Transcript Can India catch up? Can Australia do better?

Can India catch up? Can
Australia do better?
By Sanjeev Sabhlok, DRAFT, 1 June 2011
The centre of gravity of the world
economy is changing
IMF: The combined real output of China and India now equals US output
Table: Share of world output measured in purchasing power parity
Country
China
United States
India
Japan
Germany
Russia
Brazil
United
Kingdom
Australia
•
1980
2.2
24.7
2.5
8.7
6.7
0.0
3.9
4.3
1990
3.9
24.7
3.2
9.9
6.1
0.0
3.3
4.1
2000
7.1
23.6
3.7
7.6
5.1
2.7
2.9
3.6
2010
13.6
19.7
5.4
5.8
4.0
3.0
2.9
2.9
2016
18.0
17.8
6.6
5.0
3.4
2.9
2.9
2.6
1.3
1.3
1.3
1.2
1.1
Source: IMF’s World Economic and Financial Surveys: World Economic Outlook Database, April 2011
India’s economy is now as big as Japan.
By 2016 it will be six times that of Australia.
Visual depiction
United
States
The rapidly changing world
Share of world GDP (PPP)
25
China
20
India
15
Japan
10
Germany
5
United
Kingdom
0
1980
1990
2000
2007
Year
• China will become the world’s largest economy by 2016
•
(Maddison thought 2015, but IMF thinks 2016)
– Per capita in China will still (in 2016) be only a fourth of that of USA
– Ultimately China could become four times the size of USA
Australia
India as the world superpower till 1750
•
India’s performance in recent centuries is atypical
•
It was the wealthiest region during the agricultural age
– Largest arable area till the USA came to the scene
– Remained the world’s wealthiest in 12 out of the last 20 centuries
•First century World GDP share = 33%
•11th century World GDP share = 28.9%
•1700 world GDP share = 24.4% (similar share of world trade)
•
Has India been a ‘victim’ of its long-standing success?
– Caste system was well-suited to its agricultural society
•It is no longer suitable, but is now very difficult to change
•
Intellectual stagnation
– Major philosophical schools and scientific advance (e.g. number system)
– Charvaka’s and Buddha’s ideas transmitted to Greece –> Sophists –>
Socrates
– The breakthroughs of the modern world arose in Italy (Renaissance)
Key changes since 1400
• 1: The use of reason
– Critical thinking
• Islam, through Cordoba, helped recover Greek thought
– The questioning of authority
• Reformation
– Induction and the scientific method – Francis Bacon
• 2: Constitutionalism and liberty
– Origin of democracy
• Magna Carta -> Glorious Revolution
– Theory of the modern state: Thomas Hobbes, John Locke
• Society was earlier the centre. Now the individual
• 3: The secret of wealth creation (free market)
– Commercial institutions created
• Modern banks, corporations (e.g. Medici family of Florence)
– Invisible hand (Adam Smith)
• (Refinements by F.A.Hayek)
Removing obstacles to opportunity
Growth = f (governance, opportunity)
1
Obstacles
Government
• Bad policy
• Bad regulation
• Bad enforcement
Ideas
don’t
come from
governments
Society
• Some religious beliefs
• Insufficient value placed on
critical thinking
Role of
government
- to reduce negative effects
of excessive government
Opportunity
2
Innovation
pushes
out the
frontier
3
n
(technical
frontier)
The result: Modern economic growth
>> The Western economies started growing: an unprecedented phenomenon!
1-1000
1000-1500
1500-1820
1820-70
1870-1913
1913-50
1950-73
1973-2003
France
0.02
0.28
0.37
1.43
1.63
1.15
5.05
2.20
UK
0.09
0.25
0.80
2.05
1.90
1.19
2.93
2.15
USA
0.06
0.09
0.86
4.20
3.94
2.84
3.93
2.94
0.03
0.07
0.34
5.39
3.81
2.76
4.75
3.03
Japan
0.10
0.18
0.31
0.41
2.44
2.21
9.29
2.62
China
0.00
0.17
0.41
-0.37
0.56
-0.02
4.92
7.34
India
0.00
0.12
0.19
0.38
0.97
0.23
3.54
5.20
0.01
0.15
0.32
0.94
2.12
1.82
4.90
3.17
Other western
offshoots
World
Source: Madison
• Key characteristics
• Relatively slow till 1820 (10s of times the pre-1000 growh rate)
• Rapid increase after that (100s of times the pre-1000 growth rate)
– Effectively, the industrial revolution is less than 200 years old
Per capita income shot up in the West, then Japan, then…
The great divergence
• 1750 marked the end of the Mughals and conquest of (a
portion of) India by England
• India stagnated while the West grew rapidly
– The British were caretakers, not interested in India’s growth
• Post-independence socialist policies caused further
divergence
– Nehru was confused by the Fabian socialists including Keynes
• By 1980, India’s share of world output was 2.5 per cent
 (China’s share was even less, 2.2 per cent)
 India’s share of world trade is less than 2 per cent today
 Per capita income is $3000 (PPP), compared with America’s
$50,000
Why did India struggle even after
the end of colonialism?
