Blind liberalisation vs measured protectionism – Lessons from history

A few days ago the media reported that unemployment in India is at a chronically high level, and tends to rise as one goes up the knowledge ladder. Among those with a degree and vocational diploma, around one in four cannot find a proper job. Recently released NSSO data shows that in its 10-year rule, the UPA managed to create approximately 60 million formal jobs, despite an average growth rate of approximately 8%. This figure for a 450 million-plus labour force, of which over 90% is in the informal sector, is woefully low. To come to the point, India’s youth has been starved of good jobs. Hence, this election season, no single issue can claim more importance in the field of economic development than the creation of new jobs to keep up with rising demand. 

It is no secret that the past decade of high economic growth has been highly lopsided for India. With weak job growth and anaemic distribution of wealth, the real beneficiaries who have witnessed a high rise in their income levels have been the upper-middle income classes residing in key urban areas, working mostly in the service sector. They have the skills and wherewithal to exploit the benefits of the globalised economy that India is now integrated with. Both industrial production and agricultural productivity – potential areas of large-scale employment – have lagged behind. Agricultural growth has averaged 3% over the past decade despite being the main source of income for roughly half of India’s population, while manufacturing accounts for only 15% of our GDP – a far cry from the general norm in the rapidly developing economies of East Asia. Integration into the informal urban economy – not a job at a factory exporting electronics – remains the most viable route for most aspirants migrating to cities from villages.

According to a recent McKinsey report, to satisfy the upcoming demographic bulge, India needs to create 115 million jobs over the next decade; at the current rate it will have only 40 million. If we are not able to channel this demographic bulge into productive efforts, the outcome will be a macro-level epidemic of frustrated youth likely to partake in virulent nationalism, sexual predation and depression. As the Chinese experience attests, provision of good jobs ultimately depends on economic growth – a growth based on manufacturing. That is exactly the kind of growth India has been particularly bad at.

To learn from history
Most goods consumed by the world, from steel to iPods, are made in East Asia. But does the root of this industrial success lie in low-wages or flexible labour markets alone, as those who underscore the failure of Indian manufacturing point out?

East Asian history suggests that in order to seriously build a formidable industrial base and create great jobs, the ‘night-watchman’ state (with perhaps a social safety net) now in vogue, may not be enough. Governments may have to play a more active role in promoting the industrial sector, in particular by providing preferential protection and resources to selected sectors, and directing capital towards them.  There is a need for the government to delve into manufacturing needs and respond to it from the point of view of upgrading a nation’s industrial base. If a poor country’s companies are to compete with the market leaders of the rich world, they would inevitably need some extra help or protection to level the playing field. 

Thus, both Japan and Korea had high tariff barriers following World War II to protect them from the incursion of American and European exports. In the late 1970s, Hyundai began its car business with an annual production of 60,000 – most of them of poor quality. Yet the Korean government continued in its fierce protection of Hyundai until it finally began to make a profit in the 1990s. It is now a raging success story with roughly 5.7 million cars in production annually. A similar story explains the rise of China’s electronics, capital goods and green energy industries. State-run Chinese banks were compelled to siphon credit to these industries, despite their unprofitability. Why? Because this was necessary for the long-term industrial growth of the country; and look where manufacturing in China is today! 

Do we have a plan?
The current state of the economic debate in India which ultimately informs growth is fundamentally neoliberal; regardless of the side one is on in the sterile welfare vs growth or Sen vs Bhagwati debate. Macroeconomic stability, liberalised capital and goods flow, and curbing of the activitist state to prevent any ‘market-distorting’ activities, are considered the ultimate recipe of growth by virtually all mainstream political parties. One may then choose to support social welfare programmes like MNREGA or the Food Security Act or cash transfers for the sake of a safety net; but as far as economic growth or industrial development is concerned, things like public sector involvement, protectionism and an active industrial policy are considered ineffective and obsolete. Greater premium is given to overseas investment confidence, not domestic industrial upgradation. Dogma (like free trade is always good; subsidies always bad) tends to increasingly inform policy making.  

For the BJP, as news reports about their upcoming manifesto make clear, liberalising reforms need to happen right away, in particular revamping the nation’s labour laws and removing the remaining license-permit raj of the Indian Government (read the Environment Ministry); whereas policies that would ‘integrate’ the market, like the Goods & Services Tax, need to come. The underlying rationale is that these laws have trapped the animal spirit of the economy – in the process decreasing aggregate investment or making the aggregate investment less productive. 

For the Congress it is much the same, albeit a mellowed-down approach and extensive welfare provisions (like NREGA, Food Security Bill) to cater to those inevitably left behind by a market-led growth. The AAP’s focus is not clear, but given its penchant to hand-out subsidies, and yet state that “government has no business to be in business”, it is likely to go the Congress way. But the consensus on limiting government intervention in industry, and propagating it only in the vital areas of health, education and infrastructure, exists across all three main political parties.

But as demonstrated above, this fundamentally neoliberal approach has not served India well. Besides the job crisis, there has been a general hollowing-out of India’s manufacturing, mostly thanks to competition from China. India today imports much of its capital goods, machinery and electronics from its Asian neighbours in return for the bounty of its mines, and any free trade deal with the likes of ASEAN is likely to further such dependence. Ranking ninth in world manufacturing output, India trails several nations like South Korea (population 58 million), Germany (population 80 million), and significantly – its real competitor China, whose manufacturing output is more than seven times ours. It is common knowledge within policy circles that the import bill from electronics may soon surpass that of oil by 2020 if serious efforts are not made to promote that sector in India.

The most obvious answer to such a conundrum is to learn from the history of those who have succeeded – namely the successfully industrialised East Asian nations. India needs the markets, but it also needs the state to intricately fashion, support and complement the incapacities of the market – policies that are rarely fashionable in today’s political discourse. 

Akshat Khandelwal tweets at @akshat_khan.