Note “reduce barriers to business and clean up corruption.” Reduce business barriers? OK, the government erects them; only it can remove them. But it does not have an incentive to do so because those in power actually gain from them while the country loses. The story is the same with corruption. Sure the average smalltime crook is into corruption. But for massive multi-tens-of-thousands of crores corruption, you have to be in government. The high level corruption eventually trickles down and gives support to the petty corruption that the average person encounters daily.

I think a reasonable case can be made that the biggest enemy of India is the government of India. It began with the British, and the job was eagerly taken over by FNehru, and from then on, with only a short few breaks, the FNehru clan has presided over the destruction.

I repeat that here because it bears repeating: The Indian government is the greatest barrier to India’s development.

I am quite sure that this realization is not novel and certainly I am not unique in having it. Scores of able observers before yours truly have noted it. The great Milton Friedman is one of them. In a talk he gave in India in 1963 — nearly half a century ago — he said:

[Westerners] think in terms of the large, modern corporation, of General Motors, Genera Electric, and other industrial giants. But it was not firms like this that produced the Industrial revolution; they are, if anything, its end products. The hope for India lies not in the exceptional Tatas or similar giants, but precisely in the hole-in-the wall firm, in the small and medium size enterprises, in Ludhiana not Jamshedpur; in the millions of small entrepreneurs who line the streets of every city with their sometimes miniscule shops and workshops. If the tendencies so evident in Ludhiana could be given full rein, and not hampered and hindered in every direction by governmental interference and control, India could achieve a rate of growth that would exceed today’s fondest hopes.

As this final remark suggests, the correct explanation for India’s slow growth is in my view not to be found in its religious or social attitudes, or in the quality of its people, but rather in the economic policy that India has adopted; most especially in the extensive use of detailed physical controls by government. {Emphasis added.}

Nearly half a century later, the government still exerts its baleful control over the economy. Why does the Indian government use “detailed physical controls” that are evidently so damaging to India? Because that’s the way to expropriate part of the wealth the economy produces. It engineers shortages by controlling the supply. Shortages raise prices significantly above costs which end up as profits for the controllers. This is typical monopolistic behavior.

The higher the degree of control, the greater the profits. The greater the profits, the greater is the incentive to become the controller. If being the controller affords, say, $10 billion in profits, then it is worth spending a few billion to become the controller. Also, since these profits can only be had if one is criminally dishonest, it stands to reason that it will attract the most corrupt and indeed that in the competition for control, the most criminally corrupt will emerge victorious.

So here’s the whole sordid story in outline. Certain misguided ignorant people (who need not be named here) got control of the government when the British let go of their control. The new bunch was led by one particular guy who is notable for his hubris (that he knew what’s best for everyone in every sphere) and his ignorance of his own incomprehension of how an economy works. Between the father who commanded unquestioned obedience and the uncle who thought he knew it all, India was screwed.

Hubris and ignorance among the powerful is a potently destructive mix and a sure recipe for disaster. The outcome is the disaster we see today. They set up the command-control-license-permit-quota raj. It is the best way known to humanity to retard economic development.

But what’s worse is that it set up the conditions for attracting criminals to politics. Mid last century, the degree of corruption in Indian politics was high but compared to what is the norm today, it was as if the politicians of the past were veritable saints.

It’s a downward spiral. Reports of corruption in the tune of billions of dollars have lost their power to shock and surprise. At the highest levels of the government there are criminals, and the general public just takes it as business as usual. Fact is that most people are totally unaware that those billion-dollar corruption deals affect their wellbeing, and theft of public money is coming right out of their pockets.

There is a significant middle-class educated population which is capable of actually comprehending the connection between the corruption and government control. But having the capacity to comprehend is not the same as actually comprehending. Trouble is that they have not had this connection actually explained to them. The education system does not clue them in. Then of course they are too distracted by bread and circuses (or pizza and cricket, if you please) to figure it out. But even if some of them have figured it out, they are a minority and worse still, a minority that does not bother to express its outrage.

The story becomes even more dismal when you consider what the criminals do to remain in power. They tax the productive sector of the economy and hand out largess to the unproductive sector in exchange for their votes. As the saying goes, robbing from Peter to pay Paul will always ensures Paul’s support.

