An Indian Perspective
If one is going to talk about globalization, the term globalization must be defined. That’s the easy part. Globalization is defined as free cross-border flow of goods, services, capital, labour, information, ideas, intellectual property. Everything in fact. Defined thus, globalization is more than mere trade reform. Globalization has a descriptive component, as well as a prescriptive one, with the latter more important than the former. The former is simply a factual statement. Over a period of time, globalization has increased in importance and countries have become less insular. It is possible to argue that one encountered such globalization also in the 19th century. There are however two differences between earlier phases of globalization and the present one. First, the speed of change is faster. Second, because most flows (including capital) are private ones, governments have become less powerful in controlling or determining the shape of globalization.
However, there is a prescriptive element to globalization as well. The cross-country empirical evidence is fairly robust that more open economies tend to perform better than more insulated ones. Borders are after all artificial boundaries, created by governments. They are irrelevant for purposes of efficient resource allocation. The logic of Adam Smith’s specialization and division of labour does not become any less compelling because artificial national boundaries have been erected. Here is a quote from Wealth of Nations. “By means of glasses, hotbeds and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?” The point about efficiency gains need not be belaboured. If it does not make sense for Delhi to produce everything that it consumes, it does not make sense for India to produce everything that India consumes.
Why is this logic generally not accepted? It is not enough to argue that in the late 1950s and early 1960s, the government adopted a policy of inward-looking and import-substituting industrialization. Why is there extensive empathy for this import-substituting mindset? It is possible to identify a few inter-related strands, some speculative, others less so.
First, there was the colonial legacy and the identification of the Swadeshi movement with the Independence struggle. Progeny did not necessarily interpret Swadeshi in the sense that the Father of the Nation had. Second, warped policies self-perpetuated themselves in the sense that export pessimism and the resultant foreign exchange constraint, inherited from World War II, became a permanent constraint. The Foreign Exchange Regulation Act (FERA) of 1947, which gave semi-permanency to rules under the Defence of India Act of 1939, is an instance. The Preamble to this 1947 version merely stated that this was “an Act to regulate certain payments, dealings in foreign exchange and securities and the import and export of currency and bullion.” By the time the FERA of 1947 was replaced and tightened by the FERA of 1973, the Preamble had changed. The Preamble now stated that this legislation was necessary “for the conservation of the foreign exchange resources of the country and the proper utilization thereof in the interests of economic development of the country.” The late 1960s to the mid 1970s was the heyday of this Planning Commission kind of control mindset. The point however is that there was considerable public support for this mindset.
Third, perhaps innately, the Indian mind identifies itself much more easily with hierarchical and control structures. It is thus accepted that the government should...