An IDC Analysis


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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