June 1, 2003

‘While the global economy is still dictated by the US-led West, there are strong indications on the ground that the Chinese have the mechanism in place to give a tough time to the existing mechanism,’ says Rahman Sobhan

RENOWNED Bangladeshi economist Professor Rehman Sobhan says the IMF/World Bank reform models have led to structural deformities in many countries, and have wiped out domestic industrial base because the prescription is inherently flawed. He maintains that indigenous solutions to the problems should be found through a regional approach rather than begging the IMF and World Bank to tell us what to do and how to do it.

It is also imperative because of the challenges that have been unleashed in the context of WTO and globalization.

Recently when Prof Sobhan was transiting through Karachi after attending a seminar in Lahore, he was asked by Dawn Magazine, among other things, what are the options for the IMF/World Bank borrowers.

“I am not one of the economists who are in full agreement with the IMF reform process,” said Prof Sobhan, who for the last 20 years has been criticizing the Western donor agencies. “There are fundamental weaknesses in their model. The major problem with the model is that it completely ignores wide variations in the structural features of societies,” he said.

For instance, in relatively more mature economies like Brazil and India, private-sector entrepreneurs can take advantage of trading and privatization opportunities. But if the same model is applied to under-developed economies like Bangladesh, Nepal, several African states and even Pakistan, an open economy will lead to the destruction of a large segment of the local manufacturing because you cannot protect the industry, argued Prof Sobhan.

As they cannot set up a new generation of industries, which needs a period of protectionism in order to make them competitive, “it then leads to structural deformity of the economy where production base becomes increasingly concentrated.”

Besides, under the model the economies need to be export-oriented. As the countries are operating in a very unstable global market, they introduce major uncertainties into the functioning of the economy and affect a large number of people connected with it. In this context, he said, that in Bangladesh now readymade garments account for 75 per cent of its exports. “We now export about $5 billion to the US and other countries. As many as five million people, mostly women, are connected with this industry. If buyers shift to other markets, it will lead to a major social disruption.”

Prof Sobhan, who is son-in-law of the late Begum Shaista Ikramullah, says that many developing countries are in bigger crisis because they could not cope with the World Bank-designed model of import liberalization, and, as a result, their own industrial base has virtually disappeared.

Asked how he viewed Pakistan in this context, Prof Sobhan could not ignore the “very concentrated industrial base which has remained very central to textiles.” He also noted that many of the traditional industries that were built in the ‘60s and the ‘70s had now lost their competitiveness due to exposure to imports. Many of them have closed down, causing unemployment. He pointed out that “as no new-generation industries are actually coming up in Pakistan, so even though you have got more mature and better developed economy than Bangladesh, you are still facing many problems.”

Talking about the growing social exclusion in market economies where trade unions are also fast withering away, Prof Sobhan termed it “a very serious problem, indeed”. He said: “Our societies are becoming much more unequal because the opportunities provided by globalization are very unequal ... This is going to lead to major political tensions, and I think this is going to be the most dangerous consequence of globalization.”

Prof Sobhan talked about a host of other issues. The following are excerpts of the interview:

Q. Do you think the Iraq war will stem the WTO-driven globalization tide in the short term and spur regional trade?

A. “I don’t know whether the Iraq war will do that. I think the compulsions for regional trade are going to have their own self-sustaining features because a lot of regional trade is already going on, as far as Bangladesh, Nepal, Bhutan and Sri Lanka are concerned, though it is pretty one-sided. Imports from India are growing because all of us have opened up our economies much faster than India has actually done. So the main pressure in those countries is to get India to reciprocate and to give much bigger access to its market. It’s a big demand in Bangladesh. And India has been responding to that by bilateral free trade agreements.

The main difference is between India and Pakistan, and as and when Pakistan moves to establish the most-favoured-nation arrangement with India, which I think they will have to do sooner or later, you would be exposed to competition from India. The trade relations are going to be driven largely by market forces.

Q. What about the WTO deadline of Jan 1, 2005, when Pakistan will also be required to open its market? Will it be applicable to India? A. Oh, yes. Because trading across borders is going to have in any case some specific features. For instance, Pakistan imports iron ore from Australia, when it is available next door in India. Obviously, common sense will demand a rethink. The same will be the case with India.

