The Discontents of a Nobel Prize

https://thewire.in/economy/the-discontents-of-a-nobel-prize To understand the atypical response to Banerjee's win, a rare non-cricketing triumph on the global stage, one must first unpack the Indian attitude to development. Engaging the poor to understand their plight and choices might not be that Bohemian anymore. Three development economists – Abhijit Banerjee, Esther Duflo and Michael Kramer – have won the Nobel Prize for Economics in 2019 for doing precisely that. Their body of work, spread across three decades, has brought the economic life of the poor to the centre stage. How has the world reacted to the success of this relatively young trio of economists? It has been a mixed bag. Even in India, where Banerjee hails from, some critics have not allowed ignorance to get in the way of a good tirade. To understand the emotions they have evoked, it is helpful to understand their iconoclastic sins both as economists and as researchers on the Indian economy. The novel idea of talking to the poor One could cynically say that hitherto Nobel Prizes in Economics, unlike in other fields, have largely rewarded theoretical work. Banerjee et al. have tried to replace conjecture with evidence through bold experiments designed to understand how deprived communities respond to incentives and policies. They have asked scores of unassuming questions to understand the behaviour of the poor in Asia, Africa and the Americas. To get answers, they popularised the use of Randomised Controlled Trials (RCTs) in economics. Hitherto prevalent in medical research, RCTs seek to establish the response of a selected group of people to an incentive against that of another group which is left alone. The findings of Banerjee et al. and their fellow randomistas range from the obvious to the extraordinary. For instance, they found that intestinal worms rather than the lack of free textbooks or teachers kept children away from school in parts of rural Kenya – spending a mere $3.50 on deworming could buy school attendance. Young men who received cognitive behavioural therapy in low-income neighbourhoods of Chicago (US) and Monrovia (Liberia) were less likely to slip back into crime and more likely to graduate from school. Distributing bed-nets for free rather than selling them is more likely to encourage the poor to use it and buy nets subsequently. Or providing access to vocational skills and information about job opportunities were likely to delay pregnancy amongst adolescent girls. Importantly, they have brought new rigour to the evaluation of development programmes where billions of dollars are spent, usually with questionable results. However, this audacity to ask meek questions and trust answers to emerge from the huddled masses has not been universally condoned by the Pharisees of the economics sect. For this is a cult where economists ask the big questions of themselves, furnish the answers and stew in unconcealed fury whilst policymakers and the masses fail to act on their command. To their credit, the three pioneers of RCTs have never sought to present them as magic bullets or scalable to wider macroeconomic challenges, but it has not calmed the noise. It could also be said that development economics languishes in the lower echelons of status in Western-centric economics, and three prizes to such a cause might be perceived as generous. Left foot here, right foot there… So what explains the lack of unadulterated euphoria in India? No doubt, there has been more than a smidgen of pride in Abhijit Banerjee snaring the coveted prize. After all, in these times of ache din what could be better than a successful Indian? A successful Non-Resident Indian (NRI), of course. He follows in the footsteps of Amartya Sen, who in 1998, became the first Indian economist to win the Nobel Prize. Whilst Sen’s sun has been setting rapidly over the last few years, the jubilation when he won the prize was unclouded. Banerjee has not been that effective in distending the patriotic chest beyond the nationally significant 56-inch mark and there have even been a few vocal critics amongst observers across the ideological spectrum. To unpack this atypical response to such a rare non-cricketing triumph on the global stage, one must first understand the prevailing Indian attitude to development, and secondly, the ideological dilemmas playing out across the Indian political spectrum. The Indian approach to policy-making follows a similar caste structure to that of the established economics regime. The field of study – poverty – is basic and not something that terribly excites the Indian middle class living on a diet of dreams about global economic dominance. It is an inconvenient false labour just before India births a five-trillion economy. They also grew up on textbooks that promoted the virtues of ‘trickle-down effect’ – when they get their next job with an American company, move up the greasy pole of babudom or buy their next car, they will rain jobs for ayahs, gardeners and drivers that will allow the poor to lift themselves up by their chappal straps. Moreover, those in ‘command and control’ positions – in government or at the helm of development projects – know what is best for the poor. Why ask the very people who are to blame for being poor? If interventions do not work, there is a whole slew of factors – culture, traditions, lack of skills or corruption – to blame. Banerjee’s involvement in drafting a minimum income support scheme for a losing party’s 2019 election manifesto has sullied him as partisan in the minds of many. Welfare is not an idea that has found fertile ground in the minds of the Ayn Rand-esque middle-class opinion-formers. Secondly, the Indian political class is wading through muddled waters to uncertain shores. Whilst the centre of Indian politics vacillates or holidays, both the left and the right are trying to figure out what side to be on when they grow up. The Indian left has been the custodians of the poor since Independence. They have always asked and answered the big questions about poverty, marginalisation and class struggles. Their comrades have controlled universities, research institutions and editorial pages, and ensured that politicians, regardless of their political hues, are closet socialists. However, researchers who go around asking questions to the poor are stepping on their pastures without consent. So, when Duflo and other randomistas rocked up to administer RCTs in Kerala, the state health officials reacted as if it were a suppository. They were openly squeamish about RCTs, lectured her on Kerala’s admirable health indicators, refused to engage on the state health department’s objectives, and were amongst the first critics off the block when she won the Nobel Prize. If only she had attended a Party study camp or two. At the other end, the Indian right is buoyant on the back of a long season of back-slapping electoral victories and growing fanbase. While the left lives in the recent past, the right resides in the ancient past and the near future, both of which are glorious. Like the middle class, they do not appreciate stories of hunger, malnourishment, stunting and disease when they know that our ancestors flew supersonic planes and carried out complex surgeries, and we are on the verge of returning to the moon and Mars. Harping on about the misery of the poor detracts from the focus required to restore greatness; it might even endanger national security and play into the hands of our enemies. The right also believes in magic – jugaad that delivers maximum results for minimal effort, or cunning ideas that never occurred to the educated elites. Like traditional medicines, remedies for greatness might involve short-term pain, desi ghee and lead poisoning, but in time all will be fine. Alas, in the land of ‘mindfulness’ and owning the present, mindlessness abounds. Our thin-skinned reactions to the likes of Banerjee and Sen encapsulate the nascent and often brittle sense of national identity when confronted with our imperfections as a society, economy or state. We are quick to embrace celebrities with tattoos in Sanskrit or cricketers who can sledge in English, but our Podsnappery makes us prickly about comics, writers or academics who show a mirror to our darker selves. All segments of the Indian political spectrum appreciate intellectuals who are obsequious to their leaderships; NRI intellectuals who are beyond the reach of lawsuits, rent-a-mobs and enforcement agencies will be blanked or ridiculed. As Banerjee and Duflo explain in their 2011 book Poor Economics ideology, ignorance and inertia need to be fought to alter the trajectory of poor nations. In India, that battle must be fought within our political and middle classes. For now, linguistic pride supplies claimants for this success – online Bengalis and Marathas vie to add Banerjee as one or half of their own, even if his work itself might be unfashionable. Robin Koshy is an economist. Views are personal.

