Friday, February 17, 2006

Harvard Economics Professor Martin Feldstein on India's Remarkable Economic Progress**

feb 17th

damning with faint praise. that's the WSJ guy.

damning. that's the FT guy

actually given mullah arjun singh's reign, the FT guy is too optimistic.

remember the last hindu empire which had a lot of mohammedan troops -- that was vijayanagar. in hampi, you can still see the 'mohammedan troop quarters' and the mosque that is quite intact, while all the temples were ransacked and desecrated. in the heat of the battle, the mohammedan generals of vijayanagar turned coat and betrayed them to the bahmani sultans, their co-religionists. thus the old king, 90 years old, was pulled down from his elephant, his head chopped off, and displayed atop a lance. this caused the vijayanagar troops to panic and flee.

yes, mullah arjun singh now wants to impose a quota for mohammedans in the army.

this is after first insisting that no hindu symbols can be worn by army men and women. this edict was one of arjun singh's first in office.

---------- Forwarded message ----------
From: Ram Narayanan <>
Date: Feb 17, 2006 8:53 AM
Subject: Harvard Economics Professor Martin Feldstein on India's Remarkable Economic Progress**


February 16, 2006


There's More to Growth than China . . .
India has awakened from its socialist slumber

February 16, 2006; Page A16

When President Bush visits India next month, he will see a country that is making remarkable economic progress despite enormous structural problems. That progress will, however, be far less visible than it is in China. In India he will not see the modern high-rises or the general level of prosperity that he has seen in urban China. But the progress in India is nevertheless real.

India started its reforms later than China and has been handicapped by political opposition to much that needs to be done. And yet in a visit there last month, what I saw and what I heard in conversations with officials, businessmen and others persuaded me that the strong recent pace of economic growth is likely to continue. India's real GDP has nearly doubled in the 10 years since I first started going there. Last year's growth of about 8% is a plausible estimate of what India can achieve for at least the next few years. While some pessimists predict a decline to a 6% annual growth rate, the optimists believe that plausible reforms, particularly of infrastructure, could raise the growth rate to 10%.

* * *
India is handicapped by a socialist past, enormously powerful labor unions, and influential entrenched business interests. The tradition of state ownership that goes back to Nehru and Indira Gandhi is hard to reverse in a country where trade unions dominate employment in the public sector and in private industry. The Congress Party that leads the current coalition government is dominated by unions whose misperceived self-interest prevents reforms that would actually lead to higher employment and faster economic growth. To make matters worse, the current government needs the parliamentary support of the Communist Party of India.

The current government is headed by Dr. Monmohan Singh, the reform-minded economist who started India's economic reforms in 1991, when he was finance minister. There should be no doubt about his commitment to reform and about the commitment of those around him. But the political constraints mean that the reforms are less than they should be. Ironically, though, they are actually greater than they appear to be. In contrast to the previous BJP government that wanted to assure its supporters that it was achieving the privatization and tariff reductions that it had promised, the current government makes reforms in a quiet way to avoid attracting a backlash from its own political supporters.

There has been a wide range of significant macroeconomic reforms. Sound monetary policy by the central bank has reduced inflation to less than 5% despite the jump in energy costs. A floating exchange rate and the accumulation of more than $130 billion in foreign exchange reserves reduce the risk of the kind of currency crisis that hit Asia at the end of the 1990s. A complex system of state and federal taxes that has been a burden on business activity is being replaced by a unified national VAT. The budget deficit, although still too high, has been reduced despite the revenue loss that resulted from cutting import tariffs. Even with these fiscal deficits, the high rates of household and business saving mean that India's gross national saving rate is a relatively robust 32% of GDP.

The government's microeconomic policies have been less successful than its macroeconomic reforms. Energy remains a major weakness, with too little building of electricity generating capacity and a distribution system that wastes much of the electricity that is generated by a combination of free electricity for poor and agricultural households and the outright theft of electricity that is permitted by low-level bureaucrats in state energy companies. The results are electricity shortages, brownouts and the ubiquitous small generators in shops and homes because the state electricity supply is so unreliable.

