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The country is facing a catastrophic crisis of unemployment and the current turmoil

in the financial sector has brought a discussion on current account deficit (CAD), depleting

Foreign Exchange Reserves, Falling Exchange Rates in focus. And yet there is hardly any

mention of rising unemployment or floating foreign exchange. The focus is on “defending the Rupee” This is rather strange as floating Foreign exchange and free trade are very effective and efficient tools to shift jobs to areas of chronic unemployment through labor arbitrage. While labor arbitrage is safe, it not perpetual and the terms of trade may vary until the gap between developed and developing nations closes. So it is the early bird that catches most worms.

Between the two World Wars in the last century, the economies of the industrialized

nations, both victors and vanquished were in a depression. These countries started devaluing their currencies to increase employment and production. But it soon resulted in competitive devaluation by others that destabilized international trade and earned for itself the bad name of “beggar thy neighbor” policy that has stuck to present day. What happened then need not happen now with organizations like World Trade Organization and International Monetary Fund to arbitrate and regulate. It is now widely accepted that free trade is an important weapon to optimize utilization of world resources to maximize world production and to distribute the benefits evenly including those sections that are weak for historical reasons.

The popular perception of foreign trade is that exports are virtue; imports sin. Strong

Rupee a success; weak Rupee disaster. Even in exports, exports of arms is macho but that of

garments that can provide many more jobs pansy. The result of these and several other popular economic myths is that economic policy makers are working overtime to “defend the Rupee” by manipulating interest rates and depleting reserves when they should be creating jobs and increasing the GDP by taking note of falling real exchange rate of our Rupee and happily allowing the market exchange rate to match the real rate.

What is holding this back? The answer is “devaluation hesitancy” .This is very similar

to vaccine hesitancy which held up the progress of public health for couple of centuries. It

took the medical profession two centuries to combat this and their war against decease is not yet over. The task of the economist is even more arduous as the “devaluation hesitancy”

pervades widely across all sections of public including high ranking bureaucrats and policy

makers. In India, all the political leaders across parties have preached over last 75 years that

any devaluation of the Rupee is as bad as or worse than lowering the Triranga and a sure

prescription to lose next election. In these circumstances, which civil servant or Reserve Bank

Officer would dare to suggest that let the Rupee fall to its real exchange rate so that jobs would flow our way mitigating the hardship of the hordes of jobless.

It is now accepted, at least in the mainstream, that free trade is the road to higher

GDP, floating exchange rates to balance imports and exports and Reserves for stability and

steady growth. For India the bonus can be jobs for many more.

India faced a very similar situation in 1991. Due to a hung Parliament, political process was at standstill. Then out of the blue came Dr. Narasimha Rao as PM. He had many

hidden advantages in dealing with this crisis round the corner. He was already eighty years old and had already planned his retirement from politics. He knew nothing of economics and knew that he did not. He looked around and chose as his Finance Minister Dr. Manmohan Singh who knew his economics and knew that he knew. The situation then was like that of a cat on a hot tin roof. Little time and few options. Together they immediately devalued the currency by 20% followed by trade reforms that opened up the world markets and soon exports and current account reserves started rising as also the GDP.

In the1950’s, the civil war between Communist Party and the Nationalist Party in China ended and the Nationalist escaped to the island of Formosa and formed a government in exile. The government on mainland laid its claim to Formosa and also Hong Kong but made no attempt to annex these territories. But it also noted that what they offered to mainland was prosperity. On the other hand Formosa and Hong Kong were already more prosperous than communist China or any of the Russian satellite communist countries in East Europe. It wasapparent that these two tiny islands with no natural resources supported rather large populations by labor arbitrage. The ruling Junta on mainland seems to have learnt a lesson and decided to move away from the policies of Russia and its satellites and adopt what it chose to call Market Socialism. To maximize labor arbitrage opportunities it undervalued its currency.

This has apparently worked for China and it has caught up with developed nations of the world. In 1948, the world, repentant and contrite after WWII, gave itself a mandate in Art.

23 of Declaration of Human Rights for a brave new world as under.

1. Everyone has the right to work, to free choice of employment, to just and favorable

conditions of work and to protection against unemployment.

2. Everyone, without any discrimination, has the right to equal pay for equal work.

3. Everyone who works has the right to just and favorable remuneration ensuring for

himself and his family an existence worthy of human dignity, and supplemented, if

necessary, by other means of social protection.

4. Everyone has the right to form and to join trade unions for the protection of his


The time has come to renew that pledge and work towards a global economy. India

with its huge burden of supporting its unemployed population has a lesson to learn. It must

shed the “devaluation hesitancy”, let the Rupee float and allow the unseen hand to find the

optimum value and adjust its exchange rate to take full advantage of labor arbitrage

opportunities offered rather than “defend the Rupee”. It is rather late but it is never too late.


1 What Caused the 1991 Currency Crisis in India? IMF Staff Papers

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