China

China’s Population Control Model is an Outdated and a Bad Idea for India

Hum do hamare ho do,
paas aane se mat roko.
— Indeevar, Rajesh Roshan, Amit Kumar, Sadhana Sargam and Rajesh Roshan, in Jurm (1990).

 Here’s a scene from a middle class Indian drawing room of the late 1980s and early 1990s. Four men are sitting and chatting.

“You know what India’s biggest problem is?” asks the first.

“Our population,” replies the second.

“The government should do something to control it,” says the third.

“Indeed,” affirms the fourth.

Three decades and more later, whether similar conversations continue to happen in the middle class Indian drawing rooms, I have no idea, simply because I haven’t been in one for many years. But some Indians still think in a similar fashion, that is, India has a population problem and that the government should do something to control it, like the way China did. (Okay, we might want to boycott Chinese goods but we don’t have such inhibitions when it comes to their population control policy).

In fact, one such individual, even filed a public interest litigation with the Supreme Court and as reported in the Sunday edition (December 13, 2020) of The Times of India, pleaded that “to have good health; social, economic and political justice; liberty of thoughts, expression and belief, faith and worship; and equality of status and opportunity, a population control law, based on the model of China, is urgently required.” (Ironically, the above paragraph mixes the Preamble of the Indian Constitution with the Chinese population control law). 

This is precisely the kind of lazy thinking that prevails when one forms an opinion on something and continues holding on to it, without looking at the latest data. Let’s look at this issue pointwise, in order to understand that such thinking is totally wrong.

1) There is no denying that India has a large population and that creates its own set of problems, everything from lack of employment opportunities to lack of public infrastructure. But is population control the answer to that? No. Look at the following chart, which plots the total fertility rate of India.


Source: https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=IN

The total fertility rate in 2018 stood at an all-time low of 2.222. This meant that on an average 1,000 Indian women have 2,222 babies during their child-bearing years. The chart has a downward slope, which means that the fertility rate has been falling over the years. This means on an average  Indian women have been bearing fewer children over the decades.

The replacement rate or the total fertility rate of women at which the population automatically replaces itself, from one generation to another, typically tends to be at 2.1. India’s fertility rate is almost at the replacement level.

As per the Sample Registration System Statistical (SRSS) Report for 2018, the total fertility rate in urban India was 1.7 and in rural India was at 2.4. Hence, urban India is already below the replacement rate.

2) The point being that the Indian population is increasing at a much slower pace than it was in the earlier decades. How has that happened?

As Hans Rosling, Ola Rosling and Anna Rosling Rönnlund write in Factfulness—Ten Reasons We’re Wrong About the World – And Why Things Are Better Than You Think:

“Parents in extreme poverty need many children… for child labour but also to have extra children in case some children die… Once parents see children survive, once the children are no longer needed for child labour, and once the women are educated and have information about and access to contraceptives, across cultures and religions both the men and the women instead start dreaming of having fewer, well-educated children.”

Hence, as the infant mortality rate falls due to a variety of reasons, from more women getting educated to a higher economic growth to urbanisation, the fertility rate comes down as well. Take a look at the following chart, which basically plots the infant mortality rate of India over a period of time. The infant mortality rate is defined as the number of children who die before turning one, per 1,000 live births.

Source: https://data.worldbank.org/indicator/SP.DYN.IMRT.IN

The infant mortality rate has fallen from 161 in 1960 to 28.3 in 2019. As more children born have survived and grown into healthy adults, parents have had fewer children. That is one clear conclusion we can draw here.

As the Roslings write: “Every generation kept in extreme poverty will produce an even larger next generation. The only proven method for curbing population growth is to eradicate extreme poverty and give people better lives, including education and contraceptives.”

India’s adult female literacy rate (% of females aged 15 and above) had stood at 25.68% in 1981. It has since gradually improved and in 2018 had stood at 65.79%. As more women have learned to read and write, the infant mortality rate and the fertility rate have both come down.

