June 4, 1993 — drsubrotoroy
Path of the Bangladesh Taka 1972-1993
Subroto Roy 1993
Note: This was part of a 1993 study I did as a consultant at the IMF in Washington in a project on exchange-rates and exports of “South Asian” countries. The IMF is not responsible for its content.
“Bangladesh, being the former East Pakistan, shared the same currency and trade-policy history as the rest of Pakistan until the Bangladesh taka was created on January 1 1972. Pakistan rupees in circulation remained legal tender until replaced by the taka 1:1 beginning March 4 1972.
The taka was set at par with the Indian rupee, and fixed to sterling at Tk 18.9677, or Tk 7.2797 to the United States dollar. The path followed by the taka was determined partly by the initial value chosen for the new currency in 1972. Given the devastation experienced by the Bangladesh economy from natural disaster, civil war and war in 1969-1971, the initial value chosen for the taka on par with the Indian rupee was in all likelihood unrealistic, even more so to the extent the Indian rupee was itself nominally overvalued at the time.
Since that time, the principal fact about official exchange-rate policy in Bangladesh has had to do with overseas workers’ remittances far exceeding any single sector of merchandise exports as a support for the balance of payments. A multiple exchange-rate system prevailed with a secondary market as an incentive for overseas workers to remit through official channels instead of at parallel or “hundi” market-rates, the spread between the parallel and official channels being exceptionally high for Bangladesh compared to India and Pakistan. IMF technical studies laid the groundwork for abolishment of the multiple exchange-rate practice and the unification of exchange-rates, which was accomplished on March 31 1992.
The path of the official taka is informative as a measure of nominal overvaluation. Since August 1979, the official taka has been pegged within margins to a currency-weighted basket. The taka was adjusted as many as 20 times between October 1980 and January 1982, the official rate being reduced to Tk. 38.4 to sterling or Tk.20.4 per United States dollar. In January 1983, the weights were changed and in March 1985 changed again. On this basis, the nominal effective exchange rate depreciated by 29 percent and the real effective exchange rate by 21 percent between August 1979 and December 1982. From February 1985, exchange-rate policy has with IMF support tried to keep in mind an upper limit on the real effective exchange, the nominal rate declining in one year by 20 percent and the real rate by 22 percent. From the end of 1985 through November 1988, there was further depreciation of 4 percent. In absence of further nominal depreciation, combined with further deterioration of the domestic price-level, the real exchange rate appreciated by 7 percent between November 1988 and April 1989, followed by further appreciation of over 9 percent during May-June 1989. A revised index confirmed the loss of competitiveness, indicating at least 12 percent real appreciation by end June 1989 relative to 1988. From November 1988 to February 1990, the taka remained at Tk 32.27 per United States dollar with the official secondary market 2 percent higher. In 1990 the rates were depreciated six times by a total of 11 percent, corresponding to 8 percent real depreciation. The official taka was at Tk.36.49 per United States dollar as of July 7 1991. Recent Bangladesh exchange-rate policy has seemed to be guided by such considerations, and has not been responsive to regional developments such as changes in the Indian rupee.”
May 18, 1993 — drsubrotoroy
Author’s Note May 2007: Between January 1993 and about May 1993 I was a Consultant to the International Monetary Fund, Washington, DC. The IMF does not usually hire consultants, and I was hired thanks to a recommendation by Gopi Arora to Hubert Neiss. At the request of Saudi IMF Executive Director Mohammad Al-Jasser, I did an interdepartmental comparative study — the only one until that time and perhaps since — of exchange-rates and exports of India, Pakistan, Sri Lanka and Bangladesh. What follows is a part of that relating to exports. A little of it was published in an ICRIER study in New Delhi the following year, on India-United States trade.
EXPORTS FROM THE SUBCONTINENT
This study reports the main results of a study of exports from India, Pakistan, Sri Lanka and Bangladesh to their largest world markets in the period 1962-1991.
Panels of two-level Standard International Trade Classification (SITC) data were gathered as reported to the United Nations Statistical Office, Geneva in its Trade Analysis and Reporting System. These gave original data of all imports from India, Pakistan, Sri Lanka and Bangladesh as reported by each of the United States, Britain, Japan, Germany and France (G-5 countries) over the 30-year period 1962-1991 in c.i.f. terms. These countries constitute almost 75 percent of the subcontinent’s total export market, and possibly more if indirect exports via third countries like Hong Kong and Singapore are accounted for.
