Arvind Subramanian interviews trade theorist and policy wonk
“WHAT do they know of cricket who only cricket know?” asked C.L.R. James, the renowned Trinidadian historian, essayist, and cricket writer. Rare is the modern day intellectual who has not fallen victim to the narrowness of knowing that James rebukes.
Jagdish Bhagwati is one such rarity, a throwback to the era of the classical scholar, the man of letters who knows many things. John Maynard Keynes praised Alfred Marshall, the Cambridge economist, for possessing an “ideal many-sidedness.” One could say the same of Bhagwati, who is both theoretician and policy wonk, wielding a deft pen and moving easily between the ivory tower, op-ed pages, and corridors of influence. You have to stop and notice a man who tries to score a point on the merits of free trade by invoking a Balzac novella.
If over the past four decades, the world’s borders have become, and been kept, more open, Bhagwati can claim some small credit for it. His core intellectual work and his policy advocacy have, according to Paul Krugman, played a “large if subtle role in keeping protectionism from becoming respectable.” So when the Doha Round flounders or there is renewed clamor for imposing restrictions on Chinese imports or for penalizing “Benedict Arnold” firms that outsource their operations, Bhagwati can be counted on, Macavity-like, to take on the forces arrayed against freer trade. “When you choose to fight for free trade, you sign on for life. Like Jaws in James Bond films, protectionism rises again and again, taking ever-new forms,” he tells F&D. An irrepressible optimist, he is not only a veteran of successfully tangling with die-hard Indian protectionists and Japan-bashers, but also, more recently, the likes of Joe Stiglitz and nongovernmental organizations (NGOs), who embody today’s backlash against globalization.
Bhagwati has worked tirelessly to broaden the debate on economic issues, in part by founding the highly successful Journal of International Economics in 1971, and Economics and Politics in 1989. He has written numerous articles and books on development, immigration, rent-seeking, democracy, and environmental and labor standards that have bagged several awards. He has taught and guided generations of trade economists, along with advising the World Trade Organization (WTO) and the United Nations (UN). And all of his passionate and reasoned outpourings have come from a pen touched by wit and elegance (see box). In short, he has been a looming, influential presence on the international policymaking scene for many years.
An exceptional student
Bhagwati was born in 1934, one of seven children to an illustrious family in India, modest in means but lofty in its educational aspirations and social ideals. He recalls a happy but Spartan childhood, the tight purse strings loosened for only one indulgence: an unlimited account for the children at the local bookstore, where they devoured the classics, both Indian and Western. The investment paid off: a brother became Chief Justice of India’s Supreme Court, another a world-renowned neurosurgeon, and a third a highly respected metallurgist. Achievement was almost pre-ordained in this family even though ideology clearly wasn’t: his Chief Justice sibling is as doctrinaire a socialist as Bhagwati is a champion of markets and competition.
A way with words
“Language matters. Metaphors matter,” insists Bhagwati, who uses wit and words to explain and persuade. (His collection of articles and essays, “A Stream of Windows,” won the prestigious Eccles Prize for Excellence in Economic Writing). Take, for example, the brother-in-law analogy that he uses to highlight the distinction between rent-seeking behavior and corruption. When you lobby for rents and use up resources, he explains, it is a directly unproductive (DUP) activity. But if there is a brother-in-law to whom the rents are inevitably headed, nobody will bother to lobby. In this case, there is corruption but no DUP activity. Unless, of course, some farsighted crook devotes resources to court the sister in order to become the brother-in-law in order to get the rents. Then we are back to rent-seeking.
Commenting on those who argue against free trade because it leads to de-industrialization and destroys linkages between industry (ketchup makers) and agriculture (tomato growers), he observes: “As I read the profound assertion about the tomato farm and the ketchup plant, I was eating my favorite Crabtree and Evelyn vintage marmalade. It surely had not occurred to me that England grew its own oranges.”
