Atanu Dey On India's Development

The Plough and the Keyboard

[In the days before the Internet bust, an article triumphantly declared that “Indian entrepreneurs crowd world of IT start-ups” This provoked some chest-thumping on the usenet group soc.culture.indian. Some joined in with the claim that since Indians invented the zero, it was only natural that Indians are so good at software. That led to the claim that India is an IT Superpower. I get a bit impatient with all these claims. So I wrote a follow up.]

First about the start-ups: sure, some start-ups are started by Indians. So what? Start-ups are a small part of a much larger high-tech industry which is a small part of a even larger CA state economy which is a small part of a greater US economy which is a small (although significant) part of a bigger world economy. So the fact that some Indians have started companies is as significant as the dimple on the left cheek of an ant on a mole hill. In other words, as far as India or the world at large is concerned, who started what does not amount to squat. It is irrelevant noise and is totally lost in the rounding errors of numbers that matter.

Indians are no better nor any worse than any other kind of people. Intrinsically, Indians have the same sort of population distribution as any other large population. What really distinguishes Indians is that India is a extremely poor country in terms of per capita GDP. While GDP is not a complete picture of society, it is a useful (though imperfect) indicator of the economic success of the society. Given that India is a failure (so far) in the competition for world resources, it is a matter of some shame for all thinking Indians.

Whatever be the proximate causes of this failure, the ultimate cause has to be rooted in the collective intelligence and will of the Indian social structure. Suffice it to say, irrespective of whatever glorious achievements of Indians as individuals over the millennia, as a collective it is an unmitigated disaster. And I say this as an Indian to the core and I am as loyal to my motherland as much as the next guy.

So now to zero: whether zero was the greatest invention in the history of humanity, whether it is the ultimate cause of the existence of computers today — all as irrelevant as the debate about how many angels can dance on the head of a pin. The answer has no practical or theoretical implications. It will not matter one bit to a person who is starving today that someone sometime hundreds of years ago invented zero.

What matters is the here and now. Right now Indians have a lot to be ashamed about and we would be better served if we concentrate on fixing our house before we undertake the design of other people’s mansions. To put it more crudely, we better wipe our butts before we ask the other guys to wipe their noses.

In a globalized world economy, the old adage about hanging together or else hanging separately applies with renewed urgency. The US needs India as much as India needs the US, if not more. The last statement can be defended on strictly economic welfare grounds.

So what does matter, you may ask?

Recall the invisible hand that Adam Smith discovered in a competitive market economy promoting social welfare even though each individual in it does not work for altruistic reasons. The converse of that (the visible heel, perhaps) is the actions of a handful of mega-multi-national-corporations that form the military-industrial complex that run the global political arena in which the market is just another useful tool to manipulate the contended masses at one end and to exploit the immense pool of extremely poor people around the world at the other end.That is what matters, not the piss-ant internet startups, nor who invented the zero. What matters is the hijacking of the marketplace for the greed of a handful of giants — they own the politicians that make the laws that rule the people. And the people feel that they have a choice in electing their representatives. Laughable idea if it were not so tragic in its implications. What matters is the cancerous growth of governments that cater to the interests of the corporations to which they are beholden.

That’s been an unusual, sincere, and honest post. I wish there were more posts of this kind.

Thank you. The fact is that good wholesome ignorance leads to a great deal of attitude which appears to be malicious but in truth it isn’t. Both sides of this pathetic debate seems to oblivious to the larger issues that could undermine the potential gain from cooperative behaviour.

THE DEVELOPMENT PATH OF ECONOMIES

The software industry is labor intensive and India has a comparative advantage in labor intensive sectors, whether it be software or handicrafts. In a country of a billion people, about 100 million are urban and literate. Taking a conservative labor participation of about 30% (there are children, women who don’t work outside the home, and elderly), gives you a total population of 30 million people who are college educated and can compete in the global marketplace for software labor.

Since only the most motivated and the most well-educated of these make it to the US, it is no wonder that they are above the average of the larger more broad-based local population. Taking the successes of this biased sample of selected Indians and generalizing it to the whole of India is patently foolish. Sure some Indians have lots of money, sure the software industry is growing. But per capita software earnings of India amounts to about $2 a year. Even if the software earnings were to become 10 times overnight (which is unlikely) it would be about $20 per capita per year. Hardly a figure to write home about.

Time for a simple development economics lesson. Countries, especially large countries such as the US and India, follow a very predictable development path: from agriculture, to manufacturing, to service, and finally to information technology. Large countries cannot jump any of these intermediate stages any more than an elephant can fly across a creek. Small countries are more nimble on their feet and can skip across sometimes.

