How Can India Avoid Losing Its Race to Prosperity?dixitak/home/IndiaLosing_3.pdf · economically...
Transcript of How Can India Avoid Losing Its Race to Prosperity?dixitak/home/IndiaLosing_3.pdf · economically...
1
ThisversionAugust7,2018
HowCanIndiaAvoidLosingItsRacetoProsperity?∗
AvinashDixit,PrincetonUniversity
Abstract
DespiteburstsofoptimismaboutIndia’seconomicreformsandgrowth,its
performancecontinuestolagbehindChina’s.Althoughdevelopmentisnotarace
amongcountriesbutonlyeachcountry’sindividualracetobeatpovertyand
increasethewell-beingofitsownpopulation,comparisonwithothercountries
highlightswhatispossibleandshouldspuraction.Thispaperpointsoutsome
obstaclesthatIndiamustbeovercometoreachprosperity,includingpoorqualityof
education,lowfemaleparticipationinthelaborforce,badinfrastructure,andpoor
governance.Itidentifiesdysfunctionalpoliticsasthemaincause,andsuggestssome
waystoovercomethat.
1.IndiaVersusChina?
India’seconomymovedbeyondthemaligned“Hindugrowthrate”startingin
the1980s,anditspacepickedupfurtherafterthereformsof1991.China’seconomy
alsoacceleratedoverasimilarperiod.Thisledtoinevitablecomparisonsbetween
thesetwogiants;seeforexampleEmmott(2008).Thecomparisonsusuallyfavor
China,anditseconomicgrowthhasindeedbeenamazing.ButrecentlymanyIndia-
∗TextfortheIndiaPolicyForumLectureattheNationalCouncilofAppliedEconomicResearchinJuly2018.AnearlierversionwasgivenasaPublicSeminarattheIndianStatisticalInstituteinKolkata,December2015.IthanktheNCAER’sDirectorGeneral,ShekharShah,forinvitingme,andforverythoughtfulandhelpfulcommentsonapreviousdraft.IalsothankseveralparticipantsattheIPF,especiallyPranabBardhan,SurjitBhalla,VijayJoshi,andKiritParikhfortheircomments.
2
optimistshavepointedtoitsfavorabledemographicsandotherfeatures,toargue
thatIndiawillwinthisraceoverthecomingdecadesandemergeasoneofthe
world’stopeconomicpowers.
Mypurposeinthispaperistotakeasecondlookandofferamoresobering
assessment.TheIndianeconomyindeedhasmanythingsgoingforit.ButIwill
arguethatotherobstacles,especiallyitslow-qualityeducation,infrastructure,and
governance,offsettheadvantageousdemographics,anditsdysfunctionalpolitics
offsetstheadvantagesofdemocracy.Unlesstheseobstaclesaresurmountedinthe
nearfuture,ChinaislikelytoretainandevenexpanditseconomicleadoverIndia.
Ibeginwithacaveat.Economicdevelopmentofcountriesisnotazerosum
gameorarace.Acountry’sparamountconcernshouldbetheeconomicwell-being
ofitscitizens,nottheirwell-beingrelativetosomeothercountry’s.Faster
developmentofothercountriesgenerallyhelpsratherthanhindersthisprimary
goal.Asothercountriesgetricher,yourcountrybenefitsfromtheconcomitant
expansionoftrade,investment,andtechnologytransfer.Exceptinmilitaryconflicts,
relativesizesofeconomiesshouldnotbeaconcern.Any“racetoprosperity”should
bearaceagainsttime,torelievepovertyandimproveyourowncitizens’well-being
asfastaspossible,notaraceagainstothercountries.Thatiswhythetitlespeaksof
“its”race:Indiashouldraceagainstpovertyandtowardprosperity,notagainst
China.
However,comparisonsacrosscountriesserveavaluablepurpose.By
showingthatfasterratesofdevelopmentarefeasible,theycaninspireandspur
yourcountrytoaimhigher:“Ifotherscandoit,whycan’twe?”Hopefully,such
thinkingwillmakeyoutakeahardlookatthereasonsforyourcountry’sworse
performance,andthencetopolicyreformsthatyieldbetterresults.Ofcourse
reformdoesnotmeansimpleimitationofwhatworkedelsewhere;policieshaveto
betailoredtofitthespecificsofeachcountry’scircumstances.Intheconcluding
sectionIwillsuggestsomesuchmeasurestospeedIndia’sdevelopment.
3
Well-being,eventheeconomicaspectofit,ismulti-dimensional,and
conventionalmeasuressuchasGDPpercapitacaptureonlyapartofit.Chinahas
donebetterinsomeofthesedimensions,andIndiainothers.However,China’sbig
gainintheGDP-per-capitadimensionhasalsoyieldedothersuccessessuchasfaster
povertyreduction.TheHumanDevelopmentReportcombinesmanyoftheseother
dimensionsofwell-beingintoindexes,ofwhichthe“inequality-adjustedhuman
developmentindex”isquitecomprehensive.Inthelatestissue(UNDP2016,Table
3),thisranksChina90intheworld,andIndia131.Thusitisdifficulttoarguethat
althoughIndiaispoorer,itsdevelopmentishigherinitshumanaspects.
Finally,IadmitthatnothingIsayisreallynew;thesoberingfactsarewell
known.iButtheyarenotuniversallyaccepted;thereforeitseemsusefultosetthem
outinoneplace,tofocusattentionandtospuraction.
2.GDPcomparisons
India’scatchinguptoChinawillbealong-termprocess,ifithappensatall.