After graduating from St. Xavier’s High School and Sydenham College, among the best educational establishments in Bombay, Bhagwati was shipped off to Cambridge, England, to pursue law and economics. His father, a judge on the Indian Supreme Court, had high hopes for his joining the legal profession. But the independent-minded son abandoned law, having been seduced by economics and its promise for doing social good. Besides, Bhagwati notes, the food at St. John’s College, Cambridge, was “less horrid” than at Lincoln’s Inn, London.
When he arrived at St. John’s College, his tutor, C.W. Guillebaud, greeted him with the encouraging words, “You know Indians never do well at Cambridge.” But in just his second year, Bhagwati wrote a seminal paper on “immiserizing growth”—growth that worsens a country’s terms of trade so much that its welfare declines. This piece, published in 1958, spawned a cottage industry of papers, very much in the spirit of the literature of the “second-best,” which said broadly that good things (growth and capital inflows) can lead to bad outcomes in the presence of a distortion.
Cambridge, England—where he was taught by the likes of Nicholas Kaldor, Joan Robinson, and Harry Johnson—was followed by Cambridge, Massachusetts, where Bhagwati pursued graduate studies at MIT under Paul Samuelson, Charles Kindleberger, and Robert Solow, whose roles as teacher gave way over time to those of colleagues and collaborators. A short stint followed at Oxford where he worked with other great economists like John Hicks and Roy Harrod. Bhagwati left the ivory tower for the hurly burly of Indian reality in 1961, working in the Indian Planning Commission, on loan from the Indian Statistical Institute. Asked to work on ways to raise the standard of living for India’s bottom 30 percent, he reached the conclusion that is now the staple assumption in development economics: economic growth is the sine qua non for poverty reduction.
For a young economist, these years also provided a heady interaction with the giants of newly independent India—Prime Ministers Nehru and Indira Gandhi, and the polymath adviser to Nehru, P.C. Mahalanobis, who was also the architect of India’s industrialization strategy. The experience also instilled in him a rootedness in the real world and its problems that would serve him well throughout his career. Even as he indulged his love of theory, he would remain engaged with the live policy questions affecting social welfare.
A shot against protectionism
Some time around 1961 came the eureka moment with the insight that would lead to one of the more influential papers in the postwar theory of commercial policy, “Domestic Distortions, Tariffs, and the Theory of the Optimum Subsidy.” Coauthored with V.K Ramaswami, a civil servant, it was published in the Journal of Political Economy in 1963. Prior to this paper, the optimality of free trade was theoretically under siege from a variety of arguments, ranging from infant industry protection to wage rigidities and spillovers. The paper conceded that free trade is indeed not optimal in the presence of distortions in the economy. But if the distortions can be corrected by the appropriate policy instrument, the optimality of free trade is restored—a result that holds up in most cases. For example, if there is a production externality, free trade may indeed be suboptimal, but if you can provide a subsidy to boost the production of the externality-generating activity, free trade remains the best policy. The paper’s analysis, even as it acknowledged the many market failures that could justify protectionism, narrowed dramatically the case for protection.
It is often overlooked that the principle elaborated by Bhagwati and Ramaswami is also the central insight in the classic papers on public finance by Peter Diamond and James Mirrlees, which are mentioned in Mirrlees’ Nobel citation. Published several years later, these papers show that production efficiency should not be violated as long as consumption taxes are available to address whatever objectives policymakers wish to meet, or distortions they wish to address.
Bhagwati left India in 1966 for Columbia University in New York. These were difficult economic times in India, where he was one of the economic advisers to the Indian government: after years of slow growth, the shock of a widespread drought, combined with a largely indifferent response from the international community to calls for financial assistance, left India facing a serious economic crisis. Mrs. Gandhi followed the advice of her economic advisers, including Bhagwati, and devalued the currency, with all its attendant complications. His departure from India was seen by some as an academic fleeing the scene, because his advice could not “bear too much reality.” In fact, though, his reasons were personal, as he wanted to marry and settle down with Padma Desai, a distinguished academic herself.
