I like the 777. In fact, I like all wide-bodied aircrafts, the favorite so far being the Boeing 747. I think my favorite will become the Airbus 380 once I travel on one.

These planes epitomize globalization. Take the Boeing 787 “Dreamliner”. Where’s it made?

Boeing manufactures the 787’s tail fin at its plant in Frederickson, Washington, the ailerons and flaps at Boeing Australia, and fairings at Boeing Canada Technology. . . the wings are manufactured by Japanese companies in Nagoya such as Mitsubishi Heavy Industries, which also makes the central wing box. The horizontal stabilizers are manufactured by Alenia Aeronautica in Italy; and the fuselage sections by Global Aeronautica and Vought in Charleston, South Carolina (USA), Kawasaki Heavy Industries in Japan and Spirit AeroSystems, in Wichita, Kansas (USA). . .

The passenger doors are made by Latécoère (France), and the cargo doors, access doors, and crew escape door are made by Saab (Sweden). . . Japanese manufacturer Toray Industries and Boeing announced a production agreement involving $6 billion worth of carbon fiber. . . On February 6, 2008, TAL Manufacturing Solutions Limited, a subsidiary of the Tata Group (India) announced a deal to deliver floor beams for the 787 from their factory at Mihan, near Nagpur, India to assembly plants in Italy, Japan and the United States.

The manufacturing of commercial airplanes in the US reveals the patterns of current international trade. Most international trade occurs between advanced industrialized countries and much of that trade is in intermediate goods (as opposed to finished goods). Quite often the same category of finished goods are traded between two nations — cars are traded between Germany and the US — because it increases variety in consumption and lowers cost of production due to scale economies and specialization. Consumer goods account for only about a third of the US imports.

There is a new pattern emerging: the involvement of emerging economies in the production of intermediate goods. The 787 has bits that are made in Nagpur in India. This has implications for the development of infrastructure such as roads, ports and airports in India besides the development of human resources. Investments in these will increase the trade linkages between India and the advanced industrialized economies.

One evening last week in Mumbai, a friend said that it was remarkable that the financial crisis was the work of a handful of extremely greedy and immoral people. These people personally gained enormously but the cost that they imposed on the rest of the world was many magnitudes higher. The negative externalities, as economists would say, amount to trillions of dollars. These handful of people were white men.

To me, all this talk of white men causing all the trouble in the world feels a bit like the “man bites dog” situation. I have nothing against white men (and hastily add that some of my friends are white males.) Indeed, I have nothing against any group — white, brown, men, women, Hindu, Muslim, Christian, Jews, whatever — because to me, individuals matter not groups.

The global financial crisis in the US and the resulting on-going global economic crisis can be laid at the feet of a few white men. The operative word is few because it is always a few that are responsible. Look around you and you will notice that everything we enjoy or suffer has been brought about by a few. The modern world we inhabit is manifestly created by the genius (both for good as well as for the bad) and the actions of a few. More often than not, the modern world is influenced overwhelmingly by white males — most of them dead. Dead white males did it.

I think that when pointing fingers at a few white men (with or without blue eyes) for all that is wrong with the world, we should spare a thought for the other few white men who did a lot of good things. The science and technology, not to mention the institutions, which defines the modern world is for the most part the work of a few people — mostly men and mostly white. I cannot go into why this is so but it is an empirically verifiable fact. Mr da Silva has not met a black banker. But neither has he met a black person who has invented anything we so routinely use and take for granted.

We are prone to a special myopia when it comes to pointing fingers at others, particularly at those who are more successful than us. Perhaps it arises out of envy and jealousy. But at its root must lie basic ignorance. Not just people, entire systems are considered worthless and totally flawed when viewed with blinkered ignorance.

The global economic system is slowing down. The cry goes out, “Globalization has failed. The market system is bad. Capitalism is evil.” Yes, the market system is not perfect. After all, it is man made, not handed down from on high by an omniscient being. It has its faults just like any other human artifact. It does not always function well — but compared to what? Certainly the market system performs magnificently compared to socialist or communist command and control systems. The market system only appears to be bad when you compare its occasional failures relative to its long-run successes.

