 Welcome to a discussion series on free trade and liberalization as part of the 1991 project at the Mercator Centre. I am Shruti Rajagopalan and in this conversation, I am going to be talking trade with Arvind Penagariya, who is a professor of economics and the Jagdish Bhagwati professor of Indian political economy at Columbia University. In the past, Arvind has served as the first vice chairman of the Niti Ayok for the government of India and as a chief economist of the Asian Development Bank. He is the author of a number of books, but today's conversation in particular will focus on his recent 2019 book, Free Trade and Prosperity, published by the Oxford University Press. Welcome, Arvind. It's a pleasure to have you here. Shruti, better as always. Arvind, you serve as the director of the Deepak and Miraraj Centre on Indian Economic Policies at Columbia University. The centre's mission is to promote economic prosperity in India by improving the understanding of the Indian economy through research and by sustaining ongoing dialogues on major policy issues. Here we have a shared interest. As you know, the 1991 project at the Mercator Centre commemorates the liberalization of the Indian economy and its consequences on its 30th anniversary. Our main goal is to revive the discourse on economic growth and the reforms that are centred around economic ideas in India. This series on trade is a joint effort by Mercator's 1991 project and Columbia's Deepak and Miraraj Centre. Arvind, thank you for sharing your insights based on decades of research on trade. But before we talk about the reforms in India in future episodes, I want to start at a more fundamental point, which is the relationship between liberal trade policies and economic development and well-being in society. Now, this is a theme that you have explored in a bulk of your academic research and writing throughout your career. More specifically in this book, you have argued that sustained growth and prosperity almost always require low or declining trade barriers. What is the relationship between free trade and economic growth and what is the mechanism by which lowering trade barriers leads to more economic growth in developing countries? Good. Very broad question, Shruti. So probably the answer is going to be a bit long, but let me begin. So this really goes to the heart of the entire field of international trade and the number of ways to answer the question and each of them gives you some aspect of why trade matters so much. In the classroom settings, of course, we begin with the principle of comparative advantage and that simply tells you that you should specialize in what you're best at and it doesn't matter even if you are not good at any one of the tasks, but still as long as you specialize in the tasks within your abilities, the one that you do the best, go for it. It's sort of like in a hospital, for example, you've got many different doctors, there are neurosurgeons, neurologists, pediatricians and then there are physicians and then there are nurses, etc. And it's possible that the neurosurgeon is both a top-class neurosurgeon but also a top-class physician. But would we say that this neurosurgeon should also therefore do some duties of the physician? Normally we'll say no because there are other physicians who can't do what neurosurgeons can do but they can do the job of the physician. So the neurosurgeon, even if he is a better physician than all the other physicians in the hospital, ought to really specialize in neurosurgery and it's the same kind of principle that applies to countries that look, do what you do the best and specialize in it and then you export in return for what other countries are better than you add. So that's a fundamental kind of principle of comparative advantage, that's the starting point. But now we can go to other aspects, why specialization actually is beneficial. And one of the very important reasons of course that we also now teach in international trade classes is the economies of scale that find there is one reason which is this what we call the comparative advantage where I should also point out actually that if a country like China or India has a lot of abundance of labor, then it will actually produce more cheaply the products that use labor more intensively relative to capital let's say and countries like the United States, European Union etc which have a lot more capital relative to labor, they are labor scarce countries, they can produce more cheaply the capital intensive products and export those. So this is all a part of the principle of comparative advantage where a specialization is driven by the differences in the comparative costs. Now economies of scale is the second source, very important one and there again we see particularly if you look at the success of countries like China, scale has been one of the very important keys. When you produce a billion iPhones, your costs are going to be a lot lower than a country that's producing let's say only a few million because you're able to actually spread your fixed cost of production. Even more dramatic example is the aircraft industry. The first aircraft takes the it is very costly because you have to set up the entire machinery and so forth but once you have set up the machinery, second aircraft becomes much cheaper, third becomes even cheaper and so forth. So again, that's the economies of scale but in practice there are other reasons why specialization in trade and particularly being a part of the global economy turns out to be so important. We said your question was posed in terms of trade liberalization. It's really meaning don't just operate on your home turf, go out to the global markets, compete there. It's really like if you'd want to draw an analogy from sports, if you're playing cricket and you really are playing cricket only within your home state and not even national, you're not going to produce a whole lot of world-class players like Nathen Dulkar and Kohli and so forth because you're competing against the best, you learn from them, they learn from you and when the best in the world go against each other, they have to figure out all kinds of strategies and entrepreneurship is something very similar as well that when you're in the global marketplace, you go and play against one another, each of you is the best in your field, you learn from each other. So that's yet another reason why openness to trade liberalization helps. Then again, technology is another very important reason why openness matters, technological diffusion, innovation can happen in one country but in the end that innovation can become available through either patents or ultimately diffusion of technology, reverse engineering of products and so forth. That's another source of gains from trade. Again, if we go back to the Indian history, we know that we lost out so badly simply because we didn't even allow even the products to come into our country and so we didn't have any idea in those days that the quality of the product was so much superior in other parts of the world than it was in India. So again, once we opened up in 1991, we began to see the big difference and that of course forces you to either through reverse engineering or through whatever, this is the best, the customer also forces you when the customer goes for what is available from abroad, better quality at a lower price. Then of course, the domestic producers are forced to shape up as well. So that as well the technological diffusion and all. And I think I'd say one last reason why this helps is also the fact that when you open up and let me just take the case, extreme case, when you're free trade, you're benchmarking your own domestic producers to the best in the world. And then you say that, look, you know, compete against those. And for the government that also is a