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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.

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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.

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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

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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

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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.

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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

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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

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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)

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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.

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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

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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.

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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

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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

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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.

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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

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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

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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).