TECHNOLOGY AND THE INDIAN MIRACLE: LESSONS FOR INDIA AND BEYOND JOSEPH E. STIGLITZ BANGALORE JANUARY 15, 2004

FOR TWO DECADES, INDIA HAS HAD IMPRESSIVE GROWTH Indian miracle began even before the reforms of the early 90s Income has more than tripled Parts of India, such as Bangalore, have been even more impressive, rivaling East Asia Miracle

SUCCESS RAISES FOUR KEY QUESTIONS What was basis of that growth? How can it be replicated elsewhere in India? What is needed to sustain it? What lessons are there for other developing countries? What will be the reaction of the developed countries?

WHAT WAS BASIS OF INDIA’S GROWTH, OF NEW INDIAN MIRACLE?  Broad based  But greatest success centered on technology  “What separates developing countries from developed countries is not only gap in resources, but gap in technology, knowledge”

–But India has long had underemployed high skilled workers –Many emigrated abroad—highest income immigrant group in U.S. –Key question: putting those resources to use

How can Bangalore’s success be replicated elsewhere in India? Large differences in economic performance across India Large differences in education statistics (and other social indicators) Important differences in history

LESSONS FROM EAST ASIA o Still, success of East Asian countries, with different histories, cultures, geography— even different policies—suggests that there are a variety of paths to success

SOME COMMON ELEMENTS – Emphasis on technology, education –Important role for state –Emphasis on jobs, employment –Emphasis on equality –Emphasis on exports

WHAT IS NEEDED TO SUSTAIN THE HIGH RATES OF GROWTH? Low prices, wide access to internet: cheap and reliable telecommunications –Regulatory policies key –Preventing monopolies, enhancing competition Cheap and reliable electricity –Difficulties in deregulation—California –Difficulties in concessions

WHAT LESSONS ARE THERE FOR OTHER DEVELOPING COUNTRIES? Successful policies were “homegrown,” not imposed from abroad –That allowed them to whether political vicissitudes –Meant that they were more sustainable than they otherwise would have been

BEYOND THE WASHINGTON CONSENSUS  Successful policies went beyond Washington consensus focus on inflation, privatization, and liberalization Success began even before liberalization period –But could not have been sustained without real stabilization –Would not have been sustained had India given into full capital market liberalization –As in China, success based on new enterprises, not privatization of old –As elsewhere in Asia, success based largely on technology

WHAT WILL BE THE REACTION OF THE DEVELOPED COUNTRIES? Increasing worry about outsourcing of skilled jobs

OLD STORY Developed countries will benefit from globalization by increasingly specializing in high tech jobs unskilled, low wage manufacturing jobs will move to developing world, low wage service sector jobs will stay at home Developed countries need to respond by increasing skill levels

NEW WORRIES Even skilled jobs are threatened Even seemingly service sector jobs can move Will “hollowing out” of manufacturing economy be followed by “hollowing out” of service economy? Rising unemployment

MAJOR IMPACT ON AMERICAN POLITICAL CAMPAIGN Both parties talking protectionism, “fair” not “free” competition Underlying hypothesis: with fair competition America can outsell and outperform any country Ignores principles of comparative advantage Ignores fact that principle responsibility for maintaining full employment lies with macro-economic policy—that is where real responsibility lies

Worries are exaggerated Job loss is limited –One estimate is 3.3 million service sector jobs between 2000 and 2015 –If economy performs well over 50 million new jobs (gross) will be created –Only 6% increase in gross job creation –But it is large % of net: 20% Most service sector jobs cannot move With economic recovery, even if weak, job picture will improve

But worries are real Evidence of more “structural” unemployment than in previous downturns So job recovery will be slower Weaknesses in American educational system, values may undermine America’s long run competitiveness Relied on recruiting best students from abroad America’s borders have become less open

Critical point in globalization debate –General recognition of lack of balance in the past –Leading to Doha, “Development Round” –But advanced industrial countries reneged on their promises –And new American worries make it unlikely that it can go much further in fulfilling those promises

NO AGREEMENT IS BETTER THAN A BAD AGREEMENT New awareness in developing countries make another unfair agreement increasingly unlikely—no agreement is better than a bad agreement But WTO limits the ability of US to respond to worries by increased protectionism

DIM PROGNOSIS Hence likelihood of an impasse Possibly new agreements without substance— as in Miami FTAA accord Attempt by US, possibly Europe, to use economic power to get bilateral agreements Hopefully, most countries will realize that this is not in their interests, and will resist Best prospect for future: New South-South agreements

KEY LESSONS: Technology is basis for growth Government policy plays critical role International agreements cannot, and should not, limit developing country governments’ ability to fulfill those roles