To summarize: Control of the economy does two things. First, it reduces economic activity and consequently growth. Second, it gives rise to rent, which then attracts the most criminally corrupt to gain control of the government. Rent-seeking rather than good governance becomes the sole aim of those in government. The criminally corrupt are not competent to make good policy given that it was not their public policy brilliance that brought them to power. Besides, good policy generally entails a reduction in government power and control of the economy. So why would they do it even if they were advised by others who know better.

This does not have to be a counsel of despair. The reason I keep harping on this is because I believe that comprehension precedes positive change. We must first admit that there is a problem, then we have to understand the causes of the problem, then we have to figure out how to address those causes, and then do what is required.

To my mind, we have to reach, teach and breach. Reach those good citizens who are fed up of the rot, teach them the causes of the rot, and together breach the bulwark behind which the criminals govern India.

Related Posts:

The Congested-Shortage Economy. April 2010.

Manufactured Shortages and Corruption. June 2006.

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.]

In the following, I will present the features of a rational “IT Policy” and argue why it makes sense. This is only an academic exercise as this is not likely to be followed by the policymakers of India. Color me cynical but if Indian policymakers were in the habit of making rational policies, India would not be a desperately poor country, would it? Why India gets saddled with moth eaten policies made by inept policymakers is a different matter that we will save for a rainy day. But first, let’s talk IT and what it is.

Information technology (IT) – like most other technologies – provides tools and ultimately it is valued for utilitarian purposes. One generally does not care for the technology so much as care for what it allows one to do. All tools are merely means and are not ends. Technology tools are not terminal values, so to speak. Neither is possessing tools a good thing merely because it is a nifty tool and is of no utility. Confusing means and ends is not very clever but people frequently do it with predictably negative outcomes.

There is something special about information technology that it immediately attracts the worst sort of confused thinking. Food growing and processing technology, just to take a random example, is extremely valuable for feeding the starving billions. Yet it does not attract the sort of attention that information technology does. The reason could be that food processing technology is generally hidden behind factory walls and the shelves full of food in supermarkets and grocery stores don’t immediately bring to mind the fact that technology was intimately involved in the process. That technology is not visible.

IT technology is very visible. Computers, mobile phones, music players, cameras – a whole range of gizmos with bells and whistles are plainly evident. Not just that, they are what rich people have. Rich people living in rich countries have plenty of IT goodies. From there, it is only short hop skip and jump to the illogical conclusion that if one had IT goodies, one would be rich. It’s like saying, “Rich people drive around in BMWs. Poverty stricken people don’t drive around in BMWs. So if we gave every poverty stricken family a BMW, poverty will be eradicated.”

Actually that BMW example is ridiculous but not any more ridiculous than attempting to help the abjectly poor – so poor that they don’t have a clean drinking water, no sanitation, no health care, no education, and cannot afford to feed their children – by giving them access to last-mile 2 mbps broadband access, laptop computers, smart phones, and a digital identity card.

Let me repeat the implicit argument that propels the sort of IT policy such as the BJP recently declared. It goes like this: “Advanced industrialized countries use a lot of IT tools. If we gave the very poor these tools, our economy will become an advanced industrialized country.”
They confuse cause with consequence. Only after a sufficient amount of development has taken place can IT tools be developed and subsequently used. Below a certain threshold of development, IT tools are pretty worthless. Beyond that threshold, IT tools can accelerate development and are indispensible.

Let’s review what the development experience of the currently advanced industrialized countries has been. They were at one point about a century ago as poor and underdeveloped as many part of present day India. They did not have access to IT, just like most of present day India. Not only did they develop from that low level, they eventually developed the IT tools. Martians did not descend from flying saucers and hand over the technology to them.

That last point needs emphasizing. The economy co-evolved with the technology that it developed. There was co-development: the technology developed together with the human resources required to use that technology. It is a question of balance. And the balance is between the ability of the population to use the tools of IT on the one hand (the demand side) and the development of those tools (the supply side.)

To elaborate just a bit further, they learned how to read and do arithmetic before they started using word processors and spread sheets. If they had been given Word and Excel by a Martian Bill Gates as a present before they knew how to develop these programs or even before they became literate and numerate, it would have been as useful as presenting a bicycle to a fish.

