Tuesday, January 2, 2024

Raghuram Rajan: "Breaking the Mould: Reimagining India’s Economic Future"

I think the Professor is on  good terms with the Prime Minister, I wonder if Modi is listening.

From the University of Chicago's Chicago Booth Review, December 11:

In their new book, Breaking the Mould: Reimagining India’s Economic Future, Chicago Booth’s Raghuram G. Rajan and Pennsylvania State University’s Rohit Lamba make the argument that India should follow an economic development path that is based not on manufacturing, as China has done, but rather on services. In this episode of the Capitalisn’t podcast, Rajan discusses with cohosts Luigi Zingales and Bethany McLean why India’s strengths play to services-based development, how India can deal with the economic and educational inequality created by its past, how Western business should engage with India, and why democracy is critical to India’s future economic success.

Capitalisn't Podcast (transcript)

Raghuram Rajan: I really think India needs to rethink its development path. And I think if it does all this, here is a coherent path which is different—I want to emphasize—from the path we are currently on.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: During the last couple of years with Bethany, we have focused on the interaction between capitalism and democracy. At the end of the 20th century, this combination looked triumphant. As the Berlin Wall was crumbling down, capitalism and democracy were spreading the world over.

Now that we are approaching the end of the first quarter of the 21st century, this relationship looks much more problematic. Democracy is in retreat and basic democratic principles are questioned, even in the ultimate cradle of democracy, the United States of America.

If this was not enough, the enormous economic success of China makes people wonder whether democracy is an obstacle to development. I regard democracy as a value regardless of its economic effect. And I think that you, Bethany, feel the same, don’t you?

Bethany: I do, although it’s sometimes hard for me to know if I feel so strongly about it because that’s what I grew up with, and I don’t know anything else, and I’m naturally a defender of it.

Then, I also wonder, as you and I have explored a lot on this podcast, the ways in which supposed democracies, including ours, are not really very democratic and the ways in which they become corrupted. And so, I also worry about the gaps between the values that both democracy and capitalism espouse, both of which I’m big believers in, and then the reality as they are practiced.

Luigi: Yes, but actually, I regard democracy, i.e., the ability of people to express their opinion and to influence the direction of the government, as a value per se. Even if you were to tell me that you lose a little bit of GDP by being democratic, I would prefer to be democratic over nondemocratic. Now, if the question is whether you’re starving, that’s a different story.

Bethany: Yeah.

Luigi: I think that other people have started to question whether maybe there is a trade-off between being free and being wealthy. The success of China really makes people wonder, and the natural comparison is India. India is now rising very quickly and is currently the fifth-largest economy in the world. They recently passed the United Kingdom, and as you can imagine for Indian people, that’s a very important step. But according to the FT’s chief economics editor, Martin Wolf, by 2050, the Indian economy will be 30 percent larger than the US economy, at least in purchasing power parity.

Bethany: I think that’s why you see so many large corporations, from Netflix to McDonald’s, localizing their content for the Indian market. But India just recently overtook China to be the world’s most populous country, and it’s still extraordinarily young. And so, I think the question remains if India has achieved its growth because of its democracy—and India has been a democracy since independence—or despite it.

Luigi: And, of course, a lot of people are asking the question, is it the fault of democracy that India fell behind or not? One interesting statistic is that in 1960, India, China, and Korea had the same GDP per capita. Today, China is five times as wealthy as India. This is really remarkable, and it makes people question, should India give up democracy for prosperity?

There is no better person to address this question than Raghuram Rajan, who is not only my colleague at the University of Chicago, but more importantly, was a former governor of the Reserve Bank of India, which is the Indian central bank, and a very informed and acute observer of the Indian economy.

He just released a new book with a younger colleague, Rohit Lamba, and the book is called Breaking the Mould. The subtitle of the book reveals a very ambitious goal, which is “Reimagining India’s Economic Future.” The main thesis of the book is that India is now trying to emulate the path to success that China followed, and so many other so-called Asian tigers followed, but the book says it’s too late to follow that path.

The persistence of China and many other China-like developing countries in the low-skilled manufacturing sector, and the competition coming from automating manufacturing, make the traditional path of specializing in low-skill manufacturing, then working your way up, not feasible. One of the things that the book points out is that if we plot the value added per employee against the value stage or value creation, we get a smile-shaped curve. So, value added is very high in the design phase, low in manufacturing, and very high again in distribution.

Just one statistic the book reports that is very interesting in this dimension: Apple, which does not produce anything but only designs and distributes, today is capitalized at roughly $3 trillion. Foxconn, which produces the iPhone and specializes only in manufacturing, is capitalized below $50 billion.

Bethany: Part of the core argument in Raghuram’s book is that pursuing the manufacturing way to development by subsidizing new plants is hopeless for India. It’s unable to provide a young generation with enough jobs, and those jobs will not be that well paid. So, his argument is that the future is in service, and India, which has demonstrated excellence in a number of sectors, like software and consulting, should aggressively pursue the service route. This gets to his defense of democracy because he argues that this requires freeing the creative spirit of Indian entrepreneurs, and so, it can only be pursued by making India more, not less, democratic.

But Luigi, we could keep talking forever. Let’s discuss these ideas with Raghuram himself.

Raghuram, just to set the stage as we get started, how would you describe India’s economy today? Would you say it’s successful? Would you say it’s in a good place?

Raghuram Rajan: Well, it stands out as one of the few fast-growing economies in the world today, but that’s a headline number, and we have to look beyond that. One of the big concerns for Indians is jobs. Even at this pace of economic growth, around 6 percent, 6.5 percent, if you look at an annualized basis, India is not generating enough jobs. What seems to be going on is really that the higher-end firms, the more capital-intensive firms, are doing very well. What is not going so well is the small and medium sector, which is often the job-creating sector in the economy....