If we take the long view of it all, we cannot fail to notice that for most of human history, the world barely changed over hundreds of years. With the invention of markets and capitalism came the astonishing rate of change, most of it for the better. States that failed to recognize the power of markets and capitalism, stagnated and lost ground. The US, to take an example, rapidly developed in the 20th century and increased its per capita income seven-fold in a matter of a generation and a half. The US evokes envy among economies that made the wrong choices — but the fault lies not with the US but with the envious others. Even now it is not too late for some economies to take a long hard look at reality and recognize that karma — actions — matter and it is no good pointing fingers at others for their own failures.

Globalization has its discontents. But that is not sufficient reason to blame globalization. Perhaps the fault lies with the discontented and not with globalization. After all, one can refuse to be part of the global economy. India under Nehruvian socialist dispensation did precisely that, and ended up not surprisingly underdeveloped and abjectly poor.

India can still go back to its autarkic post-independence stance and get back to its dismal 2-3 percent Nehruvian rate of economic growth. No one is forcing India to become a developed economy. It can continue to keep the majority of its people imprisoned in small villages, barely scratching out a subsistence living. It can continue to keep its archaic labor laws and insane industrial policies that guarantee low productivity and low production. It has the liberty to do that and its people are free to vote for such policies. And most likely they will shortly.

It’s strange how it is fashionably PC to point fingers at white men over there but damnably un-PC to point fingers at brown sahibs on our own side. These brown bosses — few of them in this case as well — have dug us a hole from which we the unwashed masses may never ever climb out of. Thank god for the dead white men, for without them, we would have never even known that another way of living was even possible.

NOTES:
[1] President da Silva said:

“This is a crisis that was caused by people, white with blue eyes. And before the crisis they looked as if they knew everything about economics. Once again the great part of the poor in the world that were still not yet [getting] their share of development that was caused by globalisation, they were the first ones to suffer.

“Since I am not acquainted with any black bankers, I can only say that this part of humanity that is the major victim of the world crisis, these people should pay for the crisis? I cannot accept that. If the G20 becomes a meeting just to set another meeting, we’ll be discredited and the crisis can deepen.”

[Return.]

Drysdale says “that India and Australia are on the cusp of an historic opportunity for sharing a new, much more important relationship in the future than we have shared in the past.” He notes that India’s externally oriented reforms are driving India’s economic integration with the world and has regional and global implications.

India’s continued growth and industrialization is forging a relationship between Australia and South Asia that, 10 or 20 years hence, is likely to match the well-established relationship with East Asia.

All this is changing fundamentally the stature of our bilateral relationship and the priority that it must now attract. The context of that change is the emergence of the Indian economy and the opportunity for integration of the South and East Asian economies, including Australia.

He goes on to talk about the policies and strategies required for realizing the potential gains from this opportunity.

I look at development with microeconomic lenses. So I would like to quote an excerpt from his talk which especially resonates with me.

Good microeconomic policy is at the heart of the process of domestic reform and liberalisation that delivers better economic outcomes and drives effective international integration, both in real and financial markets. In seeking remedies for the under-realisation of trade and investment potential as well as superior strategies for economic integration, we need to look at, but also well beyond, trade and trade policy (or border) measures and focus on domestic reform and liberalisation (behind-the-border) measures. Domestic reforms that strengthen commodity, financial and factor markets through increased competition and efficiency now have much more important effects in promoting growth through economic integration than traditional trade policies at the border.

This emphasis on domestic reforms is important and is consistent with the view that Prof Pranab Bardhan expressed in my conversation with him. (See “Walking around the Indian elephant” and “Reforms do not address the anxieties of the general population.”)

East Asia Forum

Prof Drysdale co-edits a blog on politics, economics and public policy in East Asia and the Pacific, titled “East Asia Forum“. About the EAF:

The blog is run out of the East Asian Bureau of Economic Research (EABER) housed in the Crawford School of Economics and Government. Contributors are from the Crawford School, across the Australian National University and other regional institutions in EABER. Content includes Australian, East Asian and Asia Pacific region perspectives, with guest bloggers from right around the region.

Prof Andrew MacIntyre of ANU’s Crawford School introduced me to Prof Drysdale. Now I have a guest blog post on EAF. How cool is that?

