William E (Ted) James, Dec 21 1951- May 19 2010, friend & collaborator: How we made a little bit of history together

“Professor Roy?”, a smooth baritone asked me on the phone, within a week or so of my entering my Manoa office in the Fall of 1986. “Yes?”, I said, “My name is Ted James, and I was wondering if we could have lunch; I wanted to talk to you about working together on India”. “I thought I’d met everyone in the Department”, said I. “We at the East West Center are a bit of a mysterious bunch”, he joked. Oh so this is the US Govt calling, I said to myself, better watch out. “Well, I’ve published on India already”, I said referring to my IEA monograph which had attracted the leader of the London Times a year and a half earlier, and trying to indicate that I felt I had done my bit for India and did not see myself doing much more. “I know you have, your reputation precedes you, that’s why I thought we should meet”, he said.

 

So we met at a nondescript campus café for some stir-fry. Ted was an excessively handsome Southern Californian straight out of Hollywood central casting, and the most unlikely-looking American economist I have ever met. I am 6’ and I think he was perhaps 5’9” but slimmer and more muscular with long blond hair, bright blue eyes, a fabulous magnetic smile, someone who might easily have been a hero in a TV serial or an afternoon soap-opera.

 

He wasn’t a film-star though but an economist, though not a nerdy one like myself at the time, and he had a tremendous almost evangelical keenness to not merely comprehend the economic policy-making process of so-called developing countries, especially in Asia, but also change them for the better.

 

I was 31, Ted must have been about 34 when we first met for that stir-fry lunch. He did indeed know my 1984 work which was enough to win me over as London and Cambridge, or for that matter Blacksburg and Provo from where I had come, seemed very far away from Manoa at the time. Not only did he know my work, he had already referred to it in the references and index and perhaps the notes of a new book he had co-edited on Asian Development, which was remarkable as lags in publication and research were long.

 

Ted proposed at the lunch that he and I work together on “South Asia”, and that he would get funding from the East West Center. I suggested there was no such place, that “South Asia” was a State Department abstraction, but there were individual and complex countries, India, Pakistan, Sri Lanka, Bangladesh – and Afghanistan and Nepal too…. He agreed. We would start with working together on the theory of economic policy reform as applied to India and Pakistan first…

 

And so it began…

 

Legally speaking the funding came from the State of Hawaii and not the United States Government, from funds owed to the former by the latter.  Of the total budget of some $100,000 I was very miserly and returned 25% of it unspent, an unheard of thing.  Milton Friedman commanded a speaking fee at the time of $10,000, and agreed to our nominal $1,000 for a two-day visit on condition we told no one.:)  A Pakistani author was among several Pakistani scholars who thanked me for putting the volume together, as the first time Pakistan had been taken seriously in American academia; he asked me how much it cost, when I said $35,000 for the Pakistan book, he said the IMF would spend that over a  weekend at Bretton Woods and get nothing ….

 

As described elsewhere, the manuscript of the India-volume contributed to the origins of India’s 1991 economic reform during my encounter with Rajiv Gandhi in his last months; the Pakistan-volume came to contribute to the origins of the Pakistan-India peace process. (“In 2004 from Britain, I wrote to the 9/11 Commission stating that it was possible that had the vicious illegalities against me not occurred at Manoa starting in 1989, we may have gone on after India and Pakistan to study Afghanistan, and come up with a pre-emptive academic analysis a decade before September 11 2001.”)

 

friedman-et-al-at-uh-india-conf-19891

 

 

I came to know from Ted’s wife Tess in June that Ted had died of cancer in Manila on May 19 2010 aged 58.

 

I said to her and her family  that I do not weep for many but do weep for Ted.

(More to come… this will be a technology-consistent ongoing obituary for my friend and collaborator, which he would have found amusing for sure…)…

see also

See also https://independentindian.com/2013/08/23/did-jagdish-bhagwati-originate-pioneer-intellectually-father-indias-1991-economic-reform-did-manmohan-singh-or-did-i-through-my-encounter-with-rajiv-gandhi-just-as-siddhartha-shan/

How to fight government corruption whether on Earth or Mars

From Facebook:

Subroto Roy believes — partly from personal experience — that there is only one really sustainable way to fight government corruption whether in Afghanistan, Pakistan, India, the UK, the USA, Russia, China or Mars: tough and clean government accounting and audit processes allied with an uncorrupted press/media. And without clean government accounting, incidentally, all public finance and hence almost all monetary policy becomes meaningless.

My American years Part One 1980-90: battles for academic integrity & freedom

On the Blacksburg campus February 1982, my second year in America.

I had come to Blacksburg in August 1980 thanks to a letter Professor Frank Hahn had written on my behalf to Professor James M Buchanan in January 1980.

I was in an “All But Dissertation” stage at Cambridge when I got to Blacksburg; I completed the thesis while teaching in Blacksburg, sent it from there in September 1981, and went back to Cambridge for the viva voce examination in January 1982.

Professor Buchanan and his colleagues were welcoming and I came to learn much from them about the realities of public finance and democratic politics, which I very soon applied to my work on India.

Jim Buchanan had a reputation for running very tough conferences of scholars. He invited me to one such in the Spring of 1981. We were made to work very hard indeed. One of the books prescribed is still with me, In Search of a Monetary Constitution, ed. Leland Yeager, Harvard 1962, and something I still recommend to anyone wishing to understand the classical liberal position on monetary policy. The week-long 1981 conference had one rest-day; it was spent in part at an excellent theatre in a small rural town outside Blacksburg. This photo is of Jim Buchanan on the left and Gordon Tullock on the right; in between them is Ken Minogue of the London School of Economics — who, as it happened, had been Tutor for Admissions when I became a freshman there seven years earlier.

(I must have learnt something from Jim Buchanan about running conferences because nine years later in May-June 1989 at the University of Hawaii, I made the participants of the India-perestroika and Pakistan-perestroika conferences work very hard too.)

My first rooms in America in 1980 were in the attic of 703 Gracelyn Court, where I paid $160 or $170 per month to my marvellous landlady Betty Tillman. There were many family occasions I enjoyed with her family downstairs, and her cakes, bakes and puddings all remain with me today.

A borrowed electric typewriter may be seen in the photo: the age of the personal computer was still a few years away. The Department had a stand-alone “AB-Dic” word-processor which we considered a marvel of technology; the Internet did not exist but there was some kind of Intranet between geeks in computer science and engineering departments at different universities.

It was at Gracelyn Court that this letter reached me addressed by FA Hayek himself.

Professor Buchanan had moved to Blacksburg from Charlottesville some years earlier with the Centre for Study of Public Choice that he had founded. The Centre came to be housed at the President’s House of Virginia Tech (presumably the University President himself had another residence).

I was initially a Visiting Research Associate at the Centre and at the same time a Visiting Assistant Professor in the Economics Department. I was very kindly given a magnificent office at the Centre, on the upper floor, perhaps the one on the upper right hand side in the picture. It was undoubtedly the finest room I have ever had as an office. I may have had it for a whole year, either 1980-81 or 1981-82. When Professor Buchanan and the Centre left for George Mason University in 1983, the mansion returned to being the University President’s House and my old office presumably became a fine bedroom again.

I spent the summer of 1983 at a long libertarian conference in the Palo Alto/Menlo Park area in California. This is a photo from a barbecue during the conference with Professor Jean Baechler from France on the left; Leonard Liggio, who (along with Walter Grinder) had organised the conference, is at the right.

The first draft of the book that became Philosophy of Economics was written (in long hand) during that summer of 1983 in Palo Alto/Menlo Park. The initial title was “Principia Economica”, and the initial contracted publisher, the University of Chicago Press, had that title on the contract.

My principal supporter at the University of Chicago was that great American Theodore W. Schultz, then aged 81,

to whom the Press had initially sent the manuscript for review and who had recommended its prompt publication. Professor Schultz later told me to my face better what my book was about than I had realised myself, namely, it was about economics as knowledge, the epistemology of economics.

