Jade
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Does India's impressive economic growth offer lessons for the U.S.?
There are two lessons the United States could learn from India. The first is a lesson that the United States taught India and many other nations, but is now in danger of forgetting: openness to global trade in goods and services is crucial to taking full advantage of cost-cutting and new-product innovation that now takes place around the world.
For nearly four decades from 1950 to 1990, India was wedded to inward-looking, autarkic trade policies and failed to take advantage of productivity-enhancing effects of global competition and innovation. It was the gradual opening to the world markets that allowed India to begin growing first at 6 percent and for the last several years at 8 percent a year.
The current U.S. administration, unfortunately, is succumbing to protectionist impulses. For instance, it recently imposed fee hikes of $2,000 or more on H1-B and L-1 visas for highly-skilled foreign workers at firms employing more than 50 workers, with half or more of their workers on H1-B visas. Another example is the discrimination in tax treatment based on whether the firms create jobs at home or abroad.
In today's highly competitive global economy, if a firm moves 5,000 jobs abroad, it is perhaps doing so to preserve another 50,000 jobs at home that would otherwise be lost. Outsourcing is not particularly different from the case of Boeing buying cheaper steel abroad so that it can stay competitive vis-a-vis Airbus. Force Boeing to use domestic steel only and you can be sure that the result will be more good jobs lost at Boeing than those that would be created in U.S. steel industry.
The second lesson the U.S. can learn from India is that the financial sector and real sectors of the economy are different -- and should be treated differently. Free markets and competition, by and large, are effective in promoting efficiency in the "real" sector that produces goods and services. Government intervention in the "real" sector -- like that done on behalf of General Motors -- are counterproductive.
On the other hand, prudent regulation is necessary and important in the financial sector. That is because distortions arising out of information imperfections and asymmetries are much larger in that sector. While India is still over-regulated and will need to continue on the path to deregulation, it escaped major damage from the recent financial crisis primarily because its banks and financial institutions were subject to tighter regulation. The argument for entirely free movement of capital promoted by the United States and the International Monetary Fund, often at the behest of the U.S., has serious limitations
There are two lessons the United States could learn from India. The first is a lesson that the United States taught India and many other nations, but is now in danger of forgetting: openness to global trade in goods and services is crucial to taking full advantage of cost-cutting and new-product innovation that now takes place around the world.
For nearly four decades from 1950 to 1990, India was wedded to inward-looking, autarkic trade policies and failed to take advantage of productivity-enhancing effects of global competition and innovation. It was the gradual opening to the world markets that allowed India to begin growing first at 6 percent and for the last several years at 8 percent a year.
The current U.S. administration, unfortunately, is succumbing to protectionist impulses. For instance, it recently imposed fee hikes of $2,000 or more on H1-B and L-1 visas for highly-skilled foreign workers at firms employing more than 50 workers, with half or more of their workers on H1-B visas. Another example is the discrimination in tax treatment based on whether the firms create jobs at home or abroad.
In today's highly competitive global economy, if a firm moves 5,000 jobs abroad, it is perhaps doing so to preserve another 50,000 jobs at home that would otherwise be lost. Outsourcing is not particularly different from the case of Boeing buying cheaper steel abroad so that it can stay competitive vis-a-vis Airbus. Force Boeing to use domestic steel only and you can be sure that the result will be more good jobs lost at Boeing than those that would be created in U.S. steel industry.
The second lesson the U.S. can learn from India is that the financial sector and real sectors of the economy are different -- and should be treated differently. Free markets and competition, by and large, are effective in promoting efficiency in the "real" sector that produces goods and services. Government intervention in the "real" sector -- like that done on behalf of General Motors -- are counterproductive.
On the other hand, prudent regulation is necessary and important in the financial sector. That is because distortions arising out of information imperfections and asymmetries are much larger in that sector. While India is still over-regulated and will need to continue on the path to deregulation, it escaped major damage from the recent financial crisis primarily because its banks and financial institutions were subject to tighter regulation. The argument for entirely free movement of capital promoted by the United States and the International Monetary Fund, often at the behest of the U.S., has serious limitations