Sequencing matters. One has to learn how to read and write before attempting to do learn quantum mechanics.

This concludes the preamble to the IT policy document which I will release in the public interest. As a big supporter of free and open source content, I offer it for the political parties of India to adopt. There is of course no danger of any party actually taking it because firstly they are not that smart and secondly, this policy would actually help educate the population – which is the last thing these parties want as it will signal their exit from the matter of governing.

So there.

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.

The two broadest generalizations one arrives at from a study of economics are that markets work and that incentives matter. People respond to incentives because that is at the core of what it means to be rational. To the extent that humans are rational, their behavior is predictably in the direction that existing incentives point to. Trade between humans is rational because both parties in any voluntary trade benefit. The abstract mechanism which enables trade is called the market. Markets work in the sense that they maximize the gains from trade among an arbitrary number of entities. There are other methods of enforcing trade among people, such as the command and control mechanism often employed by communist governments. But they are at a distinct disadvantage relative to the market because the latter is based on the premise that rational actors respond to incentives.

An Example

An illustration of markets working and incentives propelling action is contained in a recent paper by Vivek Wadhwa of Duke University, et al, provocatively titled “How the disciple became the guru“. Based on the paper, Wadhwa wrote a couple of pieces in the popular press, published on 23rd July: the BusinessWeek article is “What the US can learn from Indian R&D“, and the Wall Street Journal one is “India’s Workforce Revolution“.

The authors note that in the past 15 years or so, Indian IT companies have developed competencies by learning how to compensate for poor infrastructure. Now Indian companies, not just in IT but also in global R&D, are doing well and are compensating for another major deficiency in India: India’s education system. In the popular press articles (both are essentially the same), Wadhwa reports that Indian companies are, in essence, educating their employees in-house. Workforce training is being used by Indian companies to correct for the failure of Indian high-schools and colleges in providing properly skilled graduates.

Wadhwa’s Lessons

Wadhwa, writing from an US point of view, draws lessons from the success of Indian firms despite being severely handicapped by the quality of the Indian education system and concludes his BusinessWeek piece with:

The achievements of companies in India show that employee investment, development, and empowerment are central and critical means to building and sustaining long-term competitiveness and innovative capacities in a global knowledge economy. The U.S. can learn and incorporate these lessons from India as it rethinks how to train and develop its workforce to maintain its global competitive edge. U.S. companies have long played the guru. Perhaps the time has come for the guru to learn from a disciple.

Wadhwa concludes his WSJ piece with:

The result of this workforce productivity is clear to see. In the aerospace industry, Indian companies are designing the interiors of luxury jets, in-flight entertainment systems, and collision-control and navigation systems for American and European corporations. In pharmaceuticals, Indian scientists are discovering drugs and performing clinical research for nearly all of the largest multinational drug companies. In the automotive industry, Indian engineers are helping to design bodies, dashboards, and power trains for Detroit vehicle manufacturers — and soon may develop entirely outsourced passenger cars.

The Indian experience highlights what can be achieved by investing in upgrading workforce skills. That lesson has implications for policy makers in the U.S. who worry about how the economy will adapt to globalization. If workforce training can take the output of an education system as weak as India’s and turn its graduates into world-class engineers and scientists, imagine what could be done with an American worker base that has received amongst the best education in the world.

Lessons for us

There are larger lessons we can take away from the paper and the associated reports. The first and the most obvious one is that incentives matter. The firms have an incentive — profit — to create the human resources that they need. It is profitable for them to invest in the training of people and do so cost effectively and efficiently. The training they do has to pass the market test of the benefits exceeding the costs. The corollary to it is that in their drive to seek profits, they are increasing the human capital of the society and therefore are contributing directly to economic development and growth. The corporations are obviously promoting the social good even though that is not their aim. Adam Smith’s invisible hand very much in evidence there.

The second lesson is that markets find a way around. The educational system is under a command and control regime and produces not surprisingly very faulty products. Yet the market given sufficient time figures out a way of recovering from the error the government system leads to.

