Tag: industrialization

All About Industrial Policy, Part 3

Part 1 is here, and Part 2 is here.

And here’s a brief recap of the story so far. Part 1 covers what industrial policy is, and why it is important. Part 2 helps us understand that India’s industrial policy, at least in terms of outcomes, has not produced great results.

Now let’s answer the question that really and truly matters: what should India’s industrial policy look like going forward?

We argue in this essay that we are at a turning point in development strategy. Strategies that worked well in the past are unlikely to do so in the decades ahead. In particular, the manufacturing- and export- based growth strategies that drove East Asia’s development miracles are no longer suited for today’s low-income countries; at the very least, they are insufficient. New technologies, the climate challenge, and the reconfiguration of globalization require a new approach for development emphasizing two critical areas: the green transition and labor-absorbing services. Unfortunately, policy makers do not have ready-made recipes or successful models to emulate. Confronting this challenge head-on will require therefore also building greater capacity to learn about new opportunities, constraints, and what works and doesn’t as governments experiment with new policies on a number of fronts.

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/a_new_growth_strategy_for_developing_nations.pdf

Dani Rodrik and Joseph Stiglitz have a new essay out on just this topic, called A New Growth Strategy for Developing Nations. And they begin by telling us that what worked in the past may not work in the future. And the reason for that in this instance, they say, is because of:

  1. New Technologies
  2. The Climate Challenge
  3. The Reconfiguration of Globalization

New Technologies

New technologies may well make you think immediately about AI and robotics, which we have covered yesterday and the day before. But the authors aren’t just talking about AI and robotics. They are trying to make a broader point:

The primary culprit was skill- and capital-biased technological changes in manufacturing. These changes increased labor productivity substantially in the advanced economies where innovations originate. But they also undercut the comparative advantage of low- income economies in traditionally labor-intensive manufacturing. The quality and technological standards set by leading firms in GVCs rendered labor-intensive production in export-oriented sectors even less viable.6 The result was that globally competitive formal manufacturing sectors in developing countries ceased being labor-absorbing sectors. They turned into “enclave” sectors where very few of these economies’ excess low-skilled labor could be employed. In countries where manufacturing output held its own, manufacturing employment shrank (as a share of total employment). In the few cases where manufacturing employment registered an increase, the rise was concentrated in small, informal, and low-productivity enterprises, while large, internationally-competitive firms generated little demand for labor.

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/a_new_growth_strategy_for_developing_nations.pdf

By the way, these trends have had somewhat surprising, but with the benefit of hindsight, entirely predictable consequences:

Mr Maskin’s theory relies on what he calls worker “matching”. Unskilled workers can be more productive when matched with skilled ones—that is, when they work together. Assigning a manager to a group of workers can do more for total output than just adding another worker. He places workers into four classes: skilled workers in rich countries (A); low-skilled workers in rich countries (B); high-skilled workers in poor countries (C); and low-skilled workers in poor countries (D). Crucially, he thinks low-skilled workers in rich countries (the Bs) are likely to be more productive than high-skilled workers in poor ones (the Cs).

Before the current wave of globalisation started in the 1980s, skilled and unskilled workers in developing countries—the Cs and Ds—worked together. Mr Maskin gives the example of a rural Indian man, fluent in English, who helped local farmers understand modern agricultural methods. Wage growth of high-skilled workers (Cs) was weak, because poor transport and communication links made it hard for them to work with skilled workers in rich countries. But low-skilled workers (Ds) did well: their interactions with the Cs boosted total output, which let them demand higher wages, so pushing down inequality.

The latest bout of globalisation has jumbled the pairings: high-skilled workers in poor countries can now work more easily with low-skilled workers in rich ones, leaving their poor neighbours in the lurch. Take “intermediate goods”, the semi-finished products that account for about two-thirds of world trade. The production processes outsourced by big companies in factories or call-centres are by rich-world standards unskilled. But when jobs are sent offshore, they are snapped up by C workers, the relatively skilled ones. According to research from Cornell University, the typical call-centre employee in India has a bachelor’s degree.

