Generally speaking, Indian rural populations and subsistence agriculture are almost exactly congruent notions. As long as that equation persists, India will continue to be underdeveloped and poor. The reason is that subsistence agriculture does not scale, and therefore the productivity is bounded by a very low limit.

One can move beyond subsistence agriculture by raising agricultural productivity. There are two distinct ways of doing that.

Case A: You raise the productivity of agriculture by some means such as using more capital (more mechanization and more energy, for instance). Basically, you “pull” the productivity up without any provocation such as a shortage of labor.

Raising productivity means the same (or even increased) production requires less labor. The surplus labor can then just sit around in the rural areas or migrate to the urban areas to live in slums. Here the labor is “pushed” out of agriculture as a consequence of the pulled up productivity.

I call it the “productivity pull, labor pushed” scenario.

Case B: You somehow “pull” labor out of the agriculture. There are many ways but let’s just say that industry is booming and requires labor. That means jobs in the manufacturing sector. Also imagine that the manufacturing sector jobs require some degree of skills but which can be acquired in a short time and on the job itself. So the labor gets pulled out of agriculture and into manufacturing. Now agriculture gets “pushed” to increase its productivity because there is a shortage of labor in the rural sector.

I call this the “labor pull, productivity pushed” scenario.

The two scenarios have distinct distributional outcomes. In the first case, average incomes in the rural sector don’t go up. Those who continue to be employed in agriculture do see their incomes go up because of greater productivity but that is balanced by the lowered incomes of those who are rendered unemployed. The increase in productivity merely takes from one segment of the rural labor force (those previously employed) and transfers that to those who remain in agriculture. Furthermore, there is no labor linkage between the non-agricultural and agricultural sectors.

In the second case, the average rural income goes up. Increased productivity means increased average income because the labor force has contracted. The labor released from agriculture ends up in manufacturing. Their incomes in manufacturing is higher than what it was in subsistence agriculture. So the average income of the total rural labor force (which was previously only in agriculture but now is distributed in agri and non-agri work) goes up.

That is what can be called “inclusive growth.” It is a consequence of balanced growth. To recount, the story goes this way:

1. Increase capacity in the non-agricultural sector, such as increased manufacturing or services.
2. This pushes demand for labor in the non-ag sector.
3. Labor from rural areas (agricultural labor) is pulled to urban areas.
4. Shortage of labor in agriculture pushes productivity increases in agriculture.
5. Incomes go up for the entire group that used to be previously only in agriculture.

Why do average incomes go up when labor moves from agricultural to non-agricultural sectors? Because agriculture does not admit scale economies while manufacturing and services sectors do. That’s just the way it works.

Which is why urbanization and economic growth are conjoined twins: you cannot have one without the other. Economic growth is what happens when the labor moves from agriculture to manufacturing and services. Which is another way of saying that when people move from rural areas to urban areas. But that move has to be pulled rather than pushed (in the sense I have defined them above.)

It is interesting to note that sometimes the solution to a problem does not lie in the same space as the problem. This is one such case. The problem of rural inclusive growth has a solution but that solution lies in non-rural areas and in non-agricultural sectors. India’s misplaced focus on rural areas (as opposed to a focus on rural populations) has done a lot to promote mass misery and poverty.

As Einstein had famously observed, no problem can be solved from the same level of consciousness that created it. The mindset that created the impoverishment of rural populations was one which did not understand the economic linkages that connect all sectors of the economy. It was a mindset that separated villages (and even elevated them) and tried to make them “self-sufficient.” Persistence of that mindset guarantees persistent poverty in rural areas and rural populations.

We can spend a lot of time debating how entrepreneurship and innovation in rural areas will help the rural people. But that will be of limited use until one re-evaluates the problem of inclusive growth in terms of the growth of urban India. The solution to rural India lies in the urban India that is waiting to be born.

Related post:

1. ADLI: A Lesson from the Age of Industrialization. [Dec 2003.]

2. The Better, Faster Way to Help Rural India. [July 2006.]

I strongly believe that the only way India can sustain its long-term economic growth is by unleashing and harnessing the creativity of its grassroots entrepreneurs, especially in rural areas. But here is the challenge: these grassroots inventions don’t scale up. Indeed, most rural innovation initiatives such as DesiCrew and grassroots inventions like Mitti Cool, however impressive they may be, are sadly limited in their impact to a local or regional market of a few hundred customers, and end up employing no more than a dozen workers in the local community. What is missing is a mechanism to cross-pollinate and scale up these bright ideas among India’s 250-million-strong agricultural community which lives scattered across more than 600,000 villages.

I find the paragraph interesting. His belief that “the only way India can sustain its long-term economic growth . . . by unleashing and harnessing the creativity of its grassroots entrepreneurs, especially in rural areas” is approximately right. The bit that raises questions is “especially in rural areas.” Surely, “the only way” cannot be “especially in rural areas.” Rural areas and “sustained long-term economic growth” are incompatible and inconsistent. This is puzzling since in the same paragraphs he explicitly recognizes the limitation that rural areas have — a matter of scale.

We need to go back to the fundamentals, as always.

Generally speaking, economic growth arises from an increase in productivity (the amount of goods and services that an hour of labor produces). Productivity increases depend on the degree of specialization, a fact that is well-known since Adam Smith’s 1776 book “The Wealth of Nations.” The degree of specialization is limited by the size of the market. The smaller the market for a specific good (that is, the volume of supply and demand), the smaller degree of specialization it can support, and therefore the smaller the gain in productivity through specialization.

