Arun Maira | India, a slow learning country
A country’s industrial policy must principally be a process to stimulate institutional learning
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The Indian state has many challenges. A major one is to ensure that economic growth creates jobs much faster than it has so far. A large, youthful population can provide a demographic dividend to the economy. It can also create huge societal and political problems if there are not enough jobs. Another looming challenge is to improve the ability of the state to perform its functions and provide services to citizens more efficiently.
No doubt India has progressed a lot over the past 60 years, more in the last 20 with the acceleration of economic growth. However, it must progress much faster on improvement of human development indicators and creation of jobs. Its manufacturing sector, which must be a principal source for more jobs, has been a laggard. Manufacturing accounts for only 15% of India’s gross domestic product (GDP), whereas China’s, at over 30% (of a much larger economy), has been the principal driver of employment and growth.
Citizens’ mounting frustration with the inefficiency and corruption in services that the state must assure—security, health, education, urban utilities, and transport infrastructure—was a principal factor in the dramatic defeat of the United Progressive Alliance government in recent elections. Statistics of how much poverty has reduced, how many more children are in school, and how much more power is being generated than before, did not satisfy them. They need more and want more. Citizens were also put off by the arrogance and corruption of leaders of political and government institutions. India must reform institutions and produce results much faster. A related issue is the performance of the Planning Commission and its relevance in the 21st century.
Creating a Learning Society: A New Approach to Growth, Development, and Social Progress, a new book by Joseph Stiglitz and Bruce Greenwald, provides a new lens through which one can diagnose the capability of the Indian state and progress of the economy. The perspective of learning as the primary driver of progress also suggests a fresh way to consider the role of the Planning Commission in a 21st century economy.
Stiglitz and Greenwald’s argument can be summarised in three points. One, they say that economics has become too narrow in its attempt to be precise. Economic models leave out the dynamic sides of societies—institutional capabilities and innovation, which are their unquantifiable but primary sources of development. The second point is that the essence of social development and economic growth is a process of learning. Countries learn to do what they could not do before. And if they learn faster than others, they develop faster and grow faster too. Thus Japan, then Taiwan, Korea, Singapore, and now China have swept ahead of others.
Their third point is that the process of industrialization has been the principal cause of growth of economies and living standards. It is when societies learnt to make things they could not make before, and to develop more efficient processes for making these new things, that growth took off exponentially. Thus, incomes and living standards have improved much more in the last 200 years, by industrialization, than they had in the previous two thousand years.
Several other economists—Dani Rodrik, Ricardo Hausmann and Ha Joon-Chang, to name a few—have recently argued countries grew their industrial sectors by learning faster than their competitors at the time. This explains Japan’s, Korea’s and China’s progress in recent times, and Germany’s, the UK’s, and US’s before that. Ergo, a country’s industrial policy must principally be a process to stimulate institutional learning—in firms and state institutions and their interactions; rather than allocation of resources and permissions, which was the orientation of India’s industrial planners until the 1980s; or even picking winners, which is controversial.
Stiglitz says that a clue to how countries learn can be found in how industrial firms learn. He points to the extensive literature on the subject which economists and policymakers should turn to. It is heartening to note that, in India’s 12th Five-Year plan, the paradigm of faster learning as the essence of industrial policy, is explicitly applied at last. Unfortunately, it has not been picked up by the government so far. It must, for India to grow its manufacturing sector much faster and create the many millions of jobs required in the next few years.
Several developing countries are progressing faster than India on many fronts. India and China are large countries. Both were very poor 60 years ago. India has no doubt progressed, but China has progressed much faster, not just in economic growth but also in health and education where improvements were faster than in India, even before China’s GDP growth took off.
The Indian state is a slow learner. It must learn to learn faster, and implement faster, to accelerate development and growth. Therefore, rather than assisting the government to allocate funds, which has been its principal role so far, the Planning Commission’s principal role must be catalytic. It must have within it world-class expertise in enterprise learning processes and institutional design to assist the union and state governments to learn and implement their plans and processes faster.
Arun Maira is a former member of the Planning Commission.
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