Substack

Thursday, March 5, 2020

India's capital accumulation challenge

In Can India Grow?, we argued that India did not have the capital foundations to sustain high growth rates for long periods. It needed to accumulate capital on multiple dimensions - financial, physical, human resource, and institutional.

Reinforcing the point, The Economist writes,
A lack of technology transfer is only part of the problem, however. Half of the slowdown in labour-productivity growth in recent years reflects not a failure to imitate but a failure to accumulate: weak investment has left labour with too little capital to work with. This shortfall in investment explains all the productivity slowdown in South Asia, the Middle East and north Africa, and two-thirds of that in Europe and Central Asia.
Also, I am inclined to believe in Dietz Vollrath's assessment of the institutions literature,
The point is that even if we acknowledge that "institutions matter", that does not imply that we can or should propose institutional reforms to generate economic development. It's a mistake to think of ceteris paribus changes to institutions. They are not a thing that we can easily or independently alter. If they were, then they wouldn't be *institutions* in the way that Douglass North uses the term. If you want to generate economic development, the implication of the institutions literature is that you have to reform the underlying distribution of economic power first. Once you do that institutions will endogenously evolve towards the "good" equilibrium, whatever that may be.
It helps with accumulation if you have some baseline equitable distribution of the means of production (land, in particular) coupled with investments in human resources capacity. This is one of big takeaways from the contrasting fortunes of North and South East Asian economies as chronicled by Joe Studwell

Does India suffer from an acute version of baseline inequitable resource distribution and sorely deficient poor human resources capacity?

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