The import-demand data reported by each of these countries provide the most reliable and uniform data source available.
To detect any possible trends in real growth or decline, the nominal data reported over this 30 year period were deflated to constant 1990 prices, using price-series obtained from the World Bank’s Quarterly Review of Commodity Markets December 1992. This source provides a manufactured goods unit value index for the G-5 countries, as well as individual price series for petroleum and commodities excluding energy. The latter is divided into foods (divided into beverages, cereals, fats & oils, and other), non-food agricultural, timber, and metals & minerals. It is considered the most reliable price-series data of its kind available. All figures given below are in constant 1990 U. S. dollars.
Overall, one firm regionwide fact to emerge about the subcontinent’s exports to the major industrial countries has to do with the enormous real growth of clothing, especially in the decade 1982-1991. Not only has there been remarkable growth in real terms of clothing exports from the entire region, but there has been relatively higher growth in Pakistan compared to India, and higher growth in Sri Lanka and Bangladesh compared to Pakistan.
India to the United States
India’s main exports to the United States have changed in product composition over the period 1962-1991, though not in ways predicted or hoped for by national economic plans. Between 1962-1971, the main exports other than textile manufactures (SITC 65) were agricultural: tea, coffee & spices (SITC 07), fruit and vegetables (SITC 05), sugars (SITC 06), fish and preparations (SITC 03), and crude matter(SITC 29). Between 1972-1981, the mix was transformed by growth of exports of polished diamonds (SITC 66) and clothing (SITC 84), which together with textile manufactures have dominated Indian exports to the United States since.
Between 1982-1991, the same mix continued to dominate with the significant addition of petroleum and products (SITC 33) which was the single largest export from India to the United States in each year between 1982 and 1985. Textile manufactures were the dominant export until 1978 and have been in the top four throughout the period. But there has been steady decline in real terms. The decline has been from annual averages of $740 million (c.i.f.) in 1962-71, to $406 million in 1972-1981, to $285 million in 1982-1991. India has also steadily lost market-share in total textile imports into the United States, dominating the market with an average annual market-share of 19.5 percent in 1962-1971, reduced to 10.1 percent in 1972-1981, reduced further to 4.84 percent in 1982-1991.
Clothing during the same period has shown high real growth, going from an annual average of $7 million in 1962-1971 to $178 million in 1972-1981, to $538 million in 1982-1991. Average annual market-share of total U.S. imports has gone from 0.10 percent in 1962-1971, to 2.11 percent in 1972-1981, to 2.34 percent in 1982-1991. While this has been small growth from the point of view of the United States market, the movement has been large relative to initial conditions from the point of view of Indian exporters. It is not apparent whether the decline in textile manufactures has been independent of the growth of clothing or whether there has been value-increasing substitution from textile manufactures into clothing. Comparative experience with Germany suggests there has not been such substitution.
India to Britain
India’s exports to Britain are marked by textile manufactures (SITC 65) and tea, coffee & spices (SITC 07), being among the top five exports throughout the entire period 1962-1991.
However, both of these traditional exports have declined in real terms. Annual average imports into Britain of textile manufactures from India were $253 million (c.i.f.) in 1962-1971 down to $179 million in 1972-1981 and $161 million in 1982-1991. India’s share of Britain’s imports of textile manufactures fell from 15.5 percent and 16.0 percent in 1962 and 1963 to 3.4 percent and 4.0 percent in 1990 and 1991.
Annual average imports into Britain of tea, coffee & spices from India were $269 million in 1962-1971 down to $87 million in 1972-1981 and $66 million in 1982-1991. Clothing (SITC 84) exports to Britain have shown high real growth, from annual averages of $4 million in 1962-1971 to $86 million in 1972-1981 to $200 million in 1982-1991. Of remaining exports to Britain, in the period 1962-1971 agricultural outputs like animal feed (SITC 08), tobacco (SITC 12) and crude matter (SITC 29) as well as leather goods (SITC 61) were the main product groups.