As the SRSS Report points out:

“On an average, ‘Illiterate’ women have higher levels of age-specific fertility rates than the ‘Literate’. Within the ‘Literate’ group there is a general decline in the fertility rates with the increase in the educational status both in the rural and urban areas, barring a few exceptions.”

Also, faster economic growth post 1991 has helped in bringing down poverty levels and in turn led to a lower fertility rate as well.

In 1960, the total fertility rate was at 5.906. It fell to 4.045 by 1990. By 2018, it had fallen to 2.22. Clearly, the rate of fall has been faster post 1990.

3) Now let’s talk about the China model of population control, which led to one Ashwini Upadhyay petitioning the Supreme Court, pleading that India adopt such a law as well. But before we do that let’s look at the following chart which basically plots the total fertility rate in China over the years.

Source: https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=IN-CN

China’s coercive one-child population control policy was launched in 1979. At that point of time, the Chinese fertility rate was 2.745. The interesting thing is that it had been falling rapidly from 1965 onwards when it had peaked at 6.385.

As Mauro F. Guillén writes in 2030: How Today’s Biggest Trends Will Collide and Reshape the Future of Everything:

“Back in 1965, the fertility rate in urban China was about 6 children per woman. By 1979, when the one-child policy came into effect, it had already declined all the way down to about 1.3 children per woman, well below the replacement level of at least 2 children per woman. Meanwhile, in rural China, fertility hovered around 7 children per woman in the mid-1960s, a number that decreased to about 3 by 1979.”

The point being that in 1979 when Chinese leaders pushed through the one-child policy the fertility rate in urban China was already at 1.3, much lower than the replacement rate. In rural China it was at 3, greater than the replacement rate of 2.1, but it was falling at a very fast rate. Hence, the decision to push through the one-child policy was not a data backed decision but basically politics.

As Guillén writes:

“The policymakers were unaware of the reality that fertility in China had been dropping precipitously since the 1960s, with most of the decrease driven by the same factors as in other parts of the world: urbanization, women’s education and labour force participation, and the growing preference for giving children greater opportunities in life as opposed to having a large number of them.”

Clearly, Upadhyay like the Chinese  before him, did not look at the Indian data before filing the public interest litigation in the Supreme Court and thus wasting the time of the Court as well as that of the government.

4) One of the impacts of the coercive one child policy in China was that parents preferred to have boys than girls. As Guillén writes: “While it was the law, the one-child policy created a gender imbalance of about 20 percent more young men than women, driven by the cultural preference for boys.”

The male-female ratio went totally out of whack. In 1982 there were 108.5 male births per 100 female births. This went up to 118.6 per female births in 2005. It has since fallen to 111.9. This has led to an intensified competition in the marriage market, with many Chinese men being unable to find brides.

As per the Sample Registration System Statistical Report for 2018, India’s sex ratio at birth was 1,000 males to 899 females. This works out to around 111 males for 100 females. Of course, like the Chinese even Indian parents have a cultural preference for a male child, who they believe will take care of them in their old age and also ensure that their family continues.

Imagine the havoc any coercive population control policy could have caused or can still cause, to the sex ratio in India.

In lieu of this fact, it was nice to see that the Modi government responded in an absolutely correct way in the Supreme Court. The health and family welfare ministry told the Court: “India is unequivocally against coercion in family planning… In fact, international experience shows that any coercion to have a certain number of children is counter-productive and leads to demographic distortion.”

Clearly, the government doesn’t want to become a victim of the law of unintended consequence where it wants to do one thing and ends up creating other problems. Kudos to that.

5) The Health and Welfare Statistics of 2019-20 project that India’s total fertility rate will be 1.93 in 2021, which will be lower than the replacement rate of 2.1. It is expected to fall further to 1.80 by 2026-2030.

Of course, a fertility rate of close to the replacement rate doesn’t mean that all states have low fertility rates. Recently, the data for  the first phase of the fifth National Family Health Survey (NFHS-5) was released. This had data for 17 states and five union territories. Among the large states, Bihar was the only state which had a total fertility rate greater than the replacement rate. The total fertility rate of the state stood at 3. (The data for other laggard states like Uttar Pradesh, Rajasthan, Madhya Pradesh etc., wasn’t released in this phase).