Rural markets are small because of fragmentation. The rural market is fragmented even though the rural population is huge. Integrating the fragmented markets is a big task and there are several approaches to it depending on the good or the service under discussion. For instance, for goods markets to be integrated, the transportation system has to be efficient. For services, if it is a service that can be delivered over a wire, a good telecom infrastructure can integrate the market. But if the service is non-transportable — such as a hair cut or plumbing service — then the only way is through aggregating the scattered rural population.

The natural way that markets become integrated is when the scattered village population moves to aggregate themselves into towns and cities. Cross-pollination of ideas and economies of scale (what Navi mentions in that paragraph), and hence the integration of markets, occurs naturally in dense aggregations of people.

The bottom line is this: India is heterogeneous along all dimensions, including people and places. There are leading and lagging places. The broad policy thrust has to be the development of people, not places. That means, the policy should be the development of people in the lagging areas, not the development of the lagging areas. The complementary policy for the leading areas is the development of the place.

Summary: Develop the people of lagging areas (policy A) and develop the infrastructure of leading areas (policy B). The policies A and B have to be implemented simultaneously. Policy A creates human capital who can (by migrating to the leading areas) become more productive given the infrastructure produced by policy B.

Grass-roots entrepreneurs, the ones mentioned by Navi, regardless of how clever they are, are likely to find limited success as long as they are forced to operate in small markets (that is, having to live in villages.) Larger markets are only available either in places with dense aggregations of people, or where the transportation and telecommunications infrastructure is efficient enough to provide integrated market even with scattered populations.

The long-term sustainable economic growth that Navi talks about in the quoted portion above is not possible in the context of rural areas. As long as rural populations are involuntarily restricted to rural areas, they will be forced to low productivity levels. India’s long-term economic prospects are linked to how effective India’s policies are in transforming the currently rural population into an urban population.

Should governments go with the flow and encourage the growth of cities or should they instead be spending money on rural development?

For the first time in history more than half of the world’s population live in cities -home to some of the poorest, as well as the richest, people on the planet

This mass migration from the countryside to urban areas is now being championed by the World Bank, which believes that cities – slums and all – offer the best hope of ending poverty. Cities, the argument goes, drive economic growth – encouraging entrepreneurship, innovation and wealth creation.

So should governments go with the flow and encourage the growth of cities?

Or should they instead be spending money on rural development?

Featuring some of the world’s foremost economic thinkers – from Nobel laureate Paul Krugman to anti-poverty campaigner Jeffrey Sachs – ‘Slums and Money’ explores the arguments for and against. At stake is the poverty or prosperity of billions.

Singapore, Oct 10: Mr Lee Kuan Yew, Minister Mentor, Singapore, on Friday said the PURA model advocated by the former Indian President, Mr A.P.J. Abdul Kalam, will not work in bringing about India’s transformation into a developed country.

Answering a question at a session of ‘PBD Singapore’, he said, “He is a great scientist and a very powerful man. I don’t want to cross swords with him.

“But if you study very carefully how other countries have industrialised and become knowledge economies – Korea, Japan, China and Eastern Europe – you will realise you cannot bring urban amenities to rural areas.

“How can you do it? Where is the manpower? How will you get the best doctors to stay in the rural areas?”

Getting into the area of some “hard headed analysis”, he said one needed to look at the fact that while companies such as Pepsi and Citicorp were headed by Indians, “they are outside India.”

The way to do it, Mr Lee Kuan Yew said, was by rapid urbanisation as Singapore had done it (“we don’t have a single village left in Singapore”), or by planned urbanisation, as China was doing it by moving 10 million villagers to urban areas every year. “Look at Brazil: They are building huge centres, factories for making cars, aeroplanes and all kinds of things.”

Villagers are moving to these centres, he noted.

“If you look at ancient Greece – Socrates and Virgil, were they in the countryside?

“They were in the cities where all services were concentrated.”

(Link thanks to a comment by t.)

As I always argue, Singapore got lucky in the random draw for dictators and drew Lee Kuan Yew; India got unlucky and drew Nehru. (Nehru did not know much but had at least tried to educate himself, though somewhat unsuccessfully. But what he spawned — the whole uneducated khaandaan — would not know which end of a book was the correct end to start from.)

LKY is smart. He understands why urbanization matters. He has practical understanding of it. It’s interesting that Krugman who got the Bank of Sweden Prize in economics (the economics Nobel prize) has done important theoretical work on urbanization.

LKY is also very diplomatic. I like the way he says, “I would not want to cross swords with [Kalam].” Basically he means that it would be an uneven match and it would be unsportsmanlike of LKY to fight Kalam.

I think that Mr APJ Kalam was (and still is) very powerful. His PURA model was flawed from the word go and yet it got a huge amount of press and a lot of attention among the movers and shakers of industry. No one of any importance ever spoke out against it. I did but then my name is nobody. I did develop RISC before PURA came along, though. Here’s a comparison of RISC and PURA (Nov 2006).

RISC and PURA are in some sense diametrically opposed concepts. There is of course a superficial commonality of objective: economic development. But even that superficial commonality disappears once the objective is stated in more details.

PURA’s objective is based on what I would call “village centric development” while RISC is about “urban centric development.” PURA is about distributing economic activity among a group of villages and then connecting these villages so that people are constantly moving from one village to another to get something achieved. (In one version of PURA, I believe they want to connect all villages with bi-directional high speed modern alternative fuel buses — which makes me wonder why not implement PURA in Pune since this metropolis lacks a decent public transportation system.)

