How Can India Avoid Losing Its Race to Prosperity? Avinash Dixit, Princeton University India Policy Forum Lecture NCAER, 10 July 2018
India versus China? Comparison usually unfavorable to India But China’s slowdown, India’s acceleration and more favorable demographics, raise expectations of overtaking China Aim: take a second look, offer sobering picture, emphasize need to improve policymaking and capitalize on advantages Nothing new or startling, but hope to focus attention, spur action
Caveat Development is not a zero-sum game. Other countries’ growth generally helps you: brings more trade, investment, technology transfer. But comparisons highlight missed potential. Any “race” is against time – race to eliminate poverty, raise well-being as fast as possible. Development is multidimensional; different weighting of the dimensions can produce different comparative evaluations.
Is India catching up? Suppose China grows at 10% for 10 years, 3% the next 10; India the other way round. In year 21 levels equal, but India has lost total 7 years’ worth of output over the time.
Far from catching up Reality is much worse: Growth rates PPP GDP levels / capita Catch up will take long; much output lost in meantime
Demographic dividend Population age distribution: India will have much larger population of economically active age, fewer dependents But … several handicapping factors
Low female participation Female labor force participation comparison: China 64%, India 27% (Males 78% v. 80%) Implied % of population economically active: Indian women work in home, informal economy, but formal work yields efficient labor allocation by comparative advantage; higher productivity.
Poor quality of education UN Human Development education index: improving but lagging 2005 2010 2015 India 0.409 0.456 0.624 China 0.531 0.599 0.738 Brazil 0.614 0.662 0.754 Vietnam 0.470 0.509 0.683 Worse: 50% of 10-year-olds could not read at level expected of 6-year-olds. Over 60% could not do simple division.
Poor transport infrastructure
Other internal barriers State and local taxes, and barriers to collect them, imposed high costs in money and time. Estimate Rs. 9-23 billion in 2005. Uniform GST helps but issues in implementation. Various laws and regulations about land acquisition, borrowing and lending, hiring and firing also need reform, streamlining and speedier implementation. Well-intentioned policies can have unintended bad effects.
Bad “invisible” infrastructure (institutions of governance) World� Bank's� governance� indicators Ease� of� Doing� Political� Country Voice� and� Government� Regulatory� Control� of� Business� Stability� and� Rule� of� Law Accountability Effectiveness Quality Corruption ranking No� Violence 98.03 74.76 99.04 92.31 97.60 99.04 3 Denmark 84.24 58.57 91.35 91.83 92.31 89.90 6 United� States 61.58 30.00 47.60 46.63 51.92 38.46 125 Brazil 6.90 27.14 67.79 44.23 46.15 49.04 78 China 58.62 14.29 57.21 41.36 52.40 47.12 100 India 19.70 24.29 11.06 2.39 8.17 8.65 159 Zimbabwe 21.18 0.94 9.62 3.37 3.85 3.37 183 Afghanistan India improved in recent years, but still mediocre.
Importance of institutions Can reach middle-income level by moving labor from agriculture to industry: simpler process, can do using informal relations in villages etc. Growth beyond this level requires more capital, resource reallocation, entry/exit … Transactions outside small circles of trust, require good formal institutions. Crucial for India in coming decades for escaping “middle - income trap”
Corruption Like tax, but uncertain, capricious Big deterrent to investment, innovation Experience in many countries shows: Chronic condition, like obesity, not cancer Fight against it long & slow, victories partial Government as much obstacle as help Bottom-up social coalitions can work well Social sanctions can be better than legal penalties Smart youth want to work for, buy from clean firms
Results: Missing out on foreign direct investment Inflow comparison ($ billions) 2004 2009 2014 2016 India 23.2 35.6 34.6 44.5 China 60.6 95.0 128.5 133.7 Brazil 15.0 25.9 73.1 58.7 Vietnam 2.0 7.6 9.2 12.8 Improvement, but far behind China, and may prove temporary if no lasting reforms. Comparisons matter b/c investors make them
Missing participation in global value chains % import content of gross exports: 2000 2005 2010 2014 India 15.3 25.1 33.7 21.0 China 50.6 48.0 40.1 29.3 Malaysia 60.5 56.5 51.7 39.1 Vietnam 39.1 45.1 46.6 36.3 Taiwan 39.4 44.2 49.0 43.1 S.� Korea 35.3 38.1 44.3 37.9
Summing up: India’s handicaps India’s handicaps: Low female participation in labor force Poor quality of education Good demographics of labor force, but inefficiently utilized, low productivity Inferior infrastructure, physical and invisible: governance institutions, corruption Comparisons of underlying conditions affect FDI, GVCs, and so India’s own outcome
Is democracy the problem? No; studies show no significant difference in average growth between authoritarian and democratic regimes (but authoritarian have higher variance, e.g. Singapore vs. Congo). More plausible explanation: policy making process in India is dysfunctional. Legendary political scientist James Q. Wilson described the difference between democracies in U.S. and Europe:
Types of policymaking “Policy making in Europe is like a prizefight; when one fighter knocks the other one out, he is declared the winner and the fight is over. Policy making in the United States is like a bar-room brawl: Anybody can join in, the combatants fight all comers and sometimes change sides, no referee is in charge, and the fight lasts … indefinitely.” Indian process is like the U.S., or even worse.
Where you stand depends on where you sit! Parties switch policy positions when they shift from opposition to government and vice versa: GST, Aadhaar, regulations & tariffs, rural income support, … No way to create stable expectations for investment and growth Improving political process is key, but how? Some suggestions: easy to offer, hard to do.
What is to be done? Allow states to pursue own policies (experiment), and then choose the most successful History of centralized China vs. decentralized European cities / states Some experience (mixed) in U.S. But danger that states may misuse freedom to favor local factions, castes …
What is to be done? (continued) Synchronize elections to avoid permanent campaigning, selective pandering, ... Control of corruption; led by a business community institution, rating scheme? Regulation, tax and trade policies: Be “ pro-market ” , not “ pro-business ” Do not favor incumbents, monopolies Tax policies to promote formal economic activity Good mass education, esp. female.
I shall be delighted if … … my somewhat pessimistic assessment turns out to be mistaken ... And even more delighted if ... ... my diagnosis leads to reforms of institutions and policies that transform India’s prospects. Thank you!
Data sources GDP: IMF World Economic Outlook Demography: U.S. Census Bureau International Database Female participation: World Bank, http://data.worldbank.org/indicator/SL.TLF.CACT.FE.ZS Male: http://data.worldbank.org/indicator/SL.TLF.CACT.MA.ZS Education: UN Human Development index; Economist, India special report, 2008 FDI: UNCTAD World Investment Reports. See also http://www.firstpost.com/business/the-31-bn- question-did-india-really-see-so-much-of-fdi-inflow-in-2015-2449942.html Global value Chains: OECD data on Trade in Value Added (TIVA), https://data.oecd.org Transport: http://www.managementparadise.com/article/4563/india-vs-china-an-infrastructure-comparison , also World Bank, “India Road Transport Efficiency Study” Governance, Ease of Doing Business: World Bank James Q. Wilson quote: from his book Bureaucracy (1989), pp. 299-300.
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