Publication: RITES Journal July 2014
Organization: Rail India Technical and Economic Service (RITES)
Source: www.rites.com
Date: July 2014
Summary: RITES Ltd., Government of India Enterprise was established in 1974, under the aegis of Indian Railways. It publishes an annual journal and discusses topics of contemporary significance.
Note: Please visit www.compad.in for more information
World Economic Outlook – Growth Strategies of Developing Countries and the Case of India
1. Prologue
RITES Journal 7.1 July2014
World Economic Outlook –
Growth Strategies of Developing Countries
and the Case of India
Dhanendra Kumar
PrincipalAdviser
Indian Institute of CorporateAffairs, Ministry of CorporateAffairs,
Former Executive Director, World Bank
and
Former Chairperson, Competition Commission of India.
TheAuthor has vast experience in various
sectors of the economy like finance,
industry, competition, amongst others.
In this well-researched Paper, he brings
out how the interconnection between the
economies impacts other countries. The
continued carbon emissions due to
human activity are causing problems of
infrastructure deficit, capital formation,
unemployment, etc. Striking an optimistic
note the Author brings out that with
greater all-round awareness, collective
and corrective policy initiatives and
implementation are underway.
The Author, who had earlier served as
Secretary Roads and Transport, Culture
and Defence Production in the
Government of India, reiterates that for
economic growth strategy, policy needs
to be designed with creativity which
addresses the aspirations of all sections
of society, technology with innovation
playing a major role. For this, structural
and financial reforms are the need of the
hour.
A very thought-provoking Paper from
someone who has been in the midst of it
all.
- Editor
“Development is about transforming the lives of people, not just transforming economies”.
- Joseph E. Stiglitz, Nobel Laureate
In the present era, we are living in a truly global, inter-connected economy,
in real sense of the term - “vasudhaiv kutumbkam (The world is one family)”- as
described in ancient Indian scriptures, thanks to the communication revolution. As
stated by Dalai Lama, “I find that because of modern technological evolution and our
2. 7.2 World Economic Outlook – Growth Strategies of Developing Countries
andtheCaseofIndia
global economy, and as a result of the great increase in population, our world has
greatly changed: it has become much smaller. However, our perceptions have not
evolved at the same pace; we continue to cling to old national demarcations and the
old feelings of ‘us’ and ‘them’.” Today, in the global village, a sneeze in a mighty
corner can result in epidemic in several other areas. No country can consider itself
immune from the going-on in the rest of the world. If there is trouble, or turmoil in the
Middle East, the rest of the world also immediately gets impacted. The recent
banking crisis in Portugal is the latest example which sent the stock prices in the
rest of the world into a tailspin.
The role of Bretton Wood Institutions, created seven decades ago after the
Second World War, still remains relevant, although it always needs to be chiseled to
meet the ever-changing global requirements. Several other blocks and groups of
nations, based on their homogeneity in socio-economic, politico-economic or socio-
geographic characteristics, like BRICS, G-20, CIVETS, PIGS, N-11, MINT, Mercosur,
ASEAN, etc. also play an important role in providing platforms for discussing common
issues. Yet in aggregation, the global economy remains vulnerable to various shocks,
and has been passing through a roller-coaster journey during the last several years.
In the process, it is the developing countries and relatively fragile economies which
inevitably have to pass through stressful situations and face various challenges.
The success or failure of underlying “economies” individually and also as a
group is generally measured on the “scale of development”. It is on this scale,
various countries are generally characterized as “developed”, “under-developed” or
“developing”. All the economies naturally strive to move up the ladder on the scale,
while trying to strike a right balance between things they “could do” vs. they “should
do” so that they eventually achieve sustainable development. International bodies
like IMF, World Bank,African Development Bank,Asian Development Bank, regional
groupings etc. have been designed to help them in the process.
The achievement of sustainability in national development1
requires a visionary,
scientific and strategic approach, which is both long-term in its perspective and
integrated or ‘joined-up’ in linking various development processes so that they are as
sophisticated, as the challenges are complex. A strategic approach at the national
level implies:
Linking long-term vision to medium-term targets and short-term
action;
‘Horizontal’ linkages across sectors, so that there is a coordinated
approach to development;
1. Sustainable Development Strategies – A Resource Book (Compiled by Barry Dalal-Clayton and
Stephen Bass of The International Institute for Environment and Development).
3. DhanendraKumar 7.3
‘Vertical’ spatial linkages, so that local, national and global policy,
development efforts and governance are all mutually supportive; and
Genuine partnership between government, business, and community
and voluntary organizations, since the problems are too complex to
be resolved by any group acting alone.
