U.S. Department of the Treasury

(Archived Content)

I would like to thank Sanjiv Goenka for those kind introductory remarks, and CII for inviting me to speak to you today. I am pleased to be with so many prominent Indian businessmen and businesswomen under one roof.

Also, special thanks to my old friend, Bob Blackwill, for his kind words of introduction. I understand the Ambassador spoke to a similarly distinguished audience -- in this very room -- just over a week ago. I understand the subject of his address was, among other things: chapatis, rabbits, turtles, and rocks.

All kidding aside, I have carefully read the text of Bob's outstanding precis on US-India economic relations, and I concur with his conclusions as well as his prescriptions for enabling us to maximize our bilateral economic relationship.

Indeed, the importance of the U.S.-India bilateral relationship cannot be overstated. We are the two largest democracies in the world. Both of us boast of a proud intellectual heritage. Both of us have a strong-willed and determined citizenry.

Ladies and gentleman, I have wanted to travel to India for some time to witness firsthand the extraordinary changes taking place here and to understand India's enormous economic potential. Last year, when President Bush appointed me to serve as Deputy Secretary of the United States Treasury, I decided that my first international trip would be to India.

On the morning of September 11, I arrived at the office with all of my bags packed, ready to depart for New Delhi. Unfortunately, no planes left the United States that day.

Less than five months have passed since that terrible morning. Nevertheless, we are witnessing an international landscape transformed. New alliances have developed to fight the international scourge of terrorism. An unyielding coalition has toppled one of the world's most repressive regimes in Afghanistan. One hundred and forty-nine nations and jurisdictions are working together to halt underground networks of terrorist financing.

I am happy to say that India has been a constructive ally in this effort. Since September 11, the United States, working closely with many countries, including India, has blocked some $34 million in terrorist assets and our allies have blocked nearly $70 million. Your government is no stranger to the fight against terrorism and has stood tall with us since September. Your blocking efforts are active, meaningful and comprehensive.

Just as important as grappling with the new challenges posed by terrorism, is that we work hard to promote and stimulate economic growth and prosperity. Just as we take steps to block the terrorists of today, we must strive to address the economic conditions that contribute to the terrorists of tomorrow. Economic progress remains one of the strongest weapons we have against the despair and hopelessness on which terrorism feeds, and I believe it is incumbent upon governments to move ahead with their economic reforms. Therefore, I would like to focus some of my remarks today on the challenge and the opportunity of economic reform, and in particular, freer trade.

Why is freer trade so important? In a sentence, because trade is a sine qua non of economic growth and poverty reduction, necessary but not sufficient.

For those of you who are exporters and importers, the benefits of freer and more expanded trade are clear. Freer trade means open markets. Open markets mean greater sales. Greater sales mean higher profits.

For farmers, small-scale local manufacturers or service providers, more open trade brings broader markets in which to sell a greater variety of goods and services. For the average housewife, open markets provide a wider range of products with more choices and of better quality. In sum, trade increases access to goods and services, and it boosts the overall standard of living.

But the benefits of trade are more than just more bountiful markets. Freer trade also accelerates the exchange of technology, more productive capital inputs, and the transfer of best practices. Firms in protected economies often find themselves mired in old technologies, using out-of-date machinery. Increased trade and investment provides new access to the world's best management practices, the world's best production processes, the world's best financial management.

This is not mere theory. Look at the way Korean textile production processes have spread across East Asia. It all began with Korean textile firms investing in production facilities in Thailand, Malaysia, and Indonesia. These firms brought local managers and selected workers to Korea for months at a time to learn the highly successful methods of Korean textile production.

In Korea, local managers used the best machinery, saw how various parts of the production process fit together, and learned advanced management techniques. After several months, local Thai, Malay and Indonesian managers returned home and put these best practices to use in local factories. Over time, these local managers started their own firms and Korean production processes were permanently transferred to locally owned textile firms.

Freer trade also allows domestic firms to specialize their production processes to a much greater extent than they can under import substitution. Local firms can join global production and distribution systems and can use their comparative advantage to specialize in one part of the operation. As workers and managers become more productive and learn new skills, they can move up the value-added chain of manufacturing.

Consider, also, Malaysia in the early 1970s. Malaysia built a powerful electronics sector by specializing in the assembly of parts. Over time, Malaysian firms graduated to producing packaging material and simple components, then later to more sophisticated electronic parts, and later still to testing and design. At each step, Malaysian firms carefully concentrated on being the best at a specialized stage of the process, and connected with other firms to make truly world-class products.

The effect of free trade on services is even more impressive. Services already contribute to more than 40 percent of India's GDP, with commercial services accounting for about 27 percent of India's trade. Services exports generate large numbers of jobs for workers at a variety of skill levels. With the Indian economy presently supplying the world with only about one percent of its overall trade in services, India has the potential to convert its immense human resource skills and capabilities into vast services exports.

Don't just take my word for it. Study after study has shown a positive correlation between trade liberalization and economic growth. The Uruguay Round alone - according to studies by the WTO - increased world income by $109 billion; more generous estimates put the figure at over $500 billion. That helps explain why the United States is so intent on beginning another round of multilateral trade negotiations. It will be an arduous, multi-year undertaking, but the pay-off will be great.

Economic gains accrue to the countries that are more open to trade, while more closed economies lag behind. Economist Jeffrey Sachs and Andrew Warner found that over the last thirty years, the most open economies grew by more than two percentage points faster per year than closed economies. This translates into 60 percent higher per capita income over 25 years - an astonishing difference.

India's own experience over the past decade also shows that trade liberalization inexorably leads to economic growth. The Indian reform program initiated in 1991 -- which included substantial unilateral reductions in trade barriers -- breathed life into the Indian economy after 44 years of being closed off to the outside world. In just four short years, India's total trade increased from 16 percent to 23 percent of GDP. And India's nominal GDP doubled in the same period. Since the Uruguay round, India's total trade has grown by 44 percent, an average increase of 7.5 percent annually.

