Representational image.
The concept of ‘Intellectual Infrastructure’, brought forward by noted economist Joseph Stiglitz, is to build an affluent and progressive society on innovation, factor efficiencies, and ‘out of the box’ thinking. This is critical for any country that aspires to achieve a high income status in a short span of time.
From India’s perspective, while the traditional approach involving investment in infrastructure, industries, and basic healthcare and education services can bring the country to the $5 trillion threshold, attaining $10 trillion will require a different approach.
Even though just three countries have crossed the $5 trillion, and two the $10 trillion threshold, economies of scale take a different proportion here since India must provide a decent quality of life to 1.4 billion people.
With a GDP of $5 trillion, India can only manage a nominal per capita GDP of around $3,570, keeping the country within the low middle income category in the foreseeable future. Only a $10 trillion nominal GDP can provide Indians with a per capita of over $7,140, or about $25,000 in terms of purchasing power parity.
For this to become a reality,India must maintain its current growth momentum for at least 15 more years to escape the ‘middle-income trap’. Before India, countries such as Brazil and Argentina have also tried to escape this infamous economic cleft-stick, but failed to achieve the required escape velocity. This, in turn, explains that investment in traditional factors of production can take a country to a certain threshold, but not beyond it.
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Consequently, India cannot break out of these so-called shackles without focusing on the unexplained variables of GDP calculations that collectively explain the Total Factor Productivity (TFP) of the economy.
R&D expenditure, manufacturing efficiencies, logistics, manpower skilling, and human development index (HDI)-related components are some of the ingredients of the TFP, becoming paramount in determining the escape velocity of any economy. The TFP components are not part of the traditional factors of production, instead, they define the ‘efficiency’ with which the factors are utilised by an economy.
In other words, while traditional factors of production provide the initial momentum, helping an economy reaching a critical size, the real impact on the population’s quality of life is brought about by efficiencies achieved by way of factor productivity.
No country has ever achieved a high-income status without focusing on the TFP, and there are certain success stories as well. Though some believe that efficiency in factor productivity is a natural phenomenon, and is achieved by the economy as it evolves, history tells us that deliberate attempts must be made.
Countries succeeding in achieving high per capita income within a short span of time have been those that have realised the importance of TFP early on. South Korea is a great example of how factor productivity efficiencies and innovation can help a nation become an economic powerhouse, and at the same time provide its citizens a high quality of life.
Ironically, South Korea did not start its industrialisation journey until 1953, an epoch when India already boasted of certain heavy industries, and an enviable railway network.
However, while India continued to languish as a low middle-income country, South Korea became an OECD member in less than four decades. The real growth happened from 1980 onwards, when Seoul started to invest in logistics, and manpower skilling, and focused on R&D driven high-tech sectors.
In fact, South Korean ‘Chaebols’, such as LG, Hyundai, and Samsung became cutting edge global conglomerates once the much-needed reforms took care of the economy’s modernisation, and skill needs.
Since 1980s, South Korea has been one of the best performing countries as per the World Intellectual Property Organization’sGlobal Innovation Index, achieving even double-digit economic growth numbers. Since the beginning of the century, China has also joined the bandwagon, and by emulating successful examples, it has not only escaped the middle-income trap, but also achieved milestones in technological advancement and innovation.
In recent years, Turkey has also been experimenting with the ‘Intellectual Infrastructure’ formula to escape the middle-income trap. Though late to the party, Ankara has been investing heavily in skilling its manpower to spawn high-tech industries. Apparently, Turkish consortiums have been investing significantly in imparting high-tech skills to local population through foundations such as ‘Turkish Technology Team’.
Indian policymakers must realise the importance of factor productivity efficiencies while focusing on building critical infrastructure, and the accumulation of capital resources. As India silently builds its economic prowess and attains a superpower status, policymakers must quickly identify the pain-points and deploy policy solutions at the earliest. Delay in this regard will be detrimental to India’s economic sustainability in the medium term.
South Korea, Israel, China, and Taiwan have successfully utilised such efficiency gains to their benefit,and built their economiesof scale. Acknowledging this will be crucial for India to meet the aspirations of its young and diverse population.
