Why does India grow so fast if its education system is so poor?

We have to admit that India’s education system gets an F grade. India does not feature in any of the world rankings of universities. Sure there is a lot of hype about the IITs but aside from the delusions of the seriously uninformed, the IITs don’t add up to a hill of beans. I have been writing about IITs on this blog for a over a decade. Here’s one — IITs are not what they are cracked up to be, which is likely to stick in the craw of many IITians.

If India’s education system, including higher education, is so poor then how is it that it is one of the fastest growing large economy?

Let’s unpack that question, starting with what growth rates mean.

Fastest growing merely means something is growing faster than others. That’s a relative measure of the rate and does not imply anything about absolute increases. My income grew at a respectable 200 percent last year over the previous year, while Bill Gates’ income grew at a dismal 5 percent. Impressed? You shouldn’t be. My income went up from $1000 in the previous year to $3000 the next — an increase of $2000; in the same period Bill Gates’ income went from $2 billion to $2.1 billion, an increase of $100 million, but only a 5 percent increase. Not much of a choice, is it? (I made up those numbers but the real numbers doesn’t change my argument.)

The point here is that the base over which growth is computed matters. India could grow at “the fastest rate” and still be dirt poor relative to other countries that aren’t growing as fast. India could grow at 7 percent and be counted a failure, while the US could grow at only 3 percent and be considered respectable.

Fact is that very poor countries can grow much faster than very rich countries (as illustrated by the concocted example of widely divergent personal incomes.) Poor countries start off from a very small base and therefore they have the potential to have higher growth rates. Rich countries have much less room for growth in incomes because they are already as rich as they are potentially capable of.

Poor countries have the potential to grow faster than rich countries because it is easier to remove inefficiencies when you are really inefficient than it is to increase efficiency when you are already very efficient. If someone is wasting stuff, they can be better off by stopping being wasteful. If someone is not wasting any stuff, they would be hard pressed to reduce waste.

Rich countries are richer because they are on the “efficiency frontier” — they are operating at the peak that is technologically feasible. Poor countries are poor because they are not where they could be in the technological frontier, and hence they can be more efficient than they presently are.

India is, and has been thanks to you know who, a socialist economy. Socialism strongly implies poverty and general social malaise. India’s economy was operating far below its potential for decades. It grew at a dismal long-run “Nehru Rate of Growth” of about 3 percent annually from 1950 to 1991. Inefficiencies had built up over 40 years. Even the little “liberalization” around 1991 that Prime Minister PV Narasimha Rao introduced released the Indian economy from some of the insane Nehruvian socialist policies.

(For having deviated from Nehruvian insanity, the Congress party did not forgive PV Narasimha Rao. He was abused by the Congress and consigned to the rubbish bin when he died. Every member of the Congress Party is a despicable moron. That category includes some who are prominent leaders of the current BJP.)

The little bit of liberalization that PVNR achieved allowed the Indian economy to grow at a somewhat respectable 7 percent a year. That’s impressive but not when it is considered relative to China. China started growing at double-digit GDP growth rates starting in 1978, thanks to Deng Xiaoping, and persisted at that incredible rate for over three decades. That left India in the dirt. I estimate that China’s income is about six times that of India’s and its wealth is around 40 times that of India. India is really, really very poor compared to even China (which by any per capita measure is really poor.)

China is poor but it is significantly richer than India. It can outspend India on everything, and it does. It spends more on weapons in a year than India could afford to spend in years. Honestly speaking, India cannot match China’s manufacturing capacity and nor can India match China militarily. Socialism in action. Nehruvian socialism did to India’s education system what it did to India’s industries, its financial system, infrastructure and the rest of it — namely, FOOBAR.

GDP growth rates matter, certainly. They do convey information but it has to be properly interpreted. GDP is a gross measure of how much an economy produces (and therefore how much it consumes) on the aggregate, measured at market prices of all final goods and services bought and sold in the market. Therefore it does not count those activities that are not mediated by the market mechanism. Unpaid household work, for example, does not figure in the GDP accounts.

GDP grows when more gets produced. The increase in production can be due to higher productivity of labor (more production for the same number of labor hours) and/or capital, or more labor and/or capital input, or a combination of both. Therefore, you could have GDP growth without any increase in labor or capital productivity by simply increasing the amount of labor.

If the population of a country were to increase, its GDP will also increase, all else remaining the same. To control for the effect of population increase, it is helpful to consider the per capita GDP growth rate. If the GDP grew at 7 percent but the population itself grew at 2 percent over the same period, then the per capita GDP grew at 5 percent.

Since India’s population grows at around 2 percent per year, India’s per capita GDP grows 2 percentage points lower than the GDP growth rate.

The factors that are involved in economic growth (which is what GDP growth rates measure) are many such as human capital (skilled labor force), physical capital (infrastructure, machines), natural resources (land, water), energy, etc. All of those factors are necessary but none of them is sufficient. Education is a necessary factor because it contributes to economic growth through greater labor productivity.

So now we can answer the question. India may be the “fastest growing” large economy and yet have a poor education system. India’s GDP growth rate in isolation does not imply anything about India’s higher education system. India’s GDP growth rate is partly explained by a growing population, partly due to a greater availability of physical capital (through domestic and foreign investment), and partly due to increase in available technology (which increases the productivity of both labor and capital.)

Indeed it is quite possible for the educational system to be entirely dysfunctional and yet have GDP growth.

{Hat tip: Shail Kumar for suggesting the question.}

Related posts: 

1. Notes on GDP, Money and Wealth. A bit more on what GDP is.
2. Money, Wealth, the Lion and Albert. The distinction between money and wealth. And also the tragic tale of the lion that ate Albert.
3. Money is the root of all evil. More on the distinction between money and wealth. I should note that the adage “money is the root of all evil” should be more accurately quoted as “the love of money is the root of all evil.”