‘Open economies have higher trade, per capita income’

Liberalising, or opening, an economy ensures the wellbeing of consumers by reducing the price of goods and services. At the same time, an open economy pushes informal labour-intensive firms to turn into capital-intensive so they can compete in the global market.

These were the main points highlighted by Indian economist Dr Arvind Panagariya, an economics professor at Columbia University, New York, during the opening session of the two-day "Bay of Bengal Regional Trade and Connectivity Capacity Building Program" organised by the South Asian Network on Economic Modelling (Sanem).

Experts from Bangladesh, India and other South Asian countries spoke at the virtual event, with most participants emphasising the need for strong political commitment, strengthening internal policies and reducing geo-political complexities to ensure effective free trade areas in the region.

Presenting the keynote at the event, Panagariya said the opening of an economy reduces poverty significantly.

He said South Korea, Hong Kong, Singapore, China and some other countries increased their trade and per capita income by opening their economies.

The per capita GDP in China exceeded $8,000 as it opened its economy, while India had a $2,000 per capita GDP due to having fewer free trade agreements (FTAs).

He said the FTAs of India were few and the volume of trade under those also had a low impact.

Vietnam has FTAs with China, Japan, South Korea and some other countries. It was also involved in the Trans-Pacific Partnership and Regional Comprehensive Economic Partnership, he said.

Panagariya also recommended increasing the size of firms for them to survive, saying, "When you are a liberal trade economy then you have to compete with the best in the world. Cost of production in the sub-continent is higher due to informal and labour-intensive production.

"Why would we not reduce production cost by increasing productivity? Why should our product not be competitive in the global market?"

Adding that countries should not be focused on trade deficits, he said, "When an open economy imports any product, it indicates that the supplier country is producing the product at the lowest price. When you export any product, it is cheaper for the importer."

Giving an example, he said more than 80% of mobile phones being used in India were imported, which indicated that producing phones in India was costlier than in the exporter countries.

Professor Dr Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue, said at the event that Bangladeshi producers registered exports to India worth $1.2 billion in a year but imported over $8 billion, making a trade deficit around $7 billion.

He said the majority of Bangladesh imports from India were cotton and other raw materials needed by the readymade garments industry. Utilising the imported items, Bangladesh was creating a trade surplus of $5 billion with the USA.

Mustafizur, however, asked why the export volume to India was so little 

"The country imports over $467 billion from the global market. Why not from Bangladesh then?" he said.

Sri Lankan economist Sumith Nakandala said boosting regional trade was not only a matter of tax policy or industrial policy, but it depended on both regional and geopolitical issues.