My parents came from India to visit me in California, and here we are at Yosemite.

.

Also to visit were Mr and Mrs Willis C Armstrong, our family friends who had known me from infancy. This is a photo of Bill and my mother on the left, and Louise and myself on the right, taken perhaps by my father. In the third week of January 1991, during the first Gulf War, Bill and I (acting on behalf of Rajiv Gandhi) came to form an extremely tenuous bridge between the US Administration and Saddam Hussain for about 24 hours, in an attempt to get a withdrawal of Iraq from Kuwait without further loss of life. In December 1991 I gave the widow of Rajiv Gandhi a small tape containing my long-distance phone conversations from America with Rajiv during that episode.

I had driven with my sheltie puppy from Blacksburg to Palo Alto  — through Tennessee, Arkansas, Oklahoma, Texas, New Mexico and Arizona; my parents and I now drove with him back to Blacksburg from California, through Nevada, Arizona, Colorado, Kansas, Missouri, Illinois, Indiana, Kentucky, West Virginia.  It may be a necessary though not sufficient condition to drive across America (or any other country) in order to understand it.

After a few days, we drove to New York via Pennsylvania where I became Visiting Assistant Professor in the Cornell Economics Department (on leave from being Assistant Professor at Virginia Tech). The few months at Cornell were noteworthy for the many long sessions I spent with Max Black. I shall add more about that here in due course. My parents returned to India (via Greece where my sister was) in the Autumn of 1983.

In May 1984, Indira Gandhi ruled in Delhi, and the ghost of Brezhnev was still fresh in Moscow. The era of Margaret Thatcher in Britain and Ronald Reagan in America was at its height. Pricing, Planning & Politics: A Study of Economic Distortions in India emerging from my doctoral thesis though written in Blacksburg and Ithaca in 1982-1983, came to be published by London’s Institute of Economic Affairs on May 29 as Occasional Paper No. 69, ISBN: 0-255 36169-6; its text is reproduced elsewhere here.

ppp1984

It was the first critique after BR Shenoy of India’s Sovietesque economics since Jawaharlal Nehru’s time. The Times, London’s most eminent paper at the time, wrote its lead editorial comment about it on the day it was published, May 29 1984.

londonti

It used to take several days for the library at Virginia Tech in Blacksburg to receive its copy of The Times of London and other British newspapers. I had not been told of the date of publication and did not know of what had happened in London on May 29 until perhaps June 2 — when a friend, Vasant Dave of a children’s charity, who was on campus, phoned me and congratulated me for being featured in The Times which he had just read in the University Library. “You mean they’ve reviewed it?” I asked him, “No, it’s the lead editorial.” “What?” I exclaimed. There was worse. Vasant was very soft-spoken and said “Yes, it’s titled ‘India’s Bad Example’” — which I misheard on the phone as “India’s Mad Example” 😀 Drat! I thought (or words to that effect), they must have lambasted me, as I rushed down to the Library to take a look.

The Times had said

“When Mr. Dennis Healey in the Commons recently stated that Hongkong, with one per cent of the population of India has twice India’s trade, he was making an important point about Hongkong but an equally important point about India. If Hongkong with one per cent of its population and less than 0.03 per cert of India’s land area (without even water as a natural resource) can so outpace India, there must be something terribly wrong with the way Indian governments have managed their affairs, and there is. A paper by an Indian economist published today (Pricing, Planning and Politics: A Study of Economic Distortions in India by Subroto Roy, IEA £1.80) shows how Asia’s largest democracy is gradually being stifled by the imposition of economic policies whose woeful effect and rhetorical unreality find their echo all over the Third World. As with many of Britain’s former imperial possessions, the rot set in long before independence. But as with most of the other former dependencies, the instrument of economic regulation and bureaucratic control set up by the British has been used decisively and expansively to consolidate a statist regime which inhibits free enterprise, minimizes economic success and consolidates the power of government in all spheres of the economy. We hear little of this side of things when India rattles the borrowing bowl or denigrates her creditors for want of further munificence. How could Indian officials explain their poor performance relative to Hongkong? Dr Roy has the answers for them. He lists the causes as a large and heavily subsidized public sector, labyrinthine control over private enterprise, forcibly depressed agricultural prices, massive import substitution, government monopoly of foreign exchange transactions, artificially overvalued currency and the extensive politicization of the labour market, not to mention the corruption which is an inevitable side effect of an economy which depends on the arbitrament of bureaucrats. The first Indian government under Nehru took its cue from Nehru’s admiration of the Soviet economy, which led him to believe that the only policy for India was socialism in which there would be “no private property except in a restricted sense and the replacement of the private profit system by a higher ideal of cooperative service.” Consequently, the Indian government has now either a full monopoly or is one of a few oligipolists in banking, insurance, railways, airlines, cement, steel, chemicals, fertilizers, ship-building, breweries, telephones and wrist-watches. No businessman can expand his operation while there is any surplus capacity anywhere in that sector. He needs government approval to modernize, alter his price-structure, or change his labour shift. It is not surprising that a recent study of those developing countries which account for most manufactured exports from the Third World shows that India’s share fell from 65 percent in 1953 to 10 per cent in 1973; nor, with the numerous restrictions on inter-state movement of grains, that India has over the years suffered more from an inability to cope with famine than during the Raj when famine drill was centrally organized and skillfully executed without restriction. Nehru’s attraction for the Soviet model has been inherited by his daughter, Mrs. Gandhi. Her policies have clearly positioned India more towards the Soviet Union than the West. The consequences of this, as Dr Roy states, is that a bias can be seen in “the antipathy and pessimism towards market institutions found among the urban public, and sympathy and optimism to be found for collectivist or statist ones.” All that India has to show for it is the delivery of thousands of tanks in exchange for bartered goods, and the erection of steel mills and other heavy industry which help to perpetuate the unfortunate obsession with industrial performance at the expense of agricultural growth and the relief of rural poverty.”…..

I felt this may have been intended to be laudatory but it was also inaccurate and had to be corrected. I replied dated June 4 which The Times published in their edition of June 16 1984:

timesletter-11

I was 29 when Pricing, Planning and Politics was published, I am 54 now. I do not agree with everything I said in it and find the tone a little puffed up as young men tend to be; it was also five years before my main “theoretical” work Philosophy of Economics would be published. My experience of life in the years since has also made me far less sanguine both about human nature and about America than I was then. But I am glad to find I am not embarrassed by what I said then, indeed I am pleased I said what I did in favour of classical liberalism and against statism and totalitarianism well before it became popular to do so after the Berlin Wall fell. (In India as elsewhere, former communist apparatchiks and fellow-travellers became pseudo-liberals overnight.)

The editorial itself may have been due to a conversation between Peter Bauer and William Rees-Mogg, so I later heard. The work sold 700 copies in its first month, a record for the publisher. The wife of one prominent Indian bureaucrat told me in Delhi in December 1988 it had affected her husband’s thinking drastically. A senior public finance economist told me he had been deputed at the Finance Ministry when the editorial appeared, and the Indian High Commission in London had urgently sent a copy of the editorial to the Ministry where it caused a stir. An IMF official told me years later that he saw the editorial on board a flight to India from the USA on the same day, and stopped in London to make a trip to the LSE’s bookshop to purchase a copy. Professor Jagdish Bhagwati of Columbia University had been a critic of aspects of Indian policy; he received a copy of the monograph in draft just before it was published and was kind enough to write I had “done an excellent job of setting out the problems afflicting our economic policies, unfortunately government-made problems!”  My great professor at Cambridge, Frank Hahn, would be kind enough to say that he thought my “critique of Development Economics was powerful not only on methodological but also on economic theory grounds” — something that has been a source of delight to me.

Siddhartha Shankar Ray told me when we first met that he had been in London when the editorial appeared and had seen it there; it affected his decision to introduce me to Rajiv Gandhi as warmly as he came to do a half dozen years later.