RISC concentrates all economic activity of a large number of villages in one location so that it can catalyze economic growth through lowered transaction costs, and economies of scale and scope are achieved. PURA attempts to keep people in 600,000 villages and disperse economic activity around the rural countryside. RISC says that the village as an economic social unit is inherently incompatible with development, and that the rural economy can be helped by urbanizing the population in place. RISC is feasible with limited resources while PURA is only possible if there is about $600 billion spare cash. RISC requires minimal government involvement, while PURA is what can be a license-permit-control-quota bureaucrat’s wet dream.

But once again, it is unsportsmanlike to pitch RISC against PURA.

Let’s get a little more wisdom from LKY. Here’s a bit from a 2005 Der Spiegel interview, “It’s Stupid to be Afraid.” (Thanks t again for the link.)

SPIEGEL: You’ve been the leader of a very successful state for a long time. Returning from your time in China, are you afraid for Singapore’s future?

Mr. Lee: I saw it coming from the late 1980s. Deng Xiaoping started this in 1978. He visited Bangkok, Kuala Lumpur and Singapore in November 1978. I think that visit shocked him because he expected three backward cities. Instead he saw three modern cities and he knew that communism — the politics of the iron rice bowl — did not work. So, at the end of December, he announced his open door policy. He started free trade zones and from there, they extended it and extended it. Now they have joined the WTO and the whole country is a free trade zone.

SPIEGEL: But has China’s success not become dangerous for Singapore?

Mr. Lee: We have watched this transformation and the speed at which it is happening. As many of my people tell me, it’s scary. They learn so fast. Our people set up businesses in Shanghai or Suzhou and they employ Chinese at lower wages than Singapore Chinese. After three years, they say: “Look, I can do that work, I want the same pay.” So it is a very serious challenge for us to move aside and not collide with them. We have to move to areas where they cannot move.

SPIEGEL: Such as?

Mr. Lee: Such as where the rule of law, intellectual property and security of production systems are required, because for them to establish that, it will take 20 to 30 years. We are concentrating on bio medicine, pharmaceuticals and all products requiring protection of intellectual property rights. No pharmaceutical company is going to go have its precious patents disclosed. So that is why they are here in Singapore and not in China.

SPIEGEL: But the Chinese are moving too. They bought parts of IBM and are trying to take over the American oil company Unocal.

Mr. Lee: They are learning. They have learnt takeovers and mergers from the Americans. They know that if they try to sell their computers with a Chinese brand it will take them decades in America, but if they buy IBM, they can inject their technology and low cost into IBM’s brand name, and they will gain access to the market much faster.

SPIEGEL: But how afraid should the West be?

Mr. Lee: It’s stupid to be afraid. It’s going to happen. I console myself this way. Suppose, China had never gone communist in 1949, suppose the Nationalist government had worked with the Americans — China would be the great power in Asia — not Japan, not Korea, not Hong Kong, not Singapore. Because China isolated itself, development took place on the periphery of Asia first.

Further down in the interview, he talks about democracy and why he had to do things differently.

The British came here, never gave me democracy, except when they were about to leave. But I cannot run my system based on their rules. I have to amend it to fit my people’s position. In multiracial societies, you don’t vote in accordance with your economic interests and social interests, you vote in accordance with race and religion. Supposing I’d run their system here, Malays would vote for Muslims, Indians would vote for Indians, Chinese would vote for Chinese. I would have a constant clash in my Parliament which cannot be resolved because the Chinese majority would always overrule them. So I found a formula that changes that…

People voting for narrow sectarian interests — sounds familiar, doesn’t it? Worse yet, how the politicians do their best in India to divide the population on caste, creed and religious lines just so as to get the vote. The wonders of democracy in India are a marvel to behold. A few days ago I saw a full-page ad in the Times of India which declared proudly what Mayawati had done to privilege Muslims over non-Muslims. It was a blatant display of religious discrimination and a shameful admission of the failure of the Indian political system.

Singapore gets Lee Kuan Yew. India gets Nehru and soon enough will have Mayawati. Makes you want to weep.

There is a definite positive relationship between the size of the habitation and the productivity of the population.”

The full article is below.

Urbanization and Development of India

Atanu Dey

Economic growth and development is intimately connected with the urbanization of the population. The relationship holds empirically, both across time and space. Analytically it is easy to see why economic growth and development is both a cause and consequence of urbanization.

The scale and quality of the basic habitation unit determines the success of an economy. A large number of small villages is sufficient for poverty; a number of large cities is necessary for prosperity. Specifically with reference to India, the vast majority of the population lives in villages and ekes out a meager existence from agricultural related activities.[1] For India to develop, it is imperative that India’s 700 million rural inhabitants have the opportunity to live in urban areas and work in non-agricultural sectors.

The world is getting urbanized

The big picture clearly shows that the world is getting urbanized at an accelerating pace. The entire world’s population was around 900 million in the year 1800. Less than 3 percent of that population—about 27 million people—lived in cities. The world population nearly doubled in the next hundred years. By 1900, the global population had grown to 1.6 billion, of which only around 10 percent were urbanized. Now, another hundred years later, more than half the world’s population of over 6 billion lives in cities. Estimates place around 70 percent of the world’s projected population of 10 billion in the year 2050 in cities. Human civilization is becoming a predominantly urban civilization.

Mega-regions

There is a definite positive relationship between the size of the habitation and the productivity of the population. From ancient times, larger cities have produced disproportionately more of the innovations, advances, and the production of every sort of goods and services. We recall the names of ancient cities because things of importance happened in them, mostly of the type that advanced human knowledge and capacity.