The third lesson is that the private sector has the ability and the incentive to intervene positively in education. If allowed to, it can not only employ people but it can make them employable. This limited demonstration has a wider implication. Right now, only at the high end of the employment spectrum are firms engaged in creating the human resources they need. But there is only so much demand for high-tech research and development as in aerospace, pharma, automotive design, etc. There is a much larger untouched potential for employment in more mundane sectors of the economy.

Not everyone can be trained to do high-tech work. An economy not only needs a wide spread of abilities and skills, any large population has people with a matching wide range of abilities and who have to be trained appropriately. There’s a need for plumbers, mechanics, carpenters, other skilled craftspeople, and as there is a need for scientists, doctors, engineers, and teachers. Just as in the high-tech sectors firms where training is demand driven, in the other sectors as well one can reasonably expect firms will do their respective training provided that these skills are required in the organized sector.

That last clause — skills required in the organized sector — is important. The organized sector of the Indian economy is estimated to employ only around seven percent of the labor force. The overwhelming majority of the labor force in the unorganized sector is most likely not skilled and is probably poorly educated. Consequently their productivity is low. As the organized sector expands to include more activities within its sphere (retailing is a good example), it too will require trained employees. Here one can foresee the private sector once again stepping in to fill the required gap in the education sector.

As the spread of skills required widens, the private sector will widen the areas in which they do their own private training. The expansion of the organized sector, a natural consequence of market forces, will force a change in the human capital resource base.

Policy Implications

For me, the implications are simple and strong. First, liberalization of the education system. The private sector is quite capable of providing tertiary education. Tertiary education has very high private returns and therefore the market can be expected to provide it. Here’s how it works in short. Take an engineering degree, for example. The cost of the degree has to be less than the net present value of the future stream of earnings. If it were not so, then it is clearly not privately beneficial (nor socially beneficial) to gain the degree. Therefore if one desires and has the ability to gain an engineering degree, one should be able to pay for it as well, unless there is a credit constraint. If there is a credit constraint, then once again the private sector can step in and provide the loan.

What about secondary education? The middle class (and above) is quite motivated to educate its children, and also has the ability to pay for secondary education. Only the poor need financial assistance for secondary education. This can be publicly funded as the returns to secondary education are significantly social.

And what about primary education? The returns to primary education are mostly social and the return on investment is long term. Therefore, primary education has to be entirely publicly funded for the poor; the non-poor can and do pay for primary education.

If the government withdraws from funding tertiary education entirely, it will have funds for the public funding of primary and secondary education for those who require it. Here I would stress one thing: I am talking about government funding, not government provisioning. Providing the education should still be in the private sector. (See the post “How to make India 100 percent literate in three years” for more on this.)

Second policy implication is that there should be greater range of educational institutions. After secondary school, one should have the option of going to a four-year degree college or to going to a two-year “junior college” (the equivalent of a community college in the US.) The junior colleges can be the equivalent of vocational education institutions. These can teach freshly minted high school graduates or even people who want to update or learn some new skills.

The Market Driven Future

If I were to put on my predict-the-future hat, this is what I believe is going to happen. The private sector, driven by sheer necessity, is more or less on track to enter the tertiary education business. This it is doing in a disguised way, as reported in the Wadhwa paper. It is making the best of a bad situation. It would have been much better if India did have a good tertiary education system. But there are limits to how long this disguised education will go on. I strongly suspect that the private sector will eventually twist the arms of the government and force the liberalization of the education system. It is in their interest to see that the people they hire are as whole as possible–it is better to not have to fix damaged goods, so to speak.

The second change I see is the growth of junior colleges, or as I like to call them, “Advanced Basic College” or ABCs. It would take a person about 2 years after high school to become good at some vocation. The graduates of these ABCs will be younger than the graduates of current 4-year colleges and will be better prepared to enter the workforce. These ABCs will be privately owned and will turn a hefty profit. I also believe that they will use information and communications technologies rather intensively for training.

With the LAFIA Delegation

Last month I spent a week in Delhi and Chennai with a delegation from Australia on a program called “Leading Australia’s Future in Asia-Pacific” or LAFIA. It was comprised of senior government officials from Australia and NZ. LAFIA is a joint program run by the Australian National University and the Australian Public Service Commission which visits a set of countries each year to get an in-depth understanding. This year it was Singapore, India and Thailand. I got the opportunity to present my views of where I thought India was headed (and also got to meet and hear some interesting people across a wide spectrum of activities.)