A look at the data from Health and Welfare Statistics of 2019-20 tells us that the poorer states which have higher infant mortality rates also have higher fertility rates, most of the times. This evidence is in line with theory.

6) States with a lower fertility rate will not see an immediate fall in population. This is primarily because of the past high fertility rate because of which more people will enter or be a part of the reproductive age group of 15-49. This is referred to as the population momentum effect.

As C Rangarajan and J K Satia wrote in a column in The Indian Express in October: “For instance, the replacement fertility level was reached in Kerala around 1990, but its annual population growth rate was 0.7 per cent in 2018, nearly 30 years later.” Nevertheless, population growth has slowed down and will continue to slow down further.

The larger point here being a growing population is a very important part of economic growth (of course, this is a necessary condition for economic growth but not a sufficient one).

As Ruchir Sharma writes in The 10 Rules of Successful Nations: “Throughout, increases in population have accounted for roughly half of economic growth… The impact of population growth on the economy is very straightforward, and very large. If more workers are entering the labour force, they boost the economy’s potential to grow, while fewer will diminish that potential.”

Many Indian states with a fertility rate lower than 2.1 will start facing the situation where fewer people will enter their workforce, in the next couple of decades. This includes Southern and the Western states. It also includes states like West Bengal, Punjab, Himachal Pradesh and Jammu and Kashmir.

Clearly, these states will need workers from other states to keep filling the gap in their working age population (something which is already happening). Also, as workers from high fertility states move to work in low fertility states, they will see an increase in their incomes. This will have an impact on their own fertility rates, which will fall.

In this scenario, states trying to reserve jobs for locals, is a bad idea in the medium to long-term, though it might work in the short-term by being politically popular. Also, states with lower fertility rates on the whole have higher per-capita incomes. Given that, locals do not always want to take on the low-end jobs. And for that, people from other states need to come in and take on those jobs.

People who move from less developed states to more developed states in India are those who are low-skilled or semi-skilled, largely. Alternatively, they have very high-level skills.

One indirect effect of a rise in migrants in any given state is that migrants spend a part of the money they earn and this leads to the overall increase in demand for goods and services within that state. It also leads to the government earning more indirect taxes.

This works well for the overall economy and the population as a whole though it may not be perceived in that way by the local population. As Abhijit Banerjee and Esther Duflo write in Good Economics for Hard Times: “ Migrants complement, rather than compete with, native labour as they are willing to perform tasks that natives are unwilling to carry out.”

To conclude, India has largely done whatever it had to stabilise its population growth, without resorting to any coercive policies (except for a short-time during the emergency). So, population growth has been slowing down for a while now and will continue to slowdown in the decades to come. In this environment, it is important to learn the right lesson from this entire issue, which is that societal level changes take time but they do happen at the end of the day, if the government keeps working towards it.

Also, going forward, it is important that young workers are allowed to move freely from one part of the country to another in search of an occupation; from the poorer parts to the better off parts.

As Rutger Bregman writes in Utopia for Realists: The Case for a Universal Basic Income: “Opening up our borders, even just a crack, is by far the most powerful weapon we have in the global fight against poverty.”

Of course, Bregman is talking in the context of international migration, with people moving from poorer countries to richer ones. But there is no reason why the same logic can’t apply to moving within the country as well.

Postscript: I just hope the Supreme Court judges are looking at the right data while listening to the PIL.

Amitabh Kant, the Indian Middle Class and their Dream of a Benevolent Autocrat

Dekh tere sansar ki halat kya ho gayi bhagwan,
Kitna badal gaya insaan, kitna badal gaya insaan.

— Kavi Pradeep, C Ramachandra, Kavi Pradeep and IS Johar, in Nastik (1954).

Sometime in late December last year I was part of a panel deliberating on where the Indian economy is headed, at a business school in Mumbai.

Towards the end of the discussion, a fund manager sitting towards my right, offered his final reason on why the so-called India growth story was faltering. He said, India has too much democracy.

