Policy changes and productivity

By Pulapre Balakrishnan

A WIDELY shared perception of the rationale for the reforms initiated in 1991 is a potential to increase efficiency across Indian industry. Depending upon how it is conceptualised, efficiency should be a prized objective and, contrary to simple- minded belief, boon to the countless poor. To capture increases in efficiency of production, economists have tended to work with the index of total-factor- productivity growth. It measures the extent to which output growth exceeds the growth of all inputs, thus `total' factor productivity. Intuitive as the measure might appear, computation of the index is less than straightforward and judgment can never be left far behind. Nevertheless, the measure has some considerable acceptance as a practical guide to policy evaluation.

This past year produced several studies of total factor (henceforth) productivity growth since 1991. They turn in a unanimous verdict. While this is of some methodological significance to the economics profession in India, it is more so a crucial report card for the architects of the reforms. In the latter part of 2000, four sets of researchers placed in the public domain results signalling the slowing down since 1991 of productivity growth in industry. These authors, in the chronological order of the appearance of their work, are Trivedi, Prakash and Sinate in Mumbai; Balakrishnan, Pushpangadan and Suresh Babu working between Kozhikode and Thiruvananthapuram in Kerala, and Shrivastava and Goldar, separately, in Delhi. If, as they say, truth lies in the confluence of independent streams of evidence, this instance must count as a rare configuration and thus deserving of our attention. For, not every day four sets of researchers, using two different methodologies on at least three different data sources, independently arrive at a conclusion which challenges a prime expectation from the ruling policy regime.

By the end of the 1980s, the political elites who had governed country for four decades began to lose some of their confidence. There was no more leaning to be done against the weight of the Soviet economy which, inefficient though, had provided both an intellectual argument for India's own efforts and a real presence in the form of an economic area accepting the rupee which had little currency in the international arena. Then the Soviet economy collapsed. And for India an alleged role model disappeared. To make things worse, the Persian Gulf adventure featuring the Iraqi President, Mr. Saddam Hussain, and the then U.S. President, Mr. George Bush, had resulted in rising oil prices. With dwindling foreign exchange reserves fuelling merry speculation of a likely default on its international monetary obligations, India was soon, cap-in-hand, on the kerb in H Street, Washington, D.C., not a situation one would wish for one's country's leaders, however inept. In any case, they now presented the leadership of the Western world with a god-sent opportunity to signal their triumph. China was no longer a prize, now that Mao had embraced the ``paper tiger'' over two decades ago. On the other hand, poor as it might have been, India had systematically resisted the Anglo-American ambition to hegemonise the post-colonial era. In the eyes of the world, it had done so not only within the corridors of an increasingly farcical United Nations but by actually choosing to live by an alternative worldview encompassing politics, the arts and even the patents law. Of course, that this did not always translate into a better life for large sections was not taken into account by either party.

Predictably, the international agencies had prescribed the formulae of macroeconomic stabilisation and structural reforms as the price for their extending a commercial loan to India to help it tide over its balance of payments crisis. The structural reforms comprised changes in industrial and trade policies. For about a decade by then the economics profession in the U.S. had been suggesting that trade policy be used to both discipline domestic industry by introducing competition and to enable it to compete in the international market by allowing access to the best inputs at the same price as was available to its foreign rivals. While the latter is easy enough to comprehend, the productivity impact of increased competition is difficult to understand, for it involves the counter-intuitive proposition that managers work with greater intensity precisely when their returns are lower. For something like this to emerge from the international economics establishment is odd, for, this is not conventional economics!

Be that as it may, the structural reforms initiated by the Government of India clearly envisaged a faster rate of growth of productivity. This may be ascertained from the Industrial Policy Resolution of 1991, for instance. The belief that the reforms would surely lead to a rapid round of productivity increases within the manufacturing sector was widely shared even outside government circles. Many professional economists and corporate leaders argued thus in the early 1990s. So too those members of the lay public who follow such things as shifts in the government's economic policy. After all, nobody could have helped but notice the falling behind in the international league tables of India's industry despite what they saw as four decades of protection. What they may have failed to avoid though is the trap of observational equivalence. The explanation for the lack of dynamism in an economy which also happened to be protected does not get necessarily get linked to its being cushioned against the currents of world trade. Surely several other factors were at least as important. For a start, the Indian state was never astute in its dealings with industry which it might well have disciplined through mandatory export targets or just straightforward profitability criteria. Instead its weak governance often encouraged sickness, to be understood in its legal usage in India.

Now at the beginning of the new century we have fresh information on the underlying trends in productivity growth in industry. Ten years after the launching of the reforms there is as yet no evidence of a quickening of productivity growth as promised. Is this necessarily surprising? No. From an empirical perspective, there need be nothing surprising about this result. After all, consequent upon the removal of trade barriers, we would expect some sectors to expand and some to contract in response to opportunities and threats. The net effect cannot be gainsaid from pure theory nor predicted with any accuracy. From a comparative international perspective, we now know that particularly high productivity growth was not a distinguishing feature of the impressive economic growth in East Asia, whose countries have throughout maintained very much more open economies than ours. These economies have essentially grown by mobilising resources for production, a kind of `work hard' and `save hard' strategy.

At the end of the day, by far the most important question is whether such changes in the policy regime as we have seen in India recently are what it takes to raise substantially the rate of productivity growth. Industrial production after all emerges from an interface between human beings and machines. Also it happens in real space and in historical time, which constitute the `terrain of production'. Productivity growth then is an increasingly fruitful interaction between humans and machines, requiring a progressive development of the terrain of production. The latter is not confined to the factory floor. It encompasses the social and physical infrastructure of an economy. Since no simple scheme of division is apparent, I gather the constituents together as health, education, housing, transportation, power and urban sanitation. The impact of these factors on the quality of labour input and, more importantly from the point of view of productivity growth, on labour's capacity to work a continuously expanding technological frontier is vital. In the history of development, it is the societies which have grasped this simple idea that have made rapid progress. Even in Dickensian England, an heartless era with its sweatshops and urban hellholes, the state was moved to intervene in the spheres of education and public health. Nor has it been a different story in the richest country, the U.S. In India, the reforms thus far have not addressed this aspect. In the language of post-Sen welfare economics, the focus of their attention has been on goods and not persons. However, not even a lacklustre present can legitimise a failed past imagined as glorious. We must look ahead alone.

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