The Hindu : Geography & regional growth

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Monday, Feb 25, 2002

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Geography & regional growth — I

By Jeffrey D. Sachs, Nirupam Bajpai & Ananthi Ramiah

It appears that geogrophical variation across regions may block or slow the convergence of incomes.

THE DIFFERENTIAL performance across States has begun to raise important policy questions within India. To what extent are the differences a manifestation of global economic forces acting upon India, especially during a period of economic liberalisation, and to what extent do they reflect differences in economic policies at the State and the Union level? Will market reforms tend to make rich States richer, with the poor States lagging ever farther behind? Or will market reforms lead to economic convergence across States? Specifically, are the poorest States (especially the so-called BIMARU States of Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh) condemned to fall further behind the front-runners?

In the case of China, we found that the underlying drivers of economic growth, and hence the tendencies towards convergence or divergence of regional per capita incomes, differed markedly across sub-periods, especially as a result of major shifts in the economic policy regime. During the first phase of China's market reforms, during 1978-84, the dismantling of the communes and the partial liberalisation of food production gave a great boost to major food producing regions. By the late 1980s, however, international trade had become the major driver of economic growth, and as a result the coastal regions spurted ahead of the interior provinces, a pattern which obtains till now.

Several studies of high-income market economies undertaken during the 1990s, for the U.S., Japan, and regions within western Europe, found evidence for strong convergence of per capita income among regions. We find little evidence of comparable convergence among Indian States, similar to the findings for China. This raises the question why some countries or regions demonstrate inter-regional convergence while others do not. In China and India, it appears that geographical variation across regions may block or slow the convergence of incomes. Almost all the regions among the BIMARU States (except perhaps much of western Rajasthan and parts of Western Madhya Pradesh and southern Uttar Pradesh) have the agro-climatic potential to yield high returns in agriculture because of reasonable to high rainfall and availability of perennial river waters. Much of the reason for poverty in these States is thus a human failure rather than a result of natural factors. There are States which have high variations within them both owing to historical/economic antecedents and agro-climatic factors. This is typical of the larger States, though such variation exists in smaller States as well.

The manufacturing sector is a much more consistent engine of growth, and it is likely to play a growing role after 1991 with the opening of the economy. As China's experience demonstrates, trade liberalisation in a low-wage, surplus-labour environment permits a rapid expansion of export-oriented industry, which can absorb large numbers of workers to provide goods for the world market. India's insertion into the world economy has been much less dramatic, and successful, than China's, but it has been real nonetheless. The share of exports of goods and services in GNP was stable at 7 per cent in 1980 and 1990, and after reforms rose to 11 per cent in 1999. In China the comparable share rose from 6 per cent in 1980 to 18 per cent in 1990 and 22 per cent in 1999.

There are many differences in this experience between China and India. China's reforms were bolder in promoting both FDI and manufacturing exports, and China benefited from the vast inflows of FDI from overseas Chinese investors.

The most likely site for sustained manufacturing growth in India, like China, is along the coast, especially at the four large port cities of Mumbai (Maharashtra), Kolkata (West Bengal), Chennai (Tamil Nadu), and Kandla (Gujarat). Coastal, urban-based industry can serve both the internal market and the international market, and can more readily make logistical links with foreign suppliers and customers than can interior-based enterprises. New export-oriented units are therefore heavily concentrated on the coast. Manufacturers in interior regions can of course service the domestic market, particularly in consumer goods such as processed foods, but the potential for rapid growth based on the internal market tends to be more limited than the growth based on exports to the world market.

High-tech services, such as information-and-communications-based industry (e.g. software production), or financial services are almost always reliant on a network of universities and an urban labour market. These sectors are much less dependent on coastal access, however, since much of their business can be transacted over telephone and Internet connections. A high quality of life of the location, as an attraction for highly mobile skilled workers, probably looms larger in these sectors than in other sectors of the economy. The most important State for service-sector activities is surely Maharashtra, as it combines the country's financial centre with an important IT-based industry. Other key States include Tamil Nadu, Karnataka, Delhi, and to a lesser extent Andhra Pradesh.

Urbanisation is likely to be a key determinant of economic growth; existing urban areas would be the preferred location for new investments in manufactures and services. The extent of urbanisation varies widely, and the degree itself depends on underlying geographical factors, especially the location of the main national ports (with their origins in history and the geography of natural harbours), as well as the productivity of agriculture in the region. Regions of high agricultural productivity tend to support a larger proportion of the local population in an urban setting, while regions of low agricultural productivity tend to have a high proportion of the population in peasant, subsistence agriculture.

Empirically, we find, for example, that two factors _ having a major port and having a dry steppe climate suitable for wheat production _ account for two-thirds of the variation in urbanisation rates across the States and that a 10-percentage-point higher rate of urbanisation is associated with 1.3 percentage points a year higher annual growth.

(The writers are with the Center for International Development, Harvard University.)

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