The Telegraph
Since 1st March, 1999
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- The IT and biogenetics boom alone will not help the economy

Ours is an age that is wonder-struck by technology. Our technological capability is the focus of national pride and the symbol of our status in the world. And indeed, given the impact on our way of life of the miracles of modern science, this is an attitude that should surprise no one.

It is, however, an attitude that is fast becoming an obsession. Technology is increasingly regarded as the mystic cabala of our century, with the magical properties once attributed to incantations and magic potions. Hi-tech, we believe, is the highway to success and the panacea for the problems of poverty and stagnation. Yet over the last four decades, during the space age and the IT revolution, the cracking of the genetic code and the triumphal progress of long-distance communication, the economic growth of the West has been abysmal, well below the global average. Meanwhile, east Asia has registered astronomical growth, a process to which, as the economists, Alwyn Young and Lawrence Lau, have irrefutably demonstrated, technological progress has contributed little or nothing. The Pacific miracle has been a triumph of low technology. So too over the last two decades has been south Asian growth which, while modest by east Asian standards, has yet been more than twice the global average.

Myths, however, have a life of their own in a world rarely invaded by harsh reality. The mythology of hi-tech is alive and well in India and two of its true believers have recently fallen victim to one such rare reality check. Messrs N. Chandrababu Naidu and S.M. Krishna, cyber-czars of Hyderabad and Bangalore, have just discovered that technology works no electoral miracles.

And by their unfortunate discomfiture hangs a tale. The east Asian miracle, it is increasingly recognized, is not an isolated regional phenomenon. It is part of an unfolding global pattern of specialization that is integrating the labour surpluses of Asia into the mainstream of world trade. Since the Sixties, trade has been characterized primarily by the shift of labour-intensive activities to low-wage economies, at least to those that were prepared to open up their economies.

South Asia too shared the export advantage of low wages throughout the Seventies and Eighties to the extent that it opened up to the world. However, particularly in India, this was a slow and reluctant process forced on us eventually only by the crisis of 1991. Meanwhile, old policies persisted, reinforced by the vested interests they nurtured. In particular, our policy of product reservation for small enterprise, supposedly for equity and employment, succeeded spectacularly in crippling the textile industry, the spearhead of export expansion elsewhere in the developing world. Thus, as competition for the global mass market in labour-intensive products intensified, India discovered that it had shot itself in the foot, not just by an autarchic trade policy but by an obsolete industrial policy as well. And, while trade policy was slowly reversed, a political economy dominated by interest groups ensured that product reservations were retained and reaffirmed. We voluntarily opted out of the world’s mass market for traditional labour-intensive goods, the conquest of which propelled China’s stratospheric boom of the Nineties. India meanwhile was in dire peril of restricting itself to niche exports rather than mass markets, to cottage industry, exotica and boutique products, to Ravi Shankar and swamijis galore.

Fortunately, the advantages of low labour costs are pervasive. They extend beyond traditional labour-intensive goods into new industries and services not burdened by past legislation and organized interest groups, activities moreover in which India has been the fortunate beneficiary of accidents of history. The government’s efforts to build up a large, university-educated middle class and its investment in science and technology education have created a labour force well-equipped to capitalize on the IT and biogenetics booms. And its failure, despite its best efforts, to stamp out all vestiges of the knowledge of English inherited from our colonial past resulted in the survival of an asset of incalculable value in an age of instant world-wide communication, basically in English.

Thus, while China dominates the vast world market for traditional labour-intensive manufactures, new vistas are opening up for India in software and IT, biotechnology, basic pharmaceuticals and long-distance communication-based services. In these fields, India’s assets are complementary to China’s (or, indeed, to most of east Asia’s). These advantages, however, are not permanent; they can be replicated elsewhere and they can be irreparably damaged, if not destroyed, by unimaginative policy. Fortunately, there is evidence that electoral compulsions are forcing the Centre and states to correct some of their most egregious policies: West Bengal, for instance, has been compelled by public pressure to recant on its earlier hostility to English education. The Bimaru states, however, have not yet learnt their lesson, despite the West Bengal example.

Assuming, however, that we maintain our existing comparative advantage, should we rest content with doing so' Doubtless, our quixotic industrial policy coupled with the neglect of primary education and health have made it costly and difficult to launch basic labour-intensive manufacturing with quality standards adequate for the world market. In fact, unless certain elements of our industrial policy (notably product reservation for small enterprise) are dismantled, such a venture would be doomed. Yet it is arguable that the effort is indispensable for democratic development. The expansion of IT, biotech, and business process outsourcing means an explosion in employment and incomes for the college-educated, English-speaking urbanite, incentives for upward mobility and opportunities for the less fortunate to ascend the social ladder and be absorbed in the Great Indian Middle Class.

Yet it is hardly an inclusive development strategy. It emphasizes services performed by an educated middle class as the leading sector in growth —amidst an ocean of illiteracy and poverty. Of course, income generated here will eventually trickle down to the poor through increased demand for food and manufactures. But this is a process that raises mass aspirations and then fulfils them excruciatingly slowly. Not only is it inequitable in the extreme, it is also a prescription for political volatility. It is doubtful if it is a sustainable strategy in a democracy.

Contrast this with China. China began with the virtual dissolution of the communes, an institutional reform that doubled the per capita income of its 600 million farmers between 1978 and 1984. It followed this up by flooding the world market with the infinitely varied products of its raw, but literate and healthy, labour force. The initial impact of expanding opportunity was distributed among hundreds of millions, creating an ever-widening internal market for basic manufactures that supplemented external demand. The momentum of growth became independent, to a degree, of fluctuations in the world economy. The distributional superiority of this strategy is evident. We have argued that its economic, as well as political, sustainability is also superior.

A very broad industrial base is essential for the productive employment of a billion-strong population. This cannot be achieved by “picking winners” and concentrating on a narrow spectrum, whether the capital-intensive import-substitutes of yore or new favourites like IT. The vast potential of our diversified, labour-intensive small industries needs to be tapped, not by counter-productively protecting them from competition, but by resolving their infrastructural problems (like deficient and irregular power supply and non-existent roads).

Simultaneously, labour productivity, not just of the educated elite, but of the masses as well, needs to be stimulated, essentially through investment in health and primary education. Indeed, if Naidu and Krishna had not been too dazzled by technology to retain this broad panoramic vision of growth, prosperity would have been far more widely shared in their states and the story of these elections would have been very different.

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