By Ejaz Ghani
What will India and the rest of South Asia look like in 2025? The optimistic view is that India will achieve double-digit growth rates. The pessimistic view is that growth will be derailed by structural and transformational challenges. Which of these two outlooks will prevail? What can be done today to reshape tomorrow?
What will India, and the other South Asian countries, look like in 2025? There are two contrasting opinions on this matter, the optimistic view and the pessimistic view. The optimistic outlook is that India will achieve double-digit growth rates. South Asia too will experience strong growth, primarily due to the growth of India. The pessimistic outlook is that growth will be derailed by the many transformational challenges the region faces. Which of these two outlooks will prevail? This has been examined by a number of experts including David Bloom, Barry Eichengreen, Lakshmi Iyer, Ravi Kanbur, William Kerr, Homi Kharas, Rakesh Mohan, Caglar Ozden, Stephen D. O’ Connell, Arvind Panagaria, and Eswar Prasd in a recent book, Reshaping Tomorrow (Ghani 2011).
The optimistic outlook
The optimistic outlook is based on favorable trends, including improved governance, the demographic dividend, the rise of the middle class, and the new faces of globalization.
All countries in the region have an elected government for the first time since independence. Governance has improved in two ways that will enhance the politics of democratic accountability; the diminishing importance of identity politics; and the rates of incumbency – the likelihood of a sitting legislator or state government being re-elected – are down. This is leading to governance that is more focused on development.
While China’s spectacular growth has already benefitted from demographic dividend, India is yet to do so. By 2025 India will be more populous than China. Its population will also be much younger. More than 10 million new workers will join the labor force, every year, for the next two decades. This is equivalent to the entire population of Sweden joining the labor force. The demographic dividend will accelerate growth not only through the swelling of the labor force, as the baby boomers reach working age, but also due to society’s ability to save more (working age happens to be the prime years for saving) and the increased fiscal space that will divert resources from spending on children to investing in infrastructure and technology.
A massive shift towards a middle class society is already happening. India’s middle class (daily expenditure of $10-$100 in PPP terms) will rise more rapidly compared to China, because Indian households will benefit more from growth than Chinese households, given the prevailing distribution of income. The size of the middle class will increase from 60 million in 2010 to more than one billion people by 2025. Growth, education, home ownership, formal-sector jobs, and better economic security are cause and consequence of an expanding middle class.
The world has already benefited from the trade of goods. New faces of globalization will focus on the trade of services. The world is experiencing a third industrial revolution with the services trade being at the forefront of this revolution. Services are characterized by growing tradability, increasing technological sophistication, and lower transport costs. Modern services can now be splintered in a value chain just like goods, and they can be electronically internationally transported through satellite and telecom networks. The number of services that can be transported digitally is constantly expanding – processing insurance claims; call centers; desktop publishing; compiling audits; completing tax returns; and transcribing medical records. In a not-too-distant future, patients at home will be able to speak with their doctors by satellite and students will access high-quality education via virtual classrooms. Labor matching is increasingly done online and platforms like Odesk can connect employers and employees across national boundaries. Trade of services is the fastest growing component of world trade during the last two decades. India’s service export is growing at a much faster rate than goods
export from China.
Global migration rates have been sluggish over the last 50 years. This will change. Current demographic trends suggest a rapidly ageing population in OECD countries, and a young population in India and South Asia. This generates powerful incentives for labor mobility, as well as unique opportunities for improved global efficiency. But there is an alternative outlook.
The pessimistic outlook
The pessimistic outlook is backed by equally strong arguments. History tells us that there are no more than a dozen countries that have managed to sustain an average growth rate of 7% a year for 25 years. Many have reached middle-income status, but very few have escaped middle-income traps.
Growth could be derailed by lopsided spatial transformation, poor infrastructure, lack of entrepreneurship, deep poc-kets of poverty, large informal sectors, huge social and gender disparities or high levels of conflict in the region.
Rapid growth has produced billionaires in India. However, the broad character of the region remains agrarian and rural. This has more to do with the peculiarities of growth patterns – services-led growth, which is more skill-intensive, compared to manufacturing-led growth in China, which is less skill-intensive. Slow growth in manufacturing despite rapid GDP growth should not by itself be a worry, provided it does not stand in the way of increased employment opportunities for unskilled and low-skilled workers at decent wages in industry and services, so that these sectors can still rapidly pull the underemployed workers in agriculture into
Entrepreneurship is central to job creation. While the great economic minds throughout history recognized the link between entrepreneurship and job creation, controversies remain. Our understanding of entrepreneurship is still at an early stage. Is it young businesses or established firms who contribute to job growth? Have manufacturing sectors or service sectors created more jobs? What is the geographical scale at which entrepreneurial mechanics function? Why do some cities attract more entrepreneurs? Do agglomeration economies and networking differ across formal and informal sectors and industries, cities, and genders? What makes some local governments fiscally more entrepreneurial than others?
Contrary to popular belief, it is thought that India has too few entrepreneurs for its stage of development. While India has a disproportionately high rate of self-employment and many small firms, this has not readily translated into as many young entrepreneurial firms as could be hoped.