As global population has grown, the size of the average major city has grown alongside. Today we have what can be called “mega-cities” or “mega-regions.” They bear the same relation to the average city of today as in the past a large city bore to a small town or a village.

The mega cities are easy to identify. They are collection of tens of millions of people whose annual production is measured in trillions of dollars. Their names are familiar: Greater Tokyo (a $2.5 trillion economy of 55 million people), Boston-Washington corridor ($2.2 trillion, 54 million people), and mega regions around London, Frankfurt, Chicago, Atlanta, Rome, Amsterdam, etc.

Around 1.2 billion people live in 40 mega regions of the world, and produce two-thirds of the world’s output of goods and services. They also produce more than 85 percent of all global innovation. Which means that the rest of humanity – nearly 5 billion people, or four times as many people as those who live in the mega regions – living the 191 countries produce only a third of the global output and only a sixth of the innovations? [3]

That point is worth stressing. A person living in a mega-region compared to a person not living in a mega-region is eight times as productive in terms of goods and services, and in terms of innovations is about 24 times as productive.

Cities are engines of growth

Cities are engines of growth because they “manufacture” wealth. This is literally true as most manufacturing occurs in urban locations. That is why rich economies are predominantly urban, and those economies that are largely rural are relatively poor. The transition from a poor economy to a rich one depends on the transition of the majority of the population from being rural to urban.

There is a definite trend and a correlation between the growth of cities and the progress of human civilization. This relationship is established by the increased production of goods and services. This creation of wealth is a consequence of the urbanization since urbanization makes manufacturing possible.

There is more stuff relative to people today than existed any time in our history because manufacturing stuff requires less labor per unit of output. That’s what economists call “economies of scale”: the cost of production per unit goes down as the volume of production goes up. Large manufacturing units produce stuff more efficiently.

Large manufacturing units require lots of people and large amounts of supporting activities, which in turn require even more people. In other words, a population living in a collection of villages is not as productive as the same population living in a city and engaged in manufacturing. Cities are the engines of growth because they make manufacturing possible, and manufacturing has scale economies.

Infrastructure and Cities

Manufacturing requires cities because the high population and high population densities of cities reduces the cost of getting things done. Another way of stating that is to say “transaction costs” are lower in cities. This is explained by the nature of infrastructure.

Infrastructure has “scale economies” – the larger the amount of infrastructure, the lower the cost per unit of infrastructure. Thus the high aggregate demand for infrastructure in urban areas allows sufficiently large supplies at lower average costs. Lower costs translate into more efficient services and therefore the advantage that cities have over rural areas in conducting business.

An example: Providing Education

There are a number of well-known causative factors that lead to economic growth. Among them are an educated and healthy population, reliable and adequate infrastructure, a free and fair market-driven economy, and the availability of public goods such as law and order, political freedom, efficient governance, etc. These causative factors have complex interdependencies and have to be present—simultaneous in time and co-located in space—for economic growth and development. These factors of economic growth can be most efficiently provided in—and are usually associated with—cities.

Cities provide educated people the opportunity to use their skills because cities have the supporting infrastructure and other skilled people, both of which are necessary for skilled people to fully utilize their specialized skills.

Cities aggregate a large number of people with different skills which make all of them mutually dependent for being productive. Furthermore, the education of the next generation itself is most efficiently provided in cities. Thus cities are the centers not just for the use of education but also the provision of education.

An attempt at providing highly diverse and sophisticated education to small village populations is prohibitively expensive. Every center of excellent learning – schools, colleges, and universities – is associated with urban areas, either from the beginning or from the urbanization of the place where a great center of learning is created.

Given a large enough population at a specific location, the demand for education will be sufficient for its efficient supply. A lot of people are required to provide the educational services. These people in turn need supporting services that are provided by even more people in that location.

To provide for the needs of the people, infrastructure—power, telecommunications, houses, parks, roads, water, sanitation, etc—is needed. To provide all the infrastructural services, you need yet more specialized people. Following this line of reasoning you soon reach the conclusion that it needs a city. It needs a city because a city is at the heart of a developed modern complex highly skilled highly specialized economy. Any developed and rich economy is primarily a collection of cities.

Rural Development

It is important to keep in mind that the central concern of economic growth and development is the development of people. For far too long, Indian policy has conflated the development of rural people with development of villages. That confusion has predictably led to waste of time and resources. Village development is costly because India has too many – over 600,000 – and if the limited resources available for development is spread out over them, then per village the amount available is not sufficient to affect major changes.

By insisting on the development of villages, scarce resources, which could have been more efficiently used elsewhere, are wasted. There is another way of using the same resources, and that is the development of cities. Thus, paradoxically, the answer to rural development – or more accurately the development of rural people – actually lies in the development of urban areas.

Urbanizing India’s Population

The rural population of India has to urbanize. The existing cities, however, are bursting at the seams and cannot possibly accommodate any more people. Practically all Indian towns and cities are unplanned and inefficiently use land and other resources. They are arguably inadequate for the current residents, leave alone adding hundreds of millions more people to them. The existing urban centers would do with a massive makeover but doing that is expensive. [4]

There’s a need to have new urban centers to accommodate the hundreds of millions of rural people. Imagine building absolutely new cities from scratch for 600 million people. Imagine 600 new large cities of one million people each. Imagine building houses, schools, shopping centers, parks, factories, roads, public utilities, hospitals, libraries, . . . And imagine doing that using the best urban planning known to humanity.

