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January 17, 2000

BUDGET 1999-2000

The Rediff Business Interview/Prof Jeffrey D Sachs

'Political stability, huge scientific base, large English-speaking workforce are an advantage for India over China'

Prof Jeffrey D Sachs, Harvard economist Professor Jeffrey D Sachs, guru of market reforms and expert on comparative advantages for nations, is currently serving as director at both the Centre for International Development at Harvard University and the Harvard Institute for International Development. He is the Galen L Stone Professor of International Trade, Harvard University.

Prof Sachs was in India recently to attend the Confederation of Indian Industry's Partnership Summit 2000 in New Delhi, where he urged India to globalise, especially since regionalisation is not an option available to India! He also attacked the current role of the World Bank and International Monetary Fund, asking for a fundamental shift in their policies. In a brief interview with Rediff's New Delhi Bureau Chief Amberish Kathewad Diwanji, Prof Sachs touched upon raging monetary issues. Excerpts from the conversation.

Will the devaluation of the Chinese yuan cause another Asian economic crisis?

I don't think so! The Asian crisis was not caused because of any devaluation but because of certain economic weaknesses in various Southeast Asian countries. No doubt, the crisis was triggered off when Thailand devalued its baht and South Korea devalued its wang.

Email this interview to a friend The devaluation led to many banks calling in their short-term loans since they feared a loss in income. It was the run on short-term loans that caused the financial crisis, because the Southeast and East Asian countries had too much of short-term indebtedness. Too many of the loans taken by the Southeast and East Asian countries were of the short-term variety, rather than of the medium- or long-term types.

China does not have such a huge short-term indebtedness. It has a much larger share of medium to long-term loans and hence, even if the yuan is devalued and the banks call in their loans, the outflows will be much less than what happened in 1997. And the Southeast and East Asian countries got out of the economic crisis by converting their short-term debt to medium- and long-term debt.

Will the yuan devaluation not affect the other countries, especially India?

Sure it will! Chinese exports amount to US $180 billion, and certainly any devaluation will have an impact. It might even put pressure on India to devalue the rupee, which might not be a bad idea since I think that the rupee is quite high valued anyway.

How will the entry of China into the World Trade Organisation impact upon India?

China's entry into the WTO will have an impact since both India and China compete with each other in exporting much the same kind of goods. Both China and India are in direct competition. It will also make it necessary for India to undertake further reforms to really compete successfully with China.

India will have to realise that since China began reforms and promoting its exports much before India, it has been able to capture the labour intensive goods market, which is also the market that India seeks. Hence, India will have to expand export of other goods, something that will need more reforms. Right now, Indian exports are around only $40 billion compared to China's $180 billion.

What are the comparative advantages that you see for India vis-a-vis China?

The single biggest advantage of India is its political stability. I know that if you look very closely, it does not appear that stable, but compared to China, this is a huge advantage. I seriously believe that China will have great difficulty in continuing with economic freedom but not allowing political freedom, in keeping politics centralised. These two paths are not compatible and in the coming decade, China will face huge pressures. On the other hand, India with its federalism and democracy will have the advantage.

The second is that India has a huge scientific base. I believe that India should take the lead in becoming a leading global centre for science and technology, and this advantage is helped by India's large English-speaking base.

I know English is not universally spoken in India but the fact that it is spoken has been part of the reason for the Indian success in IT.

One lesson that India can learn from China is to use its overseas resources. China was able to network its overseas Chinese very effectively and most of the early investments made in China were by the overseas Chinese. India too has a vast overseas population, and the country must network with these overseas Indians to get investments and new technologies.

One complaint that India has against the US is that its markets are not accessible and that Washington DC prefers bilateral deals to multilateral agreements. Comment.

The Indian complaint is that textiles are a protected market in the US, and I personally prefer opening it up. I really think India must push hard on this front, and it is here that the World Trade Organisation comes into play. The Seattle round, in my opinion, was scuttled because of US domestic politics, and now it is for India to push for a new round. India must seek an opening in the western markets for new labour-intensive goods (like textiles), which is where India's comparative advantage lies.

The other complaint is that the US has signed up special deals with the most backward regions to help them out. For instance, the US has signed a deal to give preferential treatment to sub-Saharan Africa, the poorest region in the world. Of course, it is a flawed deal because these countries have to buy the cloth from the US and then re-export them, which will raise costs. But I support such agreements because I think it is necessary for such deals to help the most backward regions.

What do you think needs to be India's priority in the coming decade?

Clearly, there can be only one and that is providing universal education. Today, we are in the Age of Knowledge, where the economy is based on knowledge, and in such an era it is imperative that all Indians are literate.

I also think that information technology can help India provide education to every village and city across India. Indians will have to figure out how to use IT for this purpose and make the necessary investments.

You have often deplored the role of the World Bank and International Monetary Fund?

I seriously believe that the World Bank needs to change its role. Why do we need a World Bank? There are thousands of banks that give loans for specific projects, which is what the World Bank also does. I think the World Bank should change its name to the World Development Agency and take up issues such as universal education, environment protection, and other such global issues. Today we need to mobilise knowledge, need more science and technology in the world, and the World Bank should take up such tasks.

Regarding the IMF, I think that the IMF only aggravated the East Asian crisis by following a series of wrong policies. It needs to re-examine its role. And I also think that the western nations must loosen their control over the IMF and the World Bank. Why should only westerners head the IMF when most of the time it is working in the developing countries? The IMF's canvas is really wide.

Dr Manmohan Singh I think India should again take the lead in this regard. I had written an article some time ago suggesting that Dr Manmohan Singh should be made the head of the IMF (though I am not sure if he wants the job!). India should use the rhetoric of democracy and transparency on the Western nations to get men of their choice appointed as the heads of the IMF and the World Bank.

As the world globalises, what are the reasons for worry?

I think the world needs global rules and global institutions to enforce the rules. I believe in the market economy and in global integration, but the world clearly needs to remember other factors that affect the world. We need to keep inventing new approaches.

I think the present system of the Washington consensus (where the rich nations agree on decisions for the world) is too narrow, it does not take the poorest nations into account and is not fair for a global economy.

Today, science and technology are moving ahead extremely fast in the developed world and in sections of the developing world, but the worry is that they do not reach enough of the world. We need to change all that.

Profile of Professor Jeffrey D Sachs



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