Transcript Can India catch up? Can Australia do better?

Can India catch up? Can Australia do better?
- Freedom works
By Sanjeev Sabhlok, 15 July 2011
Copyright
© Sanjeev Sabhlok
• Based on personal research and a talk I gave a few months ago
•Related to my book, Breaking Free of Nehru, and draft manuscript, The
Discovery of Freedom.
•My research is ongoing so this presentation is a sketch.
Structure of the talk
1. An explanatory framework
2. India now the world’s largest free market laboratory
•
Can India catch up?
3. A tsunami of competition unleashed
But opportunities are increasing rapidly
4. How should Australia respond?
•
Can Australia do better?
1. An explanatory framework
Freedom leads to innovation which leads to growth
“Any restriction on liberty reduces the number of things
tried and so reduces the rate of progress”
- H.B. Phillips (mathematician)
Key message
Innovation is not driven by central planners or bureaucrats who
“pick winners”. Such interference:
• reduces the number of things that people can try
• destroys wealth by wasting tax revenues in “projects” that impose
no personal consequences for ‘central planners’ (since they don’t
lose their house if their Keynesian “stimulus” fails)
Explanatory framework
Growth = f (freedom, opportunity)
Two obstacles to freedom
1) Bad
governance
People
innovate
Nanny, paternalistic state:
better
if the
• interfering
policies
• interfering
regulationgets
government
Injustice
out of their way
• contracts not enforced
Ideas
don’t
come from
governments
2) Primitive society
• interfering religious beliefs
• insufficient value placed on
science and critical thinking
1
Opportunity
2
Innovation
pushes
out the
frontier
3
n
Government’s key role:
to enable liberty
(social reform is outside government control)
(technical
frontier)
Freedom in the West
High levels
of freedom
1947
Keynesian
socialism
1991
Hayekian
fight back
Keynesian
socialism
The story of the West: decreasing freedom
•By 1970s most major businesses in the world (including the West) had been
nationalised (goal: to control society’s investment and reduce private savings)
•Hayekians fought back (Road to Serfdom underpinned Thatcher’s work) and
prevented the West going from bankrupt in the 1980s
•Keynesians actively at work
•Huge welfare state has been created
•Currencies successfully degraded
•Borrowings at untenable levels without productive capacity to repay
•Results flowing in : Greece, Spain, Portugal, Iceland (next UK and US?)
Take over of the academia
•Few economists know about Adam Smith’s system of natural liberty
•Language of “equity” (Fabian socialist version of “equality”)
•Language of “promotion of health” (subtle way of introducing paternalism)
Freedom in India
1947
Colonialism
1991
Keynesian socialism
Some freedom
India’s story: increasing freedom
•Colonialism till 1947 – almost zero growth
•Fabian socialism till early 1990s – poor growth
•Keynes and Nehru were “card-carrying” Fabian socialists (linked through
Laski)
•The Keynesians successfully achieved “commanding heights” in India and
duly bankrupted it in 1991
-India borrowed $5 billion from IMF to prevent default
•India learnt its lesson and has liberalised (albeit partially)
2. India now the world’s largest free market
laboratory
Can India catch up?
India is now a test case for the theory of freedom
Freedom increasing rapidly since 1990s in India
•Most sectors liberalised (some not yet)
•Some sectors are free because the government doesn’t work
•But still very low levels of freedom
• significant opportunity to increase liberty
India’s output is responding rapidly to increased
freedom
Recall that India was the world’s largest economy for most
of human history
•In 12 out of the last 20 centuries it was the largest
•In 6 (of 20) it was the second largest (after China)
•Its share of world GDP was between 30 to 33% (comparable
with its share of world population)
Its poor performance between 1750 and 1990 was not
due to any innate or “genetic” reasons
•Just the lack of liberty
Evidence that liberty works
Table: Share of world output measured in terms of PPP
Country
1980
1990
2000
2010
2016
China
United States
India
Japan
Germany
Russia
Brazil
United
Kingdom
Australia
2.2
24.7
2.5
8.7
6.7
0.0
3.9
4.3
3.9
24.7
3.2
9.9
6.1
0.0
3.3
4.1
7.1
23.6
3.7
7.6
5.1
2.7
2.9
3.6
13.6
19.7
5.4
5.8
4.0
3.0
2.9
2.9
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
China will overtake US (at current exchange rates) by 2020
Source: IMF’s World Economic and Financial Surveys: World Economic Outlook Database,
April 2011
But can (and will) India catch up?
