Ha- Joon Chang

Why economic growth cannot be taken be for granted

safety-of-chit

Mrs. Lintott: Now. How do you define history Mr. Rudge?
Rudge: Can I speak freely, Miss? Without being hit?
Mrs. Lintott: I will protect you.
Rudge: How do I define history? It’s just one fuckin’ thing after another.

– Alan Bennett, The History Boys


Economists these days do not give much importance to economic history. As Cambridge University economist Ha-Joon Chang writes in Economics—The User’s Guide: “Many people consider economic history [emphasis in the original], or the history of how our economies have evolved, especially pointless. Do we really need to know what happened two, three centuries ago.”
Nevertheless, a good understanding of economic history is necessary to ensure that we don’t take things for granted. Take the case of economic growth. In the times that we live in we take rapid economic growth for granted. But for much of humankind that wasn’t the case. As best-selling author and economist Tim Harford put it in a column “Economic growth is a modern invention: 20th-century growth rates were far higher than those in the 19th century, and pre-1750 growth rates were almost imperceptible by modern standards.”
Chang makes this point in his book. Between 1000AD and 1500AD, per capita income, or the income per person, grew by 0.12% per year in Western Europe. What this means is that the average income in 1500 was only 82% higher than that in 1000. “To put it into perspective, this is a growth that China, growing at 11 per cent a year, experienced in just six years between 2002 and 2008. This means that, in terms of material progress, one year in China today is equivalent to eighty-three years in medieval Western Europe,” writes Chang.
Further, at 0.12% Western Europe was growing at a very fast pace in comparison to other parts of the world. Asia and Eastern Europe during the same period grew at 0.04% per year. Hence, by 1500 the per capital income in these parts of the world would have been 22% higher than that in 1000.
Things did not improve in the centuries to come. Between 1500 and 1820, the per capita income in Western Europe averaged at 0.14% per year, which wasn’t very different from 0.12% per year, earlier. Some countries like Great Britain and Netherlands which were busy building a global empire and had also got a central bank going, grew a little faster at 0.27% and 0.28% respectively. So by modern standards the world was in a depression between 1000AD and 1820AD.
Things improved over the next 50 years. Between 1820 and 1870, the per capita income for Western Europe grew by 1% per year, which was significantly higher than anything the world had seen earlier.
One reason for this turbo-charged growth was the start of the industrial revolution. In the years leading to 1820 many new production technologies were invented. “In the emergence of these new production technologies, a key driver was the desire to increase output in order to be able to sell more and thus make more profit,” writes Chang.
Along with this, the evolution of banks and the financial system also helped. “With the spread of market transactions, banks evolved to facilitate them. Emergence of investment projects requiring capital beyond the wealth of even the richest individuals prompted the invention of the corporation, or limited liability company, and thus the stock market,” writes Chang. And this helped enterprises raise the money required to start a business, something which is at the heart of capitalism.
After 1870, the production technologies kept improving. The economist Robert Gordon divides invention and discoveries into three eras. The second era came between 1870 and 1900 and according to him had the maximum impact on the economy in particular and the society in general.
As he writes in a research paper titled Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds “Electric light and a workable internal combustion engine were invented in a three-month period in late 1879…The telephone, phonograph, and motion pictures were all invented in the 1880s. The benefits…included subsidiary and complementary inventions, from elevators, electric machinery and consumer appliances; to the motorcar, truck, and airplane; to highways, suburbs, and supermarkets; to sewers to carry the wastewater away,” writes Gordon.