Thepointcanbemadeusingasimplethoughtexperiment.Supposethetwo
countriesstartlevelinyear1,astheyalmostdidinearly1980s.iiThensuppose
Chinagrowsat10%forthefirsttenyearsandat3%forthenextten,whileIndia’s
growthgoestheotherwayround.Inyear21thelevelsareequalagain.Butinthe
meantimeIndiahaslostahugeamountofoutput,namelytheroughly
parallelogram-shapedareabetweenthetwogrowthpathsshowninFigure1.This
addsuptoapproximatelysevenyears’worthofGDP.Thatcouldhavebeenusedfor
highlyproductiveinvestmentsineducation,healthandinfrastructure,andfor
povertyalleviation.Indeed,asubstantialfractionofChina’sGDPhasgoneintosuch
investments.
Realityisevenworse;theseconddecadeoftheabovescenarioisnowhereon
thehorizon.Despiteoccasionalbursts,India’sgrowthhasbarelymatchedChina’s
4
foraquartercentury,asFigure2shows.Thegapbetweenthelevelscontinuesto
widen,similartothefirstdecadeofthescenariodepictedinFigure1,andthelossof
outputcontinuestocumulate.Chinahasindeeduseditsoutputforproductive
investmentsininfrastructureandotherformsofcapital,andthathasgivenitagood
baseforfurthergrowthandforfurtherdivergencefromIndia.
3.Demographics
ProbablythestrongestitemfavoringIndia’seconomyoverthenextfew
decadesisitsdemographicdividend.Alargeproportionofitspopulationwillbein
theworkingagerange;theproportionofdependents,especiallytheelderly,willbe
relativelysmaller.China,bycontrast,willexperienceanagingpopulationwitha
largeproportionofdependentsmuchsooneralongitsdevelopmentpaththanmost
economiesdidinhistory.Table1showsthecontrast.
UnfortunatelythisadvantageisnegatedbyIndia’sverylowrateoffemale
participationinthelaborforce:only27%comparedto64%inChina.(Theratesfor
malesareverycloseinthetwocountries:80%inIndiaand78%inChina.)iiiWhen
thisdifferenceisfactoredintocalculatetheimpliedproportionofpopulationthatis
economicallyactive,India’sdemographicdividenddisappearsandChinacomesout
ahead,asTable2shows.iv
ArecentstudybyMcKinseyGlobalInstitutemeasuresfemalecontributionto
GDPinseveralcountries.vIndia,atabout18%,faresamongtheworst;Chinahas
over40%.(OnlyPakistanfaresworsethanIndia,atabout12%.)
Indianwomendoworkintheirhomes,performingvaluabletaskssuchas
cooking,cleaning,raisingchildren,andtakingcareoftheelderlyinmulti-generation
extendedfamilies,whicharenotincludedinconventionalGDP.Butifmoreofthem
participateinthemarketeconomy,thecountrycanreapthebenefitofspecialization
bycomparativeadvantage,leadingtomoreefficientlaborallocationandhigher
5
productivity.Alas,India’sfemaleparticipationinthelaborforceactuallywentdown
from36%in2005to27%in2017.vi
4.Education
Indiahasafirst-raterecordintertiaryeducation.Someuniversitieshave
centersofexcellenceinresearchandteaching;theInstitutesofTechnologyhave
doneanoutstandingjoboftrainingworkersforthetechnologysector,including
somewhohavegoneontotoppositionsinthebestfirmsintheU.S.Butbycontrast,
primaryandsecondaryeducation,whichmustproducethelargenumbersof
manufacturingandserviceworkersforthecountry,hasanabysmalrecord.vii
Lamentsaboutpoorlyqualifiedteacherswhoareoftenabsentfromtheir
classroomsanyway,poorphysicalfacilitiesandequipment,rotelearning,andsoon
aretoowellknowntoneedrepetitionhere.Iofferjustafewprominentstatistics.
Table3showstheU.N.HumanDevelopmentIndexforsomecountriesat
roughlycomparablestagesofdevelopment;Indialagsbehindthemall.Someofthe
problemswithqualitymaybeduetotherapidexpansionofcoverage,andthese
maygetresolvedinthefuture.Indeedthereisevidenceofsomeprogressoverthe
decadecovered,buttheothercountriesseemtobeprogressingevenfaster.
Amuch-citedreportfoundthat50%of10-year-oldscouldnotreadatlevel
expectedof6-year-olds,whileover60%couldnotdosimpledivision.viiiInaworld
whereevenbasictaskssuchasoperatingsimplemachinesanddeliveringgoods
requiresomefacilitywithnumericalcontrolsandhand-heldcomputers,thisoffers
dismalprospectsforIndia’slaborproductivityinthecomingdecades.Jointlywith
thedemographicdataoftheprevioussection,itsaysthatalthoughIndiawillhave
theworld’slargestworking-agepopulation,itwillbeaninefficientlyutilizedand
low-productivityworkforce.
6
5.Transportandrelatedcosts
India’stransportinfrastructurealsocomparesunfavorablytoChina’sinall
itsaspects,asweseefromTable4.Thecontrastatthemostmodernlevels–high-
speedrailtracksandexpressways–isespeciallydramatic.ixThedataareforthe
period2011-12,andIhavenotbeenabletofindmorerecentcomparisons.Both
countriesarebuildingroads,railtracks,andairportsrapidly;thereforethepicture
issuretohavechangedinthelastfiveyears.Butthechangesareunlikelytoalter
thecomparisonsignificantlyinIndia’sfavor.Ifanything,theoppositeismorelikely
tobethecase.
FormanyyearsIndiaalsosufferedthecripplingdisadvantageofitssystemof
stateandlocaltaxes,whichrequiredlorriescarryinggoodsoverlongdistancesto
spendanabsurdlylargefractionoftheirtimewaitingatstateandcityborderstoget
taxclearances,andgreatlyraisedinternaltransportcosts.xFinallythepassageof
theGoodsandServicesTax(GST)shouldremovethisobstacle,butthecomplexityof
thetaxasitwasenacted,andproblemsinitsefficientimplementation,castdoubton
whetherthiswillbringsignificantbenefitstoeconomicperformance.Someinitial
evidenceisgood,showingthatformalizationofenterprisesisspeedingup,xibut
moredetailedandrigorouseconometricresearchonthisissueisawaited.