Positives
• Westminster model of liberal democracy and legal framework
• Indians take to science and maths as a duck takes to water
• Rapid social change under way
• Total factor productivity rising rapidly
• Urbanisation increasing dramatically
Negatives
• Significant misgovernance in education
• High levels of corruption in government
• Lot of red tape: difficulty in setting up a business
• Poor infrastructure and continuing poverty in villages
Total economic size, assuming unchanged governance
1. India will overtake USA by 2030 (10 year lag to China’s)
2. India could overtake China by 2050 (consistent with Citibank’s
forecast) and remain the world’s largest economy thereafter
Three reasons why this will happen
•
1. Democracy
-India’s democracy makes it resilient
– democracy as “shock absorber”
-China’s authoritarianism makes it brittle
•
2. Private sector driven
-Led by Indian private companies
– Many are now multinational
– Significant number of billionaires
Third reason why India will become larger than China by
2050: Young population
By 2050, nearly 40 per cent of China’s population will be older than 65
But catch-up is not about GDP. It is about per capita GDP
•
•
•
Indian per capita income still 10 times less than that of the West
India could achieve 30-40 per cent of Western per capita income by
2050
But it can’t catch up – ever, with current governance.
•
•
•
With good governance India could catch up by 2050 (or at least in the
early second half of this century)
However, no current political party is capable of delivering
improved governance.
That is where the work I’ve been doing since 1998 comes in:
-India Policy Institute
-Freedom Team of India
•
I hope that leaders can be found to lead India to freedom
3. A tsunami of competition unleashed
But opportunities are increasing rapidly
Catch-up hypothesis has its limitations
It assumes that followers copy
•But that’s not true
-myth that the West is “safe” at the “high end”/ “design” end
-“design” space being taken over by India and China
Intense innovation occurring in India (and China)
•Cut-throat price competition within the huge Indian market
-goods now often nearly 90% cheaper
•Huge reversal of ‘brain drain’ as we speak
-the best Indians aren’t leaving – they now get plenty of opportunities at home
-Indian experts settled abroad are returning (given strong perceptions of racial
discrimination, as well)
-many best Western managers now working as expats in India
•Many multinational companies have an R&D base in India
•Many good Western universities have establshed branches in India
•World class Indian universities fast coming up
Examples where India is already a leader
IT
•$50 billion worth of IT outsourcing to India
•Microsoft’s major development centre in India
•Hollywood has outsourced much animation to India
Mobile phones
•600 million mobile phone subscribers
•Lowest charges in the world
Drugs
•Half the world’s vaccines produced in India, and significant share of generic drugs)
Hospitals (of world-class standard) and medical equipment
•Cost of heart surgery = $2000
•Cost of delivering a baby = $40
Finance
•Major Wall St companies now conduct backoffice operations from India.
Steel
•Indian firm now owns large share of world steel plants.
•Rapid growth of Indian multinational companies
Mammoth competitive pressures building up in the West
Creative destruction is underway on an unprecedented scale
1.
Competition from India and China is just one of many pressures
2.
Advanced technology is making thousands of jobs redundant
•
•

Customer as producer (supermarket checkouts, airport baggage check-in)
Robotics will at least partially replace teachers, personal assistants, surgeons,
and others
A business or society that does not anticipate and adapt will die – quickly!
•
e.g. Detroit lost 25% of its population in the last ten years
But the expanding pie is creating huge new opportunities
•Economic growth is not a zero-sum game!
