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This article was first published 12 years ago  » Business » 'India's integration with the world is limited'

'India's integration with the world is limited'

By Faisal Kidwai
Last updated on: March 20, 2012 11:37 IST
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India should focus on how many are living below the poverty line instead of comparing the growth rate with the rest of the world, says an economist and global strategist.

Pankaj Ghemawat, who entered Harvard at 16 and became the youngest full-time professor at Harvard Business School, says India's per capita income is a fraction of the per capita income in the west.

India cannot change its neighbours, but it can change a lot of things when it comes to trade, says the Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona, Spain, in an interview to Faisal Kidwai

The New York Times columnist Thomas L Friedman has stated that the world is flat, but you have contradicted his claim in your book, Redefining Global Strategy. Why do you think the world is not flat?

The world is flat notion is the idea that borders don't matter and that international integration is close to complete.

And one of the points I have made in my work is that when you actually look at the things that could happen across borders or within borders, look at the cross border component as the percentage of the total, the result is much closer to what I think is 10 per cent globalization or semi-globalization rather than 100 per cent globalization.

So, if you think of the people flows, only three per cent of the world's population is accounted for first generation immigrants, these are long-term people flows.

If you think of short-term people flows, the percentage of students studying in countries other than the ones they are citizens of is only two per cent. If you want to think about information flows, the percentage of phone calling minutes that cross national boundaries is only two per cent of all calling minutes.

Even when you turn to something like the Internet, estimates are that less than 20 per cent of the bits transmitted over the Internet actually cross national borders at any point in their journey. And, finally, when you talk about money, foreign direct investment represented about nine per cent of all the money invested in the world last year.

So, it's hard to reconcile those kind of data with the notion of the world is flat.

It's hard to reconcile with just our personal experience. If you talk to any business person about whether it is easy to do business abroad, in a flat world it would be just like doing business at home, but that's clearly not the case.

You have said that the world is semi-globalized. What do you mean by that?

Well, this is to call attention to the fact that the world is far from a 100 per cent globalized.

The reason why I invented the term is that unfortunately people assume that if you say the world isn't globalized you are meaning that globalization levels are zero.

It's precisely to draw attention to the intermediate possibility highlighted by the data where levels of integration are neither zero per cent nor a 100 per cent that I invented the term semi-globalization because otherwise people resort to the dichotomy of the world globalized by which they mean a hundred per cent or zero per cent and neither of them in my views are very interesting end points to focus on.

The United States was once a champion of globalization, but now there are growing demands of protectionism, halting outsourcing and hiring locally in the US. What are your thoughts?

Well, at one level it's sort of typical kind of thing that happens when it's an even year in the US. Even years are years in which there are election in the US and, if you go back and look at the rhetoric last time between Hillary Clinton and Barrack Obama during the Democratic nomination race, some incredibly hair raising things were said about what they intended to do.

You are starting to see something similar happening with Mitt Romney, who's running to secure the Republican nomination, declaring that he would declare China a currency manipulator on his first day in office and Obama feeling obliged to shift a little bit in the direction of going after China again.

So, some of this is just a vagaries of the US election cycle. What I do find a bit concerning is the fact that historically while Democrats have been relatively protectionist, at least in articulation if not in terms of action, Republicans have been less so.

Unfortunately, there is now a general shift among both Republican as well as Democrats that the openness is somehow responsible for all sorts of social consequences, which frankly to me - given that I believe that only 10 per cent globalization has happened - doesn't make much sense to blame it for all kinds of social consequences.

The worrying thing is that if you look at the bases of both parties, there is a significant shift in the last decade away from the pattern in which Democrats tended to be relatively hostile to free trade but Republicans generally positive to a situation where both groups, and that even includes college educated Americans, have big  concerns about trade.

So the positive way of looking at recent developments is that with unemployment dropping in the US and, of course, at some point even the presidential campaign will come to an end, it will be go back to business as usual.

The worrying thing is that with the shift taking place in the US's status in the world economy and the tendency to blame foreigners for whatever bad things happen to themselves, some of the sentiments that we are seeing right now may persist and have an impact well after the elections.

That could hurt India's economy.