Discussing India with LAFIA delegates was an intensely learning experience. It helped me figure out how I feel about India and it revealed to me what I knew subconsciously but that I had never articulated. What I figured out is this: that India is going to succeed. And that the success is going to be driven by the people of India — through the private sector. Remember that the private sector is made up of people, just like the public sector. It is the people of India with their entrepreneurial skills and their desire to do well that will end up with India doing well.

What I finally realized was that the government could have been a force for good but it isn’t and we have to live with it. The education sector is government controlled and it is bad. But eventually, at significant cost, that system will be made irrelevant. It will become irrelevant because it cannot be reformed. It cannot be reformed because the government won’t allow reform.

It has been observed by many that China’s growth is top-down, or government driven. India’s growth, to the extent that the government has allowed it to grow, has been enterprise and entrepreneur driven, or in other words people driven.

I suppose it was nationalistic pride in me when I was talking to the Australians that made me come to the defense of India. It was not they were attacking India; on the contrary, Prof MacIntyre of ANU who was leading the group, had observed India over a number of years and had been remarking on the positive trends that he saw. He was clearly optimistic. It was that I felt that I had to somehow give a more positive image of India than what was evident to the delegation — the inefficiency, the senseless bureaucracy, the evident poverty and crowding.

In Conclusion: India will be Free

In my concluding statements I told them that India is not really a lost cause because the people are becoming aware of their potential and that they are struggling to get free from the clutches of the government. The quest for freedom is an exponential process. The nature of exponential processes is such that eventually growth is rapid even though the initial changes are not that perceptible. The people through the private sector, as the main driving force behind the private sector, will overcome the limitations that are currently imposed by the government, and eventually overthrow the government where appropriate and make the government irrelevant in others. This can and will happen with a speed that will astonish.

That India of the Nehru rate of growth — 2 percent a year — is a thing of the past.

I read in Wadhwa’s paper a clear indication of what is to come. The story he told was meant for the Americans. He told them that they don’t have to worry too much about the US losing competitiveness as long as its corporations learn to train their workforce more effectively. The story that I took away from his paper is that what Indian corporations are doing in learning best practices from abroad and training their employees is just the thin edge of the wedge. Soon enough it will transform the Indian education system. India would have achieved freedom finally from a rapacious government.

It’s about time, don’t you think so?

He states the standard view explaining the rapid growth of the two countries:

What explains this strikingly rapid growth? The answer that continues to dominate public discussion in the United States runs along the following lines: decades of socialist controls and regulations stifled enterprise in India and China and led them to a dead end. A mix of market reforms and global integration finally unleashed their entrepreneurial energies. As these giants shook off their “socialist slumber,” they entered the “flattened” playing field of global capitalism. The result has been high economic growth in both countries and correspondingly large declines in poverty.

Then he proceeds to demonstrate why that explanation is incomplete at best and provides a more nuanced and comprehensive explanation which touches on matters that are often neglected in the narrative explaining the growth miracles. For instance:

Start with the claim that global integration and associated market reforms resulted in high growth, which in turn produced dramatic declines in extreme poverty. Applied to China, the timing simply does not fit. China has indeed made large strides in foreign trade and investment since the 1990s, but well before then, say between 1978 and 1993, the country had already achieved an average annual growth rate of about nine percent—even higher than the impressive seven percent growth rate in East Asia between 1960 and 1980.

It is a very well-reasoned article and must be read in full. Let me close with the concluding paragraph of the piece.

Chinese and Indian economic performance has been far better in the last quarter-century than in the previous two hundred years—and this is one of the striking events in the recent history of the international economy. Other countries must adjust to this reality, and learn to treat the partial restoration of the earlier global importance of these two countries as an opportunity for trade, investment, and exchange of ideas, not as a threat. (We also need to work in tandem with them on the environment.) But we must remember that the story of their rise is more complicated and nuanced than standard accounts make out. That more complex story includes the positive legacy of China and India’s earlier statist periods, which offers general lessons for the process of development much too often ignored.