Based on Gordon’s research paper, Martin Wolf wrote in the Financial Times: “Motor power replaced animal power, across the board, removing animal waste from the roads and revolutionising speed. Running water replaced the manual hauling of water and domestic waste. Oil and gas replaced the hauling of coal and wood. Electric lights replaced candles. Electric appliances revolutionised communications, entertainment and, above all, domestic labour. Society industrialised and urbanised. Life expectancy soared.”
In fact, Gordon makes an interesting observation regarding this increase in productivity by comparing motor power to a horse. As he writes: “Motor power replaced animal power. To maintain a horse every year cost approximately the same as buying a horse. Imagine today that for your $30,000 car you had to spend $30,000 every year on fuel and repairs. That’s an interesting measure of how much efficiency was gained from replacing the horses.”
And all these inventions drove economic growth. As Bill Bonner told me in an interview I did with him a few years back: “Trains were invented 200 years ago. Automobiles were invented 100 years ago. Aeroplanes came on the scene soon after. Electricity – fired by coal, oil…and later, atomic power – made a big change too. But all the major breakthroughs date back to a century or more. Even atomic power was pioneered a half century ago. Since then, improvements have been incremental…with diminishing rates of return from innovations.”
These game changing inventions are now a thing of the past. Harford explained this to me through a couple of brilliant examples when I interviewed him for The Economic Times a few years back. As he told me: “The 747 was a plane that was developed in the late 1960s. The expectation of aviation experts is that the Boeing 747 will still be flying in the 2030s and 2040s and that gives it a nearly 100 year life span for its design. That is pretty remarkable if you compare what was flying in 1930s, the propeller aeroplanes. In the 1920s they didn’t think that it was possible for planes to fly at over 200 miles an hour. There was this tremendous progress and then it seems to have slowed down.”
The same seems to be true for medicines. “Look at medicine, look at drugs, antibiotics. Tremendous progress was made in antibiotics after 1945. But since 1980 it really slowed down. We haven’t had any major classes of antibiotics and people started to worry about antibiotic resistance. They wouldn’t be worried about antibiotic resistance if we thought we could create new antibiotics at will,” Harford added.
So the basic point is that growth of economic productivity has petered out over the last few decades because game changing inventions are a thing of the past. These game changing inventions changed the Western countries (i.e. the US and Europe) and helped them rise at a much faster rate than rest of the world. But that might have very well been a fluke of history.
Nevertheless, what these game changing inventions did was that they led to the assumption that economic growth will continue forever. But will that turn out to be the case? As Gordon wrote in his research paper: “Economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.”
And this might very well come out to be true. The core of Gordon’s argument is that modern inventions are less impressive than those that happened more than 100 years back. “Attention in the past decade has focused not on labor-saving innovation, but rather on a  succession of entertainment and communication devices that do the same things as we could do before, but now in smaller and more convenient packages. The iPod replaced the CD Walkman; the smartphone replaced the garden-variety “dumb” cellphone with functions that in part replaced desktop and laptop computers; and the iPad provided further competition with traditional personal computers. These innovations were enthusiastically adopted, but they provided new opportunities for consumption on the job and in leisure hours rather than a continuation of the historical tradition of replacing human labor with machines,” writes Gordon.
And that isn’t happening anymore.

