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Can India catch up? Can Australia do better?. By Sanjeev Sabhlok, DRAFT, 1 June 2011. The centre of gravity of the world economy is changing. IMF : The combined real output of China and India now equals US output. Table: Share of world output measured in purchasing power parity.

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can india catch up can australia do better

Can India catch up? Can Australia do better?

By Sanjeev Sabhlok, DRAFT, 1 June 2011

the centre of gravity of the world economy is changing
The centre of gravity of the world economy is changing

IMF: The combined realoutput of China and India now equals US output

Table: Share of world output measured in purchasing power parity

  • Source: IMF’s World Economic and Financial Surveys: World Economic Outlook Database, April 2011

India’s economy is now as big as Japan.

By 2016 it will be six times that of Australia.

visual depiction
Visual depiction

China

India

  • China will become the world’s largest economy by 2016
  • (Maddison thought 2015, but IMF thinks 2016)
    • Per capita in China will still (in 2016) be only a fourth of that of USA
    • Ultimately China could become four times the size of USA
india as the world superpower till 1750
India as the world superpower till 1750
  • India’s performance in recent centuries is atypical
  • It was the wealthiest region during the agricultural age
    • Largest arable area till the USA came to the scene
    • Remained the world’s wealthiest in 12 out of the last 20 centuries
      • First century World GDP share = 33%
      • 11th century World GDP share = 28.9%
      • 1700 world GDP share = 24.4% (similar share of world trade)
  • Has India been a ‘victim’ of its long-standing success?
    • Caste system was well-suited to its agricultural society
      • It is no longer suitable, but is now very difficult to change
  • Intellectual stagnation
    • Major philosophical schools and scientific advance (e.g. number system)
    • Charvaka’s and Buddha’s ideas transmitted to Greece –> Sophists –> Socrates
    • The breakthroughs of the modern world arose in Italy (Renaissance)
key changes since 1400
Key changes since 1400
  • 1: The use of reason
    • Critical thinking
      • Islam, through Cordoba, helped recover Greek thought
    • The questioning of authority
      • Reformation
    • Induction and the scientific method – Francis Bacon
  • 2: Constitutionalism and liberty
    • Origin of democracy
      • Magna Carta -> Glorious Revolution
    • Theory of the modern state: Thomas Hobbes, John Locke
      • Society was earlier the centre. Now the individual
  • 3: The secret of wealth creation (free market)
    • Commercial institutions created
      • Modern banks, corporations (e.g. Medici family of Florence)
    • Invisible hand (Adam Smith)
      • (Refinements by F.A.Hayek)

Detailed discussion

in my draft manuscript,

The Discovery of Freedom

(available on the internet)

removing obstacles to opportunity
Removing obstacles to opportunity

Growth = f (governance, opportunity)

1

Obstacles

Opportunity

(technical

frontier)

  • Government
  • Bad policy
  • Bad regulation
  • Bad enforcement
  • Society
  • Some religious beliefs
  • Insufficient value placed on
  • critical thinking

2

Innovation

pushes

out the

frontier

Ideas

don’t

come from

governments

3

Role of government

- to reduce negative effects of excessive government

n

the result modern economic growth
The result: Modern economic growth

>> The Western economies started growing: an unprecedented phenomenon!

  • Key characteristics
  • Relatively slow till 1820 (10s of times the pre-1000 growh rate)
  • Rapid increase after that (100s of times the pre-1000 growth rate)
    • Effectively, the industrial revolution is less than 200 years old