In this article an attempt has been made to understand the current phase of
the world economy, some of the common challenges being faced by the developing
countries and some options of growth strategies for them. The case of India has
been taken up as an illustration of an emerging nation poised in its remarkable
journey of graduation from a developing country to one of the strongest economies of
the world within the next few years, moving up from its current position of 10th
largest
to become the third largest economy of the world2
.
World Economic Outlook
Several years after the financial crisis of 2008-09, and a few hiccups in
between, the world economic outlook can be considered to be coming back on the
rails towards sustainable growth. The period following the global financial turmoil
was marked with shocks, nervousness, extreme uncertainty and all-round measures
needed for rehabilitation in affected countries. Most countries came up with their
survival or revival stimulus packages which have now variously tapered off. These
packages were evolved generally keeping in view the needs of the local national
economy, although as rightly commented then by Stephen Harper, Prime Minister of
Canada, “We have to remember we are in a global economy. The purpose of fiscal
stimulus is not simply to sustain activity in our national economies, but to help the
global economy as well, and that is why it is so critical in those packages to avoid
anything that smacks of protectionism”. The mood, however, remained somber,
which has now started becoming optimistic. In between, the Eurozone crisis dampened
the green shoots of recovery. The tidings for future continued to appear uncertain and
dismal until the beginning of year 2013. The impact of recovery in US economy and
expectation of monetary steps likely to be taken there added to the stress on dollar
reserves in developing countries. The period witnessed sharp fluctuations in global
currencies and rise in inflation in most developing countries, resulting in designing of
monetary policies by the Central Banks to tighten liquidity and control inflation. It
was a tight rope walking for many nations to balance inflationary pressures and the
needs of maintaining growth. Fortunately, despite a bumpy start in 2014, and on
account of various geo-political factors, performance of the US economy and recovery
of economy in several countries, the world economy is now expected to considerably
improve further in 2014-15. According to an IMF Report, much of this development
has been influenced by the economic growth in the advanced economies. On the
2. PricewaterhouseCoopers (PwC), Economic Outlook – July 2014.
4. 7.4 World Economic Outlook – Growth Strategies of Developing Countries
andtheCaseofIndia
other hand, the development in the emerging economies has been slower than
expected, according to the Report. Table 1 below enumerates the world growth output
of various countries.
Table 1 : Growth of World Output 2007-153
3. World Economic Situation and Prospects 2014, United Nations.
5. DhanendraKumar 7.5
Looking at FY 2013, there was definitely an improvement in economy and
short-term risks appeared to be have been well addressed.4
However, global economy
in different regions was evolving at different velocities, and the improved financial
conditions did not percolate evenly into growth, and in fact added to the challenges.
With regards to policy making, strong actions were taken by European
policymakers which helped avert major risks of a tail event in the euro area, US
policymakers had been able to avoid the fiscal cliff, Japan had adopted more
expansionary macroeconomic policies including ambitious changes to the monetary
policy framework and policy easing in key emerging market economies helped support
internal demand. There is a global recognition that crisis situations need emergent,
sometimes unconventional, but durable solutions to combat underlying risks.
With regards to macroeconomic framework, financial stability had
strengthened, market volatility had subsided, and asset prices rallied, confidence,
though still wavering and recovery uneven.Although policy actions had helped ease
near-term risks, old and new dangers still clouded the outlook.
IMF’s latest forecast puts global GDP growth at 3.6% in 2014 as compared
to 3.0% percent in 2013, which is reasonably decent, though still below the potential
growth of around 4%. It should therefore appear that the world could still grow faster
and generate considerably more jobs without fueling inflationary pressure.
This would also mean that the various member countries of the IMF -
advanced economies to developing economies – still have to tighten belts and work
harder for ensuring an accelerated economic growth. The burden lies on the shoulder
of the policymakers to ensure that the policies implemented cater to all aspects –
fiscal, structural and financial. There also exists a need to encourage and strengthen
international cooperation by involving various players and groupings such as IMF,
World Bank,ADB,AfDB, G20,APEC and BRICS etc. Furthermore, emerging market
giants as the likes of India and China must necessarily play a major role in leading
the global momentum towards sustainable and stronger economic growth.
The global economy is still very much influenced by the activities in advanced
economies. Though these economies are showing stronger growth in the year 2014,
the risks associated with stagnation and deflation cannot be taken lightly. The global
leaders and the national policymakers may have to follow certain bold and sometimes
unconventional monetary policies, until the economic growth is once again strong
and sustained.
As the biggest economy in the world, the United States has been one of the
main driving forces behind the global economy. It is showing an increase in private
demand as well as a stronger economic growth in 2014. It is, however, important that
the policy makers take a larger global vision and do ensure that there exists certainty
4. Annual Report 2013 – International Monetary Fund.
6. 7.6 World Economic Outlook – Growth Strategies of Developing Countries
andtheCaseofIndia
and continuity about the direction of the economic policies of their governments as
this alone could help in restoring the confidence in the market and the economy.