Uber, knickers and other interpreters of maladies

https://thewire.in/economy/indias-slowdown-uber-knickers-and-other-interpreters-of-maladies Recently, Union finance minister Nirmala Sitharaman – riled by incessant criticism of the state of the economy under her stewardship – sought to identify culprits responsible for the malaise. The multiple organ failure of the economy needed culprits more proximate than Nehru who has hitherto ably absorbed blame for failings past, present and future. So the millennials – those born between 1981 and 1996 – had to take one for the nation. The immediate irritant was the plight of the automotive sector, an anomaly in India’s otherwise low-tech manufacturing sector, that has been tanking for the last ten months with no recovery in sight. A sector that contributes 7% to the GDP and directly and indirectly employs over 34 million workers has seen its worst slump in two decades. The minister sagely pronounced that we should look no further than the millennials who selfishly choose ride aggregators such as Ola and Uber over the pleasure of car ownership. Her diagnosis was neither endorsed by the captains of the car industry nor substantiated by the prevailing poor performance of ride-hailing companies. Even as her homespun wisdom reverberated through the echo chambers of Twitter, the otherwise pliant media unhelpfully released figures of falling sales of men’s underwear. This further evidence of a free downward swing of the economy, while a bonanza for meme producers, has not hung well with the minister’s argument. How was she to know that in an age dominated by men who sermonise muscularly and goosestep in vintage khaki shorts, there might be shortcomings beneath? Alan Greenspan, the former chair of the US Federal Reserve had famously identified the fall in men’s underwear sales as a sure predictor and proof of economic recession. When men, who view their underwear as a necessity rather than a luxury, are willing to wear them threadbare, you know the economy is taking a kick below the belt. People skimp on necessities – basic food or essential clothes – only in periods of serious economic recession. What are the other rough and ready indicators of an economy going limp? Along with knickers, Greenspan identified dry-cleaning as another area where customers skimp during downturns. Haircuts too reportedly become infrequent, whilst cheaper fast-food replaces the cost and luxury of eating healthier or dining in upmarket restaurants. Conversely, in the world of women, where fashionable lingerie is a relatively affordable luxury, the freefall of the economy lifts their sales. A plausible theory is that people will spend money on things that allow them to feel good inexpensively when going out is unaffordable; lingerie might also complement the joy of staying at home. The Hemline Index, first developed by George Taylor in the 1920s, is another index that draws conclusions from the jarring response of women to a good economic crisis. Taylor, an economist from a family of textile mill-owners, observed that hemlines rose with economic growth and fell towards the ankles during the recession. In the booming 1920s, it was possibly because women could afford silk stockings that they could show off with shorter skirts. This index has survived obdurately as compiling data has evidently been delightful labour for the ‘dismal scientists’. It has also proven to be accurate. A study conducted by academics at the Erasmus School of Economics using monthly data on the hemline and chronology of the economic cycle from 1921-2009 found that this urban legend holds, although hemlines lag the economy by three years. Alas, the Hemline Index might not be of much relevance to India where hemlines have remained stubbornly close to the ground, and any upward movement is policed closely, mostly by men in khaki shorts. The lipstick index too, which predicts an increase in the sale of greasepaint during an economic downturn is not an entirely dependent indicator for the Indian economy’s arcane ways. What might be good indicators for India? Do the length of queues in front of chole-kulche roadside stalls in Delhi indicate a similar trend as the demand for fast-food in the West? Do astrologers fare better in periods of uncertainty? Do Indians speak less on their cheap mobile phone lines? More morbidly, are farmer suicides an indicator of a failing rural sector? Or are onions sales India’s most reliable indicators? As R.K. Laxman’s Common Man wryly observed after Vajpayee lost state elections despite testing nuclear weapons in 1998 – to Indians, the onion is more important than the (nuclear) mushroom. Do the sprinklings of chopped onions on pav-bhajis and uttapams thin when the going gets tough? What jugaad indicators might aid Ms Sitharaman in reading the state of the economy? The answer should be – none. Jugaad and earthy wisdom are no substitutes for the complex expertise required for the serious business of running an economy such as India’s. Right-wing populist leaders from India’s Narendra Modi, US’s Donald Trump, UK’s Boris Johnson to Turkey’s Recep Erdogan, and their cheerleaders posture that the common man has had enough of experts. The real cost of this exile of experts from public discourse and policymaking bereft of rigorous data analysis is not just the occasional loss of face for populist politicians, but the mission failure of the state and its key institutions. Be it in running the Reserve Bank or implementing tax reforms in India, managing trade relations for the US or negotiating Brexit for the UK, economists, lawyers and statisticians have essential and irreplaceable roles. Macho politics of this generation needs to choose between making peace with geeky experts who can offer advice, and continuing to get their knickers in a twist while trying to feign proficiency. Robin Koshy is a London-based economist. Views expressed here are personal.

Can multilateral trade work for the poor?

