Every Aussie who takes an interest in such matters knows how a country
goes from being undeveloped to developed. We 've been watching our
neighbours do the trick for years. It' s called export-oriented growth
and it 's all about building a big manufacturing sector.
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.
