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The long and winding road

The long and winding road
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First Published: Wed, May 28 2008. 12 52 AM IST
Updated: Wed, May 28 2008. 12 52 AM IST
Economic development is a long-term game: more Test cricket than Twenty20.
Some countries have succeeded in this game. Many have failed. A few started off well and then lost their way. And economists—though most would refuse to admit it—cannot say for sure what has separated the successful ones from the failures.
Can India become a rich country in the near future? How fast will its economy have to grow to abolish poverty? A new global commission on growth and development has identified the task before India in the statistical appendix that has been published at the end of its recent report.
A team of 21 economists, business leaders and policymakers spent two years trying to understand why some countries break out of poverty and move into prosperity, and many don’t. Nobel economist Michael Spence headed the commission. Its final report was published earlier this month (Planning Commission deputy chairman Montek Singh Ahluwalia was a member).
One question that the commission asks in its statistical appendix will interest all those who are deeply interested in India’s long-term future: What will it take for India to catch up with the rich countries?
To get to the answer, Spence and his team have made some simple but useful calculations. They start with an assumption. The prosperous countries will keep growing their average incomes at the rate of 2% a year. By 2050, citizens in nations such as the US, Japan and the members of the European incomes will thus have an average income of $75,130 a year. India is already way behind the rich countries in this game. Its 2006 per capita income (in terms of purchasing power parity) was a very modest $3,306. It has serious catching up to do—and the only way it can succeed is by growing rapidly over the next few decades.
How fast? India will have to increase its per capita income at an average rate of 7.4% a year, all the way till 2050. The slower it grows, the more time it will take to catch up.
In other words, the Indian economy will have to keep expanding at its current rate for more than four decades if standards of living are to reach those in the rich countries. There will be the inevitable ups and downs along the way, of course.
Can India do it? The task is a tough one. Only 13 economies have been able to grow at more than 7% on average over 25 years since 1950. That’s a very small number. South Korea is one of the lucky 13. It was once one of the poorest nations in our continent. It is now better off than the likes of Slovenia and Portugal.
The main task of the growth commission was to sift through the evidence and see what countries such as South Korea did right.
There are no easy answers. Economists have been deeply divided over the big question: What explains the wealth and poverty of nations? The growth commission, too, says that there are no “silver bullets to create long-running, inclusive growth”. Grand blueprints will not work.
But the commission does point out to some factors that have been common in the development strategies of the 13 countries that broke out of their poverty traps. One, they integrated into the world economy to gain access to markets and knowledge. Two, they maintained macroeconomic stability. Three, they could push up savings and investment rates. Four, they let markets allocate resources. Five, they had committed, credible and capable governments.
A test: Check for yourself what India did right and wrong in terms of these five parameters over the past 50 years.
The splendid acceleration in growth that we have seen since the middle of this decade shows that the Indian economy now has the ability to stay in the run chase. And, unlike some countries such as Russia that have seen higher growth because of higher commodity prices, India’s growth is more firmly rooted in long-term factors such as higher rates of savings, a growing labour force and productivity growth. Investment bank Goldman Sachs had said in its now-famous report on the growth prospects of the four Bric countries—Brazil, Russia, India and China—that India is most likely to maintain high growth rates in the long term.
But, at the end of the day, it’s not just about the big macroeconomic numbers. A country needs a well-trained labour force and dynamic companies to take advantage of growth-inducing policies. The authors of the growth commission report put it in smarter language: “The growth of GDP can be measured up in the macroeconomic treetops, but all the action is in the microeconomic undergrowth, where new limbs sprout, and dead wood is cleared away.”
That’s the challenge defined in another way: to encourage efficiency and creative destruction, while designing policies to protect people who are hurt in the inevitable process of change.
Your comments are welcome at cafeeconomics@livemint.com
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First Published: Wed, May 28 2008. 12 52 AM IST