The next period 1972-1981 saw the growth of clothing (SITC 84) to a position of dominance among all Indian exports to Britain, and some growth in non-ferrous metals (SITC 68) mainly copper and aluminium alloys. The latest period 1982-1991 has seen some growth of non-traditional engineering exports to the top ranks, mainly transport equipment (SITC 73), metal manufactures (SITC 69) and non-electrical machinery (SITC 71). Clothing and textiles, however, continued to dominate more than 44 percent of all exports.
India to Japan
The main feature of India’s exports to Japan over the entire period 1962-1991 is the dominance of iron ore (SITC 28) throughout. Annual average imports of iron ore into Japan from India were $401 million in 1962-1971, rising to $556 million in 1972-1981, and $572 million in 1982-1991.
The period 1962-1971 saw, in addition to iron ore, export of raw cotton and jute fibres (SITC 26), crude agricultural matter (SITC 29), crude fertilizer (SITC 27), animal feed (SITC 08), sugar (SITC 06), ferrous alloys (SITC 67), and fish and preparations (SITC 03). The period 1972-1981 saw very high growth of exports of fish and preparations (SITC 03) and polished diamonds (SITC 66), as well as some growth of textile manufactures (SITC 65). Starting from almost zero, India’s market-share of Japanese imports of fish grew to an annual average of 7.31 percent during the period 1969-1985, before falling back to 2.7 percent in the 1990s. The latest period 1982-1991 has seen the dominance of polished diamonds equalling that of iron ore, as well as significant growth in clothing (SITC 84) and petroleum (SITC 33). The main exports of India to Japan are at present polished diamonds, iron ore, fish, ferrous-alloys and clothing. It seems plausible that India’s pattern of exports to Japan has been related to the high growth transformation of Japan’s economy during this time.
India to Germany and France
As with Japan, India’s exports to the Federal Republic of Germany show unique aspects related in all likelihood to the high growth transformation of the German economy during this period. Remarkably, textile yarn and fabric (SITC 65) from India to Germany has shown large real growth during 1962-1990. German imports of Indian textile manufactures were at an annual average of just $55 million for 1962-1971; this increased to an annual average of $163 million for 1972-1981 and to $255 million for 1982-1990. Although this has not been enough to offset the large declines of Indian textiles in the United States and British markets, it may suggest that rapid domestic growth in one large importing market can reduce the impact of loss of competitiveness in a different market. Clothing (SITC 84) has shown extremely high real growth relative to initial conditions. German imports of clothing from India were at an annual average of under $4 million in 1962-1971, rising to annual averages of $96 million in 1972-1981 and $282 million in 1982-1990. The simultaneous growth of textile manufacture and clothing exports from India to Germany may suggest that there has not been value-adding substitution from the former to the latter. Other than clothing, the product composition of Indian exports to Germany has not seen much drastic change.
In 1962-1965, iron ore (SITC 28) was the single largest export only to become abruptly insignificant, possibly implying new sources had been found by importers. Besides textile manufactures, three other traditional exports — leather goods (SITC 61), tea, coffee & spices (SITC 07), and crude matter (SITC 29) — have been among the top Indian exports to Germany throughout the period 1962-1990. Of these, leather goods have shown real growth from annual averages of $34 million in 1962-1971, to $55 million in 1972-1981, to $86 million in 1982-1990. Polished diamonds (SITC 66) also have been a major export to Germany since as early as 1964, with significant growth in the latest period 1982-1990.
India’s exports to France show certain similarities with the pattern to Germany on a smaller scale. Textile yarn and fabric (SITC 65) has shown growth in real terms from annual averages of $18 million in 1962-1971, to $51 million in 1972-1981 to $63 million in 1982-1991. (The growth of textile exports to Germany and France together have not offset the declines to the United States and Britain — average annual exports to the four countries totalling $1.07 billion for 1962-1971, $0.80 billion for 1972-1981, and $0.76 billion for 1982-1991.) Clothing exports to France have shown enormous growth relative to initial conditions, moving from annual averages of under $3 million in 1962-1971, to $57 million in 1972-1981 to $108 million in 1982-1991. Besides textile and clothing, Indian exports to France have included leather goods (SITC 61), crude matter (SITC 29), polished diamonds (SITC 66) and animal feed (SITC 07). In 1982 and 1985, France also reported petroleum imports as the single largest product from India.