6.Governance
Evidencefrommanycountriesoverthelastseveraldecadeshashighlighted
theimportanceofgoodinstitutionsindevelopmentsuccess.This“invisible
infrastructure”ofinstitutionsisifanythingevenmoreimportantthanphysical
infrastructureoftransportandcommunicationnetworks.xii
Itiswellestablishedthatgoodinstitutionsareespeciallyimportantfor
progressingacrossandbeyondthemiddle-incomelevel–escapingfromthe
“middle-incometrap.”Itispossibleforapoorcountrytogettoamiddle-income
7
levelwithmediocreinstitutions,butgrowthbeyondthislevelrequiresmuchbetter
institutions(Rodrik2003,p.17).Tounderstandwhy,weneedtounderstandthe
natureofdifferentstagesofgrowthandinstitutionsappropriateforeachstage
(WorldBank2017,Spotlight6,pp.159-162).Low-incomecountriesbegintogrow
assurpluslabormovesfromagriculturetoindustry.Thisisarelativelysimple
process;familyandvillagecirclescanaccomplishthetransferofworkersintosmall
enterprises,basedonrelationalgovernanceinclosenetworks.Oncethegainsfrom
thisearlyindustrializationprocessareexhausted,however,newsourcesofgrowth
areneeded–capitalaccumulationbeyondwhatfamiliesandfriendscanprovide,
reallocationofresourcesfromlessefficienttomoreefficientfirms,entryofnew
high-productivityfirmsandexitofolder,less-productivefirms,andsoon.Allthese
thingsrequiretransactionswiththirdpartiesoutsideclosecirclesofrepeated
relationshipsandtrust,andthereforehigh-qualitysupportinginstitutionsof
propertyrightprotectionandcontractenforcement.
Indiaisatexactlythiscrucialstageofattemptinganescapefromthemiddle-
incometrap;thereforeimprovingthequalityofinstitutionsisessentialandurgent.
Unfortunatelythecountry’sprogressonthisfrontisatbestveryslow.Table5
showsthedata.Thesituationismediocre,notabysmal:Indiacomparesreasonably
wellwithChinaandBrazil.ButChinadoessignificantlybetterintheEaseofDoing
Businessranking,andIndia’sprospectforsurpassingChina,letalonereachingthe
bestlevels,doesnotseemrealistic.
7.Corruption
India’sratingforcorruptionintheWorldBank’sgovernanceindicatorsis
similarlymediocre,comparabletoChinaandbetterthanBrazil.xiiiButinitsraceto
prosperity,itmustdobetter.Corruptionisakindoftaxonbusinessandcitizens,but
moreperniciousbecauseofitsuncertaintyandcapriciousness.Itiswellknownthat
uncertaintyisastrongdeterrenttoacquisitionandimprovementofproperty,
investment,andinnovation.xiv
8
India’seconomicreformsthatgotridofmanydistortionsandrestrictionsof
thelicenserajhaveparadoxicallyincreasedtherentthatremainsatthedisposalof
politiciansandbureaucrats,andthereforeincreasedcorruptioninmanyregulatory
matters.Someofthiscorruptionmayhavebeeninitiatedandfacilitatedbythe
“supplyside”–citizensandcorporatesseekingthisrent–ratherthanthe“demand
side”–politiciansandbureaucratsexploitingtheirpowertoawardtherent.Thisis
notsurprising.Althoughgiversofbribesasacollectivitylosemoneytothetakers,
anyoneofthemindividuallyhopestobenefitgreatlybyoutbiddingothers.Sothe
gamebetweenthemisaprisoners’dilemma,leadingtoanoutcomethatisbadfor
themintheaggregate.Iwilloutlinebelowaproposalforresolvingthisdilemma.
Aneminentscholarofcorruptionanditscontrolaroundtheworld,Mungiu-
Pippidi(2011),arguesthatcorruptionisessentiallyagovernancesystem
characterizedbyparticularism,wheresomesubsetofthepopulationisfavored
basedonethnicity,class,casteorsomesuchdistinction,asopposedtoethical
universalism,whereeveryoneistreatedequallyunderthelaw.Assuch,corruption
isthedefaultstateinmostsocieties,andalmostimpossibletoeradicate.Ihave
drawnananalogywithacutelife-threateningdiseasesversuschronicconditions
(DixitandMankar,2018).Itisamistaketothinkofcorruptionasacancer:unless
everymalignantcelliseliminated,survivorswillmultiplyuntilthebodyis
overwhelmed.Insteaditshouldbethoughtoflikeoverweightorobesity.Thefight
againstthatishardandlong;victoriesaresmall;sometimesyoubackslide.But
keepingupthefightwilleventuallyproduceasignificantlyfitterandhealthieryou.
Weshouldspeakandthinkofcontrollingcorruption,noteliminatingit100%.
Somegeneralprinciples,learnedfromexperienceofmanycountries,can
guidetheseefforts.SummarizingfindingsfromDixit(2017)andDixitandMankar
(2018),Iwouldliketomakethreepoints:(1)Bottom-upsocialcoalitionscanoften
workbetterthancentralizedformalanti-corruptionagencies.Forexample,a
coalitionofyouthhasmadesignificantdentsintheSicilianmafia’sextortions.(2)
9
Socialsanctionsandeconomicincentives,includingsimplemeasureslikenaming
andshaming,canworkbetterthanpenaltiesoflaw.Forexample,diamondand
cottonmerchantsintheUnitedStateshaveusedsuchinternalmeasurestosustain
honestyincontracts.(3)Idealismofyouthtoworkforandpatronizeclean
businessescanbeharnessed,sothatcleanfirmsattractthebestworkersandhigh-
payingcustomersandbecomemoreprofitable.Therearealreadysomewelcome
signsofsuchatrendinIndia.InSection10Iwilloffersomesuggestionstocapture
theseideasintoabusinesscommunityinstitutiontofightcorruption.
