The Indian Economy Blog

September 12, 2006

Uncharted Water

Filed under: Business — Edward @ 10:02 pm

India’s industrial production grew in July at the fastest pace in a decade  (12.4 percent from a year earlier, which was the largest increase since June 1996) according to data from  the Indian Central Statistical Organisation today.

Power companies almost doubled electricity output in July to keep up with demand from factories producing cars and textiles, while government spending on roads and ports boosted sales at Steel Authority of India Ltd. Accelerating production growth in Asia’s fourth-largest economy may prompt Reserve Bank of India Governor Yaga Venugopal Reddy in October to increase borrowing costs to the highest in more than four years.”

“Growth in consumer goods production more than tripled to 19.9 percent from a year earlier after a 5.6 percent rise in June, today’s report said. Manufacturing increased 13.3 percent from 9.9 percent in the previous month.” 

“India’s $775 billion economy expanded 9.3 percent from a year earlier in the quarter ended March 31, rounding off the financial year with growth of 8.4 percent, the fastest after China among the world’s 20 biggest economies.”

What is clear is that the  Indian economy is currently gathering steam, and this at a time when there is a general consensus that the political will for reform isn’t what it used to be. Strange isn’t it?

My meaning here isn’t that reforms aren’t necessary, but that there are other factors at work, and in particular demographic ones. The importance of these demographic factors generally can be seen from the fact that it is now the newly developing countries (China, India, Brazil, Chile, Thailand, Turkey) who are pulling the global economy (and in the process pushing up energy and commodity prices). The developed world – which makes up say 50% of global GDP is growing much more slowly than the developing world – and some of this for ageing related demographic reasons. Global GDP is forecast to grow at a 5% annual rate this year, yet the US is growing at around 3.5%, Japan 2.5% and the eurozone around 2%. So you tell me, who is pulling who here?

And this is why I say we are moving into uncharted territory. Economists used to have a little model which worked on the assumption of each economy having a certain growth capacity in any given moment. But could any one tell me, what *is* the growth capacity of China or India? I certainly have no idea, and I haven’t seen anyone else make a convincing case on this topic. The magnitude of the growth we are now seeing in the developing world is beyond all historical precedent.

And there’s more, since, as US economist (and former chief economist at the IMF) Ken Rogoff keeps pointing out, with the rapid spread of globalisation the very idea of national economic capacity needs to be modified since it is not clear what it can mean any more. Globalisation among other things means the rapid movement of capital, labour, goods *and* technology and this makes it possible for some areas to grow very quickly indeed.

Of course this doesn’t mean you can just sit back and watch, since with Inflation over 5% and salaries predicted to rise by 7.3 more than  inflation in 2006 there is nothing to be complacent about. If the huge transition which is currently taking place in India is to go forward as smoothly as possible then inflation  needs containing. On the other hand the Central Bank may want to move cautiously, since the US economy  is evidently slowing, and it is not clear just what the impact of this will be for everyone else (in an interlocked world), and especially what this will mean in China, which is much more locked into the US than India is.

Some are already warning China of the dangers which a slowdown represents.  I appreciate the concern, but I think momentum in both India and China is sufficiently strong to withstand a downturn. This doesn’t mean there will be *no* effect, just that the oft predicted ‘hard landing’ is very unlikely, and especially since China is a long way from being a market economy, and the government can and will intervene to take up the slack.

Which is not the same thing as saying that – in the event of a global slowdown – global prices may not get a huge push downwards from the price reductions the Chinese export industries will be forced to make to sell all that added production which is only now coming online.

This post is not a plea complacency, but it is a plea to keep to the measure of things (such as we are able to estimate them). There is much to be done, let’s go to it!

