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 • 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 a in Ch India • 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

India as the world superpower till 1750 • India’s performance in recenturies 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% • 11 th 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 n o i • Reformation ss ipt, u c s – Francis r. Bacon m i c – Induction and the scientific method d s d u o e n l d i a e a t m e e r t ) f t F D a 2: Constitutionalism and liberty e f r n o d r y e y r t e n m – Origin of democracy i v n o e i c h t is. Revolution • Magna Carta -> Glorious n D o Hobbes, John Locke e e l h – Theory of the modern state: Thomas b T a l i • Society was earlier (avtheacentre. Now the individual – The questioning of authority • • 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) 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 1 Opportunity 2 Innovation pushes out the frontier 3 n (technical frontier)

The result: Modern economic growth >> The Western economies started growing: an unprecedented phenomenon! Source: Madison • Key characteristics • Relatively slow till 1820 (10 s of times the pre-1000 growh rate) • Rapid increase after that (100 s 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 Ø (China’s share was even less, 2. 2 per cent) Ø India’s share of world trade is less than 2 per cent today Ø 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 1980 s – 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

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 – Low levels of freedom • Failing institutions e. g. judiciary, press – Insufficient focus on infrastructure • However, it now has the largest private sector investment in infrastructure – Difficult to set up a business – Labour market inflexibility

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 Ø 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 Ø 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