From Columbia, Bhagwati moved to a prestigious professorship at MIT in 1968. Productive years of scholarship followed for the next few years as he, along with his collaborators, notably Ramaswami and T.N. Srinivasan, set about systematizing the theory of trade, distortions, and welfare. His theoretical work extended to preferential trade agreements, comparing the effects of tariffs and import quotas, and the political economy of trade. In 1980, he returned to Columbia, where he has spent the greater part of his academic career.
Tangling with policymakers
If Bhagwati’s theoretical contributions have been numerous, and, at times, seminal, his policy writings have been equally thoughtful and influential. Bhagwati, the trade theorist, might say that he has absolute advantage in theory and policy, but no clear comparative advantage. This translates as: he is better than everyone else at both but it is difficult to make out which he is relatively better at. Perhaps his earliest, and most influential, policy contribution is on development and development strategy. His books on India, first with his wife Padma Desai (1970), and later with Srinivasan (1975), systematically analyze and catalogue the problems with economic planning and the costs of inward-oriented policies. These books were part of cross-country studies coordinated, respectively, by Ian Little, Tibor Scitovsky, and Maurice Scott for the Organization for Economic Cooperation and Development, and by Bhagwati and Anne Krueger for the National Bureau for Economic Research. This body of work helped lay the intellectual foundation for the subsequent abandonment by many countries, including India, of dirigiste and autarkic economic policies.
In the early 1980s, Bhagwati started getting interested in the political economy of trade policy. This led to his highly popular book, “Protectionism,” which examined trade policy in terms of three underlying determinants—ideas, interests, and institutions, weaving analysis, anecdotes, and facts. In the late 1980s and early 1990s, he focused on U.S. trade policy, which was geared to opening up foreign markets—notably those of Japan and developing countries—on the grounds that they were practicing “unfair trade.” Market opening was often demanded under the threat of trade sanctions. Bhagwati attributed such “aggressive unilateralism” to declining U.S. economic power, which he memorably called “the diminished giant syndrome.” He was vocal and fearless in attacking the hypocrisy of those who invoked unfair trade to gain narrow commercial advantage, and the threat to the multilateral trading system posed by such unilateralism. His diagnosis of a U.S. decline proved premature, but he was not alone in this. He was right, though, on the consequences of U.S. unilateralism, which proved harmful when the U.S. forced developing countries to strengthen their patent regimes. The legacy of the intellectual property negotiations vitiated the trade atmosphere and contributed to many subsequent stand-offs between industrial and developing countries in the WTO.
“He steadfastly propagated the cause of free trade, even and particularly when it was unfashionable to do so.”
Bhagwati then turned his pen against preferential trade agreements. To him, nondiscriminatory trade liberalization—done on one’s own or in the context of multilateral negotiations—is overwhelmingly superior to regional trade agreements whereby countries reduce their barriers in favor of some, but not all, partner countries. Do it on your own, or do it in Geneva, he exhorts countries, but the Seuss-like admonitions quickly follow: not in Brussels, not in Washington, not in Tokyo, or even in Wellington. He also raised the alarm about fast-multiplying regional trade pacts with his famous spaghetti-bowl metaphor: there are so many crisscrossing free trade agreements today that their complexity and malign incentives threaten to overwhelm the multilateral trading system and slow down genuine multilateral free trade.
Bhagwati’s writings on trade policy have been especially distinctive for their courage in not bowing to fashion. He steadfastly propagated the cause of free trade, even and particularly when it was unfashionable to do so. It was easy to be spreading the free trade gospel in the heady years of enchantment with globalization. But in the earlier dark days of Indian infatuation with intervention and controls in the 1970s, he was a lone voice in India, presciently warning against the ills of intervention. “I had always admired Rabindranath Tagore’s lovely poem on Going Alone,” he explains. “I was now practicing it, since huge numbers of Indian economists and intellectuals were wedded to wrong-headed policies.”