•As the pie expands, new opportunities arise
•New goods, better goods, cheaper goods
•Opportunities for Australia include:
•significantly increased exports
-India is already Australia’s third largest export market (@$19.8 billion
worth of exports in 2009-10)
•cheaper imports (including outsourcing of high-end services)
•huge investment opportunities in India (education, e.g. TAFEs)
•increased tourism to Australia
4. How should Australia respond?
Can Australia do better?
Australia remains well inside the technical frontier
Positives
•Relatively better managed than most other nations
•E.g. relatively deregulated and flexible financial system
But huge restrictions on freedom, and significant inefficiencies
•Heavily padded bureaucracy, and a big government that directly operates
schools and hospitals (and buses!), invariably inefficiently
•Paternalistic policies and onerous regulation of most activities
•Redistributive welfare state with significant wastage (churn)
•Old, ailing infrastructure
•Taxpayer funds increasingly being dumped into Keynesian black holes
•Well-entrenched habits of “picking winners”, “fine tuning”, and crowding out of
R&D investment by government (education, “green” energy) – always based on
false assumptions
How can Australia do better?
Blocking freedom was fine with a less competitive world. It won’t cut it now:
1. Increase freedom: Get out of the way
• All padding and Keynesian policies should come to an end
-Many suggestions in Breaking Free of Nehru are applicable to Australia as well
• Step back from the abyss of the super-nanny (granny?) state
2. Be strategic: Shape the future
• Inform but don’t spoon-feed businesses! (let them do their homework)
-business associations do better than DBI, for instance
• Build policy partnerships with India
-be seen to be India’s friend (support its growth for mutual benefit), e.g.free
trade agreement
-build strategic networks with India’s governance system to influence the right
kind of change
– e.g. Australia could develop an exchange program for policy staff and executives to
work in the Indian government for 12 months in one rotation, and vice versa
Note: I’ve not highlighted geo-strategic imperatives that clearly support
stronger ties with India - that is a very significant issue as well.
The end!
Should you wish to discuss, please write to me at [email protected]
EXTRA SLIDES – IN NO PARTICULAR ORDER
More info about the framework used in these slides:
•My book, Breaking Free of Nehru
•also freely available on the internet
•Draft manuscript, The Discovery of Freedom
•available on the internet – comments appreciated
Quick historical overview
Settled
agriculture
Hunter gatherer
Industrial
Hunter-gather: till appx.10,000 years ago
• Secret of success: muscle power, local knowledge
• Outcome: small groups, low per capita “income”, high mortality
(Malthusian laws applied)
Settled agriculture: circa 8000 BC-1750
• Secret of success: animal power, local division of labour, some trade
-Caste system of India led to well-oiled agricultural machine, hence successful
• Outcome: some agricultural surplus, small tows and civilisation, low per
capita income, high mortality (Malthusian laws applied)
Modern Economic Growth: Industrial: circa 1750+
• Secret of success: brain power, global division of labour, global trade
-Different rules of the game to the agriculture epoch
• Outcome: growth without end, Malthusian laws no longer apply
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
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
Source: Madison
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)
India was 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)
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.
Per capita income shot up in the West, then Japan, then…
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
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
China will overtake US in real exchange terms by 2020
Source: The Economist, 25 June 2011
India positives
Total factor productivity is rapidly rising
Wherever the government has privatised (or is absent)
significant progress has been achieved
•
•
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 is already Australia’s third largest export market
($19.8 billion) in 2009-10
Already fifth
largest twoway trading
partner
Will become
second largest
trade partner
in the next
decade
Source: Composition of Trade, DFAT.
India key negatives
•One of the world’s most corrupt governments
Transparency
international 2010
Australia
8
India
87
China
78
•Low levels of freedom
-Failing institutions e.g. judiciary, press
Australia
India
Heritage Foundation 3
124
(freedom)
China
135
•Insufficient focus on infrastructure
-However, it now has the largest private sector investment in infrastructure
•Difficult in setting up a business
World Bank Doing
Business (June
2010 report)
Australia
10 (with 2 for
starting business)
•Labour market inflexibility
India
134
China
79