In the Autumn of 1984, I went, thanks to Edwin Feulner Jr of the Heritage Foundation,  to attend the Mont Pelerin Society Meetings being held at Cambridge (on “parole” from the US immigration authorities as my “green card” was being processed at the time). There I met for the first time Professor and Mrs Milton Friedman.

Milton Friedman’s November 1955 memorandum to the Government of India is referred to in my monograph as “unpublished” in note 1; when I met Milton and Rose, I gave them a copy of my monograph; and requested Milton for his unpublished document; when he returned to Stanford he sent to me in Blacksburg his original 1955-56 documents on Indian planning. I published the 1955 document for the first time in May 1989 during the University of Hawaii perestroika-for-India project I was then leading, it appeared later in the 1992 volume Foundations of India’s Political Economy: Towards an Agenda for the 1990s, edited by myself and WE James. (The results of the Hawaii project reached Rajiv Gandhi through my hand in September 1990, as told elsewhere here in “Rajiv Gandhi and the Origins of India’s 1991 Economic Reform”.) The 1956 document was published in November 2006 on the front page of The Statesman, the same day my obituary of Milton appeared in the inside pages.

Meanwhile, my main work within economic theory, the “Principia Economica” manuscript, was being read by the University of Chicago Press’s five or six anonymous referees. One of them pointed out my argument had been anticipated years earlier in the work of MIT’s Sidney Stuart Alexander. I had no idea of this and was surprised; of course I knew Professor Alexander’s work in balance of payments theory but not in this field. I went to visit Professor Alexander in Boston, where this photo came to be taken perhaps in late 1984:

Professor Alexander was extremely gracious, and immediately declared with great generosity that it was clear to him my arguments in “Principia Economica” had been developed entirely independently of his work. He had come at the problem from an American philosophical tradition of Dewey, I had done so from a British tradition of Wittgenstein. (CS Peirce was probably the bridge between the two.) He and I had arrived at some similar conclusions but we had done so completely independently.

Also, I was much honoured by this letter of May 1 1984 sent to Blacksburg by Professor Sir John Hicks (1904-1989), among the greatest of 20th Century economists at the time, where he acknowledged his departure in later life from the position he had taken in 1934 and 1939 on the foundations of demand theory.

He later sent me a copy of his Wealth and Welfare: Collected Essays on Economic Theory, Vol. I, MIT Press 1981, as a gift. The context of our correspondence had to do with my criticism of the young Hicks and support for the ghost of Alfred Marshall in an article “Considerations on Utility, Benevolence and Taxation” I was publishing in the journal History of Political Economy published then at Duke University. In Philosophy of Economics, I would come to say about Hicks’s letter to me “It may be a sign of the times that economists, great and small, rarely if ever disclaim their past opinions; it is therefore an especially splendid example to have a great economist like Hicks doing so in this matter.” It was reminiscent of Gottlob Frege’s response to Russell’s paradox; Philosophy of Economics described Frege’s “Letter to Russell”, 1902 (Heijenoort, From Frege to Gödel, pp. 126-128) as “a document which must remain one of the most noble in all of modern scholarship; a fact recorded in Russell’s letter to Heijenoort.”

In Blacksburg, by the Summer and Fall of 1984 I was under attack following the arrival of what I considered “a gang of inert game theorists” — my theoretical manuscript had blown a permanent hole through what passes by the name of “social choice theory”, and they did not like it. Nor did they like the fact that I seemed to them to be a “conservative”/classical liberal Indian and my applied work on India’s economy seemed to their academic agenda an irrelevance. This is myself at the height of that attack in January 1985:

Professor Schultz at the University of Chicago came to my rescue and at his recommendation I was appointed Visiting Associate Professor in the Economics Department at Brigham Young University in Provo, Utah.

I declined, without thanks, the offer of another year at Virginia Tech.

On my last day in Blacksburg, a graduate student whom I had helped when she had been assaulted by a senior professor, cooked a meal before I started the drive West across the country. This is a photo from that meal:

In Provo, I gratefully found refuge at the excellent Economics Department led at the time by Professor Larry Wimmer.

It was at Provo that I first had a personal computer on my desk (an IBM as may be seen) and what a delight that was (no matter the noises that it made).  I recall being struck by the fact a colleague possessed the incredible luxury of a portable personal computer (no one else did) which he could take home with him.   It looked like an enormous briefcase but was apparently the technology-leader at the time.  (Laptops seem not to have been invented as of 1985).

In October 1985, Professor Frank Hahn very kindly wrote to Larry Wimmer revising his 1980 opinion of my work now that the PhD was done, the India-work had led to The Times editorial and the theoretical work was proceeding well.

I had applied for a permanent position at the University of Hawaii, Manoa, and had been interviewed positively at the American Economic Association meetings (in New York) in December 1985 by the department chairman Professor Fred C. Hung. At Provo, Dr James Moncur of the Manoa Department was visiting. Jim became a friend and recommended me to his colleagues in Manoa.

Professor Hung appointed me to that department as a “senior” Assistant Professor on tenure-track beginning September 1986. I had bargained for a rank of “Associate Professor” but was told the advertisement did not allow it; instead I was assured of being an early candidate for promotion and tenure subject to my book “Principia Economica” being accepted for publication. (The contract with the University of Chicago Press had become frayed.)

Hawaii was simply a superb place (though expensive).

Professor James Buchanan won the Economics “Nobel” in 1986 and I was asked by the Manoa Department to help raise its profile by inviting him to deliver a set of lectures, which he did excellently well in March 1988 to the University as well as the Honolulu community at large. Here he is at my 850 sq ft small condominium at Punahou Towers, 1621 Dole Street:

In August 1988, my manuscript “Principia Economica” was finally accepted for publication by Routledge of London and New York under the title Philosophy of Economics: On the Scope of Reason In Economic Inquiry. The contract with University of Chicago Press had fallen through and the manuscript was being read by Yale University Press and a few others but Routledge came through with the first concrete offer. I was delighted and these photos were taken in the Economics Department at Manoa by a colleague in September 1988 as the publisher needed them.

Milton and Rose Friedman came to Honolulu on a private holiday perhaps in January 1989; they had years earlier spent a sabbatical year at the Department.

Here is a luncheon that was arranged in their honour. They had in the Fall of 1988 been on their famous visit to China, and as I recall that was the main subject of discussion on the occasion.

Milton phoned me in my Manoa office and invited me to meet him and Rose at their hotel for a chat; we had met first at the 1984 Mont Pelerin meetings and he wished to know me better. I was honoured and turned up dutifully and we talked for perhaps an hour. I recall making a strong recommendation that he write his memoirs, especially so that the rumours and innuendo surrounding eg the Chile episode could be cleared up; I also said a “Collected Works” would be a great idea; when Milton and Rose published their memoirs Two Lucky People (Chicago 1998) I wondered if my first suggestion had come to be taken; as to the second, he wrote to me years later saying he felt no Collected Works were necessary.

From 1986 onwards, I had been requested by the University of Hawaii to lead a project with William E James on the political economy of “South Asia” .I had said there was no such place, that “South Asia” was a US State Department abstraction but there were India and Pakistan and Sri Lanka and Bangladesh and Afghanistan etc. Sister projects on India and Pakistan had been sponsored by the University, and in 1989 important conferences had been planned by myself and James in May for India and in June for Pakistan.

I was determined to publish for the first time Milton’s 1955 memorandum on India which the Government of India had suppressed or ignored at the time. At the hotel-meeting, I told Milton that and requested him to come to the India-conference in May; Milton and Rose said they would think about it, and later confirmed he would come for the first two days.

This is a photo of the initial luncheon at the home of the University President on May 21 1989. Milton and India’s Ambassador to the USA at the time were both garlanded with Hawaiian leis. The first photo was one of a joke from Milton as I recall which had everyone laughing.