• Cause 1: Socialist ideology
– By quirk of fate, Nehru the Fabian socialists set India’s policies
• Rejected Milton Friedman’s specific advice
• Rejected von Mises’s views on India’s productivity
• Cause 2: New rules of the game not widely understood
– Indian education system flooded with socialists
– Economics education extremely poor
• Cause 3: Arrogance about Indian history and culture
– False pride that refuses to believe that the West could actually
offer any learnings to India
– Caste system not suited to dynamic societies.
And now, the great convergence?
• China took off like a rocket in the 1980s
– Now nearly thrice the size of India
• In just 30 years, China’s economy almost the
largest
• Will overshadow the American economy soon
• India has rapidly picked up pace after 1991
– The IMF “medicine” of 1991 has helped
– But
• People have not internalised the new rules of the
game
• Socialist political parties continue to misgovern
Comparative growth of India and China
20
18
China, 18.0
16
14
China, 13.6
12
China
India
10
8
China, 7.1
India, 6.6
6
India, 5.4
4
2
China, 3.9
India, 3.2
India, 3.7
India, 2.5
China, 2.2
0
1980
1990
2000
2010
2016
India positives
•
Total factor productivity is rising
•
•
India is the world’s largest free market laboratory today
Where the government has privatised (or is absent)
significant progress has occurred
–
–
IT sector and private sector IT education
Mobile phone wireless network
Source of the graph:
http://mpra.ub.uni-muenchen.de/10316/1/MPRA_paper_10316.pdf
India negatives
• Severe government failure
– One of the world’s most corrupt
Transparency
international 2010
Australia
8
India
87
China
78
– Low levels of freedom
• Failing institutions e.g. judiciary, press
Australia
Heritage Foundation 3
(freedom)
India
124
China
135
– Insufficient focus on infrastructure
• However, it now has the largest private sector investment in infrastructure
– Difficult to set up a business
World Bank Doing
Business (June
2010 report)
Australia
10 (with 2 for
starting business)
– Labour market inflexibility
India
134
China
79
Will India catch up?
• India is handicapped by poor governance
• India cannot catch up with the West without radically improving
its governance.
• On current indications India will end up as a middling power
– Still a much larger economy than it is today
– Of great interest to Australia
• With reforms in policy and governance, however, nothing is
impossible
 Hint: Australia (Victoria) can assist India in reforming its
governance
(no one thinking on this line: a missed opportunity!)
Huge competitive pressure building on the
West
• Tsunami of competition from low-cost innovators
– technical frontier now being pushed out by China and India
• pressure on costs to expand the market in India creating huge
pressure to innovate
• also the wage differential creates huge competitive advantage
Examples: medical equipment, drug production, medical tourism
• Impending giant tide of brain drain reversal
– Ongoing perception of racism likely to prompt giant reversal of
(previous) brain drain from China and India
• Indians not happy with second class treatment by the West
– Already the best Indians have stopped leaving India
– Many have already returned permanently
– The best brains of the West moving to India and China
Threat or opportunity?
• Over a third of the world’s production will occur in India and China in
the next few decades
• Only nations that innovate will lead
• Very hard to increase productivity in a services economy
– Australia’s productivity is languishing
– Growth in the West must necessarily stagnate or decline
• If the West doesn’t engage, its competitive advantage will be lost
• If the West assists, it will make friends and be perceived to be a
helper
– Competition will become intense, but this is not a zero-sum game!
– The West can encourage and promote freedom
 Tip: Everyone can benefit
What can Australia do?
• 1. Increase efficiency
–
–
–
–
–
Minimise unnecessary government intervention
Ensure infrastructure is based on CBA
Reduce welfare state and churn
Stop direct management of schools and hospitals
Increase flexibility of labour market
• 2. Actively reshape the future
– Get on the front foot
• Significant opportunity to set up university and TAFE branches in India
– Australia doesn’t have the baggage of history
• (But the current impression of racism is not good)
– Build strong economic and cultural relations with India
• Not foreign aid but equal partnership!
– Strategic networking with India’s governance system to support its modernisation