In Japan, recovery has been spurred by the mix of aggressive monetary and
fiscal policies, now known as “Abenomics”, after the Prime Minister Shinzo Abe. The
key challenge that lies is in relation to medium-term fiscal adjustments and structural
reforms. Some economists believe that in order to increase the confidence in the
market, it is important that the government takes further measures to deregulate
products and services markets and boost the share of women in the workplace.
Due to consistent efforts of policy makers around the globe, the danger of
another great depression has been avoided during the past five years. However, the
need of the hour is to further push appropriate policies, in order to accelerate and
sustain economic growth, with considerations of equity, and most importantly, creation
of jobs. It has to be kept in mind that pockets of hunger, and tensions of joblessness
create regions of conflicts and trouble.
Europe is another mighty region of the world where any development
immediately impacts the world economy. Fortunately, despite the recent crisis,
Eurozone is now indicating recovery, although the same is uneven and unbalanced.
Chart 1 shows the variance of growth in Europe and US. Though the general economy
is doing well, factors such as weak demand and unemployment are some of the
troubling areas. Another area of uncertainty pertains to the health of the European
banks. At the time of writing this article Portugal is witnessing this problem. Stress
tests and asset-quality review will go a long way in restoring the confidence in these
banks. To improve demand and to ensure sustained growth, it is important that
Europe considers undertaking structural reforms encouraging it.
5. Global Economy Prospects, June 2014.
Chart 1 : Despite Slow Growth,
Europe and US Signal further Expansion in Growth5
7. DhanendraKumar 7.7
Prospects and Strategies in Developing Countries
“Arthasampat Prakratisampada karoti” – Chanakya
(Economic Prosperity of the state creates prosperity for the people)
The ancient Indian economist and master of state-craft had observed more
than 2000 years ago that economic prosperity of the state is a sine-qua-non for
creation of prosperity for its people. In the strategies for economic growth with equity,
states have to calibrate their policies according to specific conditions of the society
and needs of various sections of its people. As it happens there are largely similar
problems in most developing countries, of infrastructure, manufacturing, agriculture,
employment, gender balance, education, healthcare, efficient utilization of its natural
resources, preservation of environment, infusion of modern technology, etc. Most of
them remain very vulnerable to global economic turmoil. As observed by India’s
Finance Minister, Arun Jaitley, while presenting his budget of 2014-15 in July 2014,
the current slowdown in the emerging economies poses a big threat to global economic
recovery. The economic prospects of the developing countries do not appear to be as
promising as those of the advanced economies. In comparison with the impressive
growth witnessed in the last decade, the past four years have seen rapid deceleration.
Most of the economists feel that this deceleration in growth can be attributed to the
lack of structural reforms, which could have triggered the economic growth. The
economies of some of the big emerging markets such as India and China, apart from
Brazil, SouthAfrica, Vietnam, etc. hold promise to drive the growth of world economy
in the course of next few years.
Many of these developing countries have been at the helm of economic
recovery for the past five years. Their contribution to the world’s GDP growth has
been three-quarters of the total GDP growth. Unfortunately, this recovery considerably
slowed down in 2013 due to a variety of factors. As observed in Chart 2, the pace of
economic growth has started catching up again, albeit, at a modest pace.
Chart 2 : Developing Country Activity is Strengthening
however at a Modest Pace6
6. Global Economy Prospects, June 2014.
8. 7.8 World Economic Outlook – Growth Strategies of Developing Countries
andtheCaseofIndia
Developing countries are now facing new policy challenges. Some economists
believe that policymakers in these countries must remain careful and avoid asset
bubbles or rising debt. They also believe that attention must be paid to strengthening
of financial regulation.
The low-income countries have generally been able to escape the fall-out of
global economy crisis. Countries in Africa enjoyed strong growth where the annual
output increased by 5% in 2013. Some economists believe that the governments of
these countries must now try to capitalize on this growth and prepare themselves
against any downturn in the economy, while they should continue to invest in building
their infrastructure, scientific exploration of extracted mineral resources, creation of
institutions, education and healthcare and other social programs. There is need of
better and closer cooperation among developing countries, in exchange of experience
and strategies.
Several Middle Eastern countries are facing additional challenges in the
form of social or political unrest and instability. Social and political unrest in the
region keeps on simmering for one reason or the other, and owes its origin to a
number of factors. It needs concerted actions on the part of the local governments
and international community to support peace and stability. For the economic
problems there is need of structural reforms aimed at building robust and dynamic
economy and inclusive growth. Modernization, rapid development in the economy
and creation of jobs is also likely to contribute to political and social stability.