There was no equivalent photo of the distinguished scholars who gathered for the Pakistan conference a month later.

The reason was that from February 1989 onwards I had become the victim of a most vicious racist defamation, engineered within the Economics Department at Manoa by a senior professor as a way to derail me before my expected Promotion and Tenure application in the Fall. All my extra time went to battling that though somehow I managed to teach some monetary economics well enough in 1989-1990 for a Japanese student to insist on being photographed with me and the book we had studied.

I was being seen by two or three temporarily powerful characters on the Manoa campus as an Uppity Indian who must be brought down. This time I decided to fight back — and what a saga came to unfold! It took me into the United States District Court for the District of Hawaii and then the Ninth Circuit and upto the United States Supreme Court, not once but twice.

Milton Friedman and Theodore Schultz stood valiantly among my witnesses — first writing to the University’s authorities and later deposing in federal court.

Unfortunately, government lawyers, far from wanting to uphold and respect the laws of the United States, chose to deliberately violate them — compromising a judge, suborning demonstrable perjury and then brazenly purchasing my hired attorney (and getting caught doing it). Since September 2007, the State of Hawaii’s attorneys have been invited by me to return to the federal court and apologise for their unlawful behaviour as they are required by law to do.

They had not expected me to survive their illegalities but I did: I kept going.

Philosophy of Economics was published in London and New York in September 1989

scan0001

scan0002

scan0004

The hardback quickly sold out on its own steam and the book went into paperback in 1991, and I was delighted to learn from a friend that it had been prescribed for a course at Yale Law School and was strewn along an alley in the bookshop:

scan0005

The sister-volumes on India and Pakistan emerging from the University of Hawaii project led by myself and James were published in 1992 and 1993 in India, Pakistan, Britain and the United States.

scan0013scan0011

As described elsewhere, the manuscript of the India-volume contributed to the origins of India’s 1991 economic reform during my encounter with Rajiv Gandhi in his last months; the Pakistan-volume came to contribute to the origins of the Pakistan-India peace process. The Indian publisher who had promised paperback volumes of both books reneged under leftwing pressure in Delhi; he has since passed away and James and I still await the University of Hawaii’s permission to publish both volumes freely on the Internet as copyright rests with the University President.

In 2004 from Britain, I wrote to the 9/11 Commission stating that it was possible that had the vicious illegalities against me not occurred at Manoa starting in 1989, we may have gone on after India and Pakistan to study Afghanistan, and come up with a pre-emptive academic analysis a decade before September 11 2001.

To be continued in Part Two.

Pakistani expansionism: India and the world need to beware of “Non-Resident Pakistanis” ruled by Rahmat Ali’s ghost

The Government of Pakistan is said to be due to release its initial report on the involvement of Pakistanis in the Mumbai massacres.  It is reportedly expected that the G o P will partly if not mainly or wholly attribute responsibility for the planning of the massacres to expatriate  Pakistanis  in other countries, perhaps in Europe and Britain.  If so, a fact the Government of India might find prudent to recall is that the Government of Pakistan in bygone decades did deny citizenship to Rahmat Ali himself    (who invented the acronym “P, A, K, I, S, T, A, N” ) and even deported him back to Britain from where he had carried out his vituperative and bigoted campaign against Hindus.

Rahmat Ali’s British grave has become a site of pilgrimage for expatriate Pakistani extremists and his ignorant hate-filled ideology from the 1930s has been inspiring their modern manifestos.  I said this in an article published in Karachi’s Dawn newspaper in 2005, which also pointed to Iqbal and Jinnah’s disdain for Rahmat Ali’s views (see “Iqbal and Jinnah vs Rahmat Ali” republished here).  American nationals and  British subjects of Pakistani origin inspired by Rahmat Ali’s  ghost are spreading theories of Pakistani territorial expansionism at the cost of the destruction of the Indian Republic and many other countries.

The fact that at one such website recently I myself, presumably because of my Hindu name and Indian nationality, have been referred to as a “monkey- or donkey-worshipper” 😀  may speak to the somewhat  rabid nature of such ideologies.  (Drat! And there I was expecting some elementary Pakistani courtesy and acknowledgment let alone gratitude for having created, at great personal cost at an American university twenty years ago, the volume with WE James titled Foundations of Pakistan’s Political Economy: Towards an Agenda for the 1990s with its mundane chapters on agriculture, macroeconomics, education etc!)

Incidentally, British newspapers are reporting today that America’s  CIA has been deeply concerned about British subjects of Pakistani origin being a source of international terrorism. It may be pertinent to recall  that terrorism in India’s Punjab had much support among numerous Sikh expatriates and immigrants in North America and Britain, and the same kind of thing may be true of Tamil expatriates from  Sri Lanka.  Being isolated and alienated as immigrants in a foreign country may lead to psychological conditions that contribute to such phenomena, whereby political and other events in the faraway country-of-origin take on exaggerated proportions in an individual’s mental make-up.   Certainly Rahmat Ali himself was a rather tragic lonely figure who wasted his own potential to properly contribute to Pakistan’s political history  through his own self-blinding hatred of Hindus.

SR

Of a new New Delhi myth and the success of the University of Hawaii 1986-1992 Pakistan project (with 2015 Postscript)

A leading Indian commentator says in this morning’s paper (November 15 2008) about Manmohan Singh:

“His formulation on Kashmir (“I have no mandate to change borders, but we can make borders irrelevant”), became the obvious solution once he articulated it.”

Such may be how  modern New Delhi’s myths and self-delusions  get born — since in fact there is no evidence that Manmohan Singh  or any of his acolytes had anything to do with originating the Pakistan-India peace process in recent decades, just as there has not been that Manmohan Singh or  any of his acolytes had anything to do with originating the  Congress Party’s new economic thinking in 1990-1991.

(Lest I be misunderstood I should add at the outset that I have the highest personal regard for Dr Singh, he has been  in decades past a friend of my father’s, he at my father’s request consented to discuss economics with me in Paris in 1973 when I was a callow lad of 18, he himself has not claimed the originality that has been frequently mis-attributed to him by others for whatever reason, etc.)

The origins of  the idea  about India-Pakistan and J&K expressed by Manmohan Singh’s words are to be found in the last paragraph of the Introduction by the Editors of a book which arose from the University of Hawaii’s 1986-1992 Pakistan project, which read:

“Kashmir… must be demilitarised and unified by both countries sooner or later, and it must be done without force. There has been enough needless bloodshed on the subcontinent… Modern Pakistanis and Indians are free peoples who can voluntarily agree in their own interests to alter the terms set hurriedly by Attlee or Mountbatten in the Indian Independence Act 1947. Nobody but we ourselves keeps us prisoners of superficial definitions of who we are or might be. The subcontinent could evolve its political identity over a period of time on the pattern of Western Europe, with open borders and (common) tariffs to the outside world, with the free movement of people, capital, ideas and culture. Large armed forces could be reduced and transformed in a manner that would enhance the security of each nation. The real and peaceful economic revolution of the masses of the subcontinent would then be able to begin.”

The University of Hawaii’s Pakistan project, involving Pakistani and other scholars, including one Indian, led to the volume Foundations of Pakistan’s Political Economy: Towards an Agenda for the 1990s published in Karachi, New Delhi and elsewhere. The book reached Nawaz Sharif and the Islamabad elite, including the most hawkish of Islamabad’s hawks, and Pervez Musharraf’s 2006 proposal on J&K, endorsed warmly by the US State Department,  may have grown from that paragraph. The Editors of the book, as economists themselves, decried the waste of resources involved in the Pakistan-India confrontation, saying it had

“greatly impoverished the general budgets of both Pakistan and India. If it has benefited important sections of the political and military elites of  both countries, it has done so only at the expense of the general welfare of the masses.”