The column originally appeared on The Daily Reckoning on May 14, 2015

The Make in India lesson I learnt when I bought a television set

make in indiaVivek Kaul

Yesterday’s edition of The Times of India had a very interesting newsreport. As per the newsreport: “Data available with the Bureau of Indian Standards (BIS) shows that over 60% of the recently registered products are “Made in China.””
These include products like mobile phones, printers, power adapters, notebooks, tablets and so on. What this tells you clearly is that a vast majority of electronic products that we buy in India are not made in India, but in China.
Interestingly, the last time I bought a television set few years back, it came with a weird looking plug—something that I had never seen before. It wouldn’t fit into the electrical socket at home. It took a helpful neighbour to solve the problem. He told me that I would need a converter to fit the plug into the socket. The converter cost me Rs 25 and left me wondering that why did a company which sold a product worth Rs 15,000 inconvenience its customers for something worth Rs 25? Maybe marketing professionals can throw some light on that.
Last year when I bought a smart phone a similar experience awaited me. But this time around I was prepared and as soon as the smart phone was delivered at home (I had ordered it online), I went out and bought a converter, which cost Rs 20 this time around.
As you must have figured out by now, dear reader, both the products were made in China. Not just technology products which are made in China are flooding the Indian market. There are other products as well. As The Times of India newsreport referred to earlier points out: “There are a vast majority of goods — from electricity bulbs and thermometers to Ganesha and Laxmi idols — where the government is yet to have domestic standards resulting in unregulated entry of Chinese product.” Even Rakhis are now made in China. Indeed, this has been a worrying trend for sometime now.
The reason for this is fairly straightforward—no country has gone from developing to developed without the expansion and success of its manufacturing sector. As Cambridge University economist Ha-Joon Chang writes in Bad Samaritans—The Guilty Secrets of Rich Nations & the Threat to Global Prosperity: “History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and more importantly, where productivity tends to grow faster than agriculture and services.”
And the Indian manufacturing sector cannot flourish with products being made in China. For a while there was great hope that India does not need to go through a manufacturing revolution to pull its citizens out of poverty. And that the information technology led services revolution would do that trick. But services by their very design have certain limitations.
As Chang writes: “There are certainly some services that have high productivity and considerable scope for further productivity growth—banking and other financial services, management consulting, technical consulting and IT support come to mind. But most other services have low productivity and, more importantly, have little scope for productivity growth due their very nature (how much more ‘efficient’ can a hairdresser, a nurse or a call centre telephonist become without diluting the quality of their services?).”
So, where does that leave us? Over the last few years the education infrastructure that has been built to feed trained individuals into the services sector has been huge. As Akhilesh Tilotia writes in The Making of India: “An analysis of the demand-supply scenario in the higher education industry shows significant capacity addition over the last few years: 2.4 million higher education seats in 2012 from 1.1 million in 2008.” In 2016, India will produce 1.5 million engineers. This is more than the United States (0.1 million) and China (1.1 million) put together.
The number of MBAs between 2012 and 2008 has also jumped to 4 lakh from the earlier 1 lakh. As Tilotia writes: “India faces a unique situation where some institutes(IITs,IIMs, etc.) are intensely contested while a large number of the recently-opened institutes struggle to fill seats…With most of the 3 million people wanting to pursue higher education now having an opportunity to do so, the big question that should…be asked…are all these trained personnel required? Our analysis seems to suggest that India may be over-educating its people relative to the current and at least the medium-term forecast requirement of the economy.”
What this means is that a large number of people going in for higher education will find it difficult to find jobs which are commiserate with the kind of money they have paid for their education, after they pass out. And they will not be the only ones having a tough time. India is adding nearly 13 million people to the workforce every year. And enough jobs are not being created.
This is something that the latest economic survey points out: “Regardless of which data source is used, it seems clear that employment growth is lagging behind growth in the labour force. For example, according to the Census, between 2001 and 2011, labor force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent. Creating more rapid employment opportunities is clearly a major policy challenge.”
And these rapid employment opportunities will be created only if more and more products are made in India and not China. For products to be made in India, major labour reforms need to happen. A report in The Indian Express seems to suggest that the government is working on this front. It is planning to make amendments to the Industrial Disputes Act, 1947. The government is also planning to: “codify the Central labour law architecture wherein the labour ministry plans to merge all 44 Central legislations into four codes on labour laws — one each on wages, industrial relations, social security and safety & welfare. Apart from industrial relations and wages, other codes are likely to be released during the course of the year.”
Let’s see how far is it able to go with this. 

