SINCE the economic reforms began, influential voices have called for an intensification of India’s economic relations with the Asia-Pacific region, in particular East Asia. It seemed natural that a globalizing India should forge strong economic ties with her dynamic Asian neighbours. However, with the Asian economic crisis, these ideas moved to the backburner. But now there are signs that the crisis is over, with several countries such as S. Korea once again demonstrating their resilience. A reconsideration of India’s economic participation with East Asia may therefore be appropriate at this juncture. In this paper, to keep the discussion tractable, we shall focus on the prospects of bilateral economic relations between India and S. Korea. The general logic of our analysis can be extended to other countries in the region.

In forming expectations about the future, it is important to keep in view the interplay of the two main determinants of international economic relations – market forces and economic policy. Global market forces are pushing in the direction of closer integration. Among the key drivers of this process is the need for countries and enterprises to find new markets for their exports, the efficiency seeking restructuring of global operations being undertaken by multinational enterprises, and the eagerness of global finance capital to enter ‘emerging markets’. Under these influences, trade-GDP ratios are rising in many countries, including India.

In the Asian region, market conditions have been disrupted by the recent financial crisis. The post-crisis recovery patterns in the economies of the region need to be analyzed in order to gauge their impact on future market trends that would impact India’s economic links with this region. Though market processes have become more important during the 1990s, the role of economic policy remains crucial, because it sets the parameters within which market forces may operate. We must therefore evaluate the type of international integration strategy that India is pursuing. Similarly, we need to evaluate the international economic strategies of East Asian countries. The closeness of fit between these strategies would determine the trade complementarity between India and East Asia. Should our integration strategy change, this would have significant implications for the nature of economic linkages.

 

 

The fact that there are very different ways in which newly liberalizing economies can choose to integrate with international markets is often not adequately recognized. We shall distinguish between three generic types of integration strategies or ‘modes of globalization’. In our view, this captures the essential choices before India. We shall call them: (Mode 1) Neutral-Gradualist Integration Strategy; (Mode 2) Dynamic Comparative Advantage Seeking Integration Strategy, and (Mode 3) Deep Integration Strategy. Each of these modes of globalization differs from the other in the relative emphasis it accords to the following dimensions of international linkage: (a) the stimulus to static comparative advantage, (b) long term technology and productivity enhancement, (c) intra-industry trade, and (d) FDI and portfolio capital inflow.¹

Briefly, these dimensions can be explained as follows. Static comparative advantage refers to international specialization based on current comparative cost advantages. For developing countries like India, this would typically mean specializing in the exports of primary commodities and labour intensive manufactures as well as tradable services like low-end software services. The pursuit of export competitiveness via long term technology and productivity enhancement is the approach of continuous industrial capacity upgradation in order to enter more profitable and technologically upscale markets. This has been the path followed by the East Asian ‘miracle’ economies, and it relies on strategic industrial policy.

Intra-industry trade is based on specialization in niche activities or product differentiation within sophisticated product and service markets. This is becoming the predominant mode of international trade between the industrialized countries. A typical example is automobiles which are shipped both ways between say the USA and Europe. Finally, the FDI and portfolio flow dimension is self- evident. The only point worth noting here is the dramatic rise in such flows in recent years, which has led many to view this as the defining characteristic of current globalization.

Since the patterns of potential competition and cooperation between India and these countries vary across these dimensions, the particular strategy choice has a powerful determining influence on the prospects of international economic ties. The accompanying Table provides the association between the three modes of globalization and dimensions of international integration.

India has been pursuing the Mode 1 globalization strategy since the economic reforms began under P.V. Narasimha Rao and Manmohan Singh in 1991. This strategy has more than a family resemblance to the policy package endorsed by the liberal Washington consensus and recommended by orthodox neoclassical economic thought. Despite several changes of government and difficulties in implementation, the essential aspects of this international economic strategy have been maintained.

