In my last two columns, I wrote about some of the challenges India faces in reviving growth, including evidence of declining opportunities for growth in traditional labour-intensive manufacturing, and how there still might be opportunities for growth driven by innovation and changes in demand patterns in rich countries. Last month, prominent Harvard economists Lant Pritchett and Larry Summers released the latest version of their analysis of what they call “Asiaphoria”. They argue that projections of continued rapid growth in Asia, based on recent growth performance for Asian countries such as India and China, do not fit the facts. All the data suggest that rapid growth is rarely sustainable for long periods, and that it “regresses to the mean.” Rather than future per capita GDP growth rates of 6% for India and over 9% for China, the most optimistic predictions of future growth over the next decade or two that are based on past cross-country patterns are closer to 4%. Add in population growth of about 1% a year (slightly lower than the current value, probably higher than long-run values), and that yields the most optimistic GDP growth projection, consistent with average past experience, of 5% a year.
This approach to projecting growth does not try to take account of, or predict, specific drivers of the growth process. The idea is that there are many factors that affect growth, in addition to variables such as investment, and economic policies that influence such variables. Broader governance institutions and exogenous shocks that cannot be predicted with any precision can impact growth very severely. In a striking example, Brazil, which grew at 5.2% a year from 1967 to 1980, had zero per capita growth from 1980 to 2002. In fact, the evidence indicates that developing countries have much more variable growth experiences than developed countries. But this is secondary to the tendency for countries that have grown fast for an extended period to follow that up with slow growth.
Where is the hope for India then? One cause for optimism is that India is still very poor. Hence it has significant room for catch up growth, if policies support that trajectory. Another possibility is to be one of the exceptions to the overall patterns of growth. The most significant exception, with sustained high growth, is China. The other two examples are Taiwan and South Korea, both growing for decades at over 6% per capita. Countries like Japan, Singapore, Thailand and Vietnam also have strong records, though they are not in the same league as the first three countries. So most of the strongest growth records are to be found in East Asia. Thinking about what these examples might have in common, one can note some obvious factors, including human capital, inclusiveness, a combination of trade and technological innovation, and perhaps a sense of national purpose. Of course it is difficult to quantify the individual and combined impact of these factors, or even to measure some of them. And the point of Pritchett and Summers’ analysis is to say that one cannot rely on these factors for sustained high growth, even if they are all in place.
However, let me try to make a case for India’s growth future. Start with the baseline of 5% aggregate GDP growth that comes from the comprehensive analysis of “average” growth experiences. Add 1 percentage point for India’s relative poverty (Pritchett and Summers tend to club China and India together too much in this regard), and another point for its favourable demographics, if there is an immediate attention to building human capital. And removing even some of the myriad frictions in the economy through basic policy reforms, including further opening up to trade and improving the environment for doing business, is probably worth 1 percentage point. Thus, I would argue that despite the pessimism implicit in Pritchett and Summers, annual growth of 8% is reasonable for India over the next decade.
The 8% figure is also consistent with an investment rate of 32-36% and a plausible incremental efficiency of capital use. It is not automatic, but at the same time it is well short of the extreme high performances of China, Taiwan and South Korea, both in the level of high growth and its duration. From multiple perspectives, therefore, India does not deserve to be lumped together with the other Asian giant in projecting slower growth.
It remains true that there are significant external challenges, both economic and political, that India’s policy-makers have to deal with. Global political uncertainties have risen, and there is an inflection point in terms of long-run innovation-related drivers of economic growth. Political and economic skill will be required in both these arenas, but the early signs from the new regime are encouraging, in my view. There are also internal political and social challenges, and here the problem of ideological baggage will have to be dealt with. That may yet be the greatest challenge for the new ruling party.
By Nirvikar Singh
The author is professor of Economics, University of California, Santa Cruz