ROBIN KOSHY Published in The Agenda, Issue 7, 2007 Protectionism, self-reliance and village republics are not enough to lift 1.3 billion of the world's poor out of absolute poverty. There is enough empirical evidence to demonstrate that trade can be a powerful catalyst for poverty reduction, that free trade with fairer policies will benefit the world's poor more than aid or charity. The problem is that World Trade Organisation negotiations and global trade are far from free and fair. THE RECENT COLLAPSE of the Doha Round of trade talks presents a dilemma to both champions of free trade and opponents of free trade. For supporters of free trade and multilateralism, the World Trade Organisation (WTO) provides the ideal framework for relatively unrestricted movement of goods and services, which will free markets, strengthen competition, spur innovation, and trigger growth and development around the world. Its apparent failure represents the undoing of years of progressive global integration and the success of protectionist governments and far-left outfits. To them, any doubts cast over the efficacy of multilateralism in reducing poverty are misplaced — free trade will cure all! They fear that repairing faith in multilateralism will take years, and alternatives such as Free Trade Agreements (FTAs), also known as Preferential Trading Agreements (PTAs), are a poor second choice. For opponents of economic globalisation, the WTO is the epitome of the West's neo-colonial agenda, the greed of transnational corporations, and the perpetration of the developing world's economic dependence. To them, the WTO is the rich world's negotiating range where developing countries are enmeshed in unfair trade agreements that diminish the policy space for national governments, open up domestic markets to the dumping of subsidised foreign goods and limit the access of producers from developing countries to rich country markets. The WTO represents a growing web of binding agreements that threaten to stretch beyond regulating goods and services, to controlling basic services and traditional knowledge. Opposing the WTO has served both as a rallying point and a profession for thousands of campaigners and advocacy outfits in the North and South. Now that the talks have stalled, most anti-WTO campaigners find themselves without a popular battle cry or answers about the immediate future of world trade. Understanding the WTO This crisis of purpose and surplus spare time that is beleaguering both ends of the ideological spectrum raises interesting questions. Firstly, what would the fence-sitter's view on the WTO be? To understand whether the WTO is mostly good or evil, one needs to take a closer look at its structure and founding principles. The WTO can be seen, simplistically, as the successor to the General Agreement on Tariffs and Trade (GATT), a trading system in existence since 1948 that provided rules primarily for trade in goods. The Uruguay Round (UR) of GATT negotiations (1986-1994) led to the creation of the WTO and saw its mandate expand beyond goods to cover trade-related aspects of intellectual property and trade in services. With the stated goal of helping producers of goods and services, exporters and importers to conduct their business, the WTO provides a forum for its member governments (149 at present) to negotiate trade agreements. While WTO agreements have enabled the liberalisation of trade in agricultural and manufactured goods, they also have rules to impose barriers where national and public interests are threatened. The WTO provides a rule-based framework based on agreements negotiated by governments that are binding in nature. Whether there is equity of negotiating capacity amongst member countries is a frequently debated topic, but it can be accepted that the WTO agreements provide a transparent and predictable set of rules for individuals, firms and governments. The WTO follows the 'one country, one vote' principle, where the weight of each country's vote is the same, unlike many other multilateral organisations. It does not, for instance, have a Security Council with veto powers! It also has a dispute settlement process that facilitates the settlement of differences on trade issues between countries, with retaliatory powers under a neutral process and established legal framework. This new dispute settlement mechanism that was agreed upon during the UR was a significant advancement over the dispute mechanism enshrined in GATT. In fact, the dispute settlement mechanism in the WTO is considered the most advanced dispute resolution mechanism in international law. The legal framework of the WTO is a lawyer's dreamland. The legal text, which has nearly 60 agreements, annexes, decisions and understandings running into thousands of pages, falls into several categories. At the highest level, it has 'broad principles' such as GATT (goods), General Agreement in Trade and Services (GATS) and Trade-Related Aspects of Intellectual Property Rights (TRIPS). Further, it has extra agreements and annexes for specific sectors and issues, and detailed 'schedules' of commitments made by individual countries on products and services allowed into their markets. At the narrow end, it has 'plurilateral agreements' — like the ones on civil aircraft and government procurement — that are agreements that do not have the approval of all WTO member countries. These are further underpinned by the dispute settlement and trade policy review ISSUE 7 2007 4 agenda mechanisms that settle conflicts and ensure transparency, respectively. This legislative framework of the WTO, which the voluminous legal text embodies, has some fundamental principles underlying it. The WTO seeks to promote trade without discrimination, whereby countries cannot discriminate between trading partners (all partners get Most Favoured Nation [MFN] status) and treat foreign and national products, services or persons equally (national treatment). It seeks to promote progressive liberalisation through negotiations that will contribute to the lowering of tariff and non-tariff barriers, and provide longer periods to developing countries to fulfil their obligations. It seeks to make trade more predictable by encouraging countries to 'bind' their customs tariffs for goods and market access commitments for services, removing quantitative quotas for imports and making trade policies transparent. Finally, the legal texts are also meant to create a set of rules that enable open and fair competition. Truly a picture of fairness, equity and transparency? Sadly, WTO negotiations and functioning have been very different in reality. At least part of the fear about it in the South is justified. The distribution of power at the negotiating table is skewed in favour of powerful trading blocs such as the United States and the European Union, while developing countries have struggled to influence the agenda. Till the Doha Round that began in 2001, developing countries were largely ineffective in altering agreements or commitments to protect national interests. Actual negotiating processes have been far from democratic, with Least Developed Countries (LDCs) and small nations often pressurised into accepting deals through a combination of sanction threats, aid, and closed room ('Green Room') meetings. This gunboat diplomacy of the trading powers has, in recent years, been challenged by the bigger emerging economies — namely Brazil and India. Cartels of developing countries, such as the G20 and G33, have rallied support on key issues to significantly influence the outcome of WTO negotiations. The glass ceiling in trade What have been the points of difference between the rich and the poor world, at the WTO? The numerous differences can be seen in simple terms. Poor countries have wanted greater market access for products in which they enjoyed comparative advantages, such as farm goods, textiles and leather. However, poor countries face tariff barriers on average four times higher than those applied when developed countries trade with each other. For example, textile quotas in developed countries were meant to have been progressively dismantled over a 10-year period up to the end of 2005. But significant liberalisation measures of benefit to poor countries like Bangladesh and Cambodia were not taken till the very last moment. This slow back-loaded rollback of quotas in a labour-intensive sector such as textiles that offers immediate economic benefits to developing countries was seen as testament to the developed world's lack of commitment in offering better market access. Developing countries had further demanded reductions in generous domestic support for farmers in rich countries that have made it impossible for them to compete on fair terms in the open market. For instance, US farm subsidies covered 72% of the total cost of production of rice in the country in 2003; today it is the third largest exporter of rice by virtue of these subsidies and the low tariff boundaries it has secured in many developing countries. Similarly, in 2002, Oxfam estimated that US cotton farmers (around 25,000 of them) get an estimated $ 230 per acre, which was more than three times the USAID budget to sub-Saharan Africa's 500 million people! Developed countries were also expected to make deep concessions in the markets for agricultural and industrial goods and services. In industrial goods, the US wanted India, Brazil and other developing countries to cut bound tariff levels even below their applied levels. For tariff reduction, the US favoured the application of a tariff reduction formula that would require developing countries, which generally had higher tariff levels, to make deeper cuts. The Doha Round buckled, as developing countries found these concessions indefensible domestically. The TRIPS Agreement has been another major flashpoint. The inclusion of the TRIPS Agreement was opposed by most developing countries as it was seen as a way for the WTO to bring intellectual property rights into a trade regime. The inclusion of the TRIPS Agreement was viewed as a major victory for US pharmaceutical firms, at a time when there were serious reservations about its suitability for the US itself. Innovation and research are largely led by developed countries, while developing countries are primarily end-users. Under the circumstances, strengthening the patent rights of technology-holders would, in effect, work as a resource transfer mechanism from South to North. However, more important than the financial aspect has been concern about how the stringent application of patent rights in the