The national election in India this past spring produced a shocking outcome. Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) were widely expected to win a third five-year term and increase their majority in the Indian parliament. Standing at 303 seats out of 543 going into the voting, some BJP officials spoke of winning as many as 370, or even 400, giving the prime minister and his party a stranglehold on India’s national affairs. Instead, the BJP lost ground, winning only 240 seats.
The result touched off a search for the causes of its failure to meet expectations. There are several possibilities, all of them valid at least to some extent: dissatisfaction with the cult of personality surrounding the prime minister; opposition to his government’s violation of the norms of India’s long-standing democracy -- violations that included jailing political opponents and harassing critical journalists; and dismay at the BJP’s policy of “Hindutva” – Hindu nationalism – which took the form of discrimination against religious minorities, especially the country’s 200 million Muslims, who comprise 14 percent of the total population.
Another plausible reason for the BJP’s worse-than-expected electoral showing is India’s economic performance during the decade of Modi’s leadership. In some ways, his economic record is an impressive one. Overall economic growth averaged close to six percent per year according to official statistics, although there is some dispute about how accurate these are. The growth that India has achieved, however, has not generated jobs on anything like the scale that the country’s 1.4 billion people need. By one estimate, youth unemployment stands at 45 percent. Nothing is more important for the country’s future than creating jobs at a faster rate and in greater numbers than it has done so far.
How can India accomplish this? In their book Breaking the Mold: India’s Untraveled Path to Prosperity, Raghuram Rajan and Rohit Lamba, two Indian-born economists now working in American universities, offer an intriguing, provocative, and genuinely radical suggestion. They believe that their native country can and should break the mold – that is, depart from the pattern -- of economic development and growth that every major country has followed since the beginning of the Industrial Revolution 250 years ago, a development that made sustained economic growth possible for the first time in human history.
In this standard pattern, a country begins by manufacturing simple products, usually textiles. It then moves on to products that are more complicated and more difficult to make, and require more capital and a higher level of skill among those who make them – products such as steel, automobiles, and electronic equipment. The pattern involves people leaving the farms where their forbears had lived and worked for generations and migrating to cities, where they find employment in factories and thus earn more than they did in agriculture.
In this well-established sequence, the more advanced the product, the more profitable making and selling it tends to be. As they make increasingly advanced products, those involved in producing them, including workers, become richer, and the country as a whole thereby becomes wealthier. As a country moves to more complicated manufacturing, workers’ wages rise, and other countries, with lower wages, begin to make the simpler products: with their lower wage levels, they can produce and sell them at lower cost. In this way, the global economy becomes a metaphorical ladder, with different countries occupying different rungs and the rungs denoting progressively more complicated and lucrative forms of manufacturing.
In the second half of the twentieth century, the countries of East Asia got on the ladder and added a new element to the standard pattern, a feature that began with an already industrialized Japan and reached its zenith with China. The East Asians exported much of their manufacturing products, thus expanding the market for them, which enabled them to sell more and become richer faster.
Manufacturing created wealth as well by generating ancillary jobs: jobs in other factories making parts for the main product, clerical positions in the businesses that owned and operated the factories, and jobs providing services to the growing army of urban dwellers. Ultimately, in this standard pattern, white-collar positions come to outnumber blue-collar ones, as a country’s economy moves from agriculture to industry to services – in that order.
India, however, has had difficulty with the industrial stage of national economic growth. It has an unusually small industrial sector for its level of per capita income. Part of the difficulty has to do with specifically Indian characteristics. Compared, for example, with China, it has too little of the infrastructure – roads, and ports in particular – that underpin large-scale manufacturing, although the two BJP governments in the last decade have done better on this score than their predecessors. Workers in factories, to take another example of India’s shortcomings, require a higher level of education than farmers, and India has done poorly in providing the requisite education to all of its citizens.
In addition, the country’s labor laws make it difficult to discharge workers, which discourages firms from expanding their operations, since that entails employing more of them. Finally, unlike the East Asian countries, India has historically participated only modestly in international trade.
As Rajan and Lamba note, however, some of the barriers to building a robust Indian manufacturing sector stem from the way the global economy has evolved in recent decades. The competition in low-skilled manufacturing has become fierce, as many countries – above all China, with its vast population – engage in it. The intensity of competition has driven down wages in manufacturing of this kind, reducing the economic benefits to the countries where it takes place. Moreover, the rich countries that were willing to buy East Asian products, thereby spurring growth in that region, have become less hospitable to exports, which further limits what India can hope to gain from manufacturing.
What, then, should India do to generate the jobs it needs? Rajan and Lamba suggest departing from the path other countries have followed by moving from agriculture – and the majority of Indians continue to live in villages – to services, skipping the stage in which the national economy revolves around industry. They do not advocate abandoning manufacturing, but they believe India’s prospects in services are bright, for reasons having to do, once again, with both particular features of Indian society and the evolution of the global economy.
For a poor country, India has become unusually proficient at providing services. The call centers that Western companies use are perhaps the most conspicuous example, but they are not the only ones. Some Western hospitals, for example, have the x-rays of their patients read by medical personnel in India, whose wages, because of the cost of living where they work are so much lower, undercut what the hospital would have to pay their own physicians.
Call centers and remotely-analyzed X-rays are made possible, in turn, by the digital revolution, which has dramatically lowered the cost, while expanding the scope, of communication over very long distances. That is, services can now be traded in a way that they could not before the digital age. By emphasizing the provision of services and exporting them, the authors say, India can create jobs and generate broad-based prosperity even without the robust manufacturing sector that other countries have built on their way to high national incomes.
Such a course is surely desirable, but is it feasible? The authors devote the majority of their book to discussing reforms that are necessary for the economic strategy that they propose: supplying better childhood nutrition, especially among the poor; improving education at all levels; raising the national standard of health care delivery; assisting disadvantaged groups; and promoting entrepreneurship. These are all worthy measures, and to the extent that India can put them into practice, they will undoubtedly enhance both the nation’s economic performance and the quality of the lives of India’s citizens.
Even if the country manages to implement these reforms more extensively and with greater speed than it has thus far, however, questions will remain about the new growth strategy that Rajan and Lamba advocate. For one thing, that strategy will put Indians in competition not with Chinese factory workers but with the architects, engineers, designers, and entrepreneurs of the wealthiest countries on the planet. Succeeding in that competition demands very high levels of education and skill. India produces people of this kind who are fully the equals of the best of their peers in Europe, North America, and Japan; but it does not produce them in great numbers (and ironically many of them now work in the West). Moreover, increases in per capita income depend on improvements in productivity, and this is notoriously slower in the service sector than in manufacturing. Finally, it is not clear that services spawn ancillary employment at the rate that, historically, manufacturing has.
The mold of economic growth that Rajan and Lamba believe India can and should break was established and has remained in place for 250 years for a reason: it has proven a reliable path to riches. The stage-skipping that they advocate has never taken place. That does not mean that it cannot be done. It does mean, however, that if India’s route to the status of a rich country must run from agriculture to services without passing through an intensive period of manufacturing, its prospects for achieving that universally desired goal must be considered far from certain.
Michael Mandelbaum is the Christian A. Herter Professor Emeritus of American Foreign Policy at the Johns Hopkins School of Advanced International Studies and the author of ‘The Titans of the Twentieth Century: How They Made History and the History They Made, a study of Woodrow Wilson, Lenin, Hitler, Churchill, Franklin Roosevelt, Gandhi, Ben-Gurion, and Mao,’ which will be published by Oxford University Press in September.