challenge that if they really commit to that, then they can come back and ask, why are my manufacturers, producers and certain sectors are not able to compete? Something is maybe fundamentally wrong with my policies. So you then begin to fix the domestic policies. But if you take the opposite approach, where you say that, oh, you know, there are a lot of domestic policy problems, you don't actually reform those policies. And then the manufacturers come in and say that, look, you know, I got this disability, there's 10% disability because of high electricity prices and other 10% because my labor laws are so inflexible and all. So I've got about almost 25% disability relative to the foreign suppliers. And I come and say that, okay, I'll give you 25% tariff protection. Well, I've not solved the fundamental problem. And what I have done is to allow my high cost producers to continue to produce. That's the wrong thing to do. So I think even for policy reform, commitment to free trade or something very close to free trade forces reform in the domestic policies that are in obstacle. So these are some of the four or five very important reasons why free trade actually does help growth. And then of course, we can come as we go forward to the link between, at least the empirical link between openness and growth, as well as the empirical link between openness and poverty. I would actually add one more aspect that I've actually learned from you and your work, if you permit me, which is that once we open up globally to free trade, all the inputs also become cheaper without tariffs and protectionism, which means that everything that is being produced, whether it is for the global economy or the domestic economy, automatically without any change in technology, without any additional changes in global productivity, you can still produce everything cheaper, because now you have access to the cheapest and best inputs from abroad, which is going to make your domestic and global output better. And sometimes cheaper inputs may just give you larger margins. And sometimes they may help you compete better by competing better on price globally. So that I think is one more important effect of opening up to free trade. Absolutely. I think it is a very good point I missed out, but technology is not the only thing, but also the inputs themselves. And you're absolutely right. And we've got fantastic examples from India. You go back to 50s and 60s. We won't allow, for example, the clothing manufacturers to import fabric. And the fabric we produce domestically was not world-class. And so when you use that fabric to manufacture clothing, you can't export that because the global customer comes in and says that this cloth is just not to my kind of taste or to my kind of quality. And so even on the export side, you are not able to compete. So it's not both factors, not just the input prices, but also the quality of the input. Similarly, a lot of the machinery because of India's initial emphasis on heavy industry. A lot of machinery began to be produced domestically, but this machinery was not to the quality. So not only a little more expensive, but it was also not the world-class quality. And so then if machines are some standard, then the products that you produce with them also won't compete. So absolutely, I think very, very important as well because technology, after all, is also embedded or embodied in machines. Yeah, absolutely. So I am obviously very persuaded by your arguments that free trade leads to rapid economic growth and not just by the arguments, but also some of the evidence that I have seen. But there are often skeptics and those who are persuaded that free trade may increase the size of the market, may lead to economic growth. But they are not persuaded that it actually benefits the poor in developing countries. So first, can you tell us the link or rather the broad empirical evidence that connects free trade to economic growth and then whether actually it reduces poverty in developing countries? What has the track record been globally say in the last 50 or 100 years? Okay, so let's first, I mean, ultimately the link of openness to poverty principally is through growth. One can draw at least conceptually some link more directly from openness to poverty. And we'll perhaps come and discuss that as well. But I want to start first with growth because I think this is where the big impact on poverty comes from openness. If you can really engineer faster growth, growth in the range of 8-9% a year as some of the most successful countries were able to do, then there is no way forwards are left behind. We can come to evidence as well to be sure that what I'm saying actually supported by the data themselves. But let's get to the evidence. Now, of course, conceptually all the factors that we have discussed, we have talked about just now, the specialization, economies of scale, technological diffusion, availability of inputs, the technology that is embodied in machinery, all sorts of factors are there which can in principle contribute to faster growth. And of course, theory on this is a little more ambivalent depending on how you write your model. There are all these endogenous growth models that one could look at. But in the end, they don't provide you enough guidance in the sense that depending on how you write the model, you could show trade to be leading to faster or slower growth. So then you have to choose which model and so forth, which is why I think the empirical evidence here becomes most critical. So let me just say that we can look at the empirical evidence and let's do that systematically at two or three different levels. I mean, this is a very vast subject among economists, trade economists, especially trade economists, and at least three levels at which we can look at it. One is at the very aggregate level. Over the years, if we look particularly at the developing countries, starting in the post independence era largely, how the economy is developing country economies have performed during various periods. The second we can look at this issue of causation, because a lot of the skeptics come in and say that, look, fine, you see this correlation or association between faster growth and faster growth in trade. But how do you know that causation is going from growth to trade or from trade to growth? So there is also a good bit of literature on causation, whether actually the faster growth in trade leads to faster growth in the per capita income and so forth. So we can come to that. And third is what I find most persuasive personally, I would say, which is the country case studies. So we can look at countries that have grown very rapidly over certain periods of time and try to see whether that is being, that growth is being driven by policies that largely rely on open markets. I should say from the beginning here that trade is one of the things which is very important for faster growth. There can certainly be factors that could prevent that benefit of openness leading to faster growth failing to realize. It's very simple that you can have free trade policy, but if your transportation links to ports are not good, if your infrastructure is awful, then even if you opened up yourself in terms of the policies, you're not going to get there because no trade response would happen. Likewise, if the rest of the world is closed, you are open, well, it still is not going to have much impact because the rest of the world is not trading. So there are factors and then you can extend it to some of the domestic policies. If domestic policies are incredibly constraining like India had all this investment licensing, the all sorts of rigidities in the labor markets, rigidities in the land markets, then also the impact of the policies will not be realized. So I'm perfectly aware that the lack of