Time for a structural shift

The current debate in India on the need for inclusive growth and the steps required for it have been guided by ideas and concepts which have their most lucid and open-minded expression in the seminal work of professors Jean Dreze and Amartya Sen, India: Development and Participation .

The basic thrust is to focus on the ‘push’ factors for creating a conducive environment for inclusion through provisions for education, health and income generation.

None of these are disputable and all inclusive societies have strong orienting factors in this direction. But are these enough? Although they are undoubtedly necessary conditions, are they sufficient? An equally important question often not asked is: an inclusive society at what per capita income or wealth level?

The issue I would like to raise is: Should not the focus shift to the nature of the economic structure in which that society operates? By using the phrase ‘economic structure’, I do not wish to talk about the capitalism versus socialism debate, but focus on the composition of goods and services being produced by that society in relation to their consumption.

Unctad has long being analysing the nature and direction of international trade, using nomenclature such as ‘high tech’, ‘medium tech’ and ‘low tech’ for goods. India’s export performance has been astoundingly good, post liberalisation, but mainly consists of low/medium tech goods.

High-tech goods amount to only 7-8 per cent of our exports but approximately 25 per cent of our imports in a normal year. They also have a 25 per cent share in internationally traded goods.

In other words, while we have a consumption pattern similar to the rest of the world, our production pattern is deviant. Most, if not all our industrial peers, are more congruent to the world production pattern than we are. Another oddity is that while the internal CAGR of these exports is much higher than our aggregate exports, the base is not growing, indicating that new entrepreneurs and foreign companies are not enthused with prospects here.

Against this backdrop, I wish to draw attention to an analytical survey entitled: ‘Technology works: High tech employment and wages in USA’ brought out by the Bay Area Council Economic Institute in 2012.

The report was inspired by the works of Enrico Moretti, professor of economics at the University of California, Berkeley, and especially his article ‘Local multipliers’ in the American Economic Review , May 2010, and his recent book The New Geography of Jobs .

Moretti introduced the concept of local job multipliers, i.e. the concept of a job creating the requirement of additional support jobs. He demonstrated the concept of job multipliers — “every time a local economy creates a new job by attracting a new business, additional jobs might also get created mainly by increased demand for local goods and services”.

Further, different types of jobs have different multipliers and high tech industries (relating to the fields of science, technology, engineering and mathematics or STEM) have significantly higher job multipliers than medium- and low-tech industries.

The main reason could be the relatively higher income levels of STEM workers. Most of the additional jobs are created in non-technology areas in all walks of life, which include professionals (doctors, lawyers and so on, but also those from sports and the arts) and non-professionals (taxi drivers, waiters, carpenters). The council report studied the high-tech sector and found extensive support for the local multiplier idea. “Apple employs 12,000 people in Cupertino city but at least 60,000 jobs are related to Apple in the Silicon Valley. High-tech jobs are the cause of local prosperity and doctors, lawyers, roofers and yoga teachers are the effect.”

An interesting aspect of high tech industry, apart from the job multiplier, is that it is logistics neutral. Whilst I was in Exim Bank of India, our studies showed that these were widely dispersed though located in relatively dense clusters. Colorado (a desert-intensive state deep in the US midwest, 800 km from the closest sea port) and Chengdu (in midwest China over 800 km from the sea) both had thriving high-tech manufacturing clusters, but states closer to the sea ports in the same countries did not.

And high tech zones do not use much land area: for example, the Chengdu zone is located in 13,000 hectares. Some 16,000 firms, including 250 foreign companies, operate there.

In 2001, their exports were $1.5 billion on a GDP of $14 billion. In 2010, their exports were $14 billion and state GDP $493 billion.

India is large, populous and undoubtedly poor but, at the same time, is it not a respectably large industrial economy? We undoubtedly have huge illiteracy and low skill levels but even if the percentage of highly skilled is small, in absolute numbers is it smaller than in Korea or the UK? Significantly smaller?

Our current aggregate exports are in excess of $300 billion. If our actual percentage share of exports of high tech goods had been somewhere in line with that of the world trade (25 per cent instead of 7-8 per cent), one wonders what would have been the impact on our journey to an inclusive society? Should we not ask why this has not been happening if we truly want an inclusive economy? Should not we do something about it?

The writer is a former chairman of Exim Bank

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