The results of following this strategy are apparent from empirical analyses of the commodity composition of India’s trade basket. Labour and resource intensive commodities dominate India’s export basket while science-based products which are scale-intensive and differentiated are low. This pattern has been strengthened in the last decade. Moreover, there has been no improvement in the index of export diversification.² FDI and portfolio capital flows, though substantially higher than in the near autarky conditions of the pre-reform era, are quite modest by international standards. All this confirms our classification of Indian strategy as Mode 1 globalization.

 

 

Meanwhile, before the Asian crisis, most of the East Asian NICs (newly industrializing countries) pursued Mode 2 globalization. There had also been, during this phase beginning in the 1980s, a remarkable intensification of intra-Asian trade, which reflected a new regional division of labour under the auspices of regional economic groupings such as the APEC and ASEAN. This phenomenon can be broadly described as a process by which the entire region as a whole exports the full spectrum of products (from primary to high-tech) mainly to advanced country markets. This specialization among the countries of the region has often been described as the ‘flying geese’ pattern.³

It implies that there is a technology leader Japan, followed by S. Korea and Taiwan in the next rung of technological sophistication, with countries such as Indonesia, Philippines and Thailand making up the rear of the flock. There are interlinkages between these countries, both of trade and investment, through which the dynamic pattern of competitive specialization is sustained. As wages rise, for example, the labour intensive export industries migrate from the ‘senior’ to ‘junior’ members of the flock. China and the United States have significantly challenged this Japan-led vision of regional specialization. Nevertheless, for the purposes of this paper, the long term dynamics of the region is well captured by the metaphor.

What has this implied for India’s economic relations with the region? Essentially, for the pre-crisis phase until 1997, by juxtaposing the two globalization modes, we can explain the rather low level of international linkage between India and the region.⁴ As far as exports are concerned, India had to compete with the technology followers in the Asian grouping for advanced country markets in primary and labour-intensive industries. Lacking the relational foundations based on regional business networks, India was at a disadvantage in penetrating the markets of the more economically advanced regional economies such as Japan, S. Korea and Taiwan, and to a lesser extent Hong Kong and Singapore.⁵ These business ties are more important in the Asian business milieu than elsewhere, as even the US and the EU have found to their chagrin. In this context, India’s inability to enter any of the major East Asian regional trade groupings as a full member, cannot but have a significant dampening impact on trade.

 

 

Now for the pre-crisis scenario with respect to investment. Several of the capital-surplus Asian countries have remained interested in exploring possibilities in India, including Japan, S. Korea and Singapore. However, here too the progress has been modest given India’s halting, unfocused, and case by case approach to FDI. Thus, with India pursuing Mode 1 globalization, and East Asia following Mode 2 (with its own particular regional emphasis) the possibility of closer, strategically significant integration between the Indian and East Asian economies remained bleak in the 1991-97 period.

 

 

To the above analysis, we should add another important influence on the choice of the mode of globalization. Throughout this period, starting in the 1980s, there was pressure on both India and the entire Asian region to accept, or at least shift towards globalization Mode 3. These pressures emanated from US and Europe based global corporations, and were expressed through a multiplicity of forums. These included bilateral demands (as in the US-Japan case), initiatives such as the Multilateral Agreement on Investment (MAI), the bargaining postures of these countries in the WTO negotiations, as also the actions of private business forums as in the Davos based World Economic Forum.

The agenda of ‘deep integration’ is to move beyond crossborder liberalization of goods and services to include two further dimensions: (a) free crossborder movement of assets of all kinds, and (b) harmonization of economic laws and regulatory frameworks across countries. These demands reflect the interests of powerful transnational interests in both finance and material production. Politically leveraging on the fiscal and balance of payments woes of developing countries, this approach is essentially one of dangling the carrots of markets and capital to induce these countries to accept the unfettered movement of capital.