flexibility in many of the other policies can negate basically the benefits that could otherwise accrue from trade. But the point here is that trade by itself is not sufficient, but it is perhaps the most important necessary condition and it always in designing your policy reforms, it is a very good starting point. Once you begin to open and feel committed to opening the economy to trade, you are also going to do other policy reforms systematically so forth. So with that dealt with, let me now get to the evidence that in broad terms does the evidence really support the link between openness and growth. Now some of the early work that came out particularly from Danny Rodrey. So first he did this short book in 1999 where he argued that if I look at the data, then the period during which the developing countries do the best is the one prior to the oil crisis. And so it takes about 1961 because the data really are available starting from 1961 on a consistent basis for a large number of developing countries. So he takes those data says in 1961 to I think 73 or 74 and finds that during that period on in aggregate the growth rate for the developing countries was higher than the subsequent periods. So you can take almost take it from 1974 or 75 to 1995 or so because he's writing in 1999 and it turns out to be true that 61 to 73 or 74 the GDP growth rate of the developing countries is higher. And so therefore he concludes that really the golden period of growth for the developing countries was when they were actually pursuing import substitution. Now broadly speaking that observation is also perhaps correct that broadly speaking that was a period during which the developing countries as an aggregate if you take it were more into import substitution. Now then later actually same sentiment is then expressed very much a quote by Hajun Chang who is another relatively influential kind of free trade critic. But Hajun Chang was already writing in 2007 by which time the evidence had changed. But either he did not do the figures right himself or relied on old evidence. So he has no excuse actually to missing out the data being factually incorrect because I've done the data. What happens is that it is true that initially 61 to 73 or 74 the developing countries do grow better. But then the oil crisis hits and all sorts of bad things happen. And then there's also this liberalization that is largely kind of driven by the World Bank and the International Monetary Fund. There's a debt crisis that happens in the 1980s and that sort of leads Latin American countries. The African countries into debt traps and that gives the International Monetary Fund a lot of clout. And so they really go in and largely you can say there was some bit of forced liberalization. In that liberalization in the end at that time at least was not so much owned by the countries themselves. And then of course what that also means is that a lot of the other complementary reforms that ought to happen probably didn't happen at the time. And so that period does and then even generally the global economy doesn't do that well during this period. So developing countries did do poorly. But of course the impact of this drive by the IMF in the World Bank partially of course, but also there was diffusion of ideas of trade economists that was beginning to happen. In the 1970s some major research projects had been done one by the OECD, another by NBER, a third by the World Bank. So all these research projects were diffusing the ideas of these as well as evidence from these projects. And that sort of led to the gradual acceptance actually on the part of many of the developing countries and they began to own this process of liberalization. We know of course India was a big example 91, but China before that had started already. But a lot of the Latin American countries also came on board, countries in Africa came on board. And then lo and behold we begin to see the evidence completely turned around. So I've done the numbers and I'll give you some numbers. So I've taken the 1961 to 2013 which is a fairly large period and I divide it into three different periods. Now you can divide it any which way. These are all close to five decades of data and you can whichever way you want to divide it. It doesn't matter. The evidence is so strong that once this liberalization took root and countries began to own it, growth rate is significantly higher actually in the mid-1990s onwards period. So 61 to 75 in my taking is about 3.1% for the developing countries. Then 76 to 94, it does drop to 2.4. So this was the period, the World Bank pushing it out and the entire Soviet Union breaking down. The Eastern European countries turning from inward policies to outward policies. But this is a transition period. So it did drop to 2.4 percent, but 95 to 2013, 4%, which is significantly higher than the 3.1% that had been achieved in 1961 to 1975. So that's the one basic point. So you can slice these data, whichever you want. I do it even by decades. So by decades, if you do 61 to 70, 1960s decade, growth was 2.9%. 71 to 1980 was 3.3%. But then you come to the later decades and you have 2001 to 2010, 4.7%. So it was really significantly almost hitting 5% as an aggregate for the developing countries, quite unprecedented. Not only that, actually it also turns out that during the early decades when growth was happening, the early 60s and early 70s, 1960s and early 1970s, OECD countries were growing very rapidly. They grew much more rapidly. So if you want to take the period 1961 to 75, OECD countries are growing at 3.5%. So they are providing the kind of impetus that they're serving as the engine of growth for the developing countries as well. But if you take the third period 1995 to 2013, when the developing countries are growing 4% compared to 3.1% in the first period from 61 to 75, OECD countries are growing during this period from 95 to 2013, only 1.4%. So it is the liberalization by the countries themselves that is making all the difference. So it's clearly their liberalization, not the rapid growth of OECD countries. OECD countries are growing. Sometimes people say that today the economic environment is not good enough, the global economy is not growing and therefore trade cannot be the engine of growth and all. But hey, China, all developing countries taken as a group, 95 to 2013, OECD countries are growing only 1.4%. But because they had their own policies which were much more out of oriented and admittedly some of the other complementary policies in place as well, they grew at 4%. Now, one last point here, which is also important to bring in is that even for the period 61 to 75, even in one word to say that this was a good period for the developing countries, which countries are driving that growth? You've got Korea, you've got Taiwan, you've got Singapore, Hong Kong, some of the most open economies are the ones that during this period actually grew so rapidly, something like 8% to 10%. Even in that period, but if you read Roderick or Harjan saying, you'll see no references to Korea go elsewhere, but not in this context. But in the end, this is what mattered. No, I think the last point you said really is important and I know that's one of the reasons both you and I think specific country studies become very, very important in this context. But the 3.1% and the 4% in later decades that you point out, that's an aggregate across all countries which are put in the bucket of developing countries. But it doesn't tell you very much about which are the countries which are growing fast, which are the countries growing slowly and which are the countries which are in negative rates of growth, which also happen in certain years for certain countries. So when you look from 61 to 75, India is in the, what is pejoratively dubbed as the Hindu rate of growth. And it's the