Education, infrastructure and growth


Yasheng Huang Associate professor at the Sloan school of Management shot into prominence on the back of a paper he authored with another writer of Harvard Business School. The crux of their argument was this: In spite of dismal success when it comes to attracting foreign direct investment (FDI), India will overtake China. India’s reluctance to aggressively woo FDI, helped spawn a breed of domestic entrepreneurs that China lacks. Therefore, they argued, in the long run, India will overtake China Nice! But in the long run, as another economist famously said, we’re all dead. Why then is Huang, currently in India on invitation CII, so impressed with India’s creaky infrastructure?

India is a tropical country and there is enough evidence to prove growth rates in tropical countries are slower than that of countries with temperate climates like China. On the face of it, the argument sounds specious. But Huang isn’t willing to give up. In a tropical country, the incidence of infectious diseases is higher and because health is an important input for economic growth, India has to expend a lot of resources to deal with the problem. China doesn’t. Add to this that India has a low savings rate, low investments and poor infrastructure. In spite of these, if a country clocks 8%, it is impressive.

Technology doesn’t matter:

Indian technology companies like Infosys, Wipro and others enable India to overtake China in growth. Not necessary, the entire hypothesis that India’s software capabilities are superior to that of China’s is not correct. China produces as many engineers as India and files more patents. Even the argument that India’s English speaking capabilities hold the country’s technology business in good stead is also not convincing. If that were the case, the Japanese would never have made it.

What really matters instead is access to capital. India allowed these companies to raise funds from the markets. That wasn’t possible in China and entrepreneurs went elsewhere.

In the absence of local entrepreneurs, foreign capital came in to fill the void. Therefore, it is misleading to look at the size of exports from a country. What you should be looking at is who gets to keep the profits. In India, Indians keep the money they earn.

There is nothing impressive about Shanghai which impresses Indians. Shanghai sucks resources. It grew because of massive Chinese central government investment, not economic liberalization.

Going back to the eighties special economic zones (SEZ) were first set up in four regions of China. Then, the government, constrained for resources needed to find ways to give industry a boost and let them flourish. In the 90s, carried away by its success, the government started throwing its own resources into building new zones. Shanghai is only one costly example. From an economic perspective that was undesirable for various reasons.

Most importantly this capital was diverted from resources that would otherwise have gone into developing other parts of the country. Making matters worse was the fact that FDI was favored over domestic investment. Local enterprises cannot be discriminate against foreign companies. If urbanization happened as a natural consequence of economic growth, it’s good. Not otherwise. All the buildings in Shanghai look pretty. But there is no productive activity going in them comparable to the expenditure made for making them.

India needs “Basic education.� India spent money on creating institution of higher learning. But when it comes to primary education, the country suffered. As against this, the Chinese started pushing its rural masses into schools from the sixties. A couple who went to primary school and now have children and if the couple needs to spend 30% of their annual income on educating the kids, they will because they understand the value of education.

In India on the other hand, because its masses didn’t go to school, they are not capable of appreciating its benefits. The government should pay parents to send their kids to school. That is why spending on basic education must be given a priority compared to spending on infrastructure. For example if you spend on airports, you spend less money on everything else.

To conclude the building up of infrastructure must begin with basic education and the expenditure should be balanced from spending on basic education to higher education to large infrastructure projects so that growth is a balanced one unlike Shanghai of China.