In contrast, telecommunications is working well because of widespread use of privately supplied cellphones, now at 75 million users and rising at 3.5 million per month. It is ironic that cellphone service is widely available at low cost because it was regarded as a luxury and therefore left to the market, while electricity is hard to obtain because it has been regarded as a necessity and therefore managed by the government.

Transportation is beginning to improve. A new "open skies" agreement with Washington allows U.S. airlines to fly to any city in India and grants Indian airlines a similar access in the U.S. American travelers have already benefited from new nonstops to Delhi from Chicago and Newark. Within India, privately owned airlines are providing low-cost service among a large number of cities. Although there is still wrangling over details, it now looks like there will be new private airports in Bangalore and Hyderabad and public-private partnerships to rebuild the major airports in New Delhi and Mumbai. Road travel is still difficult in India but a national network of divided highways, begun under the previous BJP government, is cutting time for passenger and truck traffic among major cities. The excessive dependence on trucks for long-distance shipping may be reduced by a recent rule change allowing private rail containers.

The system of primary and secondary public education is a terrible failure, especially for girls and low-income and rural households, with a resulting high level of illiteracy. In contrast, elite institutions of higher education produce world-class graduates among those who have been able to buy quality secondary school education. Although the explosive demand for technically qualified engineers and computer programmers is being met in part by private post-secondary schools, there is a shortage of teachers that may limit the future growth of such schools.

Despite this, high-tech industries are growing rapidly because of the combination of wages that are low even by Chinese standards, an absolutely large educated labor force and widespread knowledge of English. Information technology is only the most visible of these. The pharmaceutical industry is growing rapidly, helped by well-educated chemists and by India's new intellectual property protection legislation that is bringing foreign pharmaceutical companies to supplement what Indian firms are doing.

But industrial activity in general, particularly employment-intensive manufacturing, is much less developed than in China. Industrial development is hampered by labor market rules that apply to firms in the "organized sector" and by the continued government ownership in a wide range of industries. The result is that less than 5% of the population works in the organized sector, the rest remaining in agriculture, retailing, and various small-scale services.

The growth of firms and the establishment of new firms is also hampered by the weakness of the banking system. The commercial banks are still largely state-owned, a relic of their nationalization by Indira Gandhi. They devote much of their lending to the purchase of government bonds. Although new private banks are expanding, there is political resistance to selling the state banks or allowing foreign banks to enter the Indian market despite the contribution that could make to economic growth.

* * *
The success of China in raising the living standard of its people is causing Indian policy officials to think about what India should be able to achieve. A few years ago, whenever I spoke to Indian officials about China's economic performance I was likely to hear that such comparisons were irrelevant because China was a dictatorship and India a democracy. I no longer hear that excuse. It is now common for officials to compare their own performance and policies to those of China and to look at Chinese experience for guidance on what might be done in India.

The optimistic mood in India's business community, the desire for reforms by the top leadership of the government, and the growing number of relatively middle-class households provide a force for change and a source of support for new entrepreneurial activities. If the political leaders can now persuade the traditional opponents of reform that growth can benefit their constituents and that better new jobs will replace the old, India will see decades of remarkable achievement.

Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.