same year as when India becomes more and more inward. The first attempt at devaluation fails in 1966, Mrs. Gandhi takes a turn to be even more socialist and inward looking. That is exactly the period when we see the emergence of what we call the Asian Tigers. You have South Korea leading the group and you have Singapore, you have Hong Kong, you have Taiwan. And then of course, followed by China, which is a different scale in terms of the size of the economy. But the 3.1% and the 4% masks this difference even within developing countries. There is a separation even within that pool. Yes, absolutely. That is the point that you have to desegregate. I mean, I've written on this and this is reported in the relevant chapter in my book as well, that what I did actually for each of these periods, I separated the countries. And this is the earliest, the first thing I wrote was a paper which was titled, Miracles and Devakas. So what I said was any country that grows on a sustained basis, which could be about one and a half decades, let's say in per capita terms at 3%, let's call that miracle growth. This arbitrary, but you can choose another 3.5% or you can choose 2.5%, whatever the basic thrust of the argument doesn't change. And then I called the Devakas countries, which in per capita in some terms either don't grow or grow at negative rates. So they actually per capita income declines. And I look at both because there's also this complaint that of free trade causes decimation, countries suddenly the domestic industry is destroyed by free trade. And so it leads to this very negative kind of growth. So you look at the Devakas also that is trade behind that kind of Devakas. So I basically try to look at at least the association. And when you do that overwhelmingly countries that are growing at 3% or more in per capita terms, they overwhelmingly actually are also experiencing at that time rising trade to GDP ratio, rising exports to GDP ratio. Because what that means is that the GDP is per capita GDP is growing 3% and if population is growing another 1-2%, then the GDP is growing at 4-5%. And even then when you say exports to GDP ratio is rising, that of course means that your trade is rising even faster than the GDP. So that's the miracle part of the story. Devakas part of the story turns out that you almost rarely find that the negative growth is correlated with fast surges of imports. You just don't see imports growing at any fast pace during the period when countries do very poorly in per capita terms. I'm going to ask you to elaborate more on per capita income and the relationship with economic growth. But before that, for the listeners especially sometimes it seems like oh 1% to 2% they seem like such small numbers. But we're talking about rates of growth and when you start compounding, the impact is really, really large. So there are different estimates in different countries, but very, very rough rule of thumb estimate for India is that an increase in 1% of GDP per capita growth leads to an additional 3 million people getting lifted out of poverty. So if you're talking an additional 3% per capita growth, you're talking about 9 to 10 million people being lifted out of poverty. And now when you see that over say 15 years or 30 years, you're basically eliminating the extreme poverty in a country in a relatively short period of time in global history. 15 years, 20 years is a very short time in global history to actually eliminate the poverty problem. So on the face of it, it seems like 1% here, 2% here, it seems like you're haggling over such small numbers. But the impact on real lives of the poor is quite extraordinary. So I'm going to request you, can you take us through the link between this kind of, the nexus between free trade economic growth now translating to improvements in per capita GDP? Okay, so we can look at the data. So we got some data here. I'll give you some. So we can look at this World Bank actually has compiled most of these data. And so do some dramatic comparison here. Let's do some dramatic comparison. So unfortunately, we don't have the 1950s data. I mean, at least the World Bank on a consistent basis doesn't give the data for the 1950s. Although we know from other sources, not the World Bank, but other sources where the scholars have tried to estimate the GDP per capita income in the 1950s, you look at India, you look at China, you look at South Korea, those three roughly started about the same place in the same place in around early 1950s. And actually, at least for South Korea, there's also a period of civil war, not civil war, but the South Korean North Korea war, which had decimated it in 1954, it probably started below where India was because of the devastation of the war. Some of the other countries which did better, did well also, Singapore, Taiwan, they had probably started, they were probably a little bit higher. But by 1961, this is what it looks like. So I'll give you the numbers. This is in real terms, so it's in 2010 constant US dollars. China's per capita income was 141 dollars. India was actually significantly more, according to the World Bank numbers, $336 and South Korea is about three times of India at that time, $968. So South Korea is about, you can say $1,000, a little less than that. China about 140, 141 to be precise and India $336. So India is in the middle. Come to, let's say year 2000. You come to 2000. India gets to about 827. China has now surpassed India by a good margin. It's almost twice of India, $1,768. And of course, South Korea is on a different scale by now, $15,400. So $15,400, $827, and $1768 for China. So India is $827, China is $1768, South Korea is $15,414. Come to 2019, this is sort of roughly the current period. Now where do we stand today? Today, 2019, China is $8,242 per capita income. India is one fourth of that, $2,152. And South Korea is about $28,676. You can see, you know, this totally. Now, also very interestingly, we can look at the numbers later, but it turns out that in South Korea and China both. And then you can look at Taiwan, Singapore as well. Poverty got eliminated pretty much by this kind of phenomenal growth they experienced. And it got eliminated by growth itself. You know, they hardly had any social programs. In the way India has actually a very low level of income started these social expensive programs like the National Rural Employment Guarantee Scheme or the public distribution system of food and so forth. You know, these countries really ran none of that actually on any significant scale whatsoever. You may find tiny programs here and there, but nothing significant. Much of the poverty actually reduction happened purely by growth. And you'll see, you know, when we look at South Korea, particularly as a country case study, we'll find that that is indeed the case. You know, I just wanted to take this briefly mentioned that this whole issue about causation, whether, you know, it is trade causing growth and growth causing trade. So now, you know, economists have actually looked at this. And then, you know, so let me explain that and then we can come to the discussion of South Korea. I think that's where a lot of the good, you know, country case study gives you a lot more feel for what is happening. And so, but on causation now, you know, what what economists have done is to at least the earliest studies that were done. This is a study by Jeff Frankl and his co-authors. And what they did was they use the gravity model. Now what the gravity model does is it shows that looking at the distance between the between two countries offers a good measure of trade, meaning farther away countries controlling for their GDP levels, countries that are located far apart, trade far less, and countries that are closer to each other in distance trade a lot more. So, so distance turns out to be a very