Source: Madison

the great divergence
The great divergence
  • 1750 marked the end of the Mughals and conquest of (a portion of) India by England
  • India stagnated while the West grew rapidly
    • The British were caretakers, not interested in India’s growth
  • Post-independence socialist policies caused further divergence
    • Nehru was confused by the Fabian socialists including Keynes
  • By 1980, India’s share of world output was 2.5 per cent
    • (China’s share was even less, 2.2 per cent)
    • India’s share of world trade is less than 2 per cent today
    • Per capita income is $3000 (PPP), compared with America’s $50,000
why did india struggle even after the end of colonialism
Why did India struggle even after the end of colonialism?
  • Cause 1: Socialist ideology
    • By quirk of fate, Nehru the Fabian socialists set India’s policies
      • Rejected Milton Friedman’s specific advice
      • Rejected von Mises’s views on India’s productivity
  • Cause 2: New rules of the game not widely understood
    • Indian education system flooded with socialists
    • Economics education extremely poor
  • Cause 3: Arrogance about Indian history and culture
    • False pride that refuses to believe that the West could actually offer any learnings to India
    • Caste system not suited to dynamic societies.
and now the great convergence
And now, the great convergence?
  • China took off like a rocket in the 1980s
    • Now nearly thrice the size of India
      • In just 30 years, China’s economy almost the largest
      • Will overshadow the American economy soon
  • India has rapidly picked up pace after 1991
    • The IMF “medicine” of 1991 has helped
    • But
      • People have not internalised the new rules of the game
      • Socialist political parties continue to misgovern
india positives
India positives
  • Total factor productivity is rising
  • India is the world’s largest free market laboratory today
  • Where the government has privatised (or is absent) significant progress has occurred
    • IT sector and private sector IT education
    • Mobile phone wireless network

Source of the graph:

http://mpra.ub.uni-muenchen.de/10316/1/MPRA_paper_10316.pdf

india negatives
India negatives
  • Severe government failure
    • One of the world’s most corrupt
  • Low levels of freedom
    • Failing institutions e.g. judiciary, press
  • Insufficient focus on infrastructure
    • However, it now has the largest private sector investment in infrastructure
  • Difficult to set up a business
  • Labour market inflexibility
will india catch up
Will India catch up?
  • India is handicapped by poor governance
  • India cannot catch up with the West without radically improving its governance.
  • On current indications India will end up as a middling power
    • Still a much larger economy than it is today
    • Of great interest to Australia
  • With reforms in policy and governance, however, nothing is impossible
    • Hint: Australia (Victoria) can assist India in reforming its governance

(no one thinking on this line: a missed opportunity!)

huge competitive pressure building on the west
Huge competitive pressure building on the West
  • Tsunami of competition from low-cost innovators
    • technical frontier now being pushed out by China and India
      • pressure on costs to expand the market in India creating huge pressure to innovate
      • also the wage differential creates huge competitive advantage

Examples: medical equipment, drug production, medical tourism

  • Impending giant tide of brain drain reversal
    • Ongoing perception of racism likely to prompt giant reversal of (previous) brain drain from China and India
      • Indians not happy with second class treatment by the West
        • Already the best Indians have stopped leaving India
        • Many have already returned permanently
    • The best brains of the West moving to India and China
threat or opportunity
Threat or opportunity?
  • Over a third of the world’s production will occur in India and China in the next few decades
  • Only nations that innovate will lead
  • Very hard to increase productivity in a services economy
    • Australia’s productivity is languishing
    • Growth in the West must necessarily stagnate or decline
  • If the West doesn’t engage, its competitive advantage will be lost
  • If the West assists, it will make friends and be perceived to be a helper
    • Competition will become intense, but this is not a zero-sum game!
    • The West can encourage and promote freedom
      • Tip: Everyone can benefit
what can australia do
What can Australia do?
  • 1. Increase efficiency
    • Minimise unnecessary government intervention
    • Ensure infrastructure is based on CBA
    • Reduce welfare state and churn
    • Stop direct management of schools and hospitals
    • Increase flexibility of labour market
  • 2. Actively reshape the future 
    • Get on the front foot
      • Significant opportunity to set up university and TAFE branches in India
    • Australia doesn’t have the baggage of history
      • (But the current impression of racism is not good)
    • Build strong economic and cultural relations with India
      • Not foreign aid but equal partnership!
    • Strategic networking with India’s governance system to support its modernisation