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Sunday, October 12, 2003

India and the Second Track

Another of Atanu Dey's ideas relates to the skewed development produced by a highly clustered export driven growth in the context of the enormous agricultural sector which caters for over 700 miliion of India's population. Clearly some strategy which takes this reality into account is essential.

Before the Information Age was the Industrial Age. Policy was then focused on ways to make the transition from an agricultural to an industrial economy. Among the various models (such as export-led growth, import-substitution industrialization, and others) there was one that was called 'agricultural demand led industrialization', or ADLI, which was pioneered by Irma Adelman. ADLI recognized that cost-reducing technological change increased agricultural productivity and thus increased rural incomes. Increased rural incomes provided a demand boost for manufactured goods both for consumption as well as for use in agricultural production. The increased demand for domestically manufactured goods raised wages which in turn were spent on the consumption of agricultural output.

On the labor side of the market, as agricultural productivity increased, labor shifted from the agricultural sector to the manufacturing sector. Thus the industrialization of the population was achieved at pace with the labor transition and was based on increased agricultural productivity attained through the use of appropriate technology. The lesson from the ADLI model is directly relevant to the question of ICT production and use in an LDC's economic growth strategy. The ICT sector is very small compared to the rest of the economy for any LDC. While IT exports will only lead to direct gains only for the IT sector, far more gains can be realized through the use of IT in the non-ICT sector and through the production of IT for domestic consumption. The use of IT in the non-IT sector will increase productivity leading to higher incomes and greater demand for consumption goods which will increase employment, and so on. We can call it the 'Growth from IT Adoption', or the GITA model. One institution that I have worked on which operationalizes the GITA model is 'Rural Infrastructure and Serices Commons' or RISC.

Now this argument is very interesting, and curiously enough it is very similar to one being used by Mogan Stanley's Daniel Lian, in connection in particular with the rural consumption dimension of what is increasingly being called Thailand's second track development strategy:

The development challenge for resource-rich Southeast Asia, given the rise of China and its growing dominance in mass manufacturing, is the implementation of a balanced development strategy that lessens its dependence on external demand and mass manufacturing driven by foreign direct investment (FDI) from multinational corporations (MNCs). The key to future economic success and survival for Southeast Asia is better leverage of domestic demand and resources to produce 'inner' economic strength, economic winners and pricing power through the growth of local enterprises that thrive on indigenous resources and skills, rather than positioning their economy as tax havens and cheap labor sites for MNCs. The winning Southeast Asian economies are likely to be niche and nimble, with large parts of its economy residing outside the domain of mass manufacturing, as China seems destined to become the global factory.

The second track of the dual-track strategy that we have consistently been advocating over the past three years has two dimensions (see Twin Dimensions of Mr. Thaksin's Dual Track Mode, May 7, 2003). The first dimension concerns policy initiatives aimed at producing a structural lift in domestic demand. This should alter the mix of external and domestic demand in terms of contribution to growth as well as overall output. The second dimension concerns the creation of a 'local enterprise element' consisting of local enterprise and product development alternatives to mass manufacturing for export.

Local enterprises should not only cater to local demand, but their indigenously created and developed products and services should also be used to open new export markets by leveraging the country's unique skills and resources. Unlike the defunct single development track through mass manufacturing, these local products and services would not conform to supply chains controlled by global industrial MNCs, or be tied to the excessively volatile global capex cycle; instead, sources of external demand for these local products and services would be the discerning tastes of global consumers.

The success of Prime Minister Thaksin Shinawatra's economic program vividly demonstrates the validity and merits of the second track principles............The Thai rural and SME sectors had been vastly underdeveloped. As at end-2000, about 40% of Thai households engaged in farming and other rural activities but contributed just 10% of GDP. In the past 30 years, there has been little government support for vigorous SME development. At the beginning of Mr. Thaksin's economic regime -- early 2001 -- the government administered a small dose of fiscal medicine, for example, the introduction of the village fund and numerous micro credit programs for SMEs. These were not only aimed at stimulating rural demand through private consumption, but chiefly encouraged the formation of rural businesses and the development of SMEs to structurally ignite the underleveraged rural economy and SME sector.
Source: Morgan Stanley Global Economic Forum

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