Globalisation in its latest guise means such workers come into more regular contact with less-skilled people in the rich world. The Anglophone Indian cited by Mr Maskin may go to work in an export factory where he meets tight deadlines laid down by its American owners. The Cs work with Bs and end up being more productive. The Ds are left by the wayside.

https://www.economist.com/finance-and-economics/2014/08/23/revisiting-ricardo

Question: Who do you think the D’s are likely to vote for in their countries the world over? Who do you think they have been voting for these last ten years or so?

Industrial policies have consequences, children.

Tread (trade?) carefully.

Hello, services.

And because of rapid advancements in technology and the resulting changes in patterns of globalization, the good ol’ industrial policies recommended and implemented in places ranging from America in the 1770’s to South Korea in the 1950’s no longer work. Also, I should note, because of climate change, as Rodrik and Stiglitz discuss in their paper.

And so, they say, services is where it’s at. It is the service sector that will have to absorb all the young people who are going to come of age in India oer the next two decades.

But there is (of course) a problem. The problem is that the kind of service sector growth you and tend to think about (IT/ITeS/BPO/KPO) has “limited potential to create large numbers of employment for the typically low-educated, low-skilled workforce of a developing economy. These new jobs, they say, are a “hodge-podge of largely self-proprietorships or micro/small firms, typically non-tradable and often informal”.

Now this is a major problem, because as they themselves say earlier on in their essay, their entire attempt is focused on answering what they describe as their key strategic question:

Where will the better, more productive jobs come from?

The footnote associated with this question confidently asserts that “Our concern here is not with the overall quantity of jobs or with full-employment, but with the structure of jobs. Reasonable macroeconomic policies (along with “flexible” labor markets) will ensure full employment, but the resulting structure can be sub-optimal from a developmental standpoint and not growth-promoting. We focus, therefore, on the creation of more jobs in the more productive sectors of the economy as a vehicle of structural transformation and growth, analogous to the role that industrialization has played historically”.

But that, alas, doesn’t resonate with the “hodge-podge, non-tradable and often informal” service sector. And that is going to be a challenge along two fronts (at least).

First, this will have an impact on inequality. When the authors say that the best that can be hoped for is that some service sector firms will see an increase in productivity, but the vast majority will not, they are also saying that some workers will see a rapid increase in their wages, but others will not. Maskin’s model will continue to have legs in this brave new world of ours.

Second, expectations setting becomes even more important. Based on what we currently know, growth via even the most successful industrial policy won’t be as impressive as it was in the second half of the twentieth century. Short, brutal version: yes, India has missed the proverbial bus.

Even in the best-case scenario, a services-based model is unlikely to deliver growth rates approaching those experienced in East Asia. For one thing, increasing productivity in labor-absorbing services is likely to prove more difficult than in manufacturing, even if the strategies outlined previously prove successful and even if there remains a significant gap in productivity in the services sector between developed and developing country. This is because manufacturing technologies are more standardized and have proved easier to copy despite large differences in the context of developing countries. But there is another general-equilibrium reason as well. Under manufacturing-led growth strategies, a succession of export- oriented sectors – wigs, toys, garments, autos, steel – could take off one after the other without regard to domestic demand. By contrast, the expansion of non-tradable services – those that are most likely to absorb employment — is ultimately limited by the size of the home market. Individual service sectors cannot keep growing if other service sectors are not also expanding and increasing their productivity; the growth of retail, say, depends on the growth of personal services, hospitality, and the rest of the economy. Otherwise, the profitability of the more rapidly expanding services would soon collapse. This complementarity on the demand side necessitates balanced growth and lowers the ceiling on the potential growth rate of the economy.

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/a_new_growth_strategy_for_developing_nations.pdf

But Not Doing Anything Ain’t An Option

Why can’t the markets just “figure it all out”? Isn’t that what they’re supposed to be good for in the first place? Why bother with industrial policy at all?

Rodrik and Stiglitz recommend against letting markets do their thing, because there are things that stop the market from working the way it is supposed to. We call this market failure. And that is why, the authors say, all of the most rapidly growing economies of the past have relied heavily on industrial policies promoting productive diversification and the growth of new industries.

