Export Subsidies in India's textile sector

As mentioned in an earlier post, countries follow export-oriented or import-substituting industrialisation. India has followed a mix of both over the years and has been more towards the former in recent years, due to tariff reduction commitments as a result of multi-lateral trade negotiations amidst other free trade agreements, etc. The main policy of export incentivisation is just subsidizing exports. This is prominent in key sectors such as textiles. However, World Trade Organization (WTO) recommends all members to phase out their export subsidies. 

Now our policy-makers face a dilemma. Should we just remove them all abiding by WTO commitments or keep protecting the exporters? While this may render the export-oriented industries susceptible to tighter competition in their import markets, productivity improvements could help offset such disadvantages. More specifically, the money saved by the government by cutting subsidies can be used to increase productivity by better infrastructure, etc. A paper I wrote with Vasundhara Rungta, which is forthcoming in the journal Margin, explores the interaction between these two different aspects to evaluate the economy-wide impact of the export subsidy reforms and productivity improvements in Indian textile and clothing sector. 

Our analysis stands on various policy simulations applying the general equilibrium model of the Global Trade Analysis Project. The welfare impacts of the removal of the Indian textile and clothing subsidies in millions of US dollars shows that India is expected to encounter a loss of about 71.5 million US dollars, while the other Asian countries may gain about 218 million US dollars. In a different scenario, we simulate the impact of a complete phase out of subsidies provided to the textile and clothing industry of India and a simultaneous increase in total factor productivity growth to 3.5 %. This leads to a net positive welfare change! We conclude that merely removing subsidies is not enough as the policy makers often worry. Investments in total factor productivity should come about simultaneously, probably by employing the surplus funds from saved subsidy payments into areas like Research and Development (R&D) and infrastructure, in enhancing total factor productivity. This conclusion may be qualitatively generalised for any sector in the world which is examined for export subsidy reforms, but similar economy-wide studies are recommended for specific cases.

China's rise and its effect on labor in developed countries

Policy-makers in the developed countries often worry about the perceived damage to the labor market caused by the rise of China and India. In this new paper, forthcoming in Economic Modelling, it is shown that such an impression can be visible when we look at the aggregated data of workers, but the reality is that a major section of workers in the developed countries get benefited by the rise of China. Unskilled workers, as an aggregate entity lose in terms of wages and employment, but 54% of their categories actually gain, while the loss is not high for the remaining 46% as well!

Here is an extract from this paper's summary:

This paper examines the impacts of growth in China’s economy and trade on the skill premium of labor in developed countries. We utilize a unique global dataset that disaggregates workers by occupations to identify impacts across labor categories with different skill sets, complementing the widely used GTAP Data Base in the CGE framework offered by the GTAP model. To study the impacts of China’s fast-paced growth, we model the counterfactual, i.e., what if China grew and opened at a more modest rate; we then compare this baseline with China’s actual growth. Results indicate that a strong rise in manufacturing exports from China to the US impacts output and employment in the US. The US shifts its production away from light manufacturing sectors to more service-oriented sectors that also tend to engage higher skilled labor. There is a small decrease in the real wages of unskilled labor and a rise in the real wages of skilled labor. Interestingly, not all categories of unskilled labor lose, rather those that are more directly linked with manufacturing sectors are impacted; unskilled ‘service and shop workers’ and the unskilled ‘agricultural workers, machine operators, assemblers, craft workers, and others’ observe a small decline in real wages, while the impact on unskilled ‘clerks’ is insignificant. For all categories of skilled workers, there is an increase in real wages primarily driven by the shift in production to services and high-skilled labor intensive categories, resulting in the rising skill premium. Hence disaggregating the labor data provides greater depth on the understanding of the differential impacts on domestic workers resulting from trade, and thereby to guide policy how these differential impacts can be smoothed through redistribution of benefits. Consistent with other study findings, there is a positive impact on overall growth and welfare in the US, EU and Australasia.  

Understanding Policy Impacts and Supply Chains for Business Intelligence

Today's world is full of enormously inter-linked countries and even businesses. Therefore, business planning decisions should take into account the linkages between different business segments as well as countries. Government policies also affect businesses not only in the home country but also elsewhere. However, typically business analysts who work on forecasts and planning do not account for changes in terms of policies and supply chains in their countries and elsewhere. 

 

Let's take the example of cotton subsidies in the US. Although this is more debated in the US in the context of the debt ceiling issue than anywhere else, any decision on it has far-reaching implications on textile industries in India and other countries. Similar things may be said of what happens to policies influencing resources in resource-rich countries.

Therefore, we need a simple framework that marries data methods employed in economic policy modeling with day-to-day business intelligence. This framework could employ publicly available rich information on linkages between countries and business segments/sectors to evaluate the market changes that can arise from major global and local policies, such as the GTAP framework. This has immense potential to facilitate a scientific approach to handle future uncertainties involved in the business intelligence.