Tuesday, 3 June 2014

Developed Vs Developing World - A Simplified Look

It has always been a cherished dream : wanting to emulate the Developed World, and dreaming of following it in every way. The "Developed World" is nearing the end of its reign in terms of rapid economic growth. While it is, and will remain, ahead in terms of per capita GDP for the foreseeable future; the rapid economic growth will obviously come from Emerging Market Economies. Growth rates are low; inflation is low and interest rates are low as most are developed economies. Some are sitting on huge public debt mountains and are literally ticking time bombs. Money drives money; the combination of the above -low growth, low inflation etc means a slowing economy for the perfectly simple reason that it is easier to grow @ 8% on 100 dollars, which means just 8 dollars. But try the same on a base of 10000 dollars - and you are looking at 800 dollars worth of incremental economic output. This is why Developed World companies are always on the lookout for investment opportunities in other countries

Further, the social safety net in the west is a burden even for their large economies, as the past 3 years have proven. That they cannot now go back on the safety net is certain; it has become a structural component in their economic model. They can afford it for a time; the developing world cannot. The West developed in the traditional model - Agricultural -----> Manufacturing  ------> Services. We, on the other hand, went directly to services. Does this imply that we have made a mistake? Or have we done the right thing? For that, let us take a look at the developed world  vis-a-vis the developing world :

  • Remember: Money drives Money. The needs of the developing world are different; money spent on social welfare at the expense of infrastructure (for ex) is not the way forward - as the first is an expense while the second is an investment. We need investment to deveolop; and further - quite a few western countries development was based on "blood money", which was easy to come by.  That option is no longer available.
  • Second, the stage of technological development and penetration; the pace of scientific innovation and inventions are different in the two cases.. (Development and Penetration are 2 differing aspects: India, for example, has nearly 100% of the technological prowess of the west - but Penetration among its people is abysmal as opposed to ubiquitous usage in the west). This means a different set of realities, and challenges
  • Third, the infrastructure conundrum. Each economy has varying levels of infrastructure challenges, development and requirements. This requires individual modelling, and not one-size-fits-all
  • Fourth, Basic Factors like education, health etc. Even in 1950, western nations were ahead of the current status (as of 2011 figures) on these parameters, The reason is the 100+ years of unchallenged growth propelled by blood money, easy land (America), and colonialism which provided funds for both the industrial revolution as well  as investment in people. This means extra focus needs to be given on the development on human potential in the developing world
  • Fifth, varying needs as per the stage of economic development and socio-economic realities. The goods and services required vary wildly as per the stage of development.
  • Sixth, current internal structure of the economy, If, for example, you have only small companies then some level of protection might be required to engender internal growth and competitiveness. In this, it is noteworthy that in our case, the bulk of our economic output is through the Unincorporated sector of the Indian Economy. This is an important point that needs to be kept in mind
  • Seventh, level of development of the financial and banking markets
  • Eighth, extent and depth of internal resources availability
  • Ninth, Level and speed of information flow when the west was developing as compared to now is completely different
  • Tenth, Level of corruption is also totally different
  • Eleventh, The population size,  the will of the people and their expression
  • Twelfth, and most critically, the pace of change between then and now is widely different; the Modern world is growing at an almost breakneck speed, compared to the staid speed of yesteryears 

The above is a cold and dispassionate analysis of the developed and developing world in very simplified terms; the intention is only to highlight the differences. The above points clearly spell out the widely divergent nature of the developed economies versus the developing economies. They also highlight some critical factors. One of the first requirements for growth is Investment Avenues, Sources of funds and their utilization towards the objective of attaining growth. These are different today than when the west was developing; which is what I have highlighted. They had access to easy money from their colonies, money they looted. We as a nation dont have that luxury. The pace of growth during the developmental stages of the Developed versus the Developing world also indicates that opportunities are thrown up at a faster rate; and if you have to ability to cash in, there is nothing wrong in doing so. Our mistake was not in going directly to services, but in not focusing on the right things.

Today it is a matter of building selective competitiveness in sectors where you have a competitive advantage - like India started its upward trajectory on the back of its manpower and educational  institutes. As a result, knowledge intensive sectors like Pharmaceuticals and especially IT took over as the growth engine, providing revenues, allied opportunities and momentum. The presence of a robust (although restrained) corporate sector meant relatively easy scale-up in other sectors as well once the reigns on business were eased. The presence of a very strong financial, legal and banking sector was the catalyst as well as the assurance. Thus, it is a question of building the basic blocks combined with building selective competitiveness....

What we now need to do is focus, or rather re-focus on building the basics - Human Development Parameters, and Infrastructure. The most critical point - point 4 - shows the vital need for almost a warlike focus on this. For example, The literacy rate in Japan in 1929 was 43.8%, with over 90% enrollments in schools. In India, in 2001, the literacy rate is 62.8%. Japan was at this level of literacy around 1960 or thereabouts. This should underline the critical need for focussing on these basics; these are the basics which determine success. 

And this is where we as a nation went wrong; demonstrably wrong. Today, we are counted among the worst nations on HDI Parameters. The requires money - building infrastructure and HDI parameters requires heavvy duty investments - in a highly competitive world with limited sources of funds. In  such  a world, it is important that we as a nation are more competitive than other nations. Which means, Infrastructure, a healthy population with the requisite skills, a robust economy with solid institutions and ease of doing business. That is all that is required. And that is where we went wrong... we forgot to build the institutions - which the west did during their developmental phase.

The pull towards providing safety nets, or subsidising people, will be great; to be sure, there is plenty of reason for us to go down that path, given the ugly realities of poverty that we are facing. But that path is one of great risk; we need to invest every rupee we have into productive assets. I understand that some level of support is required - but let us all not go overboard. If even some developed economies can find themselves in trouble over this matter, then it is being overoptimistic to expect that we can solve our problems that way. We need to minimise, or at least optimise, all such support and put the savings to productive use. That is the need of the hour for India... and the sooner our political class realises this, the better. 

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