As Indian Prime Minister Manmohan Singh wound up his much-touted state visits to Russia and China – replete with diplomatic pomp and high-powered dialogue – in a corner of Washington D.C. a very different approach to foreign policy was being given considerable impetus. The setting was the SelectUSA 2013 Investment Summit, a U.S. government initiative to promote trade and investment partnerships directly between foreign investors and state, regional and local governments.
Meanwhile, thousands of miles away, in the city of Chennai, a similar approach was being espoused by a key figure in next year’s Indian general elections. Narendra Modi, the prime ministerial candidate of the Bhartiya Janata Party, was calling for a greater role for states in India’s economic diplomacy. A seemingly maverick concept for a country with a highly centralized foreign policy, but when juxtaposed with the worrying decline in foreign direct investment (FDI), economic growth and jobs, the idea of harnessing the ability of states to promote trade and investment is not without merit.
Paradiplomacy: A Proven Model
The concept Modi was describing in his talk, far from fantastical, enjoys strong academic and practical support. Termed “constituent diplomacy” or “paradiplomacy,” it was first proposed in 1990 by the American scholar John Kincaid, who outlined a foreign policy role for local and regional governments within a democratic federal system. Considerable academic attention has since been devoted to paradiplomacy, with potential applications as wide-ranging as addressing the euro crisis to managing American interests in the Middle East. Economic paradiplomacy related to trade and investment in particular has become an institutionalized practice across the world – in federal states like the United States, Canada and Belgium, quasi-federal states like Spain, non-federal states like Japan and even non-democratic states like the People’s Republic of China. A few distinct models of paradiplomacy are practiced around the world, all successful at FDI promotion.
Canada is a textbook example of paradiplomacy, with provinces like Quebec and British Columbia constitutionally empowered to drive their economic diplomacy independently. In 1969, the province of British Columbia merged its trade and foreign ministries into a single provincial foreign affairs department that in the famous words of then Trade and Commerce Minister Waldo McTavish Skillings had an emphasis on “salesmanship rather than diplomacy.” Starting with three trade mission offices in London, San Francisco and Los Angeles, British Columbia now runs 11 missions on three continents, coordinated by a large global office in Vancouver.
The primary aim of that office is to promote exports internationally and British Columbia’s exports have been well ahead of the curve. In 2011, Canada’s national exports averaged 10 percent growth, whereas British Columbia’s exports grew nearly 14 percent. British Columbia has also managed to successfully diversify its export portfolio and tap into emerging Asian markets in the Pacific Rim. While the U.S. accounts for about 75 percent of all Canadian exports, with less than 10 percent being shipped to the Pacific Rim, for British Columbia the ratios are almost equal, at close to 43 percent each. In a 2012 ranking by the Financial Times, Vancouver beat every city in North and South America to rank as the most business-friendly city.
Born in the USA
Canada’s mighty southern neighbor, the United States, offers a different, yet vibrant, federal model of economic para-diplomacy. States were left out of international politics until the 1970s, but have since been significantly empowered to pursue economic diplomacy within the American federal system. While export promotion is coordinated with Washington, states have full autonomy to attract FDI. In 2011, American states attracted close to $225 billion in inbound investment from foreign companies, and foreign-owned firms have created more than 6.4 million jobs in US states.
State governors and other leaders undertake a host of international interactions to promote exports, attract investment and create jobs in their states. Given the capacity to promote understanding and skills development related to foreign business environments, state trade missions have seen explosive growth. Starting with just one mission set up by New York in 1953, there are now more than 225 state mission offices globally. States also frequently host foreign delegations. In 2001, California alone reported hosting 637 foreign dignitaries from 67 different countries. State legislatures increasingly pass resolutions on international topics and governors often lobby the center for favorable foreign trade policies.
The Rise and Rise of Sao Paolo
Further south, India’s fellow democratic BRIC member, Brazil is a definitive example of yet another model of paradiplomacy: the municipal model. Paradiplomacy at the city level has evolved significantly in Brazil since 1988, when the decentralization of the Brazilian federation was approved under the new constitution. At the federal level, the Ministry of External Relations has established a separate administrative service that creates dialogue with municipalities and federal states.
The meteoric rise of Sao Paulo, now the richest city is Latin America, makes it the poster-child of Brazil’s municipal paradiplomacy. Attracting massive investment, around 1.19 percent of the world’s total FDI, Sao Paulo stormed into second place in the ranking of top FDI destinations in the Americas, nipping closely at the heels of New York. It was the only city from outside North America in the top 10 and it sits at number 6 on the global rankings. All 26 government departments of Sao Paulo have foreign partnerships or projects, especially in the building of infrastructure. Both Britain and the United States have established formal bilateral relations with Sao Paulo, perhaps the only city in the world to have this distinction.
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.
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.