Similarly, the persistent current account surpluses of the East Asian economies with North America and Europe serve as a ploy to achieve a similar objective of market access. The economic rationale for Mode 3 is far from clear;⁶ there is also substantial political opposition from organized labour in the rich countries. Nonetheless, these pressures have been significant, and investment regimes have been liberalized throughout Asia. Were Mode 3 to be adopted by the East Asian countries and/or by India, the prospects of closer integration between them would recede even further than has been the case. Such a globalization mode would tend to induce an intense phase of corporate restructuring driven by mergers and acquisitions, with US and European MNEs acquiring controlling interests in the region. The process would be accompanied by a greater role of foreign institutional investors, serving mainly as a conduit for western financial funds. Western countries, by and large, enjoy competitive advantage in the financial sector, and this would be reflected in this finance-driven type of international integration.

 

 

It is therefore important to assess the likelihood of the adoption of Mode 3 by India and countries in the East Asian region. Take the East Asian region first. The choice of Mode 3 does not appear to be one about which any of the governments are particularly enthusiastic, because it would severely delimit the scope of national economic policy making in a region in which public policy and discretionary intervention have been at the core of the so-called East Asian miracle. There is also very little evidence that home-grown liberal opposition to suffocating governmental intervention has led to demands for dismantling the intervention systems. Indeed, it is only in the throes of economic crisis that most East Asian countries were dragged towards the type of deep harmonization that some western countries and the IMF have encouraged. One can therefore predict, with some assurance, that as the crisis recedes and the recovery takes hold, East Asian countries will attempt to retain as much of their Mode 2 strategy flexibility as possible. This trend is already visible in S. Korea, where the recovery has been marked.

 

 

We shall now take a closer look at South Korea. After the financial crisis, the IMF imposed stringent conditionalities on South Korea in return for its bailout package. These recommendations, if followed through, would ‘completely overhaul the structure of governance of the Korean economy.’⁷ The thrust of these conditionalities was to bring about a comprehensive restructuring of the financial sector, the dismantling of existing ties between the government, banks and businesses, the undertaking of substantial trade liberalization, full-fledged capital account liberalization aimed at entry of foreign investors, and labour market reforms to ease layoffs. As Rodrik aptly sums up, ‘In effect, the reforms in labour market institutions, trade and capital accounts, and government-business relations entail a remoulding of the Korean economy in the image of a Washington economist’s idea of a free market economy.’ In short, this would mean Mode 3 globalization.

It turns out, however, that the Koreans have resisted following this blueprint. From Bagchi’s account of the Korean recovery,⁸ one may conclude the following: (i) The initial phase of Korean restructuring following the crisis led to numerous bankruptcies, but this process peaked in 1998. Most of the insolvent firms were small and medium enterprises. (ii) There was a phase immediately following the crisis during which the Korean government liberalized the FDI regime, and foreign firms used the opportunity to acquire Korean firms leading to a spate of takeovers. (iii) However, these trends have been countered by a recovery engineered by the chaebols (conglomerates) which are the mainstay of the Korean economy. Some of them had been instrumental in the borrowing spree that spawned the crisis.

 

 

What needs to be noted is that most of these companies were able to withstand the crisis and avoid foreign takeovers. Urged by the government, these chaebols engaged in the so-called ‘Big Deal’, a process of corporate restructuring whereby these conglomerates swapped assets between themselves in order to streamline their portfolio of companies and focus on ‘core competence’. Through a relational process outside the stock market framework, corporate restructuring has occurred, leading to a group of formidable national firms with enhanced competitive strength.

Thus we see a non Schumpeterian process of reorganization at work in Korea, which pre-empts the market mediated alternative, yet another demonstration of the enormous organizational flexibility of East Asia. As a result, foreign takeovers have been stalled in the chaebol sector.⁹ (iv) The result of this process is that Korean firms have again achieved dramatic export growth since 1998. And as the recovery gains ground the Koreans have become less willing to shift to Mode 3 and are showing signs of reverting to Mode 2. This confirms our argument above that the switch to Mode 3 in this region is more a sign of distress and response to coercion than an integration strategy that government and business would voluntarily embrace.