pharmaceuticals sector favours large transnational pharma companies and restricts competition from the manufacturers of cheaper, generic medicines. The affordability of medicines and the public health disaster that could arise from non-affordability in sub-Saharan and Asian countries has, in part, been assuaged by the Doha Declaration on TRIPS and Public Health. However, concerns remain about the possibility of pharma companies manipulating regulations in developing countries. Moreover, many countries, under pressure from pharma and business lobbies, have not made adequate use of the leeway that the TRIPS Agreement provides. There is also no delusion that TRIPS-compliant patent regimes are going to spur research in tropical, infectious and parasitic diseases that abound in the poor world — only $ 400 million of the $ 70 billion spent on health research in 1998 was spent on HIV/AIDS and malaria research (Sudip Chaudari, 2003). Ironically, 84% of the expenditure on research and development incurred by Indian companies in 1999 was on diseases prevalent in rich countries! Perhaps it has been the experience with the TRIPS Agreement that has made most developing countries vociferously oppose the inclusion of 'the Singapore issues' (named after four working groups set up during the WTO Ministerial Conference in The cost of trade liberalisation ISSUE 7 2007 5 Singapore in 1996) — investment, competition policy, transparency in government procurement, and trade facilitation. Although some progress has been made in trade facilitation, most developing countries prefer to make progress on these issues unilaterally rather than as a binding multilateral commitment. The remit of the GATS Agreement, especially where it expands to the liberalisation of financial services and utilities such as water and power, also faces obstacles in the developing world. Even where market access concessions were offered, it was typically in sectors where poor countries had no comparative advantage. The 'Everything but Arms' initiative of the EU has been derided as the 'Everything But What You Produce' initiative. The US too offered 97% duty-free access to LDCs, which was great so long as LDCs produced robots, advanced computers and jet turbines. The goods that they actually produced, such as farm products and textiles, were carefully packaged in the remaining 3%. To the surprise of the US, the developing countries denounced such offers. Instead, the offers bred the collective belief in the South that the North was negotiating in bad faith. Indisputably, there have been huge leaps in the negotiating capacity of countries of the South at the WTO negotiations. Many Western trade experts rummaging through the rubble of the collapsed Doha Round of talks have been apportioning ISSUE 7 2007 Desmond Roberts large helpings of blame on Brazil and India. Some analysts worry that developing countries, including India, have displayed inadequate interest in a Doha deal, and that this could affect the resumption of talks. However, there is no denying that many of the high ambitions with which the Doha Development Round was launched, in the aftermath of the 9/11 terrorist strikes in the US, as an opportunity to build solidarity across rich and poor nations and share the benefits of globalisation, have been buried. The Doha Round and the WTO have largely failed to improve access to rich-country markets for goods and services from poor countries, or to reduce the handicap of poor-world farmers competing with rich-world farmers pampered by generous government subsidies. The failure of the multilateral talks has been seen by many as the failure of multilateralism itself. Which brings us to the third question — is the multilateral trade regime good for development? Making sense of multilateralism There is enough empirical evidence to demonstrate that trade can be a powerful catalyst for poverty reduction. The success of East Asia in lifting nearly half-a-billion people out of poverty since the mid-1970s can be attributed to export-led growth that generated employment, created investment opportunities, enabled the production of goods with a higher technology component, and created linkages that filtered benefits to the Trade and poverty reduction 6 agenda rural economy. Oxfam's 2002 trade report, 'Rigged Rules and Double Standards', had suggested that 128 million people could be lifted out of poverty if Africa, South Asia, East Asia and Latin America increased their share of world exports by 1%. Contrary to what many detractors of global trade might believe, autarchy, protectionism, self-reliance and village republics are not enough to lift 1.3 billion of the world's poor out of absolute poverty. If the alternative to trade as a catalyst is aid, then there is no doubt that most LDCs would opt for trade. In his book, Trade Policy and Global Poverty, William Cline of the Centre for Global Development established on the basis of empirical analysis that liberalisation in agricultural trade would be the most powerful way to reduce global poverty, as three-fourths of the world's poor live in rural areas. The poor in villages are more likely to be dependent on farming, and any increase in export opportunities would leave them better-off. He estimated that global free trade could increase agricultural prices by 10%, hike real wages of unskilled labour in developing countries by 5% and boost the global economic welfare of developing countries by US$ 90 billion annually. This could pull an estimated 200 million people out of poverty, or even 650 million people, if one factors in capital investment and a period of 10-20 years. Poverty reduction gains are highest from liberalisation of agriculture and textiles. The US$ 90 billion that developing countries could gain would tower over the US$ 50 billion that developing countries receive in aid. Free trade with fairer policies and trade relations that are not skewed in favour of rich countries would benefit the world's poor more than aid, charity and preferences. Those who are dismissive of the WTO should also remember that the alternatives are not attractive. FTAs/PTAs — regional and bilateral — will take over where multilateralism ends and, unlike at the WTO, poor countries cannot fire from the shoulders of bigger countries like India or Brazil with better negotiating capital. Each country will be pitted against the trading and negotiating clout of the US or the EU. FTAs have been growing rapidly since the 1990s, and there could be as many as 300 by 2008. In the last six years, the US has concluded 14 FTAs and it is currently negotiating 11 more. The EU is following a similar approach, and the underlying logic is clear. Developed countries have been effectively using the regional and bilateral route to extract commitments that developing countries collectively refuse at the WTO. In fact, the regional route has been used either to make existing commitments at the multilateral level more stringent, or to facilitate the entry of non-trade issues. During the Tokyo, Uruguay and Doha Rounds, the US used bilateral and regional agreements with developing countries to extract commitments on agricultural subsidies and intellectual property rights that these countries collectively refused to give in to at the multilateral talks. Indeed, US FTAs that are being concluded with developing countries are replete with clauses more stringent than those in the WTO agreements. FTAs between developing countries have become rampant too. Many hope that the web of FTAs and associated trade discrimination will ultimately push nations back to the multilateral trade regime. The optimists among them hope that this will lead to a WTO system with fairer governance and operation. The rule-based framework that the WTO provides is indeed the best forum for poor countries to ensure that the global trading system is not an exchange where each country protects its own special interests. Genuine free and fair trade will see countries specialising according to their comparative advantages. Finally, it needs to be noted that not all the ills of trade can be blamed on the WTO and developed countries. Developing countries and their institutions are equally culpable. The social and economic shocks that are frequently blamed on trade liberalisation are accentuated by weak institutions and policies, at the national and regional levels. Few developing country governments integrate trade policies or, for that matter, agricultural and industrial policies within their overall poverty reduction strategies. Economist Dani Rodrik has highlighted the importance of property rights, regulatory institutions that correct the operation of markets (such as SEBI and TRAI), institutions for macroeconomic stabilisation (RBI), social insurance (for example, job security and welfare) and institutions that manage social conflict (for instance, effective police, free media and independent judiciary) in boosting economic growth. One could argue that this is common sense, but not many developing countries can claim to be following these maxims. Inequalities in access to education, health, assets, markets and finance keep the poor from reaping the benefits of trade and growth. In a review of evidence linking trade liberalisation to economic growth in the Economic Journal (2004), Alan Winters cites the work of economists like Ann Krueger and Arnold Harberger that demonstrated that trade liberalisation reduces avenues for corruption and improves competition. Corruption (or 'rent seeking', as the euphemism of the economists goes) is higher in countries with strict industrial polices such as licensing, and simple, non-discretionary policies reduce the scope for it. Further, openness improves access to the intermediate goods and heavy machinery that are needed to increase production. Reduced corruption, a skimpier bureaucracy, improved competition and better access to intermediate goods contribute to economic growth. This is another dose of common sense that suggests that good governance at the national level can contribute to shared prosperity and poverty reduction. There is no doubt that trade is poorly managed at all levels, and that reforms are indeed necessary. The current hiatus in the trade talks is an opportunity to correct some of the imbalances at the WTO and at national levels. The champions and opponents of free trade need to find a middle ground where sloganeering is replaced by consensus on a new order for making world trade work for the poor as well. Robin Koshy is a trade economist based in London. The views expressed in this article are his personal views