The report shows, for example, that every religion is losing and gaining members, but that the Roman Catholic Church “has experienced the greatest net losses as a result of affiliation changes.” The survey also indicates that the group that had the greatest net gain was the unaffiliated. More than 16 percent of American adults say they are not part of any organized faith, which makes the unaffiliated the country’s fourth largest “religious group.”

The money quote for me is:

Muslims rival Mormons for having the largest families. And Hindus are the best-educated and among the richest religious groups, the survey found. [emphasis added.]

Now that is what I call globalization: India importing the Indian rate of growth from the US. Notice that the socialistic Nehru rate of growth of 2 percent per year was prevalent for nearly forty years after India’s independence. Only in the mid 1990’s did the pace pick up — around the same time that Indians started making it big in the US.

He states the standard view explaining the rapid growth of the two countries:

What explains this strikingly rapid growth? The answer that continues to dominate public discussion in the United States runs along the following lines: decades of socialist controls and regulations stifled enterprise in India and China and led them to a dead end. A mix of market reforms and global integration finally unleashed their entrepreneurial energies. As these giants shook off their “socialist slumber,” they entered the “flattened” playing field of global capitalism. The result has been high economic growth in both countries and correspondingly large declines in poverty.

Then he proceeds to demonstrate why that explanation is incomplete at best and provides a more nuanced and comprehensive explanation which touches on matters that are often neglected in the narrative explaining the growth miracles. For instance:

Start with the claim that global integration and associated market reforms resulted in high growth, which in turn produced dramatic declines in extreme poverty. Applied to China, the timing simply does not fit. China has indeed made large strides in foreign trade and investment since the 1990s, but well before then, say between 1978 and 1993, the country had already achieved an average annual growth rate of about nine percent—even higher than the impressive seven percent growth rate in East Asia between 1960 and 1980.

It is a very well-reasoned article and must be read in full. Let me close with the concluding paragraph of the piece.

Chinese and Indian economic performance has been far better in the last quarter-century than in the previous two hundred years—and this is one of the striking events in the recent history of the international economy. Other countries must adjust to this reality, and learn to treat the partial restoration of the earlier global importance of these two countries as an opportunity for trade, investment, and exchange of ideas, not as a threat. (We also need to work in tandem with them on the environment.) But we must remember that the story of their rise is more complicated and nuanced than standard accounts make out. That more complex story includes the positive legacy of China and India’s earlier statist periods, which offers general lessons for the process of development much too often ignored.

I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation.

It’s a strange article considering that he does know his economics. Surely he knows that trade is good. International trade is also good, subject to some very well-understood conditions. He understands Adam Smith and David Ricardo well enough to write econ textbooks and is a professor at Princeton.

I think it is easy to see that with the rapid fall in the cost of transporting bits, many non-tradeables have become tradeables. All services that are potentially digitizable have become tradeable. When trade is opened up among two economies, both economies do gain from increased specialization but every sector in both the economies don’t gain. The sector which is import-competing loses and the sector which is exporting wins. Nothing unheard of and unexplained about that. Sure, to protect the interests of those who hurt, you could use trade protection. But that is more costly than to compensate the workers of the import-competing sector.

Blinder agrees that trade protection is not the answer.

Trade protection won’t work. You can’t block electrons from crossing national borders. Because U.S. labor cannot compete on price, we must reemphasize the things that have kept us on top of the economic food chain for so long: technology, innovation, entrepreneurship, adaptability and the like. That means more science and engineering, more spending on R&D, keeping our capital markets big and vibrant, and not letting ourselves get locked into “sunset” industries.

Blinder is wrong about blocking electrons: it is quite possible to block them from crossing national boundaries. It is technically possible and is often done for political reasons. But I agree that the US needs to do more than just try to outlaw offshoring. All in all, a fairy disappointing article. Blinder was just having a bad economics day perhaps.

Last Fall, I wrote a widely read piece called Venture Capital in India, in which I pegged the Indian venture boom to be largely in Real Estate, Retail, and to an extent in Consumer Internet, not much in actual technology.

