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Lessons From The Past

Most nations eagerly pursue foreign direct investment that brings jobs, infrastructure and new products. But India’s opposition parties are bucking such trends and its own history of open trade with protests and demands for withdrawal of this benefit of globalization, explains Nayan Chanda, YaleGlobal editor, in his column for Businessworld. The conflict adds to an uncertain business climate. “Already a year of massive corruption scandals and policy paralysis in New Delhi have taken their toll on foreign investors’ enthusiasm for India,” Chanda writes. He identifies a trend that threatens India and other nations, too – opposition that refuses to respect democracy, election decisions, or policymaking that entails alternatives and compromise. Instead, in their desperate quest to gain power, political opponents balk at all policies, their only goal to weaken governments and the party in charge. Chanda outlines historical examples in China and India, demonstrating a connection between an open-door policy for trade and the art of compromise and cooperation in domestic politics, all of which contribute to security and prosperity. – YaleGlobal

Lessons From The Past

Historically, India’s open-door policy has paid rich dividends, but in a democracy, even a no-brainer prescription policy may be ignored for political gain
Nayan Chanda
Businessworld, 27 November 2012
As the Parliament’s winter session arrives, the air in New Delhi is again thick with protest slogans. First-time visitors to India may be forgiven for thinking that they have walked onto the set of a movie about colonialism, featuring brave natives standing up against imperialist invaders. Indian opposition parties are agitating against what the rest of the world does not have enough of: foreign direct investment. Welcome to the alternative universe of Indian opposition politics. Whether out of conviction or political expediency, the opposition parties’ demands for withdrawing FDI does more than just fly in the face of the worldwide trend. It seems like an effort to reverse the trend of Indian history, in which prosperity was always based on openness.

The opposition’s protest against FDI in retail, banking, aviation and insurance does not mean they are xenophobic, or that they are hostile to all foreign investment. Nor is it accurate to suggest that FDI in retail is some sort of a panacea, or that it comes without its problems. But the message that the opposition is sending to the world amounts to raising a red flag on the beach: ‘Danger – Enter the water at your peril’.

As the competition for capital in the post-financial crisis world heats up, the impact of such an unwelcoming signal to investors is not hard to imagine. Already a year of massive corruption scandals and policy paralysis in New Delhi have taken their toll on foreign investors’ enthusiasm for India. During April-August 2012, FDI inflows dropped by 60 percent – from $20.63 billion to $8.16 billion – compared to the same period last year. Even if the agitation fails, the political uncertainty that it implies can only discourage foreign investors.

In a democracy, it is the duty of the opposition to question government policies and offer improvements or alternative policy that could produce the desired result. But Pavlovian opposition to all government initiatives is bad policy even it is occasionally good politics. The present protest is particularly regrettable as it seems to disregard the country’s historical experience. In many ways, the 1991 reforms that launched India on a growth trajectory can be seen as a return to India’s pre-colonial past when the country’s open-door policy brought prosperity.

India’s openness to foreigners and the trade opportunities they brought can be seen in the large colonies of Arabs, Jews, Armenian and other trading communities in medieval times.

Correspondence from Abraham Izu, a 12th century Jewish merchant, gives a peep into India’s early supply chain economy. He ran a factory in Cochin where his employees turned copper, tin, and old bronze vessels sent from Europe into new vessels for export. The Mughal encouragement of cotton and silk textile (with specific promotion of European designs and colours for the European market) and spice exports filled their coffers with silver bullion brought by the Europeans from the New World. In 1659, Gemelli Careri, an Italian visitor to India, was dazzled by the country’s wealth. “All the gold and silver that circulated in the world eventually found its resting place in the Mogul empire,” he wrote. Late historian Angus Maddison’s magisterial survey ‘The World Economy: A Millennial Perspective’ offers evidence of India’s dominating position as a result of its wise policy.

In 1700 India produced nearly a quarter of the world’s GDP, with China close behind. The period of colonial rule, the struggle for independence followed by bureaucratic socialism plunged the winners to the bottom of the world’s economic league. Today, India’s share of global GDP is just 2 percent.

China under Mao too sank to the bottom over the same period, but has made a stunning recovery under Deng Xiaoping’s open door policy. Hundreds of billions of dollars’ worth of investment and technology have flowed in, making the country an export powerhouse and lifting China to the rank of the world’s second-largest economy. Last year, China drew a record $116 billion in FDI, creating some 340,000 jobs. India was a distant second, attracting just $36.50 billion, and its faltering exports since have widened its current account deficit. Attracting FDI would be the logical course not only to revitalise retail and banking sectors creating jobs, but to finance the deficit and reduce pressure on the Rupee as well. But in a democracy, even a no-brainer policy prescription may be ignored for political gain.

The author is director of publications at the Yale Center for the Study of Globalization and editor of YaleGlobal Online.

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