8.Implicationsfortradeandinvestment
Thesedeficienciesofphysicalandinstitutionalinfrastructurehaveaffected
India’sabilitytoattracttradeandinvestment.India’sowneconomicperformance
doesdependonhowwellitcomparesinmattersofinfrastructureandgovernance
withotherdevelopingcountries,especiallyChina.Wheninvestorsandfirmsfrom
advancedcountriesarelookingfordestinationsfortheirplants,valuechainsources
andtradepartners,amongotherconsiderationstheycomparetransport,power
supply,securityofpropertyandcontract,andabsenceofcorruptioninalternative
hostcountries.IfIndiacannotemergeasagoodorthebestdestination,itsown
growthwillsuffer.Thusaracetoprovidegoodconditionsforforeigninvestorsand
tradersdoesaffectIndia’sownabsoluteeconomicperformance,eventhoughweare
notinterestedinanycomparisonsorraceinoutcomesperse.
Foreigndirectinvestmentcanbenefittheeconomy,notonlybyaugmenting
domesticcapitalaccumulation,butalsobybringingmoderntechnologyand
managementpracticesthatdomestictechnicalpeopleandmanagerscanlearn,and
improvingtheworkers’skills.Table6showsthedataoninflowsofforeigndirect
investment.India’srecordshowssomeimprovementinrecentyears,butstilllags
farbehindChina,andshowsnothingliketheaccelerationthatBrazilandVietnam
haveachieved.
10
Perhapsthebiggestnewphenomenonininternationaltradeoverrecent
decadeshasbeenthegrowthofglobalsupplychains,andmanydeveloping
countriesandevenmiddle-incomecountrieshavebenefitedfromparticipatingin
thisformofproductionandtrade.Table7showssomecomparisonsforone
measureofthis,namelytheimportcontentofgrossexports.WeseethatIndiahas
largelymissedoutonthesechains.Chinainfactseemstobeprogressingbeyondthe
stageofrelyingonsupplyingandprocessingintermediateinputstoWesternOEMs,
andgoingontodesignandproductionofitsown,technologicallyincreasingly
sophisticated,productsandservices.
9.Dysfunctionalpolitics
CanwepinpointacauseforIndia’spatchyeconomicperformance?The
mediaandpublicdebatesofferdifferentsingle-causeexplanations,butlikemost
complexsocialphenomenathisoneislikelytohavemanyinteractingcauses.
However,whenpoliciesonsomanydifferentissues–education,laborforce
participation,infrastructure,governance–aredefective,itisplausiblethatthe
policymakingprocesscarriesashareoftheblameforthefaultsinallofthem.HereI
wanttofocusononefeatureoftheprocessthatissurelyveryimportant:India’s
dysfunctionalpolitics.
Idonotmeantoblamedemocracyperse,althoughauthoritarianism,
especiallyofthepopulistkind,ishavingaresurgencearoundtheworld.Research
linkingthetypeofpoliticalregimetoeconomicoutcomesshowsmixedresults.A
wide-rangingsurvey(Gerring,Bond,BarndtandMoreno2005)foundsignificantor
evenslightlynegativeeffectofdemocracyongrowth;another(Przeworskiand
Limongi2000)concludedthatpoliticalinstitutionsmatterforgrowth,buttheeffect
isnotcapturedbyabinarydistinctionbetweendemocracyandauthoritarianism.
However,arecentpaper(Acemoglu,Naidu,RestrepoandRobinson2018)argues
forcefullythat“Democracydoescausegrowth.”Anotherlineofresearch,for
exampleAlesinaandRodrik(1992)andWeede(1996),looksatthevariancein
11
economicperformance.Thefindingisthatdemocraciesshowsmallervariance.They
operateundermanyconstraints,andthereforemaynotperformbrilliantlybutare
savedfromterriblemistakes.Authoritarianregimesfollowthewhimsofoneora
fewtoprulers,andyoumaygetaLeeKuanYeworaMobutuSeseSeko,sothe
varianceislarge.
Mydistinctionisbetweentypesofpoliticalprocessesindemocracies.The
renownedpoliticalscientistJamesQ.Wilsoncapturedthisbrilliantlyand
memorablyinhisremarkscomparingEuropeandtheUnitedStates:“Policymaking
inEuropeislikeaprizefight;whenonefighterknockstheotheroneout,heis
declaredthewinnerandthefightisover.PolicymakingintheUnitedStatesislikea
bar-roombrawl:Anybodycanjoinin,thecombatantsfightallcomersand
sometimeschangesides,norefereeisincharge,andthefightlasts…indefinitely.”
(Wilson1989,pp.299-300)
India’spoliticalprocessseemsevenworsethanthatintheUnitedStates.The
countryspansahugespectrumofregional,religious,caste,andlanguagedifference.