30 Comments »

  1. As you say, India is achieving these amazing growth rates without implementing the reforms that many say is necesary for India to truly take off. Given that these numbers (from the Bloomberg story) are spitting distance from a 10% annualized GDP growth rate in the quarter, is this a bad thing? What would the growth rate be if the “correct” policies were implemented (e.g. labour market reform, reducing the budget deficit, reduced tarrifs, etc.) 15%? Is 15% growth even conceivable in an economy of the scale of India; it seems impossible without uncontrollable inflation. And this is all happenning in a world with $70/barrel oil! Maybe the current inefficiencies are a good thing in that they act as a necessary drag on growth so that things don’t start getting unmanageable (i.e. as an alternative/complement to high interest rates). Steady 10% GDP growth would be fantastic, doubling GDP in 7 years. In 7 years, India would get to where China is now and 7 years after that to where Malaysia is now. Think of the reduction in poverty and improvement in people’s lives that that would mean. The next 20 years is critical since India’s demographic advantage is at its maximum during that time. These are uncharted waters indeed.

    Comment by ramster — September 12, 2006 @ 11:03 pm

  2. This is why India is one of the most interesting countries to follow as an observer of the international economy (that would be me :)) these days. Now this is uncharted waters as you se rightly put it (both of you that is) and it is not clear what kind of development we are going to see. I am a bit inclined to start talking about global potential output and sustainability of growth in the long run but I won’t go too much into this here since no one can say whether this will be the end result although I do believe it is a point worth considering.

    Meanwhile and now that we are at it with the Indian manufacturing sector … you really do need to see this article from NYT (I mean this!)

    http://select.nytimes.com/gst/abstract.html?res=F30914F6355A0C728CDDA00894DE404482

    NewEconomist did a post;

    http://neweconomist.blogs.com/new_economist/2006/09/younger_india.html#more

    and so did I …

    http://clausvistesen.squarespace.com/alphasources-blog/2006/9/5/indias-manufacturing-sector-is-picking-up-the-pace.html

    Notice especially this quote from the article …

    ‘More than two-thirds of foreign investment in the last year has gone into manufacturing in India, not services.’

    Conventional wisdom has a nag of changing rather quickly it would seem :).

    Comment by claus vistesen — September 13, 2006 @ 2:20 am

  3. I agree with ramster above: do we really need a 15% growth rate?
    The amazing thing is that India is growing at this rate despite the ‘compromise’ on ‘economic reforms’ that the world keeps telling us we need. It makes you hope that India can chart its own unique path to economic reform the way it has carved out its own unique form of liberal democracy.

    Comment by Shivani — September 13, 2006 @ 9:15 am

  4. Figures are just indicators and it can be grossly underestimating or overestimating. just becuase India grows at 10%, it doesnt necessarily imply that the populace in benefitting largely. Definitely certain sections of the population benefit and this is eveident in the large inequalities present in India.
    India definitely needs to reap the agvantages of the ‘demographic dividend’ which would culminate towards the end of 2020 according to the statistics. Gretaer emphasis needs to be given to social and physical infrastructure. It is crucial that the government increases spending in sectors like education and health.

    And definitely there is much to be done!

    Comment by Alex — September 13, 2006 @ 12:03 pm

  5. Edward, you thing the demographic dividend is already in play? I thought it was 2030-2050 based hypothesis. If this were true, won’t China be negatively impacted?

    Also, while the export % of Chinese GDP is getting smaller, it’s still significant. Any slow down in US will significantly impact China – I am not sure what that $60billion FDI and the rest of the huge capex will do – unless Euro-region picks up the slack.

    Won’t it be great if India and China can feed off each other without having to rely on US or Euro to suck up the imports? I guess neither countries economies are large enough to take up slack – surely India is not, yet.

    Comment by Chandra — September 13, 2006 @ 1:22 pm

  6. given the scant and tardy information gathering and reporting process, one needs to look at all these numbers with a grain of salt. there is this vast underground economy (like the one prevalent in dharavi which is supposed to parallel in numbers to mumbai as a whole if rumours are to be believed) that no one takes into account.

    it has happened the same in china. the real growth is probably higher in india too, because the baselines are so small. whatever it is, let it continue, for we do need prosperity badly, and across all segments, if we are to stop those naxalites from spreading their wings to the coastal states too. :)

    Comment by phantom363 — September 13, 2006 @ 7:07 pm

  7. There is a problem. Is this rate of industrial growth sustainable? Is the recent news of industrial growth distracting us from a more pressing problem? We’re back to being unable to grow sufficient grain and having to import wheat from Australia. Unsustainable industrial growth (China’s industrial growth may have come at an enourmous enviromental expense that they may not be able to recover from.) would hurt the economy long term. We should learn from their experiences.