Chasing the Agricultural Market Access Mirage

with Prabhash Ranjan

First published in The Business Standard on July 23, 2005

When the heads of the earth’s most powerful countries met at the G8 summit in Gleneagles, Scotland earlier this month, there was no shortage of prose to underscore the importance of trade for development, particularly for the least developed nations of Africa. Less than a week later, when trade ministers from 30 World Trade Organisation (WTO) member countries, including those from the G8, met at Galian, China to accelerate the pace of negotiations under the Doha Round, progress was agonisingly slow. The Mini-Ministerial meeting that got over on 13th July was, it seems, let down as always by the perennial slip between the cup of wishful hopes and the lip of harsh realities of the negotiating process.

If trade is to help make poverty history, then agriculture is the area where progress needs to be made urgently, as more than two-thirds of the people living below poverty work on farms in the developing world. The meeting disappointed, although a fresh proposal from the Group of 20 (G20) countries to provide ‘the basis for further talks on methodology to cut tariffs in agriculture’, provides a ray of hope. What does this offer in bridging the yawning gap between developed and developing countries on the methodology of agricultural tariff reduction and does it safeguard the interests of the Southern countries adequately?

Based on the tiered approach given in the July Package for tariff reduction, G20 has proposed that the tariff rates of developed countries be divided in five bands and that of developing countries into four bands and then tariffs within each band be subjected to linear cuts. (More bands for developed countries, simply because they have a higher variance between maximum and minimum tariff rates for different products.) Higher tariff bands will then be subject to greater linear cuts in order to meet the target of high tariff reduction, as warranted by the Doha mandate and the July package. Further, the proposal states that the tariff reduction by developing countries would be less than two-third of the reduction undertaken by developed countries. This proposal of G20 is significant as it is the first attempt to operationalise the tiered approach for reducing the agricultural tariffs. Initial reports emanating from Dalian suggested that EC and US favour this proposal although the Cairns group countries such as Australia and Switzerland were against it.

In protecting the interests of the developing countries that G20 represents, two premises are important. Firstly, developing countries have a defensive interest in protecting their vulnerable farm economies. Any tariff-cutting exercise should not impose an undue burden on them to drastically reduce their tariff rates and bear the adjustment costs. Secondly, tariff-cutting exercise should lead to substantial improvement in market access for developing countries by steeply cutting the tariff rates in developed countries. In other words, from a developing country perspective, any tariff cutting methodology should be soft on developing countries and hard on the tariffs of developed countries. The negotiating issue would then be the degree of softness and hardness of the tariff cutting methodology.

The G20 proposal meets the defensive interests of developing countries well. By proposing a linear approach for developing countries, the proposal ensures that the tariff cutting exercise would be soft on developing countries. For instance, for a country like India that has an average bound tariff rate of 116 percent in agriculture and maintains a bound tariff rate of 100 percent or more on 536 products out of 671 products (HS 6 digit level), a linear approach for tariff reduction is an appropriate way forward in the tariff cutting exercise.