The column originally appeared on The Daily Reckoning on May 6,2015

Recover black money from India first, Modi. Instead of making noises about what lies in Swiss banks

Vivek Kaul

Narendra Modi and his government have had quite a fascination for the black money that leaves the country. Black money is essentially money that has been earned, but on which a tax has not been paid.
During the electoral campaign for the 2014 Lok Sabha polls, Modi promised that all the black money that had left Indian shores would be recovered and Rs 15 lakh deposited in the bank accounts of every Indian. Later Amit Shah, the president of the BJP, dismissed this as a chunavi jumla.
In the budget presented in February 2015, the finance minister Arun Jaitley focussed on black money and said: “The problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully.”
At the same time Jaitley unleashed a series of measures to counter the menace of black money leaving the shores of this country. “Concealment of income and assets and evasion of tax in relation to foreign assets will be prosecutable with punishment of rigorous imprisonment upto 10 years,” was one of the measures that Jaitley spoke about during the course of his speech.
Recently, the Income Tax department issued new income tax forms which asked for a plethora of information from individuals travelling abroad. This was again seen as a step to curb black money. These forms had to be withdrawn after a wave of public protests.
As per the Global Financial Integrity report titled Illicit Financial Flows from Developing Countries: 2003-2012, around $439 billion of black money left the Indian shores, between 2003 and 2012. What is interesting is that in 2003 the total amount of black money leaving India had stood at $10.1 billion. By 2012, this had jumped more than nine times to around $94.8 billion. In comparison, the money leaving China during the same period grew by less than four times during this period.
Given this, one really can’t blame the government for being overtly worried about the black money leaving the country. Also, black money that remains in the country has some benefits. Cambridge University economist Ha-Joon Chang explains this in his book Bad Samaritans—The Guilty Secrets of Rich Nations and the Threat to Global Prosperity, in the context of a minister taking a bribe (which is also black money, given that the minister is not going to declare the bribe as an income).
As he writes: “A bribe is a transfer of wealth from one person to another. It does not necessarily have negative effects on economic efficiency and growth.” If the minister taking the bribe decides to spend/invest that money in the country, it has a positive impact on economic growth, as the spending creates economic demand and the investment creates jobs. At least in theory, the idea seems to make sense.
In comparison, the black money leaving the country is a total waste. As Chang writes: “A critical issue…is whether the dirty money stays in the country. If the bribe is deposited in a Swiss bank, it cannot contribute to creating further income and jobs through investment—which is one way odious money can partially ‘redeem’ itself.”
Once we take this factor into account Modi government’s crackdown on black money leaving the shores of the country starts to make immense sense. But the question is how good are the chances of recovering the money that has already left the shores?
There is a great belief in India that all the black money is lying with banks in Switzerland. But this belief is incorrect. As Chang writes: “Switzerland is not a country living off black money deposited in its secretive banks…It is, in fact, literally the most industrialized country in the world.”
Data released by the Swiss National Bank, the central bank of Switzerland, suggests that Indian money in Swiss banks was at around Rs 14,000 crore in 2013. In 2006, the total amount had stood at Rs 41,000 crore.
The reason for this fall is simple. Over the last few years as black money and Switzerland have come into focus, it would be stupid for individuals or companies sending black money out of India, to keep sending it to Switzerland.
There are around 70 tax havens all over the world. And so this money could be anywhere. Getting all this money back would involve a lot of international diplomacy and cooperation. Also, the question is why would tax havens return this money. The economies of many tax havens run because of this black money and no one undoes a business model that is working.
An estimate made by the International Monetary Fund suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland and beyond the reach of any tax authorities. Some of this money must have definitely originated in India.
Long story short—it would be next to impossible to get back any of this black money.
Now let’s get back to domestic black money. As per Chang this money if invested properly can create jobs as well as economic growth. In the Indian case a lot of this money gets invested into gold and real estate. Money going into gold does not create any jobs. And money that goes into real estate has driven up home prices in particular, all over the country, to extremely high levels. Most middle class Indians cannot afford to buy a home now.
Given this, it makes tremendous sense for the government to crack down on domestic black money, instead of making noises about recovering black money that has already left the shores of this country. Further, focus should be on ensuring that the number of people paying income tax goes up in the years to come.
In short, the black money menace first needs to be tackled domestically.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on DailyO on Apr 27,2015

