In Defense of Free Trade

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SIPA’s Arvind Panagariya, the Jagdish Bhagwati Professor of Indian Political Economy, is an expert on trade who served in the cabinet of the Indian prime minister Narendra Modi from 2015 to 2017. As vice chairman of the National Institution for Transforming India, also called NITI Aayog, Panagariya helped lead a think tank within the government that provided strategic and technical advising on key issues. He is also a former chief economist of the Asian Development Bank and has worked with the World Bank, the IMF, and the UN in various roles.

Panagariya’s latest work, Free Trade and Prosperity (Oxford 2019), is the first book-length defense of free trade that focuses on developing countries. In it he combines empirical evidence with historical cases to dispel myths and demonstrate the critical role of trade in growth as well as poverty reduction. Panagariya recently spoke with SIPA Magazine about his book.

Note: The conversation took place before the May 19 conclusion of India’s elections, which increased the majority held by Modi’s Bharatiya Janata Party.

You’ve already authored more than 15 books on trade. What made you decide to write this book in particular?

The first 15 to 20 years of my work was mostly on the theory of international trade, which is my core area of my specialization. But coming from India, I also think about economic development. This book is where trade and economic development meet. What I found was that several books have been written making the case for free trade, but almost all of them are written in the context of developed countries. A lot of writings exist on developing countries and free trade, but there is no single source where you get a full-scale defense of free trade with developing countries at its center. That was the motivation for this book.

Do you believe that countries will adopt varying trade policies, with some pursuing free trade and others pursuing protectionist policies, or will most once again converge on a certain global norm?

We’re at the crossroads right now. For many decades, the United States provided the necessary leadership to create a multilateral trade system, which initially started with the General Agreement on Tariffs and Trade and culminated in the World Trade Organization. The United States saw it as its own mandate to have a set of rules which are followed by all the countries, and it led to a huge amount of liberalization, in different phases.

Now a large number of developing countries are becoming important, and the interests have clashed. The United States now feels that it has been hurt by its own openness; at least the political leadership sees it that way. And that, of course, has led the United States to become more defensive, which has had a detrimental effect on the world. That’s in the global context. If the global system starts to unravel, then domestic political economies start to assert themselves. We’ll see a temporary setback.

But I remain an optimist. In spite of actions that the United States has taken against China, China against the United States, and some of the other countries against one another, on the whole, the global economy remains open. If you look at numbers for global trade—over $17 trillion in merchandise trade and another $4–$5 trillion in services trade—these are large numbers. So if any country wonders if it can benefit from free trade, there are a lot of opportunities.

What’s the best way to engage someone who has a very different view on trade from yours? This is especially important for current students who will be future policymakers.

That’s why I wrote the book! Somebody has to be willing to engage. If someone has already made up their mind that trade is not good for them, it’s harder. So I don’t expect them to change their minds, but there are a lot more people with open minds who are willing to look at the evidence. This book provides very solid evidence.

In the end, choosing between free trade and protectionism, you have to ask where protectionism has resulted in prosperity—and it is pretty hard to find evidence of that.

You’ve worked in the Modi government as a cabinet minister, and you’ve defended his policies. What’s your response to those who criticize the government policies in the economy and other areas?

In my personal view, the government has made huge progress and embraced much-needed economic reforms. Thanks to many reforms by two prime ministers in the 1990s, India grew very fast from 2003 to 2011. But during the years of high growth, the reforms stopped and the growth rate fell. In the last five years, the reforms came back to infrastructure building, including in roads, civil aviation, railways, and waterways.

In terms of social reforms, progress has been made in health, education, and other areas. India never had a good bankruptcy law, but now there is a modern one called the Insolvency and Bankruptcy Code (IBC). A myriad of taxes have been consolidated into the goods and services tax. There is also a Direct Benefit Transfer (DBT), which uses one’s biometric data to make transfers. It has cut out a lot of leakages in the system. Demonetization has gotten bad press, but I personally think that if you’re going to do something about corruption, this has to be one of the steps.

What do you think is the most important economic issue that the next Indian government must address?

Going forward, reforms on labor law, use of land, and privatization of public-sector enterprises need to start. Thirty-five public-sector enterprises have already been approved for privatization.

We also need reform on higher education—the current governing structure for higher education was placed in 1956, which is antiquated and needs to be replaced by a new law. Compared to any other country, India has too much interference in the institutions of higher education, from state governments to the central government body called the University Grants Commission, and within university administration. We need autonomy. I started this process before I left, and some progress has already been made. But we need a new higher education law to clean up the existing cobwebs and allow autonomy. In the United States, once you get a license from your state government, there isn’t much interference in how to run the university. That model has worked very well.

What is your advice for students?

At the university, study analytical skills very hard. Once you go into the fi eld, you’re confronted with too many facts. You need the ability to extract those facts and think through. Otherwise, you’ll be overwhelmed by the facts. If you want to bring real change, you need to be there. It varies by country, but in India I felt it was especially true. In the United States, there’s a continuum of ideas among universities, think tanks, and government, but that’s not the case in India. When it comes down to convincing politicians, you need to be inside politics. It helps. So study your skills and go into the field.

— Jeenho Hahm MPA ’19