    I believe that in order to have a stable rate of industrial growth and to build a strong manufacturing base, we must also take proactive measures to protect much of the agricultural base. This includes switching over to drip based watering (to prevent rapidly increasing ground salinization), improving water desalinization and decontamination technology (to provide water independent of the monsoon) and improving localized industrial power generation.

    There’s no point in suddenly building lots of petrol engine based cars if the price of petrol in the next 5 years shoots up further as predicted.

    Lots of problems to solve.

    Comment by Javali Ram — September 13, 2006 @ 7:08 pm

  8. Interesting comments everyone.

    Ramster and Shivani,

    I think we largely agree, there is a limit, but on the other hand this shouldn’t be used as an argument *against* reforms. These reforms are needed to make all this sustainable in the future. But there is no doubting the momentum now.

    “Steady 10% GDP growth would be fantastic, doubling GDP in 7 years. In 7 years, India would get to where China is now and 7 years after that to where Malaysia is now.”

    This would be lovely, truly lovely, so many people would benefit, and so much suffering would be eased. I also think it is doable. Of course there will be recessions, but there will also be growth ‘excess’ on the other side.

    Basically I have a theory that the later fertility declines, and the later the DD takes off, the more rapidly the whole fertility decline and growth transition takes place. (This is partly because of globalisation and the rate of techology and behavioural trasfer. The mobile phone alone has made a huge difference here. So if China looks set to peak at around 11 % I don’t see why India couldn’t peak at around 12% or 13%. It is very hard to say, but clearly this would be sustainable for any length of time.

    Italy peaked in the 1950s (remember there is a downside as well as an upside here, as populations age) at 5% per annum. Since that time it has dropped steadily at the rate of about 1% per decade, and in the 1990s was at an annual rate of about 1% per annum. Following this trajectory, and what we already know, it is not unreasonable to imagine that this decade the Italian economy will flatline (an average of 0% growth) and possibly enter negative territory in the next one (say -1% pa 2010-2020).

    You can see more explanation of this and some graphs here:

    http://demographymatters.blogspot.com/2006/03/neo-classical-growth.html

    The Japanese graph (which you can click on) is interesting, since they did hit 15% briefly in 1959 and again in 1969.

    Comment by Edward — September 13, 2006 @ 7:13 pm

  9. Alex,

    “Figures are just indicators and it can be grossly underestimating or overestimating. just becuase India grows at 10%, it doesnt necessarily imply that the populace in benefitting largely.”

    Obviously, and the benefits must reach the whole population eventually. But pragmatism suggests that this process will go in stages. The hard part is getting people to transit out of agriculture.

    Comment by Edward — September 13, 2006 @ 7:15 pm

  10. Chandra,

    “Edward, you thing the demographic dividend is already in play? I thought it was 2030-2050 based hypothesis. If this were true, won’t China be negatively impacted?”

    No, if you look at the growth numbers in the last 5 years it is definitely in operation. The thing is there is still a lot more to come. China started before India, but remember China reduced fertility *before* it had the economic reforms, under the old system. This means that the Chinese process is a shorter one. This could present difficulties for them.

    Also remember the huge difference between North India and South India here, the process is much later in the North. The South is already below replacement fertility and can have European a lowest low fertility and increased life expectancy profile within a decade. Sustainabilty in India will in part be about equilibrating such imbalances.

    By the time we get to 2030 the DD part will all be over. India better get rich before it starts getting old.

    “Any slow down in US will significantly impact China – I am not sure what that $60billion FDI and the rest of the huge capex will do – unless Euro-region picks up the slack.”