That is the greatest opportunity India has – of building from scratch – which is not available to any developed economy such as the US. American cities are notoriously inefficient in terms of resource use and sustainability. Their legacy urban centers will burden the transition to living in more sustainable cities.

But India does not have that legacy burden. [5] Most Indians living in villages would welcome the chance of living in well-designed efficient cities. They are already doing so as is evidenced by the fact that tens of millions of rural people migrate to cities – often choosing to live in urban slums. They are voting with their feet saying that life in an urban slum is preferable to life in a village.

Conclusion

The economic development of India requires economic growth. Cities are engines of growth because there is a bi-directional link between urbanization and growth. Therefore the rural people have to be urbanized for India’s development and growth. Every economy has followed that path which begins with agriculture being the main source of income for the majority of the population and ends with agricultural employment being a very small fraction of the total labor force.
India needs to stop making little plans and start thinking big.

Make no little plans. They have no magic to stir men’s blood and probably themselves will not be realized. Make big plans; aim high in hope and work, remembering that a noble, logical diagram once recorded will never die, but long after we are gone will be a living thing, asserting itself with ever-growing insistency. Remember that our sons and grandsons are going to do things that would stagger us. Let your watchword be order and your beacon beauty. Think big.

Daniel Burnham (1846 – 1912)
Visionary urban planner and Chicago architect

NOTES:

[1]. It is a reasonable guess that you, the reader, are unlike the average citizen of a developing country in the sense that you live in a city and are engaged in non-agricultural work. Moreover your above average income is related to your living and working in an urban area.

[2]. In the year 1900, the world’s 10 largest cities were (in descending order of population) London, New York City, Paris, Berlin, Chicago, Vienna, Tokyo, St Petersburg, Manchester, and Philadelphia. The combined population of those 10 cities was approximately 26 million. By 2005, just Tokyo — the largest city then — itself had 35 million people, followed by Mexico City with 19.4 million. Mumbai with 18.2 million ranks 5th. [Source: www.192021.org ]

[3]. The Rise of the Mega Regions Wall Street Journal April 12, 2008.

[4]. Fires, earthquakes, carpet bombings have served that function for many other cities in the past.

[5]. There’s an interesting analogy illustrating the burden of a legacy. The US had one of the best landline based telecommunications system in the world by the early 1970’s. That legacy system actually prevented them from transitioning to a more efficient mobile telephony system in the 1990’s. India, given that there was no landline telecommunications system to speak of, immediately leapfrogged the twisted copper-wire stage and went straight to the more efficient wireless system. Sometimes it helps to arrive late.

Economic growth in a sense, and to a much larger extent economic development, is more akin to a game of golf than a game of chess. In golf, the opponent’s moves matter very little; you may as well play by yourself and later compare scores if needed. In chess, your move depends on how your opponent has moved and how he is likely to respond to your move. In other words, chess is a strategic game while golf is not. All this is very broadly speaking, naturally. I don’t mean to imply that there are no dependencies among economies as they grow; what I mean is that, especially for a large economy like India, how much it produces and how determines how materially prosperous it is and is independent of how other economies are growing. For strictly benchmarking purposes, one can glance over at the neighbors. And if one is smart, one can learn from the experiences of those neighbors. Still, when it comes to economic growth, it is largely the case that you are playing against yourself.

Here I want to glance at India’s large northern neighbor and recently a strategic competitor in the fiercely competitive game for control of scarce resources. China has been moving mountains — quite literally as you will soon note — for quite a few years for growing its economy. From an Indian perspective, it is a chilling reminder that there are no shortcuts to economic growth and that it takes something special in terms of will and perseverance to overcome the ill-effects of flawed economic policies and failed leadership. It is also a story of hope and the indomitable human spirit, a story of almost superhuman striving by mere mortals.

Words, not Numbers

Regular readers of this blog may have noticed that rarely do I have charts, graphs, and tables of statistics in my posts. It is not that I mistrust those devices as they do illuminate the subject. But I leave the numbers to sources that do rely on them for making their points. Honestly speaking, I am fairly suspicious of numbers that have pretenses to a degree of precision that is not even theoretically possible. In one report I had read (from some global consulting firm), I had seen figures which made my head hurt. It said something like, “By July of 2010, the US would have outsourced 10,573,425 jobs to India.” I wondered if they meant July 1st or July 31st; and whether it was by 10 AM of a particular date or was it by 10:30 AM. How did they know that the number in the units’ place was 5 rather than 6 or 4?

I am convinced that you, gentle reader, have seen a lot of numbers projecting what is going to happen to India by such and such a date. One report that I recently glanced at was from KcKinsey which Sramana Mitra has blogged about recently on the growth of India’s middle class. Makes fascinating reading, I am sure, for MBA-types. But I digress. I will get back to that McKinsey report in a different post shortly.

For now, I would like to point you to a National Geographic feature titled “China’s Boomtowns” from June 2007 (Hat tip: Abhishek Sarda.) It is well worth the 10-odd minutes it takes to read it. No charts and graphs there. But it tells a story that makes you admire the spirit of the Chinese. There are lessons in that story that underline some of my obsessions that have to do with the prerequisites of economic growth in the modern world. Without any charts or graphs, the story is replete with lessons that we should have learnt and perhaps we still can if only our benighted leaders were to pay attention.