Anelectionisimminentconstantlyinonestateoranother;thereforenational
partiesconstantlychangetheirpositionsandpromiseallkindsoffavorstocompete
withlocalparties.Andevenatthenationallevel,theoppositionopposesjustforthe
sakeofopposing,soyourpolicypositiondependsonwhetheryourpartyisin
power.ArecentarticleinTheEconomistgaveexamplesofsuchshiftsinMr.Modi’s
policies,butotherpartieshaveperformedsimilarsomersaults.“InsomecasesMr
Modihasadoptedpoliciesthathesharplycriticisedwhileinopposition.Hehad
dismissedAadhaar,aCongress-initiatedprojecttoissueallcitizenswithaunique,
biometricallycertifiableidentitynumber,asnothingbutagimmick.Inpracticehis
governmenthasmadeAadhaarcardsmandatoryforeverythingfrommobile-phone
linestofoodsubsidies.TheBJPrepeatedlystymiedCongress’sattemptstoreplacea
quainthodgepodgeoflocaltaxeswithanationalgoodsandservicestax,onlyto
bringintheGSTitself,withgreatfanfare,lastyear.MrModialsofrequently
disparagedCongressprogrammestoboostruralincomesaswastefulvote-buying.
12
Buthisgovernmenthasraisedspendingonthese,whileseveralBJP-runstate
governmentsareofferingmassiveloanrelieftoindebtedfarmers.”xvSomeofthese
shiftsareacceptanceofgoodpolicies;othersareexamplesofdistortionary
subsidies.Butsuchshiftsmoregenerallycreateuncertaintyandinstabilityinthe
mindsoftradersandinvestorsbothathomeandabroad.Theywillthereforereact
withcautionanddelay,harminggrowth.
ThisdysfunctionalpoliticsisreflectedinIndia’slowly14.29ratingonthe
WorldBank’sgovernanceindicatorfor“Politicalstabilityandnoviolence”(Table
5).xviWhilethoseratingscanbecriticizedonmanygrounds,andthedistinctionof
10oreven15pointsintheratingcanbeputdowntovariouserrorsof
measurementandjudgment,weshouldfranklyandhonestlyadmitthatIndia’s
recordisindeedpoor.
Perhapsthereissomereasontohopethatpartiesandpoliticianswhenin
powerwilldotherightthing,orthatthe“deepstate”ofnon-partisancivilservants
andhigh-qualityeconomicadviserswillkeeppoliciesontherighttracknomatter
whatpartyorpoliticianisinpower,butitwouldbeunwisetorelyonthat.
10.Whatistobedone?
Itiseasyformetopointoutthemanyandinteractingproblemsthatconfront
thecontinuationofIndia’seconomicdevelopment,itisfarhardertoidentifygood
solutions.AsthefamousAmericanessayistH.L.Menckenwrote,“Foreverycomplex
problemthereisananswerthatisclear,simple,andwrong.”Thereforeitiswith
considerablehesitancythatIoffersomesuggestions.Ialsowanttoemphasizeatthe
outsetthatIbelievethesearerequiredactions,butprobablynotenoughontheir
own:inthejargonofformallogicormathematics,theyarenecessaryconditionsbut
notbythemselvessufficientconditionsforsuccess.
a.Improvingthepoliticalprocessanddialogue
13
TomuteIndia’snever-endingpoliticalbrawl,allcentralandstateelections
canbesynchronizedandcoordinatedtotakeplaceonlyonceeveryfiveyears.This
willallowunhinderedoperationoftheactualprocessofgoverningandpolicy
makingforatleastthreeorfouryearsbeforethenextroundofelectionslooms.It
willalsomakeitharderfornationalpartiestomakeselectiveappealsandpromises
toseparatespecialinterestsoneatatime.Whenallpoliticalfavorsmustbe
promisedsimultaneously,oppositionpartiesandthemediacanspotandcriticize
mutuallyinconsistenciesandillogicalitiesinthepolicies.Thismayhelpalittlein
improvingIndia’sratingfor“Politicalstabilityandnoviolence”intheWorldBank’s
governanceindicators(Table5).Thereisindeedsomerecentdiscussionofsuchan
electoralreform,butthatitselfhasbecomeapoliticallycontentiousdebateinthe
usualway.
b.Controllingcorruption
Equallyimportantis“Controlofcorruption.”Wehaveseensomeprogressin
thelastseveralyearsinmanymattersofpettybribery;technologyandreformshave
madeitsimpler,faster,andcorruption-freetobuyatrainticketortogetapassport.
Allpoliticiansprofesstobeagainstcorruption,butitishopelesstoexpectthe
governmenttotakeanyfirmorrapidactionagainstitbypassingandenforcing
stronglaws.Afterall,politiciansandbureaucratsarethemainbeneficiariesfrom
corruption.Thereforeitisimperativeforcitizensandbusinesspeopletojoin
togetherandtakecollectiveactiontohelpcombatcorruption.Theimmediate
reactiontosuchaproposalisthatwhenanofficialorpoliticiandemandsabribe,an
individualcitizenorbusinesspersonishelpless.Individuallytheyareindeed
helpless,butincollectivitytheyhavealotofpower.Infactthesituationisaclassic
“prisoners’dilemma.”Collectivelytheyarehandingovermoneytotheofficialsand
politicians,buteachistemptedtoimprovehisorherownchancesofgettingthe
resourceorlicense(forexampleconstructionorspectrumrights)byuppingthe
14
bribe.Theyneedcollectiveactiontoresolvethedilemma.xviiSomeadmirableefforts
ofthiskindhaveindeedbeenmade;anotableexampleistheLokpalmovement.But
inmyopinionthesuccessoftheseeffortshasbeenlimitedbecausetheywereledby
idealists,notbybusinesspeoplewithgoodorganizationalandmanagementskills.If
toppeopleofthelattertypecanbepersuadedtotakeanactiverole,anti-corruption
fightswillhaveamuchbetterchanceofsuccess.Eventhen,theprocesswillbeslow,
andsuccesspartial.
DixitandMankar(2018)proposeabusinesscommunityinstitutiontotake
suchcollectiveaction.Thefirststepistogenerateaccurate,publiclyavailable
informationaboutwhichfirmsarethebestwhenitcomestoresistingcorruption.