Jibe specialist Rahul Gandhi needs to understand why ‘Make in India’ matters

rahul gandhiVivek Kaul

In his new avatar, Rahul Gandhi, the current vice president of the Congress Party and successor to the throne that has been kept warm for him over the last ten years, has become a jibe specialist.
His latest jibe has been at the ‘Make in India’ programme. “The prime minister talks about ‘Make in India’. No one does more ‘Make in India’ than the farmers of Punjab. They have made this country stand (on food grains production),” the Gandhi family scion, who recently returned from a 57 day foreign sojourn, told the media earlier in the day today (April 29, 2015).
This potshot was uncalled for, simply because no nation has gone from being a developing country to becoming a developed country without the support and the rapid expansion of its manufacturing sector, which is what the ‘Make in India’ programme is all about.
As Cambridge University economist Ha-Joon Chang writes in Bad Samaritans—The Guilty Secrets of Rich Nations & the Threat to Global Prosperity: “History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and more importantly, where productivity tends to grow faster than agriculture and services.”
India has failed to latch on to a manufacturing revolution. The services industry was India’s big hope. But services by their very design have certain limitations. As Chang writes: “There are certainly some services that have high productivity and considerable scope for further productivity growth—banking and other financial services, management consulting, technical consulting and IT support come to mind. But most other services have low productivity and, more importantly, have little scope for productivity growth due their very nature (how much more ‘efficient’ can a hairdresser, a nurse or a call centre telephonist become without diluting the quality of their services?).”
Also, for the services sector to flourish a strong manufacturing sector is required because that is where the demand comes from. Hence, as Chang puts it: “This is why no country has become rich solely on the basis of its service sector.” This is something that Rahul needs to understand.
India needs a strong manufacturing sector which it currently lacks. The reason is simple. Only a vibrant manufacturing sector can create enough jobs for the 13 million Indians who enter the workforce every year. The ‘Make in India’ programme is a step in that direction.
In his interaction with the media Rahul further said: “When the poor do ‘Make in India’, is it not ‘Make in India’? Is it something else?” What does this statement even mean?
Rahul’s concern for agriculture may be genuine, but a simple point he needs to understand is that there way too many Indians dependent on farming. Agriculture forms around 18% of the gross domestic product and employs more than 50-60% of Indians, depending on which estimate you trust.
Only 17% of who work on farms survive only on money they make from their farm. Everyone else does some extra work. As Mihir Sharma writes in Restart—The Last Chance For the Indian Economy: “Our agriculture simply does not earn enough; and it has too many people…We no longer need to ensure that enough food is grown; for decades, we have been growing enough food. The country that invented granaries cannot build enough to store its vast stockpiles of grain; and yet we plant and harvest more.”
A major reason for this has been a rapid increase in the minimum support price(MSP) of wheat and rice, during the Congress led UPA government. The MSP is the price at which the government buys rice and wheat from the farmers, through the Food Corporation of India(FCI) and other state government agencies. Rahul told a farmers’ rally in New Delhi earlier this month: “We increased the MSP of wheat from Rs 540 to Rs 1400…The MSP has not changed, no benefit to farmers.”
But what the Gandhi family scion does not realize is that this rapid increase in MSP has led to other major problems. As Sharma writes: “It distorts the choices that farmers make—those who should be finding ways to grow vegetables, which grow more expensive every year, are instead growing wheat we no longer need.”
It has also led to a situation where a state like Punjab which is essentially a semi-desert is growing a large amount of rice through the extensive use of underground water. This has led to water table falling rapidly over the years.
Given these reasons, Rahul Gandhi needs to get his economics right. The country has suffered enough over the decades for the garibi hatao politics of the Congress party. Sadly, Rahul and Congress continue to practice the garibi hatao politics of doles. What we need now are jobs and more jobs. And those jobs can only be created through the rapid expansion of the manufacturing sector.
This bit of wisdom is nothing new. It was known nearly 300 years back as well. As Chang writes: “[Robert] Walpole [the first British prime minister] knew this nearly 300 years ago, when he asked George I[the British King at that point of time] to say in the British Parliament: ‘nothing so much contributes to promote the public well being as the exportation of manufactured goods and the importation of foreign raw material.’”
Being in the opposition, Rahul obviously needs to criticize the government. The ‘Make in India’ programme in its current form is a little more than a marketing slogan. If this slogan needs to be turned into a reality, there is a lot more that needs to be done—from improving the ease of doing business to labour sector reforms. Nothing much seems to be happening on these fronts.
Why can’t Rahul criticize this for a change? It might just turn out to be a real reinvention than the forced “angry young man” image that he seems to have adopted in the recent past.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on Apr 29, 2015

