Aiyar's ambivalence

[Home Views Editorials Big Idea Daniel H Rosen February 20, 2008 Unskilled labour was so abundant in the past that many manufacturers chose archaic modes of making stuff rather than invest in technology and innovation. That choice has brought its own problems, as many manufacturers are finding it hard to compete in the face of even moderate wage inflation. But moreover, by directing the bulk of investment into heavy industry instead of labour-intensive light industry and services, China is not growing according to its best advantages. The five biggest energy users in China — steel, cement, aluminum, glass and chemicals — employ fewer people today than they did ten years ago, and fewer people than the service sector in Guangdong province alone. China’s labour advantage simply doesn’t accrue to most of the best known Chinese firms.
Lax intellectual property rights protection has created an economy with a questionable ability to deliver real hi-tech innovation close to the frontier. Much of what passes for hi-tech in China is actually a modest adaptation of existing technology, often involving piracy. Where more significant innovation is taking place, it is usually owned and operated by foreign enterprises. This is good for China, no doubt. But it is not the same thing as booming indigenous innovation. The lack of a regulatory culture produces weak quality controls, which has made building Chinese brands difficult. Concerns about lax products standards have lately tarnished Brand China itself. Corporate governance remains merely an aspiration.]

[The high cost of delayed reform ET 26 Feb, 2008, 0018 hrs IST, Swaminathan S Anklesaria Aiyar, TNN For a short but incisive economic history of India since Independence, you should read the first hundred pages of Arvind Panagariya’s new book (India: The Emerging Giant, OUP)... The first phase, 1951-65, is widely called Nehruvian socialism. But Panagariya describes this as “Take-off under a liberal regime”. Many other academics have come to the same conclusion — that what is derided as Nehruvian socialism actually applies mainly to the Garibi Hatao policies of Indira Gandhi. Yet in fairness to Indira Gandhi, she was widely believed to be implementing a socialist agenda that Nehru launched but could not implement because of vested interests. Nehru’s socialist rhetoric was at odds with his pragmatic handling of the economy. His rhetoric called for the government to control the commanding heights of the economy. He was fascinated with Soviet-style planning. Yet in practice he presided over an era of low tariff and non-tariff barriers, and easy entry of foreign direct investment. Shell, Exxon and Caltex entered with 100% equity and no conditions. So did dozens of MNCs in pharma and other sectors. This era had price and distribution controls, many dating from World War II, but these (and industrial licensing) became serious impediments only in the 1960s. Phase 1 witnessed GDP growth acceleration to 4% per year from just 1% during the British Raj. Public investment in infrastructure, industry, agriculture and social sectors increased hugely in the first three Five Year Plans. Panagariya might have made more mention of institution building in this era, which was a source of immense strength in subsequent dark days, and continues to serve us well 60 years later. Nehru’s main fault was that he ignored the vital role of exports, and focused instead on import substitution. This approach was facilitated initially by running down the huge sterling balances India inherited from World War II, and later by foreign aid. But such financing was unsustainable. Phase 1 ended in economic ruin in 1965, when two droughts, war with Pakistan, and a suspension of foreign aid converted Nehru’s once-proud India into a beggar dependent on American food aid to prevent mass starvation...I am less gung-ho than Panagariya on how far the private sector can replace dysfunctional public services. Indeed, I worry about the sustainability of 8.5% growth in Phase V. Panagariya thinks that the reforms have been sufficiently wide and deep to explain 8.5% growth. But India ranks only 104th, far behind many African countries, in the Heritage Foundation’s Index of Economic Freedom. The World Bank’s latest Doing Business report ranks India at just 120th out of 180 countries. India holds 126th position in the Human Development Index, and 72nd in the Corruption Perception Index of Transparency International. Such a country looks vulnerable in the coming global downturn.]

Swaminathan S Anklesaria Aiyar's reservation about the private sector sends shivers down our spine. [TNM]