Last week, Sujai Karampuri made a well researched case for technology product companies in India.

In the recently concluded Philippe Courtot interview series, we discussed at length the various ways in which India and China could undercut US companies, and Philippe acknowledged that in his business (Qualys is an outsourced managed security service provider, a SaaS play), it is quite possible that an Indian company could come up with a vastly lower cost structure, and customers would switch immediately, if they are convinced about the reliability of the service.

Just to set the economics in perspective, Qualys has invested $65 Million to build an infrastructure that “is at the scale of the planet” to monitor, audit and report network security problems.

Let me throw a challenge in the direction of the Indian entrepreneurs: Go figure out how to build this same business for $30 Million, and I can tell you, you will have an absolute winner in your hands.

ps. You can read the Courtot interview here:

[Part 1] [Part 2] [Part 3] [Part 4] [Part 5] [Part 6] [Part 7] [Part 8] [Part 9] [Part 10] [Part 11]

Yesterday, the use of shipping container celebrated its 50th birthday. The first container ship sailed from Port Newark to Texas on the 26th of April, 1956. As the Spiegel article of Nov 2005 The Box That Makes the World Go Round notes: “More than 3,500 cargo ships are sailing the Pacific, Atlantic and Indian oceans today. They are loaded down with about 15 million containers. Like beads lined up on a necklace, these huge vessels ply their transcontinental routes.”

The world is made up of a few fundamental big ideas. One of the big ideas is “standardization” which manifests itself in a variety of ways, from little standardized bits of interchangeable hardware (such as nuts and bolts which make manufactured goods cheap) to standards such as the Internet Protocol (which makes communications cheap.) Without standardization the world would be a much poorer place. For India’s economic development, India has to adopt standards, if not actually evolve some standards where they don’t exist. The real power of markets depends on standards.

I grant you that Friedman writes bestsellers and some of my best friends are huge fans of his. And I think that globalization—the integration of the world’s markets—is not merely a good thing overall but is inevitable and monotonic. In any market integration, there are winners and losers, be it labor market integration or the market for lemons. Be that as it may, what I want to do someday is to write a book called The World is Mad.

“What!?” you would exclaim upon reading the title, “I thought the world was sane. Thanks Atanu, you are a bloody genius.” And then you would proceed to read the book and figure out that indeed the world is mad and that I do not fall into the hasty generalization trap unlike some others I could mention.

Madness suffuses the world around us. Why don’t we perceive it? Because physiologically we have evolved to tune out any background information. We stop taking notice of something that is all-pervasive. The madness I am talking about is so commonplace so as to be taken as normal.

The globalization of madness, like the globalization of trade and stuff, did not begin recently. It has been going on for a bit. I am talking about the 800-pound gorilla in the room which practically everyone is ignoring: the Weapons of Mass Destruction Industry.

The US leads in the globalization of madness just as it leads on practically all other bits of globalization. Check out Ben (of Ben and Jerry’s) on the US nuclear stockpile. It costs $17.6 billion every year to merely maintain it. Let me spell that out: $17,600,000,000. And that is just to keep the stock in readiness. The stockpile of 53,000 nuclear weapons costs much more to build.

Thousands of billions of dollars to build the whole military apparatus, all with the one single objective: kill people. What is worse, this military apparatus kills people whether these weapons are used or not. How? They export part of their obsolete weapons of mass destruction to Third World countries which pay billions of dollars to acquire them. These Third World countries starve their people in order to extract sufficient resources to pay for the weapons. And the madness is so acute that some people in the Third World countries actually rejoice that their governments are acquiring these weapons. I regularly keep getting emails congratulating me that the Indian government is almost surely going to finally get a huge batch of F-16s from the US! To me that is depressing beyond words. It is like someone happily reporting the thrilling news, “Congratulations! Your country will continue to see millions of deaths through starvation and disease over the next 10 years—guaranteed.”

Just because it is all-pervasive madness does not make it sanity. We continue to go about our daily business without paying much attention to this madness. We are in the business of rearranging the deck chairs on the Titanic even as the ship is sinking. I have to remind myself that we don’t necessarily have to be smart; we just have to stop being so stupid. There is one thing that India needs to do if it wants to develop and it has nothing to do with IT this or internet kiosk that: it has to stop spending money on weapons of mass destruction. And that goes with equal force on the other impoverished overpopulated illiterate countries around India.