Similar Pasts

For much of the recent past, China and India were similar in many respects. Very large populations, very deep and widespread poverty, largely agricultural, and saddled with brain-dead economic policies rammed down the throats of the powerless populations by ignorant policymakers. Then the Chinese people got lucky: they got a dictator who was smart. This dictator was different from the other dictator who had propelled China into a “Great Leap Forward” which left tens of millions dead. India matches the first part of China’s story — it got a dictator who wanted to personally control India’s climb into “The Commanding Heights” but succeeded in digging a very deep hole for most of the 350 million living around 1950 that even 60 years later, the number of deep-hole dwellers is variously estimated to be between 500 and 800 million. Thanks awfully, Mr Jawaharlal Nehru.

The new path that the dictator of China took around 1970 propelled economic growth and lifted hundreds of millions out of the hole that had been dug for them by communism. India, by contrast, continued along the path blazed by Nehru, and the path was solidified into an 8-lane superhighway by his daughter. (She was another ignorant autocrat — and appeared to be fairly convinced that ignorance was better than knowledge since she saw no need for the education of the masses. Though she had all the opportunity in the world, she herself never got any formal education and I believe was kicked out of Shantiniketan, a school where you would have to work hard to get kicked out of. The irony that numerous educational institutions are named after her would not be tolerated but for the ignorance of the Indian population.)

India went careening down this superhighway of socialism until it was wrecked through a collision with the barrier of a balance of payment crisis. Headless chickens have been known to display more foresight than the architects of India’s economy.

But I digress once again. Let me get back to what China did: it became the world’s manufacturer. Manufacturing is capital intensive but if you do enough of it, you do require lots of people. Lots of people churning out stuff means that there is more to go around. So labor is attracted into the sector and the laborers get paid wages. Those wages may be low compared to advanced industrialized economy standards but are far superior to the alternative of starving on a farm in the rural interior of China.

Manufacturing

Where did all the wealth that exists in the world today come from? (Wealth is stuff — not money. Stuff that we eat, stuff that shelters us, stuff that transports us, etc.) It is largely manufactured. There is more stuff relative to people today than existed any time in our history because manufacturing stuff requires less labor per unit of output. The fact though is that manufacturing has what economists call “economies of scale”: the cost of production per unit goes down as the volume of production goes up. So large manufacturing units produce stuff more efficiently. And large manufacturing units require lots of people and large amounts of supporting activities which in turn require even more people. In other words, a population living in a bunch of villages is not as productive as the same population living in a city and helping with manufacturing. Cities are the engines of growth because manufacturing has scale economies.

Cities, not Villages

Indian policy makers have an obsession with villages. Villages were Gandhi’s fetish; and Gandhi is an Indian fetish. So I think that the policy maker’s obsession derives from the fetish**2 (the fetish of a fetish) that Indians indulge in. I am not against fetishes, mind you. My own obsession with the primacy of individual freedom compels me to approve of all personal fetishes. Whatever floats your boat, is what I say. But when fetishes intrude into sensible policy making, I draw the line.

So the point that I am attempting to make is this. Build cities. That will require a great deal of manufactured stuff. So you need lots of manufacturing. And forget the crumbling mega-slums we currently pretend are cities, and forget the tiny impoverished settlements we call villages. Build livable cities and build factories that will produce the stuff that the poor currently don’t have because it is not produced. Manufacturing so much stuff will require lots of people. And we have people coming out the wazoo — they are currently stuck in a declining agricultural sector.

Yeah, move a few mountains. They do that in China. India can imitate that bit at least.

Mukesh Ambani apparently gets it.

The 17th July edition of Newsweek International carries a must-read article on Mukesh “Mr Big” Ambani’s Makeover Plan for the Nation. The article says that Mukesh

has finalized plans to invest more than $11 billion over the next decade to build two new satellite cities outside creaking, overcrowded Mumbai and Delhi. He foresees these metropolises emerging within just four years, each with a population of 5 million people making $5,000 a year, on average (or seven times India’s norm), and hosting top multinational companies. And that is all pretty simple—a development on steroids—compared with the idea that really gets Ambani going.

Ambani’s favorite scheme aims to revolutionize in one swoop two of India’s largest but most backward sectors: farming and retail. . . . Ambani plans to invest $5 billion by 2011 to put both the farms and the stores on the road to modernity, connect them through a distribution system guided by the latest logistics technology, and create enough of a surplus to generate $20 billion in agricultural exports annually.

Further down in the article, it says

Ambani wants to build a chain of both small and supersize stores across India, creating 1 million jobs and reaching $25 billion in annual sales, all by 2011. If his plan succeeds, he says, consumers will get fresher food at lower prices, rural incomes will soar, farmers will become active consumers, and Reliance will become “a WalMart in India.”

And finally

To transform Indian farmers into quality suppliers for his new retail chain, Ambani plans to create 1,600 farm-supply hubs across India, providing technical know-how and credit, selling seeds, fertilizer and fuel, and buying produce. He also plans to build some 85 logistics centers to move food to retail outlets and to ports and airports for export.

See why I say that it appears as if the man gets it?

First, he talks about creating cities. Cities are the engines of growth since it is an urbanized population which has the productive capacity to create economic wealth and thus lead to development. India’s largely rural population has to be urbanized and since the existing cities are basically incapable of absorbing the population, new cities have to be developed.

Second, he talks about transforming agriculture by raising its productivity. Building a large number of farm-supply hubs will make the supply chain for agricultural inputs more efficient. Raising agricultural productivity will not only increase production but will also release farm labor which can then migrate to the cities and produce non-agricultural goods and services.