Map 1 : A.M. Best’s Country Risk Tier (CRT) for MENA region (5 – Highest
Risk, 1 – Lowest Risk) September 2013
9. DhanendraKumar 7.9
It is important to remember that the problems faced by each country are
dependent upon the specific characteristics of that region or economy and therefore
these challenges vary from country to country. Despite a forecast of growth, it is
important that the policymakers must first turn their attention towards addressing
problems such as high public and private debt, fiscal and current-account imbalances,
and growth models that are unable to generate enough jobs.
Apart from the financial problems mentioned above, the developing countries
around the world also face various other problems related to efficient utilization of
resources and development of infrastructure, which are crucial for the economic
growth of a country.
The availability and scientific management of natural resources like minerals
and extractive resources is vital to country’s economic and social growth. Management
of land resources and land reforms is yet another critical ingredient in the process.
One can refer to the classic example of Mexico, which, after a revolution ,witnessed
redistribution of land from large landowners to ordinary small peasants. This resulted
in many small fragmented land holdings, which is now preventing the Mexican farmers
from supplying agricultural produce at competitive costs in international markets.
There exist in the world many examples of countries which have either efficiently
utilized their meagre natural resources, e.g. Hong Kong and Taiwan, and also of
countries which haven’t been able to effectively use and manage their resources.
An important aspect with regard to economic growth is the quality of workforce
employed by a company. Human workforce employed in the economy of a state
matters a lot as far as the sustained economic growth is concerned. More than the
number of people employed, it is the training and expertise of these people that
matters. This is one aspect where the developing economies have been found to fall
short of expectations. In the modern world, most of the production is knowledge-
intensive, thus putting a premium on a well-educated skilled workforce. Developing
countries usually lack the requisite educational set-up to deliver such trained personnel
and this leads to a slow or stagnant economic growth.
While education is important, provision of right skills based in the demand is
even more important for optimum utilization of the human resources.
For most developing countries, agriculture plays a major role in economic
growth. Considering that in most developing countries, majority of population directly
or indirectly depends on agriculture, any incremental growth in this sector leads to
economic empowerment of larger sections of population. This in turn adds to their
purchasing power with increase in demand and positive spin-offs in the rest of the
economy. The UK Food andAgriculture Association estimates that world population
will increase 47% to 8.9 billion, by 2050. Investment in agriculture is essential to
meet the demands of food and nutrition for this growing population. For developing
10. 7.10 World Economic Outlook – Growth Strategies of Developing Countries
andtheCaseofIndia
countries, which are characterized by agriculture supported economies, this is an
opportunity to increase their economic growth. However, agriculture in these developing
countries can also suffer from various dangers and vagaries of nature. There is need
of suitable investments in appropriate technologies and R&D, water and energy
management techniques. One of the other serious impediments is also the continued
emergence of too many small fragmented landholdings as a result of succession
and partition among the families. This could result in increasing the costs per farmer
for each produce. Several governments have followed suitable policies for consolidation,
cooperatives or community farming.Any neglect in suitable policies towards promoting
agriculture in these areas can play havoc.
Population growth is an acute problem in most developing countries which
leads not only to fragmentation of lands as enumerated above, but also to a constantly
increasing pressure on limited resources of food, education, healthcare, etc. In fact
there is a correlation between illiteracy and poverty on one hand and population
burst on the other, Chart 3 shows the expected trend in population growth till 2150.
In order to maintain and sustain growth and quality of life for all their citizens, developing
countries have to lay much greater emphasis on population control.
Chart 3 : Expected Trend in Population Growth till 2150
Women constitute nearly half the population but do not have an adequate
share in economic growth, largely on account of lack of opportunities. In order to
fully utilize this largely untapped talent base, it is important to ensure their
empowerment and education facilities. According to various global studies, best
investment to fight poverty, fuel growth and combat extremism is to invest in girls’
11. DhanendraKumar 7.11
education.An extra year of primary school boosts girls’ potential wages by 10-20%.
According to another study, girls who stay in school for 7 or more years typically
marry 4 years later and have two fewer children than those who dropout. An NGO in
its study – EGO – has found that when girls and women earn income, they invest
90% of it in their families, books, medicines, etc., while for men this figure 30-40%.
In fact, Larry Summers when he was Chief Economist at the World Bank wrote that
“Investment in girls’ education may well be the highest return available in the developing
world”. Similarly, it is important to boost investment in the healthcare of all citizens,
and especially girls.
Developing countries also typically suffer from lack of efficiency in
manufacturing sector and performance below the optimum levels. Today, in the globally
interconnected world and with the advancement of communication technologies, the
trends and demands in markets keep on changing rapidly. It therefore becomes
increasingly important for the manufacturing sector to continuously remain agile and
respond to market trends more quickly, in order to remain relevant in the market. In
most developing countries the challenges on account of government policies which
impact manufacturing sector arise from difficult business environment and regulatory
shackles, rent seeking and corruption, infrastructure deficits, labour policies, expensive
or scarce commercial bank credit, etc. and all these lead to a vicious cycle of
erosion in economy, employment, demand and growth. As an illustration, Table 2
indicates quarter wise growth in manufacturing sector in India, which has generally
remained stagnant.
