What growth rates are feasible?
There was once a time when saving and investment was thought to be the dominant factor determining growth rates. Once the savings rate of a country was known, a fixed capital-output ratio was applied and growth rates were thought to be determined. Today, we think very differently about this question. Many countries with savings rates close to India's have obtained growth rates much higher than those seen in India.
Every economy solves two questions: (a) What goods to produce, and (b) How should those goods be produced. We will obtain high growth rates when the correct answers to these questions are found.
Openness to trade has profound consequences for the "What goods to produce" question. In a closed economy, resources are wasted in inefficiently trying to produce all goods. When import barriers are removed, labour and capital is freed up from inefficient sectors and become available for more productive applications. This gives us growth by improving resource allocation. This ancient insight of economists of the 18th century has not yet been assimilated in India, where we continue to suffer major distortions owing to the continued use of protectionist devices such as anti-dumping investigations, tariffs, etc.
The question "How should goods be produced" is about technology: we obtain growth when better technology is put into the production process. This is influenced by knowledge: Ignorant producers use inferior technology.
Looking one step deeper, the incentives to obtain knowledge are strongly driven by the extent to which entry barriers define the degree of competition. The traditional culture of firms in India involved a low priority on knowledge, largely because this culture was crafted in the decades spent in an environment with "self-reliance" and a lack of competition. This led firms to emphasise operations work at the expense of research and development work. Here, we see a deeper consequence of trade liberalisation: removing barriers to trade is important because it will change the incentives that firms face in improving their knowledge.
In the olden days, knowledge changed slowly and was transmitted slowly. The great growth episodes of the past -- UK, US, Japan and Russia -- all involved modest growth rates, with per-capita GDP growth of just two to three percentage points per year. The fastest build-up from a primitive society to an industrial economy was that of Japan, which went from the Meiji restoration in 1868 to becoming a world power in the 1930s.
There is an opportunity today for us to obtain the fastest percentage growth rates in human history:
- The gap in technology
- India is the last major country engaged in the project of economic development. Hence, the gap between Indian productivity and that of the most developed countries today is higher than that seen anytime in the past. This implies that when new technology comes into India, and brings Indian productivity up to world standards, it will give higher percentage growth rates as compared to those seen in past growth episodes.
- The methods for diffusion of knowledge
- When Japan was dealing with a gap in knowledge in 1868, the most important device they used was the slow process of sending students abroad to learn contemporary science and technology. Today, we in India have much better access to contemporary knowledge, using magazines, books and the Internet. The Japanese did not have cell phones, computers and the Internet at the time of the Meiji restoration; hence we can surely be more effective in dealing with the problem of building up knowledge as compared to what they faced in 1868.
There are two aspects in which the Internet has profound implications for growth rates in India. The first lies in access to knowledge about science, technology, and process design. The Internet as a means of education is particularly relevant given the apalling state of higher education in India. The typical individual leaves university with an extremely poor stock of knowledge; the Internet makes it possible for such individuals to tool up to international standards in terms of knowledge at a low cost.
Everyone trying to push frontiers in firms in India today can utilise the Internet to access knowledge that is directly relevant to their work. A person working in the securities industry can search http://www.google.com for "straight through processing"; a person in the field of computer software can ask google about "Java cryptography"; a person in the textile industry can ask google about "tufted carpets". The man running a bakery in Nagpur can improve his product range by finding new ideas about bread--making on the Internet. In each industry, the Internet can ease the isolation of people trying to do things better than the low standards prevalent in India; it can supply knowledge about top-end technologies outside India.
The second aspect lies in interacting with entities abroad for trade or capital account transactions. The Internet can help in getting in touch with individuals and firms abroad. Traditionally, India has been an insular country; people in India did not travel abroad and did not know too many people abroad. The Internet can transform the human networking of the domestic elite into the global economy. It can help us fully harness the gains from trade which would otherwise take a long time to reach fruition. In particular, the Internet allows us to better harness the Indian diaspora, which has thus far played a very limited role in India's economy.
How are we faring on Internet access today? Broadly speaking, dialup access in Bombay seems to work fairly well by world standards. However, outside Bombay the quality of service is very poor. Broadband access (above 1 Mb/s) is important for the transmission of knowledge. For example, many lectures, seminars and conferences are available on video on the Internet, and can be accessed by a person having broadband Internet access. Broadband connectivity, which is available internationally for Rs.2500 per month, seems to be roughly 25 times costlier in India.
In summary, we can think of three aspects to the growth process today:
- What to produce. We can eliminate trade barriers, and harness immediate benefits by moving labour and capital from inefficient industries (where firms close down) into more efficient industries. More importantly, the elimination of trade barriers would improve the level of competition in the domestic economy, and thus produce greater incentives on firms and individuals in India to acquire knowledge.
- How to produce. This is the question of technology, and knowledge. Low entry barriers, and openness to FDI, will generate incentives to obtain knowledge; the Internet will reduce the costs of accessing knowledge.
- Financial capital. Finally, given that all these ingredients are in place, there remains the traditional constraint of financial capital. Investment requires capital, and by opening up to global capital flows, India can eliminate domestic constraints on availability of capital.
I believe that the improvements in the technology of transmission of knowledge, and the scale of global capital flows today, imply remarkable growth opportunities for India today. We should not define our goals using episodes with high growth that were seen in other countries in the past, which took place under conditions with slow diffusion of knowledge, and much less capital mobility.
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