I actually prefer their argument in the very last paragraph of their essy, where they say that choosing not to have an industrial policy is also an industrial policy. You might well think that this is a most brilliant idea, but try telling that to the B and D workers in Maskin’s world.

So What Should We Be Doing?

The significant uncertainties in technological evolution, heterogeneities among production units, and the highly dynamic setting in these new areas require a new model of iterative, strategic collaboration between firms and government agencies (national and sub-national). The focus would be on experimentation and learning, with objectives, instruments, performance criteria and institutions developed and shaped over time. Government capacity would be accumulated in the process, rather than presumed as given.

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/a_new_growth_strategy_for_developing_nations.pdf

In plain simple English, this is what it means:

  1. “Significant uncertainties” means “We don’t really know what a new industrial policy will look like”.
  2. “Iterative and strategic collaboration” is academic speak for “We’ll figure it out as we go along”.
  3. “The focus would be on experimentation and learning, with objectives, instruments, performance criteria and institutions developed and shaped over time” means we are not joking about pt. 2
  4. “Government capacity would be accumulated in the process, rather than presumed as given” means “We know that governments don’t know anything about this either, but they’ll have to learn, same as the rest of us.”

So that paragraph is really saying this:

We don’t know what a new industrial policy will look like, but we will figure it out as we go along. We have to, we have no choice. And that includes you too, government!

Now, you may think that I’m being facetious, but I assure you that I am not. They’re quite right!

We really don’t know what the world is going to look like with the advent of robotics and AI. We really don’t know what impact climate change will have during and beyond the time-frame of us getting used to a world with AI. But employment markets are likely to be volatile, and there may well be job losses, particularly in the manufacturing sector. Generating twenty million jobs every year, year after year, for the next twenty years is going to be tough, but we have to do it. Otherwise, we are screwed. Manufacturing probably won’t do it for us, so we have to figure out how to make it work using a combination of manufacturing, export oriented services, and non-tradable services.

India’s challenge is to not just catch up with those who went before us, but to do so on a brand new map. Technology has torn up the old one, you see. We have to do it starting about five years ago, if not earlier. We have to do it with our current state of state capacity, and for a larger number of people than has ever been attempted before (including China from twenty five years ago). And we have to do it while contending with climate change, and in geopolitical scenarios that are crazier than they have been in a long, long time.

Let’s wish ourselves luck, because we’re going to need it.

All About Industrial Policy, Part 2

Yesterday’s post covered what industrial policy is, a taxonomy of industrial policy, some details about South Korea’s industrial policy, and the importance of negative incentives.

So… well, then. We’re done, right? We know industrial policy is important (and why). We know what we did wrong, we know what South Korea got right. So let’s go ahead and er, make shit happen.

Industrial Policy From Here on In Won’t Be Easy

But hang on, let’s first make coffee.

What do we need to make coffee? Well, we need some coffee, we need some water, we need heating equipment of some kind, and we need a person to do all of this for us. In the language of the economist, we can combine raw materials, capital and labor in order to produce output.

But hang on for a second. Do we really need the last item on that list?

Now, you might notice that the cup was placed on the stand, the water was already in the machine, and about a thousand other “Well, actually” responses are possible. And depending on how we think about robotics and AI, our responses are likely to be biased towards either end of the “OhThat’sSoFreakingCool – WTF!” spectrum.

But like it or not, here’s the truth: the advent of AI and robotics is here, and it is only a matter of time before capital replaces many, many jobs in not just manufacturing…but also services.

Yeah, but that’s way out in the future, right?

The Ticking Time Bomb That is India’s Unemployment Problem

Um, not so much:

From 1990 to 2007, the study shows, adding one additional robot per 1,000 workers reduced the national employment-to-population ratio by about 0.2 percent, with some areas of the U.S. affected far more than others.

This means each additional robot added in manufacturing replaced about 3.3 workers nationally, on average.

That increased use of robots in the workplace also lowered wages by roughly 0.4 percent during the same time period.

“We find negative wage effects, that workers are losing in terms of real wages in more affected areas, because robots are pretty good at competing against them,” Acemoglu says.

