Its Race to Prosperity? Avinash Dixit, Princeton University India - - PowerPoint PPT Presentation

How Can India Avoid Losing Its Race to Prosperity?

Avinash Dixit, Princeton University

India Policy Forum Lecture NCAER, 10 July 2018

India versus China?

 Comparison usually unfavorable to India  But China’s slowdown, India’s acceleration

and more favorable demographics, raise expectations of overtaking China

 Aim: take a second look, offer sobering

picture, emphasize need to improve policymaking and capitalize on advantages

 Nothing new or startling, but hope to focus

attention, spur action

Caveat

 Development is not a zero-sum game. Other

countries’ growth generally helps you: brings more trade, investment, technology transfer. But comparisons highlight missed potential.

 Any “race” is against time – race to eliminate

poverty, raise well-being as fast as possible.

 Development is multidimensional; different

weighting of the dimensions can produce different comparative evaluations.

Is India catching up?

 Suppose China grows at 10% for 10 years,

3% the next 10; India the other way round. In year 21 levels equal, but India has lost total 7 years’ worth of output over the time.

Far from catching up

 Reality is much worse:

Growth rates PPP GDP levels / capita Catch up will take long; much output lost in meantime

Demographic dividend

 Population age distribution:  India will have much larger population of

economically active age, fewer dependents

 But … several handicapping factors

Low female participation

 Female labor force participation comparison:

China 64%, India 27% (Males 78% v. 80%)

 Implied % of population economically active:  Indian women work in home, informal economy,

but formal work yields efficient labor allocation by comparative advantage; higher productivity.

Poor quality of education

 UN Human Development education index:

improving but lagging

 Worse: 50% of 10-year-olds could not read

at level expected of 6-year-olds. Over 60% could not do simple division.

2005 2010 2015 India 0.409 0.456 0.624 China 0.531 0.599 0.738 Brazil 0.614 0.662 0.754 Vietnam 0.470 0.509 0.683

Poor transport infrastructure

Other internal barriers

 State and local taxes, and barriers to collect

them, imposed high costs in money and time. Estimate Rs. 9-23 billion in 2005. Uniform GST helps but issues in implementation.

 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.

Bad “invisible” infrastructure (institutions of governance)

India improved in recent years, but still mediocre.

Voice and Accountability Political Stability and No Violence Government Effectiveness Regulatory Quality Rule

• f

Law Control

• f

Corruption Denmark

98.03 74.76 99.04 92.31 97.60 99.04 3

United States

84.24 58.57 91.35 91.83 92.31 89.90 6

Brazil

61.58 30.00 47.60 46.63 51.92 38.46 125

China

6.90 27.14 67.79 44.23 46.15 49.04 78

India

58.62 14.29 57.21 41.36 52.40 47.12 100

Zimbabwe

19.70 24.29 11.06 2.39 8.17 8.65 159

Afghanistan

21.18 0.94 9.62 3.37 3.85 3.37 183

World Bank's governance indicators Ease

• f

Doing Business ranking Country

Importance of institutions

 Can reach middle-income level by moving labor

from agriculture to industry: simpler process, can do using informal relations in villages etc.

 Growth beyond this level requires more capital,

resource reallocation, entry/exit …

 Transactions outside small circles of trust,

require good formal institutions.

 Crucial for India in coming decades for

escaping “middle-income trap”

Corruption

 Like tax, but uncertain, capricious  Big deterrent to investment, innovation  Experience in many countries shows:

 Chronic condition, like obesity, not cancer  Fight against it long & slow, victories partial  Government as much obstacle as help  Bottom-up social coalitions can work well  Social sanctions can be better than legal penalties  Smart youth want to work for, buy from clean firms

Results: Missing out on foreign direct investment

 Inflow comparison ($ billions)  Improvement, but far behind China, and may

prove temporary if no lasting reforms.

 Comparisons matter b/c investors make them

2004 2009 2014 2016 India 23.2 35.6 34.6 44.5 China 60.6 95.0 128.5 133.7 Brazil 15.0 25.9 73.1 58.7 Vietnam 2.0 7.6 9.2 12.8

Missing participation in global value chains

 % import content of gross exports:

2000 2005 2010 2014 India 15.3 25.1 33.7 21.0 China 50.6 48.0 40.1 29.3 Malaysia 60.5 56.5 51.7 39.1 Vietnam 39.1 45.1 46.6 36.3 Taiwan 39.4 44.2 49.0 43.1 S. Korea 35.3 38.1 44.3 37.9

Summing up: India’s handicaps

 India’s handicaps:

 Low female participation in labor force  Poor quality of education  Good demographics of labor force, but

inefficiently utilized, low productivity

 Inferior infrastructure, physical and invisible:

governance institutions, corruption

 Comparisons of underlying conditions affect

FDI, GVCs, and so India’s own outcome

Is democracy the problem?

 No; studies show no significant difference

in average growth between authoritarian and democratic regimes (but authoritarian have higher variance, e.g. Singapore vs. Congo).

 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

 “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.”

 Indian process is like the U.S., or even worse.

Where you stand depends

• n where you sit!

 Parties switch policy positions when they shift

from opposition to government and vice versa:

 GST, Aadhaar, regulations & tariffs, rural income

support, …

 No way to create stable expectations for

investment and growth

 Improving political process is key, but how?  Some suggestions: easy to offer, hard to do.

What is to be done?

 Allow states to pursue own policies

(experiment), and then choose the most successful

 History of centralized China vs. decentralized

European cities / states

 Some experience (mixed) in U.S.

 But danger that states may misuse freedom

to favor local factions, castes …

What is to be done? (continued)

 Synchronize elections to avoid permanent

campaigning, selective pandering, ...

 Control of corruption; led by a business

community institution, rating scheme?

 Regulation, tax and trade policies:

 Be “pro-market”, not “pro-business”  Do not favor incumbents, monopolies  Tax policies to promote formal economic activity

 Good mass education, esp. female.

I shall be delighted if …

 … my somewhat pessimistic

assessment turns out to be mistaken ...

 And even more delighted if ...  ... my diagnosis leads to reforms of

institutions and policies that transform India’s prospects.

 Thank you!

Data sources



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



Education: UN Human Development index; Economist, India special report, 2008



FDI: UNCTAD World Investment Reports. See also http://www.firstpost.com/business/the-31-bn-

question-did-india-really-see-so-much-of-fdi-inflow-in-2015-2449942.html



Global value Chains: OECD data on Trade in Value Added (TIVA), https://data.oecd.org



Transport: http://www.managementparadise.com/article/4563/india-vs-china-an-infrastructure-comparison , also World Bank, “India Road Transport Efficiency Study”



Governance, Ease of Doing Business: World Bank



James Q. Wilson quote: from his book Bureaucracy (1989), pp. 299-300.