With India's opening to external markets, a whole lexicon has been tossed out the window: special import licenses, export quality, import quotas, and the Inspector Raj, to name a few. We hope that more will follow: octroi, the special additional duty, and the negative list for imports.

Freer trade has also helped increase India's access to the U.S. market dramatically, almost doubling India's exports from $5.3 billion in 1995 to more than $10 billion in 2000. The United States now absorbs 23 percent of India's goods exports and has accounted for more than 35 percent of India's export growth over the last five years.

More dramatic has been the expansion of India's exports to the United States in what is generally viewed as our most restrictive market - textiles and apparel. India now supplies more than $2.7 billion worth of textiles and apparel to the United States - an 84 percent increase as a result of the reduction in U.S. barriers through the Uruguay Round.

Nowhere is the confluence of globalization, trade liberalization, and Indian ingenuity more obvious than in information technology. India's domestic reforms during the 1990s combined with international trade liberalization, under the 1997 Information Technology Agreement, to give impetus to India's nascent IT sector. India's IT sector has grown at an average annual rate of 50 percent, from almost nothing in 1991 to sales of $8.3 billion in 2000 and employment of 400,000. India's IT sector generates 15 percent of Indian exports and accounts for about 2 percent of GDP. Bangalore - India's Silicon Valley - is setting an example of how private enterprise, if left alone, can flourish in India.

However, in no way am I suggesting that trade liberalization, whether unilateral or as part of multilateral trade negotiations, is an easy process. Or that trade liberalization is a process in which every individual firm and every worker will benefit. Firms that enjoy the greatest protections often find it difficult to compete in an opening trading system. At the same time, many firms that cannot even exist in a closed economy come to life under open trade to provide more jobs at better wages, while providing consumers with much better choices and prices.

As a lifelong advocate for freer trade, I am sympathetic to the hurdles policymakers must confront in trying to lower domestic trade barriers. Like India, the United States historically has had its own highly protectionist trade regimes. In the United States, we spent almost 70 years trying to claw back from the economic disruption caused by the high tariffs of our own Smoot-Hawley Tariff Act of 1930. It is hard to believe that in 1934, the average U.S. tariff on manufactured goods was 44 percent. Today it stands at just 3 percent.

I would also like to stress again that freer trade alone will not unleash India's vast growth potential. More open trade must be part of a broader economic development strategy. Economic experiences from around the world point to four key policy ingredients to maintaining economic growth:

First, governments must maintain macroeconomic stability. Large budget deficits and undisciplined monetary policy lead to high levels of debt and inflation, they restrict the private sector's access to capital, and they undermine incentives for new investment.

Second, governments must invest heavily in health and education. A healthier, better-educated population is essential to a productive workforce.

Third, governments must establish strong institutions for governance, with minimal corruption, enforceable contracts, and a lean and competent civil service.

And fourth, governments must establish conditions under which private enterprise can flourish: strong infrastructure, minimal red tape, and very little government intervention.

As you know, India's economic reforms in the early 1990s took significant steps in this direction. The results of the first phase of this program were striking -- a substantial expansion of trade and acceleration of economic growth to 6-7 percent in real terms. These reformsprovided a glimpse of the kind of growth India could reclaim if its growth potential were truly unleashed.

Yet, in recent years, India's reform program has, frankly, stalled on many fronts. Progress on privatization has slowed. Many bureaucratic hurdles to private enterprise remain. Macroeconomic balance has proven elusive. Large fiscal deficits have re-emerged. And unfortunately, lingering investment disputes have cast a dark cloud over foreign investor attitudes towards India.

I have noticed that some of the media debate in India about the Dabhol power company has focused on only one of its U.S. shareholders, when there are three. This preoccupation misses the point. U.S. policy is that we want to see Dabhol and similar difficulties faced by U.S. companies in the Indian power sector resolved in a manner that is fair to all parties. A fair and equitable resolution to the Dabhol project will have the effect of assuring American investors that India honors the sanctity of contract and the rights of investors. The sooner these difficulties are resolved, the better it will be for both our countries.

Also, I truly hope that India will redouble its efforts to accomplish important second-generation reforms, and vigorously work towards achieving macroeconomic balance. Progress on these fronts, together with steps to further open the trade regime, will lock in and build upon the gains achieved by the first generation of reforms. India, a country of over 1 billion people, owes it to its people - not to the United States or anyone else - to finish the job of creating an environment that will allow India achieve its enormous economic potential.

Moreover, by accelerating the process of trade and broader economic reform, I believe India has a golden opportunity to continue to increase its influence and stature in the world. In this regard, I am reminded of what one of the fathers of modern day India, Jawaharlal Nehru once said: The policy of being too cautious is the greatest risk of all.

In conclusion, let me go back to one of my opening thoughts. We stand at a critical, though not entirely new moment in history, forced, as we are, to consider both the possibilities of expanded trade and expanded global conflict. Writing at a similar junction in history, noted Western economist Adam Smith drew a direct connection between trade and conflict in his classic work The Wealth of Nations, penned in 1776.

According to Smith, the inhabitants of all the different quarters of the world may arrive at that equality of courage and force, which . . . can alone overawe the injustice of independent nations into some sort of respect for the rights of one another. But nothing seems more likely to establish this equality of force than the mutual communication of knowledge and all sorts of improvements which an extensive commerce carries along with it.

It is my hope that India and the United States can cooperate more closely in the years to come, not just to defeat terrorism, but to continue to lead the world as friends, partners, and allies. Thank you for your attention and for inviting me here today.