 

 

Turning now to India, what are the prospects of a switch in the mode of globalization? India’s ability to succeed with a Mode 1 strategy has, in the last few years, suffered a setback with the slump in export growth. Though a turnaround is likely, the long term prospects with Mode 1 are not bright. The reason is that with the new global tendency for trade liberalization and export orientation, competition will be increasingly severe. There are many developing countries now scrambling for export markets in labour intensive products, and which are targeting the same advanced country markets.

While labour intensive exports can and should provide the initial platform, India must evolve a framework for diversification and quality improvement of her export basket. With the end of the MFA, even in traditional exports like textiles and apparel, quality based competition will become essential. India’s export performance has been boosted in recent years by success in a non-conventional labour-intensive product – software services. But here too, rising wages of software professionals imply that long term competitiveness can only be sustained through productivity increases and entry into the more lucrative but technologically and organizationally challenging segments of the software industry.

Finally, what has been the effect of Mode 1 globalization on the core manufacturing industries? External sector liberalization has been justified on the grounds that it would lead to increased efficiency and productivity in Indian industry. While competition has certainly increased, there is no firm indication yet of Indian industry graduating to globally competitive positions, excluding a small number of information technology and pharmaceutical firms. The export participation of organized industry as a whole remains low. Since India is likely to remain committed to maintaining its momentum of international economic integration, the foregoing observations suggest that a market pressure driven policy shift will emerge in the near future.

 

 

Which way will India shift – Mode 3 or Mode 2? It would seem that the gradualism and caution which have characterized India’s external sector policies are likely to continue. More than ideology, they reflect the pragmatic requirements of political survival of coalition governments. The only circumstance in which this might change is if India sinks into a deep economic crisis through mis fortune or financial mismanagement. In that case, we would have to face the types of conditionalities from our financial ‘rescuers’ similar to those faced by the devastated Asian countries. Mode 3 is therefore not likely, even though pressures from a number of international platforms would continue. Since Mode 1 is likely to encounter difficulties in the future, beleaguered governments lacking an alternative vision may be compelled to edge towards Mode 3 in small steps. It would, in my view, be wiser to shift towards Mode 2. This would, however, require a change in our style of economic governance.

 

 

The major change entailed in the shift from Mode 1 to Mode 2 would be to accord more attention to the micro dimensions of economic policy. Hitherto, the reforms have been macro driven, i.e., the central concern has been to manage the macro economy properly. An example of such a focus is to view FDI primarily as a conduit for foreign savings, and its management mainly in terms of the balance of payments. Mode 2 is more concerned with competitiveness, and thus issues of industrial capability, technology transfer, operational efficiency of firms become the key foci of policy. On the road to globalization, the shift from Mode1 to Mode 2 is necessary, particularly in relation to the large, organized industrial sector.

Policies must deal not merely with conventional macro economic objectives (level of output, price level, exchange rate and stability of output), but with others (international competitiveness, structure of output, productivity, and patterns of innovation).¹⁰ The content of micro policy would need to vary between sectors of the economy, and this would mean closer cooperation between government, business and civil society actors. Policy making capacity and appropriate processes would, however, have to be built. Improbable as this might seem, there is already some evidence in India of efforts to evolve sector specific approaches for attaining/maintaining competitiveness as exemplified by the National Task Force for Information Technology. It is therefore possible to imagine the adoption of Mode 2.

Let us then consider a scenario in which both India and South Korea adopt Mode 2. What would be the prospects for trade and investment ties? This situation would be the most propitious for mutually beneficial relations. The following factors need to be borne in mind in assessing the potential of such linkage.¹¹

* Even though the strategy pursued is Mode 2, it is to be implemented in a changed global environment. There have been substantial internal reforms in both countries, and these will continue. The net effect would be to considerably facilitate cross-flows of international trade and investment.

* From the Korean standpoint, India is attractive on a number of counts. It remains a long term attraction as a large market. Also, India can play a role in the global cost reduction plans of large Korean enterprises. For historical reasons, South Korea may not be able to access the Chinese economy and its labour force as much as some other countries in the region. India is therefore an attractive alternative. India’s educated and technologically skilled workforce is a strong asset, and its quality is being increasingly recognized abroad. The possibility of India being an export production base is quite strong.