Martin Wolf: What India must do to outpace China 

By Martin Wolf, Feb. 14, 2006 19:56

The "India Everywhere" campaign of the Confederation of Indian Industry took this year's annual meeting of the World Economic Forum, in Davos, by storm. If public relations were the route to economic success, India would be a world-beater. Indians were indeed everywhere, while the Chinese were relatively invisible. Since Indian economic growth is now forecast at 8.1 per cent this fiscal year (to March 31 2006), confidence is running high. Yet confidence has an evil twin: complacency. It is far from certain that India's growth rate is now durably and decisively above the average of the pas quarter of a century. It is equally far from certain that India will do better than China in exploiting its potential. Much reform is still needed. The greater the complacency, the greater is the risk of doing too little, too slowly. Hitherto, China has taken the lead. Over the past 25 years, its economic growth has averaged just under 10 per cent a year. According to Angus Maddison, the economic historian, Chinese gross domestic product per head, at purchasing power parity, rose almost twice as fast as India's. Will this relative performance change? More important, might it change because of a surge in India's growth? Shankar Acharya, a former chief economic adviser to the Indian government, argues persuasively against this view, in the introduction to a forthcoming book. He suggests that medium-term growth is likely to remain about 6 per cent a year.* This is certainly consistent with the trends (see chart). Not only has Indian growth averaged just under 6 per cent over the past 25 years, but a five-year moving average has deviated remarkably little from this level. While Indian growth has exceeded 7per cent in the past three calendar years, this followed three years when it averaged just 4.7 per cent. Much of the recent growth surge has been cyclical rather than structural. Why, then, might a reasonable analyst anticipate a surge in India? There are three broad reasons: first, Indian demography is relatively favourable; second, India has better institutions than China; third, India has more room to improve its policies and investment performance. These points have force. But they also describe potential, not performance.

According to United Nations forecasts, India's dependency ratio (the ratio of those above and below standard working age to those of working age) will indeed fall below China's, but only in 2030. Moreover, both countries will still retain the opportunity to improve the quality of the labour force and to shift workers out of agriculture. Unfortunately, India has done a particularly poor job of absorbing its labour force into productive employment. Between 1993-94 and 1999-2000, for example, the economy grew 6.5 per cent a year and employment just 1 per cent. Crippled by restrictive labour regulation, employment in organised manufacturing has remained stagnant at about 6m, or 1.5 per cent of the labour force. The much-vaunted information technology sector employs just 1m – a drop in the Indian Ocean. Unused labour is not an advantage, but a terrible burden. It is true, again, that India has a number of institutional advantages over China: a well-developed private sector; a relatively entrenched legal system; a stable democracy and freedom of speech. The World Bank's governance indicators reflect some of these advantages, particularly a vastly superior score on "voice and accountability" (see chart). It also gives India a modestly better score on the control of corruption and the rule of law. But it gives a worse one on regulatory quality and government effectiveness. Of the latter there can be little doubt: China's ability to mobilise resources remains far greater than India's, as demonstrated in its vastly superior performance in provision of infrastructure. This brings us to the third reason – the potential for policy improvement. India has a large opportunity to raise the investment rate, which remains well below Chinese levels even after the recent revisions to the latter's GDP (see chart). The difference in investment rates is the proximate cause of the difference in growth rates between the two economies.

Behind the huge gap in investment are significant and enduring Indian policy failures. Huge fiscal deficits are one example. Still more important have been the deep-seated obstacles – in the labour laws, the reservation of production to the small-sale sector and even in trade policy – to rapid expansion of labour-intensive production. That, in turn, helps explain the biggest discrepancy between Chinese and Indian growth: Chinese manufacturing grew at close to 12 per cent a year between 1990 and 2003, while India's grew at just 6.5 per cent, well below the 7.9 per cent achieved by India's services. This pattern, suggests an illuminating working paper from staff of the International Monetary Fund, is connected to a long-standing bias towards a skill-intensive pattern of economic development.** Up to 1980 this bias generated a relatively small, and skill-intensive, manufacturing sector. Since then it has generated an exceptionally large, but also skill-intensive services sector. The share of services in employment was no less than 17 percentage points below that of comparable countries in 2000, even though its share in output was 4 percentage points higher. Both of these patterns were biased against mass employment and, to the extent that profitable opportunities were foregone, against growth itself. This must change if India is to thrive. The improved performance of the Indian economy in the last quarter century is both a fact and an achievement. Yet it could be better still. It will not become better, however, without substantial further reform. As Mr Acharya points out, change must occur in five pivotal areas: deregulation of labour markets and an end to the reservation of production to the small-scale sector; revitalisation of agricultural growth; increased investment in infrastructure; elimination of fiscal deficits in the current budget; and, finally, across-the-board privatisation and further trade liberalisation. Yes, all this will prove difficult. But it is also hugely important. India stands on the threshold of accelerated growth, but it will not cross it without a great deal of assistance.


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