The room was full of MBA students, just the kind of audience which laps up reasons like the one offered by the fund manager. As soon as he finished speaking, I explained to the audience why the fund manager was wrong, not just because India and the world need democracy, but also from the point of view of economic growth.

Of course, that wasn’t the first time I had heard the too much democracy argument being made in the context of it holding back India’s economic growth. Over the years, I have seen, friends, family members, random acquaintances and men and women I don’t know, make this argument with panache and great confidence.

It seemed, as if, in their minds, they had a picture of this great leader who would come on a white horse, brandishing his sword, and set everything right. They wanted India to be governed by a benevolent autocrat. 

Given this, it is hardly surprising that Amitabh Kant, the CEO of the NITI Aayog, and one of central government’s top bureaucrats, said yesterday (December 8, 2020): “Tough reforms are very difficult in the Indian context, we are too much of a democracy.”

The thinking here is that given that India is a democracy, decision making takes time and effort and you can’t just push through economic reforms which can lead to economic growth. Getting things done needs a collaborative effort and hence, is deemed to be difficult. Hence, it would be great to have less democracy, making it easier for a strong leader to push economic reforms through.

Of course, the mainstream media has largely ignored Kant’s comment. But this is an important issue and needs to be discussed.

The question is where does the thinking of too much democracy come from.

Some of it is remnant from the emergency era of 1975-1977, when trains used to apparently run on time. Trains not running on time was basically a manifestation of the general frustration of dealing with the so-called Indian system.

The logic being that, with the then prime minister Indira Gandhi keeping democracy on a backseat, it essentially ensured that the system (represented by trains) actually worked well (represented by trains running on time).

In the recent years, too much democracy hurting India’s future economic prospects comes from the economic success of China. China doesn’t have democracy. The Chinese Communist Party governs the country. In fact, there is no difference between the Party and the government.

This essentially has ensured they can push economic growth without any resistance from the opposition, different sections of the society or the citizens themselves for that matter.

China is not the only example of this phenomenon. Countries like South Korea under Park Chung-hee, Taiwan under Chiang Kai-shek and Singapore under Lee Kuan Yew, made rapid economic surges under leaders who can be categorised as benevolent autocrats.

As economist Vijay Joshi said at the 15th LK Jha memorial lecture at the Reserve Bank of India, Mumbai, in December 2017:

“ Fewer than half-a-dozen of the 200-odd countries in the world have achieved super-fast and inclusive growth for two or more decades on the run, and almost all of them were autocracies during their rapid sprints.”

So, history tells us that most super-fast growing countries at different points of time have been autocracies.

Beyond this, there is the so-called India growth story which also leads to the sort of thinking which concludes that too much democracy hurts economic growth. Ravinder Kaur makes this point beautifully in Brand New Nation—Capitalist Dreams and Nationalist Designs in Twenty-First-Century India.

As she writes:

“What is dubbed a growth story in policy-business circles is essentially an enchanting fairy-tale blueprint of economic reforms along with calls of a strong political leader to implement it… After all, capital has always rooted for strong, decisive leaders and centralized governance that can ensure its swift mobility and put the nation’s resources at the disposal of investors.”

A good part of India’s corporate and non-corporate middle class buys into this kind of thinking. They look at themselves as investor-citizens.

This leads to the firm belief that autocracies lead to faster economic growth. Hence, too much democracy is bad for economic growth. Only if India had a stronger leader. QED. Or so goes the thinking.

Dear Reader, this is nothing but very lazy thinking. While, most super-fast growing countries may have been autocracies with a benevolent autocrat at the top, the real question is, are all autocracies with a benevolent autocrat at the top, or at least most of them, super-fast growing countries.

Economist William Easterly makes this point in a research paper titled Benevolent Autocrats. As he writes: “The probability that you are an autocrat IF you are a growth success is 90 percent. This probability seems to influence the discussion in favour of autocrats.”