Table 2 : Quarter-wise Growth in the Manufacturing Sector
Incidentally in India’s case, the sector wise share in total employment, as
shown from Table 3, the share of employment in manufacturing and agriculture has
been going down, which is the story in many developing countries.
12. 7.12 World Economic Outlook – Growth Strategies of Developing Countries
andtheCaseofIndia
Table 3 : Sector-wise Share in Total Employment7
1999-2000 2004-2005 2009-2010
Agriculture 59.9% 56.6% 52.9%
Manufacturing 11.1% 12.2% 10.5%
Non-manufacturing 5.3% 6.5% 12.2%
Services 23.7% 24.7% 24.4%
Infrastructure services are like arteries and veins of an economy and in most
developing countries remain a weak link. Electricity, telecommunications, roads,
rail, ports, airports, etc. are crucial for the development and sustenance of a modern
and efficient economy. They are also critical for the growth of industry, trade and
tourism. It is ironical that infrastructure deficit is often caused on account of lack of
capital investment, inadequate government policies, inefficiency, corruption and poor
planning, and ultimately leading to clogging of wheels of economy, which further
leads to lack of capital formation. In the power sector, there are often issues relating
to generation due to inadequate coal linkages, inefficiencies in transmission and
distribution, and ultimate losses leading to shortages. Infrastructure is key to efficiency
and economic development and needs to be given the attention it deserves. Apart
from development, maintenance is another aspect which often gets neglected.
One of the multiple ways that countries generate money to fund their
developmental schemes is through foreign direct investment (FDI). Cautious optimism
has returned to global FDI. Global FDI inflows rose by 11% in 2013, to an estimated
US$ 1.46 trillion – a level comparable to the pre-crisis average reaching the upper
range of UNCTAD’s forecast. After the 2012 slump, global FDI returned to growth,
with inflows rising 9 per cent in 2013, to US$ 1.45 trillion. UNCTAD projects that FDI
flows could rise to US $1.6 trillion in 2014, US $1.7 trillion in 2015 and US $1.8
trillion in 2016, with relatively larger increases in developed countries. The following
chart represents the Global FDI inflows, average 2005–2007, 2007–2013 (Billions of
US dollars):8
Chart 4 : Global FDI Inflows
7. Planning Commission, Government of India.
8. UNCTAD.
13. DhanendraKumar 7.13
Continuing their 2012 performance, developing economies accounted for
more than half of global FDI again in 2013, as their inflows reached a new high, at an
estimated US$ 759 billion. The increase was mainly driven by Latin American and
the Caribbean, and Africa while developingAsia “the world’s largest recipient region
for FDI” saw its flows at a level similar to 2012. Among major regional and inter-
regional groupings, APEC9
and BRICS almost doubled their share of global FDI
inflows from the pre-crisis level.APEC now accounts for more than half of global FDI
flows, at par with the G20, while BRICS jumped to over one fifth. In ASEAN10
and
Mercosur11
, the level of FDI inflows doubled compared to the pre-crisis level. Regional
and inter-regional groups of which developed economies are members (e.g. G20,
NAFTA) are all experiencing a slower recovery. For development, it is important that
suitable measures are taken by developing countries in order to attract FDI, as
money naturally flows where there are returns and productivity. Table 4 shows the
net financial inflows to developing countries.
Table 4 : Net Financial Flows to Developing Countries12
9. Asia-Pacific Economic Cooperation.
10. Association of Southeast Asian Nations.
11. Argentina, Brazil, Paraguay, Uruguay, Venezuela and Bolivia.
12. Global Economy Prospects, June 2014.
14. 7.14 World Economic Outlook – Growth Strategies of Developing Countries
andtheCaseofIndia
Many developing countries also suffer from problems of governance deficit,
leading to inefficiency in delivery of services, corruption and rent seeking.According
to various global studies, this aspect is a major contributor to inefficient utilization of
natural resources, slow economic growth, discontent and low morale. Strong,
responsive and transparent governance apparatus is vital to the growth of any
economy. People’s participation in decision making and growth oriented policies are
essential for economic development. Another important pillar is competition oriented
regulatory policy framework designed to promote fair competition among all players,
to encourage entrepreneurship and talent. There is also need of reviewing all the
regulatory policy framework on an ongoing basis to ensure that redundant and archaic
regulations are done away with. Many advanced countries have standing review
mechanisms to judge whether the time and cost of compliance is commensurate
with the benefits to accrue therefrom. This need cannot be summed up more
appropriately than in the words of the great ancient Indian economist-statesman
Chanakya, “Arthasya Mula Rajyam”, which means that prosperity or wealth depends
on good governance of the state. According to World Economic Forum, Philippines
is considered a perfect example of good governance.13
Once considered the “sick
man ofAsia”, it is now seen as an economic success. This has happened all because
of certain economic reforms that the previous governments were shy to undertake,
despite the urging of the various economists to do so. As a result of these reforms,
the GDP of Philippines grew by 7.2% in 2013, despite the country suffering from
various natural disasters. It has also gone up 26 places in the World Economic
Forum’s “Global Competitiveness Index” since 2010, and 30 places in the World
Bank’s and the International Finance Corporation’s “Doing Business Index” in 2013.