Even more difficult and solitary was his advocacy of free trade during the days of Japan-bashing. It was difficult because, for a brief period, it appeared that free trade was losing its intellectual legitimacy in the wake of strategic trade theory. This theory argued that protectionism could be used by countries, as a tool of industrial policy, to appropriate rents in oligopolistic markets at the expense of trading partners. Even his star pupil, Paul Krugman, deserted the fold, albeit temporarily, when he famously wrote: “Free trade is not passé, but it is an idea that has irretrievably lost its innocence … it can never be asserted as the policy that economic theory tells us is always right.” Japan-bashing had acquired academic respectability. Bhagwati withstood this assault until the verdict on strategic trade theory slowly came in: theoretically interesting but virtually inconsequential for policy.
These days, Bhagwati’s interests have gone beyond free trade in goods to flows of capital, labor, and the phenomenon of globalization more generally. His controversial but highly influential piece against liberalizing capital flows across borders, “The Capital Myth,” was published in Foreign Affairs soon after the Asian financial crisis. The paper made the point that free trade in goods was qualitatively different from free trade in capital flows for the simple reason that the latter can, because of being driven occasionally by “panics and manias,” be destabilizing and costly. “If you were for free trade,” he wryly remarks, that did not mean that you had to be for “free capital flows, free immigration, free love, free whatever.” This argument on capital flows was not radically novel, and goes back at least to Kindleberger. But the paper drew blood because it asserted that the drive toward capital account liberalization was about more than the lofty ideology that all economic transactions, regardless of whether they affected goods or capital, should be free. It was, he argued, about the interests of those he called “the Wall Street–U.S. Treasury complex”—the power-wielding elite in Washington D.C. and New York, advancing their financial gain at the expense of developing countries.
As for the flow of people across borders, like a true liberal (in the British sense of the term), he prefers fewer restrictions, but recognizes that there are important differences with free trade in goods. He has called for the establishment of a World Migration Organization (WMO)—not to tell nations what they should do but to carry out surveillance along the lines of the IMF’s Article IV consultations. The WMO would review systematically and periodically a country’s policies on legal and illegal migrant and refugee flows. He hopes this would create the “Dracula effect”—exposing illiberal policies to daylight and scruntiny—thereby leading to better, and more liberal, policies worldwide. Several decades ago, he proposed extending income tax jurisdiction to expatriate citizens, arguing that citizenship created tax obligations. The “Bhagwati tax” has recently regained attention in the context of addressing the “brain drain” from the poorest parts of the world.
As someone who has rightfully earned the distinction of an eminence grise, Bhagwati, despite his prolific writings, also manages to find the time to be a consultant at large, dispensing wisdom to governments, working with NGOs like Human Rights Watch, advising the UN on globalization, and more recently on African development, which he considers “the greatest developmental challenge of our times.”
The elusive Nobel
Many of Bhagwati’s peers and students think that the Nobel Prize would fittingly crown a lifetime’s achievements. Bhagwati himself jokes that if he does not get the Nobel, he would be the second deserving person from the Indian state of Gujarat—after Mahatma Gandhi—to be denied the honor. How strong are his Nobel credentials? After all, the Nobel Prize in economics is not awarded for breadth of erudition, for “many-sidedness,” but for the one or two flashes of insight that solve a problem or open up new areas of inquiry; it is given to the hedgehog not the fox. Who better to pronounce on this question than Paul Krugman, a strong candidate for the Nobel himself: “The crucial point for me,” he tells F&D, “is that people didn’t understand at all clearly how distortions in a trading economy relate to policy before Jagdish spelled it out. Once he did, it became so clear that it was hard to believe that someone had to point it out. In my view, that makes his work Nobel-worthy.”
It would, however, be unfortunate if the world assessed Bhagwati by the reductive and capricious yardstick of the Nobel Prize alone. John Maynard Keynes in his “Essays in Biography” defines a master economist as someone who “…must possess a rare combination of gifts … He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must …be as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.” Few will quibble that Bhagwati survives as an endangered species in this fast-dying tradition of master economists. As Paul Samuelson said at the festschrift for Bhagwati’s sixtieth birthday, “Jagdish Bhagwati can take pride and pleasure in his lifetime of contributing to the art and science of economics.” The good news is that, ten years on, he is still at it.
Arvind Subramanian is a Division Chief in the IMF’s Research Department.