But that is the wrong question to ask. The question that needs to be asked should be exactly opposite—if a country is governed by an autocrat what are the chances that it will be a growth success? Or as Easterly puts it: “The relevant probability is whether you are a growth success IF you are an autocrat, which is only 10 percent.”

And this is where things get interesting, if we choose to look at data. Ruchir Sharma offers this data in his book The Ten Rules of Successful Nations. Let’s look at this pointwise.

1) In the last three decades, there were 124 cases of a country growing at faster than 5% for a period of ten years. Of these, 64 growth spells came under a democratic regime and 60 under an authoritarian one. Clearly, when it comes to countries growing at a reasonable rate of growth for a period of ten years, democracies do well as well as authoritarian regimes.

2) Let’s up the cut off to an economic growth of 7% or more for a period of ten years. How does the data look in this case? Sharma looked at data of 150 countries going back to 1950. He found 43 cases where a country’s economy grew at an average rate of 7% or more for a period of ten years. Interestingly, 35 of these cases came under authoritarian governments. As mentioned earlier, super-fast growth and autocrats go together. But this just shows one side of things.

3) So, what’s the other side? While super-fast growth in a bulk of cases has happened under authoritarian regimes, so have long economic slumps or economic slowdowns.

As Sharma writes:

“Long slumps are also much more common under authoritarian rule. Since 1950, there have been 138 cases in which, over the course of a full decade, a nation posted an average annual growth rate of less than 3 percent—which feels like a recession in emerging countries. And 100 of those cases unfolded under authoritarian regimes, ranging from Ghana in the 1950s and ’60s to Saudi Arabia and Romania in the 1980s, and Nigeria in the 1990s. The critical flaw of autocracies is this tendency toward extreme, volatile outcomes.”

Also, under authoritarian regimes, economic growth can see wild swings.

So, for every China there is a Zimbabwe as well, which people forget to talk or think about. For every Singapore, there are scores of African dictators who killed thousands of people during their rule and destroyed their respective economies. Hence, while autocracies may lead to super-fast growth, they can also lead to long-term economic stagnation and huge political turmoil.

Also, evidence is clear that steady growth happens best in democracies.

As Sharma writes:

“Together, Sweden, France, Belgium, and Norway have posted only one year of growth faster than 7 percent since 1950. But over that time, these four democracies have all seen their average incomes increase five- to sixfold, to a minimum of more than $30,000, in part because they rarely suffered full years of negative growth.”

Further, if you look at the list of countries with a per-capita income of more than $10,000, all of them are democracies. China, as and when it reaches there, will be the first autocracy, which will make it an exception. An exception, which proves the rule. That is, in the  medium to long-term, democracy and economic growth go hand in hand.

At least, that’s what history and data tell us. But don’t let that come in your way of believing the good story of authoritarian regimes run by benevolent autocrats leading to fast economic growth all the time.

It must be true if you believe in it. I mean, Mr Kant surely does. And so do a whole host of middle class Indian men and women.

There’s a Basic Disconnect in Trump’s Plan to Make America Great Again

donald trumpThis is the third and the final column in the series, where I explain that Donald Trump’s idea of making America great again, by imposing tariffs, is not going to work.

Dear Reader, before you start reading this column, it perhaps makes sense to read the two columns published before this, in order to get a complete perspective on the topic. (You can read the columns here and here).

In today’s column we will take a look at how Trump’s entire idea of driving up exports while driving down imports, is contradictory to say the least. Let’s start by looking at Figure 1, which basically plots the trade deficit of the United States over the years.

Figure 1: US trade deficit (in $ million) 

Trade deficit is a situation where the imports of a country are more than its exports. We can see that the United States has run a trade deficit with the rest of the world over the last four decades. The trade deficit peaked between 2004 and 2008, fell for a few years after that, and started going up again.

The American trade deficit came down in the years 2009 and 2010, and these were years when the American economy and the global economy, were both not doing well. Now let’s take a look at Figure 2, which basically plots the exports and imports of the United States over the last four decades.

