Where is India Losing Out? Avinash Dixit, Princeton University ISI Kolkata Public Seminar 14 December 2015
India versus China? n Comparison usually unfavorable to India. n But recent optimism (and schadenfreude) about China s slowdown, India s prospects and favorable demographics, have led to high expectations of overtaking China. n Aim: take a second look and offer sobering picture, emphasize need to improve policymaking and capitalize on advantages.
Some caveats n Development is not a zero-sum game or race. Other countries growth generally helps you: more trade, investment, technology transfer. But comparisons highlight missed potential. n Development is multidimensional; different weighting of the dimensions can produce different comparative evaluations. n Nothing new, but worth restating in one place to focus attention, perhaps spur action.
Is India catching up? n Suppose China grows at 10%/yr for 10 years, 3% the next 10; India the other way round. In year 21, levels equal but India has lost about 7 years worth of output in the interim.
Far from catching up n Reality is much worse: Growth rates PPP GDP levels / capita Catch up will take long; much output lost in meantime
Demographic dividend n Population age distribution: n India will have much larger population of economically active age, fewer dependents n But several handicapping factors
Low female participation n Female labor force participation comparison: China 64%, India 27% (Males 78% v. 80%) n Implied % of population economically active: n Indian women work in home, informal economy, but formal would have higher productivity, more efficient labor allocation.
Poor quality of education n UN Human Development education index: n Worse news: 50% of 10-year-olds could not read at level expected of 6-year-olds. Over 60% could not do simple division.
Poor transport infrastructure
Other internal barriers n State and local taxes, and barriers to collect them, impose high costs in money and time. Estimate Rs. 9-23 billion in 2005. Uniform GST to replace all this mess is essential. n Various laws and regulations about land acquisition, borrowing and lending, hiring and firing also need reform, streamlining and speedier implementation. Well-intentioned policies can have unintended bad effects.
Poor governance Regulatory quality and Control of corruption need most attention.
Results: Missing out on foreign direct investment n Inflow comparison ($ billions) n Jump in 2015, but it is questionable, and may prove temporary if no lasting reforms.
And missing participation in global value chains n % foreign value added in gross exports:
Summing up India s handicaps n Low female participation in labor force n Poor quality of education n India may have large numbers but inefficiently utilized, low productivity n Inferior infrastructure n Weak governance in many respects n Dysfunctional policymaking process
Is democracy the problem? n No; studies show no significant difference in average growth between authoritarian and democratic regimes (but authoritarian have higher variance, e.g. Singapore vs. Congo). n More plausible explanation: policy making process in India is dysfunctional. Legendary political scientist James Q. Wilson described the difference between democracies in U.S. and Europe:
Types of policymaking n Policy making in Europe is like a prizefight; when one fighter knocks the other one out, he is declared the winner and the fight is over. Policy making in the United States is like a bar-room brawl: Anybody can join in, the combatants fight all comers and sometimes change sides, no referee is in charge, and the fight lasts indefinitely. n Indian process is like the U.S., or even worse.
What is to be done? n Improve political process n Improve institutions of governance n Enact and implement essential reforms, especially in education, tax policy etc. n Encourage enterprise, but be pro-market, not pro-business spur competition, do not favor incumbents, monopolies n All easy for me to say, but
Data sources n n n GDP: IMF World Economic Outlook Demography: U.S. Census Bureau International Database Female participation: World Bank, http://data.worldbank.org/indicator/sl.tlf.cact.fe.zs Male: http://data.worldbank.org/indicator/sl.tlf.cact.ma.zs n Education: UN Human Development index; Economist, India special report, 2008 n FDI: UNCTAD World Investment Reports. See also http://www.firstpost.com/business/the-31-bn-question-did-india-really-see-so-much-of-fdi-inflowin-2015-2449942.html n Global value Chains: OECD data on Trade in Value Added (TIVA), https://data.oecd.org n Transport: http://www.managementparadise.com/article/4563/india-vs-china-an-infrastructure-comparison, also World Bank, India Road Transport Efficiency Study n Governance, Ease of Doing Business: World Bank n James Q. Wilson quote: from his book Bureaucracy (1989), pp. 299-300.