Such words were impossibly bold in the  late 1980s-early 1990s.  However,  as stated in  a special editorial article “What to tell Musharraf”     in The Statesman of December 16 2006, they seemed  in recent years incomplete and rather naïve even to their author, who was myself, the only Indian in that project and the one who had conceived it. Most significantly, the position in international law in the context of historical facts had been wholly neglected. So had been the manifest nature of the Pakistani state (as it had become prior to the splendid 2008 elections).

The Hawaii project had involved top Pakistani economists, political scientists and other commentators but had deliberately chosen to keep the military and the religious clergy out of its chapters.  And it was the military and religious clergy who in fact came to dominate Pakistan’s agenda in the 1990s, at least until the 9/11 attacks in America indirectly  altered the political direction of the country.

The peaceful and mundane economic agenda outlined for Pakistan in the Hawaii project  has come into its own  by way of  relevance ever since.  A few weeks ago, the first trucks filled with fruit, woolens and many other goods traversed across the “Line of Control” in J&K for the first time in sixty years.   The Pakistan project that James and I led at the University of Hawaii in the late 1980s may be now declared a success.   Among other things, our book explained to Indians that there does exist a Pakistani point of view and perhaps explained to Pakistanis that there does exist an Indian point of view.  That  is something that had not existed before our book.

pak

Postscript 18 Nov 2015:  I have made clear at Twitter that I find the K.M. Kasuri book promoted and publicized in India by MS Aiyar, S Kulkarni, B Dutt and others in Delhi and Mumbai is mendacious where it is not merely self-serving.  Its clear intent is to get India to accept the (false) ISI/Hurriyat narratives about 1947, Kashmir, Bangladesh, terrorism etc.  Its purported ideas of demilitarisation and a borderless Kashmir are essentially lifted from my earlier 1980s work in America cited above — which I myself have rejected as naive since the Pakistani aggression in Kargil in 1999.  More anon.

Monetary Integrity and the Rupee

 

Monetary Integrity and the Rupee: Three British Raj relics have dominated our macroeconomic policy-making

First published in Business Standard 28 September 2008

 

Taxation via inflation “does not require detailed legislation, and can be administered very simply. All that it requires is to spend newly created notes. The resulting inflation automatically imposes a tax on cash balances by depreciating the value of money”. Philip Cagan said this in a pioneering 1956 study of hyperinflations worldwide. Britain’s Hugh Dalton observed how government deficits could be met by “use of the printing press to manufacture legal tender paper money” to pay government creditors either directly “with new paper money specially printed for the purpose” or indirectly “out of loans to itself from the Central Bank”. Milton Friedman and Anna Schwartz pointed to America’s wartime resort to inflation.

 

Government debt held by a central bank quickly filters through to appear as an asset in balance-sheets of commercial banks, causing expansion of bank-lending and hence of bank-deposits and broad money. After the attack on Pearl Harbour, the US Treasury could get from the Federal Reserve or commercial banks “any funds that it needed beyond those secured by taxation and by borrowing from non-bank sources”. America’s wartime banking system became “a mechanism for providing funds to finance government expenditure” — deposits grew because “bank buying of government securities increases bank deposits”.

 

In RF Harrod’s words: “There is a well-known aphorism that ‘bank loans create deposits’…. if the central bank has an increase of assets, whether through a gold inflow or its own increase of ‘lending’ (including the purchase of bills or bonds), some commercial bank will have an increase of assets of equal amount, in the form of claims on the central bank (deposits at it or notes issued by it) and an increase of deposit liabilities of equal amount to its customers”.

 

India has followed in peacetime over six decades what the USA and Britain followed during war. Our vast growth of bank-deposits in recent decades has been mostly a paper (or nominal) phenomenon caused by unlimited deficit-finance in a fractional reserve banking system. Policy-makers have widely misinterpreted it as indicating a real phenomenon of incredibly high savings behaviour. In an inflationary environment, people save their wealth less as paper deposits than as real assets like land, cattle, buildings, machinery, food-stocks, jewellery etc.

 

Almost 50% of annual public revenues in real terms may have been arising from inflationary finance in recent decades. To take a specific example, during Dr Manmohan Singh’s tenure as Finance Minister, Union Government expenditure net of operational income was some Rs. 1.3 trillion (Rs 1.3 lakh crore) in 1994-1995. Some Rs. 675 billion (1 bn= 100 crore) was raised from all taxation that year, Rs 183 billion from direct taxes. The remaining Rs. 620.8 billion was borrowed on behalf of future generations of citizens using the Government of India’s credit. What is termed “Gross Fiscal Deficit” is this additional or marginal annual borrowing — it adds itself to the ongoing stock of public debt every year and has been continually monetised insofar as our mostly nationalized banking system annually comes to hold government securities to that additional amount.

 

India’s inflation-history shows a first phase from the 1870s until the Second World War when money prices fluctuated in response to real shocks, positive and negative, domestic and international. E.g., the US Civil War and First World War caused demand surges for Indian manufactures like cotton textiles and steel railway-tracks, while the Great Depression saw Indian prices crashing with world prices.

 

During the Second World War, money prices in India rose at their fastest rate ever, caused by deliberate British policy to pay for war expenditure by printing money. The British resort to inflationary wartime finance saw the highest money supply growth rates in India ever to occur to date. This pattern came to be adopted and institutionalised by independent India’s socialist authorities, so there has been a third phase of steady inflationary finance from the 1950s until today, along with negative shocks like military and civil conflicts, droughts and oil price-rises, as well as happier developments like technological progress leading to growth of real income (see graph).

 

Two more relics from the wartime British Raj continue to dominate Indian macroeconomic policy to this day. One is unlimited spending on vast standing armies — our supposed adversary itself being a political remnant of the Raj with similar macroeconomic problems to ourselves. India’s army has some 19 divisions facing Pakistan, Pakistan’s army has 19 divisions facing India!

 

The other relic has been the Indian rupee becoming inconvertible as a world money ever since import quotas were imposed across the Sterling Area in 1940-1942.  Lack of convertibility has made all government finance in India unlike that in modern Western economies. US government bonds are held freely in foreign portfolios so a Swiss household or Japanese bank may trade these as they please. Bond prices vary inversely with interest-rates, and yield curves would be attempted to be defined reflecting the maturity-structure and state of expectations. Competitive arbitrage in international capital markets may succeed in ensuring government debt is priced accurately.

 

A central bank with a convertible currency sells debt to raise monetary interest rates and attract capital flows, buys up its debt to lower rates and cause capital outflows. Money growth unwarranted by real growth depreciates the currency under floating exchange rates; a partial export of inflation occurs under fixed-rates. Debt instruments are liquid near-moneys, and it is because US Government debt has been liquid that debt instruments of its sub-sovereign divisions like States or municipalities are almost as liquid. If sovereign debt is not liquid, nor will be sub-sovereign debt.

 

In India, bank assets may be liquid domestically but are illiquid internationally. Government debt is not held by domestic households as voluntary savings nor has it been a liquid asset held worldwide in foreign portfolios. The same holds *a fortiori* for debt issued by more than two dozen State Governments. “Mutual funds” created in recent years do contain government debt on modern principles of portfolio-selection but amounts involved are small. The Rupee achieving monetary integrity after more than six decades of governmental misuse would be indicated only when any ordinary Indian resident can freely hold or trade India’s money for foreign moneys or precious metals as he/she pleases. India’s economy and money can begin to move towards coherence and integrity only when we put to rest the three relics from the wartime British Raj which we unthinkingly have allowed to dominate our macroeconomic policy-making ever since.