There is huge heterogeneity in entrepreneurship across states in India. The spatial distribution of start-ups in India is more fluid than in the United States. For the United States, existing city population levels, city-industry employment, and industry fixed effects can explain 80% of the spatial variation in entry rates. The comparable explanatory power for India is 29% for manufacturing and 33% for services. While this lower explanatory power could be due in part to dataset features and/or subtle, necessary shifts in the empirical estimations, it is clear that a large portion of this gap is due to India being at a much earlier stage of development, both generally and for these particular sectors. Yet there is no question that entrepreneurship works; formal-sector job growth has been strongest in regions and industries that have exhibited high rates of entrepreneurship and dynamic economies.
The informal sector remains overwhelmingly large and persistent. What is worrying is that informal employment does not seem to disappear with rapid growth. Transformation of the unorganized sector is important to India’s modernization, growth, and attainment of regional economic equality. The unorganized sector is very large, accounting for over 99% of establishments and 80% of employment in manufacturing. The unorganized sector is stubbornly persistent—it accounts for 81% of manufacturing employment in both 1989 and 2005. This persistence is not due to particular subsets of industries or states, as most industries and states show limited change in unorganized sector employment shares. Policy makers will need to be more innovative to overcome informality traps.
Most countries in South Asia are currently immersed in, or are just emerging from, conflicts of varying nature and scope, ranging from the recently ended civil wars in Sri Lanka and Nepal and insurgency in Afghanistan and Pakistan, to low-level localized insurgency in India. The result is human misery, destruction
of infrastructure and social cohesion, and death. The knock-on effects are huge.
India, despite reaching middle-income status, is home to the largest concentration of poor people in the world. More than one billion people lived on less than $2 a day in 2005. Nearly 250 million children are undernourished and suffer from hidden hunger. Child mortality and malnutrition levels are among the highest in the world. More than one third of adult women are anemic. One woman dies every five minutes from preventable, pregnancy-related causes. The share of female employment in total employment is among the lowest in the world , and gender disparities are deep and widespread in South Asia.
What can be done?
First, growth cannot be taken for granted. The link between demographics and growth is not automatic. A demographic dividend could morph into a demographic disaster, if people are not healthy, educated, and trained.Globalization also does not automatically engender growth. India needs physical infrastructure – ports, transport, and communications – to take advantage of trade. This is not just about the shift away from agriculture and into industry and services. It is also about the transformation required to move into higher-quality goods and services.
Second, rapid growth is important for poverty reduction. Rapid growth was instrumental in reducing poverty but poverty rates have not fallen fast enough in India to reduce the total number of poor people. Poverty reduction in India and China are precisely in line with what economic growth would predict. Although inequality increased more rapidly in China than in India, China still managed to reduce poverty faster than India, due to a faster pace of income growth.
Third, growth is not sufficient. Social progress – education, health, and women’s participation in economic activities – have not kept up with income growth. Boys outnumber girls in school enrolment. Dropout rates for girls are higher than those for boys. Dowry puts pressure on families of girls to marry them early, leading to preference for sons. Legal and judicial systems, as well as law enforcement mechanisms, have failed to address the high incidence of violence against women. Death rates for young girls are much higher than boys. Higher death rates for young girls are symptomatic of a general pattern of discrimination against girls. The expectation that girls will grow to do little other than serve their husbands reduces a parent’s incentive to invest in their daughter’s human capital. Uneducated women then have few alternatives and so the expectation becomes self fulfilling, leaving women in a continuous circle of neglect. Gender disparities, which begin at childhood in the region, have significant adverse long-term effects. Women and girls bear the largest and most direct costs of social disparities.
So, policymakers should consider direct policy interventions to accelerate social progress, with a particular focus to enhance gender inclusiveness. Policymakers should not think of growth as separate from inclusion. Increased income and social disparities should not be viewed as the price to pay for higher growth. A development response that aims to promote growth first and deal with human misery later is not sustainable.
The demographic dividend is a time-bound opportunity. It provides policymakers with an incentive to redouble their efforts to promote the skills of the working-age cohort so that it has the ability to contribute productively to the economy. Time is of the essence. Policymakers need to take action today in order to reshape tomorrow.
About the author
Ejaz Ghani, an Indian national, is currently Economic Advisor at The World Bank. He has worked on Africa, East Asia, and India/South Asia. He has written on poverty, growth, trade, fiscal policy, debt management, conflict, decentralization, entrepreneurship, employment, and agriculture. He has edited the book Reshaping Tomorrow – Is South Asia Ready for the Big Leap? (Oxford University Press 2011). He has taught economics at Delhi University (India) and Oxford University (U.K.). He is an Inlaks Scholar, and obtained an M. Phil. & D. Phil in Economics from Oxford University. He undertook his schooling in Bihar at St. Michael’s High school Patna; his undergraduate degree at St. Stephens College; and Masters degree at Jawaharlal Nehru University. The views expressed here are those of the author and not The World Bank.