Everything I know about international trade, I learnt from his lectures. He is matchless in his ability in making difficult concept accessible. It is always a pleasure to listen to him and learn. I spent some time in conversation with him last month in Berkeley. The transcript of the entire conversation I will post later. For now, here is a brief write up.

Walking around the Indian Elephant

Much disagreement in economic policy debates, as in many other debates, can be avoided by the simple expedient of continuing to walk around the elephant. An elephant is a package deal and must be examined from various angles for a fuller comprehension. Matters such as economic growth, inequality, reform, liberalization, privatization and globalization, often end up entangled in semantic differences that can be resolved through a more comprehensive understanding of what they mean.

Economic reform has to be a package deal and furthermore it has to be understood to be so. That’s what Pranab Bardhan, professor of economics at UC Berkeley, said in a recent conversation I had with him. Although considerable progress has been made over the last 20 years in liberalization, particularly deregulation, further progress depends on gaining the support of the general population for reforms. Studies have revealed an overwhelming majority of people oppose reform. According to Bardhan this is because the reforms do not address the anxieties of the general population.

The average Indian is not affected directly by reforms such as in taxation, finance, and international trade. Reform would be more meaningful to them if they understood reform to be not just cutting the size of the government but also the improvement of the quality of governance. Leaders who favor reform have to explain that reforms can directly help the poor and reduce poverty. The poor care more about reforms in institutions such as the police, judiciary, and the bureaucracy because it affects their day to day living.

Bardhan stresses that the government has an important role for the poor. “Social service delivery, education, health, child nutrition, drinking water, irrigation water – all these services, the government has to be involved. That is the role of the government, to provide public goods and services. The problem is the government is in too many things in India and does most things badly. So its role has to be reduced in some areas but in others, it has to more effectively deliver those services.”

Bardhan believes that it is the power of the labor unions in the public sector that hinders privatization to an extent. The richer the industry, the more powerful the unions; they try to get a share of the rents the industry earns. This is in itself not a bad thing but for the fact that 93 percent of Indian labor is in the informal sector. And even in the small organized labor sector, one has to address what he calls the “social vertigo” that labor faces. It arises from the anxiety that if they lose the job, there is no comprehensive social safety net for them. The strategy should be that together with labor law reform, to gradually introduce a safety net for the organized sector at least so that opposition to reform can be defused.

Does liberalization explain the current Indian growth rates? Certainly in the corporate sector, de-licensing and deregulation have played important invigorating roles by unleashing energies that were controlled before. But it is hard to explain why the services sector is the leading sector in India, unlike say in China where manufacturing is the leading sector. Since two-thirds of the services is in the informal sector, they have to be below the reform policy radar. Bardhan while advancing some tentative hypotheses remains puzzled by it.

The growth of inequality is a matter of concern for him. If the majority does not see gains from high growth, then the reforms and consequent high growth rates will not be sustainable. Only if the reforms are communicated to the poor as being part of a package that will help them, will the political opposition to the reforms be contained.

On the liberalization of the education sector, a matter very critical to India’s growth and development, Bardhan was clear that the government should be involved with the funding of lower level education but should not necessarily be involved with the provisioning. But the government must entirely exit from the business of tertiary education. Currently higher education suffers from lack of autonomy and too much interference from the government. But the teachers’ unions are firmly against the reduction in the involvement of the government.

Bardhan is cautiously optimistic about the Indian economy. He feels that ten percent growth is not sustainable though perhaps seven percent could be. But rather than gross growth rates, what interests him is the rate at which the bottom half of the population is growing economically. Even if that section were growing at five or six percent, it would be acceptable. However, it is not and that is so because the bottom half is largely in agriculture which unfortunately is a declining sector. Rural industrialization could raise the income growth rate of the rural population.

The fact is that rural infrastructure – roads, power, irrigation – are declining. What is needed is massive public and private investments in them, and better governance in managing the infrastructure.

For Bardhan, reforms have to be comprehensive package for them to be effective. For them to be politically feasible, the general public has to know which parts of the reforms directly affect them positively. Most importantly, the reforms have to result in efficient social service delivery because that is what matters to the common person. For me, since the Indian economy is metaphorically seen as an elephant, it makes sense to continue to walking around it to fully understand what it is.