This trend is already evident in the case of automobiles, and is likely to accelerate. The Koreans have an effective industrial R&D system which is particularly strong in its adaptive capabilities, but not as strong in the basic sciences. India may be able to provide a complementary basic science capability in certain niche areas, given its network of science and technology institutions. For all these reasons, Korean FDI would be attracted to India and provide a basis for these linkages to take hold. Indeed, the trend in Korean FDI is sharply upwards, and it would only increase if the Indian growth rate were to rise.

* From the Indian perspective, the main attractions of deepening economic relations with South Korea would lie in the following opportunities. India’s strength in the IT sector means that East Asia is an attractive market, and the penetration of the Korean market is low at present. There has been a change in the attitude of young Koreans who seem keen on entrepreneurial activities, and there is a growing interest in IT as well. This would make Korea an attractive base for Indian IT firms, perhaps for forging alliances.

In the core manufacturing sectors, strategic alliances might make it feasible for India to learn from the strong manufacturing efficiency of Korean enterprises. Opportunities for cooperation abound in electronics, textiles and auto components industries. Indian industry associations, such as FICCI and CII, have noted the strong technological capabilities of Korean small and medium enterprises (SMEs). India might gain from international strategic tie-ups between Indian and Korean firms in this category. If successful, this could have a substantial impact on Indian technology capacity in the SME sector in which we lag behind. Technology and organization upgradation here could make possible a far greater degree of local value addition and make international ancillary ties more feasible. India could also benefit from Korean expertise in infrastructure projects – in ports, roads and so on. Last but not least, Korea could provide a substantial market for Indian primary products, such as agricultural exports.

* A final consideration is the potential role of an Indo-Korean economic relationship in providing the foundation for a stronger Indian presence and participation in the East Asian economic zone. A strategic and multipronged, two-way relationship with Korea would provide a presence and positive image for India and Indian products in the entire region. It would provide an economic window to the region, which is difficult to traverse without first establishing relational networks. India needs one or two countries with which it could establish substantive ties. South Korea and perhaps Singapore would be the two most suitable. This could in time lead to strengthened ties with Taiwan, the People’s Republic of China and others. One can also predict with some confidence that, should this occur, India would be inducted into the Asia-Pacific economic grouping and derive such benefits as are now available only to the members of this club.

As it happens, the political basis for developing a deeper relationship with South Korea already exists. India’s relationship with that country has always been friendly and without friction. Cultural ties go back a long way. Diplomatic and business to business contacts have been strengthening in recent years. Bilateral economic flows have increased substantially, making South Korea the single largest source of FDI ($ 714 million) in the first 10 months of calendar year 1999. All of these are indicators of the underlying soundness of a closer strategic economic relationship being suggested in this paper. Needless to say, our argument does not imply that such relations should be exclusive. Under Mode 2, both countries would apply their specific strategic criteria in assessing economic relations with all other countries. In particular, SAARC would benefit and get revitalized, rather than being weakened. An economically resurgent India is the surest catalyst to put the SAARC process on an economic cooperation track, for then we would be in a position to offer some meaningful economic benefits to other member nations.

 

 

To conclude, let us sum up the main argument of this paper. I have argued that prospects for a more robust economic relationship with the East Asian countries are good. But the extent to which this potential can be translated into reality is conditional on the general approach to globalization that India and the countries in the region choose to adopt. This is an era of intense change in policy frameworks, and India is certainly not the only country undergoing economic reform. It is in fact hard to think of a country where economic models are not being revised. East Asia, after the financial crisis, is in the throes of major structural readjustment. The entire process is closely related to the rapid integration of the world economy.