If you look at the crackdown that has already on US visa policy, and Infosys has been very much in the crosshair in particular on that, but that's something that has made on-sight operations difficult for all firms.

And there are two reasons for that. Firstly, you are uncertain whether the visas will be approved and the second is the huge increase in visa fees, which has significantly dented the economics of on-sight software development.

The other big problem, from an Indian prospective, is that we were kind of late to the globalization party, unlike China.

While China is the focus of much of the current legislative activity in the US and Europe, the point is the Chinese have already kind of  maxed out in terms of what they wanted to do in the export front and there is a shift away from thinking about export growth to the domestic market.

In contrast, India still trails very badly in this regard. I had prepared a study that we had rolled out at the Apec Summit on global connectiveness with the DHL Gobal Connectiveness Index.

When you look at where India ranks currently, it becomes clear that India needs to become much more integrated with the world economy than it currently is. That becomes harder, obviously, in a climate of protectionism.

When I look at India's trade, India ranks at 109 out of 125 countries in our sample in terms of overall intensity of trade with the rest of the world. And while it does a bit better on service than on merchandise trade, these are not numbers to be very happy about.

Why does it fare so badly in global trade?

The causes are multiple, ranging to historical reasons to the Licence Raj. I remember when I was doing a study for CII with Mike Porter on Indian competitiveness in the 1990s; we had more that one industrialist tell us 'look we have a huge protected domestic market, so why bother with exports'.

That is a problem.

There are some structural issues, such as the conditions of the ports, in particular, and the general state of Indian infrastructure. One of the reasons why software has managed to defy some of these general trends is because they don't have to rely on Indian ports. Most of the barriers are geographical and artificial ones, for example our failure to improve our infrastructure.

Then there are other natural geographic barriers, it's better to call them political barriers.

India has very poor trade connectivity with its neighbours. When you run a cross country regression that sort of tries to predict how much a country should trade with each other based on proximity and compare Indian results with the results for the world at large, the biggest deviation from the cross country relationship are the top country regression plan is the fact that India trades much les with Pakistan
than any normal model would predict.

Unfortunately, if you look at our neigbours, this is one of the key structural differences between China and India; China is part of the East Asian production workshop.

India, in contrast, is surrounded by countries that either because we have political tensions with them or because of their internal dysfunctions simply aren't that attractive as trading partners. The breadth of Indian trade interactions is actually quite high but regional numbers are not very high. Most parts of the world that have progressed have progressed with much closer regional integration than what Saarc currently exhibits.

There are multiple reasons for India's low global trade but, at least, some of the reasons have got to do with things we can change.

We can't change who India's neighbours are but we can change how bad the infrastructure is, we can change the incentives to expand overseas and we can do a lot more things that would connect India to the world.

India is projected to become an economic powerhouse in the next two or three decades. In your view, which aspects of India's economic development are positive and which require attention?

There are several things that should be seen in prospective. India is already a large economy in absolute terms and will become an even larger economy, obviously. But, again, we should refrain from premature congratulations.

The World Bank forecast running to 2050 suggest that even in 2050, our per capita income is going to be a fraction of the per capita incomes in the west.

So, it's all very well to talk, as I believe the chief economic advisor to the cabinet did, about 'Well, we are still growing at six per cent, look at Europe, it's growing at one per cent'.

The point is that that one per cent is on a per capita income of $30,000. Our six per cent is on a per capita income of somewhere between a $1,000 and $1,200.

So, it's very easy to get seduced by the percentages to believe that we are sort of outpacing them and we are just so far behind in terms of per capita income that what may look like a very lofty percentage number doesn't turn out to mean that much in absolute terms.

Secondly, averages mask a huge amount of variation and the fact that South Asia is the leading contributor to world poverty, so we should avoid chest thumping, especially when India has the single largest number of poor people in the world.

Of course, it's common wisdom now that inclusiveness is important but much of what is still being done is either a carryover of schemes that have been shown to be ineffective or almost Reaganesque thinking of trickle-down economics.

Rather than looking at the size of the economy, thinking of how many people are living at less than a dollar a day or two dollar a day might be a more appropriate focus.

