P. Vaidyanathan Iyer has a
great first
draft of history, in the new Sunday magazine that goes with
the Indian Express, telling the story of what happened in
India in late 2008.
This was a difficult period with 6 shocks hitting us in a short
time period:
Things could have turned out much worse. The individuals at MoF,
SEBI, and RBI really came together and delivered. As India becomes a
more complex economy, it becomes more and more important to bring
top quality skills into policy making. The Indian success of crisis
management in late 2008 is tightly linked to India's success on
the
great conflicts over appointments in 2008.
Reading Vaidy's article made me go back into September and October
2008 on this blog to see what I was thinking and writing at the time:
When I look back, I feel that (of all people) the NIPFP
Macro/Finance Group should have quickly and clearly
understood the
linkages between multinationals and the money market, and how
the collapse of the money market in London in late September would
surely matter greatly to India. We had the building blocks: We truly
get India's high de facto integration into global finance,
and we truly get the rise of Indian multinationals as a game
changer. But we weren't cool enough to connect these pieces and make
the consequent inferences to a surprising conclusion. We only woke
up when it was obvious that the Indian money market had
collapsed.
When I look back, the really hard thing at that time was the `fog
of war' which envelops economic policy thinking. In the best of
times, the Indian statistical system is weak, and at a time like
that, the data was hopelessly out of date. We're being penny wise +
pound foolish in ignoring the informational foundations of the
economy, without which policy makers are forced to fly blind. We do
this by tolerating an
awful statistical
system, and by preventing the financial markets
which produce
vital information.
There was a lot of drama and loud opinions, but it was very hard to
figure out what was actually going on. I was also quite concerned
about Indian CEOs crying wolf in order to get money from the
government, given the long history of Indian CEOs not knowing how to
make an honest living. So I was biased in favour of ignoring the
cries at first.
On VoxEU, there is a fascinating article titled
India: Those two big outliers by Jesus Felipe, Utsav Kumar
and Arnelyn Abdon.
The interesting fact that they highlight is that both India and
China are wise beyond their per capita GDP when it comes to the
sophistication and diversification of their exports.
The evidence that they show, on the change in export
diversification, is quite striking:
| China | India | |
| 1962 | 105 | 71 |
| 2007 | 265 | 254 |
| Change (times) | 2.52x | 3.58x |
In India's case, in 1962, in the depth of India's autarky, there
were 71 commodities exported with `revealed comparative advantage'. By
2007, this number had gone up by 3.58 times. Both China and India are
outliers (with excessively high values seen for export
diversification) when compared with other countries at the same level
of per capita GDP on a PPP basis.
One element of the explanation of diversification is sheer
size. Continental India has a diverse array of locations. Coastal
Gujarat is a good location for processing crude oil for export, and
Bihar is a good place for growing Litchis for export. By aggregating
both places into a single country, we get high levels of export
diversification. A casual examination of their graph (Figure 2) makes
me think there is some support for this conjecture - positive outliers
in the graph are big countries like the US and Germany; negative
outliers are small countries like Ireland and Finland.
Why does India do sophisticated export, well beyond what one would
expect for its level of per capita GDP?
Aside: PISA > 625 is a much weaker condition than IQ >
146.
Some people bemoan the inequality of human capital that is found in
India, i.e. the huge gap between this upper tail and the modal
value. But given that we have a low per capita GDP, would we rather
have equality where everyone has low skills, or would we rather have
an incredible upper tail in the distribution of knowledge, that is
able to learn new technology, plug into globalisation, and power the
country along?
This is also related to Albert Hirschmann's theme of unbalanced
growth: he had argued that growth involves developing an
`unbalanced' capability (e.g. India and the software industry led by
a small core of high end capabilities), and then harnessing the
benefits of the catchup by the rest of system (e.g. telecom reforms,
mass scale computer programming education, broad business skills in
running globalised firms out of India).