For this reason, the paper has delineated three plausible alternative modes of globalization. I have tried to explain the relatively low level of integration with East Asia by showing the limitations imposed by our current mode of globalization (Mode 1). Under Mode 3, it has been argued, the prospects of special and significant ties with East Asia would be the lowest. Though there are strong external pressures on India and the East Asian countries to adopt Mode 3, this is not likely to occur except under conditions of economic distress. Countries in the region are likely to resist the imposition by the western advanced nations of ‘imperial harmonization’ of standards and regulatory frameworks, and total capital mobility. South Korea for example is moving back towards Mode 2, as its recovery gains ground.

The paper suggests that Mode 2 would be the most advantageous for India, as the long term sustainability of Mode 1 is doubtful. Mode 2 globalization would offer the best possibility for strategic linkage with the region. Since by definition, strategic integration involves prioritization and assessment of options, we have confined the discussion here to a consideration of Mode 2 linkage with only one country, South Korea. This country, in our view, should receive closer attention in our international economic strategy in the Asian region. The avenues of gainful interchange with South Korea under Mode 2 have been delineated. A more complete analysis would require detailed analysis for each East Asian country.

 

 

The shift to Mode 2 in India, though desirable, requires some preconditions to be fulfilled. Essentially, it would require a revamp of our economic policy apparatus to improve the quality of economic governance. Greater coordination within government between diplomatic and international economic positions, and between macro economic and sectoral policies are obvious requirements. Because Mode 2 entails greater use of sector-specific microeconomic policy intervention, the information demands of such policies are high. Hence, what is also needed are the institutional means to foster closer interaction between policy makers and implementers, and business, academia and civil society. If such institutional capacity building can be achieved, Mode 2 globalization would be feasible, and India would be able to reap benefits through greater cooperation with Asia.

 

TABLE

Modes of Globalization and International Integration Dimensions

Footnotes

1. A more detailed discussion of this framework is available in Chiranjib Sen, Can India Look East? Assessing the Potential for India’s Economic Relations with East Asia, in S. Neelamegham, D. Midgley and C. Sen (editors) Enterprise Management: New Horizons in Indo-Australian Collaboration, Tata-McGraw Hill, 1999.

2. See A. Ganesh-Kumar, Kunal Sen and Rajendra R. Vaidya, India’s Export Competitiveness and Finance, in Kirit S. Parikh (ed.), India Development Report 1999-2000, Oxford University Press, 1999.

3. This is an old metaphor going back several decades. Not surprisingly it originated in Japan (in the work of Akamatsu).

4. Our argument may seem to contradict past issues of the Economic Survey (GOI) which have observed the rise in India’s trade with Asia in the pre-crisis phase. No doubt, compared to the past, trade and investment links have grown. However, they remain low relative to the potential.

5. It is not coincidental that the Asian economies with which India’s trade volumes have been relatively high are also those countries in which there is an Indian ethnic presence.

6. See for example, Dani Rodrik, Governing the Global Economy: Does One Architectural Style Fit All. Paper prepared for the Brookings Institution Trade Policy Forum conference on Governing in a Global Economy, 15-16 April 1999. See also J. Bhagwati, ‘The Capital Myth’, Foreign Affairs, May-June 1998.

7. Rodrik, op cit., p. 5.

8. See Amiya Kumar Bagchi, ‘A Turnaround in South Korea’, Frontline, 30 July 1999.

9. There are of course some exceptions. Daewoo Motors might turn out to be a major exception. Between September 1997 and June 1998, foreign firms (mainly from the US and Germany) acquired 11 large Korean enterprises. See World Investment Report 1998 (UNCTAD), p. 336, for details.

10. See J.H. Dunning, The Global Economy, National Governments and Supranational Economic Regimes. Discussion Paper 1997/E/30, Centre for International Management and Development, University of Antwerp.

11. This section of the paper has benefited from the contributions of fellow participants at The Third India-Korea Dialogue, organised by the Indian Council for Research on International Economic Relations and the Seoul Forum for International Affairs, New Delhi, 17-18 December 1999. Without implicating any individual in the views expressed here, I would like to acknowledge this debt.