INDIAN ECONOMIST PANKAJ GHEMAWAT: ‘Employment against extreme right and nationalism’

The 2008 financial crisis and the lingering economic crisis are increasingly putting the economic globalization under pressure. Pankaj Ghemawat, an internationally renowned economist of Indian origin, thinks that there is plenty of space for more international integration. On the condition that efforts are being made to urgently increase employment.

Pankaj Ghemawat (°1959, Jodhpur, India) was a teacher at the Harvard Business School for 25 years and became the youngest full professor at Harvard. Since 2009, he is working at the IESE Business School in Barcelona. In its September edition on employment, The Economist quoted Ghemawat and Flemish Minister-president Kris Peeters referred to his work when he launched his “Flanders in Action” campaign a few years ago. Pankaj Ghemawat visited Brussels in the beginning of September following the invitation of the European think-tank Bruegel.

His presentation on European integration was based on the conclusions of one of his most recent books, World 3.0. Global Prosperity and How to Achieve it. Using figures and statistics, Ghemawat demonstrates that today’s economy is much less globalised than opponents and proponents think. Not more than two percent of all phonecalls are international. Only two percent of all university students study abroad. Only three percent of the world population is a first generation migrant. Only nine percent of all fixed investments can be categorised as “direct forecign investments”. And of all global trade, no more than 20 to 30 percent is bordercrossing.

These are important observations, says Ghemawat, because proponents of globalisation think that there is hardly any possibility to gain more profit from further global integration, as “earth is already flat”, in the words of Thomas Friedman. Critics like the Turkish economist Dani Rodrik emphasise that the deep economic integration is threatening national sovereignty and the nation states’ ability to make independent choices. And as mass democracy is nowadays only shaped within the borders of nation states, this would imply that extensive globalization is incompatible with maintaining or enhancing mass democracy. According to Ghemawat, ‘these are important matters, but given the fact that the level of economic integration is far less than generally assumed, they are not yet at issue.’

Also within the European Union, the Member States’ borders remain very determining for trade, says Ghemawat. Jean-Claude Trichet, the president of the European Central Bank recently claimed that the EU is almost as integrated as the US, but Ghemawat calls this an ‘outrageous exaggeration with dangerous implications if the policy would be based on this presentation of the reality.’ Even in Belgium, he says, 80 to 90% of all goods and services consumed are produced in Belgium. And Belgium has the EU’s most open economy, both for import and export. In other words, national borders still play a very important role in the economic activity, even though studies reveal that such borders decrease the intensity of trade by 66%.

Pankaj Ghemawat: ‘I once calculated the impact of borders to the Catalan borders, knowing that there is a strong tendency in Catalonia to gain independence of Spain. If Catalonia was to be separated of the other Spanish regions by a real national border, gross national product would drop by 12%. When I presented these calculations at the Flemish Scientific Economic Congress, I was asked whether these figures would apply for the a possible Flemish independence. But as there are no available data on interregional trade within Belgium, a calculation proved to be impossible. In these conditions, how can you know whether a separation would be a good idea, strictly economically speaking? Nevertheless, the strive for autonomy or for an independent state within Europe is often presented in economic terms, both in Catalonia and in Flanders. In reality, these claims have a cultural ground, based on a –often historically rooted – mistrust against others.

How can this cultural distance and the economic cost be reduced?

Pankaj Ghemawat: The first step is to increase the availability and accessibility of sound, trustworthy information on people and groups to whom we usually refer in terms of prejudices and generalizations. Recent market research in Germany confirms that there is not enough foreign news coverage and that negative news items are ten times as numerous as positive ones. No wonder that the population is convinced that it should be protected against foreigners and foreign countries. In this context, politicians should be much more conscious of the impact of their words.

I also strongly believe in investing in more interaction. An initiative like the Erasmus programme for European higher education students probably contributes much more to the creation of a European identity than many more expensive initiatives. Similar schemes can be set up between regions which are unfamiliar or mistrusting each other. Furthermore, investing in education as such is already a good policy to reduce cultural distances. Research has shown that there is a positive correlation between having a higher education level and less mistrusting foreigners. And the most crucial of all is probably to ensure that unemployment rates are as low as possible. In situations of high unemployment, there is always a tendency to look for someone to blame. And often this search leads to people which are different.

Isn’t it so that the economic crisis creates unemployment?

Pankaj Ghemawat: Today in the United States there are seven million jobs less than there were in December 2007. In August employments rates did not go up, but even if from this month on there would be a monthly growth of 100,000 jobs, it would take until the end of 2017 to reach the 2007 level again, regardless of the natural increase of jobseekers in the meantime.

Can the Tea Party’s success and their radical rejection of government interventions be explained by the economic decline of the American middle class?

Pankaj Ghemawat: The Tea Party’s main sponsors are not part of the people who impoverished in the past twenty years, to use an understatement. Indeed the Tea Party is to a large extent a scream of rage, in a similar way as the Spanish indignados are screaming out their anger against the “system”. Extremes are touching each other ever more clearly.