PS: There is a followup to this post here.

The fact is that the majority of the world’s population is not part of the globalization — or at least not directly part of globalization. I think of the vast telecommunications network that spans the globe to be somewhat congruent with the globalization as defined above. Indeed, the state of the telecommunications infrastructure of any place in the world could be used as a proxy for determining how globalized it is.

For instance, India is among the less globalized of the major economies — China is more globalized compared to India. China’s telecommunications infrastructure is now about 10 times greater than India’s (although in 1989 India had a higher telephone density.) In India, the urban areas are more globalized compared to the rural areas, and so on. The US and other advanced industrialized countries are the most globalized and have the most advanced and developed telecommunications networks.

I was discussing this with Steve Stohs, a friend in Berkeley, and he added that there is a virtual side of globalization, characterized by the flow of ideas across communications networks, which is dual to the physical side of globalization, which is manifested in a flow of goods and materials. The virtual side is necessary for the physical side to function, but not vice versa.

How did India, in 15 years, go from being a synonym for massive poverty to the brainy country that is going to
take all our best jobs? Answer: good timing, hard work, talent and luck.

I would have asked a slightly different question:

How did India, in 15 years, go from being perceived as a country of massive poverty to being perceived as the brainy country that is going to take all our best jobs? Answer: Spin, racist zenophobia, and ignorance.

Let’s take the last one: ignorance. People are generally ignorant of the fact that there are two distinct Indias. Sharad Joshi distinguised them by calling the urban, rich, educated one India and the rural, poor, uneducated one Bharat. I will borrow that nomenclature. India is small, say about 100 million people at most. India has programmers and BPO call centers and cars and Baristas and McDonalds. Indians get educated at IITs and IIMs and travel abroad and talk to each other in Hindi sentences such as, “mera sleep bahut disturbed ho raha hai these days.”

In contrast to that, Bharat is a huge country of about 900 million, most of whom live in rural areas. They are largely illiterate, poor, have little education, don’t speak in English, do manual labor in farms, wouldn’t know what to do with a computer even if one came and bit them on their skinny behinds, have no illusions about anything shining and are generally ignorant about feeling good.

Ignorance about the existence of Bharat is widespread in India. Examine any magazine published in India and you would learn that the most pressing problems in India include what to do about a waist-line, which car to buy, where the hottest shopping spots are in the world, which movie star is sleeping with whom, and how India is shining.

How foreigners perceive India depends on what they have been fed by the news media. Sometimes the news media concentrates on Bharat and the focus is therefore on poverty and hunger. Then for some reason, Bharat is ignored and India comes into the limelight. The focus is then on the IT industry and all BPO and call center and job loss to brainy Indians. The reality is pretty much what it was before.

The other two factors — spin and racist zenophobia — I may take up later or leave it as an exercise for the interested reader.

A nice chatty piece as usual from Tom. He argues against putting up protectionist walls with folk wisdom as his major tool. The bit of folk wisdom which goes what goes around, comes around. It boils down to argument by anecdotes, really.

Argument by anecdotes is great expect for the fact that your adversary could also use the same tactics and then it can only end in a shouting match with the winner being the one who can shout the loudest. Demagogues — that tribe which Tom has a special disdain for — use anecdotes all the time.

I am not saying that Friedman should have written an academic paper citing published sources on the costs and benefits of outsourcing for the US economy. It is just that he starts off by admitting that the matter of outsourcing is a complex issue and that it requires reference to reality for one to comprehend it. Then he descends into a trap that he himself cautions others about. My gripe is that his reference to reality is too selective, the sample size too small for the conclusion that he wishes to support.

For instance, many other commentators stand on the other side of the issue and support their position by re-telling heart-wrenching tales of yuppy programmers in the Silicon Valley being unable to make their SUV payments because their jobs have been stolen by Indian programmers making less than $3 an hour.

Folk wisdom: one swallow does not a summer make. Or as we sophisticated people like to call it: the logical fallacy of the hasty generalization.