Paradiplomacy Closer to Home
Closer to India, the People’s Republic of China has made intelligent use of paradiplomacy to propel its impressive FDI performance, using a hybrid model that combines central coordination and municipal diplomacy. Beginning in the early 1980s, the “Open Coastal Cities” program was one of Deng Xiaoping’s flagship initiatives in economic reform. To attract FDI, 14 coastal cities were allowed to maintain preferential policies such as reduced customs duties and permits for foreigners to operate financial and tertiary businesses. By 1992, this policy was extended to all provincial capitals. In the next phase of innovation, municipal foreign affairs offices were opened in major economic cities so that they could lobby consulates for investments into their city and coordinate consular requirements for foreign investors and employees. Starting 1992, FDI into China took off and by the next decade, China was accounting for a third of global FDI.
Provinces actively invite and host international delegations and send trade representatives to Chinese consulates abroad. The U.S.-China Governors Forum, an annual meeting between U.S. governors and Chinese provincial leaders to promote trade and investment, is now in its third year. Municipalities are usually allowed significant autonomy in setting the investment-related policies for their city. They also get to keep significant earnings from investments which they reinvest in economic development. Municipal and provincial governments compete on several developmental metrics, which decide the political advancement of their leaders. The results are clear for all to see. In the late 1980s, Shenzhen was a fishing village without even a traffic light; today, it is a global economic powerhouse with world-class infrastructure. Whether it is Shanghai, Beijing or inland cities like Chongqing, Chengdu or Kunming, municipal paradiplomacy has enabled China to develop several mega-cities of international standard.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Can India Follow Suit?
India’s constitution grants the central government exclusive jurisdiction over foreign and defense policy. Item 9-20 of the Union List from the 7th Schedule of India mandates Delhi’s role in any consular or trade representations, foreign trade agreements, conventions with foreign countries and so forth. All FDI-related policy on sectors, ownership quotas and other matters are decided by central government institutions: the Department of Industrial Policy and Promotion (DIPP), the Foreign Investment Promotion Board (FIPB) and the Ministry of Commerce. These bodies also handle FDI promotion, with some coordination with industry bodies. State investment promotion boards exist but are primarily single-window clearance systems that assess and approve bids. They do not concern themselves with promotional activity.
Still, some signs of economic paradiplomacy are emerging in India. States like Gujarat conduct international investor summits, and border states have been pushing for greater cross-border trade. Punjab, for instance, has pushed for additional trade routes at the Wagah border and Tripura has set up and championed border haats or markets along the India-Bangladesh border.
However, states are not empowered to set up trade mission offices abroad, nor do they actively send trade delegations to different countries. The state’s levers to attract FDI remain governance, infrastructure and tax related. That is fine, but the promotional ability and entrepreneurship of states is not being utilized and they remain relatively passive in shaping the investment climate in India.
A Way Forward
This is not to say that paradiplomacy should be promoted with abandon in India – liberalization has its repercussions. The biggest concern is that states might speak in different voices from the center, complicating coordination in an already garrulous nation. In the U.S., for example, former Minessota governor Jesse Ventura actively championed a free trade agreement with China at a time when Washington was somewhat less enthusiastic. Additionally, to attract FDI, governments might compromise on tax collection, environmental regulation and other compliance issues, to the detriment of their residents. It is also not necessary that every state be active in utilizing the increased access to drive investment.
Still, one way to incorporate paradiplomacy in India might be in the area of promoting and attracting investment. FDI policy, certain caps on tax, and environmental benefits would be formulated centrally, but the states would be empowered to liaise with and appeal to foreign investors through trade mission offices, consulate representatives, delegations and other forums. Apart from creating healthy competition for investment, this could also lead to allocative efficiency, where states are able to accelerate the process of attracting investment and technical know-how into sectors where they enjoy a comparative advantage. The role of the center would be to coordinate and monitor state-led initiatives that could have adverse national impacts.
India may not aspire to create the next Sao Paulo but it should give more thought to making innovative use of economic paradiplomacy.
Tanvi Ratna (@tanvi_ratna) is an Indian foreign policy analyst and a member of the Citizens for Accountable Governance. She is a graduate of Georgetown University and the Lee Kuan Yew School of Public Policy and has worked previously on Capitol Hill and at the Ministry of External Affairs, New Delhi.