However, the G20 proposal falters on the latter issue of substantially improving market access for developing countries. Developing countries face formidable tariff barriers in developed countries in the form of tariff escalation. For instance, in Japan, the bound tariff rate on raw sugar is 224 percent and this climbs to as high as 328 percent for refined sugar. Canada levies 9 percent on raw sugar and 107 percent on refined sugar. The respective bound tariff rates for raw and refined sugar in EU are 135 per cent and 161 percent respectively. The story is the same if one looks at the tariff rates on cocoa beans vis-à-vis chocolate or fresh orange vis-à-vis orange juice. The net effect of these differential tariffs on raw and processed commodities is that it is difficult for developing countries to move up the chain of value addition. The G20 proposal that advocates a linear approach would lead to less reduction in tariffs as compared to the non-linear Swiss formula. It should instead have called for developed countries to undertake steep reduction in their tariff structures by adopting a non-linear approach embodied in the Swiss formula within the five bands.

The G20 submission also proposes the maximum tariff limit to be capped at 100 percent for any individual product in developed countries. This high tariff cap is rather generous of the G20, considering the fact that developed countries such as Japan, EU and the US have 579, 85 and 45 products respectively, that have bound tariff rates equal to or more than 100 percent.

One must not ignore the importance of the G20 proposal in breaking the impasse and bridging the divide between the developed and developing countries on the tariff reduction formula. Nevertheless, it is pertinent to ponder the cost that such an agreement imposes on the developing countries that have a lot at stake and too few good cards to play with. In the negotiations ahead, US, EU and other developed nations will no doubt demand, and perhaps secure milder cuts and higher tariff caps. It could be interpreted that the G20 proposal is closer to the ‘fallback position’ rather than the ‘negotiating position’ for developing countries. Further, there are indications to suggest that if developed countries do agree to this G20 proposal, they could ask developing countries for concessions in other areas of trade negotiations such as industrial products, where India is already in a tight spot on the issue of tariff reduction methodology.

No doubt, the present round of negotiations is an opportunity for developing countries to negotiate and bargain for greater and deeper cuts in the tariff rates in developed countries. Missing this opportunity will only postpone the reforms in agricultural trade much to the detriment of the farmers in the South and progress has so far been slow. As Celine Charveriat of Oxfam puts it candidly, at the current rate, countries would not even have agreed on the seating plan, let alone a framework for agricultural reform by the time the WTO Ministerial Meeting happens in December 2005!

However, the G20 should not press for an agreement at any cost, as having no agreement is always better than a bad agreement. At Cancun in 2003, the G20 had demonstrated its resolve in wrecking the talks rather than accepting a negative agreement. Developing countries have to be vigilant to ensure that unlike in the Uruguay Round, the Doha Round leads to a balanced outcome. Better an agreement about the seating plan on the deck of a sinking ship than on a ship sailing into the past.

Patently in National Interests?

First published in the first issue of Trading Up in April 2005

In 1977, Donald Smith and his father, Frank Smith, of Orlando, Florida secured the US Patent No. 4,022,227 for a hairstyle that would enable ‘patients’ with partial baldness to cover their pate by growing hair longer on the sides and combing it over. While the prevalence of this patently unflattering ‘combover’ style precedes the Smiths’ patent, its popularity has remained unabated to this day. The Smiths have, however, failed to garner even a dime through royalty, despite the sanction of the law. An Ig Nobel Prize for absurd and improbable research in 2004, with no monetary benefits, is the biggest reward they have yet got for their thought.

Not all frivolous patents go unrewarded. When such patents are in the realm of medicines and have a public health implication, then the reward for the patent holder can be at considerable costs to the larger public good. India has been the key protagonist of a long-drawn-out drama, to set in place a national patent regime that provides incentives for research and development (R&D), prevents abuse of patents and protects public interests (public health in particular) while meeting its international obligations under the Trade Related Intellectual Property Rights (TRIPS) Agreement. A stage show, that has had global and national audiences and actors comprising civil society groups, national and multinational pharmaceutical firms, least developed, developing and developed country governments; economists, lawyers and lawmakers.

From a simplistic and narrow pharmaceutical perspective, instituting a patent regime that is compliant with the TRIPS Agreement, required repealing the controversial feature of the Indian Patents Act 1970 that enabled process patents whereby domestic firms could develop generic copies of patented drugs by following a different manufacturing process. This needed to be replaced with a system that allowed product patents with 20-year validity for pharmaceutical products. Successive amendments of the Act in 1999 and 2002, an Ordinance in 2004 and the recent Amendment Bill in March 2005 have all been key milestones on the route to compliance. While campaigners for access to cheaper medicines express disappointment at amendments that exceed the requirements of the TRIPS Agreement, coalition equations and rediscovery of ‘national interests’ by political parties paved way for a final bill that was not as excessive as it could have been.

Several questions abound about the efficacy and impact of the new law. Is it all good and does it reflect a consensus of national interests, as the government believes? Will it be able to ensure affordable drugs and treatment in a country where the per capita health expenditure was as low as US$ 22 in 1998? Will the current Bill improve access to more effective treatments and drugs for diseases prevalent in India? Can the domestic industry cope with the opportunities and challenges that will arise?

Some Good, Mostly Bad?

Indeed, there are many broad positives in the new bill. Pre-grant opposition that would enable a member of public to challenge a patent application before it is granted has been restored. The process of issuing a compulsory licence (CL), that will enable the government to authorise a third party to produce a patented drug in the event of a national emergency (for example a plague epidemic) has been sped up. Further, exports to countries with inadequate manufacturing capacities are also permitted under CL. The bill also provides a measure of immunity to producers of generic versions of drugs that have application pending in the mailbox from excessive royalty demands and litigation.

However, considerable ambiguities that could dilute the gains persist. Firstly, what can be patented (scope of patentability) under Section 2 of the Bill that accepts ‘inventive step’ as a feature that involves technological advance, economic significance or both, opens up possibilities for pharmaceutical firms to file patents for marginal improvements on known molecules or by merely citing economic potential. Not specifying pharmaceutical substance as a new ‘chemical’ entity could allow formulations, isomers and other incrementally modified drugs to be considered as new inventions. If one views the 8926 mailbox applications for patents that the Indian Patent Office received during 1999-2004 against the 274 new chemical entities that the US Federal Drug Administration approved during 1995-2004, it would be naive to conclude that we are in the midst of a pharmaceutical revolution. Evergreening of patents to extend monopoly rights by citing trivial advances, therefore, still remains a possibility.

