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A switch to the fast lane

A switch to the fast lane
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First Published: Tue, May 08 2007. 08 27 PM IST
Updated: Fri, Jul 20 2007. 02 33 AM IST
A new study conducted by a team of psychologists shows that urban animals walk faster these days. Walking speeds in 32 major global cities have increased by more than 10% over the past 10 years. The average time taken by a random sample of 35 men and women to walk along a 60-foot pavement decreased by 30% in Singapore and by 20% in Guangzhou in China. Indian cities did not feature in the study because, according to one local language newspaper in Mumbai, the researchers could not find a 60-foot stretch of pavement that was flat and uncrowded enough to allow a pedestrian to walk as fast as he wished.
This study tells us a fair bit about the faster pace of urban life. It also offers an interesting analogy to discuss one of the big debates in the world of economics—the trend in Indian productivity.
The standard theory of economic growth says that there are two main reasons why an economy grows over the long run—more inputs and better productivity. Input-led growth means that a country puts more workers and machines on the job. But such growth has its limitations—the population ages as an economy develops and the returns on capital fall. So, productivity and innovation are the key to sustainable growth.
In the mid-1990s, while the rest of the world was in awe of the Asian economic miracle, a few sceptical economists such as Paul Krugman and Alwyn Young pointed out that East Asia’s growth was not sustainable because it was driven by higher usage of inputs rather than by growth in productivity. Their scepticism was not off the mark—a fact that the perma-bulls in Asia realized when economy after economy in the region toppled into recession during the 1997 crisis there.
So, it is not surprising productivity growth in India is a hotly debated issue. Barry Bosworth and Susan Collins of the Brookings Institution in Washington DC said in a recent paper that total factor productivity (TFP) in India has been growing at a slower pace than it has been in China. What was especially controversial was their claim that TFP growth in India was declining: It grew faster in 1993-99 than in 1999-2004. These conclusions (among others) set off a firestorm of debate, with some commentators saying that low productivity growth was reason enough to cast doubt on India’s growth acceleration.
Other studies have come to different conclusions, which is not surprising because TFP is notoriously hard to estimate. A more valid criticism of the Bosworth and Collins study (or, rather, of those who drew pessimistic conclusions from it) is that the study stops at 2004, almost precisely at the moment when the Indian economy took off. Goldman Sachs economist Tushar Poddar, for instance, has said in an update on the investment bank’s famous BRICs research: “The recent growth spurt was achieved primarily through a surge in productivity, which we believe can be sustained.”
Incomes between nations converge when productivity converges. We tend to think of the process of catching up at the aggregate level. But is there another way of thinking about the journey from poverty to wealth? That is where the new study on another journey—urban walking—could provide a framework to take a fresh look at the issue.
When those psychologists say that people in Singapore walk faster than those in New York, what do they mean? Merely that the average speed in one city is higher than in another. This does not mean that every pedestrian in Singapore walks faster than every pedestrian in New York. There could be individuals in New York who walk faster than their peers in Singapore. So, if the others in New York try to close the gap between themselves and the fastest New Yorkers, average speeds will jump. Rather than benchmark against the Singapore average, what will happen if New Yorkers try to benchmark themselves against the best in their town?
It works like this in the productivity game as well. There are many Indian firms that have world-class productivity. The average is pulled down by sectors and industries that are either over-regulated or poorly managed. What if more and more Indian firms try to catch up with the best in the land?
This is why I found a recent research paper by Chang-Tai Hseih of the University of California at Berkley and Peter Klenow of Stanford University very interesting. They have studied the productivity in manufacturing plants in India (and China). The two economists say that if capital and labour are reallocated across factories so that the marginal productivity in labour and capital between them narrows to US levels, India’s TFP can rise 40-50%—leading to a huge surge in productivity and growth.
For that, we will need a new round of internal reforms, especially those that will help small and medium enterprises use capital and labour more efficiently.
Your comments are welcome at cafeeconomics@livemint.com
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First Published: Tue, May 08 2007. 08 27 PM IST
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