 

Internet or washing machine? Choose the latter anyday

 
washing machine
Vivek Kaul
At a recent family dinner I sat through two younger cousins talking about the love of their lives: their latest mobile phones. The glow and the happiness on their faces was very visible, even though they were on the opposite ends of the spectrum. One had bought the latest version of Samsung Galaxy and the other had bought the latest version of the Apple iPhone.
We live during an era where internet led technology plays a great role in the lives of people. It also gives a lot of meaning to their lives, as is the case with my cousins. Every new gadget, be it the latest mobile phone or the latest tablet, gives us a feeling of progress. And we regard these recent changes as revolutionary.
But do they really make a difference? Of course, they do. It would be foolish to say they don’t. So let me reword the question. Does the progress in information and communication technology, almost all of which use the internet, really make as much difference as lets say the availability of running water or the invention of the washing machine and other household appliances?
Robert Gordon, an American economist, has this to say in a research paper titled “Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds. (You can read the research paper here)
“The biggest inconvenience was the lack of running water. Every drop of water for laundry, cooking, and indoor chamber pots had to be hauled in by the housewife, and wastewater hauled out. The average North Carolina(an American state) housewife in 1885 had to walk 148 miles per year while carrying 35 tons of water. Coal or wood for open-hearth fires had to be carried in and ashes had to be collected and carried out. There was no more important event that liberated women than the invention of running water and indoor plumbing, which happened in urban America between 1890 and 1930.”
Cambridge University economist Ha-Joon Chang makes a similar point in his brilliant book 23 Things They Don’t Tell You About Capitalism “The internet revolution has (at least as yet) not been as important as the washing machine and other household appliances, which, by vastly reducing the amount of work needed for household chores, allowed women to enter the labour market.”
Running water, washing machines and other household appliances helped women save time on the daily chores and thus enter the job market. As Chang points out “Washing machines have saved mountains of time. The data are not easy to come by, but a mid 1940s study by the US Rural Electrification Authority reports that, with the introduction of the electric washing machine and electric iron, the time required for washing 38 lb of laundry was reduced by a factor of nearly 6 (from 4 hours to 41 minutes) and the time taken to iron it by a factor of more than 2.5 (from 4.5 hours to 1.75 hours). Piped water has meant that women do not have to spend hours fetching water (for which according to the United Nations Development Program, up to two hours per day are spent in some developing countries). Gas/electric kitchen stoves…have vastly reduced the time needed for collecting firewood, making fires, keeping the fires alive, and cleaning after them for heating and cooking purposes.”
The impact these developments have had on the way we live has been really fundamental. The same does not stand true for the internet. At least, not as yet. As Chang explains “To be sure, for some, the internet has profoundly changed the way in which we work…However, for many other people, the internet has not had much impact on productivity. Studies have struggled to find the positive impact of the internet on overall productivity – as Robert Solow, the Nobel laureate economist, out it, ‘the evidence is everywhere but in the numbers’.”
Many of us maybe spending more and more time on the internet, but that doesn’t mean it has had an impact on economic productivity and economic growth and in turn made our lives ‘really’ better.
Economist Bill Bonner explained this dichotomy very well in a 2011 column. As he wrote “Nowhere was the Internet revolution more focused than in the USA. Nowhere did people have higher hopes for it. And nowhere were the results more disappointing. The typical teenager now spends half his life…not just half his waking hours, but more than half a day on some sort of electronic device. Does it make him smarter? Richer? More civilized? More coherent? Not so’s we’ve been able to detect! Not every technological advance results in an increase in standards of living. Take Twitter, for example. Or nuclear weapons. Or dozens of other innovations and inventions. The Internet, like TV before it, is a great entertainment device. It is also very useful, improving productivity in a vast number of industries. But it has not speeded up GDP growth or improved living standards.”