Secondly, while the Bill allows for public and interested parties to oppose patents before they are granted, it is unclear whether challengers to patent applications will have access to all relevant information. What is clear, however, is that the controller of patents has the final say and contestants will have no room for appeal at the pre-grant stage.

Thirdly, producers of generic versions of new drugs in the mailbox can continue to produce them even after grant of patent, if they were producing them before 1^st January 2005. These generic manufacturers who have made ‘significant investment’ will however, have to pay a ‘reasonable royalty’. The subjectivity over ‘significant investment’ and ‘reasonable royalty’ opens them for interpretation. Besides, where a web of patents (patent thickets) covers a single pharmaceutical product, the prohibitive cumulative royalty that the generic producer might end up paying could make drugs frightfully expensive.

Fourthly, the Bill stipulates that applications for CL will be considered only three years after the grant of a patent. When better drugs that can save lives exist, the issuance of compulsory licences to ensure availability and affordability should have been weighed by public health concerns, albeit with justifiable royalties to the patent holders.

The Bill assigns considerable discretionary powers to the office of the Controller of Patents in framing rules and in deciding on pre-grant opposition. While such powers might enable faster decision-making process, it is worth debating whether the Patents Office has the requisite management, technical and infrastructural capacity to face up to the challenges that the new Bill brings.

A Consensus through Consultations?

Nevertheless, civil society organisations (CSOs), public health campaigners and the domestic pharmaceutical firms have been celebrating the minor gains that moderated the final Bill significantly from the December 2004 Ordinance. In all fairness, the turn of events that swayed the governments to incorporate some of the TRIPS flexibilities was perhaps more a fallout of realpolitik and political realignments than a willingness on the government’s part to listen to civil society and public opinion. This is disconcerting. For one, in a democracy, defining and protecting national interest is not the sole preserve of the government. For all the competence that the government machinery might embody, public sentiments, even if India were insular to the pleas of other developing countries dependent on it for cheap generic drugs, need to be respected.

Besides, popular opinion was not predominantly in favour of India reneging on its commitments, but to operate within the flexibilities that the TRIPS Agreement and Doha Declaration allowed to ensure access to cheaper medicines and drugs. In a country where public health expenditure was 0.9% of the GDP in 2002 (WDR, 2004), 97% of the private expenditure on health is out of the pockets of patients (WHO, 1998), and less than 50% of the population have access to essential drugs or have been immunised (WHO, 1998), public health concerns need to be accommodated sufficiently while defining national interests.

Cheaper Drugs, Better Drugs?

Will the prices of drugs and health care rise? Kamal Nath, Union Minister for Commerce and Industry, has tried to allay fears of galloping drug prices by pointing out that 97% of the drugs are off patent and none of the drugs on the Essential Medicines List are on patents. Estimates of the value of drugs that would get into the product patent regime vary from US$140 million based on the Minister’s figures to US$ 700 million according to the Pharmaceutical Research and Manufacturers Association of America (PhRMA). How much of these estimated values get transferred to the end-customer as a mark-up on price and by when, remains to be seen. India will have to plan ahead to establish a credible and comprehensive mechanism to monitor and enforce affordability and accessibility of essential medicines, once they come under patents. Canada’s Patented Medicines Prices Review Board that exclusively monitors the prices of patented drugs provides a model for emulation.

Will the current Bill improve access to treatment and R&D for new drugs in a largely poor nation with a high incidence of tropical and communicable diseases? Reverse engineering facilitated by the Indian Patents Act 1970 helped create a strong domestic pharmaceutical industry with the capability to develop cheaper generic versions of patented drugs. As a consequence the share of domestic pharmaceutical firms in India increased from 32% in 1968 to 77% in 2003 (UNCTAD, 2004). Although India accounts for only 1.5% of the global pharmaceutical market of US$ 480 billion, it accounts for an estimated 20% of the global consumption (Goldman Sachs, 2004). The difference in value and volume would indicate that Indian firms service the high volume–low priced segment of the market.

Domestic Industry to the Fore?

Can the domestic industry shift from being primarily a producer of cheap generics to a developer of proprietary drugs, new drug delivery systems and new chemical entities? India has several advantages. It has 64 United States Federal Drug Authority approved producing plants, the most outside the US. It has cheaper, yet highly skilled labour, low clinical trial and fixed asset costs. (UNCTAD, 2004) Indian firms, such as Ranbaxy and Dr. Reddy’s are committed to increasing their R&D expenditure to 10% of their revenues from around 7% today (Economist, Sept 2003).

However, these advantages have to be put in perspective. Pfizer’s global R&D expenditure of US$ 7.1 billion is roughly the size of the entire Indian pharmaceutical industry’s domestic and export market. It is estimated that the industry spends up to US$800 million to bring a new molecule to the market (DFID Report “The Effect of Changing Intellectual Property on Pharmaceutical Industry Prospects in India and China”, 2004). Even if money can buy more in India, drug development costs are astronomical. Which is perhaps why domestic firms, namely, Ranbaxy, licenses new discoveries to multinational firms for trial and development (Economist, September 2003). So long as this remains a viable strategy, R&D of these companies might focus on drugs that are relevant to the market of the multinational partner. Observers point out that even if R&D expenditure by Indian firms go up, it is likely to focus on areas where they can make quick money – diseases more prevalent in rich countries, such as cardiac diseases and diabetes. In 1999, only 16% of the R&D expenditure in India was spent on infectious and parasitic diseases prevalent here (DFID, 2004). Product patents will be beneficial to India if it leads to research and development for the supply of new drugs relevant to its disease profile.

For this to happen, Indian firms will have to buck the current trend and invest more in diseases such as AIDS, dengue, malaria and tuberculosis. Current figures are heavily skewed against poor man’s diseases. The Commission on Intellectual Property Rights reported in 2002 that firms tend to spend on drugs that have a market potential of around $1 billion per annum or more, which is not often the scenario for drugs meant for developing country markets. Of the 1223 drugs introduced between 1975 and 1996, only 13 were aimed at tropical diseases. Only US$ 400 million of the US$70 billion spent on health research was spent on research on AIDS and malaria in 1998 (Sudip Chaudari, 2003).

