Lessons from the West

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Lessons from the West

via Prep4Civils by admin on 11/18/11

Italian economy poses one of the biggest dangers to world GDP today. The story has striking lessons for India.

Indian Scenario

• India's growth story is something we often take for granted.
• The recent corruption scandals made many people concerned about growth.
• Most of us believe that this is only short term. India's long term growth will remain unchanged.
• Accumulation of Physical and human capital along with an enterprising, innovative private sector, young population with improving education levels will push growth in labor productivity. Domestic savings and inflow of foreign capital will help improve infrastructure which would increase efficiency.
• This argument suggests that in the coming decade a serious slowdown in GDP growth in India seems most unlikely.
• Many of us believe that Indian households are prudent and save large share of their income but the reality is not much of our savings are utilized as productive investment.
• Barely 10% of Indian households borrow from formal financial sector. India invests nearly one third of its income.

Italian Scenario

• Italy invested 20 per cent of its GDP each year in the last decade. This was more than what Germany invested. However, data suggests that in Italy, capital stock was inefficiently used. This meant that despite investing more, growth did not pick up as much as it could have, as it did in Germany.
• Another argument often heard in Italy is inadequate infrastructure investment by the government. Italy has surpassed Germany by investing 2.5 per cent of GDP on developing infrastructure in the last 20 years.
• Italian workers are today more educated than they were 10 years ago. Graduates have increased rapidly from 13 to 18 per cent of the workforce. But larger infrastructure investment or the improved quality of the workforce has not prevented a growth slowdown.
• What inhibits growth in Italy has been the low level of investment in R&D but Italy's R&D's share in GDP has actually increased about one-fourth over the last decade, proportionally as much as in Germany and more than in the rest of Europe.

Reasons for Slowdown

• Inefficient use of Capital stocks
• Deterioration on Governance
• Three most important indicators of governance on which Italy has done badly are:
  1. The rule of law
  2. Government effectiveness in general
  3. Control of corruption.

Lessons for India

• India is below Italy on all these indicators. If we look at the last 15 years, India has either worsened or improved very marginally.
• If the Italian performance on these measures is any indicator, then India's case may not be too different.
• It suggests that even if we make improvements in sectors such as infrastructure, education, capital investment and R&D, it may not be good enough to ensure long-term growth.

Keywords

• Control of corruption captures perceptions of the extent to which public power is exercised for private gain. It also includes "capture" of the state by elites and private interests.
• Rule of law measures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police and the courts, as well as the likelihood of crime and violence.
• Government effectiveness captures perceptions of the quality of public services, the quality of the civic amenities and the degree of its independence from political pressures. It also includes the quality of policy formulation and implementation and the credibility of the government's commitment to such policies.

- Article by Amit Mishra [amitmishra599@gmail.com]

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