India still struggles to understand the alchemy by which access to new technologies, processes and markets is converted into increase in productivity.
This is the first part in a new series.
You'd think that economists would have worked out by now exactly what causes economies to grow. But, several good ideas and Nobel Prizes notwithstanding, big gaps in our knowledge remain. "Productivity" growth, in particular, is one of the great mysteries of the discipline. And it has been since the 1950s, when economists first discovered that, no matter how hard you try, economic growth is greater than the sum of how much capital and labour has increased. Over half, perhaps as much as two-thirds of growth in the United States till that time simply couldn't be accounted for by additions to the workforce or to the capital stock.
After Moses Abramovitz pointed this out in 1956, he added a dismayed, and much quoted passage: "This result is surprising in the lopsided importance which it appears to give to productivity increase, and it should be, in a sense, sobering, if not discouraging, to students of economic growth. Since we know little about the causes of productivity increase, the indicated importance of this element may be taken to be some sort of measure of our ignorance about the causes of economic growth."
After the 1950s, it became generally supposed that the "residual", unexplained growth — "the measure of our ignorance," as Abramovitz called it — was related, somehow, to technical progress. There is an intuitive appeal to this supposition, but there are problems here, too. For one, it turns out that, in the midst of the spread of computers in workplaces in the 1980s and 1990s, productivity in the US grew far less than it did in the 1950s and 1960s. Paul Krugman, writing in 1996, was typically scornful: "In fact, the so-called revolutions in management, information technology and globalisation are vastly overrated by their acolytes," he said. Advances "have taken place on a very narrow front, tied directly or indirectly to the magic of silicon, which allows us to manipulate and transmit vast amounts of information at blinding speed. How much difference does this really make to people's lives? Information is a means, not an end: people can't eat information, wear it, live in it." Krugman spoke too soon, though, the years after 1996 saw sustained increases in productivity — till a sudden drop-off in 2005, one that can't easily be explained.
For the developing world, this is even more dismaying than for the West. If the most data-rich and closely studied economies in the world can't work out where growth comes from, countries like India are pretty much stumbling in the dark. Looking at more relatable success stories, like China, for insights into productivity growth doesn’t help either. After all, China has seen a sharp and worrying productivity slowdown since about 2006, one they have tried to compensate for by sinking ever more of their savings into fixed capital — a strategy that’s doomed to fail if productivity keeps sinking.
Clearly, we still struggle to understand this alchemy by which access to new technologies, processes and markets is converted into increases in productivity. We know, however, two things. First, that it happens with a bit of a lag. The spread of computers in offices in the 1980s and early 1990s began to create productivity growth only after Krugman derided their contribution as “overrated” in 1996. Going back even further, the foundation of US growth in the mid 20th century was a surge in productivity in the 1920s — the "dynamo revolution," based off mass electrification of industrial processes — that took place a full "four decades after the first central power station opened for business."
And second — perhaps more important, in the case of India and similar developing economies — in each case, this alchemical reaction needed a labour force somehow prepared for it. When China opened itself to the world and its productivity exploded, it had a literacy rate of around 90 per cent. India's literacy rate is still nowhere near that level, as Amartya Sen has often pointed out. As for the diffusion of skills to young people, Indian researchers have often pointed to China's far more effective vocational training. Unlike in India’s faltering skill development programme, China’s system — launched in mid-1990s — heavily subsidises local vocational schools, gives them relative freedom over what they teach, and works closely with local industry. And when the dynamo revolution took hold in the 1920s, it was accompanied by changes in labour policy by employers that prioritised skill and security of tenure in their employees. (The proportion of manufacturing firms with personnel departments grew from below seven percent in 1915 to about a quarter in 1920.)
In contrast, young people across a wide swathe of the developing world have largely been abandoned by their governments and their employers. They will have to rely on themselves, if they are to see their own productivity grow.
Here’s a bet worth taking, though: Is it the case that, for the first time in history, people in their position may actually have a chance to do it for themselves? To bet on India’s future is to bet on these young people, and to bet on technology. Can access to broadband finally allow them to cut out their useless governments and educational systems and get the skills they need — a prerequisite for productivity growth? We may not understand where productivity growth comes from. But what needs to be examined is whether the hundreds of millions of young people in places like India are solving that question for us.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Mihir Swarup Sharma is the Director Centre for Economy and Growth Programme at the Observer Research Foundation. He was trained as an economist and political scientist ...Read More +