Pakistan to the United States and Britain
In the period prior to 1972, Pakistan’s exports to traditional markets in the United States and Britain were dominated by raw jute and cotton fibres (SITC 26) and cotton and jute manufactures (SITC 65).
Since 1972, cotton manufactures (SITC 65) have shown remarkable real growth, and along with clothing (SITC 84) have dominated Pakistan’s exports to these markets. Annual average imports of cotton manufactures from Pakistan into the United States and Britain were $87 million and $76 million respectively in 1973-1981, rising to $182 million and $117 million respectively in 1982-1991.
Pakistan’s share of total textile imports rose from an annual average of 2.3 percent in 1973-1981 to 2.9 percent in 1982-1991 in the United States market, and from 1.8 percent to 1.9 percent in the British market. This contrasts with India’s declining textile exports to the same markets in the same period.
Average annual clothing imports from Pakistan into the United States and Britain were $22 million and $11 million respectively during 1973-1981, rising to $164 million and $62 million respectively during 1982-1991. During the period, Pakistan’s market-share of clothing imports has risen from 0.2 percent to 1.0 percent in case of the United States, and from 0.3 percent to 1.9 percent in case of Britain. Again, these are small changes for the importing markets but large changes from the point of view of exporters relative to initial conditions.
Other than textiles and clothing, significant movement in Pakistan’s exports to the United States and Britain is found in instruments, watches and clocks (SITC 86) to the United States, which went from an annual average of $10 million during 1973-1981 to $26 million in 1982-1991.
Pakistan to Japan, Germany and France
Pakistan’s exports to Japan have been dominated by cotton yarn and fabric (SITC 65) and cotton fibres (SITC 26), both showing strong real growth. The first has gone from an annual average of $79 million in 1973-1981 to $304 million in 1982-1991, the second from $48 million to $75 million in the same time period. Other exports to Japan include fish (SITC 03), leather goods (SITC 61), and petroleum and products (SITC 33).
Pakistan’s exports to Germany and France have been dominated by clothing (SITC 84) and cotton yarn and fabric (SITC 65). Average annual exports of clothing have grown from $19 million in 1973-1982 to $86 million in 1982-1991 in case of Germany, and from $8 million in 1973-1981 to $55 million in 1982-1991 in case of France. In the same periods, average annual exports of cotton yarn and fabric went up from $34 million to $66 million in case of France, and went down from $107 million to $99 million in case of Germany.
Other exports from Pakistan to Germany and France have included leather goods (SITC 61), cotton fibres (SITC 26), sugar (SITC 06) and petroleum and products (SITC 33).
Sri Lanka’s exports to the major industrial countries are marked by drastic decline in exports of tea (SITC 07) and rapid growth of exports of clothing (SITC 84).
Sri Lankan tea exports were at an annual average of $175 million to Britain and $49 million to the United States during 1962-1971, reduced to $38 million and $24 million respectively in 1972-1981, reduced to $23 million and $16 million respectively in 1982-1991. Between 1980 and 1991, Sri Lanka’s market-share of total British tea imports fell from 11 percent in 1980 to 7 percent in 1991. Evidently this loss of market-share was not India’s gain, as India’s share of the same market fell even more drastically, from 33 percent in 1980 to 17 percent in 1991. India and Sri Lanka traditionally dominated the world market for tea. Major competitors since then have been China, Indonesia, Kenya and Malawi.
Sri Lanka’s exports of clothing to the United States, Germany, Britain and France have grown very rapidly, making clothing the dominant export of Sri Lanka in the last decade. Average annual exports of clothing rose from $39 million in 1972-1981 to $361 million in 1982-1991 in case of the United States; from $10 million to $70 million in case of Germany; from $3 million to $27 million in case of Britain; from $2 million to $20 million in case of France. Although rates of value-added growth will be lower in view of Sri Lankan imports of raw materials (from India and Pakistan), clothing has clearly shown phenomenal growth relative to initial conditions.