Thisshouldbedoneusingatransparentandresearchunit,withgoodobjective
oversighttoensurethatitdoesnotitselfgetcorruptedorpronetobias,toconfer
ratingsonbusinesses,ratherliketheMichelinstarsystemforrestaurants.Thena
socialcoalitionwithtraditionalmediaandsocialmediawillbuildmomentum
amongthebrightestyoungIndianstoworkforandbuyfromthebest-rated
businesses.Somesanctions,suchasostracisminbusinessandsocialcontacts,can
alsobeimposedontheworstoffenders.Intime,suchamovementcangeneratea
raceamongbusinessestoachieveandsustainthetopthree-starratings,andchange
thewholeculturetoonewherecorruptionisregardedasastigmaandcleandealing
asavirtue.
c.Usingstatesaslaboratoriesforreform
India’sstateshavepowerstosettheirownpoliciesinmanymatters,and
thesepowerscanbeexpandedtosomeextent.Thismakesthemusefullaboratories
forpolicyexperimentation.Statescaninasensecompeteamongthemselves,and
thebestpoliciescanbeimitatedelsewhere.Insteadofanationalpolicythatrunsthe
riskoffailingnationwide,anymistakesorfailuresinonestate’spolicyarelimitedin
theireffect.ThisargumentisdevelopedbyMuralidharan(2013);Panagariya(2014)
alsoadvocatesempoweringthestates.
15
AtthelevelofthegreatquestionofwhatproducedtheriseoftheWest,
Muralidharanpointsout(usingresearchbyJoelMokyr)thatChinawasmore
developedthanEuropeinthe15thcentury,butChinawasaunifiedempirewith
uniformpoliciessubjecttowhimsanderrorsofthecentralauthority,whereas
Europehadmultiplepoliticalentitiestryingdifferentapproaches,andsuccessof
onestatewascopiedbyothers.SimilarlyintheUSinthe1990s,theClinton
administrationletstatesexperimentwithwelfarereformandincorporatedsomeof
thebestpracticesintoFederallaws,althoughtheresultsofthatarestillbeing
debated.
Butempoweringstatesisnotapanacea,andhasside-effects.InIndia,some
stategovernmentsdoenactpoliciesconducivetoeconomicsuccess,butothersare
capturedbyfactionsbasedonreligion,caste,ethnicortribalidentity,andsoon,and
implementdistortingpoliciesthatareharmfultothestate’soveralleconomic
performance.ThisiswhatJamesMadisonwarnedinhisfamousFederalistNo.10
(1787).Inarelativelysmallpolity,afactionismorelikelytoattainamajorityand
pursueparticularisticpoliciesthatdamagethegeneralgood.Inalargernation,
differentfactionswillbalanceeachotherandanyoneofthemislesslikelytoattain
andabusepower.
Myconclusionisthatallowingstatestoexperimentandcompeteison
balanceagoodidea,butitshouldhaverulesandconstraints,withenoughcentral
oversighttoensurethatstatesdonotmisusetheirpowerstoservefactional
interests.
d.Streamliningregulation
India’sregulatoryqualityisalsoratedmediocreintheWorldGovernance
Indicators.Someremnantsofthelicenserajstillpersist,andnewareasofresource
allocationsuchasspectrumrightsanddrillingrightsofferrichopportunitiesfor
16
corruption.Asmuchofthisregulationaspossibleshouldhave“brightlines,”soitis
clearandpubliclyobservablewhetheracompanymeetstherequirementsand
qualifiesforthelicenseorpermit.
Regulationisoftentreatedasanideologicalissue:governmentversusfree
enterprise,orplanningversusmarkets.Inpracticeeven“pro-business”policies
becomepro-incumbent,whereprotection,subsidiesandbailoutspreserveexisting
monopoliesoroligopoliesattheexpenseofconsumers.Regulationsshouldinstead
be“pro-market,”fosteringcompetition.Tokeepdomesticmonopoliesontheirtoes,
thecountryshouldremainopentoforeignfirmsfortradeandinvestment.
e.Improvingthequalityofeducation
Theschoolsystemneedsdramaticimprovements.Heateddebatesgoonall
overtheworldontheseissues.Arepublicschoolsbetterorsomekindofprivate
schools–charter,religious,…?Whatistherightsetofcarrotsandstickstoensure
thatteachersshowupforworkandactuallyteachproperly?Areteachers’unions
necessarytoensurehighqualityoraretheymerelyprotectingbadteachersfrom
dismissal?Doescentralizedtestingimprovestandardsordoesitjustleadtonarrow
“teachingtothetest”?ThesequestionsofferIndiaagreatopportunitytoexperiment
usingvariationacrossstatesandrandomizedcontrolledtrials,toevolvethebest
policiesandthenadoptthemcountrywide.Academicresearchershaveconducted
suchtrialsonsmallscales;hereIhaveinmindmuchlargeronesthatcanshow
whetherandhowfarthefindingsoftheresearcharevalidandscalablebeyondthe
researchlevel,andyieldfasterpolicyimplementationforthosefindingsthatdo
havesuchbroaderapplicability.
f.Femalelaborforceparticipation
Fletcher,PandeandTroyerMoore(2018)discussindetailseveralpotential
policiestoimprovefemaleparticipationinIndia’slaborforce.Hereisasmall
17
sample:(1)disseminatinginformationaboutthefinancialbenefitsofworkandjob
opportunities,(2)businesstrainingthatincreasesfemaleentrepreneurship,self-
employmentandborrowingtosetupbusinesses,(3)removinglegalbarrierslike
restrictionsonfemaleworkinghoursordifferentialskilllevels,(4)quotassimilarto
thosethathaveworkedtoincreasefemalerepresentationintheparliamentandin
villagecouncils.Moreover,theyarguethatinitialsuccessinthesemeasureshave
beneficialmultipliereffects,bytransmittinginformationandincentivestoother
femalerelativesandworkingtobreakdowninhibitingsocialnorms.Ensuringthe
safetyofwomenatwork,andincommutingfromhometoworkandback,isalso
veryimportant.