If the product patent regime leads to an era where even Indian domestic firms move on to more lucrative segments of the markets, then the repercussions on public health in the developing world could be catastrophic. Public policy initiatives to address this market failure have to be strengthened. Public-private partnerships, public investment in R&D, providing incentives to private firms for research could be some of the strategies. Bold approaches are also called for. The Institute for OneWorld Health, a US based not-for-profit pharmaceutical company follows an interesting model. It gets owners to donate intellectual property on drugs for diseases with huge public health impact but no market potential (for example, diarrhoea, which kills 2m people a year in developing countries), raises funds from donors and gets researchers to contribute their expertise, mostly for free.

Defining National Interests…

The US Special 301 Report of 2004 states rather unabashedly that the United States will advance its national interests in guaranteeing a higher degree of intellectual property protection through a variety of mechanisms including the negotiation of free trade arrangements and the use of Generalised System of Preferences. If the Indian government were ever to articulate its national interests in such a manner, it would be welcome to see it defining the accessibility and availability of drugs to millions of poor in India and elsewhere as one of the key guiding principles while administering the new patent regime. A patent regime that ensures access to new drugs for diseases prevalent here at affordable prices. And keeps innovative hairstyles and frivolous patents out.

Fair Trade: For Better or Worse?

(Published in The Business Standard on 10^th May 2005)

In 2003, the United States exported 3.8 million tonnes of rice, making it the third largest exporter in the world, trailing only behind Thailand and Vietnam. This is despite the fact that it costs twice as much in the US to grow rice than it does in the other two countries. Such sterling export performance has been aided by the US$ 1.3 billion (72% of the total cost) that the American rice farmers got as subsidies in 2003! (Oxfam Briefing Paper 72: Kicking Down the Door, 2005)

Not all countries can afford to bankroll their way to a comparative advantage in trade, especially when there is none. Certainly, not the developing countries. The dictum of classical economic theory where trade specialisation takes place according to comparative advantages is out of operation in a trading architecture riddled by trade distorting domestic support and high tariff boundaries. Will free trade that removes these distortions especially in developed countries, restore comparative advantages of developing countries in agricultural commodities, increase their export earnings, boost wages of their unskilled labour and stimulate economic growth in general?

Arvind Panagariya of Columbia University, thinks otherwise. His conclusions are born out of the fact that most of the least developed countries (LDCs) are net importers of agricultural commodities – 45 of the 49 LDCs import more food than they export. In his paper, ‘Agricultural Liberalisation and the Developing Countries: Debunking the Fallacies’ (2004), he contents that if subsidies are removed, the net importers of food will end up paying more for food. This loss will not be offset, unless they can become sufficiently large net exporters. Cut in rich country subsidies will therefore benefit only big agricultural exporters such as Brazil and Argentina, while most LDCs will be worse off than they were before. Although his arguments are not backed by substantive empirical analyses, some other studies estimate that larger countries will benefit, while smaller countries in the same regions will suffer (for example India will benefit, while the rest of South Asia will lose out). If poor countries emerge as net losers, it could stem their enthusiasm for the Doha Development Agenda and jeopardise liberalisation of trade in future.

Therefore, he argues that the poorest nations are better off with high domestic subsidies in developed countries so long as they get preferential access, while larger developing country exporters are kept out by high tariffs. He cites the European Union’s Everything But Arms (EBA) initiative (or more precisely, Everything but Arms, Bananas, Rice and Sugar initiative!), that gives duty and quota free access for LDCS to sell at the high prices prevalent in the EU markets.

William Cline of the Centre for Global Development draws diametrically different conclusions about the impact of trade liberalisation on the basis of his empirical analysis and economic modeling in his book ‘Trade Policy and Global Poverty’ (2004). He argues that liberalisation of agricultural markets is the most important way to reduce global poverty as three-fourth of the world’s poor (living on less than US$2 a day) are in rural areas. Rural poor are more likely to be dependent on farming and any increase in export opportunities will increase their income. The gains of the rural poor will outweigh the losses of the urban poor and there will also be a redistribution of income from cities to villages. Cline estimates that global free trade could increase agricultural prices by 10%, hike real wages of unskilled labour in developing countries by 5% and boost global economic welfare of developing countries by $90 billion annually. This, he estimates could pull 200 million people out of poverty, or 650 million people, if one factors in capital investment and a longer term period of 10-20 years. Welfare gains are highest from liberalisation of agriculture, followed by textiles and apparels.

The US$90 billion that developing countries could gain will dwarf the US$ 50 billion that developing countries receive as aid. Yet another argument, in favour of freer and fairer trade over aid and preferences. Interestingly, this corroborates Oxfam’s calculation in its trade report in 2002 (Rigged Rules, Double Standards) that put the loss to developing countries due to rich country trade restrictions at US$100 billion a year. Cline cites evidence that only a sixth of the world’s poor live in the net food importing countries and estimates that over 130 million people could be pulled out of poverty in India and China alone. If this were put in the perspective of the global target of halving poverty by 2015, it would reflect significant advances in the two biggest battlefields. Here, one of Pangariya’s arguments merits consideration – trade liberalisation has adjustment costs that could impact smaller and poorer countries more. Hence, compensation programmes need to be designed smartly to factor these costs in and prevent these countries from being disenchanted.

However, to cite these adaptation pangs and static losses to net food importing countries as reasons enough to preserve status quo and debunk trade liberalisation where it is needed most, is strange. As strange as the American comparative advantage in rice. Moreover, it cannot be ignored that many LDCs are net food importers today due to pressures from beyond their borders. Rice imports to Haiti, an LDC, increased by 150% between 1994 and 2003 after the International Monetary Fund forced it to cut rice tariffs from 35% to 3%. Ironically, three out of four plates of rice consumed in Haiti today come from the US. Any guesses on the number of empty plates in the homes of impoverished Haitian rice farmers?

Panagariya, A., ‘Agricultural Liberalisation and the Developing Countries: Debunking the fallacies’ , 2004

Cline, W., ‘Trade Policy and Global Poverty’, Centre for Global Development, 2004