Does xenophobia work?
One of the central debates about economic growth and development concerns the importance of openness to the outside world. In this context, openness has many aspects -- openness to ideas and technology, to trade, and to capital inflows.
At the outset, we should separate political issues about openness from the economic issues. Many thinkers of both communist and religious flavours fear openness on the grounds that it might lead to more people adopting liberal values. We will disregard this aspect and focus upon the question of economic growth.
Primitive notions of economic growth were focussed upon capital. India was thought to be a poor country owing to a scarcity of machines, so the most important issue in economic development was a high savings rate and the rapid acquisition of machines. As India's experience shows, the existence of savings alone does not generate growth. In any case, with openness on the capital account, vast quantities of foreign capital can always be obtained when needed, so the shortage of capital need not be a critical constraint.
In recent years, the understanding of economic growth has shifted from physical capital to human skills. If human skills are lacking, it is not easy to import them. Economic growth is about productivity growth, or the ability of people to participate in complex production processes.
The experience of the last fifty years across numerous countries suggests that openness is a vital ingredient to rapid growth of human skills:
- The technologies used by OECD countries to obtain per--capita incomes above $10,000 are all available in their books and journals. Hence, countries which have a high degree of exposure to western books and journals would rapidly acquire these skills. Ideas gleaned over the Internet are visibly having an impact upon myriad companies and industries in India today.
Yet, critics of open economic policies fear the ideas that are found in western books and the Internet.
- Openness to FDI brings world technology into the country. This has enormous spillover effects. FDI has the obvious effect of high payments to labour and capital that is directly used by the foreign firm. In addition, FDI spurs skill development among competing local firms. FDI makes knowledgeable local workers, who carry these new skills with them when they switch jobs or start new firms.
Yet, critics of open economic policies fear the ability of FDI to drive Indian firms bankrupt.
- Openness to trade is enormously important. Trade barriers protect inefficient domestic firms and industries -- when they are removed, foreign imports present competition for local firms. The firms that survive are forced to dramatically upgrade their skills. The firms that die also yield productivity growth by freeing up labour and capital for better uses. Exports constitute opportunities for skill development, and companies and industries which succeed in exporting are frequently able to redeploy these skills in the domestic market.
Yet, critics of open economic policies fear the consequences of breaking down India's trade barriers.
- Openness to the world encourages the use of international role models in domestic debates. Many small countries have an intelligensia which is far from the sophistication and brilliance of learned people in India. Yet, these countries have routinely fared better than India on many questions of public policies owing to the reduced xenophobia that goes along with being a small country.
Yet, critics of open economic policies think that India is different, and do not learn from experiences in other countries.
The Experience of Software
India's software industry is one of the jewels of India's economy of the 1990s. The accomplishments of this most--cerebral of industries universally evokes pride. Every strain of ideology, ranging from liberals to communists to religious parties, agrees that the success of the software industry is an important achievement which should be strengthened and replicated in other areas.
It is useful to measure the ground realities of India's software industry in terms of the debate about openness.
- Swadeshi technology
- India's software industry is free of either vedic mathematics, premier padminis, or "indigenous forms of financial derivatives". The industry uses the best technology available, by world standards.
- Foreign companies operating in India
- Almost all major players in the computer industry worldwide have operations in India. Foreign firms are ardently wooed by local governments.
- Openness to foreign capital
- FIIs have been avid buyers of software stocks, and have accelerated acceptance of software stocks amongst local investors. Foreign private equity funds have been much friendlier towards software projects than most Indian banks or financial institutions. Foreign venture capital firms have played a vital role in many major software projects in India.
- Linguistic hackles
- Both education and work in the software industry work almost entirely in English.
- Role for public sector
- The public sector is essentially absent in the software industry.
- Role for Indian business houses
- The software industry is dominated by recently started companies or foreign companies. Traditional business houses are not important. There has been no protection or encouragement for Indian business houses.
- Barriers to Imports
- The elimination of barriers to import of computer hardware or software was a vital milestone on the path to explosive growth of the Indian software industry.
- Openness to ideas
- India's software industry heavily uses the Internet, and has the highest rate of foreign travel (including work abroad by Indians) as compared with any other industry in India.
- Role for government
- The part played by the State in India's software story consists of enabling good quality electricity and airports, public expenditures for education and research, and getting out of the way (eliminating import barriers, allowing public sector companies to fade into insignificance, coercing telecom monopolies, etc.).
- Production spanning countries
- The software industry is replete with situations where Indian operations play a part in global production processes. If India (and nothing but India) were to be built by Indians (and none others), then a large fraction of software outfits in the country would immediately have to close down.
In this sense, the inputs underlying the remarkable success of India's software industry appear to be liberal economic policies, emphasising the importance of openness to ideas and cooperation of inputs from different countries in global production processes.
Protectionist and xenophobic ideas have gained much currency in the recent years. On the question of openness, there is a remarkable congruence between the ideas of the traditional left and the new right (which comprises religion coupled with Indian capitalists).
As we gear up to strengthen tariff and non--tariff barriers, protect Indian businesses, improve self--reliance, impose barriers upon foreign capital, strengthen censorship in electronic media, and turn our backs upon western liberal ideas, it would be useful to contrast these illiberal policy initiatives with the factors underlying the development of this family jewel, our software industry.
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