 

The Excel graphs built on my data were made into a nice picture by Business Standard but seem to have been removed from their website, and hence are reproduced here now for the first time today, Oct 2, 2011:

 

See also, more recently,

India’s Money, 2012,

Critical assessments of India’s economic policy, plus my 3 Dec 2012 Delhi talk on India’s money, Interview on Lok Sabha TV 2012, GDI Impuls Zürich Interview, Sunday Guardian Interview & Asian Age/Deccan Herald coverage

https://independentindian.com/2013/11/23/coverage-of-my-delhi-talk-on-3-dec-2012/

 

Milton Friedman’s defence of my work

Twenty years have passed since the acceptance of my book Philosophy of Economics for publication — which coincided with the attack on me arising out of the very success of the India-perestroika and Pakistan-perestroika projects I had been leading  (an attack from within the University that had sponsored the projects since 1986).   I was graced with the support of two  of the 20th Century’s great economists, TW Schultz (1902-1998) and Milton Friedman (1912-2006).   Professor Schultz’s defence of my work has been published already.  Here is that of Professor Friedman.   Both  Professor Friedman and Professor Schultz were later expert witnesses on my behalf in a federal trial (a trial that unfortunately came to be marred by demonstrable bribery and perjury, yet to be rectified).

Addendum 23 Dec 2016:  the jury trial demanded 14 Feb 1990 has never happened; a bench trial with an admittedly compromised judge happened in 1992, marred by demonstrated bribery and perjury  https://independentindian.com/thoughts-words-deeds-my-work-1973-2010/my-american-years-1980-96-battling-for-the-freedom-of-my-books/become-a-us-supreme-court-justice-explorations-in-the-rule-of-law-in-america/

My books in the Library of Congress and British Library

Six volumes are listed in the United States Library of Congress in Washington DC under my name <http://www.loc.gov&gt;.   For convenience, these are given with their call numbers below.   

 [ 1 ]  Roy, Subroto  

Foundations of India’s political economy : towards an agenda for the 1990s / editors, Subroto Roy, William E. James.  1992

ACCESS: Jefferson or Adams Bldg General or Area Studies Reading Rms

 CALL NUMBER: HC435.2 .F68 1992

 

[ 2 ] Roy, Subroto

Foundations of Pakistan’s political economy : towards an agenda for the 1990s / editors, William E. James, Subroto Roy.  1992

ACCESS: Jefferson or Adams Bldg General or Area Studies Reading Rms

CALL NUMBER: HC440.5 .F59 1992

 

[ 3 ]  Roy, Subroto

Margaret Thatcher’s revolution : how it happened and what it meant /edited by Subroto Roy and John Clarke.  2005

[ 4 ] Roy, Subroto

Roy, Subroto. Philosophy of economics : on the scope of reason in economic inquiry / Subroto Roy. 1991

[ 5 ]  Roy, Subroto

Roy, Subroto. Philosophy of economics : on the scope of reason in economic inquiry / Subroto Roy.  1989

ACCESS: Jefferson or Adams Bldg General or Area Studies Reading Rms

 

CALL NUMBER: HB72 .R69 1989

 

[ 6 ] Roy, Subroto

Roy, Subroto. Pricing, planning, and politics : a study of economic distortions in India / Subroto Roy.  1984 

ACCESS: Jefferson or Adams Bldg General or Area Studies Reading Rms

 

CALL NUMBER: HC435.2 .R66 1984

 

The British Library in London http://catalogue.bl.uk, has the same titles under 9 listings as below:

1  Foundations of India’s political economy : 1992.  96/06669 DSC  ORW.1993.a.1142

 

2  Foundations of Pakistan’s political economy : 1992.  YC.1993.a.2144  ORW.1994.a.1019

 

3 Foundations of Pakistan’s political economy : 1992. 93/06010 DSC

 

4 Margaret Thatcher’s revolution : 2005. SPIS.320.941

 

5. Roy, Subroto. Philosophy of economics : 1989. 8458.S.1/92

 

6 Roy, Subroto. The philosophy of economics : 1989. 89/23299 DSC

 

7  Roy, Subroto. Philosophy of economics : 1989 YK.1991.a.5102

 

8 Roy, Subroto. Pricing, planning and politics : 1984. X.0519/26

 

9 Roy, Subroto. Pricing, planning and politics : 1984. 6217.450000 No.69 DSC

(The difference may have been caused by different editions or reprints being listed, for example the volume on Pakistan was published in Karachi too.)

 

Understanding Pakistan

UNDERSTANDING PAKISTAN

First published in The Sunday Statesman & The Statesman Editorial Page Special Article

30-31 July, 2006

By

Subroto Roy

Pakistan’s political institutions have failed to develop properly over sixty years. Yet in the last ten years or more, its Government has acquired weapons of mass destruction and in 1998-99 its Foreign Minister half-threatened to use these against India in a first strike. As a religious and cultural phenomenon and as a putative nation-state, Pakistan needs to be sought to be understood in as unbiased and objective a manner as possible, not least by Pakistanis themselves, as well as by Afghans, Bangladeshis, Chinese, Americans,Israelis, Arabs, Iranians etc. besides ourselves in India.

The slogan “Islam in danger” has always had some substance since orthodox Muslims constantly face temptations in the world existing around them from materialism, scepticism, syncretism, pantheism etc. Some responded defensively to the Westernisation/modernisation of India’s Hindus, Parsees and Christians by becoming insular and separatist in outlook, and anti-individualist or communal in behaviour.

“We are an Arab people whose fathers have fallen in exile in the country of Hindustan, and Arabic genealogy and Arabic language are our pride,” declared Wali Allah (1703-1762), a contemporary of Nejd’s founder of Wahhabism. “We must repudiate all those Indian, Persian and Roman customs which are contrary to the Prophet’s teaching”, declared Barelvi (1786-1831), who also initiated the idea of a religious mass migration of North Indian Muslims. His movement saw “jihad as one of the basic tenets of faith… it chose as the venue of jihad the NW Frontier of the subcontinent, where it was directed against the Sikhs. Barelvi temporarily succeeded in carving out a small theocratic principality which collapsed owing to the friction between his Pathan and North Indian followers…” (A. Ahmed, in Basham (ed) Cultural History of India).

Political and psychological tensions between Pakistan’s Pashtun/Baloch tribal people and Punjabi/ Urdu elite continue to this day, even when many of the former have integrated into industries and vocations controlled by the latter. The highlanders were never part of Hindu societies, while the plainsmen, whether they admit it or not, ethnically were converts for the most part from India’s native religions (though here again the religious syncretism of Sindhis, both Muslim and Hindu, may be contrasted with orthodoxy). Barelvi’s theocracy, named Tariqa-yi Muhammadiya, had remnants near Sittana until the First World War, and his followers are still a major component of Pakistan’s most orthodox today.

Muslim separatism in North India would have been futile without British political backing. As early as 1874, the British saw their advantage: “The existence side by side of these hostile creeds (Hindu and Muslim) is one of the strong points in our political position in India. The better classes of Mohammedans are a source of strength to us and not of weakness. They constitute a comparatively small but an energetic minority of the population whose political interests are identical with ours.” When the Agha Khan’s 1906 delegation first pleaded for communal representation, Minto agreed with them, and Minto’s wife wrote in her diary the effect was “nothing less than the pulling back of sixty two millions (of Muslims) from joining the ranks of the seditious opposition.” The slogan “If you are not with us you are against us” was always widely applied by the British in India in the form “If you dare to not be with us, we definitely will be with your adversaries”.

One obscure ideological current of today’s Pakistan came via the enigmatic personage of Inayatullah Mashriqi (1888-1963), who, from being a Cambridge Wrangler, became a friend of Adolf Hitler in 1926, received a Renault as a gift from Hitler (possibly housed in a Lahore museum today) and claimed to have affected Hitler’s ideology. Mashriqi created the Khaksars, modelled on the Nazi SA, and was often jailed for violence.

