade as an Engine of Growth. As we know globalisation in trade entails tangible products that are physically shipped, intangible products that is the services like the tourism and financial services which augment employment and productivity, capital flows, migration of labour, the accessibility and transparency of information technology in its multiple versions and access to technological changes at affordable costs. Many theories like the theory of comparative advantage analysed long ago by David Ricardo and more recently by Heckscher and Ohlin has sought to explain the benefits of countries engaging in international trade. Accompanying literature has explained the benefits of trade both in terms of enhancing the capability of human capital by replicating best and more efficient practices and in other multiple benefits like innovation, technological improvements and its transmission to other nations. Trade openness gives producers access to larger markets, allow them to increase the scale of their production and encourages market competition and market innovation. These enhance productivity and employment and act in the interest of all stakeholders. No doubt all economic activities including international trade will have winners and losers. Distributional consequences of freer international trade cannot be overlooked. However, nations constantly rekindle their capability to produce goods and products which are efficient and competitive for exports. Trade was and remains an important engine of growth. Recent literature suggests that no country can hope to experience high rates of economic growth closer to double-digit numbers unless its export capability is vibrant and dynamic for constant rejuvenation. Second, historically however prior to the first world war, trade was associated as a vehicle of colonisation. But post Second World War period, with the Great Depression of the inter war period, trade was re- recognised as a means of shared prosperity. This period was also marked by the evolution of multilateral institutions. The recent origin of these multilateral institutions are embedded in the replacement of the League of Nations, given its failure to prevent the Second World War and the creation of the United Nations (UN). The phrase United Nations was first used by Franklin Roosevelt in the 1942 declaration to describe the group of countries who subscribed to the Charter of the United Nations on 26 June 1945. Alongside around the same period, other multilateral institutions were also established particularly the Bretton Woods institutions, International Monetary Fund (IMF) and the World Bank as well as the General Agreement on Tariffs and Trade (GATT). Why are all these multilateral institutions now seem to be in seminal decline? The United Nations, of course, is no doubt based on the universally acceptable principle of ‘one country one vote’ but some of its key decision making bodies like the Security Council does not reflect the economic power configuration that exist today. It is trapped somewhat in a time misaligned with current realities which diminish their relevance in today’s world. No doubt, an important role has been played by other sister organisations and intergovernmental agencies of UN like WHO, UNICEF, UNDP etc. International cooperation through these agencies has delivered many other achievements, including the eradication of smallpox via an immunisation campaign led by the World Health Organisation the reversal, via the Montreal Protocol, of damage to the ozone layer and the recent OECD/G20 project on base erosion and profit shifting and automatic exchange of tax information to bring about a fairer international tax system that tackles tax avoidance and evasion head-on. Let me comment on some of these institutions. The GATT which was established in 1947 had the primary objective of “reduction in tariffs, quotas and subsidies”. Till its replacement by the World Trade Organisation (WTO) in 1995 for a period of about forty-eight years, it adhered to its broad charter and undertook complex negotiations and international trade flourished with diminishing tariffs, improved market access and dismantling quantitative restrictions and provided for freer access to goods. The separate commitments undertaken under the aegis of the GATT largely fulfilled its objective. Thereafter, we became more ambitious when we established WTO which had a much broader mandate for dealing with almost every form of economic activity entailing other types of trade barriers like anti-dumping measures, non- tariff measures, intellectual property rights and standards. WTO members agreed to execute “a non- discriminatory trading system that spells out their rights and their obligations” covering issues that range from trade of goods and services to intellectual property, dispute settlement and policy reviews. In November 2001, WTO member governments initiated new negotiations at the Fourth Ministerial Conference in Doha, Qatar and meanwhile, continued working on the implementation of the present agreements. This new initiative was called the Doha Development Agenda (DDA). This new round of negotiations became a critical turning point for the future of the WTO and the global multilateral trade system. However, the meetings came to a deadlock due to issues like agricultural subsidies and industrial product subsidies. The WTO also instituted a system of Dispute Resolution under which disputes are first referred to a dispute resolution panel