Besides tea and clothing, significant movement in Sri Lanka’s exports over the long run appears in polished diamonds (SITC 66). Sri Lankan exports amounted to annual averages of $5 million and $4 million to Japan and the United States respectively in 1962-1971; $32 million and $17 million respectively in 1972-1981; and $38 million and $32 million respectively in 1982-1991. Value-added may be considerably lower given imports of rough diamonds via Belgium and India.
Like India and Pakistan, Bangladesh’s exports to the United States have been dominated by clothing (SITC 84) and textile yarn and fabric (SITC 65). As with India, textile manufactures have fallen drastically in real terms while clothing has shown enormous growth relative to initial conditions. While it is possible again that there has been value-increasing substitution from one towards the other, this appears unlikely as Bangladesh’s textile manufactures are mainly jute products. Average annual exports of textile manufactures from Bangladesh to the United States fell from $130 million in 1972-1981 to $75 million in 1982-1991, while clothing exports rose from near zero in 1972-1981 to an annual average of $249 million in 1982-1991. Unofficial (smuggled) trade across the India-Bangladesh border is reported to be high, and it is possible Indian exporters have sought to sidestep United States quotas by going through Bangladesh which does not face quotas.
The remaining significant movement in Bangladesh’s exports to the United States has been in fish (SITC 03), which has risen from an annual average of $8 million in 1972-1981 to $35 million in 1982-1991.
Bangladesh’s main exports to Britain have included jute fibres (SITC 26), textile manufactures (SITC 65) and fish (SITC 03). Average annual exports of jute fibres went from $19 million in 1973-1981 to $8 million in 1982-1991; textile manufactures went from $20 million in 1973-1982 to $21 million in 1982-1991; and fish went from $3 million in 1973-1981 to $18 million in 1982-1991. The remaining significant movement in Bangladesh’s exports to Britain include the appearance of transport equipment (SITC 73) as the top export at an average annual amount of $121 million in each year 1978-1980, followed by its equally sudden disappearance. And clothing exports have shown rapid growth from near zero to average annual exports of $50 million in the period 1988-1991.
Bangladesh’s exports to Japan have been dominated by fish and preparations (SITC 03), with average annual exports growing rapidly from $11 million in 1973-1982 to $54 million in 1982-1991. Other exports to Japan have included textile manufactures (SITC 65), petroleum and products (SITC 33), leather goods (SITC 61) and raw jute (SITC 26).
Bangladesh’s exports to Germany and France are marked by the rapid recent growth of clothing from negligible amounts to an annual average of $60 million in case of Germany and $52 million in case of France in 1987-1991. Other exports to Germany and France have included fish (SITC 03), textile manufactures (SITC 65), and leather goods (SITC 61).
Some discrepancy exists in the data as India does not report any exports of petroleum to either the USA or France in these years.
April 22, 1988 — drsubrotoroy
A note on the welfare economics of regional cooperation
April 22 1988
(Statement at a conference on regional cooperation in Asia and Latin America held at the East West Centre, Honolulu, April 1988)
How should we evaluate the success of efforts at regional cooperation? When we look at different attempts at cooperation around the world, what general principles and observations might we bring to bear from within the discipline of economics? I propose to try to answer this broad normative question, and at the same time to report on certain aspects of the interesting and informative papers given by Dr. Ffrench-Davis, Dr. Wong, and Dr. Bhuyan on Latin America, ASEAN, and South Asia respectively.
It may be helpful to remind ourselves at the outset of the textbook classification of forms of economic cooperation. This usually traces a route from the least orderly and least integrated to the most orderly and most integrated — from the free-trade area to the customs union to the common market to the economic union. The free-trade area has no intra-area tariffs and therefore has a free flow of goods, although each member can have what tariffs it pleases with the rest of the world. The customs union maintains the free flow of goods of a free-trade area and in addition has a common tarriff barrier with the rest of the world. The common market is a customs union and in addition has free flow of factors like labour and capital. The economic union is a common market which in addition has a common currency and a uniform monetary and fiscal policy, and which probably must have a common federal government as well.