But the official ideology of today’s Pakistan came from Mohammad Iqbal (1877-1938), an admirer of Friedrich Nietzsche. Indeed, “Pakistan” would have been better named “Iqbalistan” and its nationals “Iqbalians”, just as countries like Colombia, the USA, Israel, Saudi Arabia etc. have been named after an individual person. Iqbal’s 1930 Presidential Speech to the Muslim League in Allahabad conceptualised the country that exists today: “I would like to see the Punjab, NWFP, Sind and Baluchistan amalgamated into a single state…the formation of a consolidated NW Indian Muslim state appears to me to be the final destiny of the Muslims at least of NW India… India is the greatest Muslim country in the world. The life of Islam as a cultural force in this living country very largely depends on its centralisation in a specified territory… “

Though Kashmiri himself, Iqbal was silent about J&K being any part of this new entity. Nor did he see this Muslim country being theocratic or filled with anti-Hindu bigotry: “A community which is inspired by feelings of ill-will towards other communities is low and ignoble. I entertain the highest respect for the customs, laws, religious and social institutions of other communities…. Yet I love the communal group which is the source of my life and my behaviour; and which has formed me what I am by giving me its religion, its literature, its thought, its culture,and thereby recreating its whole past, as a living operating factor, in my present consciousness… Nor should the Hindus fear that the creation of autonomous Muslim states will mean the introduction of a kind of religious rule in such states…. I therefore demand the formation of a consolidated Muslim state in the best interests of India and Islam. For India it means security and peace resulting from an internal balance of power, for Islam an opportunity to rid itself of the stamp that Arabian Imperialism was forced to give it, to mobilise its law, its education, its culture, and to bring them into closer contact with its own original spirit and the spirit of modern times.” Iqbal clearly wished to be rid of the same stamp of Arabian Imperialism that Wali Allah had extolled.

In 1937, Iqbal added an economic dimension referring to Shariat in order that “at least the right to subsistence is secured to everybody”. A “free Muslim state or states” was “the only way to solve the problem of bread for Muslims as well as to secure a peaceful India.”

Iqbal persuaded MA Jinnah (1876-1948), who had settled once again into his London law practice, to return to India in 1934. But when, following the 1935 Government of India Act, India experienced its first democratic elections in 1937, the Muslim League’s ideology promoted by Iqbal and Jinnah failed miserably in the very four provinces that Iqbal had named.

Three days after Hitler’s attack on Poland, the British chose to politically empower Jinnah. Until September 4 1939, the British “had had little time for Jinnah and his League. The Government’s declaration of war on Germany on 3 September, however, transformed the situation. A large part of the army was Muslim, much of the war effort was likely to rest on the two Muslim majority provinces of Punjab and Bengal. The following day, the Viceroy invited Jinnah for talks on an equal footing with Gandhi…. because the British found it convenient to take the League seriously, everyone had to as well” (F. Robinson, in James & Roy (eds) Foundations of Pakistan’s Political Economy). Jinnah himself was amazed: “suddenly there was a change in the attitude towards me. I was treated on the same basis as Mr Gandhi. I was wonderstruck why all of a sudden I was promoted and given a place side by side with Mr Gandhi.”

Britain at war was faced too with intransigence from the Congress — Gandhi, for example, rudely dismissing the 1942 Cripps offer as a “post-dated cheque on a failing bank”. It was unsurprising this would contribute to the British tilt towards Congress’s adversary. Suddenly, Rahmat Ali’s acronym “PAKSTAN” , supposedly invented on the top floor of a London bus, was becoming a credible possibility.

By 1946, Muslim electoral opinion had changed drastically in the League’s favour. By 1947, Iqbal’s lofty philosophical vision of a cultured Muslim state had degenerated into irrational street mobs shouting: “Larke lenge Pakistan; Marke lenge Pakistan; Khun se lenge Pakistan; Dena hoga Pakistan”.

Events remote from India’s history and geography, namely, Hitler’s rise and the Second World War, had contributed between 1937 and 1947 to the change of fortune of Jinnah’s League, and hence the fate of all the people of the subcontinent. Even so, thanks to AK Azad’s diplomacy, the May 1946 Cabinet Mission Plan denying Partition and Pakistan did come to be accepted by Jinnah’s Muslim League, and it was doubtless the obduracy and megalomania of Azad’s Congress colleagues which contributed equally to the failure to find a political solution ~ along with the vapid behaviour of a pompous, vacuous Mountbatten who caused infinite uncertainty until June 3 1947, as to what was going to happen to the lives of scores of millions of ordinary people within a few weeks.

In August 1947, the new Pakistani elite hardly felt or even wished to feel free of the British ~ they merely felt independent of what they saw as Congress domination, and had now acquired some power for themselves. Far from any nation-building taking place, Pakistan’s early years were marked by political, legal, constitutional and military chaos and trauma. Both Dominions made a grab for the Raj’s common assets, especially the armed forces.

Indeed, how did the Kashmir problem originate? As much as any other factor, it occurred because of the incompetent partitioning of military assets and hurried decommissioning of British Indian armies ~ causing thousands of Mirpuri soldiers to return to a communally inflamed Punjab/ Jammu region.

The first J&K war started within weeks of Partition and was in all but name a civil war ~ somewhat like the American Civil War. It was a civil war not merely between Kashmir’s National and Muslim Conferences but also between Army regiments who had been jointly fighting Britain’s enemies until very recently.

Pakistan’s leadership vacuum started at once. Jinnah was ill and died shortly. Liaquat Ali Khan was the only politician of any experience left. He faced on one side Pashtuns having no wish to be dominated by a new Karachi/ Rawalpindi elite, and on the other side, the Kashmir conflict. The most basic functions of governance never got started. Taking a Census has been one such function since Roman times, yet Pakistan has never had one. Writing a Constitution is another, but Maududi and others demanded “That the sovereignty in Pakistan belongs to God Almighty alone and that the Government of Pakistan shall administer the country as His agent”. As a result, Pakistan’s few constitutionalists have been battling impossibly ever since to overcome the ontological mistake made of assuming that any earthly government, no matter how pious, can be in communication with God Almighty as easily as it can be with foreign governments.

The Rule of Law is another basic function. But when Liaquat was himself assassinated in 1951, his assassin was killed on the spot yet the murder remained unsolved. Mashriqi was immediately arrested because of his hostility to the Muslim League, but later released. Because the assassin was Pashtun, Afghanistan was blamed but the Afghan Government proved otherwise. The investigating policeman was killed in an aircrash, and all documents went with him. Final suspicion pointed towards Akbar Khan, the renegade Army general who had led the attack on J&K and was in jail for the Rawalpindi conspiracy. Years later, Liaquat’s widow (the former Irene Pant of Naini Tal) rued the fact no one was ever prosecuted.

After Liaquat’s assassination, the period of Ghulam Mohammad, Nazimuddin, Mohammad Ali Bogra, Chaudhury Mohammad Ali, and most importantly, Iskander Mirza leading up to Ayub Khan’s Martial Law in 1958, was simply appalling in its display of the sheer irresponsibility of Pakistan’s new super-elite. Instead of domestic nation-building or fulfilling the basic functions of governance, close comprador relations came to be established with the US and British Governments ~ exemplified by Mirza’s elder son taking the American Ambassador’s daughter as his (first) wife and moving to a lifelong career with the World Bank in Washington. This comprador relationship between Washington, London and Pakistan’s super-elite flourishes and continues to this day. E.g., the current World Bank head and architect of the 2003 Bush invasion of Iraq, Paul Wolfowitz, remains in a mentoring relationship with Shaukat Aziz, a former American bank executive, who is General Musharraf’s Prime Minister. For better or worse, Pakistan’s Government will never veer from the side of Anglo-American policy while such comprador relationships remain intact.

