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Economy slackens despite big potential
By Raghuram Rajan |
June 18, 2012, Monday
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Print Edition
Print Edition
EMERGING markets are slowing. One reason is that they continue to be dependent on exports to advanced industrial countries. Slow growth there, especially in Europe, is economically depressing.
But a second reason is that they each have important weaknesses, which they have not overcome in good times.
For China, it is excessive reliance on fixed-asset investment for growth. In Brazil, low savings and various institutional impediments keep interest rates high and investment low, while the educational system does not serve significant parts of the population well.
And Russia, despite a very well-educated population, continues to be reliant on commodity industries for economic growth.
Hardest to understand, though, is why India is under-performing so much relative to its potential. Indeed, annual GDP growth has fallen by five percentage points since 2010.
For a country as poor as India, growth should be what Americans call a "no-brainer." It is largely a matter of providing public goods: basic infrastructure like roads, bridges, ports, and power, as well as access to education and basic healthcare.
And, unlike many equally poor countries, India already has a very strong entrepreneurial class, a reasonably large and well-educated middle class, and a number of world-class corporations that can be enlisted in the effort to provide these public goods. Satisfying the demand for such goods is itself a source of growth.
But, also, a reliable road creates tremendous additional activity, as trade increases between connected areas, and myriad businesses, restaurants, and hotels spring up along the way.
As India did away with the stultifying License Raj [red tape required in doing business] in the 1990s, successive governments understood the imperative of economic growth, so much so that the Bharatiya Janata Party (BJP) contested the 2004 election on a pro-development platform, encapsulated in the slogan, "India Shining."
But the BJP-led coalition lost that election. Whether the debacle reflected the BJP's unfortunate choice of coalition partners or its emphasis on growth when too many Indians had not benefited from it, the lesson for politicians was that growth did not provide electoral rewards. In any event, that election suggested a need to spread the benefits of growth to rural areas and the poor.
There are two ways of going about that. The first is to increase income-generating capabilities in rural areas, and among the poor, by improving access to education, healthcare, finance, water, and power.
The second is to increase voters' spending power through populist subsidies and transfers, which typically tend to be directed toward the politically influential rather than the truly needy.
In the years after the BJP's loss, with a few notable exceptions, India's political class decided that traditional populism was a surer route to re-election.
For a few years, the momentum created by previous reforms, together with strong global growth, carried India forward. Politicians saw little need to vote for further reforms, especially those that would upset powerful vested interests.
But, while politicians spent the growth dividend on poorly targeted giveaways such as subsidized petrol and cooking gas, the need for further reform only increased. For example, industrialization requires a transparent system for acquiring land from farmers and tribal people, which in turn presupposes much better land-ownership records than India has.
Resource Raj
As demand for land and land prices increased, corruption became rampant, with some industrialists and bureaucrats using the lack of transparency in land ownership and zoning to misappropriate assets.
India's corrupt elites had moved from controling licenses to cornering newly valuable resources like land. The Resource Raj rose from the ashes of the License Raj.
As with the other major emerging markets, India's fate is in its own hands. Hard times tend to concentrate minds.
If its politicians can take a few steps to show that they can overcome narrow partisan interests to establish the more transparent and efficient government that a middle-income country needs, they could quickly re-energize India's enormous engines of potential growth.
But a second reason is that they each have important weaknesses, which they have not overcome in good times.
For China, it is excessive reliance on fixed-asset investment for growth. In Brazil, low savings and various institutional impediments keep interest rates high and investment low, while the educational system does not serve significant parts of the population well.
And Russia, despite a very well-educated population, continues to be reliant on commodity industries for economic growth.
Hardest to understand, though, is why India is under-performing so much relative to its potential. Indeed, annual GDP growth has fallen by five percentage points since 2010.
For a country as poor as India, growth should be what Americans call a "no-brainer." It is largely a matter of providing public goods: basic infrastructure like roads, bridges, ports, and power, as well as access to education and basic healthcare.
And, unlike many equally poor countries, India already has a very strong entrepreneurial class, a reasonably large and well-educated middle class, and a number of world-class corporations that can be enlisted in the effort to provide these public goods. Satisfying the demand for such goods is itself a source of growth.
But, also, a reliable road creates tremendous additional activity, as trade increases between connected areas, and myriad businesses, restaurants, and hotels spring up along the way.
As India did away with the stultifying License Raj [red tape required in doing business] in the 1990s, successive governments understood the imperative of economic growth, so much so that the Bharatiya Janata Party (BJP) contested the 2004 election on a pro-development platform, encapsulated in the slogan, "India Shining."
But the BJP-led coalition lost that election. Whether the debacle reflected the BJP's unfortunate choice of coalition partners or its emphasis on growth when too many Indians had not benefited from it, the lesson for politicians was that growth did not provide electoral rewards. In any event, that election suggested a need to spread the benefits of growth to rural areas and the poor.
There are two ways of going about that. The first is to increase income-generating capabilities in rural areas, and among the poor, by improving access to education, healthcare, finance, water, and power.
The second is to increase voters' spending power through populist subsidies and transfers, which typically tend to be directed toward the politically influential rather than the truly needy.
In the years after the BJP's loss, with a few notable exceptions, India's political class decided that traditional populism was a surer route to re-election.
For a few years, the momentum created by previous reforms, together with strong global growth, carried India forward. Politicians saw little need to vote for further reforms, especially those that would upset powerful vested interests.
But, while politicians spent the growth dividend on poorly targeted giveaways such as subsidized petrol and cooking gas, the need for further reform only increased. For example, industrialization requires a transparent system for acquiring land from farmers and tribal people, which in turn presupposes much better land-ownership records than India has.
Resource Raj
As demand for land and land prices increased, corruption became rampant, with some industrialists and bureaucrats using the lack of transparency in land ownership and zoning to misappropriate assets.
India's corrupt elites had moved from controling licenses to cornering newly valuable resources like land. The Resource Raj rose from the ashes of the License Raj.
As with the other major emerging markets, India's fate is in its own hands. Hard times tend to concentrate minds.
If its politicians can take a few steps to show that they can overcome narrow partisan interests to establish the more transparent and efficient government that a middle-income country needs, they could quickly re-energize India's enormous engines of potential growth.
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