Third, the farm output will be more efficiently brought to the market. It is estimated that around 40 percent of farm produce never reaches the consumer. Introducing efficiencies in the supply chain of farm output and retailing it efficiently will translate into lower prices for consumers and higher realized prices for the farmers. This in turn will increase farm incomes so that the remaining rural population would be able to effectively demand more non-agricultural goods and services — the same stuff that is being produced by the labor released by the farms.

This is along the lines of Irma Adelman recommended long ago: Agricultural Demand Led Industrialization, or ADLI.

The important point to note is that the schemes that Mukeshbhai is concentrating on has, prima facie, nothing to do with development, leave alone development of rural India. But in effect that is precisely what will happen. The answer to India’s rural economic development lies in cities. It is the urbanization of the rural population which will help rural development, not the so-called “development of villages” as I have argued for a while.

To a large extent, the 1,600 farm-supply hubs are approximations of RISC. RISC are the seeds of a mini-city in the rural area. With about 5,000 of these, you can effectively aggregate the 600,000 villages into productive mini-cities.

The approach that Reliance is taking is commendable because it is private sector driven and does not involve the government directly. Indirectly, of course, the government has to acquiese to the plan. Not just that, it is possible that the government will give away quite a bit of the land needed for these new Reliance cities at below-market prices. Yes, Reliance has power and it will only grow. But the question we need to ask is this: is it better that the land gets utilized and wealth created, and even though some of that immense wealth will go to enhance the Ambani fortunes, than the alternative where the land sits around doing precisely nothing and millions of people don’t get to lead a better life? I think the answer is a no-brainer (unless of course the answer is from a no-brainer communist), “Yes, better that someone creates wealth and takes a chunk of it if it means that lots of people will also grow rich, than the alternative.”

[This blog has a lot of posts on cities and urbanization. You can see the whole category on "Cities and Urbanization", or you can see the following selected posts:

2. India Needs Cities.]

The meeting was chaired by Renuka Vishwanathan, Secretary, Mininstry of Rural Development. Largely the meeting was attended by secretaries from various state governments such as Chattisgarh and Orrisa. There were a couple of people from President Kalam’s office; Dr PV Indiresan, the architect of PURA; Dr PS Rana, Chairman and MD of HUDCO (Housing and Urban Development Corporation); a couple of people from the Council of Indian Industries (CII); and a few others.

The meeting began with an extended introduction by Ms Vishwanathan. She was interested in figuring out the cost of PURA and how she could justify that cost. She stressed that there are various governmental bureaucracies with their existing funding which are already working on all the various components of rural development. What is it that PURA proposes to do which is not being already done?

As the meeting progressed, I realized that what PURA was going to do was to add another complex bureaucratic organization to the already massive one. If bureaucracy was what helped development, India should have been the most developed economy in the history of the universe. If upliftment of villages was what is needed for rural development, surely the rural population would be thriving considering that for decades, village upliftment has been at the core of all public policy.

When after the introductory remarks Ms Vishwanathan requested my opinion, I made my usual point. I asked them to consider the question: Is rural development about the development of villages or is it about the development of the rural population? There is a distinction which we neglect with sad consequences.

A “developed village” is one which does not lack water, electricity, housing, sanitation, telecommunications, good road/rail connectivity, employment opportunities in agricultural and non-agricultural activities, schools, entertainment, medical and health care facilities, well-developed functioning markets, recreation facilities, government services, and a few other things.

To make a village “developed” you need, among other things, money. If money were no object, you can have a developed village in short order. And if you had sufficient money, it would be pretty easy to develop India’s 600,000 villages. Let’s remember that India has more than half a million villages with an average population of 1000 people. Each village can be developed (as defined above) at a conservative cost of Rs 100 crores (or about US$22 million). The per capita cost of developing a village is a modest Rs 10 laks (or US$ 22,000). For 600,000 villages to be developed, you need only about Rs 600,00,000 crores (or US$ 13,200,000,000,000, or $13.2 trillion).

India’s annual GDP is around $600 billion. So $13.2 trillion is about 20 years’ worth of India’s production would have to be fully invested in India’s villages for the villages to be developed. The resources required to do village level development at a modest Rs 100 crores per village is of the order of the annual gross national product of the US.

A bit of arithmetic is all it takes for us to realize that the idea of developing 600,000 villages is nonsense. (Those who refuse to do arithmetic are doomed to speak nonsense.)

Sure, one can quibble with the figures: use Rs 10 crores instead of Rs 100 crores per village. You still end up with US$ 1,300 billion as the cost of making the rural population developed through “village-level” development. When you are talking about trillions of dollars, we just don’t have it.

Why is village-level development so expensive? I call it the “too many, too little” problem. Villages are unable to take advantage of certain economies because they are too many of them and they are too little. They thus cannot gain from agglomeration economies, and economies of scale and scope.

Cities exist because of the density of aggregation is high and this reduces the cost of providing services and infrastructure and the cost of engaging in any economic activity (transaction costs). The presence of lower cost services and infrastruture in cities is made possible by economies of scale and scope. The availability of low cost infrastructure and services coupled with lowered transaction costs makes the population more productive. That is why economic development is both a cause and consequence of urbanization (the dense aggregation of people in cities): you cannot have one without the other.

For India to be developed, India has to be an urban economy. By that I mean, the majority of India’s population — say, 80 percent — has to be in cities and towns, instead of the current only 30 percent. In other words, if you were to look at a developed India somewhere in the future, you would see that India does not have 600,000 small villages any more. Aggregations of 1,000 people (which is what an average Indian village is) is just not consistent with a developed economy. What 600,000 tiny villages is consistent with is dire poverty and which is what we have.

