A recent paper by Robert J. Gordon entitled Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds raises basic questions about the process of economic growth (NBER Working Paper 18315, August 2012). It questions the assumption, nearly universal since the Nobel Prize-winning economist Robert Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever.
Gordon summarizes the argument as follows: The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IRs), that is, IR #1 (steam, railroads) from 1750 to 1830; IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870-1900; and IR #3 (computers, the Web, mobile phones) from 1960 to present. It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. Once the spin-off inventions from IR #2 (airplanes, air conditioning, inter-state highways) had run their course, productivity growth during 1972-1996 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once—urbanization, transportation speed, the freedom of females from the drudgery of carrying tonnes of water per year and the role of central heating and air conditioning in achieving a year-round constant temperature.
He makes several interesting points, including the observation that “innovation since 2000 has centered on entertainment and communication devices that are smaller and smarter but which do not fundamentally change labour productivity or the standard of living in the way that electric light, motor cars or indoor plumbing did”. The article suggests that it is useful to think of the innovative process as a series of discrete inventions followed by incremental improvements that ultimately tap the full potential of the initial invention. For the first two IRs, the follow-up process lasted over 100 years. For IR #3, it was much faster. Gordon believes that the US faces several headwinds that will likely slow the process of innovation. He states that “the headwinds include the end of the ‘demographic dividend; rising inequality; factor price equalization stemming from the interplay between globalization and the Internet; the twin educational problems of cost inflation in higher education and poor secondary student performance; the consequences of environmental regulations and taxes that will make growth harder to achieve than a century ago; and the overhang of consumer and government debt.”
Gordon is careful to point out that his research is valid only for the US and that its implications for other countries may be very different since some have tailwinds and others a different mixture of headwinds.
It is an interesting exercise to apply the ideas from the article to India. In many ways all three IRs are still being implemented in India. One may argue that the age of steam engines and railroads—IR #1—is behind us, but that will be partially correct in the context of contemporary India. Only Mumbai and Chennai and more recently Kolkata and Delhi have full-fledged mass transit rail systems. In Bangalore and Kochi, to say nothing of a dozen other big cities, it will take more than a decade for mass transit rail to acquire a city-wide footprint. Uni-gauging, electrification and updation of coaches and engines is approximately Rs.100,000 crore and a decade or more behind schedule. Implementation of IR #2 is in its infancy in India. Even as electricity was beginning to make a nationwide impact, it has become inconsistent in its availability. As for running water, indoor toilets and modern plumbing, it seems to be a case of two steps forward and two steps back. Strangely, India has made giant strides in IR #3 with the ubiquitous availability and use of mobile phones.
At a time when innovation around the world is slowing, India’s innovation revolution can take off only if we focus on making the impact of IR #1, 2 and 3 consistent and widespread in the country. India’s own innovation energy is probably best focused on reducing the oil dependence and cost of access for these technologies. There have been some successes. India’s per unit telecom cost is among the lowest in the world, we perform thousands of cataract surgeries at a fraction of global cost and, while the Tata Nano is not (yet) a success, the concept of fundamentally re-engineering a car for cost remains a powerful idea. We will have to do the same for textiles, food, healthcare and more. Some cost reductions will come from tweaking, but true cost revolutions can only come from fundamentally reimagining products, services and delivery. Since India is oil deficient, it will have to do this without increasing its dependence on petroleum products. Clean coal technology? Teleporting? Bicycles?
PS: “To raise new questions, new possibilities, to regard old problems from a new angle, requires creative imagination and marks real advance.” —Albert Einstein
Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets.
To read Narayan Ramachandran’s previous columns, go to www.livemint.com/avisiblehand-