Wemaythinkthathigherincomespercapita,andmoreandbettereducation,
willimprovefemalelaborforceparticipation(FLFP).However,researchshows
(Fletcher,PandeandTroyerMoore(2018),Figures2and6)thattheinitialeffectof
thesechangesistolowerthatrate.TheresponseisU-shaped;itisonlybeyond
middle-incomelevelsandatpost-secondaryeducationlevelsthatFLFPincreases.Of
coursehigherincomesandbettereducationaredesirableontheirown,butany
consequentbenefitsinFLFPmustbealonger-termconsideration.
g.Improvingphysicalinfrastructure
India’sphysicalinfrastructureofroads,railways,airtransport,powersupply,
communicationstechnologies,andsoon,isimproving,butnowherenearfast
enoughforitsoveralleconomicambitions.Acceleratingthepaceisimportant,but
runstheriskthatprojectsarelaunchedwithoutenoughscrutinyandoversight,
corruptionbecomesmoreprevalentandshoddyprojectsgetthrough.
Goodphysicalinfrastructureisimportant,buttoacquireit,thecountryneeds
simultaneousandequallybigimprovementsinits“invisibleinfrastructure”–awell-
educatedandskilledworkforce,goodgovernance,lowcorruption,andsoon.All
18
theseimprovementsarestrategiccomplements;havingafewofthemwillprobably
dolittlegoodonitsown.
10.Concludingcomment
IhavearguedthatIndia’seconomicperformanceanditsfuturepotentialfall
farshortofitsambitions.Ihavedescribedseveraldeficienciesinitsphysicaland
institutionalinfrastructure,andinpolicieswithregardtoeducation,trade,
investmentandregulation,andidentifieditsdysfunctionalpoliticsasamajorcause
ofmanyofthese.Ifmyassessmentturnsouttobemistaken,Ishallbedelighted.If
thisessayservesasawake-upcallandleadstoreformsthatthenprovemewrong,I
shallbeevenmoredelighted!
19
Figure1:Hypotheticalgrowthpathcomparison
(Source:Author’sspreadsheetcalculations)
GrowthratesLevelspercapita
Figure2:ActualPPPGDPcomparisons
(Source:IMFWorldEconomicOutlook)
20
Table1:Populationagedistributioncomparison
(Source:USCensusBureauInternationalDatabase)
Table2:Proportionofpopulationeconomicallyactive
(Source:Author’scalculationsbasedonthedatainTable1andEndnotei.)
Table3:Educationcomparisons
(Source:U.N.HumanDevelopmentIndex,http://hdr.undp.org/en/content/human-
development-index-hdi)
2005 2010 2015India 0.409 0.456 0.624China 0.531 0.599 0.738Brazil 0.614 0.662 0.754Vietnam 0.470 0.509 0.683
21
Table4:Transportinfrastructurecomparisons
(Source:http://www.managementparadise.com/article/4563/india-vs-china-an-
infrastructure-comparison)
Table5:Qualityofgovernance
(Sources:WorldBank,http://info.worldbank.org/governance/wgi/#home
andhttp://www.doingbusiness.org/rankings)
22
Table6:Foreigndirectinvestmentinflows($billion)
(Source:UNCTADWorldInvestmentReport,
http://unctad.org/en/pages/DIAE/World%20Investment%20Report/WIR-Series.aspx)
Table7:Valuechains:%importcontentofgrossexports
(Source:OECDdataonTradeinValueAdded(TIVA),https://data.oecd.org)
2004 2009 2014 2016India 23.2 35.6 34.6 44.5China 60.6 95.0 128.5 133.7Brazil 15.0 25.9 73.1 58.7Vietnam 2.0 7.6 9.2 12.8
23
REFERENCES
Acemoglu,Daron,SureshNaidu,PascualRestrepoandJamesRobinson.2018.
“Democracydoescausegrowth.”JournalofPoliticalEconomy,forthcoming.
Alesina,Alberto,andDaniRodrik.1992.“Distribution,PoliticalConflictand
EconomicGrowth:ASimpleTheoryandSomeEmpiricalEvidence.”Pp.23-50
inThePoliticalEconomyofBusinessCyclesandGrowth,eds.A.Cukierman,Z.
Hercovitz,andL.Leiderman.Cambridge,MA:MITPress.
Dixit,Avinash.2015a,“Corruption:Supply-sideanddemand-sidesolutions.”In
DevelopmentinIndia:MicroandMacroPerspectives,eds.S.MahendraDev
andP.G.Babu,Springer,2015,pp.57-68.
--------.2015b.“Howbusinesscommunityinstitutionscanhelpfightcorruption.”
WorldBankEconomicReview,29(suppl1),2015,S25-S47.
---------.2017.“Anti-corruptioninstitutions:Somehistoryandtheory.”In
Institutions,Governance,andtheControlofCorruption,eds.KaushikBasuand
TitoCordella,PalgraveMacmillan,2018,pp.15-49.
--------andRitikaMankar.2018.“NewideasforfightingcorruptioninIndia.”
LiveMint,April23.Availableat
https://www.livemint.com/Opinion/mxVdMVeQUBEfoJWmY0scRL/New-
ideas-for-fighting-corruption-in-India.html
---------andRobertPindyck.1994.InvestmentUnderUncertainty.Princeton,NJ:
PrincetonUniversityPress.
Emmott,Bill.2008.Rivals:HowthePowerStruggleBetweenChina,IndiaandJapan
WillShapeOurNextDecade.Orlando,FL:HoughtonMifflinHarcourt.