Figure 2: 

Figure 2 makes for a very interesting reading. The exports and the imports curves of the United States, move more or less in the same way. This basically means that when imports go up, exports also go up and vice versa. Why is that the case? The reason for this is very straightforward. The United States is the largest market in the world. When it imports stuff, it pays dollars to other countries, which are exporting stuff to the United States. These countries can then use these dollars to pay for American exports.

Hence, if Trump keeps going ahead with imposing more tariffs on imports into the US, as he has suggested for a while, he will deny other countries an opportunity to earn “enough” dollars through which they can pay for their imports from the US, which are basically the exports for the US. The larger point being that it is not possible to increase American exports and decrease American imports at the same time. This is the simplistic plan that Trump has to make America great again and there is a basic disconnect at the heart of it. Also, any such plan will have a negative international impact.

Now let’s take a look at Figure 3, which basically plots the American trade deficit with one country, and that is China.

Figure 3: 

Figure 3 clearly shows that the American trade deficit with China has gone up dramatically over the years. The Chinese imports help keep inflation low in the United States. They also help keep interest rates low, as the dollars earned by the Chinese, have over the years found their way back into the United States and are invested in American treasury securities and other debt securities. This foreign demand for American financial securities has helped keep interest rates low in the US. Over and above this, there is another major point that arises here. Take a look Figure 4. It plots the overall trade deficit of the United States, along with the trade deficit that the country runs with China.

Figure 4: 

Figure 4 tells us very clearly that over the years, the trade deficit with China has formed a greater proportion of the overall trade deficit run by the United States. In 2017, the trade deficit with China formed nearly 66% of the overall trade deficit.

Much has been said about the fact that Trump is basically not thinking about the long-term, but is trying to beat down American trading partners into giving American companies better terms. The trouble is that the bulk of the American trade deficit is with China and unless Trump takes on China, the gains of his so called policy are going to be very low.

Of course, it is not easy to bully China, given that other than helping maintain a low inflation and low interest rates in the US, the Chinese also own more than a trillion dollars of American government treasury securities and if push comes to the shove, it can use these treasury securities, as a bargaining tool.

Also, the current Chinese regime is turning more and more authoritarian and is unlikely to take to any bullying by the US, lightly. The only way America can become great again on the industrial front is, if it is able to compete with the products being produced internationally, both on the price as well as the quality front.

The column originally appeared on Equitymaster on March 16, 2018.

Shutting Out Chinese Products is Not Going to Create Jobs

Public rallies against imported Chinese goods are held quite regularly these days, across different parts of the country. India’s dependence on Chinese goods has only grown over the years. This can be made out from Figure 1, which plots India’s imports from China every quarter, for the last few years.

Figure 1 tells us very clearly that India’s imports from China have grown over the years. Having said that, it doesn’t make sense to look at imports in isolation given that India exports stuff to China as well. Hence, Figure 2 plots India’s trade deficit with China (i.e. the difference between our total imports from China and our total exports to it).

Figure 1:
Figure 2 clearly shows that India’s trade deficit with China has grown over the years. This means that we import much more from China than we export to it. A major reason for this lies in the fact that most of the Indian firms are small in size. Take a look at Figure 3.

Figure 2:
What does Figure 3 tell us? It tells us very clearly that close to 85 per cent of Indian manufacturing firms are small. They employ less than 50 workers. In case of China, only around 25 per cent of the manufacturing firms are small. Also, in case of China, more than 50 per cent of manufacturing firms are large i.e. they employ more than 200 workers. In the Indian case, around 10 per cent of the manufacturing firms are large. And India has very few middle-sized firms which employ anywhere between 50 to 200 workers.

Figure 3: Distribution of manufacturing workforce among small,
medium and large firms in India and China
Given this small size, Indian firms lack economy of scale, which is basically a proportionate fall in costs gained with increased production. Hence, Indian products are costlier than Chinese products. In a recent newsreport, Blooomberg quotes a small shopkeeper as saying: “India-made lights cost twice as much… Customers aren’t willing to pay that.”