powerful explanation for bilateral trade, not totally necessarily, but bilateral trade. So what they do is use use this gravity model, which which uses distance as the determinant of trade. They estimate the part of the trade which is driven by the distance bilateral distance between the countries. And then there's a look, you know, so this is clearly not and you're controlling for GDP, you're controlling for GDP. So therefore, this is this is the part of the trade which is not impacted by GDP. It is only impacted by bilateral distance. Now then they run it, you know, that if you take that part of the trade and see what impact it has on per capita income growth, per capita income, they find that, you know, countries that are on balance trading more have higher per capita incomes than countries that are trading less. So this is a trade which is uncontaminated by GDP levels. And so this is, you know, after that, of course, you know, now there is a long paper by Doug Arvind which does a survey of number of these studies that have been done, which try to, you know, find different clever ways econometrically to get around the causation issue. And now there is plenty of evidence actually, you know, so after my book came out, there's a lot of studies have come out actually, which basically point out to this fact that after, you know, starting from the 1990s, you see very substantial kind of increases in incomes of the countries that had opened up. And they are able to actually also establish the causation running from opening up and expanding trade to GDP growth or per capita GDP growth. So we have that evidence. No, and I personally find that evidence quite persuasive, especially the post 90s evidence after the collapse of the Soviet Union, as you point out, more and more countries are now embracing unilateral liberalization and opening up to free trade, which is, you know, the part of the transition economies in the Eastern Bloc, many developing countries, and overall the questions people were asking changed, right? Earlier, this was up for a debate. And something that seems to have changed after the collapse of the Soviet Union is now instead of debating the fundamental question of whether free trade and growth are linked to each other, we start thinking about what kinds of mechanisms exactly how are they linked to each other, exactly what kind of growth takes place and so on and so forth. But I want to dig deeper into the South Korean case. You know, one of the miracles of the 20th century, especially the second half of the 20th century is South Korea. Of course, China is known better, the Chinese story, both because of the size and scale, the enormity of the success. But the reforms initiated by Deng Xiaoping is pretty well known across the world and, you know, the impact that it's had on China. The South Korean miracle is, I think, very underrated and also under discussed and under recognized. And it comes in a different time period when this is not the prescription for most developing countries. So, you know, as you pointed out, in the 1950s, South Korea is devastated by civil war. In today's terms, you could stand globally in the rankings of something like Syria or Yemen, right? Modern day Syria and Yemen is sort of where South Korea is starting in the 1950s. About 10% of its GDP is coming from American aid. So it's really being propped up by aid and not as a trading economy. They have no real natural resources to speak of, no real, you know, big agricultural output to speak of. And today, when you look at South Korea, the story is dramatically different. So one, of course, if you just do a simple ranking of countries by GDP per capita, South Korea is 35th across the world, right? It ranks higher than even some European countries in some years like Portugal. So that's one part of the success story. But on other terms, it's also a big power in terms of, you know, exporting what we call soft cultural exports, right? So, you know, whether you're talking about Korean movies, Korean, you know, K-pop, you know, in popular culture, Korean fashion, cosmetics. Korea seems to have had a very different, you know, sort of impact on the world for a country of its size. So that's, you know, a second part. And during COVID, we see that Korea seems to have managed and arrested the problem right from the beginning, right? They've had very unique solutions. And if there is a success story early on in COVID, not later on post vaccinations, but very early on, I would say South Korea stands, you know, as a highlight. So they've also improved their infrastructure, their state capacity, their social cooperation and cohesion and so on. So to me, it seems like South Korea is really the miracle story or like the breakout story, you know, in the 20th century. Can you tell us one more just about what happened in South Korea? Because I think the story is relatively unknown. And then, you know, maybe we can delve into other parts of how the structural transformation took place in South Korea to sort of, you know, take it from what was they used to call South Korea the global basket case, right? So how did it go from that kind of a reputation to the reputation it has today? Yeah, no, very good. I think, you know, summarized it beautifully. And two additional exports that are emerging from South Korean food is catching on as well. Yes, it's fantastic. And you mentioned Korean movies, but Korean dramas. I mean, I'm a big fan myself of Korean dramas. And I should also mention that actually, finally, I found the Korean masks to be the best. So the designing, you know, they really think about it. For teaching my classes, I've been not using the Korean masks. And, you know, because for two hours, you are speaking with the mask on. And so you'd need the mask to be such that nothing else comes in, but at least air comes in. I would actually add to your list of shopping Korean sunscreen for the summer when you're outdoors and mask free. I have found Korean sunscreen to be the best of any sunscreen that I have used. It's not sticky. It does the job really well. And we can now get it in the United States. And, you know, we have recently started changing, you know, you've been in this apartment for about 17 years, so changing all the appliances. And all of these are LG Korean. And then, you know, it's not just that they function well, but they think of the consumer kind of conveniences, you know, exactly how to, even small things like, you know, what in the cooking range, what should be the size of the burners and, you know, what should be the distance between the burner itself and where the pot is going to set, all sorts of things. They pay attention to these design issues. Just as I mentioned about the mask, you know, designing is very important in almost any consumer item, you know, we think of designing perhaps only on clothing, et cetera, but appliances also are proper designing. So anyway, let me get to the key issue that you have raised on growth first, right? So it is good to at least get some perspective on the numbers first. It is the numbers that hopefully, you know, the audience can also remember as we go deeper. So 1954 to 62, right? So this is, so 54 is when the Korean War ended and Korea began to rebuild. So 1954 to 62, the growth rate in Korea, annual growth rate, this is the GDP, not per capita, but GDP growth rate, is about 4.2%. So that's the eight year period and 4.2% growth. Then the whole decade, 1963 to 73, Korea grew 9.1%. Now, this was completely unprecedented as far as I know, well, in the maybe Taiwan and Singapore and Hong Kong alongside happening, but so recognizing that fact, this is, you know, completely unusual experience for anybody, no country, you know, during the earlier Western country at least, you know, all the prosperous countries, none of them had ever grown