The Indian Economy Blog

January 21, 2006

Guy de Jonquières on India’s Apathetic Govt

Filed under: Basic Questions,Business,Politics — Reuben Abraham @ 1:40 am

Guy de Jonquières wrote an op-ed yesterday in the Financial Times in which he points to one of the most frequently debated issues on this blog, namely how long can economic growth continue at a fast clip while the reforms process stagnates. He lays out the case that the driver of economic growth thus far has been the private sector, while the best thing that can be said about the government is that it hasn’t turned the clock backwards. Nonetheless, there are serious problems lurking right around the corner…..

There are signs that the economy is overheating and that recent growth has been stoked up by a consumption boom fuelled by lax fiscal and monetary policies. The result is a widening current account deficit, much of it financed by intrinsically volatile short-term portfolio inflows. Foreign exchange reserves are ample to prevent a crisis. But higher interest rates look inevitable. The central bank seems anxious to act but the government is resisting. That is hardly surprising. Not only is it keen to keep growth up; as a big borrower, largely to fund current expenditure, it wants to keep debt service costs down. Despite Delhi’s efforts to restrain the states’ spending, the consolidated budget deficit remains stubbornly above 8 per cent of gross domestic product.

More seriously, fiscal indiscipline limits public investment, above all to renew crumbling infrastructure. Investment, though rising, is still only 6 per cent of GDP – a quarter of the level in China. Lack of modern airports, electricity supply, highways and ports not only throttles India’s relatively small manufacturing sector and exports; it cramps services, notably tourism, potentially a big job creator. Incredibly, fewer tourists visit India each year than Singapore [Ed: Something to keep in mind while reading those feel-good stories about increasing tourist arrivals].

Education cries out for investment. India’s colleges are straining to meet exploding demand for top-flight graduates. Still more important, the country’s literacy rate of just 64 per cent – compared with more than 90 per cent in China – underlines the scale of the effort needed to make the large numbers of rural poor employable outside agriculture. Finally, a sustained attack is needed on rampant official corruption and chronic public mismanagement, whose malign consequences Indians often blame on “democracy”. That is a pathetic cop-out. Democracy has not prevented sound policymaking and clean and efficient government elsewhere. Nor need it do so in India.

4 Comments »

  1. “namely how long can economic growth continue at a fast clip while the reforms process stagnates.”

    Well this is what we are about to find out. Maybe a bit longer than de Jonquières and those with a more pessimistic inclination imagine. One of the points I would highlight is that if the important point is ‘hands off’ government, then at least not doing anything isn’t doing nothing.

    I still feel that conventional theorists are having a hard time coming to terms with the dynamism you can now see across developing economies from China to India to Turkey to Chile. I think maybe the first thing that need to do is to start believing their eyes, and then start digging a bit deeper.

    “Education cries out for investment.”

    Of course this is the 100% important point.

    Comment by Edward — January 21, 2006 @ 2:14 am

  2. Edward, have you read Bill Easterly’s “The Elusive Quest for Growth”? If not, I’d highly recommend it because he throws out a lot of numbers that question a lot of the assumptions we make about the economic growth process, including about education. You may or may not agree with Easterly, but he manages to be very provocative.

    But yes, you’re right about the *optimum* role of government in the growth process. Unless we figure that out (and this involves questioning a lot of the generally held assumptions in the light of the Asian growth story), fiery debates without much evidence are what we have to resign ourselves to :) Jeff Sachs makes a good start with economic geography?

    Comment by Reuben Abraham — January 21, 2006 @ 2:25 am

  3. “Edward, have you read Bill Easterly’s “The Elusive Quest for Growth”?”

    Yes Reuben, I’m afraid I have, and unfortunately I wasn’t very impressed.

    I think this is now well behind the curve. Growth isn’t so elusive these days, except in the cases of what the UN HDI calls the demographic outliers. They aren’t growing, and are indeed going backwards.

    But one big chunk of humanity just took off, and Easterly doesn’t seem to offer any coherent explanation of why this is happening. This would be the starting point, since if we can understand why some rockets are streaking ahead then there is more possibility of better targeting our proposals in the case of those countries whose rockets aren’t doing so.

    Basically I am deeply dissatisfied with the two main approaches to this issue today. On the one hand Jeffrey Sachs (who IMHO has gone off the rails since he started this Millenium ) and

    Basically, I do agree with this implicit critique of Sachs from Easterly:

    “I find the audacious claim that policy reform can cut world poverty in half a little daunting”

    http://www.nyu.edu/fas/institute/dri/Easterly/File/national%20politics%20and%20economic%20growth.pdf

    And I do agree about proposals for reform needing to be more modest. But I don’t think Easterly really understands the heart of the problem better than Sachs does. I am still working on my own ideas, and haven’t got the story completely straight to my own satisfaction yet. Also I have been more focused on the growth issues of the developed economies, but I am aware that I need to better explicitly address the Sachs/Easterly debate, and I will get round to it (soon, I hope).

    Comment by Edward — January 21, 2006 @ 12:05 pm

  4. Incidentally Reuben, one of ther reasons I am a little bit disdainful about Easterly is that he addresses what seem to me to be yesterday’s issues. What do I mean?

    Well, lets look at what Russia and Iran are getting up to. There is no doubt that the authoritarain regimes in these countries are trying to leverage the pressure on energy prices which is produced by rapid growth in the developing world to play their own ‘games’.

    Now the big, big danger on my radar screen is that thinking in the OECD world moves rapidly geoplolitically in the direction of the idea that growth should go back to being more not less elusive.

    I often see people from the US arguing these days that the global economy is growing too fast. Even Brad Setser’s argument about the US deficit issue can, I fear, be used in this way (although this I am sure isn’t Brad’s intent).

    Comment by Edward — January 21, 2006 @ 2:09 pm

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