The other factor that helps make Chinese imports cheaper is the huge fall in international shipping costs over the years. This is a point that Tim Harford makes in his new book 50 Things That Made the Modern Economy: “Goods can now be shipped reliably, swiftly and cheaply: rather than the $420 that a customer would have paid… to ship a tonne of goods across the Atlantic in 1954, you might now pay less than $50 a tonne.”

This has had a major impact on the way goods are manufactured and business in general is carried out. As Harford writes: “Manufacturers are less and less interested in positioning their factories close to their customers – or even their suppliers. What matters instead is finding a location where the workforce, the regulations, the tax regime and the going wage all help make production as efficient as possible. Workers in China enjoy new opportunities; in developed countries [and developing countries] they experience new threats to their jobs; and governments anywhere feel that they’re competing with governments everywhere to attract business investment. On top of it all, in a sense, is the consumer, who enjoys the greatest possible range of the cheapest possible products – toys, phones, clothes, anything [emphasis added].”

The point is that the Chinese factories operate on a very large scale and that makes their products cheaper than the ones being made in India. The fact that transportation costs are low, helps as well.

Those against Chinese products want this dominance of Chinese products on India to end. As Arun Ojha, national convener of Swadeshi Jagran Manch recently told Bloomberg: “Our youth are losing jobs and we are becoming traders of Chinese products.”

It is important to dissect Ojha’s statement. What he is essentially saying is that because Indians are buying Chinese products, Indian industry is shutting down and the Indian youth are losing jobs. So, what is the way out? The way out is that we stop buying Chinese products and start buying Indian ones. Will this help?

This is where things are no longer as straightforward as they seem. The straightforward interpretation here is that, as Indians stop buying Chinese goods and start buying Indian goods, Indian industry will flourish, and Indian youth will find jobs. Now only if it was as simple as that.

Henry Hazlitt discusses a similar situation in his brilliant book Economics in One Lesson, in the context of United Kingdom of Great Britain and United States of America. As he writes: “An American manufacturer of woollen sweaters… sells his sweaters for $30 each, but English manufacturers could sell their sweaters of the same quality for $25. A duty of $5, therefore, is needed to keep him in business. He is not thinking of himself, of course, but of the thousand men and women he employs, and of the people to whom their spending in turn gives employment. Throw them out of work, and you create unemployment and a fall in purchasing power, which would spread in ever-widening circle.”

An American manufacturer of sweaters can sell his sweaters for $ 30 per piece. At the same time, an English manufacturer can sell the same sweater for $25 per piece. Hence, the American manufacturer charges $5 or20 per cent more for the same product than the British one. Of course, if both the products are allowed into the American market, the consumer will buy the cheaper one. This would mean that the British manufacturer would flourish. In the process, the American manufacturer might have to shutdown and this would mean a loss of a huge number of jobs.

The American government would obviously be bothered about the American manufacturer and the American jobs. Given this, to ensure that the American manufacturer can compete, the American government needs to impose a duty of $5 on the British manufacturer. This will mean the British manufacturer will also sell sweaters for $30. In the process, the American manufacturer would be able to compete, and jobs would be saved.

This trouble with this argument, as convincing as it sounds, is that it does not take the point of view of the consumer buying the sweater into account. As Hazlitt puts it: “The fallacy comes from looking merely at this manufacturer and his employees, or merely at the American sweater industry. It comes from noticing only the results that are immediately seen, and neglecting the results that are not seen because they are prevented from coming into existence.”

If the consumer ends up paying $30 per sweater, he would be paying $5 more. This basically means that he would have $5 less to spend on other things. As Hazlitt writes: “Because the American consumer had to pay $5 more for the same quality of sweater he would have just that much less left over to buy anything else. He would have to reduce his expenditures by $5 somewhere else. In order that one industry might grow or come into existence, a hundred other industries would have to shrink. In order that 50,000 persons might be employed in a woollen sweater industry, 50,000 fewer persons would be employed elsewhere.”

If the British manufacturer was allowed a level playing field and sweaters continued to sell at $25 per piece, the American manufacturer would soon have to shutdown. The loss of these 50,000 jobs would be noticed. This would be the seen effect of letting the British sell in the American market.