To summarise the argument, the internet is not a revolutionary technology that it is made out to be. But such is the fascination for internet that it has distorted our perspectives. And these distorted perspectives have an impact on many political and economic decisions that are being made. “It would not matter if this distortion of perspectives was just a matter of people’s opinions. However, these distorted perspectives have real impacts, as they result in misguided use of scarce resources. The fascination with the ICT (information and Communication Technology) revolution, represented by the internet, has made some rich countries – especially the US and Britain – wrongly conclude that making things is so ‘yesterday’ that they should try to live on ideas…This belief…has led those countries to unduly neglect their manufacturing sector, with adverse consequences for their economies,” writes Chang.
The love for the internet led information and communication technology revolution has distorted perspectives in India as well. The Uttar Pradesh chief minister Akhilesh Yadav has been distributing free laptops to students. While that is a noble idea, it is worth remembering that UP continues to be one of the most backward states in India. Wouldn’t the money be better spent by ensuring that there is a regular supply of water in more villages? Wouldn’t that money be better spent in ensuring that electricity is available for longer hours?
In a country where resources are scarce such questions need to be asked. Of course, if Yadav goes about ensuring regular water supply in more villages and better availability of electricity, it doesn’t make for great news. Distributing ‘free laptops’ sounds so much more ‘economic’ and ‘social’ progress than ensuring the availability of water in villages (I mean, we have been trying to do that since 1947. Give me something new).
On the flip side compare this to Nitish Kumar, the chief minister of Bihar, distributing free cycles to girls and boys, so that they could continue attending school. A solution like this, clearly has a greater economic impact than giving away free laptops. (Though it needs to be said that instances of fraud have come to light, where people have collected cheques to buy cycles and then disappeared).
This distorted perspective has also led to more and more state governments in India falling over one another to attract IT companies to set-shop in their states. A similar zeal is not seen when it comes to setting up of manufacturing companies. IT companies also continue to get income tax exemptions. At an individual level almost every engineer now wants to work for an IT company, which means a shortage of talent for companies in other sectors.
But the bigger problem with this distortion is the rapidly growing belief that India can skip the manufacturing revolution. “Especially with the rise of service offshoring, this view has become very popular among some observers in India. Forget all those polluting industries, they say, why not go from agriculture to services directly? If China is the workshop of the world, the argument goes, India should try to become the ‘office of the world,” writes Chang.
But there is a problem with this distorted perspective. It has never happened before except for a country like Seychelles which has a population of around 85,000 people with a per capita income of $9,000. As Chang writes “No country has so far achieved even a decent (not to speak of high) living standard by relying on services and none will do in the future…As for the developing countries, it is a fantasy to think that they can skip industrialisation and build prosperity on the basis of service industries. Most services have slow productivity growth and most of those services that have high productivity growth are services that cannot be developed without a strong manufacturing sector.”
People often talk about Switzerland as having avoided the manufacturing revolution because all the black money of the world goes there. That is not true. “In per capita terms, Switzerland has the highest industrial output in the world (it could come second after Japan, depending on the year and the data you look out)…We don’t see many Swiss manufactured products around because the country is small (around 7 million people), which makes the total amount of Swiss manufactured goods rather small, and because its producers specialise in producer goods, such as machinery and industrial chemicals, rather than consumer goods that are more visible,” Chang points out.
Given these reasons, it is important that we rid ourselves of this obsession that we have for the ‘so called’ internet led information and communication technology revolution. There are other more important issues to think about.
The article originally appeared on www.firstpost.com on May 25, 2013 
(Vivek Kaul is a writer. He tweets @kaul_vivek)