at 9.1% in a single decade. So that was completely unprecedented. Then we see some sort of set back to growth. This is the period 74 to 82, another kind of eight year period, 6.9%, 7 if you wish, but clearly 2 percentage points below what had been achieved in 63 to 73. And then it resumes 1983 to 95, economy again grows about 8.7%. So that's another 12 year period, 8.7% fantastic growth. Now, you know, by this time Korea is fully transformed. I mean, it is no longer a poor country. Transformation is practically complete. And we'll look at and look at some of the actual changes that happened during this period. Poverty, of course, is pretty much, you know, at least the way we think of poverty in Asia, in China or India, the abject poverty or extreme poverty, that's pretty much gone in Korea by 1995, per capita incomes have really grown quite a bit. We looked at some of the numbers on per capita income already. So that's in a nutshell, you know, is the growth story. Now, let's look at, you know, what happens to trade during this period. Now, trade, if you start out in South Korea around 1960s, till about 1965, about 5% exports are 5% of the GDP. So they're about 5% of the GDP. By early 1970s, by early 1970s, 72, 73 somewhere there, it has already close to 30%. About 28% maybe, you know, so it's already about 28%. And by 1987, you've gone to 38% of the GDP. Now, what was 5%, you know, so it's trade is exploding during this period. Absolutely phenomenal. Now, how is the transformation happening? Hong Kong, Singapore, Taiwan, South Korea and China. So those are the countries which have grown at this kind of pace of 8% to 10% on a sustained basis for almost 2 to 3 decades, almost 3 decades. So in each of these cases, manufacturing is the first driver. It is the manufacturing growth that takes off. And then as manufacturing grows, what happens is that it requires more and more workers. And in each of these cases, you'll see that the manufacturing that is growing very rapidly and that is also the operating in the export market is highly labor intensive. So it's things like clothing, footwear, furniture, these kinds of products are what are being exported progressively more and more. And so it requires workers. Where do the workers come from? They draw them out of agriculture. Now, these are also, you know, products which don't require a whole lot of time to train the workers. So if the farmers can come out in 6 to 8 weeks, they can. Kori also was ahead of most of the countries in terms of the literacy. So whereas on higher education, they didn't do very well for a long time. I mean, today, of course, they are well ahead of most other countries in the region. But on higher education, they didn't spend much. But on primary education and literacy, they were very big. In fact, in those days, anybody who acquired college education was required by law to teach in a primary school for 5 years, including actually, you know, President Park Jung-hee, I mean, he's the kind of man behind the Korean miracle. Even he had actually taught in school for 5 years as a part of his mandate. So he was an Army general, of course, but he had also done that. So if, you know, generally, you've got 5 or 6th grade level primary education, then workers can be trained into these labor-intensive industries. That remains true today also. So that's how they built up the workforce. And they operated in the global economy. So these are good jobs that got created. And they kept drawing, kept drawing. And so the share of manufacturing began to rise in the GDP. As these workers came in, and at decent wages, they got employed, they spent their income. As they spend, of course, a lot of non-traded services, because services tend to be non-traded, most of the services, in those days particularly, you know, so services also then begin to kick in as an engine. So there is this kind of connectedness between manufacturing growth and services growth. So both of them, they then begin to draw both services and manufacturing begin to draw workers out of agriculture. So that process happens. So, you know, the share in GDP of agriculture, which, you know, around 1965, which was close to about 40%, by 1990, that dropped below 10%. So that's the share in GDP. And manufacturing rose during that period from about, you know, something like 13%, 14% in 1960 to about 30% in the 1980s throughout. And services, of course, particularly after 1975, services took off as well. So, you know, there's a sequencing that initially it's manufacturing that draws more workers, but then it becomes a services. Now, workforce-wise, the story is even more dramatic. You know, about 1965, about 60% of the workers are in agriculture. This 1965, about 60% of the workers are in agriculture. By 1990, that figure drops to below 20%. So there is 40 percentage points movement within 30-year period. So dramatic transformation in terms of the profession. And what is most remarkable is that during this entire period, wages, real wages, have been growing on average 9% to 10%. You know, one can look at different periods. For instance, you know, if you take 65 to 73, wages grew 9.3%. 74 to 1982, they grew 9.6%. And then 1983 to 90, 10%. So, you know, it's between 9% and 10% throughout. So this is tremendous kind of boost to services demand, which have to be supplied locally and that creates jobs and services as well. So it is quite remarkable. Now, one last part of the transformation of South Korea. You take 1960s until about 1965 again, middle of 1960s, it's about 30% urban. And by the way, you know, we are in India, if you look at 2011 census, urbanization is still only 31%. So of course, you know, so Korea did start a little more urban than India did initially. India has been obviously much more rural. But look at what happens, the rate of urbanization as this rapid growth happens. By 1990 already, the urbanization was about 75%. It really kind of exploded. And it's not just, you know, that somehow all the rural labor force kind of moved into urban areas. That was certainly part of the story. But it is also the fact that many of the rural areas turned urban. This transformation always happens. I talk in terms of these types, you know, there is a Mumbai-Shanghai model of urbanization and then there is Shenzhen model of urbanization. Mumbai-Shanghai one is the one where cities already exist and more and more people come to these urban centers. That's the Mumbai-Shanghai model. But the Shenzhen is different. Shenzhen, you go to 1980. This is in China, on the coast, you know, Shenzhen was a bunch of fishing villages. Maximally, the population was 300,000 in 1980. And today, it is one of the most urbanized spots on the face of earth. It's incredibly urban, the entire kind of robotics industry, etc., is located in Shenzhen. And its population is something like 12-13 million, some much larger, you know, from 300,000 to something like 12-13 million. And per capita income is about $25,000 per year. It is rivaling Korea's pretty much, you know, in Shenzhen itself. So this urbanization was the other kind of very, very important feature of this transformation. So, you know, and the transformation of Korea is no different than of Taiwan, for instance, or before that of Japan, or before that of if you want to go back in history, United Kingdom, United States, Germany, etc. The big difference is that what the earlier countries, the United States, UK, Germany, etc., took over 100 years. South Korea comprised it all in 30. I mean, they really got to where these countries took 100 years to get to, they did it in 30. That was absolutely the big difference. And also, can you tell us one, another aspect of structural transformation, which is initially South Korea starts out as a very low-tech exporter, right? So they're really exporting garments, they're exporting hair. I