    Definitely this will be a problem. 2007 does not look like it is going to best the best of years. Remember Europe is ageing, and in some key economies – Germany and Italy – domestic consumption is flat since people save rather than borrow. I would definitely say that to a considerable extent Germany is living off China and the US (as is Japan).

    “Won’t it be great if India and China can feed off each other without having to rely on US or Euro to suck up the imports?”

    Well basically I think you are both going to be so big that something like this is more or less bound to happen. If people in the US or Europe can’t see it I think it is because they are thinking with their emotions. The UK to China will be something like Denmark or Sweden to the UK. And remember they live well in Denmark and Sweden, being relatively small isn’t a problem, but obviously Denmark can’t buy all Britain’s exports.

    Comment by Edward — September 13, 2006 @ 7:26 pm

  11. phantom363

    “given the scant and tardy information gathering and reporting process, one needs to look at all these numbers with a grain of salt. there is this vast underground economy”

    Oh yes, definitely. One curious thing here. I remember when a lot of ‘first world’ bloggers used to laugh at China, and say ‘these numbers are false’, ‘this can’t be sustained’, ‘this will all collapse’. You don’t hear this any more. Noone seems to be laughing now. Things have gone strangely silent. As they sing in the football matches, “oh, they’ve all gone quiet over there”.

    The figures of course were ‘false’, but in the sense you mean: they were a significant underestimate.

    Comment by Edward — September 13, 2006 @ 7:30 pm

  12. “Lots of problems to solve.”

    Obviously Javali Ram obviously. There are huge issues to address, especially as you suggest in areas like agriculture and ecology. I mean we have a serious problem of resources for a planet with nine billion people, and those resources have to be shared out more fairly.

    “There’s no point in suddenly building lots of petrol engine based cars if the price of petrol in the next 5 years shoots up further as predicted.”

    You are absolutely right. This *is* a serious issue. We have to find alternative energy sources, and this has an impact on agriculture too because of the intensive use of fertilizers.

    Also there is climatic change to think about.

    For many reasons India cannot simply adopt a ‘western’ lifestyle, one of these is health and obestity, which I am going to post about, but there are plenty of other reasons. But somehow in India I don’t think there wil be any shortage of critical eyes to be cast over all this :).

    Comment by Edward — September 13, 2006 @ 7:53 pm

  13. Edward,
    Do you mean to say that we must have agriculture contributing to the economy or is it that we need to reduce the disguised unemployment prevalent in the agricultural sector.

    (http://alexmthomas.wordpress.com)

    Comment by Alex — September 13, 2006 @ 9:36 pm

  14. Alex

    “Do you mean to say that we must have agriculture contributing to the economy or is it that we need to reduce the disguised unemployment prevalent in the agricultural sector.”

    Both really. In the long run India needs a modern productive agricultural sector which both employs a lot less people but which both produces more product more efficiently and at the same time constitutes a far lower share of overall GDP. That is what development is all about really.

    Comment by Edward — September 14, 2006 @ 12:19 am

  15. In your post, you asked the question: What is India and China’s growth capacity? Allow me to address the India part for now.

    According to the Solow growth model, the potential long-term rate of growth of an economy (the rate at which it can grow without stoking inflation) is simply the sum of productivity growth and labor force growth. For the past three years these have been running at 6% and 2% respectively — hence the 8% rate we have had.

    We can take it one step further and analyze the two components:

    (1) Labor force growth is where the “demographic dividend” comes in. In my view, India is already realizing this – EU and Japan both have a shrinking labor force, and the US and China are barely growing, and will also start shrinking within the decade. Our economically active population (ages 15-64) is growing at 2% per year and is projected to continue at that rate at least until 2030. There is little reason to doubt that this will change. However, the key is that, as these workers come of age, we need to ensure that they can find suitable, long-term, full-time employment. The scary thing about the growth of the last few years has been that the growth in jobs has been slower than the growth of the working age population (hence the adage “jobless growth”). Education, a loosening of labor laws, as well as a concerted effort to develop a robust labor-intensive manufacturing sector are all necessary to ensure that the young workers are able to integrate into the economy rather than being forced to its fringes (eg: in unproductive agriculture, and/or in creating social unrest). The industrial production numbers you quote give me some hope in that regard.