So India which is a country 70% of whose population is agricultural cannot become an information technology superpower however pretty a song you sing about the internet and the world wide web. India has to have a nuts-and-bolt manufacturing base which can only exist if labor moves from agriculture to industry. Then with increased productivity of manufacturing, incomes rise and therefore consumption of services rise relative to basic consumption and so the economy moves to a service economy.

To cut a long story short, all this hype about India and software is a lot of horse doodoo if India cannot improve agricultural productivity followed by industrial productivity. * But that is another sordid story which involves the license-permit-quota-raj, the brown sahibs that inherited India as their personal fiefdom, the corruption of the Nehru-Gandhi family and their cohorts, the sham democracy that they instituted — enough to turn the strongest stomachs.

Dear Atanu, can you please explain why countries have to go through the manufacturing stage before getting to the service economy?

I have a related question – how does a service economy compete against a manufacturing economy? The example before us, the US (service economy) vs China (manufacturing) seems to show that very quickly the service economy suffers great balance of payment deficits. It is not clear to me how the service economy is sustainable. * Thanks,
RS

Why an agricultural base is absolutely essential.

Raghu, imagine a large economy such as the US. Without going into the numbers (for the simple reason that I don’t have them handy) we can safely say that international trade forms a very small part of it, something of the order of single-digit percentage points. That means that most of what the economy consumes is produced within the economy — agricultural, manufactures, services — nearly all of it is domestically produced and consumed.

A large economy when it starts off on its developmental trajectory, it is largely agricultural. Say 80% of the labor force is engaged in producing food and only 20% in manufacture and services. (It helps to consider the whole world as a large economy.)

This economy has little surplus food and therefore can only support a small service sector. Services, after all, are a sort of a luxury good. When you are poor, you don’t get fancy haircuts, don’t go to too many concerts, you don’t produce too many plays, or write too many novels, or consume too much education and art.

As agricultural productivity increases, labor moves to produce manufactures that go to increase the quality of life, which in turn produces capital goods that are invested that further increase agricultural productivity which in turn leaves more labor free to produce investment goods.

A virtuous cycle begins.

The investment in capital goods makes manufacturing more productive. Eventually you have something like 2% of the labor producing food, about 20% producing manufactures, and the rest providing services. Afterall, if 2% of the population can produce food for the rest, and if only 20% of the labor produce all the manufactures due to automation, then the rest have to produce concerts, novels, movies, provide dentistry, education, insurance, banking, and pornography.

A modern efficient large economy is a service economy only because it is also a very efficient agricultural and manufacturing economy too. Its sustainability derives from the productivity of the two older activities.

Your question about the trade deficit of the US vis-a-vis China in terms of manufactured tradeables is an interesting point. The trade deficit is large but in terms relative to the size of the US economy, it is peanuts. Put it this way: if all international trade were to stop overnight, it would hurt the US economy but it will not be catastrophic. On the other hand, if international trade were to stop overnight, Hong Kong, Singapore or Taiwan will be history. They are small economies dependent upon trade for their survival.

For somewhat different reasons, India too would be hardly affected if it were completely cut off from the rest of the world — in a sense it is largely cut off from the rest of the global economy thanks to the colossal stupidity of the venal bastards that have ruined it over the half century of its existence as an independent country.

I should provide a small model of what I said earlier. Assume that population growth is zero. This assumption does not change the results obtained but it simplifies the model.



Year Agricultural Sector Manufacturing Sector Services Sector
Labor% Output Output % of Total Labor% Output Output % of Total Labor% Output Output % of Total
1 80 80 80 15 15 15 5 5 5
2 50 150 47 40 150 47 10 20 6
3 10 200 20 50 500 50 40 300 30
4 5 250 12 30 1000 50 65 750 38

The figures that I concocted show that agricultural output increases 3-fold while it uses one-sixteenth of the labor it used to use; the labor first shifts to manufacturing and then it shift out of that when productivity (and output) increase dramatically. Finally, the labor force in services goes up steadily and sectoral output as a percentage of total output continues to go up. Note that although the absolute output of the older sectors go up, the percentage they contribute to total output (their relative share) does not go up.

Given that the population does not change at all, they now can consume 3 times as much food in year 4 as they did in year 1; consume 60 times as many computers and cars; nearly 8 times as many movies and orthodontists.

The upshot of this is that diseases of affluence take hold — obesity and heart disease from all that extra food and low levels of physical exertion. And increased services means that we have more telemarketers, pornographers, and web page designers and shrinks.

The limiting cases in either direction are (a) a hunter gatherer society with no manufactures or services; all labor in food gathering and in reproduction, and (b) a future society where food and manufactures are done by automation and the entire population is engaged in producing movies and reproducing.

These two worlds co-exist on earth of course right now. But 10,000 years ago, we were at one extreme; a 100 years from now we will be at the other extreme. Genetic engineering, nanotechnology, and so on will take us there.