Posted by: Shiv Muttoo | November 6, 2010

Big Brother’s Watching His Own Back, Again


In June this year, following a meeting with President Obama, BP agreed to create a $ 20 billion fund to compensate for the damages caused by the oil spill it created in the Gulf of Mexico, pre-committing two-thirds of its annual cash flows over a 3.5 year period. The spill had caused extensive damage to marine wildlife and prospects of the fishing industry in the region after the blast that started it killed 11 rig workers.

In August, India was urged to go easy on its $ 300 million compensation demand made on Dow Chemicals, an American company, for causing the world’s greatest industrial catastrophe in Bhopal that took away thousands of lives a quarter of a century back, apart from inflicting debilitating injuries to many more thousands. The ‘noise’ around this issue was also seen to be positioning India in an unfavorable manner for further financial assistance from the World Bank.

Clearly, American fish are more valuable and therefore deserve better than Indian people.

And indeed the noise levels are down here in India. However, thankfully, our government remains firm in its resolve to bring justice to each and every victim and will put systems in place to ensure that a repeat of Bhopal does not happen. That’s the sense of purpose that runs through India’s rulers and we are all richer for it, in life and in death!

As though to demonstrate this, a panel of ministers has recently announced additional compensation of about $ 16 million that will benefit 4,000 people, previously not recognized as dead!

This is not the only instance of the American juggernaut (derived from the Sanskrit word Jagannatha, which means the Lord of the Universe), though weakened from the strife of the last couple of years, asserting its might and using a different yardstick for itself.

In the mid 1990’s, the process of economic liberalization created the platform for globalization of world trade. The World Trade Organization (WTO), guided by industrialized/first world countries, developed a trade framework for all to follow. This meant that the lenient process patents regime applicable to the Indian pharmaceuticals sector had to go starting 2005. Many believed that domestic players in the sector would be rendered uncompetitive and eventually be run over by big pharma majors. However, the industry adapted well, focusing on global off-patent generics, low-regulation markets, contract research, clinical research, even drug discovery. While global majors have since included India as a market for their product pipeline, introducing drugs that are priced way out of reach of most Indians, the Indian pharma companies have done reasonably well too.

The crumbling walls of world trade, while opening up emerging markets to global corporations, created huge opportunities for aspiring entrepreneurs in the developing world. The IT industry is one such, having grown from just over $ 1 billion 15 years back to $ 73 billion today. That’s CAGR of 33 percent, including strong contributions from global majors such as IBM and Accenture! The targeted $ 225 billion in the next ten years may look aggressive today, but it’s only 12 percent annual growth. Given Indian IT’s exemplary track record, all targets have been met or exceeded through every business cycle and against all odds, this should be within the realms of reality.

But there are stronger headwinds today. America, Indian IT’s largest market,  is protecting its turf by building walls of protectionism around itself, the same walls that were dismantled twenty years ago. All the tricks of the trade – tariffs, quotas, restrictions – are being used to try and keep the Indian IT companies at bay. Mindful of weakening public opinion highlighted by the mid-term polls, the administration has focused its attention on IT outsourcing that is seen to be taking away jobs from a country facing unprecedented unemployment.

At the same time, the President has urged American students to work harder and develop skills for greater global competitiveness. However, the issue here is not of competitiveness but of compensation. Median salary for fresh-out-of-college workers in America is $ 40,000, compared to $ 12,000 in China and only $ 5,000 in India. Whatever be the level of competitiveness, any skill is good at a price and at 3-6 times is priced out of the global talent market.

With restrictions on the movement of goods and people lowered across the world, water continues to seek its own level. Not only does foreign merchandise continue to flow into America, but both jobs and cash fresh from the printing press are continuing to flow out. Mr Obama hopes to plug this leak. But he really needs to ask his countrymen curb their excesses and learn to live more frugal lives. Else, all he will end up creating is not jobs at home but valuation tsunamis in emerging markets.

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Responses

  1. A follow up thought:
    The difference in salary levels in US and BRIC is a reflection of difference in standard of living. But since even in PPP terms US is costlier (dont have exact #s) the other big question is ‘is the cost of maintaining same std of living is more in US than in BRIC?’ If yes it shows INEFFICIENCY in the way US functions!!
    And in an interconnected world no country can keep sealing that gap for ever, things will inevitably re-balance itself; but how long??


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