Transcript Can India catch up? Can Australia do better?

Can India catch up? Can Australia do better?
- - Giving freedom a chance
By Sanjeev Sabhlok, 15 November 2011
Copyright
© Sanjeev Sabhlok
• Based on personal research and a talk I have given in March, August and
November 2011
•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.
Note: This talk simplifies complex ideas considerably and focuses
on the big picture
Structure of the talk
1. An explanatory framework
2. India is now the world’s largest free market laboratory
•
Can India catch up?
3. Impacts on the world: a tsunami of competition
unleashed
•
But opportunities are increasing rapidly
4. How should Australia respond?
•
Can Australia do better?
1. An explanatory framework
The natural effort of every individual to better his
own condition is so powerful, that it is alone, and
without any assistance, not only capable of
carrying on the society to wealth and prosperity,
but of surmounting a hundred impertinent
obstructions with which the folly of human laws
too often encumbers its operations.
- Adam Smith
anticipating the socialists
and Keynesians even in 1776
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 observation
Innovation is not driven by central planners (bureaucrats) who
“pick winners”. Such attempts:
• merely reduce the number of things that people can try; and
• destroy wealth by wasting tax revenues in “projects” that impose no
personal consequences for ‘central planners’ (they don’t lose their
house and shirt if a $2 trillion Keynesian “stimulus” fails)
Simplified explanatory framework
Growth = f (freedom, opportunity)
Two obstacles to freedom
1) Governance
People innovate
Nanny, paternalistic state:
• interfering
policies
and laws
better
if the
• “Food police”
government gets
Injustice
out of their way
1
Opportunity
2
Innovation
• contracts not enforced
Ideas
don’t
come from
governments
pushes
out the
frontier
2) Social
• interfering religious beliefs
• science and critical thinking
insufficiently valued
3
n
Governance must
enable liberty
(social reform is not a government’s job)
(technical
frontier)
The rise and fall of freedom in the West
Post-1688
High levels
of freedom
1947
Keynesian
socialism
1991
Hayekian
fight back
Keynesian
socialism
• 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 (his Road to Serfdom underpinned Margaret
Thatcher’s work) and prevented the West from going bankrupt in the 1980s
•The Keynesians and socialists are behind this decline
•Massive welfare state has been operationalised
•Currencies severely degraded
-The US dollar is worth less than 5 per cent of its value 100 years ago
•Borrowings at untenable levels - without productive capacity to repay
•Results flowing in : Ireland, Spain, Portugal, Greece, Italy, (USA?)
The take-over of academia
•Few economists today know about Adam Smith’s system of natural liberty
•Excessive use of the language of “equity” (Fabian socialist concept)
•Positive liberty concepts: language of “promotion of health” (paternalism)
What’s been the trajectory of 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
•Nehru was Fabian socialist. Keynesian ideas were commonly used.
•“Commanding heights” of the economy
• As is inevitable, India was duly bankrupted in 1991
-India borrowed $5 billion from IMF to prevent default
•India learnt its lesson and has liberalised (partially)
2. India is now the world’s largest free
market laboratory
Can India catch up?
India: the world’s largest test case for liberty
Freedom has been increasing rapidly since 1990s in India
•Most sectors have been liberalised
•Some sectors are free simply because the government doesn’t
deliver what it says it will
•Overall, still low levels of freedom (on various international
indices)
•significant opportunity to increase liberty
India’s output has responded rapidly to the
limited increase in freedom
Historical context
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)
Poor performance between 1750 and 1990 not due to any innate
reason
•Key deficit: Lack of liberty relevant to modern productivity society
Liberty works – the cases of China and India
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, even at current exchange rates, by 2020
Source: IMF’s World Economic and Financial Surveys: World Economic Outlook Database,
April 2011
But can India actually catch up?
Positives
• Westminster model of liberal democracy and laws
• Indians take to science and maths as a duck takes to water
• Rapid social change is under way, breaking previous barriers
• Total factor productivity is rising rapidly
• Urbanisation is increasing rapidly
Negatives
• Significant misgovernance across the board, including education
• High levels of corruption and “crony capitalism”
• Massive red tape
• Poor infrastructure and continuing poverty
Forecast - assuming unchanged governance
Assuming no change to governance
•
India is very likely to overtake USA by 2030 (10-year lag to China’s)
•
India will probably overtake China by 2050 (consistent with Citibank’s
forecast) and remain the world’s largest economy thereafter
Three reasons:
• 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: 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 is 10 times less than the West’s
India may achieve 30-40 per cent of Western per capita
income by 2050
But with current governance it can’t catch up – ever
•
•
•
Gets harder and harder to catch up
Radical change in governance (and society) needed
No current political party capable of delivering the
necessary governance
3. Impacts on the world: a tsunami of
competition unleashed
But opportunities are increasing rapidly
Those who catch up can do better (than the leader)
Catch-up hypothesis assumes that followers copy, hence don’t
threaten the leader
•But that’s not true
-it is a myth that the West is “safe” at the “high end” or “design” end
-the “design” space being contested by India and China
Intense innovation now occurring in India (and China)
•Cut-throat price competition in the huge Indian market
-goods now sometimes nearly 90% cheaper
•Reversal of ‘brain drain’ occurring
-the best Indians aren’t leaving India today –plenty of opportunities at home
-Indian migrants abroad are returning (not helped by perceptions of racial
discrimination in the West)
-many high quality Western managers now working as expats in India
•Many multinational companies now have R&D base in India
•Many good Western universities have established Indian branches
•Indian universities increasing their quality rapidly
Examples where India is already one of the leaders
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 back office operations from India
Steel
•Indian firm now owns large share of world steel plants
•Rapid growth of Indian multinational companies
Bad news: Mammoth competitive pressure on 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
Good news: New opportunities
•Economic growth is never a zero-sum game!
•As the pie expands, new opportunities arise for everyone
•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?
- and, can Australia do better?
Australia remains inside the technical frontier
Positives
•Relatively better managed than most others
•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!) - inefficiently
•Paternalistic policies and onerous regulation of most activities
•Redistributive welfare with significant churn, hence wastage
•Old, ailing infrastructure (e.g. Melbourne’s traffic congestion)
•Taxpayer funds dumped into Keynesian black holes (won’t name but obvious)
•Habit of “picking winners” and “fine tuning”, thus crowding out R&D and other
investment – such efforts are always based on false assumptions
How could Australia do better?
Blocking freedom was fine in a less competitive world. It won’t do now:
1. Increase freedom: Get out of the way
• Padding and Keynesian fine-tuning and meddling should come to an end
-Many suggestions in Breaking Free of Nehru are also applicable to Australia
• Step back from the abyss of the granny (super-nanny) state
2. Be strategic: Shape the future
• Inform but don’t spoon-feed businesses
-business associations can do far better than DBI, for instance
• Build policy partnerships with India
-be seen to be India’s friend, e.g. free trade agreement (already some
movement on this front)
-build strategic networks with India’s governance system to influence the right
kind of change
– e.g. Victoria could develop an exchange program for policy staff and executives to
work in the Indian government (for 12 months each) and vice versa
Note: Geo-strategic imperatives also support stronger ties with India.
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