The paper, “Robots and Jobs: Evidence from U.S. Labor Markets,” appears in advance online form in the Journal of Political Economy. The authors are Acemoglu and Pascual Restrepo PhD ’16, an assistant professor of economics at Boston University.

https://news.mit.edu/2020/how-many-jobs-robots-replace-0504

And the kicker is that this article was published in May 2020. Dunno if you’ve noticed, but there have been a couple of advancements in AI since then.

Long story short, there may just not be that much of demand in manufacturing for labor in the years to come. And that’s a problem for us, because the one thing we will have a lot of is, well, labor:

18 million people turn 18 each year in India and we have over a 100 million people surplus in agriculture. Unless we create 20 million new jobs each year, India’s dream of a demographic dividend could easily turn into a nightmare!

https://takshashila.org.in/20mj

And how are things going on the job creation front?

The number of fresh formal jobs created fell by 10 per cent in 2023 compared to the previous year, reflecting slowdown in the pace of formal job creation, a Business Standard analysis of the latest payroll data shows. This is crucial as only the formal workforce enjoys social security benefits and is protected by labour laws.

Released by the Employees’ Provident Fund Organisation (EPFO), the latest data available till October 2023 shows that 9.06 million new subscribers joined the Employees’ Provident Fund (EPF) between January and October. The figure was 10.1 million in the corresponding period of the previous year.
The data also shows that the number of new young subscribers belonging to the 18-28 age group declined by 11 per cent to 5.97 million this year from 6.71 million in the corresponding period last year. This is crucial because subscribers in this age group are usually first-timers in the labour market, thus reflecting its robustness.

https://www.business-standard.com/economy/news/fresh-formal-jobs-creation-falls-10-to-9-06-mn-in-2023-epfo-data-123122600612_1.html

Quality Over Quantity is Applicable to Debates Too, Y’Know

Now, if you like, you can yip about whether this is the correct way to calculate employment and go on a “actually, it is not all that bad” op-ed writing spree. If you like, you can yap about how this actually understates the problem, and go on a “actually, it is much worse” op-ed writing spree.

Me, I prefer to internalize the fact that we are simply not creating enough jobs, and haven’t been doing so for years.

Worse, the demand for labor is going to go down in manufacturing from here on in. Thinking through this problem is, I would argue, a better use of our time than generating forwardable content for WhatsApp.

This matters, by the way, because election season is upon us, and we will soon have hordes of people yelling at each other on every platform available to humanity, online and offline. Half of them will yell about how 2004-2014 was heaven, and 2014-2024 was hell. The other half will yell about exactly the same thing, but with a (-1) outside the bracket.

Is it half and half? Or is it 37% and 63%? Quick, somebody run an RDD on this so that we can talk about truly important stuff on Twitter!

I invite you, dear wise and discerning reader, to stick your tongue out at all those rabble rousers and look at this chart instead:

Manufacturing, value added (% of GDP) – India, China, Korea, Rep.

Fact: if we had an industrial policy across these twenty years, it has failed. Full stop. No proof required, one might say.

Manufacturing as a percentage of GDP has not only not gone up in this time, it has actually declined from 16% to 13%. I look forward to the world class econometric analysis that Extremely Angry Economists on both sides of the divide will come up with to show that “No, actually, most of the decline occurred in <U/N,P/D,A> era”…

…but again, my personal stance is why bother trying to figure out who couldn’t get a stalled car to start? It’s still sitting right where it was twenty years ago, and that’s the real problem.

And it gets worse:

Manufacturing, value added (% of GDP) – India

So let’s get one thing straight:

Not a single government has managed, over the last three decades, to set India on a sustained and sustainable path of increasing industrialization.

What Have We Learned, And What Do We Know?

Asking why no government could do this so far is a good use of our time. Asking what can be done from here on in is a good use of our time. Squealing and screaming about who is responsible for it not having happened so far may be cathartic, but that’s about it. Doesn’t help much beyond that.

So what can be done from here on in? Well, if the manufacturing chart is a depressing one, here is one imbued with some optimism:

Services, value added (% of GDP) – India

Can services absorb all those young folks looking for jobs in the years to come? Or will manufacturing have to come to the rescue? Can it, given robotics and AI?

