A new approach for a jobs policy for India4 min read . Updated: 03 Oct 2016, 03:28 AM IST
Old ideas about industries and about how industrial policy is made will have to be unlearnt
The Washington Consensus forced changes in government policies around the world. International trade had to be free. ‘Industrial policy’ to nurture domestic industries was taboo. It was a tide that lifted many boats with growth and reduction of poverty in many countries. Now the tide is running out. Protectionism is rearing its head, even in Washington. Both US presidential candidates are harrumphing about saving American jobs. Brexit has hit the European Union where it hurts. The trade deal between Europe and the US is in jeopardy. And it is once again kosher to talk about ‘industrial policy’ to nurture sectors that will create more employment—even in the UK and the US, where Margaret Thatcher and Ronald Reagan had fuelled ideologies that propelled the Washington Consensus.
The intellectual and ideological pushback since the 1990s against the very concept of industrial policy provoked an intensive examination by some economists of the history of the remarkably rapid and strong industrialization of many countries—Japan, Korea, and China, and going back a century, the US too. All these countries had nurtured their industries while they were growing, protecting them from stronger competitors from other countries.
However, picking winners and protecting domestic industries has not worked equally well for all. India stands out as an example of the failure of the industrial policy it practised until the 1980s. Equally though, the absence of a coherent industrial policy since then has hurt India. The opening up to global trade and welcoming of foreign investments since the 1990s has opened the Indian market to producers abroad. It has benefited Indian consumers. However, India’s manufacturing sector has languished at around 15% of its gross domestic product (GDP), which is much smaller than China’s at 35%, and is a smaller portion of the economy than even Japan’s and Germany’s—countries with much stronger currencies and much higher wages too. And overall jobs have not been growing fast enough in India.
The Indian economy has generated fewer jobs per unit of GDP growth than many other economies. India, with its much (and prematurely) celebrated demographic dividend, needs to create more jobs than any other country in the world, and much faster than it has. More than any other country, India needs an effective industrial policy to stimulate domestic job creation. The ‘100 million jobs’ question is: What should be the features of this policy? Which sectors should be nurtured? And what would be the best ways to nurture them?
The growth of industries, and with them economies, is a process of learning. Enterprises learn to do what they could not before, and then to do it better than enterprises in other countries. The remarkable progress of Japanese industries after the World War II was accelerated by the TQM (total quality management) movement, which was a movement for pervasive learning at all levels of enterprises, as well as by product innovations. The Japanese government worked alongside industries and learnt how to facilitate the growth of industry. Deng Xiaoping described the process of nations’ learning as “crossing the river by feeling the stones underneath". Producers on the ground venture forward into new unknown spaces. Policymakers at the head receive the signals from the ground and adjust the weight of policies to enable the feet to progress safely and faster.
If India must grow industries and jobs much faster than others, it must improve the way it goes about making industrial policy. The consensus amongst economists who have been delving deeply into the histories of industrially advanced countries—Joseph Stiglitz, Dani Rodrik, Ricardo Hausmann, Ha Joon-Chang and others—is that industrialization is a process of rapid learning. And good industrial policy is the process by which producers and policymakers consult and collaborate and learn together.
‘Picking winners’ and allocating resources to them is a paradigm of industrial policy that governments may instinctively adopt when pressed to produce results quickly. It was the paradigm underlying India’s industrial planning until the 1980s. It is not a good paradigm for industrial policy. The choices made could be wrong, especially when the future is uncertain. Industry boundaries are blurring, and new industries are emerging. Even within established industries, sources of competitive advantage will shift in dynamic and often unpredictable ways. The only source of an enterprise’s and a nation’s sustainable competitive advantage will be its ability to learn and change faster than any potential competition from other industries and other countries.
India announced a new manufacturing policy in 2011 to boost the share of manufacturing in India’s GDP from 16% to 25%. Since then, it has realized that manufacturing will not create many jobs, with automation becoming necessary for enterprises to ensure quality and remain competitive. Moreover, the boundaries between manufacturing and services are becoming increasingly blurred. Does it matter if India creates the jobs it must in “services" rather than in “manufacturing"? Many jobs could be in the expansion of healthcare and renewable energy—sectors that India must grow. Traditional definitions of industries, and skill development organized in assembly lines to train people for jobs in them, may result in people being prepared for jobs that may not be there.
The future has to be found, and shaped, by enterprises and policymakers learning together, faster and better than they have done before. Old ideas about industries and about how industrial policy is made will have to be unlearnt. Unlearning habits of thought, and unlearning ideas that are ingrained in institutions, is never easy. More than ever, sound industrial policy must be a systematic process for learning and moving together—moving by feeling the stones underfoot. The future of India will depend on how fast leaders of institutions, in government and in the productive sectors, learn and apply a new approach for a new ‘jobs policy’ for India.
Arun Maira is a former member of the erstwhile Planning Commission.
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