If these jobs are to be protected, then even the British sweaters would have to sell at $30 per piece. This would leave the consumer with $5 less, which he could have spent on something else, otherwise. This lack of spending would impact other industries and jobs would be lost there. It’s just that the loss of these jobs would not be so visible as was the case with the American sweater industry. This is the unseen effect.

Now replace the United States with India and the United Kingdom with China in the above example, the entire logic remains the same. If Indians move towards buying more Indian goods than Chinese, they will end up paying more for those goods. This will leave them with less money to spend elsewhere. This would impact other industries, where jobs would be lost. It’s just that these job losses won’t be so obvious.

This is a rather obvious point that most people miss out on while analysing this issue. There is a certain opportunity cost of money. As Dan Ariely and Jeff Kreisler write in Dollars and Sense-Money Mishaps and How to Avoid Them: “The opportunity cost of money is that when we spend money on one thing, it’s money that we cannot spend on something else, neither right now nor anytime later.”

Given this, shutting out Chinese products is not going to create jobs in India. The only way jobs can be created is if Indian industry can compete with China. Right now, it doesn’t.

The column originally appeared in Equitymaster on Nov 27, 2017.

Small isn’t always beautiful

Many people these days find it difficult to believe that the Chinese per capita income was lower than the Indian per capital income up until 1990. Only in 1991, did China go ahead of India.

Data from the World Bank shows that in 1990, the Indian per capita income was $375. The Chinese were at around $318. In 1991, the Chinese per capita income rose gradually to $333, whereas India’s came down to $309.

Between 1990 and 2015, the Chinese per capita income went up more than 25 times to $8,028. On the other hand, the Indian per capita income, went up by around 4.3 times to $1598.

Hence, the Indian per capita income is 80 per cent less than that of China, though a little over half a century back we were at the same level. There is a lot that China did in between and India did not. Trying to summarise that in one column of around 650 words is not possible. Nevertheless, there is one basic point that needs to be made.

China benefitted from a massive economy of scale in its manufacturing sector. Economy of scale essentially refers to the savings in costs as companies grow bigger and produce more. As George Stigler writes in The Scandal of Money: “Perhaps the most thoroughly documented phenomenon in all enterprise, learning curves ordain that the cost of producing any good or service drops by between 20 percent and 30 percent with every doubling of total units sold. The Boston Consulting Group and Bain & Company charted learning curves across the entire capitalist economy, affecting everything from pins to cookies, insurance policies to phone calls, transistors to lines of code, pork bellies to bottles of milk, steel ingots to airplanes.”

The point being that as companies grow bigger and produce more, the economy of scale essentially ensures that costs keep coming down. This makes companies more and more competitive as they keep growing bigger. As Stigler writes: “Growing apace with output and sales is entrepreneurial learning, yielding new knowledge across companies and industries, bringing improvements to every facet of production, every manufacturing process, every detail of design, marketing and management.”

China’s manufacturing sector was built on large factories churning out stuff at rock bottom prices, allowing them to compete all over the world.

This is something that the Indian industry in general and manufacturing in particular totally missed out on. The National Manufacturing Policy of 2011 estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people. This means that any SME, on an average, employed 2.27 individuals.

The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.

What this tells us is that an average Indian manufacturing firm is very small. It lacks economies of scale and in the process is not able to compete internationally and even locally. This explains why so many products that we use in our daily lives are now Made in China.

One area where this is more than obvious is in the apparel sector. The Chinese are vacating this sector given that their labour costs are going up. It was expected that India would capture this vacant space. But that is not happening because Indian apparel firms lack scale.

As the latest Economic Survey points out: “One symptom of labour market problems is that Indian apparel and leather firms are smaller compared to firms in say China, Bangladesh and Vietnam. An estimated 78 per cent of firms in India employ less than 50 workers with 10 per cent employing more than 500. In China, the comparable numbers are about 15 per cent and 28 per cent respectively.”

To conclude, small isn’t always beautiful.

The column originally appeared in the Bangalore Mirror on March 15, 2017