    (2) It is notoriously hard to figure out the driving forces of productivity growth – but crudely, it can be broken down into capital deepening (substituting capital for labor) and an abstract term which economists call ‘total factor productivity growth’ or TFPG. Mathematically, TFPG is simply the residual – the amount of productivity that can NOT be attributed to an increasing capital stock. In my view, the main driving forces of this are innovation and the level of competition in the economy.

    All this technical jargon brings me to the meat of my argument: economic and political reforms need to be targeted at three things: increasing innovation and competition, generating employment, and decreasing regional inequalities. There are literally thousands of things that need to be done in order to achieve this – ranging from improving the quality of our administrative and judicial systems so that doing business is easier, to building infrastructure so that our manufacturers can export faster, to delivering basic services (health and education) to large swaths of the country. This is no easy task – and having to build a social and political consensus around it makes it even harder.

    Like everyone, I am not happy with the pace of reforms: if I had it my way, they would be done faster. At the same time I recognize that the leadership of our country operates under certain constraints (constraints that we, through our constitution, actually impose on them) and it is their job to build consensus. My sense is that our PM recognizes the political obstacles, and has instead decided to focus on ‘reform by stealth’ – that is to say, start doing the many many reforms which are NOT controversial and when you have the legislative muscle, then go for the tougher stuff like labor laws, etc.

    I don’t want to draw this out too much further but I would like to make two final points. To those who say that India doesn’t need rapid growth, you could not be more wrong. We have a massive stream of young people who are about to come of age and if we don’t find a way to integrate them into the economy, there will be increasing social and political unrest (imagine the Naxalite movement on steroids) and we will most likely fall apart as a polity. And to those free-marketeers who are upset at the stalled economic reforms and the seeming impotency of our government institutions to do anything right, I would say that, to maintain our democracy and our various freedoms, we need reform by consensus – not by fiat. The former is sustainable, the latter isn’t.

    I couldn’t agree with the author more that now is not the time for complacency. However, nor is it the time for impatience.

    Comment by Nandan Desai — September 14, 2006 @ 3:46 am

  16. Edward,
    You mention ‘using a lot less people’. What do you envisage the population to be employed in? IT enabled services? Manufacturing?

    Wouldnt this labour (almost 60% of the population) in the agriculture, cause disguised unemployment in other sectors?

    What is your vision?

    http://alexmthomas.wordpress.com

    Comment by Alex — September 14, 2006 @ 12:40 pm

  17. India may be hit by US slowdown

    http://inhome.rediff.com/money/2006/aug/21india.htm

    August 21, 2006 18:08 IST
    India is at a greater risk than the other three BRIC (Brazil, Russia and China) economies in the event of a slowdown in the US economy, a study by global investment banking firm Goldman Sachs has said.
    Though India’s export to the US is only 18 per cent as compared to 31 per cent to Asia and Japan, it is more at risk as, “The exports to the US are concentrated in jewellery and precious metals, suggesting that its trade may be fairly vulnerable to a slowing US consumer,” the study said.

    The United States has been “the engine of global growth” for several BRIC countries but it has not emerged as a more important export destination, ‘The Globe and Mail’ quoted the report.

    Though, US economic growth is expected to slip to below 2.5 per cent in 2007 from 3.5 per cent this year, China will not be affected much as 44 per cent of its exports go to Asia and Japan, as compared to 21 per cent to the US.

    Moreover, 45 per cent of China’s exports to US are in the form of machinery and transport equipment, while the share of lower value manufactured goods has dropped to 38 per cent from 58 per cent, the study added.

    The study further suggests that, Russia is also not at risk as its exports to US are concentrated in petroleum products and other natural resource commodities.

    “Unless the US slowdown causes commodity prices to fall significantly (and we do not think it will) Russia should be fairly well shielded,” the study said.