remember you had mentioned this is a big part of the export industry. So there are, the composition of exports and imports has also changed over the years, right? Now imports are much more design-based, technology-based, innovation-based, whereas once upon a time it was more, someone else is innovating and now, and you know, South Korea is the cheap labour manufacturing hub, which can sort of, produce things at scale and sell them cheap. But that has also changed as Korea has gotten richer. Oh, absolutely. Yeah, you know, so this, and the whole idea here is, and this is where I think India can really learn that what we are doing is only we try to kill people only from the top. Now, because the Indian history or development has been different because it started with the heavy industry and all, and so you did acquire some expertise in these very high-tech industries early in the game and sort of, you know, that advantage translated eventually, I would say, between Indian IT industry, software industry, revolution and so forth. But the whole point is that you still left most of your, the large bulk of hundreds of millions of worker population completely untrained, completely unskilled. And, you know, you can't train the population into this kind of very high-level skill by bringing a farmer into IT industry or farmer into finance industry, you know, you can't do that. You really have to, you know, begin at a level at which you can bring them in and give them certain training, certain skills, important certain skills that they are able to absorb with their level of education and all. And then you build up and then you build up. And that's, you know, also in that process, during this process that I described, South Korea began to become more and more capital abundant. We talked about wages rising almost 9.5-10% a year, that is referring to labor scarcity. Cheap labor is no more available, labor is becoming more and more scarce factor. So you then can also shift into more capital-intensive exports, where India wants to do it right away. That is again the problem you see that then your limited capital is being absorbed by, let's say petroleum refining industry or some machinery industry or something, right? You know, then you deprive the other labor intensive sectors of the capital. So there are these lessons to be drawn from South Korea that nobody immediately started off with these high-tech exports. But Korea today, of course, is fully transformed because, you know, its particular income is close to about $30,000 and at that level, evidently, you can do much more. And so the workforce is also become more educated and you've got some world-class universities in Korea now. So in higher education, they have caught up even though they didn't start. So notwithstanding the disadvantage of the language and all right, we all kind of revel into this thing about English is our language and we know English, but look at, you know, South Korea had no English and it could still develop and become so influential and not even actually projected soft power, right? In spite of the lack of English, it is able to project its soft power too. So it's quite interesting, you know, but that all goes with wealth. You see, if you create wealth successfully, then it can be done. Yeah, and you know, at so many points in our history when we read literature about how Korea was talked about, you know, in the 60s and 70s and then China, there is this pejorative first world commentary, right? Oh, these are people who just know how to make cheap t-shirts, right? That kind of a, it's a very pejorative first world way of looking at the problem. But now we realize that, you know, Taiwan and South Korea used to be the countries that made cheap t-shirts and then it got substituted by China, then now even China is too rich to be making cheap t-shirts as cheaply as the world needs. So now Bangladesh is the new place that is making cheap t-shirts and if India doesn't catch up, it's going to be some country in Africa next, right? So the idea is if you're cheap labor and you are competitive at it, the irony is you're not going to be cheap labor for too long because you're going to get rich rather quickly. And I think that is one of the under-appreciated lessons that there is no shortcut to the structural transformation. We can talk about this also in the future episodes of our conversation on, you know, premature deindustrialization, a lot of the barriers to structural transformation for India and other developing countries. But on South Korea, I, you know, before we wrap that story up, I want to just, you know, ask you the question about a lot of the commentary on South Korea said that there was a success to South Korea, which can be attributed to industrial policy and not just a free trade. So far, our conversation on South Korea has been how free trade transformed the South Korean, you know, miracle growth story. How much of it can be contributed to industrial policy of South Korea if at all? And is there any merit in those arguments? Yeah, no, I, you see, when a success happens, right, when a success happens, everybody thinks that it is their favorite theory that caused that success, right? And so, and they managed to throw in enough to confuse the wider audience and make it look like, you know, it was some sort of fancy stuff that they think countries ought to be doing and that's what Korea did and that's how Korea succeeded. And industrial policy, of course, is one of these favorite ones that they throw in. And, you know, so they, various terms get used sometimes as industrial policies, and as they say, it was targeting, right, you know, or industrial targeting, that is what led to the success of Korea. So, so the broad point, first of all, here to understand is that, you know, governments always do something. It's governments don't sit back, you know, in this sense of when we say that invisible hand, let it do the work and the government should be completely hands off and all. That is not what the governments do. Governments want to show that they are doing something and they are producing the success, right. So, there is always these interventions that happen. And then they say, look, you know, they were doing all these interventions and Robert Wade, for example, writes a whole thick book about Taiwan, you know, where he finds it, here is this intervention and is that intervention and all. The real question is that, you know, can you connect the interventions to the success? In the end, you know, you're saying that, yeah, we all agree that Korea has grown rapidly in South Korea and Taiwan grew rapidly, Singapore grew rapidly. And some interventions did happen. But just because the interventions are happening, does that mean that those interventions are the cause of the rapid growth? Or is it the case that those countries would have grown even more rapidly if interventions were absent? Yeah. There was this very interesting exchange between Robert Wade and in separate papers, of course, so they're not face to face. But Ian Little, who was very much at the forefront of advocating the outward orientation model. And so Robert Wade kind of asked this question rhetorically, saying that, you know, if you are going to argue that in South Korea, interventions actually were harmful to growth, then you are saying that South Korea would have grown even more rapidly than it grew. But it was already growing so rapidly that it is completely implausible that the absence of those interventions would have actually led to even faster growth. So my story is more plausible because, you know, it grew that rapidly. And so obviously the interventions were making a positive contribution. This is sort of, you know, how is that an argument? But Ian Little had a good response to that. He said that, why does Mr. Wade think that Korea