and appeals against the decisions of the panel go to an appellate board. All these premises have now become questionable. The economic contours have changed and nations are increasingly asking for bringing changes in agriculture policies, intellectual property rules and other aspects of domestic economic policy under the surveillance and supervision of the overarching organisation like the WTO. Regrettably, the dispute settlement mechanisms which is at the heart of the international regime is in disarray and became non-functional on the 10th of this month with the retirement of two of the remaining three members of the World Trade Organization (WTO) Appellate Body, and a veto by the United States on fresh appointments of members to the forum, to deal with the pending cases as well as new issues which may arise. Notwithstanding the dormancy of the WTO, the world has turned increasingly towards protectionism. This is explained in two ways. The constant threat of trade war and protectionism looms large. The latest is the US and China trade war with each raising claim to increase tariffs on their imports. There are also concerns over the trading relations of China-US with Japan and EU. All these threaten to resurrect the protectionist world which we have happily left behind. 10. In the meantime, trade blocks are making their dominance stronger. The consequence of these increasing bilateral or preferential trade agreements have value for the limited stakeholders and detract from the universality of gains from trade. The controversy of regional, bi-lateral Vs multilateral trading arrangements has a long history. Those arguing in favour of free trade or regional trade agreements suggest that if the optimum which may be multilateral remain elusive should we deny themselves the gains even from these more limited agreements and arrangements. While certainly, these limited preferential trade agreements are better than no agreements, they are sub-optimal arrangements because the full value of technology gains, externalities and competitiveness is not achieved. The current controversy on Current Account Deficit with each trading partner is also misplaced – one must look at the overall picture and the ability to finance these deficits credibly. The multiplier gains from trade will be masked with an exclusive focus on only the current account deficit. The best which can be thought is that hopefully these would be merged in the more bi-lateral arrangements once all stakeholders are willing to make these arrangements more universally. As many major trading nations sign trade agreements among themselves, creating a “spaghetti bowl” of trade arrangements that bypass the World Trade Organization (WTO), the organization becomes increasingly less relevant in the conduct of trade negotiations. I believe that the world will be worse off in this spaghetti bowl of mutually contradictory limited arrangement than the multilateral world which we seem to be suddenly bidding adieu to. Similarly, on the financial side, the World Bank and the International Monetary Fund were created as two inter-governmental institutions in 1944. The World Bank earlier known as the International Bank for Reconstruction and Development, corrected its course substantially under President Robert McNamara as its mission began to shift focus on income inequality and poverty. The World Bank has an important and credible history of financing important developmental projects through long term loans both at a concessional and sometimes market-based rates as it has given its triple-A rating the ability to raise market funds effectively. The IMF has equally over the years sought to fulfil its charter to ‘foster global growth and economic stability’ and ameliorate or ward off incipient crisis and provide balance of payment support to nations in debt stress. Nonetheless over these decades both the World Bank and the IMF, however, have developed many rigidities as they encounter new challenges. For one in its decision-making process and quota rights, as they are called, notwithstanding recent changes they remain misaligned with the changing realities of the 21st Century. The decision making process assigns higher weightages to Europe and United States, inadequately reflects changing power configurations, particularly of Asia and China. Institutions of mutual cooperation must reflect contemporary realities in seeking to deal with the problems and opportunities of today with the rules of the game which were meant for yesterday. Failing which they will invariably become irrelevant. Besides given larger flows of private capital and Foreign Direct Investment, the financial clout of both these institutions are in increasing doubt notwithstanding their imprint on market sentiment. For another, there is a persistent feeling that the rules of the game impaired as they are, have not been applied in a non-discriminatory way. Let me give an example. We are all aware that under Article IV of the IMF, each member nation must subject themselves to a detailed scrutiny of their overall macroeconomic policies. This is designed to locate any insipient crisis, take remedial steps and encourage countries in implementing actions which would contribute to its broad objective of its charter i.e. foster global growth and economic stability. How is it that for instance that the IMF failed to spot the global financial crisis of 2007-08 when there was such a dramatic meltdown of the US economy which impaired the