24
Fletcher,Erin,RohiniPande,andCharityTroyerMoore.2018.“Womenandworkin
India:Descriptiveevidenceandareviewofpotentialpolicies.”Kennedy
SchoolofGovernment,HarvardUniversity:workingpaper.
Gerring,John,PhilipBond,WilliamBarndt,andCarolaMoreno.2005,“Democracy
andGrowth:AHistoricalPerspective,”WorldPolitics,57(3),323-64.
Madison,James.1787.TheFederalist,No.10.OriginallypublishedbyJ.&A.McLean.
Mundle,Sudipto.2018.“TheparadoxofweaknessandstrengthinChinese
education.”Mint,March15.
Mungiu-Pippidi,Alina.2011.“ContextualChoicesinFightingCorruption:Lessons
Learned.”NorwegianAgencyforDevelopmentCooperation.Availableat
SSRN:https://ssrn.com/abstract=2042021
Muralidharan,Karthik.2013.“India'sstatescanbelaboratoriesforpolicy
innovationandreform.”BusinessStandard,January21.
Panagariya,Arvind.2014.AReformAgendaforIndia’sNewGovernment.C.D.
DeshmukhMemorialLecture,NewDelhi:NationalCouncilofEconomic
Research.
Przeworski,AdamandFernandoLimongi.1993.“PoliticalRegimesandEconomic
Growth,”JournalofEconomicPerspectives,7(3),51–69.
Rodrik,Dani(ed.)2003.InSearchofProsperity:AnalyticNarrativesonEconomic
Growth.Princeton,NJ:PrincetonUniversityPress.
25
Sabharwal,Manish.2018.“Thevirtuesofformality:OneyearofGST.”IndianExpress,
July2.
Subramanian,Arvind.2018.“Climatechangeandautomationthreateneconomic
convergence.”FinancialTimes,April19.
UnitedNationsDevelopmentProgramme.2016.HumanDevelopmentReport2016:
HumanDevelopmentforEveryone.NewYork:UNDP.
Weede,Erich.1996.“Politicalregimetypeandvariationineconomicgrowthrates.”
ConstitutionalPoliticalEconomy,7,167-176.
Wilson,JamesQ.1989.Bureaucracy:WhatGovernmentAgenciesDoandWhyThey
DoIt.NewYork:BasicBooks.
WorldBank.2017.GovernanceandtheLaw:WorldDevelopmentReport.
Washington,DC.
Xu,Mingzhi.2017.“Ridingonthenewsilkroad:Quantifyingthewelfaregainsfrom
high-speedrailways.”UniversityofCalifornia,Davis:workingpaper.
26
ENDNOTES
iFordiscussionofsomeotherforcesthatthreatenIndia’sclimbtohigh-incomelevels,seeSubramanian(2018).iiAlthougheventhenChinaprobablyhadbetterhealthandeducation,andlessethnicheterogeneity,thanIndia;thesemayhavebeenconducivetoitsfasterdevelopment.iiiThedataaretakenfromWorldBankdatasets,http://data.worldbank.org/indicator/SL.TLF.CACT.FE.ZSandhttp://data.worldbank.org/indicator/SL.TLF.CACT.MA.ZS ivForadetaileddescriptionoflowfemaleparticipationinIndia’slaborforce,andanalysisofthesocial,culturalandpoliticalreasonsforit,seeFletcher,PandeandTroyerMoore(2018).Seealsoaspecialbriefing“IndianWomen:AJobofHerOwn”,inTheEconomist,July7,2018.vTheEconomist,April28,2018,“Womenomics:TheSky’stheLimit.”viTheEconomist,March17,2018,“WomeninIndia:StuckintheBack,”chart3.viiChinahasalsoneglectedorbackslidedinthequalityofitsruralschools;seeMundle(2018).ButitsrecordstilllooksmuchbetterthanIndia’s.viiiTheEconomist,December11,2008,“SpecialReportonIndia:Creaking,Groaning”.ixSeeXu(2017)foracalculationofthesubstantialeconomicbenefitsofthehigh-speedrailwaynetworkinChina.xWorldBank,IndiaRoadTransportEfficiencyStudy,2005.Availableathttp://documents.worldbank.org/curated/en/922721468035082667/India-Road-transport-service-efficiency-studyxiSeeManishSabharwal,xiiTothebestofmyknowledge,RohiniPandeshouldgetcreditforcoiningtheterm“invisibleinfrastructure.”xiiiTherearedifferencesinthenatureofcorruptionamongthesecountries.Chinaisauthoritarianbutquitedecentralized;itscorruptioncomprisescollusionbetweenlocalbusinesspeopleandofficialsindifferentregionsorcities.Itiskeptincheckby
27
thelocalofficials’careerconcerns:theirknowledgethatpartyleadershigheruparewatchingandwillpunishthehighlycorruptbydenyingthempromotion(orworse).xivForananalysisandquantificationoftheseeffects,seeDixitandPindyck(1994).InthisregardChina’scentralizedsystemmayhaveanadvantage;theirtop-levelofficialsmaybeabletomakecrediblepromises,inthemannerofa“one-stopshop”forlicenses,permitsetc.,whereasinIndia’smorechaoticsystemaninvestorneverknowswhenanotherofficialorpoliticianwillturnupanddemandanotherbribeorkickback.xvTheEconomist,February21,2018.“India’sBJPgovernmentlooksevermoreliketheoneitreplaced.”xviThisindicatorconflatestwothingsthatareoftencorrelated,butimperfectlyso.InIndia,violenceisprobablynotahugeissue,sothelowlyratingmustbeduetoajudgmentaboutpoliticalinstability.xviiFordetailsofthisargument,seeDixit(2015a,b).