Now we learn about one thing through comparison and contrast with other things. Thus efforts at cooperation in South Asia and Latin America and ASEAN are fittingly compared and contrasted both with one another as well as with efforts, say, in post-War Europe. It has been generally believed too that more integration is a good thing. So for instance, while the European Community still remains something between a customs union and a common market, the European experiment as a whole has been motivated by a desire (or perhaps by wishful thinking) to form an economic union like that of the United States. And it is the U. S. — whose Constitution in 1789 started with the words: “We the people…, in order to form a more perfect union….” — which surely remains the best example the world has yet seen of an effective economic and political union. Yet even in the U. S. the process took a hundred years and a lot of bloodshed. In many places in the south today, the Civil War between 1861 and 1865 is still referred to as the “War between the States”. A lesson from the American experience may be that an important and yet intangible benefit of attempts at integration, regardless of how much integration it actually leads to, may be the prevention of unnecessary war. No matter how far the European Community is from its explicit goal of an economic and political union, or how wishful such a goal might be, or how much is wasted in resources by the bureaucracy in Brussells, if European cooperation has helped to reduce to zero the probability of a third European war in the twentieth century, it may have contributed to the economic welfare of Europe.
Now the prospect of pointless war within the European Community has become ludicrous but this may not be so elsewhere. Neither Dr. Ffrench-Davis nor Dr. Wong has found it necessary to say anything about military tensions, so it is possible that the prospect of needless wars within Latin America or within ASEAN has become as ludicrous as in Europe, and it is possible that regional institutions have helped towards that. If so, that should be registered on the credit-side of the balance sheet when we are evaluating the success of LAFTA or ASEAN or the Andean Pact. But certainly the same cannot be said in South Asia, where military tensions between India and Pakistan have seldom been far from the surface.
In fact the South Asian case is interestingly seen from another angle as well. For consider the basic fact that the main economic point of regional cooperation is to improve mass welfare via increasing trade. Yet Dr. Bhuyan reports that trade has yet to be put on the SAARC agenda in any serious way. The leaders of the SAARC nations have been talking about meteorology and drug abuse and the rights of children and science policy and solar technology and all kinds of other worthy issues, but they have not been talking about abolishing quotas and reducing tariffs on one another’s goods. In terms of the textbook classification, regional cooperation in South Asia in the late 1980s has not yet reached even the starting point of discussing a free-trade area. Yet paradoxically just about forty years ago, the same nations which today find it so difficult even to talk about improving trade, were completely united and integrated from an economic point of view — not merely in a free-trade area or customs union or a common market but in a full-fledged economic union. The departure of Britain from the subcontinent and the political partition between India and Pakistan did not logically entail that the economic union which South Asia had been for numerous centuries had to be completely destroyed. Yet that is what happened. The welfare costs of the lack of foresight on all sides at the time have not yet been calculated.
Drawing these thoughts together then, my first general observation is quite an obvious one. Efforts at regional cooperation can lead to more and better contacts, information, and channels of communication – between heads of governments, finance ministers, businessmen, private citizens, and so on. There is, in short, an increase in trust. Or to put it in economists’ language, there is a reduction in transactions costs or an increase in the stock of what may be called the “informational capital” available to traders and potential traders. Regardless of whether tariffs do in fact come to be reduced and trade increased, the stock of trust or informational capital is valuable. The maintenance of this stock may require expenditures on bureaucracies, conferences etc. (expenditures which Dr. Wong reports to be small in case of ASEAN). But if these expenditures have quietly reduced or are reducing the probability of needless wars between the member-states of LAFTA or ASEAN or SAARC (and here we might recall just how many needless wars were fought in European history between countries at the same so-called “stage of development” as those now in Asia and Latin America) then the expected utility of the bureaucracies may be certainly positive and perhaps rising.
Military conflicts or civil wars destroy not only physical and human capital but this kind of informational capital as well. It is this stock of informational capital which was destroyed with the breakup of the economic union in South Asia forty years ago, and which the South Asian nations are now finding so hard to rebuild. The same can be said perhaps of China and Taiwan, North and South Korea, and so on.
Next, I would like to return to the basic rationale of regional cooperation being to increase welfare via increasing trade via lowering tariffs, probably reciprocally but perhaps even unilaterally. It is to encourage as much improved efficiency in production and hence in consumption as possible; or in Jacob Viner’s terms to have as much “trade creation” and as little “trade diversion” as possible. Such a purpose would or should take as axiomatic Adam Smith’s remark: “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” (Wealth of Nations, IV.viii.49). Yet, at the same time, the fact of the matter is that it is national governments, and not business firms let aside ordinary households and consumers, who are involved in attempts at regional cooperation. Stated in terms of a principal-agent problem, it is governments who are the agents while the mass of individual taxpayer/consumers are the principals.
