Jagdish Bhagwati on fixing the economies of non G-20 nations.

Jagdish Bhagwati: Well I think that three things we can learn from the – at least I’ve learned – in the post-war period. Because we had about 50 years of experience, and I’ll focus more on the poorer countries. The rich countries aren’t all that different anyway in terms of what I’m saying.

One is we need to be less fearful of the international trade and investment. We were so fearful. A lot of poorer countries just turned off trade altogether. India in ’91, this inward flow of equity and investment – meaning of multinational equity – you won’t believe it was $10 million. Unbelievable. It didn’t make any sense, because ________ work. That’s just making it difficult for people to bring things in.

Sorry it was $100 million, not $10 million. I lost a zero on that one. But it’s still nothing when it’s one-third the size of our budget at Columbia University.

So it was really miserable. We have learned that trade and investment are an opportunity and not a threat. You can use them. It doesn’t mean you throw yourself completely open, but you can use them much more than many countries did.

I think that’s one important lesson.

The second is there was a fear of market __________, and that’s natural. When there’s lots of scarcities and you’re behind the curve, your first reaction is to go and intervene; you know, try and __________ things. And it’s a natural feeling.

__________ at Harvard, a great historian, wrote a whole book, Economic Backwardness in Historical Perspective [by Alexander Gerschenkron]. And when you’re behind the curve, you intervene. But of course he wasn’t critical of it. He was sort of describing it more or less. And it’s very difficult to learn that markets can be used to achieve whatever objectives you want to, because that sounds totally counter to common sense.

When I came to this country and started driving on the snow, and I was told if you get into a skid, you steer in the direction of the skid. I said, “Are you trying to kill me?” This sounds absurd, right? Because your natural tendency, common sense is to go the other way.

It’s that kind of thing. We will learn that. So even in the environment, now people are much more willing to _________ reduce CO2 emissions. We can use tradable permits rather than just quantity of controls.

So everywhere I think people move to the middle ground on that one too, not knee-jerk rejection of markets. Again, more skepticism about just public sector per se.

When I was growing up, everyone was for the public sector including myself. You learned again that it can settle into a variety of problems. The incentive structure becomes very difficult to handle. It doesn’t mean no public sector. It does mean that to try and use it judiciously. Otherwise leave it to the private sector.

And the third one, of course, is democracy. I think we discussed it on China. A lot of us are skeptical at the beginning. Because again, the model they were using, it was almost Marxist, which was blood, sweat, and tears would produce surplus, which you would invest and grow faster.

Now so similarly, a Draconian system, a communist system like China would be able to tax its citizens much more drastically, create a greater surplus and grow faster. But we never allowed for the fact that it would also undermine people’s incentives and so on and so forth; that growth was not just a function of investment, but also for how much you got out of it. And that has now come into the picture.

So democracy now is not just a value in itself, which it was when I was young; but it is also seen as being productive. So it is good on grounds of sustainable development.

So I think these are three important lessons we have learned. And I think those are things which I would really push.

In fact I wrote to the new president of the World Bank [Robert B. Zoellick]. I said, “The first thing you need to do is to study,” because he’s not into development. That’s one of the problems, again, about leadership which we provide for international institutions.

Bob Zoellick was very fine for _________. But I doubt if he’s studied the environment. I doubt if he knows anything about anything that has to do with development.

So I said, “Look. Study it. These are the kinds of ideas which some of us really believe we have learned.” And he learned this as a result of experience, not from amateur theorizing. And develop your own vision, and then make a speech about what you stand for. And then develop the different programs around that.

So things like corruption for example. Corruption grew because of the licensing system. It’s not something ______ to our culture. It is also functional policies. And so we know something about all that now. And so bring it all together.

Recorded On: Aug 14,  2007