One of the biggest problems in emerging economies is corruption. Billions
of dollars are lost as a result of corruption, which otherwise could have been used for
fueling the economic and structural development of the country. Apart from the loss
of huge amount of money, corruption also results in increasing income differences,
economic growth without results on social indicators, market distortions, etc. In a
report titled Illicit Outflows from Developing Countries 2002-2011, published by the
Global Financial Integrity, a research and advocacy organization based in Washington,
D.C., it has been stated that hundreds of billions of dollars that could have been
used for anything from food security to education, have instead been wasted away
as part of numerous illicit deals around the globe. The report further stated that the
larger the economy, the more were the illicit outflows.14
Corruption, which is like a
cancer for the economic growth, has to be curbed in a determined manner with the
right policies. The developing economies must strictly implement and enforce anti-
13. Purisima, Cesar V. : “Why good governance is good economics”, available at http://forumblog.org/
2014/05/purisima-philippines-governance-corruption-growth-economics-east-asia-2014/.
14. Fortin, Jacey : “Trillion Dollar Theft: In Developing Countries, Staggering Losses Due To Corruption
Exceed Incoming Aid, Says Report”, as reported in International Business Times on December
27, 2013.
15. DhanendraKumar 7.15
corruption laws in their territories. There is also a need for international cooperation
for ending this vicious practice.
Institutions play a major role in achieving essential pillars of economics,
which could lead to well-being of the world at large. This is primarily because the
operating scale has grown to such proportions that it has become difficult to be
managed by individuals. To substantiate this point, Daron Acemoglu and James A.
Robinson, in their excellent work “Why Nations Fail”, a New York Times best seller,
suggest the following about Institutions -
“Poor countries are poor not because of their geographies or cultures
or because their leaders do not know which policies will enrich their
citizens. Poor countries are poor because of their institutions.
Rich countries are organized around “inclusive” political and
economic institutions. Inclusive institutions give the average person
a voice in the political realm. In the economic realm, they establish
a level playing field, protect property rights, offer the average person
opportunities to rise up, and reward innovation.
Poor countries are poor because they are organized around
‘extractive’ institutions. An extractive economic institution is one
designed to extract resources from many by the few. These
institutions are the norm, not the exception.”
Very often we would have wondered as to why two nations that look very
similar to each other, endorsing similar economic strategies, perhaps having more
similarities than differences in every dimension of comparison, differ so greatly in
their economic, social and political development. The subtle response to this really
very valid question lies in the difference in “Institutional Developments” across various
countries. Even if we choose the best strategy ever thought of, the merit of the
strategy lies in its execution and implementation.
The Case of India
Angus Maddison of the University of Groningen has noted that India was the
largest economy in the world in the early 1700s, before the onset of the Industrial
Revolution, with China close behind15
. However this was followed by a recession of
about 250 years. India is now on a trajectory of rapid growth, and poised to join the
league of world’s biggest markets. It could well take lessons from countries like
South Korea, which are now prosperous, but have experienced financial crisis earlier
in one form or another.
15. Speech by former Union Finance Minister Shree P. Chidambaram on “The Rise of the East:
Implications for the Global Economy” delivered at Harvard University, April 2013.
16. 7.16 World Economic Outlook – Growth Strategies of Developing Countries
andtheCaseofIndia
Looking at the trends during the past several years, India’s growth swings
from 4% to 9%. India, by virtue of being one of the most populated nations of the
world, has a global impact on all material facts and figures like global averages. For
instance, World Bank report16
in the year 2008 suggests the following on falling
Poverty levels and why it is likely to fall further:
“In the last 30 years absolute poverty has fallen substantially. This is almost
entirely due to sustained growth. The fall is likely to continue because India is likely
to grow at a fast pace for another 15 years, when it will catch up to where China is
today, and China has another 600 million people in agriculture yet to move into more
productive employment in urban areas.”