    Comment by Guz — September 14, 2006 @ 1:42 pm

  18. Hi Edward,
    This might interest you: I heard Martin Wolf’s talk today- which was apparently a distillation from his book on globalisation. Anyway, on the Indian population question, he was quite emphatic that India needs to reduce its population growth if it wants to improve the quality of life of its people. He did not see India’s population as an economic advantage at all. He suggested education for women so that they would stop having children…
    Shivani

    Comment by Shivani — September 14, 2006 @ 7:51 pm

  19. Shivani,

    “India needs to reduce its population growth if it wants to improve the quality of life of its people.”

    I absolutely agree with this. One of the reasons that India took so long taking off was that the women were having so many children. Agriculture tends to produce a fertility and poverty trap in that sense. But this transition has started. In the South you are already below replacement fertility. The North will now come steadily down. I agree with Wolfe, female education is very important, then you get a dynamic where people study more, have children later, and earn more because they are better qualified. It is the steady movement upwards in first birth ages that really drives the transition.

    Of course, later, like most of the developed world, you will have a problem with below desireable fertility, but this is a developed world problem at the moment, it isn’t a priority for India, and anyway you will be able to get the benefit of the experiences and solutions found in the already rapidly ageing countires. This is an important theretical issue that we are furiously working away on right now.

    Comment by Edward — September 14, 2006 @ 10:19 pm

  20. Guz

    “India is at a greater risk than the other three BRIC (Brazil, Russia and China) economies in the event of a slowdown in the US economy, a study by global investment banking firm Goldman Sachs has said.”

    Well I would take that with a pinch of salt if I were you. In the first place the whole BRIC idea is wrong, or at least partly wrong, since it is simply based on the idea that these countries are big. But the demographic dividend is also part of the picture, and Russia had its demographic dividend years ago, under the old communist system, but because of the politics it wasn’t able to get rich.

    Now Russia is socially effectively moving backward, life expectancy has fallen, the birth rate is around 1.2, and the population is getting steadily older and declining both through natural momentum and because a lot of young Russians are emigrating. This case has nothing to do with Brazil, China and India, though, say, Turkey has everything to do with the same process.

    Basically we don’t know how sensitive to a slowdown in the US India will be. A global slowdown equally could produce more pressure for cost reduction and outsourcing. Right now I don’t know enough about the trade interconnections which are driving global growth, I’m not sure anyone does. Of course luxury items can be affected, but if you are selling cheap jewelry, in fact when people feel glum they may even buy more of this. Italy might have a bigger problem in this sector.

    “Moreover, 45 per cent of China’s exports to US are in the form of machinery and transport equipment,”

    Yes, this is interesting, but what about China’s sales of this kind of thing in the developing world. The US is an impoortant market but it isn’t the only one. My point in this post is that there is so much growth going on in the developing world that there is plenty of room to trade between each other. This I think we be much clearer on the upswing after the next downturn.

    ““Unless the US slowdown causes commodity prices to fall significantly (and we do not think it will) Russia should be fairly well shielded,” the study said.”

    This is very hard to call, since no one knows how low energy can fall during a slowdown, since in part this depends on how much things slowdown. Russia is very dependent on energy though, there is no doubt about that.

    Basically, this post is about growth, there will be time to think about what happens in the slowdown when we get there, and we still don’t really know when that will be.

    Comment by Edward — September 14, 2006 @ 10:32 pm

  21. Nandan

    A very interesting and substantial comment. Thanks.

    Broadly we agree. Just a few points.

    “For the past three years these have been running at 6% and 2% respectively — hence the 8% rate we have had.”

    Yes, but the labour force component should now start to accelerate, since it is not only an age issue, but is about getting non-productive population into productive activities, and this is also gender related. As you suggest this is the part that isn’t automatic, since you have to have your labour market expanding fast enough to create the jobs to allow this to happen. Normally in the DD there is a certain circularity though, since the increase in saving which comes from having less dependent children makes funds cheaper and more available for investment, although again you still need efficient capital markets to make sure these funds get through to the projects that need them.

