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New
Delhi, 25 October 2002
Mohan
Guruswamy has taken pains to explain the true meaning of
globalization and how it may contribute to national economics for
the growth of our economy. He tellingly illustrates the flaws in the
so called 'swadeshinomics' , whose advocates may be undermining the
country's economic progress.
Globalization
Vs Swadeshi
By
Mohan Guruswamy
With
the Congress having almost entirely opted out of the political
debate, the debate on all major issues seems to be almost entirely
within the Sangh
Parivar. One of this is the ongoing behas between the
Vajpayee faction’s globalization and the Swadeshi Jagran Manch’s
swadeshinomics. The SJM continues to equate its Neanderthal
economics with economic nationalism. Nothing can be further from the
truth. Economic nationalism must be based on an objective
understanding of the realities of the changed market place and
relating it to national interests. Since the term economic
nationalism is now much abused without many understanding much about
it, and mostly because people like the SJM use it interchangeably
with their economic nonsense some explanation is called for. It is
mostly about pragmatism, a quality rare among the ideologically
inflamed.
Globalization
very simply is a system that envisages a seamless global market
place where money, goods and technology, but not people, move
unhindered between nations. Globalization thus places great limits
on sovereignty. Under the globalization regime, in theory, money
will flow where the economic opportunities are, and where there is
money the flow of technology and capital goods combine to create new
and efficient producers, thus in turn creating local markets and the
capacities to enter overseas markets with competitive goods and
services. This is essentially the kind of hype that institutions
such as the World Economic Forum promote in their annual fest for
the world’s fat cats. The motivations of fat cats are mostly about
profits and fattening themselves as we have seen with Percy Barnevik
of ABB and Jack Welch of GE and are less about the welfare of
nations. In fact to such people the idea of a nation is a
disagreeable notion.
Thus
what may be even fine in theory is far from it in practice for such
policies merely make us vulnerable to furious inflows and outflows
of short-term capital. Take the Indian case. For the period
1991–2001 the total amount of actual foreign direct investments (FDI)
or here to stay investments have been Rs. 77,103 crores against
approvals for Rs. 246,798 crores. On the other hand the total value
of foreign institutional investments (FII) for the period
1993–2001 was Rs. 231,408 crores. This money has not been idle. It
has contributed greatly to stoking speculative activity in the stock
market and making huge and quick profits that in turn has been
exiting at short notice. The net FII investments thus are a mere Rs.
55,040 crores. Even out of the cumulative FDI investments, over a
third is from Yashwant Sinha’s favorite country, Mauritius,
suggesting that much of it is just Indian money being recycled.
Even
when FDI’s are to finance manufacturing technology and production
facilities it is quite often for the production of low value added
goods that are no longer economically produced in the developed
countries. This would happen even without the globalization regime.
For often these flows take place because the developed markets have
become saturated and therefore unattractive. Take for instance
refrigerators. China and India are now the worlds two greatest
markets for them because most homes do not have them and because we
have the world’s largest cohorts of young people with the
wherewithal to buy them. So it makes greater sense for white goods
manufacturing MNC’s to produce them here.
The
first step then taken is to gobble up domestic producers who with
their greater local experience and fully depreciated plants are
usually very efficient producers even if the products are somewhat
outdated. Most of the big local producers like Kelvinator, Allwyn
and Voltas have thus been taken over. Godrej and Videocon are
probably the surviving Indian owned producers of these white goods.
In less than a decade foreign companies have taken over 90% of this
market starting with 0% in 1990. Not one refrigerator is exported
mainly because the companies that control production here own
production centers in most other markets as well. The WEF inspired
factions in the BJP and Congress in favor of globalization seem to
be ignoring one essential reality, and that is you don’t become an
economic power by merely importing and consuming goods. You become
one by also making other countries consume your goods which in turn
will pay for the imports that are altering our lifestyles.
