How India Changed Growth

Growth economics is filled with errors. The Solow residual has become ingrained in conventional wisdom as "technology" when it is really a measure of intangibles. Technology, sure, but also culture, institutions, creativity. Not to mention, conventional wisdom assumes a linear link between more R&D spending and more innovation. What about entrepreneurs?  Most startups I know don't have an R&D budget -- the whole company is a tech gamble!  How can government officials measure that?  They can't.

But the biggest myth of practical growth economics is getting punctured, thanks to India. The CW still hasn't digested the truth yet, because it is still beholden to the idea that manufacturing is the alpha and omega of prosperity.  Well, India has been showing that a country need not "industrialize" to grow. Rather, India is leap-frogging (for the most part) the trail of sweatshop tears by embracing services-led development.  You might call it a Globalization strategy instead of Industrialization strategy. And lest we forget, embracing Industrialization was no guarantee of success. Remember Africa circa 1960?

Here's Ejaz Ghani in a VOX essay:

... India’s growth pattern in the 21st century is remarkable because it contradicts a seemingly iron law of development that has held true for almost two hundred years since the start of the Industrial Revolution (Chenery 1960, Kaldor 1966). This law – which is now conventional wisdom – says that industrialisation is the only route to rapid economic development for developing countries. It goes further to say that as a result of globalisation the pace of development can be explosive. But the potential for explosive growth is distinctive to manufacturing only (UNIDO 2009). This is no longer the case.

... Service-led growth is sustainable because the globalisation of services is just the tip of the iceberg (Blinder 2006). Services are the largest sector in the world, accounting for more than 70% of global output. The service revolution has altered the characteristics of services. Services can now be produced and exported at low cost (Bhagwati 1984). The old idea of services being non-transportable, non-tradable, and non-scalable no longer holds for a range of modern impersonal services. Developing countries can sustain service-led growth as there is a huge room for catch up and convergence.

Maintream economics taught students that services dominate the non-tradeable sector (think haircuts) across distance.  I always wondered what Elvis or Lassie would say to that.  But now I just wonder what the accountants in India would say.  Probably the same.  Woof. 

This is worth keeping in mind the next time someone tells you that "America used to be a place where people made things."  It still is, but that's not the future. In the future, manufacturing will be automated. American factories will quietly produced more stuff with less, or no, workers on the line. Indeed, that trend may make China's industrialization strategy a bad bet over the long-term.

Comments

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[Mr. Econotarian]

Any advanced economy needs a mix of service and manufacturing. It might be a mix of a small amount of high-value-add manufacturing like the US though.

I suspect that India still has too many regulations keeping its manufacturing sector from being able to export much.

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