Economic growth has been good, although it's coming down. In the last forecast, it was projected to be less than six per cent, but it's still it's a lot better than the Hindu growth rate of two or three per cent that I grew up with when I was in India as a teenager.

The negative side is that inclusiveness is paid a lip service, especially if you look at income inequality, which has got steadily worse.

Secondly, India's integration levels with the rest of the world are still quite limited. The good news there is that it offers room for improvement and it may help contribute to Indian growth.

Thirdly, and I'm most worried about this, is the internal integration of India, which seems to be decreasing rather than increasing. One can see it at a political level, for instance, the imposition of Goods and Services Tax agreement has been held up as the result of the recent elections.

The resistance to GST is widespread because it's an important piece of reform. It is interesting to see how much of resistance is being orchestrated at the state level.

For a large country like India, the internal market is always going to be very important, even more important than the external market, and overall one has to pick and choose.

It's already quite fragmented due to poor infrastructure, differences within India, etc., so the notion that it might become even more fragmented as a result of political maneuvering is one that is quite frightening and a huge missed opportunity if it were to happen.

There are some Indian business houses, such as Tatas and Ambanis, which are trying to make it big internationally. You have studied world's leading multinationals very closely, so what approach or lessons should Indian companies take if they want to make it big overseas?

First thing is to start off with is a sense of realism. When I read the Indian press there is huge amount of excitement about Indian multinationals buying up the world.

Now, if you go and look at the data in the past decade, India's share of global cross border deal by value was 1.4 per cent and in the past five years, it was only 1.9 per cent, which is about the same as Brazil and Russia and well below firms from China and Hong Kong, whose shares exceeded six per cent since 2007.

So, a few large deals do not mean Indian multinationals are taking over the world. Secondly, there has been a focus on expansion by doing large deals, quite a few of which have not worked out as well people had hoped, although one or two have, such as Tata Jaguar Land Rover deal, which is the single most positive mega agreement.

And it's interesting to compare that approach with how the Indian software industry has done it, which has taken the strategy of organic expansion rather than buying off firms overseas.

And, ultimately, in some respects that makes for a stronger overseas footprint rather than simply saying we are going to bolt on a lot of foreign assets, especially with the current dollar and rupee exchange rate as well as the capital shortage in India, affordability is not quite what it used to be.

So, I would say start with realism, remember that there are multiple routes to international expansion not just acquisition of foreign entities. Thirdly, if you do decide to go the acquisition route, have some plan for how the acquisition is going to add value.

It's just not a question of being there or buying, it's a question of being able to add value that more than exceeds the takeover premium you typically have to pay to take over a foreign or domestic entity.

You have recently written a book, World 3.0: Global Prosperity and How to Achieve it. What does 3.0 mean?

It was little bit of a contrast between the worldviews that have preceded it and what I'm suggesting. So, what I call world 1.0 is a world in which national borders are virtually impermeable and international interaction as a result is very limited.

This is a sort of worldview. When I was taking my macro-economic courses at Harvard 30 years ago, it was entirely focused on closed economy model world and this is still what many domestically focused companies are stuck with.

World 2.0 is the opposite extreme, the extreme popularized by Friedman, which says national borders don't matter at all and international integration is close to complete and already towards the beginning of the interview have explained why that's a view point that's grossly in variant with data.

World 3.0 is the worldview that recognizes that international interactions are important, but that national borders still matter, that's specifically from a company prospective. While it's important to think of going global, it's important to recognize that one size fits all is unlikely to be the approach that makes all globalization successful.

I guess, among other things, there was an analogy with what people have talked about with the web. Web 1.0 was the old, look-up model, where you just looked the information up. Web 2.0 is sort of somewhat exaggerated notion people have of everybody being able to talk to everybody else.

Web 3.0 in contrast recognizes that while, for instance, somebody on Facebook could in principle just as easily form friends halfway around the world, 85 per cent of friends on Facebook tend to be from the same country.

And, so, web 3.0 is about contextuated communication rather than just communication between everybody. It recognizes that context matters and that other things, like geography and culture, do influence patterns of communications on the web.

And that's fairly close to the kind of view that I take of interactions more generally in world 3.0.
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