Before the 1971 war, West Pakistan was in a frenzy from a propaganda campaign of “Crush India” and “Hang Mujib”. General Niazi’s surrender to General Arora in Dhaka Stadium ~ causing 90,000 PoWs whom India then protected from Bangladeshi revenge ~ shocked Pakistan and shattered the self-image of its Army. ZA Bhutto was the only populist politician of the country ever, and his few years held vanishing promise of a normal political agenda (no matter how economically misguided) finally arising. But Bhutto suppressed the new Baloch revolt with the Shah of Iran’s military help; at the same time he failed to protect his own back against Zia ul Haq’s coup, leading to his judicial murder in 1979. Zia tried to rebuild the Army’s shattered esprit de corps the only way he knew how, which was by indoctrinating the Punjabi officer corps with Sunni dogmatism. This coincided with the Afghan civil war, influx of refugees, and US-Saudi-Chinese plan to defeat the USSR. Pakistan’s super-elite in their comprador role were happy to allow themselves to be used again and be hung out to dry afterwards.

All normal branches of Pakistan’s polity, like the electorate,press, political parties, Legislature and Judiciary, have remained at best in ill-formed inchoate states of being. The economy remains, like India’s, one fed on endless deficit finance paid for by unlimited printing of inconvertible paper money, though Pakistan has had relatively more labour emigration and much less foreign investment and technological progress than India. Both are wracked by corruption, poverty, ignorance and superstition.

Over half a century, the military has acquired vast economic and political interests and agendas, on pretext of protecting Pakistan from India or gaining “Kashmeer” for it. With few and noble exceptions, academics, politicians and journalists have remained timid in face of fascistic State-power with its militarist/Islamist ideology ~ causing a transferance of the people’s anger and frustration onto an easier target, namely ourselves in India. Anti-Indianism (especially over J&K) remains the sole unifying factor of Pakistan’s super-elite, regardless of what history’s objective facts may have to say. Much political courage and understanding will be needed for that to be reversed.

All countries hunger for genuine national heroes who take upon themselves individual risks on behalf of ordinary people. Wali Khan stood up to his father’s jailors, and young Benazir of 1980s vintage to her father’s executioner. But Pakistan has had few such heroes,certainly none among its bemedalled generals. Why AQ Khan is seen as a hero is because he at least took some personal risks, and finally brought Pakistan a kind of respect and independence in the world with his Bomb.

Path of the Pakistan Rupee 1947-1993

Path of the Pakistan Rupee 1947-1993
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.

“The Pakistan rupee traded 1:1 with the Indian rupee at the time of Independence.  As noted, Pakistan chose not to devalue with sterling and the Indian rupee in 1949, which led to the end of the common market which existed with India.  Almost six years later, on July 31 1955,  Pakistan with IMF approval devalued to Rs.4.76 to the United States dollar, again establishing the same par-value as India.

Pakistan did not respond to the 1966 Indian devaluation although the Pakistan economy had suffered similar shocks, especially the 1965 war with India and natural disasters and civil conflict in East Pakistan.  On July 22 1970, a fluctuating tourist rate was introduced, effecting a partial devaluation.  Demonetization of bank-notes in June 1971 and the civil conflict leading up to the December 1971 Bangladesh war led to considerable capital flight via the well-developed parallel market where the Pakistan rupee reportedly touched Rs. 25 to the United States dollar.
Following the breakdown of the Bretton Woods mechanism as of August 1971, the official Pakistan rupee began to appreciate because of its peg to sterling.  In September, Pakistan like India changed its peg from sterling to the dollar, thereby depreciating with the dollar.  But Pakistan stayed at the same rate that had been established since 1955 of Rs.4.76 per United States dollar.  As with India, it is possible that in the period 1949-1979 long-term damage was done to Pakistan’s competitiveness relative to other developing countries by highly overvalued nominal exchange-rates associated with an inward-oriented trade regime.
In May 1972,  Pakistan implemented a major exchange reform, unifying existing multiple exchange-rates and declaring a new par value of Rs.10 to the United States dollar, which implied a 130 percent nominal devaluation and 62 percent real devaluation.  After a small appreciation in 1974, the rupee was maintained at Rs. 9.9 to the United States dollar for the next nine years.  However, the real exchange rate appreciated by an estimated 20 percent in the first half of the 1970s, and then depreciated by about 8 percent in the second half of the 1970s.  Domestic inflation relative to foreign inflation caused further loss of competitiveness as the real rate appreciated by nearly 10 percent in 1981-1982.  Although the authorities were aware of a loss of competitiveness, they were unwilling to devalue the nominal rate for almost a decade.

Faced with a severe balance of payments situation, Pakistan in January 1982 finally abandoned the fixed peg with the United States dollar and pegged to an undisclosed currency basket with the dollar retained as the intervention currency.  The rupee was depreciated by nearly 20 percent in 1982-1983 and a further 11 percent in 1983-84, with real exchange-rate depreciations of 11 percent and 4.6 percent respectively.  A substantial improvement was recorded in the current account especially on workers’ remittances (accounting for almost the same as the entire merchandise exports of Pakistan) which rose by 30 percent over the 1981-82 level.  The nominal depreciation slowed in 1984-85, with slight real rate appreciation.  This became reflected in the current account with workers’ remittances showing a remarkable elasticity and falling by almost $300 million.  In 1985-86, the nominal exchange-rate was allowed to depreciate at a more accelerated pace.

The influence on Pakistan’s exchange-rate policies of India may be separated into different factors.  Pakistan’s initial decision in 1949 not to follow the devaluation of sterling and the Indian rupee was seen by contemporary observers as a statement of national sovereignty by the new country.  However, the detrimental consequences of this led six years later to Pakistani devaluation to the same par-value as India at Rs.4.76 per United States dollar.  Pakistan did not respond to India’s 1966 devaluation to Rs.7.50 to the United States dollar, and the Pakistani devaluation of 1972 to Rs.10 to the United States dollar was a change of policy specifically in the new circumstances following the 1971 war with India over Bangladesh.   The 1972 devaluation was in all likelihood long overdue, since, as already noted, both Pakistan and India may have sustained long-term damage during the Bretton Woods period from overvalued nominal exchange-rates in face of numerous economic shocks, especially natural disasters and wars with one another.

In relation to their mutual hostilities, overvalued nominal exchange-rates in India and Pakistan have been of course conducive to each country’s defence sector imports, although at the cost of mutual loss of competitiveness for export and other hard-currency earning sectors of in the world economy.

Pakistan did not nominally depreciate any further in the 1970s despite real exchange-rate appreciation.  The delinking from the United States dollar and the start of active depreciation did not begin until January 1982.  Whether this was coincidence or a response to the fact that India actively began to depreciate at the end of 1981 is hard to tell.  In any case, the Pakistan rupee and Indian rupee both depreciated almost in tandem during most of the 1980s  The extent of similarity was tested when the Indian rupee moved in the range of -1 to 1 percent, 1-2 percent on either side, and more than 2 percent on either side.  The greater the change in the Indian rupee’s bilateral exchange-rate with respect to the United States dollar, the larger the extent of similarity in movement between the Pakistan rupee and the Indian rupee.  In the Indian case, the large likely influence of the United States dollar has been noted, with the Indian currency depreciating less fast when the dollar was appreciating with respect to other major currencies than when the dollar was depreciating with respect to other major currencies in the 1980s.  The Pakistan rupee seemed to be maintained in the 1980s at a significantly competitive rate with respect to the Indian rupee — e.g. at 1.32 per Indian in 1986, 1.34 in 1987, 1.30 in 1988, 1.27 in 1989 and 1.24 in 1990.   This indicates a distinct change from the 1949 situation when resisting devaluation was seen as a statement of national sovereignty.
The large Indian devaluations of 1991 left the Pakistan rupee at 1.06 per Indian, and in 1992 at 0.97.  The major changes which have taken place in the Indian exchange-rate regime in 1992 and 1993 have been followed closely by the Pakistan authorities and public.”

India, Pakistan, Sri Lanka, Bangladesh Manufactured Exports to Major Countries

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.

Method

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.[1]  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

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.

Bangladesh

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).

[1]Some discrepancy exists in the data as India does not report any exports of petroleum to either the USA or France in these years.

A note on the welfare economics of regional cooperation (1988)

A note on the welfare economics of regional cooperation

Subroto Roy

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.