The Hindu Business Line : More gains in cartels than Free Trade Zones

THE Prime Minister, Dr Manmohan Singh, has proposed a free trade zone (FTZ) with the Asean (Association of South-East Asian Nations). Like many mainstream economists, Dr Manmohan Singh thinks that free trade will beget prosperity. Indeed, for India, free trade will result only in small benefits. Big gains will arise only if India forms cartels with countries having similar resources.

Free trade theory holds that each country should manufacture what it is best at. If India has comparative advantage producing tea and Thailand cameras, then the former should export tea and import cameras.

The difference in resource endowments determines the extent of gains that would accrue from free trade. For instance, if both India and Sri Lanka grow good quality tea, free trade between the two will not benefit eithermuch. But free trade between India and Iraq, for instance, would be beneficial, as India can get cheaper oil and Iraq, software.

The resource endowments of Asian countries, barring Japan, are largely similar to India's. Hence, the gains from free trade with Asean will be minimal. But the gains from cartelisation will be greater. Consider this: Eighty per cent of the world's resources are found in developing countries, yet they account for only 20 per cent of global income. Going by free trade theory, developing countries, endowed with much of the world's labour, land, water and mineral resources, should have a greater share of the global income.

But this is not happening. Free trade, to the extent it prevails, is leading to skewed income distribution. It appears that monopolies, not free trade, are determining the flow of world wealth. World trade may be thought of in terms of a `monopoly sector'. There is no `free trade' here. Then comes the `competitive sector'.

This would include producers of coffee — India, Brazil and Vietnam — and automobiles — Mexico and Thailand. These countries battle one another to supply cheaper products to the rich countries. Indeed, the most efficient among these would gain. India may score over Brazil in coffee and the reverse may hold true for sugar. But gains from such competition would be minimal because of the low-profit margin. Thus, there is a double advantage for rich countries. On the one hand, their monopoly pricing is getting them higher incomes, and competition among the poor countries is providing them cheaper products.

On the issue of FTZ, there are limited synergies between India and Asean. Both are seeking foreign investments from rich countries. There may be some synergy in minerals, but the share of these in their trade basket is small. While Asean countries can import services such as software and entertainment from India, this will hardly go to alter the rich-poor asymmetry.

On the contrary, free trade will lower further the prices of products such as cameras and cars and worsen the asymmetry by providing cheaper goods to the rich countries. Thus, India-Asean co-operation will have to take a different direction.

We will have to co-operate in making resource-based monopolies to counter the technology-based ones of the rich countries. If Boeing and Airbus can co-operate to sell aircraft at high prices, India and Thailand should do the same, jacking up paddy prices, for instance.

Economic theory recognises cartels. Trade unions are cartels of suppliers of labour. Equity demands higher incomes to the largest numbers. This can be secured only by resource-rich developing countries forming cartels. India and Asean should not compete with each other in the proposed FTZ, but cartelise and raise product prices — what the OPEC did in the 1970s is a case in point.

India would do well to form cartels with Bangladesh (for jute), Sri Lanka (tea), Thailand (rice), Vietnam and Brazil (coffee), and so on. Only then will poor countries be able to garner a greater share of the global income.

(The author is a New Delhi-based freelance writer. He can be contacted at bharatj@nda.vsnl.net.in)