Liberation and Development — Part II

Last week on May 3rd, I began discussing Liberation and Development which I will continue now. I had written that

I will further argue that it is possible to bootstrap the process of development but only if resources are used efficiently and if problems are solved by addressing causes rather than by alleviating superficial effects.

The point I was making is that energy, credit, and knowledge are the basic ingredients for economic production. Economic production is a pre-requisite for development. Efficient use of the three basic ingredients is important. I had also taken a more generalized view of credit where I considered the stock of capital available to an economy as form of credit. It is intergenerational credit because the present generation can use the capital stock created by the previous generations. The capital stock is represented by the machines, buildings, transportation systems, etc. The source of the capital stock is investment which itself the flip side of a flow of savings. Savings in any period is the difference between production and consumption of that period. Finally, efficient use of savings translates into capital stock via through the investment route.

Does efficiency in the use of savings matter? The chairman of the US Federal Reserve Board Mr Alan Greenspan believes it does. At a conference in Chicago on May 6th, in his speech Globalization and Innovation, Greenspan said:

Although saving is a necessary condition for financing the capital investment required to engender productivity, it is not a sufficient condition. The very high saving rates of the Soviet Union, of China, and of India in earlier decades, often did not foster significant productivity growth in those countries. Saving squandered in financing inefficient technologies does not advance living standards.

Volumes can be written in merely outlining how inefficiently India uses its savings. There has to be a reason for why an economy which has a high savings rate cannot translate those savings into higher production through the intermediate steps of investment, capital stock growth, and higher productivity. One of the primary reasons could be the missing complementary ingredient which is knowledge or know-how. Our savings rate is high but savings are low because our incomes are so low. A poor person with a Rs 1000 income and 20% savings rate will only be able to save Rs 200. Compare that to a rich person with a savings rate of 5% but an income of Rs 10,000, saving Rs 500. Furthermore, the rich person is likely to have better investment advice and therefore be able to mobilize his savings better than the poor person.

In other words, when it comes to savings and what to do with them, we are caught in a classic bind which is exemplified by the lament garibi mein aataa geelaa. I cannot quite translate it accurately but it goes like this: Too much water in the dough has made it unusable; but one is so poor that one cannot afford any more flour to correct the imbalance; thus whatever little one had is also wasted. The caution therefore is that when one is poor, one cannot afford not to be careful about how to use the resources one has. How much water to add to a given amount of flour is a decision taken by policy makers who may or may not be sufficiently knowledgeable about cooking. If at the end of the day, all you have is a lump of useless runny dough, you know that the policy makers have messed up. That is what has happened in the case of India. For decades, absolute morons ruled the country whose idiotic economic policy led to the disaster we see around us today.

The economy is being freed after decades of mismanagement and misrule. But even now, we are definitely not out of the woods. Whether it is telecommunications policy or education policy: the idiots continue to pour too much water in the too little flour we have. I would like to look into the telecommunications policy tomorrow.

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