How should a policymaker think about this in general? How should a policymaker think about this in an Indian context? What are the strengths and weaknesses of either approach? What does research say about all of these questions? That’s what we will talk about in tomorrow’s post.

But make no mistake: this is what really and truly matters. India managed a good start on the long road to development in 1991, but we haven’t traveled far enough on that route in the years since. And that long road is about to get a whole lot tougher, given AI and robotics.

So please, let’s get a move on.

Should we get started on this then, or should we continue to shirk our responsibilities and shout inanities online instead?

Now that’s the kind of s and sh pontification that I can truly get behind.

All About Industrial Policy, Part 1

In 1961, India’s income per person was $86, South Korea’s was $94 and China’s was $76. India was right in the middle of a very poor pack of countries. India’s income per person today is around $2300, China’s is around $12,500 and Korea’s is around $35,000.

Rajan, Raghuram; Lamba, Rohit. Breaking the Mould: Reimagining India’s Economic Future (p. 47). Penguin Random House India Private Limited. Kindle Edition.

Pictures are worth a thousand words, no?

And as I always say whenever this chart comes up in a class I’m teaching, I don’t think it is possible to look at this chart and not ask “Saala, what did they do that we didn’t?”. And because I like to play around with words, I say that some of the students might also wish to ask what we did that they didn’t.

So what did they do?

They enacted “government policies directed at affecting the economic structure of the economy”, in the words of Joseph E. Stiglitz and Justin Lin Yifu. Or if you prefer shorter, simpler phrases, they had better industrial policy.

So what are these government policies directed at affecting the economic structure of the economy? Why are they needed, what effects do they have, who came up with them, and is there anything special about industrial policy as regards India? Let’s deal with each of these questions in turn, one at a time:

What is industrial policy?

Rapid sustained economic development, Rodrik and Stiglitz tell us, requires an explicit strategy.

And almost always since we came up with the idea of rapid (it’s not always been sustainable in more than one sense of the term, alas, about which more later) economic development, the strategy has always had one goal: how can we industrialize better?

Why industrialize at all is a fair question to ask, of course. And the answer is that it is painfully clear to us that you cannot hope to be a developed nation without industrializing first. This becomes clear by doing lots and lots of complicated econometric studies, or by looking at a chart with a lovely title.

It’s a chart called What The Fuck Happened in 1750? And the answer is industrialization. Industrialization happened, starting 1750. Or there and thereabouts, at any rate:

And so what we would like to do is make sure that as many countries industrialize as quickly as possible, so that the citizens of all countries can live a longer, healthier and more productive life. Or that’s the plan hope, at any rate.

So what is industrial policy? It is a policy aimed at industrializing a country as quickly as possible. And if you go and take a look at the India, China and South Korea chart again, you can now look at it as three separate industrial policy experiments. One of them clearly worked when it was implemented, one figured it out a little while later, while the third is beginning to hit its straps only now.

So did these three countries differ in terms of their industrial policy, or did they have the same type of industrial policy, but different qualities of implementation?

Think diets, if that helps. If three of your friends are comparing their weight loss, were they on different diets, and therefore lost weight at different rates? Or was it the same diet, with some of your friends being better at sticking to it? And in the case of the the countries, it turns out they were implementing wildly different types of industrial policy.

Which begs the question: how many types of industrial policy are there anyway?

Types of Industrial Policy

Dani Rodrik and Mariana Mazzucato present a framework for evaluating the different types of industrial policies in their paper, Industrial Policy with Conditionalities: A Taxonomy and Sample Cases. On pp 8 and pp9 of their paper, they present a simple framework, based on which I have created that picture you see above.