‘If Catalonia was to be separated from the other Spanish regions by a real national border, its gross national product would drop by twelve percent.’

A German study from 2010 concluded that for each percentage of decrease in economic growth, there is about one percentage of additional support to extreme right or nationalist parties. This effect is even stronger in countries with a relatively balanced income distribution. The attractiveness of right wing parties in times of economic decline and high unemployment should convince centrist parties to speed up and increase their efforts to reduce unemployment.

Nevertheless, employment seems to be lower on the priority list than rescuing banks.

Pankaj Ghemawat: To address the crisis and unemployment, the Spanish prime minister José Zapatero invited the 37 largest companies to a round table conference last year. Alltogether, these companies accounted for no more than five percent of employment in Spain. The sector of small and medium sized enterprises (SME) is much more important for the creation of employment. Also in the US, the emphasis is continuously on large re-launch plans or on innovative sectors, while government investments are actually much more effective in the SME’s.

Few people seem to be aware how dangerous unemployment is for the social welfare which we treasure so dearly. An economy like the Spanish one, with 45% of the university graduates cannot find a job, ultimately creates a society in which a large number of people have no interest in its well-functioning. In Europe, all discussions and policy proposals always go back to the Lisbon Objectives, based on innovation. However, all academic research reveals that job creation is better and faster achieved by imitating successful examples, as a result of which relatively small companies can gain small productivity profits.

In your opinion, which country has a successful employment policy?

Pankaj Ghemawat: Singapore. The country is fortunate to be part of a growth region and to have manageable scale – even though a population of 6.5 million inhabitants is not ridiculously small. But Singapore also had to manage its ethnic diversity, has no natural resources and, when it gained its independence 50 years ago, no future perspectives either. Despite all this, they managed to build up a prosperous country.

Does this have to do with the fact that Singapore was governed by the Chinese?

Pankaj Ghemawat: I’m always very reluctant when I hear cultural explanations for economic success. Growing up in India in the seventies, it was commonly accepted –also in India – that our slow economic growth was caused by Hinduism and its presupposed fatalism. In the meantime, nobody is mentioning this anymore, now that in and outside India these same Hindu’s turn out to be extremely successful entrepreneurs, if they are not hindered by unnecessary administrative burdens.

Is free trade always a solution?

Pankaj Ghemawat: All reliable research suggests that increased global economic integration would be beneficial, also for developing countries. The absence of an actual regulation, however, has ended the public support for this enhanced integration. Marine Le Pen and her Front National now want to counter the crisis by closing down economic borders and by regulating the national economy. Business schools are reluctantly admitting that the financial world may have made some mistakes, but they only believe in a moral call for increased responsibility in their actions, certainly not in a better regulation or control of the financial and economic players. None of these both positions seems useful to me to overcome the current impasse.

Some countries were ruined by the way in which globalisation has been organised or imposed. You have been referring to the Haitian example.

Pankaj Ghemawat: Thirty years ago, Haiti was still exporting rice. Today, Haiti is importing 80% of its own rice consumption. This is the consequence of an imposed liberalisation of the rice market in the nineties. This resulted indeed in low consumer prices ($3.80 per kilo imported rice vs. $5.12 for one kilo of Haitian rice), but also in a country-wide impoverishment. The income of the farmers, the majority of Haitians, dropped significantly.

Is this an argument against globalisation for weaker states?

Pankaj Ghemawat: It is especially an argument pro well targeted regulation of economic globalisation. Because if measures are taken to make the import of rice more difficult or impossible, rice producers would mainly get a low price and not be stimulated to produce more. Developing good policies in countries like Haiti, where twenty to thirty percent of the population is living off the harvest of one crop, is not easy. But even there it would be better to take specific time-bound measures to support the rice farmers, than to have a general subsidy policy. This sort of non-discriminating approach ultimately makes especially the speculators happy and almost never reaches the poorest.

When India and Thailand decided to limit or suspend their rice export during the 2008 crisis, this decision mainly led to a further rise of the rice prices on the world market. In any case, no more than five percent of the worldwide rice production is being traded internationally. Reducing this share to three percent is not solving the shortage. It is much more wise to provide food subsidies to people who really need it and to escape starvation.

In many countries, India to name one, such subsidies are often the cause of corruption.

Pankaj Ghemawat: This is a real concern and a major problem in India. But well-oriented subsidies do not cause more corruption than the current system in which rice consumption is subsidized for everyone. In India, decision makers and politicians are increasingly paying attention to inclusive growth. The government developed interesting programmes to achieve this inclusive growth. The reality is less colorful.

Now there is an objective to provide all people with identity cards, ideally linked directly to a personal bank account. This would allow to transfer money from Delhi directly to the needy, without any intervention of officials, politicians or other third parties. In India, this would be a more than welcome opportunity. Nowadays, if one wants to be elected in India, it is almost inescapable to engage with criminal financers of some sort.