would not have grown even faster had there been no interventions? Because Taiwan, in fact, did have less intervention, lot less intervention than Korea did. And Taiwan did grow faster than South Korea. So there was one. But also, if we go back to the growth rates that I had mentioned of South Korea, we have the, there is a full period from say rapid growth beginning in 1963 to 1990s. So let's look at that. So 1963 to 1973, full decade, Korea grew 9.1%. And this is of course the beginning of the miracle. It's the beginning of the miracle. Was that beginning of the miracle in any way connected to these industrial targeting? No. In fact, this is a period during which there is no industrial targeting. Policies are all neutral, products are left to them, entrepreneurs are left to decide what they want to export. And we have discussed this great example of human hair, which nobody thought could be an export item. And if you look back at in 1962 or 61, there is no, in the Korean export basket, there are no human hair. And suddenly they begin to appear in mid 1960s and by 1970 to 73, there are 10% of the total Korean exports. So there is no targeting happening during this period. Targeting starts in 1973. They were feeling some possible threat from the United States that they might start imposing restrictions on Korean exports and things like that. And also, I think the US was making some noises about withdrawing its part of its forces out of Korea and all. So there was some fear that this military aid will also decline and all. And so therefore, you need to ramp up your more capital intensive industry. So this is where the industrial targeting started. And it's called the heavy industry and chemicals drive something like that, HCI, heavy and chemical industry drive HCI. And suddenly they intervene here. Now, one side story to that, of course, is which and Kruger kind of tells very nicely that some of the failures that happened simply don't get any mention because they disappear. So she refers to this ball bearing factory that they had started in South Korea during this 1970s period, the one of industrial targeting. It was a complete white elephant. It was so costly that they couldn't compete in the export market. And in the domestic market, there was not enough demand. So at the most, they could run it for two or three days out of the week. And eventually that factory, that massive white elephant had to be closed down. This is a failure. And some of the industries that were given this targeting business eventually did succeed. But the question is that was it the intervention? If you look at the immediate impact, of course, of the intervention, the period from 1974 to 82, your growth rate drops to 6.9%. From 9.1, it has dropped to 6.9%. So if I really correlate growth to your period of industrial targeting, you are certainly not doing that well. There are also studies that many of these industries that were targeted exhibited a lot lower productivity growth than the other industries which had not been targeted. So there is some evidence there, that evidence there as well. But the fundamental point really is that when they say that, oh, you targeted let's say auto industry or something and it became such a big success. I mean, the World Bank was arguing against Korea doing auto industry and but they invented and did it anyway. But the question is, it's a post hoc fallacy. Just because you did it and then its success happened doesn't mean that because you intervene at that time and the success happened. Eventually South Korea was becoming more capital abundant. And so this would have happened anyway. Maybe the industrial targeting hasened it and brought it a little sooner. But certainly the success was not due to that. Gradually Korea was becoming capital abundant and this transformation would have happened. And notice that once they, so this HCI drive is abandoned by late 70s. By 1980, more or less they were abandoned. But then look at the growth rate. Growth rate again from 1983 to 95 when you are back to liberalization and neutral policies not targeting, then growth rate jumps back to 8.7%. So where is the success of industrial targeting other than post hoc fallacy? What is it called? Post hoc ergo proctor hoc. After this, therefore because of this. That is what's happening. I mean, there is a connection here just because you intervene and eventually some industry succeeds. First of all, not every industry that you intervene succeeded actually some major failures as I mentioned about the ball bearing factory in South Korea. But the successes were because again, you talk of Japan, for instance, Hajun Chang refers to all these Japanese interventions in the mid 1930s on the auto industry or 1950s. And then 1980s, Japanese cars become so successful. So all look if the Korean government, if the Japanese government had not done it, then how does it follow? I mean, it's entirely possible that the car industry maybe absent Japanese government intervention, maybe it would have disappeared. But does it mean that it would have never reappeared? Once you become more positive active, your capital becomes cheaper still, because you have more capital abundance, eventually the industry would come back up. I mean, it's not like. So there is a lot of this post hoc fallacy going on in making these arguments. And I think just the broader point that you have always said, which is even if you can find individual success stories in one case here, in one decade here, in one industry in a particular country and so on. The question we're not asking is if someone picked the winners and losers correctly in one case. It's a question of sustained economic growth over say two, three, four decades, which leads to a particular kind of structural transformation. And on that, I think the evidence is quite clear in favor of trade liberalization and against industrial policy, right? Even if they've had a handful of successes here and there, which can be attributed to particular industries. I would actually go even one step further and say that let's say even if there is merit in arguing that the Japanese government intervened and helped the car industry. And then decades later, Japan is one of the biggest leaders in car exports and so on. We also don't know the counterfactual of what else Japan may have done even better at than cars maybe had that not been propped up earlier. So both sides, even in the success stories, it's very difficult to argue if resources went to their highest valued, most productive use in that particular instance, or maybe without the government nudging capital in a particular direction, that capital would have gone somewhere even better. And maybe Japan would have produced computers even cheaper two decades before instead of cars or something like that. And those things are very difficult to untangle. We can just sort of make these arguments. But I think in terms of the two, three, four decade evidence that you provide, the South Korean story is just extraordinary. Since we're going to do a series of conversations around this topic, I have a number of other questions starting with industrial policy. I want to learn more from you about infant industry and protectionist policies of that sort, which have taken place in various developing countries. Of course, we need to talk about the history of Indian trade policy, the history of Indian trade growth within the economy, up to liberalization and after liberalization and what is happening currently in India, which is sort of a U-turn in one sense, walking away from trade liberalization and so many other themes that you've written about. So I think we can end the episode here and when you come back, we talk about many more such themes. Thank you so much for doing this today, Arvind. Thank you, Shruti. Great pleasure. Great conversation.