June 1, 1998

The answer to sanctions and aid cuts is more liberalisation -- not less

Jagdish Bhagwati

India's decision to abandon its traditional nuclear policy is remarkable. Given the stereotypical foreign view, beautifully reflected in E.M. Foster's depiction of the complex and nearly tortuous Hindu Godbole as contrasted with the direct and uncomplicated Muslim Aziz in A Passage to India, the irony of the BJP choosing explicitness in favour of obfuscation in our nuclear policy is obvious.

But regardless of whether one agrees with the decision to go explicitly nuclear, the important questions relate to the next steps that India must take. In particular, President Bill Clinton's sanctions raise two questions: have we shot ourselves "in the head", as claimed by Senator Jesse Helms; and what should we do to minimise the damage from the sanctions and to even turn them, perhaps, to our long-term advantage?

It is clear that the US sanctions cannot inflict serious direct damage on India. First, they are certain to be virtually unilateral in scope. Other countries are not afflicted with the kind of automaticity in sanctions that the US Congress increasingly favours, leaving little discretion to the executive. Besides, for predictable reasons, Russia, France and the UK cannot be expected to go along with the US.

True, Japan has a special nuclear sensibility, being the victim of such weapons. But even its suspension of aid is likely to be confined to minuscule grants as distinct from loans. After all, Japan's aid programme has historically reflected its own economic interests and has not been sold to the Japanese people as altruistic. The other nations, such as Sweden, do not count. Their suspended aid programmes are negligible.

Unilateral sanctions are typically ineffective. If the US Exim Bank withdraws financing from US firms, it is these companies that lose export orders and investment opportunities in India. In fact, the recent worry in the US against the use of unilateral sanctions has been precisely centred on the adverse effect on the US in terms of exports lost while the targeted nations suffer little, if at all. US newspapers and TV have been full of exaggerated estimates of "losses inflicted on India"; these are little more than garbage.

The US will indeed have to vote against loans to India at the World Bank and the IMF. But it does not have an effective veto at either institution. It is also hard to see the US working overtime, and effectively, to get others to go along with it at these institutions. This is because India is a democracy with a virtual domestic consensus on the nuclear decision. Further, the US administration itself has fought off domestic demands for sanctions against a communist, authoritarian regime such as China.

Besides, even if the IMF-World Bank assistance were discontinued for a year or two, the costs are not going to be critical. India has prudentially avoided extensive short-term borrowing and is thus not vulnerable to temporary shortfalls in aid inflow. On the other hand, the decades of autarky in trade and negligible inflow of equity investments have created a weakness. These afflictions have still not ended. The problem must be immediately taken in hand if the impact of sanctions is to be minimised by our own policies.

If the reduced aid flows and public credits are to be met with a firm response, we have to open the economy to trade and equity investments, not close it. This would make our markets more attractive and thereby induce market-determined increments of export earnings and investment flows. Equally, by getting foreign businesses to develop a greater stake in the Indian economy, we also create countervailing incentives in the US to offset those pushing for continued sanctions.

This is a lesson from authoritarian China's successful containment of the human rights lobbies. Businessmen with packed suitcases on official flights to Beijing, with the glint of profits in their eyes, became the major opponents of sanctions against China.

So if the BJP-led coalition uses this moment to practice "reactive nationalism", by going outwards instead of inwards, India's reforms will benefit. By finally encouraging rapid growth, and thus also fighting poverty, that would earn us the global respect we crave, which nuclear explosions alone can't earn. Russia has innumerable nukes; but as soon as Boris Yeltsin leaves the room, people snicker at Russia's decline and economic chaos.

The next few weeks are going to decide whether we move to what many of us would like to believe is India's tryst with a great destiny: prosperity and true independence, courtesy a far fuller embrace of trade and investment. Alternatively, we can continue to be in a state of poverty and dependence, such as is manifest from a mere scanning of the aid suspensions in recent days.

My CNN website reveals Sweden cancelled a $119 million aid deal, Denmark froze aid worth $28 million. My head spins. After 50 years of independence, are we still begging for aid from even these small nations?

Surely, if life were fair, then we would tie the politicians who followed the wrong policies -- and the economists who advised us disastrously -- to the next missile. We cannot do that. But we can certainly change our ways; and now that we have a chance we cannot afford to miss.

The author is Arthur Lehman professor of economics and political science at Columbia University, New York.

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