Even
of the Rs. 77,000 crores which has come as FDI’s since 1991 much
of it has been for equity capital to take over existing operations
or to take full control of existing affiliates. As we have seen in
the case of companies such as Kelvinator India which Whirlpool took
over or Cadburys India which the parent company took full control of
by buying out local investors. This was just one set of owners
replacing another, resulting in no great contribution to the economy
by creating a new market and contributing to the overall expansion
of the national economy.
On
the other hand even when all major financing needs are met by
borrowings from the local market the investments in new ventures
benefit the economy greatly. Typical instances of this would be the
Hyundai and Ford investments to set up fully integrated car
manufacturing facilities near Madras. Such investments create new
jobs; new multiplier effects; and add more to the GNP. Good economic
sense would suggest preference for more direct investments, which
create new value addition chains. The SJM’s economics will have
none of this. They will re-invent the wheel if they have to, as long
as Indians own the firm doing so. Ownership, not economic good sense
is their main concern.
The
bulk of the foreign investment in India, much of which is re-routed
from Mauritius, has gone into the capital market. This is usually
very short-term money that flies from financial market to market in
pursuit of quick gains and leaving behind little of lasting value
behind. Even NRI deposits are of this kind mostly to take advantage
of the higher interest rates offered in India. In national
accounting this is the money that sits in the foreign reserves
column. Of our current and growing foreign reserves of over US$60
billion more than a third is of this kind. Even if a part, albeit, a
good part were to want to suddenly take flight, currency values and
equity values will both plummet. The crises in the East Asian
financial markets were largely due to this. Swadeshi economists, if
they can be called economists, will argue that the East Asian crisis
is proof of failure of those economic systems. This is of course
total nonsense, just as their prescriptions are. This brings to mind
a telling comment by Dr. Jagdish Bhagwati, the well-known economist
and proponent of globalization, who acidly commented, “if the RSS
has any economists then I am a Bharata Natyam dancer!”
All
the East Asian economies are bounding at more than 8% growth once
again, while we are still struggling with less than 6% in our best
years. The focus must be on how to make us less vulnerable to this
sort of roller-coaster ride. People like Mahatir Mohammed, the
Malaysian Prime Minister, seeing through this have advocated
currency controls to restrain money managers from jerking the
economy around. Diverse economists like the Nobel Prize winning
James Tobin, and Joseph Stiglitz till not long ago the World
Bank’s top most economist, have time and again stated that the
greatest threat to national economies comes from the money managers.
James Tobin has advocated taxes to impel short-term and hence hot
money to become more long term and participate in nation building
rather than sit as reserves in some foreign bank.
Such
economic nationalists place a premium upon national self-interest
goals. Lets take the car industry again. Hyundai and Ford Motors
were set up outside Madras with a total investment of over Rs. 3000
crores each. By contrast Honda has invested less than Rs. 500 crores
in its car project. Both are foreign owned companies. While Hyundai
and Ford now make every major part of its cars here, Honda mostly
assembles cars from parts it largely procures from its Japanese
plants. The economic results of this are very different. Hyundai
generates more jobs, adds more value, does less damage to the
balance of payments and has a greater impact on national accounts.
Honda adds far fewer jobs, little value, leaves a big hole in the
BOP and has far less impact on national accounts.
Now
comes the question of ownership. The best would be to have Indian
owned companies like Telco making cars based on their own designs
and hence with no restrictions on exports. The next best bet would
be the Hyundais and Fords, which bring huge direct investments to
India to set up Greenfield and full manufacturing facilities.
The
Birla owned Hindustan Motors that assembles the Mitsubishi Lancer is
not very different from the Japanese owned Honda Siel similarly
assembling the City or for that matter General Motors assembling the
Opel or Mercedes Benz India, which kit assembles cars with the three
pointed star here. It matters very little who owns which facility.
What matters are where does our money end up and whom does it work
for. This does not matter to the globalizer and is beyond the
comprehension of the swadeshiwallahs!
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