    “EU and Japan both have a shrinking labor force, and the US and China are barely growing”

    This is not entirely correct. Japan has a declining potential labour force, so does Italy and Germany (and incidentally Russia, and places like Lithuania, Estonia, you need to look at Eastern Europe). France, the UK and Spain have (thanks laregly to immigration still expanding workforces, in some cases on a quite expansionary basis. The US too still, thanks to higher fertility and immigration has a growing potential labour force. They need to create about 300,000 jobs a month just to absorb the impact of this. China is about to stabilise. Then China will not be able to increase output simply increasing the number of people working, it will have to go for improving the *quality* of the work done (as you say productivity) or in other terms move up the value chain.

    “It is notoriously hard to figure out the driving forces of productivity growth – but crudely, it can be broken down into capital deepening (substituting capital for labor) and an abstract term which economists call ‘total factor productivity growth’”

    Yes, well quite. Moses Abramovitz used to call the residual “the measure of our ignorance”. How you interpret this residual depends on
    your theoretical model. On one account (which Griliches used to go for) there shouldn’t be a residual, it is all measurement error. On another, Schumpeterian, account it is a kind of technological ‘rent’ you get while the others catch up.

    Let me put a couple more possible factors which influnce the total productivity (or income per capita) of a society. One is life expectancy. Here it is important to consider average life expectancy at the age of say 20, since the huge presence of infant and child mortality in the pre-transition societies skews the data otherwise.

    Now the Demographic Dividend is also associated with a continuous increase in life expectancy, from say an expectancy of 25 more years (on average) at 20, to one of 45 more years, and then to one of 65 more years (to age 85). Now the interesting thing is that the first of these leaps is hugely beneficial from a productivity point of view, while the second leap (which is happening now in Europe) may be less beneficial since the child dependency situation is increasingly swapped for an age dependency one.

    Also we, as individuals, have a lifetime productivity profile. This varies from occupation to occupation (cricketers peak earlier, and judges later) but if we consider averages, then it is normally thought that in skilled work people take off after the mid twenties, and peak in the mid to late 40′s. After this individual performance is normally considered to decline.

    So obviously any society with very ‘thick’ generations in the 25 to 45 age group is a very productive one. This would tend to be a peak growth point.

    I don’t know whether this is suitably clear. This is one of the topics which I myself am working on.

    Comment by Edward — September 14, 2006 @ 11:00 pm

  22. Alex

    “You mention ‘using a lot less people’. What do you envisage the population to be employed in? IT enabled services? Manufacturing?”

    Basically what I am arguing is the the transition from an underdeveloped to a developed economy can be seen in the career structure of the population. From having relatively few in services, a few more in industry, and the vast majority in agriculture you need to move to an economy were the great majority work in services, some work in industry, and a small percentage remain in a very productive agriculture. Obviously there is no iron law here, and the balance will vary from one model of development to another. In France, for example, more people still work in agriculture than they do in the UK.

    Comment by Edward — September 14, 2006 @ 11:07 pm

  23. Thanks for your response Edward.

    I agree with all your points. In some ways, I was making the point about the determinant of economic growth in order to outline the need and scope of reforms.

    In my work, I have done quite a bit of research on productivity growth using company-level data (sales being a proxy for output, PP&E a proxy for capital input, and employee hours a proxy for labor input) accross several big countries. The purpose of doing this painstaking exercise was firstly to compare the results with the available macro data, and secondly to delve into the determinants of TFPG by looking at variables like level of competition, regulatory structures, innovation (although it is very hard to find good quantitative data on this), corruption, etc. Competition was by far the most significant determinant — not only at the national level but also at the industry level (yes, I actually went through the companies one by one and categorized them!). My measure of competition was simply the concentration of sales in a particular industry (more concentration implying less competition). Furthermore, I found that the fastest-growing economies had productivity which was driven by TFPG, not capital deepening. So my point here is simply that I have a renewed degree of faith in the residual as a ‘catch-all’ term, as well as the major driver of the economy.