If 600,000 villages is not what we will eventually have (if ever the 70 percent of the Indian population have to move out of poverty), then there is little point in doing village-level development. It makes no sense to behave as if forever rural India will continue to be 600,000 villages. And that is precisely what the government in its myopia is doing. It is attempting to take very very limited resources (orders of magnitude smaller than the required trillions of dollars) and spread it on the “development” of 600,000 villages.

The point I attempted to make at the meeting was that we should be focusing on the development of the rural population and NOT the development of villages. As long as one insists on keeping the rural population in tiny villages, one is dooming them to poverty.

The fatal flaw of PURA is that its object of interest is the village. My model — RISC — avoids developing villages like the plague.

Now back to the meeting. It is possible that resources will be allocated, another layer of bureaucracy will be added, more meetings and reports generated, and the same old cycle of useless spending undertaken. Or maybe the whole exercise will get entangled in bureaucratic red-tape and nothing much will happen and only a little bit of resources wasted.

In the meanwhile, I have hope that other people, working on their own initiative and with a vision of what the future can be, will take India forward. One such person is the chairman of HUDCO, Dr PS Rana. I met with him briefly the next day and I will write about it the next time.

Rural India needs affordable services – from education to market access, from telecom to healthcare, from financial intermediation to entertainment. The key issue in rural India is the non-availability of services at affordable prices. Linked to this is the lack of perceived opportunities in rural areas. These twin factors create a situation in which few want to do business in rural India.

It also leads to the exodus of people from rural areas to urban slums, which stretch the resources in the cities and towns even further. In other words, rural India is caught in a trap that it seems difficult to get out of.

… What Dey and Khosla propose is the creation of 5,000 rural hubs across India, each catering to a population of about 100,000 or about 100 villages, such that the hub is no more than a “bicycle-commute” distance away for people in the villages. These hubs will have about 10,000 square feet, built at a cost of about Rs 2 crore each. They will have state-of-the-art infrastructure – including 24×7 electricity, broadband connectivity, security and sanitation.

This standardised infrastructure reduces the costs of operation for service providers in rural India. From the point of view of the rural populace, there is one place where it can get multiple services – services which were hitherto not available or too expensive.

The RDLC could do for rural India what the institution of Land Grant Colleges and Universities, the Morrill Act of 1862, did for rural US. (Incidentally the act was signed by my favorite American president — Lincoln.) The act donated public lands to the states to provide colleges for the benefit of rural US.

The idea was to remove education from being the sole preserve of the privileged and fortunate elite and ‘democratize’ it by bringing it to the children of farmers, mechanics, and laborers. The goal was the application of knowledge to issues relevant to farms, households, and factories. (I am an alumnus of the University of California system which is also a land-grant school, incidentally.)

Thus the land-grant universities were formed with the charter to teach, conduct agricultural research, and most importantly to provide extension services. The sons and daughters of rural America had access to education. Though it was initially thought that the kids would go back to the farm, farm productivity increases precluded that. But that was no tragedy: the urbanization of America was achieved by these educated sons and daughters of rural US — they provided the human resource needed for the US to move from an agrarian society to an industrial society.

Now consider the Indian situation. The urbanization of India is not taking place because the rural population does not have access to education. Thus when forced to move, they migrate to urban India to be employed at menial jobs and live in mega slums. This has got to change if India is to develop. No amount of BPO and ITES is going to cut it: the only hope is to educate the rural population and do so efficiently and with no loss of time. IT has the potential to do just that: bring education to the hundreds of millions in rural India.

Those who refuse to do arithmetic are doomed to speak nonsense.

Over the years I have seen too many instances of errant nonsense that a little bit of arithmetic would have prevented. I think that the power of arithmetic is not fully appreciated. Even people in very powerful positions utter complete nonsense when they refuse to do simple calculations.

In the recent workshop that I was at, I had presented our model we call RISC (Rural Infrastructure & Services Commons). The model is based on the recognition that the provision of infrastructure is a necessary precondition for services that are necessary for rural development. Infrastructure investment is ‘lumpy.’ You have to have at least a certain minimum amount of investment before it is of any use to anybody.

Since there is a minimum scale below which infrastructural investment is not viable, and since total investment is limited, providing infrastructure to every of the 600,000 Indian villages is not an efficient option. Therefore, RISC recommends that infrastructure investments be made in locations that are accessible by a large number of villages to start off with. Later, as economic conditions improve, village level development of infrastructure would make more sense. This, of course, implies that the facilities will not be immediately accessible to everyone. Some will incur a travel cost. Moreover, the travel cost will be relatively greater on women than on men considering that men are more inclined to travel the 10 kms or so the average facility may be located.

One participant objected to the model based on the differential travel cost. She held that the solution is that every village should have all facilities. Here is where we need to do some arithmetic. Add up all resources for infrastructure investemnt at our disposal. Divide that by 600,000 and you have quantity x, the available resource per village. Find out the investment cost of the minimum viable unit of infrastructure and call it y. Now compute the ratio y over x and call that number z. If z is equal to or less than 1, we can provide every village with the required infrastructure base. Otherwise, we need to invest y resources in a central location that z villages will have to share.

It is true that women would be at a disadvantage relative to men when it comes to travel. But then the answer is not that infrastructure resources should be squandered based on gender equity considerations but rather that women should be assisted in some way so that they overcome their mobility issues. (It is always more practical for Mohammed to go to the mountain than for the mountain to come to Mohammed.)

Let’s do arithmetic and persuade others to do some arithmetic as well.