1. India, China rising even as West slows down; Meghnad Desai explains why this great transformation happened

India, China rising even as West slows down; Meghnad Desai explains why this great transformation happened

India has not reached its Lewis moment yet (thanks to bad labour legislation). It can absorb capital looking for higher yield

By: | Published: December 12, 2017 5:44 AM
Income growth rates are also low in the Eurozone and the UK. The US seems to be in a state of full employment, low inflation and around 3% income growth.

The Great Recession of the last nine years has inspired pessimism in the OECD nations about inter-generational economic mobility—children worse off than their parents, low productivity growth and secular stagnation. But inflation is surprisingly low. Income growth rates are also low in the Eurozone and the UK. The US seems to be in a state of full employment, low inflation and around 3% income growth. But the feeling is of Americans being losers.

Contrast this with the rise of China. China and India have done much better, with dramatic declines in poverty. Indeed, economist Surjit S Bhalla shows that the share of China and India in the total world population will match their share in world income by 2030 as it had been in 1500. The centre of economic gravity has moved steadily eastwards. In the 1950s, Paul Baran argued with a fashionable Leninist pessimism about the impossibility of growth in underdeveloped countries if they stuck to the capitalist path. When growth did come to Japan, the Asian Tigers and, finally, China—more moderately, to India—it came via exporting to the Western countries, importing capital & manufacturing technologies and using cheap labour. How and why did this come about ? In his book, The New Wealth of Nations, Bhalla proffers an answer. In one word, it is “education”, or as he says, in two words: “human capital”. It is education which enabled Asia to emerge as the leading growth region as the West slowed down. Between 1951 and 1970, the rich countries’ per capita incomes grew at 4.1% p.a. while the rest grew at 2.3%. But between 1981-2016, their growth slowed down to 1.4%. The poor countries had 2.6 billion poor people. But while the developed countries slowed down, the latter speeded up growth.

Any book by Bhalla is, of course, full of numbers and tables and graphs. He provokes his readers by arguing against the received wisdom of increasing inequality of wealth (neglect of the value of human capital being the major flaw), extolling the advance of women everywhere as a consequence of education and a growing middle-class. It is a book rich with ideas and vignettes from pop songs and dialogues from movies.

By a happy coincidence, earlier last week, I chaired a session where my colleague and friend of over 50 years, Charles Goodhart, and his young co-author, Manoj Pradhan, discussed their explanation of the stagnation in the developed countries—The Great Reversal: Demographics Driving Global Trends. Their emphasis was on the demographic reversal in the rich countries. Declining reproduction rates and increasing longevity meant a greater need for savings but also healthcare needs. As Bhalla refers to an oversupply of skilled labour in these countries, Goodhart and Pradhan blame automation and lack of investment for the low wage growth. It is remarkable that, during the 1960s and 1970s, population growth was considered a problem to be tackled. Now, we speak of a demographic dividend. The key, in my view, is the availability and mobility of capital. During the first 30 years after World War II, there was a great hunger for capital in the rich countries which had to repair war-time damage, cope with the baby boom and meet the aspirations of their citizens. There were restrictions on international capital movements as part of the Bretton Woods system. There was a backlog of technological innovations from the Great Depression and the war periods which could be used in manufacturing now. The result was full employment, steady growth due to increasing productivity and rising incomes of workers as well as their share in total income. This was broken in 1970s. The US went off the dollar exchange standard as it did not want to cover its trade deficit with gold. Then, in 1973, oil prices quadrupled. Suddenly, inflation took off, and wages rose to squeeze profits. But thanks to the container ships and communications satellite, whole factories could be moved to where labour was cheaper. The Bretton Woods system had broken down; so, restrictions on capital movement went. Western capital went East looking for cheap labour. But the workers had to be educated enough to follow instructions given by computer-aided management from a distance. This change in economic conditions is missing in Bhalla’s account as much as in the Goodhart-Pradhan’s. It is this that explains stagnant manufacturing wages in the US. The massive manufacturing output of cheap Asian labour eliminated inflationary pressures.

The world has fewer miserably poor countries, but many more stagnant rich ones. This is also India’s chance. As Goodhart/Pradhan say, China has reached its ‘Lewis moment’ where there is no surplus rural labour left to move to urban industries. India has not reached that yet (thanks to bad labour legislation). India can absorb capital looking for higher yield. This is where Make-in-India makes a lot of sense.

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  1. A
    Arun Goyal
    Dec 16, 2017 at 12:04 pm
    Interesting..However, we forget that India grew due to integration with world economy following near default in loan in the early 1990s. Make in India should not, and must not, go back on this and put us back on the reductionist and isolationist policies of the Indira Gandhi days.
    1. A
      Dec 15, 2017 at 11:24 am
      thanks for sharing that awesome information : emetechnologies /digital-marketing-course-in-chandigarh/
      1. J
        Dec 14, 2017 at 9:42 am
        Make in India does not make any sense now. India missed the manufacturing bus 20 years ago. Now industrial production is most!y automated and there's going to be little use for those ha!f educated rural youths pouring into towns. Other countries will on!Y be interested in pushing their polluting industries here. India should instead train its youth in service industries. ITES is not the only area with great opportunity. Health and geriatric care has a huge global demand. It is beyond understanding why India is not paying attention to developing an army of well trained nurses and doctors, where it has a natural compe ive advantage.
        1. C
          Dec 13, 2017 at 10:18 am
          India needs to concentrate on improving its productivity and efficiency. This need not require huge capital investment. Many of our economic activities are hampered by government legislation. If one identifies legislation that has tied up our economy in knots, we will be able to have higher growth, without much investment. Of course, the resulting higher productivity would make the economy more compe ive globally.
          1. S
            Dec 12, 2017 at 7:03 pm
            In the 60s of the last century Rockefeller,planned for DE-INDUSTRILITZATAION of the US.the aims - 1.Transferring pollution.DETROIT used to smoke-filled d street lights were needed even during the day dustrialiazing the East inn its turn. . 2.No hard work.Earn via the Stock Markets,Derivatives etc manipulating everything,including Gold and the US Dollar. 3 dustrlies the East.It destroys the Agri sector.Bring in GMO 4..GMO,to be spread cross the world. and control food. Beijing and Delhi re indications of what is to come.
            1. S
              Dec 12, 2017 at 7:09 pm
              Industrialization requires destruction of forests.this reduces RAINS dustries themselves guzzle water.These adversely affect the Agri sector will less food production.Land grab is also possible,s distressed farmers sell their Lands.
              1. H
                Harish Harish
                Dec 14, 2017 at 2:30 pm
                Yep, you got it right there. The author couldn't get this point in his whole article. It has lot more to it.
              2. R
                RAVIKUMAR T
                Dec 12, 2017 at 10:14 am
                I don't think China has reached its Lewis moment! Probably it has to make huge investment in interior China otprevent the movement of huge migrant workers to coastal cities.
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