Q. The size of Pakistan and Bangladesh economies is not big enough to produce goods and services on economies of scale to compete in the global market. How can they resolve this problem through regional cooperation?

A. Today, technology is becoming the most competitive factor. Size no longer has the same importance as was the case earlier. It is all about your capacity to assimilate technology, and use it properly. So essentially what countries like Bangladesh and Pakistan need to do is to educate their people to upgrade their knowledge.

The obvious apprehension would be the Indian competitiveness. But it is surprising that China is the biggest competitive threat: they are competing with Bangladesh in readymade garment export; they are competing with India in selling their light engineering goods; and they have already made very heavy inroads in Pakistan. Besides, they are competing with several European countries. China is truly globally competitive.

So in order to be able to have access to a large market we have to upgrade our plants with more competitive products and by using the regional advantage. For instance, with an open trading system with India, its north-east part becomes more competitive for Bangladesh than western India.

Q. Could you elaborate on how India, Pakistan and Bangladesh will fare after China’s entry into the WTO?

A. I think they will face very severe difficulties because China has now opened up its economy. It is now the world’s largest exporter outside the US and Japan. It now attracts two-third of foreign direct investment that goes into the developing countries. Although they may give you the idea they have a market economy, but I believe the Chinese government is very much directing the way in which you can participate in the globalization process. They can set prices. They can build subsidies that can never be caught by the WTO. They can use a variety of ways to improve competitiveness. China will be the first beneficiary of greater globalization.

US is already fearful of that, and is likely to retain certain protectionist features in the system to deal with the problems posed by China.

Q. The US sidelined the UN over Iraq, and is also sidelining the WTO by going for bilateral agreements and regional trade. Are they pursuing unilateralism in trade as well?

A. Yes, very much so. They have been saying that even before 9/11. The US has recognized that its size is a strategic resource and for getting into its market one has to pay a heavy price. With the new strategic unilateralist approach, they are now increasingly willing to bypass the international political order. The US now feels that it can do whatever it likes, whenever it likes and wherever it likes.

Q. There are assertions that because the EU is emerging as an economic bloc and China is an engine of growth in East Asia, the world economic order is changing. Is it true?

A. That process has many problems. In Europe itself now there is division between the old and the new. The US has leap-froged over the EU and is attempting to build a special relationship with some in the old Europe. But the new Europe is very vulnerable. The notion that Europe would emerge as an autonomous, strategic as well as economic entity that would counter-balance the world order is itself under threat. Potentially, China could become the basis for the construction of a new Eastern bloc.

Q. Back to the region, in the face of SAARC failure to promote regional trade, how feasible do you find the concept of Southern Silk Route?

A. While there is not enough trade now, the opportunities are considerable. The danger is that if we do not take a South Asian approach, virtually all the existing relations would become bilateral in nature, and this would further complicate the SAARC process, and the whole construction of the free trade area would run into greater difficulty. To sustain this process you have to create an appropriate trading environment. The compulsion to rebuild the infrastructure is very strong, and benefits are enormous.

We import cotton from Pakistan. It takes about forty days for a container to reach Bangladesh. But in the event of having an integrated transport structure where you could transport the containers either on train or on trucks, this could get to Bangladesh in four days.

India had expectations of trading not just with Afghanistan, but also with Central Asia. Ideally, they are going to do it competitively if they have road and rail links through Pakistan. So Pakistan’s links with Bangladesh will have to go through India; and India’s links with Central Asia will have to go through Pakistan.

But the Chinese are very smart about this, because the whole centrality of the Southern Silk Route was the Chinese urge to change the landlocked status of their Hunan province.

Q. Initially you had done lot of work on rural development and we saw changes in the devolution of power. We also have put in place a mechanism here. Why this has not come up in either of the countries?

A. Every government has sworn to promote local government, but at the end of the day the results have not been good. In India, Pakistan, Bangladesh and Nepal, there are very serious difficulties on two counts. One, the legislators are not happy with devolution because it curtails their power and influence. Two, the bureaucracy does not want its own authority to get diluted.

This tension has not been satisfactorily resolved anywhere. Besides, the devolution of power also depends on how democratic the local system is. For a strong local system, there should be a genuine desire on the part of political players and the bureaucracy to devolve power, and the existence of a strong democratic political culture at the local level.

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