Shyam Ponappa / New Delhi December 07, 2006
How India can improve its productivity
...our governments' focus has by and large simply not been on those issues we would expect as a priority from our current understanding of improving per capita GDP: systems that provide enabling infrastructure--energy, communications, transportation, basic health (including water and sanitation), education services and shelter, with good regulation to foster an appropriate level of competition.
It is increasingly evident that India is at a tipping point. A qualitative change is beginning to show in a broad swathe of services, products, and mindsets, although it is equally clear that for most activities, this inflection is at an early stage. There are a host of reasons for this, and by definition, it is this convergence of many factors that makes for a tipping point.* Consider the features that make for a good neighbourhood or city, and it is obvious that regional and national transitions happen for complex reasons.
They encompass the interrelated factors comprising people in their various dimensions, such as their nature, skills, productivity, organisation, systems, demographics, their physical and material environment including their natural environs, proximity and linkages, enabling infrastructure, movements of capital and people elsewhere in the world in every connected sector and location, technological and economic developments, the condition of their emigrants to other societies, and much else. Understanding the variables in the tipping point is important for shaping the future, however, even if it is difficult to deconstruct the elements. And one factor clearly at work in India's present transition is its improving economic competitiveness.
According to the McKinsey Global Institute's former director and founder, William W. Lewis, competitiveness is the single, most important factor in increasing per capita GDP, the most critical need in India, at least up to a point. Lewis's book, The Power of Productivity,** is based on MGI's study of industry sectors in 13 countries over 12 years to identify each sector's pattern of productivity, i.e., the ratio of the value of goods and services consumed to the amount of time worked and capital used to produce these goods and services. Sectoral competition is most influential in determining productivity (which is certainly borne out by the rise of India's IT and BPO sectors), and that national productivity closely tracks per capita GDP adjusted for purchasing power parity. Lewis concludes that large sectors like retail, wholesale, and construction have the greatest effect on GDP, and to improve per capita GDP, countries must increase their productivity in all sectors primarily through intense, fair competition in consumers' interests.
A surprise, however, is his dismissal of the role of infrastructure in productivity. This is difficult to accept given what one sees in India, China and elsewhere, as well as our experiences of working in enabled environments.
MGI maintains that poor regulation is the main factor limiting productivity by distorting competition. To quote from "Regulation that's good for competition," by Scott C Beardsley and Diana Farrell, on which there will be more in my next article, "India could raise its labor productivity by 61 percentage points if it removed harmful rules."
Among the choices that will significantly affect India's competitiveness for a long time through factors it can control, the endogenous factors, are four areas where enlightened choices will help India become much more competitive:
- The first is the domineering, adversarial stance inherited from colonial and prior feudal legacies of our government towards our people.
- Second, the involvement of the Left in mainstream government and its effects on the social, political, economic, and cultural aspects of our lives.
- Third, partisan politics that exploits bigotry, caste, the effects of reservations through misrepresentation, whether of statistics, situations/examples from India or other countries, or any other mala fide distortions.
- Fourth, the Great Divide between the champions of free markets and of state participation.
In our collective interests, changes in all four require collaborative solutions with one aim: an appropriate level of competition in the overall public interest. With these changes, India can then plan properly for, and achieve, good regulation. Now to the specifics.
The four fundamental change areas therefore concern:
- Government's attitudes: from ruler to facilitator partner.
- The Left: from hard-line ideology pushing adversarial class conflict to participative action for the greatest good.
- Social/Personal attitudes: from predatory exploitation for short-term gains to enlightened, long-term societal enrichment. This applies equally to all individuals as consumers or producers, whether in politics, administration, in public or private corporations, or as individuals per se.
- Market Philosophy: from the Great Divide (privateers, capitalists, freebooters, and libertarians, versus state participation) to collaborative aims and actions.
A conscious effort with this mindset could then result in good regulation with high productivity.
The changes in the role of the government are outlined below. Subsequent articles will address the other areas: changing mindsets from confrontational unionism to collaborative 'works councils'; from short-term selfish gains to longer-term societal benefits through a pragmatic coalition of interests crossing political and ideological lines; from dogmatic capitalism, libertarianism or socialism to pragmatic eclecticism and collaborative action for the greatest gains.
Government: From Ruler to Facilitator & Partner
If our government understands and acts to orchestrate a beneficial level of fair competition, we will get the most benefit from available capital and labour. Together with the instruments of colonial exploitation inimical to our interests, our government also inherited the domineering mindset, although in a more patronising role, instead of being a lead facilitator and partner in the public interest.
As a consequence, barring law and order, our governments' focus has by and large simply not been on those issues we would expect as a priority from our current understanding of improving per capita GDP: systems that provide enabling infrastructure--energy, communications, transportation, basic health (including water and sanitation), education services and shelter, with good regulation to foster an appropriate level of competition.
The daily newspaper ads for power backup systems and water purifiers indicate the failure of government in providing these essential services. The bitter zoning conflicts in our cities reflect a similar failure.
For instance, the Delhi Development Authority has only built a fraction of the planned commercial space over the last 45 years (16 per cent according to the DDA itself). This situation must change for us to have the government we need. India does not need feudatories preying on their own people, but a government that engages with its people to plan and create a framework for productive activity. Without this, it will be difficult if not impossible to rapidly increase overall prosperity (per capita GDP).
** The University of Chicago Press, 2004