The Hindu Business Line : Three players of trade game in new economic geography

"Europe is changing and reinventing itself," writes Jean-Joseph Boillot in his book Europe after Enlargement. And exploring what happens when there is `geoeconomic realignment of globalising markets' are Jagdish N. Sheth and Rajendra S. Sisodia in Tectonic Shift. Both, says, D. Murali, are gritty reads for the weekend.

The Prime Minister, Dr Manmohan Singh, leaves for Germany today. He will be jointly inaugurating the Hannover industrial trade fair along with the German Chancellor, Ms Angela Merkel. India's participation at the fair is said to be `the largest ever by a Partner Country.' More than 300 of our companies are expected to participate, to orchestrate the `single biggest brand-building exercise' for Indian manufacturing, engineering and related technologies, as the Commerce Minister, Mr Kamal Nath has said.

"Germany is the European Union's biggest economy and most influential country. We have to see our growing relations with Germany in the context of deepening of the India-EU strategic partnership," is a quote of strategic expert, K. Subrahmanyam cited on www.newkerala.com in an IANS report dated April 21.

Origins and growths

Let's trace the history of the European Union (EU), rewinding to 1951. That was when Germany joined five other countries, viz. Belgium, France, Italy, Luxembourg and the Netherlands, to found the European Coal and Steel Community. Six years later the European Economic Community and the European Atomic Energy Community came into existence, as one learns from http://europa.eu.int, the portal site of the European Union (EU).

"Five successful enlargements have followed since then." Denmark, Ireland and the UK joined the EU in 1973; Greece came in eight years later; in 1986, Spain and Portugal became members; and Austria, Finland and Sweden joined the EU in 1995.

In 2004, the EU had thus 15 members. In May that year, it underwent `a historic enlargement', to add 10 more members from Central and Eastern Europe and the Mediterranean: Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovakia and Slovenia.

What is `enlargement?' "A carefully managed process which helps the transformation of the countries involved, extending peace, stability, prosperity, democracy, human rights and the rule of law across Europe," says the EU. And the process has been ongoing; the accession of Romania and Bulgaria are expected to happen in 2007, thus completing the fifth enlargement of the EU that started in May 2004. Accession negotiations have been launched with Croatia and Turkey. "Future enlargements will go at the pace dictated by each country's performance in meeting the rigorous standards, to ensure the smooth absorption of eventual new members," declares the site.

A formidable new order

"Europe is changing and reinventing itself," writes Jean-Joseph Boillot in Europe after Enlargement, from Academic Foundation (www.academicfoundation.com). However, the enlargement `to 25 members in May 2004, and probably between 32 and 37 over the next decade' impacts the EU's economic geography, not so much the place of Europe in the world economy, opines the author.

Boillot gives an example: The 12 central and eastern European countries have an estimated growth potential of 4 to 5 per cent, compared to 2 to 2.5 per cent of the old 15 members of the EU; yet, by the turn of the decade, the dozen countries will only account for just about 11 per cent of the Greater EU's GDP (gross domestic product), as against 8.5 per cent in 2000, measured in terms of PPP (purchasing power parity).

The new economic geography will be `a formidable new order', alerts the author. For instance, a recent Kearney report has listed in `the 10 most attractive countries of the world' not only India and China but also three major east European economies. Boillot cites another example of how, in recent years, the Czech Republic, with a population — of only 10 million, has been attracting more FDI (foreign direct investment) than India that has a hundred times as much population! Interestingly, a major share of FDI to the Czech Republic comes from `the old European economies such as Germany and France.'

The India angle

EU, with nearly 460 million citizens, is India's largest potential market, notes the author in a chapter with India focus. "EU is India's largest trading partner, accounting for 25 per cent of India's global trade." EU-India trade has grown from euro 4.4 billion in 1980 to euro 33 billion in 2004, informs Europa. "The EU is also India's largest source of foreign direct investment," it adds. Sobering, though, are these numbers: "India accounts for just 1.7 per cent of total EU trade. India attracts only 0.3 per cent of the EU's world-wide investments."

Boillot is of the view that trade between India and the accession countries is currently below potential because of the inadequate commercial arrangements such as correspondent banking, lines of credit, export guarantee, insurance and so on. He analyses the impact of EU enlargement on Indo-EU trade under two heads, viz. trade creation effect, and trade diversion effect. The first occurs when "imports from a new, efficient member replace inefficient local production," and the second is "a shift of imports from an efficient to a less-efficient source."

Useful inputs are available in the sector-wise analysis of impact.

Three challenges to realignment

What happens when there is `geoeconomic realignment of globalising markets?' Tectonic Shift say Jagdish N. Sheth and Rajendra S. Sisodia in their book from Response (www.indiasage.com).

"As long as developed nations mainly trade with each other, they won't be able to grow very fast. Developed nations are low on growth and high in prosperity," writes Philip Kotler in his foreword. Salvation for developed countries is in linking with developing economies, he adds, citing examples: Japan linking its future with China, the US with Mexico, and Western Europe turning to Eastern Europe for growth. The tripolar system that the book speaks of has only three regional blocs, viz. US/North America, European/African, and Asian.

The authors call their work "a continuation of the journey started by Commanding Heights by Daniel Yergin and Joseph Stanislaw." That book had demonstrated that governments were `retreating from the commanding heights, and giving way to market forces,' because of failure of government-controlled economies.

Trade blocs must ensure mobility of resources, argue the authors. "EU passport holders are free to move and work anywhere." For instance, "Nokia hires people from all over Europe — it may have Italians working in Finland and Germans in Sweden". The Americas rank next to EU on mobility of people, while Asia remains very restrictive. Views vary, however, on whether "free movement of people would have a greater beneficial economic impact than the free trade of goods and services." There are three challenges to realignment, say the authors. One, an entrenched domestic private sector, as exemplified by the US textile industry, whose captains "fight to hold onto subsidies and other trade practices that, in the long run, make little economic sense for the country." The book notes how Asian countries such as Japan, South Korea and Taiwan overcome this obstacle "by vacating industries and moving up the value chain."

The second challenge is political gridlock; for instance, the EU faces the question of where the power would lie — `in Brussels, or within the governments of member states'. And the third challenge is of rising expectations, even as progress happens gradually.

Solution to this may lie in `relaxed emigration laws,' suggests the book. "To the extent possible, people should be allowed and encouraged to move to wherever they discern the greatest opportunity, thus precipitating a global `levelling' of the economic playing field." Hurdle to this, though, would be the means to travel, which the impoverished would lack.

Paradoxically, while good leadership is the real key, "leaders will be measured by how quickly they deliver economic progress."

Gritty reads for the weekend.

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