    Returning to the points you made in your reply, I fully agree that demographic dynamics are probably equally (if not more) important driver of growth. However, I do not think that there is much that can be done at the policy level to effect change here substantially. On the other hand, policy changes CAN have a direct and large impact on TFPG — hence I would say that is the best use of the reformers’ political capital.

    I am not saying that policy changes can’t alter the demographic dynamics of a country — reducing infant mortality, delivering better healthcare, and improving education can definitely do that. However, my (admittedly unsubstantiated) claim is that, on the margins, this change is lower than can be expected from TFPG-enhancing reforms.

    You bring up another important point which hadn’t occured to me — which is the INTERPLAY between demographics and productivity growth. I have to think some more about this – in the mean time, thanks for the stimulating discussion.

    Comment by Nandan Desai — September 15, 2006 @ 2:56 am

  24. “thanks for the stimulating discussion.”

    Lo mismo digo yo. Which is just Spanish for the feeling is mutual.

    “I am not saying that policy changes can’t alter the demographic dynamics of a country — reducing infant mortality, delivering better healthcare, and improving education can definitely do that. However, my (admittedly unsubstantiated) claim is that, on the margins, this change is lower than can be expected from TFPG-enhancing reforms.”

    OK, Ok. Let’s just say that the beast walks on two legs: one of these is demographic and the other is institutional (in the broadest sense of this term). Of course at some level getting maximum benefit from something like TFP is very interesting, you only have to look at the US/EU differential in the uptake of ICT, and then the subsequent leveraging that the Scandinavian economies have made of it, to see that.

    Basically I am a macroeconomist, and if I bend the stick in the direction of demography it is only because so many people tend to imagine that it has no importance. Essentially I think this idea comes from some flawed correlation studies which were done back in the 1980s. I think what has put the demographic question firmly back on the agenda again is the emphasis of David Bloom and others on the fact that it is *age structure* and not *size* which is the important thing. What you then need to do is ‘marry’ this understanding to a revamped version of demographic transition theory (ie one which takes into account the two-step longevity transition, and the arrival of lowest-low fertility).

    If you like ‘big picture’ stuff, this is my first stab at putting my ideas together on all this:

    http://www.edwardhugh.net/homeostasis.html

    Essentially it is a ‘work in progress’, since I am not sure that I have all the details right yet. This is my objective over the next twelve months, to knock it all into shape.

    Anyway, please stick around, I would appreciate an ongoing debate, and not only is there a lot to do, there is also a lot still to understand. (Incidentally I hope to have a post up on obesity in India, and why it could well be a big problem, over the weekend or early next week).

    Comment by Edward — September 15, 2006 @ 9:16 am

  25. I am definitely not one of those who underestimate the importance of demographic structure. I spent about 6 months back in 2004 working at Columbia University’s programme for population aging in developing countries – and saw firsthand how limited an understanding we have of the effects of structure and how to deal with it. I will certainly check out your work on this.

    I think political-economists dismiss the importance of demographics primarily because of a general wariness of what they construe as social engineering (since according to econ theory, a policymaker cannot CHANGE human behavior, only EXPLOIT and MANAGE it). Having worked at a place which reccommended policies to deal with demographics, I would say that occaisionally we were guilty of that overreach.

    Comment by Nandan Desai — September 15, 2006 @ 7:37 pm

  26. From having relatively few in services, a few more in industry, and the vast majority in agriculture you need to move to an economy were the great majority work in services, some work in industry, and a small percentage remain in a very productive agriculture. Obviously there is no iron law here, and the balance will vary from one model of development to another. In France, for example, more people still work in agriculture than they do in the UK.

    I fail to understand some things. Please educate me here and I mean it seriously.

    What will the majority of people do in services? Health Care/unchecked housing construction as in the US? Tourism as in a tourist country like say Maldives/Singapore? Remember that the life expectancy is also creeping up, so you need to occupy people for a longer amount of time.

    Comment by Amit Kulkarni — September 18, 2006 @ 11:35 pm

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