Industrial policy depends, they say, on the answer to these four questions:

  1. What type of firm behavior are you targeting through your industrial policy?
    • Do you hope to ensure equitable access to the products and services that will result from your industrial policy?
    • Or do you hope to direct firms’ activities towards socially desirable goals?
    • Or do you hope to get the successful firms to share their returns with you, the government (via royalties, perhaps, although other options are also available)
    • Or do you plan to require that profits be mandatorily reinvested into productive activities?
  2. How do you plan to work out the conditionalities associated with the program? Are they up for negotiation, or are they cast in stone?
  3. Is the upside from the program split? Is the downside split? (When I say split, I mean between the firm in question and the government).
  4. Finally, what about measurement criteria?

Using this framework, Rodrik and Mazzucato say, you can figure out the type of industrial policy at play.

Here’s how their framework can be applied to the case study of the now famous Oxford/AstraZeneca vaccine program, for example:

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/conditionality_mazzucato_rodrik_0927202.pdf, Table 2

So all right, there’s industrial policy, which is about industrialization, and South Korea seems to have done a better job of it than China and India (so far), and that’s because they used a type of industrial policy that worked better. Speaking of types, there’s lots of different types possible. But it still begs the question: what was South Korea’s industrial policy, exactly?

South Korea’s Industrial Policy

Understanding South Korea’s industrial policy requires a book length treatment, and there are more than a few that have tried to tackle the subject. As you might imagine, it is difficult to compress all of that material into a single blog post. But here’s what can be said:

  • South Korea’s industrial policy was inspired in part by the Meiji Reformation in Japan
  • The Meiji Reformation was in part based on the historical school of economics from Germany.
  • This historical school took part of its inspiration from… and this might surprise you a bit… Alexander Hamilton(!)
  • In particular, you might want to focus on a specific report:

One that has become especially well known was the ‘Report on the Subject of Manufactures’ submitted to Congress in 1791. In the report, he stressed that the United States needed to develop its manufacturing sector in order to grow its economy, bolster its military, secure its sovereignty, increase productivity, and absorb labour. He also stressed that industrialization was necessary to avoid being disadvantaged in trade with European nations, especially Great Britain, the industrial superpower at the time. The way to do this, according to Hamilton, was for the United States to protect and nurture its manufacturing sector through active use of industrial and trade policy. More specifically, industrialization was to be achieved by strategically applying tariffs and import bans on imported manufactured goods.

Hauge, Jostein. The Future of the Factory: How Megatrends are Changing Industrialization (p. 35). OUP Oxford. Kindle Edition.

And so the outline of South Korea’s industrial policy was to protect and nurture its manufacturing sector. Here are two questions worth asking:

  1. Protect it from whom?
  2. Nurture it for what purpose?

It is the answers to these questions that helps us understand where India and South Korea differ in terms of their industrial policy from the second half of the twentieth century.

The Carrot and The Stick

Both South Korea and India, you see, were clear about the answer to the first question. Both of their domestic industries needed to be protected from foreign competition.

But their answer to the second question could not have been more different. South Korea said that the protection and the nurturing was necessary so that South Korean firms could one day become world-beaters.

India, on the hand, ended up protecting its domestic manufacturers in perpetuity. Or least until 1991, at any rate.

We have names for both policies (of course we do). The South Korean policy was about export promotion – protect domestic firms until they learn to play with the big boys on their own turf. The Indian policy was about import substitution – if you’ve ever seen a mollycoddled spoilt Indian kid, that was India’s domestic firms until 1991. (As always, it’s a more complicated story than that, but hey, this post is long enough already. Some other day, maybe, we’ll dive deeper into this)

In other words the South Koreans got their incentives right – they held out the carrot, but didn’t hesitate to wield the stick when necessary. The carrot was pretty much whatever it was that the South Korean firms asked for – cheap labor, state supported finance, guaranteed power, great roads, you name it.

But Rodrik and Mazzucato’s framework comes into play here, because access (pillar 1) was given to export oriented firms, based on strict and non-negotiable conditionalities (pillar 2), with explicit and clear measurement standards (pillar 4):

The capacity to export told politicians in Japan, South Korea and Taiwan what worked and what didn’t and they responded accordingly. Since exports have to pass through customs, they were relatively easy to check up on. In Japan, the amount of depreciation firms were allowed to charge to their accounts – effectively, a tax break – was determined by their exports. In Korea, firms had to report export performance to the government on a monthly basis, and the numbers determined their access to bank credit. In Taiwan, everything from cash subsidies to preferential exchange rates was used to encourage exporters.

Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (pp. 76-77). Grove Atlantic. Kindle Edition.

And if the measurement in pillar 4 didn’t come up to the expected level, pillar 3 kicked nito play, and how:

North-east Asian politicians then improved their industrial policy returns through a second intervention – culling those firms which did not measure up. This might have meant a forced merger with a more successful firm, the withdrawal of capital by a state-directed financial system, withholding – or threatening to withhold – production licences, or even the ultimate capitalist sanction, bankruptcy. Since the 1970s, there has been much talk about state industrial policy in western countries being an attempt to ‘pick winners’ among firms, something that most people would agree is extremely difficult. But this term does not describe what happened in successful developing states in east Asia. In Japan, Korea, Taiwan and China, the state did not so much pick winners as weed out losers.

Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (p. 77). Grove Atlantic. Kindle Edition.

India? We have the Industrial Disputes Act, which makes it difficult for us to shut down loss making firms, let alone those firms that are not exporting.

The protection to labour in larger firms is extremely high in India and translates into excessively high effective labour costs. As an example, Chapter V.B of the Industrial Disputes Act of 1947 makes it nearly impossible for manufacturing firms with 100 or more employees to lay off workers under any circumstances. Such high protection makes large firms in labour-intensive sectors, in which labour accounts for 80 per cent or more of the costs, uncompetitive in the world markets. Small firms, on the other hand, are unable to export in large volumes.

Panagariya, Arvind; Bhagwati, Jagdish. India’s Tryst With Destiny . HarperCollins Publishers India. Kindle Edition.

So we’ve learnt:

1. What Industrial Policy is…

2. What types of industrial policy there are…

3. What South Korea’s Industrial Policy looked like back in the day…

4. The importance of negative incentives in designing effective industrial policy (and that India sucked at getting the negative incentives right)

OK, cool. So CTRL-C and CTRL-V the South Korean awesome sauce idea into India and we’re sorted. Right?

Right?

To be continued tomorrow!

India: Links for 24th June, 2019

  1. “Was the earlier system, based largely on ASI (Annual Survey of Industries) for manufacturing (registered and unregistered), perfect? No, it wasn’t. Is the MCA-based system perfect? No, it isn’t. Despite problems with MCA, is the MCA-based system superior to the ASI-based one? The consensus (I didn’t use the word unanimity) among experts seems to be that it is.”
    ..
    ..
    Bibek Debroy’s article discusses Arvind Subramanian’s paper. That excerpt above is probably the best way of thinking about it – and as I’ve said before and will say again: if thinking about GDP measurement doesn’t give you a headache, you aren’t doing it right. By the way, two of the twitter threads this past Saturday were about the same issue: worth reading, in my opinion.
    ..
    ..
  2. “In manufacturing, the increase in informalisation is due to two reasons, according to a 2018 study by the Indian Council for Research on International Economic Relations: first, because of dispersal of production from larger to smaller units; and second, because of the creation of an informal workforce subject to fewer regulations, the fact that employing contract (or informal) workers reduces the bargaining power of the regular or formal worker, suppressing wages overall.”
    ..
    ..
    Indiaspend reviews the state of employment in the country, and finds that there is far too much informalization – but also that this is increasing  over time. In this regard, the best book, by far, to read is Bhagwati and Panagariya’s “Tryst with Destiny”.
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  3. “Indian macro policy has been operating under an implicit 2-4-6-8 framework, which are the targets for the sustainable current account deficit, the desired level of retail inflation, the consolidated fiscal deficit target embedded in law and the aspirational rate of economic growth. There is a need to take a fresh look at this macro policy playbook for two reasons. First, the individual targets have been decided at different points of time by different parts of the economic policy ecosystem rather than emerging from a common analytical project. Two, there are reasons to doubt its internal coherence given that India has rarely been able to meet all four targets simultaneously over the past decade.”
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    The always excellent Niranjan Rajadhakshya comes up with a useful framework to keep a tab on India’s macro levers: 2-4-6-8 is a very useful mnemonic. The rest of the paper speaks about whether this framework makes sense!
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  4. “This crisis has systemic written all over it because the market can no longer distinguish financiers that are illiquid from those that are insolvent.”
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    I’m calling it: there’s a major crash just waiting to happen in the Indian equity (not just equity) markets, no matter what is done. Speaking of what is to be done, the five suggestions here make a lot of sense. Andy Mukherjee doing what he does best.
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  5. “India’s firm size distribution is excessively small, even compared to other developing countries. Also, complementarily, the number of really large firms are also excessively small. We have a “small is bad” problem. What is driving the small-ness? Is labour regulations responsible for discouraging businesses from “placing too many workers under one roof”? Is there anything else driving or contributing significantly to this trend?”
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    Bhagwati and Panagariya once again. Also, urbanization matters! Artificial dispersion of industries or people (same thing) tends to not work. Gulzar Natarajan on what needs to be done to increase productivity in India.