India’s long-term growth potential is considered very high by most economists
and research organizations. The country has just undergone a peaceful changeover
of government during 2014 democratic elections, the biggest such exercise on the
planet. The new government has been voted in, with overwhelming majority, on the
promise of rapid development and robust economic growth, and all the initial signs
during the earliest few weeks confirm to the above determination. Challenges, however,
are immense but the direction and strategies appear to be sharply focussed.
According to Indian Economic Survey 2014, the country is expected to grow
between the range of 5.4 -- 5.9 percent in the current fiscal year. While presenting
the Budget 2014-15 before the Parliament , the Indian Finance Minister, Mr. Arun
Jaitley, expected a sustained growth of 7% for India in the next five years. In view of
the past performance, this is not unachievable. There is an unprecedented focus on
education and skill development. One of the motto’s for the present government is
“Har Haath Ko Hunar” (Providing skill to every person) and “Skilled India”, which in
essence strive to break the barriers between formal education and skill development,
and put in place a mechanism to give academic equivalence to vocational
qualifications.As Stephen Covey famously wrote “Studies have identified a significant
‘skills gap’ between what students are currently being taught and the skills employers
are seeking in today’s global economy. Our children must be better prepared than
they are now to meet the future challenges of our ever-changing world”. There is an
enormous focus on infrastructure, manufacturing, job creation, agriculture, irrigation,
smart cities and induction of new technologies. The new government has a sharp
focus on good governance, curbing corruption and black money, simplification of the
procedures and strengthening the trade infrastructure so as to reduce transaction
time and costs. There is a sharp focus on promotion of investments in the
infrastructure sector, and areas like domestic production in defence manufacturing
and other sectors. FDI policies have also been re-calibrated to attract greater capital
inflows into the selected sectors, including defence, insurance and construction.
16. The Growth Report “Strategies for Sustained Growth and Inclusive Development” by Commission
on Growth and Development (World Bank) in 2008.
17. DhanendraKumar 7.17
The levels of GDP growth during the last several years in India have remained
stagnant or declining as evident from Chart 5. It is, however, expected that this trend
will show rapid improvement in the next few years.
Chart 5: India’s GDP Growth17
The policymakers are conscious of the fact that a lot of the growth in India is
still to come as it realizes its demographic dividend, while India’s share of the working
age population will continue to rise. Nearly one-half the additions to the Indian labour
force over the period 2011-30 will be in the age group 30-49, even while the share of
this group in advanced countries will continue to decline. This means greater
production, savings and investment in India as the demographic dividend is reaped.
The challenges before India, like many other developing countries, are
daunting. It has to support world’s largest chunk of poverty stricken population, and
raise their standard of living to certain basic minimum acceptable levels. It has to
provide them basic needs of healthcare, education, clean drinking water, housing
and employment. Development of infrastructure and energy remains a mammoth
task. While it has not utilized its fair share of earth’s carbon space like most developing
countries, there are fears that global warming might impact availability of basic
necessities like fresh water, food and energy. As per survey, 400 million Indians do
not have access to electricity in their homes and 800 million use some form of
biomass as their primary or only energy source for cooking. The strategies enunciated
by the new Government in India to achieve these objectives have been endorsed by
most economists and seem to be relevant for consideration by other developing
countries too.
Growth in different sectors has been characterized by a gradual decline
during the past few years. Chart 6 below shows the growth levels in agriculture,
services and industry sector during the period 2011-14.
17. Deloitte India Budget Analysis, July 2014.
18. 7.18 World Economic Outlook – Growth Strategies of Developing Countries
andtheCaseofIndia
Chart 6 : Percentage Sectoral Quarterly GDP Growth of India18
Economic Strategies in India19
The new government has already outlined its roadmap for fiscal prudence,
with an eye on growth. There is a strong emphasis on fiscal consolidation, discipline
and reforms in the financial sector. The Finance Minister has mentioned establishment
of an Expenditure Management Commission, among many other measures, to
achieve it.
Some of the strategies suggested by economists to strike specific challenges
are:
Table 5 : Custom Economic Strategies that work well in a given situation
A Situation An Economic Strategy
Financial Crisis
Price Stability
18. Deloitte India Budget Analysis, July 2014.
19. Patnaik, Ila : Chapter 1 “ Maintaining Macroeconomic Stability”, Getting India Back on Track:
An Action Agenda for Reform - Ashley J. Tellis, Bibek Debroy and Reece Trevor.
Sound Financial Regulation Macroeconomic stabilization
that reduces the volatility of Business cycle
In order to achieve this, there is a need for low and stable
inflation as witnessed by India for only 7 years in history,
1999-2006. As a consequence, low interest rate environment
will prevail along with reduced relative price fluctuations. Long-
term investment is encouraged.
Contd.