The situation is such that the agents can probably get away quite well without attending to the interests of their principals in matters of mutual tariff-reduction. But if they do want to attend to the interests of their principals, what Smith’s remark does is give them a simple rule of thumb to apply: does such-and-such a policy proposal have a reasonable chance of helping the ordinary consumer? That is to say, will it enlarge the budget-set of the average household? Or in other words, will it reduce the average household’s expenditures and/or increase the average household’s income?
Improving trade necessarily implies exploiting comparative advantages better, and hence it implies increasing specialization. So if the basic purpose of regional cooperation is indeed to improve economic welfare via more trade, and if this purpose is indeed to be seriously served, then the process of obtaining the greater specialization will necessarily imply the decline of some industries and the rise of other industries in each participating economy.
If country A and country B are both involved in import-substitution, and country A’s industry 1 is relatively less inefficient than country B’s industry 1, then the economic integration of A and B will imply that country A’s industry 1 will rise and country B’s industry 1 will decline, while country B’s industry 2 will rise and country A’s industry 2 will decline.
Again I am saying something which is obvious from an economist’s standpoint. I do so for the following reason. It is clear from Dr.Wong’s paper that the leaders of ASEAN seem to be relatively serious about tariff-reduction. They may not have succeeded as much as they would have liked but they see and understand the fundamental purpose of regional cooperation. The spirit is willing but the body is weak. It would seem from Dr. Ffrench-Davis’s paper too that mutual tariff-reduction has also been a central part of the discussion surrounding Latin American cooperation, and Dr. Ffrench-Davis himself has decried the slowing down of reciprocal trade in the 1980s. However Dr. Bhuyan’s report suggests that, with trade off the SAARC agenda and all kinds of other activities on it instead, SAARC is in danger of becoming merely another vehicle for the ever-expanding role of the State in South Asia. If I might generalize on a remark Sven Arndt made yesterday: if the domestic policies of individual countries are an unsound basis for economic development, then no amount of regional cooperation will have any significant beneficial effect. Indeed it might even worsen things by distracting attention from fundamental problems, increasing centralization and politicization of economic decisions, and so on.
A few small points to end with.
1. Dr. Ffrench-Davis refers, I think in a neutral way but I am not sure, to “regional investment planning” in the Andean Pact. Dr. Bhuyan refers, I think with approval, to “balanced regional industrialization through agreed specialization… the idea is to allot particular industries to particular countries in which they have special interest” (p. 17). I have not been able to see how the increasingly centralised allocation of resources entailed by such a policy is conducive to the basic purposes of regional cooperation. Greater specialization is indeed a natural corollary of economic integration. But the forces of trade, and not the SAARC headquarters in Kathmandu, surely need to be allowed to determine its direction.
2. Both Dr. Ffrench-Davis and Dr. Bhuyan refer to stronger and weaker, or bigger and smaller, members of a regional grouping. And Dr. Bhuyan suggests “that a straightforward liberalization of trade by dismantling all trade barriers may benefit the larger countries more than the smaller ones” (p. 12). I am not at all sure that this is right. For example, in the Heckscher-Ohlin model the scale of an economy is not relevant to the gains from trade — one country may have absolutely greater amounts of every single factor than another, and yet trade may benefit both because they have relatively different amounts of the factors. (Similarly in the Ricardian model, one country may have an absolute advantage in the production of both goods, and yet trade may still be beneficial because the countries differ in the relative advantage of the production of each good.)
Thus, in conclusion, all three reports we have been given of efforts at regional cooperation in Asia and Latin America are interesting and informative. Once again it would seem ASEAN has been leading the way in getting the basic economics as right as possible given what is politically feasible. And here again we have to think not of ASEAN’s absolute success, but its success relative to other attempts, including I would say the European Community). Latin America does not seem to have been very far behind in the matter of getting the basic economics right. While South Asia, which not long ago was in fact the most closely integrated economy of all, sadly seems to lag far behind both in thinking and in achievements.