financial systems so severely. How did the Fund not spot a crisis of this scale much less prompt the US to take timely corrective action. How is it also that the rule of the game in terms of conditionalities of both for structural loans and for financial accommodation have more stringent conditions for developing world than other countries in say Europe like Greece or Spain where these rules are more flexibly applied. Such discriminatory approach cannot inspire long term confidence, both in terms of their technical competence or in terms of an impartial approach. A lot of this, of course, emanates from the unequal say in the management and the running of the institutions to which I have alluded to earlier. What is the way forward? Do we need to rediscover globalisation and multilateralism or do we adjust to a more disorganised world? A disorderly international framework would not be in anyone’s interest. Any discovery or rediscovery of the relevance of these institutions must be based on three broad principles. First, in recognising that the institutions of the 20th century are ill-equipped to deal with the challenges of the 21st Century. I would say this as we are to enter the third decade of the 21st Century. They must be rebuilt in a recognition more genuinely reflecting the concerns of all stakeholders, civil society which can enable a global economic system which is inclusive and improves the wellbeing of all stakeholders. It must be based on the considerations of today and not of yesterday that we have left behind. Second, while the broad and centrepiece of the principle of globalisation is efficiency and productivity through valued-added chain, the trade arrangements cannot be unmindful of the compelling needs of employment and poverty which many emerging markets face. Third, more importantly, these must be adapted to what will be the main drivers of productivity over the next few decades. These drivers of change in my view must include the following: First, Advancement in Medical sciences, stem cells and microbiology in today’s world has high productivity potential. As Freeman Dyson has remarked, if the 20th century was the century of physics, the 21st century will be the century of biology. Recent developments in molecular biology and genetics imply revolutionary changes in longevity. Second, 5G and its inherent technological capabilities resulting in larger bandwidth, higher reliability and low latency etc. have a spectrum of benefits for the future. We have not fully fathomed the far-reaching changes embedded in the full development of 5G possibilities in changing life pattern of economic and social management. Third, Artificial intelligence, nanotechnology, and genetic engineering seem to qualify as general-purpose technologies (GPTs) that have many applications across many spheres in production and research. Fourth, the migration of workers which make important contributions to the labour market in both high- and low-skilled occupations. It boosts economic growth by adding to the working-age population. This becomes all the way important for advanced economies like Japan, Italy etc. where ageing population is heading towards a strained economy. Migrants arrive with skills and contribute to human capital development of receiving countries as well as enhance their productivity. However, liberalisation of labour laws should needs with a changed mind-set of people who are ready to accept people from different races. Combining the gains of migration with preservation of the cultural identities of recipient nations with ideological and needs careful calibration. Can robots coupled with technology replace humans? Think of a world where large parts of the world experience unemployment and poverty within other areas economic growth and welfare maximisation is stymied by shortage of labour. Finally, international Cooperation to control Global warming and climate change and increased use of renewable energy. This is important for the survival of the planet itself and it is dependent upon the cooperation from all stakeholders. It is extra-ordinary that the consequences of global warming is being experienced by all of us, there are some who remain in denial of the science, its consequences and remedial action. 18. The institutions of the past do not reflect these newer concerns which will be the primary drivers of change. Is it sensible to create new institutions or restructure the existing ones? Whichever way we decide the drivers of tomorrow must receive the priority and concerns of policymakers. If the old institutions are to be carried forward in a restructured way, we must go back to the drawing board and redraw their configurations. This is easier said than done. Nations would protect their turf and so will be these institutions. However, that will be a zero-sum game. Notwithstanding these, we cannot postpone serious action for a better tomorrow. Without these changes, there will not be a better tomorrow. Or, shall we create new institutions which can prioritise these concerns based on our experience of the past coupled with the contemporary realities. Either way, the choice is ours. Since I began with the quote from John Maynard Keynes let me end with one from the same person, once confronted Keynes responded by saying “when circumstances change, I change my mind. What do you do?” The circumstances of the 21st Century have changed. We need to change our mind. Both globalisation & multilateralism needs reinvention.”