19. DhanendraKumar 7.19
Fiscal Crisis
A few strategies for developing the economic growth in India were also tabled
before the Parliament by the Government in its Economic Survey Report, of July
2014. A few of these and the announcements in the Budget thereon, are:
• Control on inflation and rising prices – fresh thinking on fiscal policy
framework – increase supply side of the equation.
• Boost growth in agriculture sector to achieve second Green Revolution
– review trade barriers and market distortions and move towards national
markets. Strengthen distribution system.
• Review regulations to reform “Ease of Doing Business” environment,
and attract FDI.
• Review policies on taxation to boost manufacturing sector, investments
and trades.
• Set-up National investment and manufacturing zones (NIMZs) for a sharp
boost to manufacturing and creation of jobs.
• Modernize infrastructure, roads, rails, ports, etc.
• Set up smart cities, and modernize urban infrastructure.
Many of these strategies may be relevant for other developing countries too.
Conclusion
The world has now become a global village in terms of inter-connected
economies where any development anywhere impacts the others. In spite of the
various institutions like the World Bank, IMF etc. the global economy has been
passing through sharp turbulence and shocks. Fortunately the worst phase seems
to be over and the global economy is now witnessing green shoots of recovery and
there is an air of cautious optimism. There are, however, several problems that continue
to loom large on the horizon, emanating from oil shocks, energy crisis, conflicts and
tensions in certain regions and stressed banking institutions. In order to sustain the
process of economic development and quality of life on the planet, there is need of
preservation of environment, which has been brought under tremendous stress in the
past during the development process of developed nations. The continued
Avoiding any populist measures which are likely to offer some
political gain and later, the country may have to pay the
price. In last few years, India was impacted with a number of
populist measures, that did not do much good, For instance,
programs like NREGA may not be dynamic enough and just
expenditures in line with business cycle environment. One
should acknowledge the fact that growth is needed to finance
redistribution. The new government had hinted on hard
measures to bring the economy on track. Welfare schemes
may be revisited on their appropriateness and affordability
basis and an effort could be made to eliminate severe
leakages.
20. 7.20 World Economic Outlook – Growth Strategies of Developing Countries
andtheCaseofIndia
carbonization has to stop as it may negate all efforts of development. Among the
developing countries there are huge problems of infrastructure deficit, governance,
corruption, capital formation, unemployment, gender imbalance, etc. The good news,
however, is that there is much greater awareness in all the regions and among the
people, and corrective actions in policies and implementation are under way. In the
present era of globalization, all the countries have to shoulder their share of burden
in the interest of sustainability and equilibrium. The current situation can be best
described in the words of Mr. Kaushik Basu, Chief Economist of World Bank, “The
financial health of economies has improved. With the exception of China and Russia,
stock markets have done well in emerging economies, notably, India and Indonesia.
But we are not totally out of the woods yet. A gradual tightening of fiscal policy and
structural reforms are desirable to restore fiscal space depleted by the recent financial
crisis. In brief, now is the time to prepare for the next crisis”.
While governments in most developing countries are battling with challenges
of governance, infrastructure deficit, inefficiencies in delivery of services, lack of
security, appropriate policy matrices have to be designed for meeting with each one
of these, contributing into the fulcrum of rapid economic growth. This need is well
captured in the words of the former President of India, Dr. A.P.J. Abdul Kalam —
“When learning is purposeful, creativity blossoms. When creativity blossoms, thinking
emanates. When thinking emanates, knowledge is fully lit. When knowledge is lit,
economy flourishes.”
It is of prime importance that any economic growth strategy is designed
with creativity to meet the needs and aspirations of all sections of the society. In the
process, the needs of youth and the role of women cannot be overlooked. The important
contributors – infrastructure and agriculture – have to be given centre-stage along
with the needs of employment of youth and their education and skilling. The role of
technology, innovation and R&D in process is paramount for boosting productivity. In
view of the constant migration of rural population to urban areas, there is need of
modernization of urban centres with attendant facilities of transport, energy and
related infrastructure.
In order to effectively deal with the above mentioned problems, it is imperative
for the governments around the globe to implement various structural and financial
reforms. A special emphasis must be placed on devising a set-up that will promote
and encourage good governance.
Economic Growth and Sustainable development, empowered by social,
political and economic institutions of the country, will help a lot in addressing the
various problems plaguing the world today. Echoing the sentiment expressed at the
beginning of the article, hopefully the world will continue to focus on learning as
much as on money, so that not only growth is achieved but a “consistent” growth,
not only “development” but a sustainable development and ultimately the standard of
living of people and nature of the legacy that will be handed over to the next generation
and century, should be of a kind that could make the current generation proud and
make them feel better. As the former US President, Bill Clinton said “No generation
has had the opportunity, as we now have, to build a global economy that leaves no-
one behind. It is a wonderful opportunity, but also a profound responsibility”.
*****