In a recent NBER
working paper, Eric A. Hanushek and Ludger Woessmann offer
interesting evidence about the tradeoff between `rocket scientists or
basic education for all'. They say:
Both the basic-skill and the top-performing dimensions of educational
performance appear separately important for growth. From the estimates
in column 3, a ten percentage point increase in the share of students
reaching basic literacy is associated with 0.3 percentage points
higher annual growth, and a ten percentage point increase in the share
of top-performing students is associated with 1.3 percentage points
higher annual growth....
the effect of the top-performing share is
significantly larger in countries that have more scope to catch up to
the initially most productive countries (col. 5). These results
appear consistent with a mixture of the basic models of human capital
and growth mentioned earlier. The accumulation of skills as a
standard production factor, emphasized by augmented neoclassical
growth models (e.g., Mankiw, Romer, and Weil (1992)), is probably best
captured by the basic-literacy term, which has positive effects that
are similar in size across all countries. But, the larger growth
effect of high-level skills in countries farther from the
technological frontier is most consistent with technological diffusion
models (e.g., Nelson and Phelps (1966)). From this perspective,
countries need high-skilled human capital for an imitation strategy,
and the process of economic convergence is accelerated in countries
with larger shares of high-performing students.Many countries have focused on either basic skills or engineers and
scientists. In terms of growth, our estimates suggest that developing
basic skills and highly talented people reinforce each other.
Moreover, achieving basic literacy for all may well be a precondition
for identifying those who can reach “rocket scientist” status. In
other words, tournaments among a large pool of students with basic
skills may be an efficient way to obtain a large share of
high-performers.
On a related note, it is very, very hard to create high end skills
when starting from scratch. Witness the difficulties faced by China
which had to start from scratch after destroying the elite in the
Cultural Revolution. When the economy is ready with demand for a
particular set of specialised skills, it may take decades to fill
these gaps. As an example, by the late 1980s and early 1990s, it was
obvious that there is a giant opportunity for India in software
exports and in BPO. But it took 10 years for the education system to
re-engineer itself to produce these skills in large quantities, and
then make possible large numbers for IT/ITES exports. In similar
fashion, the NDA got going on raising expenditure on infrastructure by
2003, but last month,
Bajaj has an article in the New York Times about shortages
of civil engineers. It is convenient, in economic development, to have
a pre-existing base of high-end skills ahead of time, before the phase
of high growth arrives.
The argument in this blog post has emphasised size. There are many
other good things about size, such as economies of scale in the
domestic economy, and paying for the fixed costs of global firms in
learning about a country in order to do business in it.
If size is such a good thing for economic development, why has it
failed so far: as of 2010, why are India and China far behind OECD
levels of per capita GDP?
One key story lies in globalisation. Big countries feel they can
get away with autarkic policies. They feel self-sufficient and are
prone to cut themselves off from the world. Policy makers in small
countries don't think they have a choice in trying to create a
domestic car industry, but their counterparts in places like Brazil or
India or France feel they can experiment with industrial policy. Once
this problem is solved -- as seems to be partly the case with India
and China where trade liberalisation has arrived though capital
account liberalisation has not -- big countries are no longer held
back by autarkic policies. In addition, plugging into globalisation,
by itself, yields world scale, and thus boosts certain dimensions of
size.
Another story, emphasised by Lant Pritchett, lies in the extent to
which India is not a single common market, and has thus squandered
these potential gains from size. Conversely, as we strip away the
legal and tax impediments against intra-India movement of goods,
services, capital and labour, and as we bulk up on the infrastructure
of transportation and communications, we will obtain returns to size
which were not visible in the pre-2000 Indian GDP data.
Finally, on the role of size and sophisticated technological
civilisation,
see Insufficient
data on Charlie's Diary.
I am grateful to Lant Pritchett, Jishnu Das, Pratap Bhanu Mehta,
and Josh Felman for comments and improvements on this post.
On the mistakes in the recent CSO data release,
see P. Raghavan
in the Indian Express.
By the time 3G telephony came about, India was well into the
telecom revolution. By December
2007, there
were 190 3G networks in 40 countries and 154 HSDPA networks in
71 countries, but none in India. We're
now finally
getting on with it, and will probably be the last place in the
world with 3G telephony.
And there are the failures in organising the Commonwealth Games.
It is enough to make a man worried.
