Saturday, November 22, 2014
You encourage under-employed rural workers to move to the city and take jobs in factories. Because your one big economic advantage is an abundant supply of cheap labour, you start by concentrating on making low-cost, simple, labour-intensive items such as textiles, clothing and footwear.
Since the locals don' t have much capacity to buy this stuff, you focus on exporting it. Foreigners lap it up because to them it' s so cheap.
As the plan works and the country 's income rises, you plough a fair bit back into raising the education level of your workers, which allows you to move to making more elaborate goods and to paying higher wages. You 're on the way to being a developed country.
Over the decades we' ve seen a succession of countries climb this ladder: Japan, Hong Kong, South Korea, Taiwan, China and now even Vietnam and Bangladesh at the bottom. It s like pass-the-parcel: as each country' s labour gets too expensive to be used to produce low-value thongs and T-shirts, some poorer country takes over and starts the climb to prosperity.
That 's the way it s always done. Except for one country: India. Its economy started growing strongly in the 1990s and now it' s the world 's third-biggest (provided you measure it correctly, allowing for differences in purchasing power).
India has got this far without building a big, export-oriented manufacturing sector. It 's done something that' s probably unique: skipped the manufacturing stage and gone straight to the rich-country stage, in which most growth in jobs and production comes from services.
The Indians have done it by being so good with software and other information and communications technology and the things that hang off it, such as call centres. It' s a big export earner.
It' s an impressive effort, and there' s no reason a developing country shouldn' t have a big tech sector. But, even so, the experts are saying India would be a lot better off if it had a bigger, more vibrant manufacturing sector, employing a lot more people who, by Indian standards, would be on good wages.
This is a key theme in the Organisation for Economic Co-operation and Development 's report on the Indian economy, issued this week.
The report offers suggestions on what could be done to encourage the growth of manufacturing, which go a fair way towards explaining why manufacturing never really got going the way it did in other emerging market economies .
First, some basic facts. India has a population of 1250 million and before long it will overtake China 's. About 29 per cent of the population is younger than 15.
Manufacturing accounts for only 13 per cent of India' s gross domestic product, which is low compared with the other BRIICS emerging economies: Brazil, Russia, Indonesia and China, but not South Africa.
Indian manufacturing probably accounts for a slightly smaller share of its total employment. Huh? It 's normally the other way round. You 'd expect it to be quite labour intensive. But "despite abundant, low-skilled and relatively cheap labour, Indian manufacturing is surprisingly capital and skill intensive," the report says.
Almost two-thirds of manufacturing employment is in companies with fewer than 10 employees. That compares with Brazil' s 9 per cent. This tells us the sector' s many small firms mean it isn' t exploiting its potential economies of scale.
And, indeed, its manufacturing productivity is low, with productivity 1.6 times higher in China and and 2.9 times in Brazil.
India' s employment in manufacturing hasn' t grown much over the years, with the sector hardest hit by the economy' s recent slowdown. What new jobs have been created have been " informal" , with workers not covered by social security arrangements.
Manufacturing' s share of India' s merchandise or goods exports (that is, ignoring the big and rapidly growing exports of IT services) fell from 77 per cent to 65 per cent over the decade to 2013.
My guess is an important reason for the sector 's unusual configuration and weak growth is excessive regulation. India has been and still is a highly, and badly, regulated economy. The socialists ' obsession with manufacturing means I wouldn' t be surprised if the newer technology sector has taken over the running because, being outside the Left' s traditional preoccupations, it wasn' t so heavily regulated.
Some regulation has been removed but, particularly as they apply to manufacturing, India 's labour and tax laws, which are tougher on bigger than smaller firms, have inhibited and distorted the industry 's development.
As the report puts it, manufacturing "firms have little incentive to employ and grow, since by staying small they can avoid taxes and complex labour regulations".
A second part of the explanation the report points to is what it calls "structural bottlenecks" . As with all developing countries, the whole Indian economy suffers under inadequate economic and social infrastructure.
But manufacturing is particularly reliant on good transport links - more so than the tech sector - and India 's transport infrastructure is still bad.
Every business needs a reliable electricity supply, but manufacturing probably needs it more than most. A business survey has found that 48 per cent of manufacturing firms experience power cuts for more than five hours a week. About 60 per cent of firms feel that erratic power supply affects their competitiveness and they would be willing to pay more for a more reliable supply.
As usual with developing economies, the list of things that need reform is long. The challenge for governments is to give priority to the ones that would do most to help, even though everything is interconnected.
In the case of Indian manufacturing, however, the OECD' s top recommendation is to introduce simpler and more flexible labour law, which doesn' t discriminate by the size of the enterprise.