December 30, 2024 ☼ The Intersection ☼ public policy ☼ economics ☼ social capital ☼ epistemology
India must invest in social capital, productivity growth and original thinking to become a prosperous nation.
This is from The Intersection column that appears every other Monday in Mint.
As we come to the end of the year I want to draw attention to a debate that ought to have received greater attention. In August, Indermit Gill, the World Bank’s chief economist shocked everyone by arguing that on current trends it would take India 75 years to achieve achieve a quarter of the United States’ per capita GDP. China would achieve this in ten. Gill called for a new approach and structural reforms for India to escape what he calls “the middle income trap”(a situation where growth slows down once the per capita income is in the range of $1100 to $13000 per annum).
The World Development Report 2024 has some sensible recommendations for middle-income countries.
No one can say if Gill’s prediction is accurate. While he has received criticism and brickbats challenging the euphoric popular narrative, he actually deserves appreciation for offering a dose of negative feedback that can help us reflect on our economic policies. There are useful recommendations in the latest World Development Report that Gill’s team has produced. Whether or not you believe in the existence of a middle-income trap, promoting competition, leveraging human capital and improving energy efficiency are sensible policy directions. India, like other middle-income countries is likely to benefit from adopting them.
Gill & Kharas (2020) is a very interesting paper. The bit about whether increasing competition helps middle-income countries particularly so.
In an earlier work, Gill and his co-author Homi Kharas have inferred that middle-income countries grow when they have mechanisms for increasing investment in physical and human capital; incentives for innovation; and institutions that can successfully carry out structural reforms. If we aspire to be a developed country by 2047, we should pay attention to these underlying factors. One aspect of this is macroeconomic policy: about interest rate regimes, tax rates, financial sector regulations, digital public infrastructure, R&D expenditure and so on. But there are other aspects that economists and technocrats tend to overlook: concerning society, attitudes and mindsets.
See my comment the farm law reform fiasco.
First, the policy flexibility that a middle-income country requires is constrained by political space that its leaders have. India’s attempt to reform farm laws failed because that space did not exist and which the government did not try to create. People prefer to stay with a known devil if they do not sufficiently trust that the unknown god will arrive as promised.
According to opinion polls, a majority of Indians say they trust their government. However, we distrust politicians, public officials and more generally, each other. This means, as in the case of the farm laws, we will not be able to attain a better equilibrium. So much of policy change involves addressing misallocation of resources. For this to happen, those who stand to lose out must trust the social mechanisms that will compensate them for their sacrifices. As this column has consistently argued over the year, building social capital must become a national priority.
See my proposal for a multi-contributor social security system that brings society into social security.
Second, the tendency to unthinkingly adopt socio-economic narratives from the rich Western countries can be distracting or counterproductive. Inequality, universal basic income and high taxes on the ‘rich’ are imported luxury beliefs that are unaffordable at Indian incomes. As Gill and Kharas point out, for India, “the dangers for policymaking lie with lobbying and incumbency rather than with inequality itself. In fact, the degree of social tolerance for inequality is often linked with perceptions of future mobility. When the latter is high, then tolerance for inequality is also high and vice-versa.”
Similarly, old-fashioned exhortations that one should work hard are disparaged on social media as being out of touch with today’s realities. Well, the reality is that labour productivity in India is one-tenth that of the United States, a quarter that of China and Brazil, and lower than that of South Africa. To be globally competitive Indians will have to work harder and learn faster, even as policy changes improve education, skills and public services in the longer term.
Finally, a lot of countries became rich because they innovated first and set norms afterwards. Slave labour preceded human rights. Copying preceded patents. Empires preceded self-determination. Mercantilism came before multilateral free trade. More recently, artificial intelligence startups swallowed all the content on the internet before the world woke up to data ownership rights. Ergo, it is unlikely that a country can become a world leader by following the rules set by incumbents.
China’s global leadership in electric vehicles and climate transition offers useful lessons. Creating new engines of growth in sectors where technology is changing fast and where norms are not settled is risky but can be massively rewarding. Remember, it is firms that compete. The policy question then is how does India create companies that can become global leaders in emerging sectors. Can we get there if domestic firms are protected from international competition? The meagre private investment in R&D, especially by India’s largest companies, tells us a story.
Tailpiece. India is today one of the world’s big powers but many geopolitical strategists have yet to adopt a more confident approach to foreign policy. Many traps are those of the mind.
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