Links for 8th May, 2019

  1. “The god question is not easy to answer conclusively because god’s existence is a matter of faith, not science. There is no mathematical proof. God is a construct of belief. The great Austrian-American mathematician Kurt Gödel once attempted to prove the existence of god. His ontological proof of god, by definition, is more axiomatic and derived from semantic logic than from real mathematics. It was not long before it was discredited and the axioms questioned. Undeterred, a group of mathematicians from around the world is using open-source documentation to formalise Gödel’s proof to a level where it can be proven by computer programs. We will wait.”
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    Sachin Kalbag, a guy worth following on Twitter, writes about a near death experience he had some years ago, and asks questions about god, faith, belief and logic.
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  2. “You guys are so angry and militant, you’re going to cause havoc,” he recalls being told, delivering his anecdote with a comic’s timing. “You are not getting any arms. You are not ready to fight. You are raaaaw,” he says, disintegrating into laughter. Instead of war, the 21-year-old studied economics, ending up at the University of East Anglia in England. “When all this fighting is over,” he was told, “there will be a country to run.”
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    A short interview with Tito Mboweni – my only criticism is that it is too short, but then again, that’s the style of the Lunch with FT series. By the way, you might want to try Googling the series. Some extremely interesting interviews.
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  3. “The first two factory acts, one in 1881 and the other in 1891, neglected to shorten working hours. When the 1890 Factory Commission gathered workers’ voices, both male and female workers overwhelmingly demanded a shorter working day. Doorpathee told the commission: ‘It will be better if the hours are shortened.’ The 1891 Factory Act declared Sunday a holiday, limited the work day to 11 hours for female workers and seven hours for child workers (aged between nine and 14). But it left out adult males from the ambit of a shorter work day, and men continued to work between 13 to 16 hours per day.”
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    A truly lovely read about Bombay workers, their living conditions, and about the night schools that started in Bombay at that point of time.
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  4. “In short, strange as it may seem, industrialisation of India is the soundest remedy for the agricultural problems of India. The cumulative effects of industrialisation, namely a lessening pressure (of surplus labour) and an increasing amount of capital and capital goods will forcibly create the economic necessity of enlarging the holding. Not only this, but industrialisation, by destroying the premium on land, will give rise to few occasions for its sub-division and fragmentation. Industrialisation is a natural and powerful remedy…”
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    1918. Dr. Ambedkar wrote the essay from which this excerpt is taken in the year 1918. 101 years later, we still retain policies that keep people tethered to agriculture. Also worth reading is the rest of the article – and indeed, therefore the writings of Dr. B.R. Ambedkar.
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  5. “Sloman and Fernbach cite a survey conducted in 2014, not long after Russia annexed the Ukrainian territory of Crimea. Respondents were asked how they thought the U.S. should react, and also whether they could identify Ukraine on a map. The farther off base they were about the geography, the more likely they were to favor military intervention. (Respondents were so unsure of Ukraine’s location that the median guess was wrong by eighteen hundred miles, roughly the distance from Kiev to Madrid.)”
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    Never be too confident of anything, least of all about whatever it is that you think you know, is my key takeaway from this article – but implementing this is easier said than done!