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Monday, October 20, 2003

A word of caution

This is a slightly off topic post. But I think it is important to consider the peripheral issues effecting economy and to look at India in the context of what is happening elsewhere in the world.

But let me first note that I am thrilled to read Amy Wildman's story on Indian economy that Rueben posted below. A story like this, on the NYT homepage, is a big deal. And frankly, this worries me a little. I too believe that India has an opportunity here that a country rarely gets. But I also think that Vivek Uberoi (who recently joined us in IndiaEconomyWatch) hit the bull's eye when he said on an e-mail to the group:

There is so much breathless commentry on the Indian economy in the western press these days--which is quite nice. However, India remains a desperately poor country and life for a lot of Indians is still nasty brutish and short. We should not loose sight of these people at IEW.

I worry that if we are not careful, the growth may accelerate the endemic corruption of Indian institutions and the increasing fragmentation of our politics that is eating away our society. I have been wondering, what effects the essentially regional nature of the current IT and BPO boom may have, on Indian politics and society.

I was reading Kenichi Ohmae a few weeks back. Ohmae is the prophet of the rise of Regional economies. In his last book, now slightly dated, He talked about, how in Japan, some regions have been bearing a disproportionate part of national developmental burden in and how this has created huge social dischord.

Of the country's (Japan's) 47 prefectures, 44 are net recipients of government subsidies. The other three - Tokyo, Osaka and Aichi (Nagoya) - pay the rest. ….More than 85% of the nation's wealth is created in the regions of Tokyo, Osaka and Fukuoka, Sapporo, and Nagoya. All the others receive more from the central government than they pay in.

.. This arrangement is both reflected in and sustained by the country’s voting patterns. The heart of the LDP's traditional support came from the rural areas, to which is returned a disproportionate share of the centrally provided subsidies, in the form either of direct grants of money or services or for indirect protection like trade barriers against the import of foreign rice or beef.

… If I live in one of Japan's three major cities, this arrangement quickly begins to lose its appeal. I may be as reasonable as the next man, but it is hard to see why I should keep footing this kind of bill.

Yesterday, in his rejoinder in Slate (which is worth reading in its entirety) to David Brook's new column in NYT, Daniel Gross nailed one of the core economic issue underlying the current tumult in USA:

Essentially, the Northeast (for my definition here, I use New England plus New Jersey and New York) subsidizes the federal government to a massive degree. Incomes are far higher in the Northeast—and the equally Democratic West Coast—than they are in other regions. Meanwhile, many other regions—say, the South and the Great Plains—subsist on federal largesse. On a per capita basis, those in the Northeast pay far more taxes and receive far fewer benefits than people in other regions.

On a percentage basis, those with the largest disconnect between the amount they ship to Washington and they amount they receive back are in the Northeast. New Jersey receives only 62 cents back on every dollar shipped to Washington, while Connecticut and New Hampshire receive 65 cents and 66 cents, respectively.

The data flies in the face of received notions about wealth, partisan affiliation, and dependence on the federal government. The five largest recipients of federal largesse in 2002 were all non-Northeast states: New Mexico, North Dakota, Alaska, Mississippi, and West Virginia (four of which went Republican in 2000). The states shortchanged the most were New Jersey, Connecticut, New Hampshire, Nevada, and Massachusetts- four of five of which are in the Northeast, and four of which voted Democratic in 2000. In fact, when you look at the voting behavior of states- based on 2000 per capita income - 11 of the 13 wealthiest states voted for Gore while 15 of the poorest 17 states voted for Bush.

So, skewed development and the resulting social dischord exists in two of the biggest economies in the world. But the relative homogeneity of people in countries like Japan or USA have so far held the ensuing social polarization in check. India has a lot of things. But one thing we dont have is homogeneity.

I don't think anyone would dispute that we are right now looking at the development of three powerful regional economies in India. In the South, there is what I would call the golden triangle of Bangalore, Madras and Hyderabad. New Delhi and the satellite towns of Gurgaon, Noida and Faridabad in the North and the Bombay (or Mumbai, if you prefer that) - Pune corridor in the West are the two other key hubs that together with the Southern cities form the center of gravity of the IT / BPO / biotech boom in India.

But unlike Japan or USA, India also has the problem of an increasingly fragmenting and violent political system. All the Southern states are run by regional parties. The center of gravity of political power resides in the Gangetic valley of Northern India which is largely being bypassed by the technology led economic rejuvination in India. If you consider the fact that the large food and fertilizer subsidies are mostly going to big farmers in Northern India, that the bedrock of caste and religion based politics is in UP and Bihar and that basic distrust that often exists between the Hindi speaking North and the Dravidian states has not gone away, you would probably agree that we are looking at a potentially much bigger social upheaval in India unless we can figure out how to bootstrap the rest of the country.

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