Rural Economic Development and RISC

Nobel Prize winning economist Robert Lucas had remarked that once you start thinking about economic growth, it is hard to think of anything else. What are the causes of economic growth and how can the process be enabled is a question that has obsessively occupied some of the best minds in the world of economics and commerce.

The question takes on an unparalled urgency and importance when applied to the rural Indian economy because it presents an enormous challenge, and, consequently, presents an equally great opportunity for making a difference in the lives of hundreds of millions of people. India’s economic development is predicated upon India’s rural development because around 700 million Indians live in rural India. An astonishing one out of every ten living humans lives in rural India.

Rapid progress in GDP growth and globalization in the last decade has primarily impacted the urban economy. While software exports, business process outsourcing, etc, have helped urban economic growth, it has done relatively little for the rural economy.

Without rural economic development, India has little chance of achieving growth rates required to become a developed nation. Furthermore, economic development is both a cause and a consequence of urbanization. Clearly, in the Indian context, urbanization through further rural to urban migration is both unsustainable and socially disruptive. Therefore urbanization of the rural population will have to be achieved in the rural areas.

Rural India is caught in what is called a development trap. Because of lack of economic opportunities, incomes are low. Therefore they are unable to pay for goods and services that would enable them to increase their incomes. This leads to low demand for goods and services. Consequently, firms don’t find it profitable to do business in rural India. This leads to the inadequate provision of infrastructure, which in turn leads to lack of economic opportunities, and so on.

It is important to recognize that human capital is the scarce resource globally. Fortunately India is lavishly endowed with immense human capital. However, physical capital is in relatively short supply in India. The challenge therefore is to use the limited capital most efficiently to break out of the poverty trap by integrating the rural economy with the urban Indian economy and indeed the global economy.

Various models for rural economic growth have been proposed and implemented. Vinod Khosla and I have proposed a model which harnesses the power of the information and communications technology (ICT) revolution to accelerate rural economic growth. The model called Rural Infrastructure & Services Commons (RISC) has the potential for achieving the multi-faceted goals of sustainable development. It uses limited resources efficiently by focusing them in specific locations that are accessible to a sufficiently large rural population, such as that of 100 villages.

RISC provides the benefits of urbanization by making available to rural populations the full set of services and amenities that are normally available in urban areas. It brings the benefits of ICT and the increased access to global markets that globalization promises.

The model recognizes that rural populations face a number of inter-related gaps, not just the celebrated digital divide. Bridging them simultaneously with a holistic solution is more likely to succeed than any partial intervention can.

The model facilitates the coordination of the investment decisions of the private sector, the public sector, NGOs, and multilateral lending institutions. To achieve its goal, the model strikes a number of balances &#151 between the local and the global, between planned infrastructure investment and market-driven service provision, between specialization and standardization. It does not require government subsidies for its continued operation, although the government does have a role in providing some critical functions such as risk alleviation, loan assistance, and enacting enabling legislation.

A typical RISC installation would provide services for about 100,000 rural people. These services, mostly but not all provided competitively by a large number of for-profit firms, will range from education, health, market making, financial intermediation, entertainment to government services, social services, etc. Since all services themselves require the infrastructural services such as power, telecommunications, water, physical plant, etc., large specialized firms will provide the infrastructure.

RISC obtains urbanization economies, which arise from the agglomeration of populations and infrastructure facilities. By installing RISCs to serve the rural populations of an entire state, economies of scale and scope are also obtained. Scale economies would be significant at each level of the model. At the infrastructure level, there are transaction costs associated with the necessary coordination between the firms providing the core infrastructural services. At the services level, the cost of the services will be inversely proportional to the quantity demanded and supplied.

A RISC provides a complete set of services and functions. Each service provider itself is a customer of other services co-located on the RISC. The banker uses the internet and postal services, and the internet service provider uses the banking and postal services, and so on. They make each other mutually viable and even possible. All these economies essentially lower the cost of service provision and, in a competitive market, makes them more affordable.

At a certain level of abstraction, the proximate causes of poverty can be seen as two gaps: the ideas gap and the objects gap. The objects gap is the lack of physical resources &#150 too little land, too little capital stock, etc &#150 that contribute to persistent poverty. The ideas gap is the lack of knowledge about how to make the best use of the resources available. Fortunately, the cost of knowledge goods has dropped precipitously due to the revolution in information and communications technologies. Bridging the ideas gap is a much easier task than ever before. RISC uses ICT intensively towards that end.

The transition from the concept to the actual implementation of the RISC model requires co-ordination of investment decision of the government and the large firms that provide the infrastructural elements. It is a non-trivial but surmountable challenge provided the political will and the vision exists among policy makers, private sector leaders, leading investors, and opinion makers.