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TECH TALK: As India Develops: A Tutorial on Development

February 26th, 2004 · No Comments

The India of today is still largely agriculture-driven, in that a majority of its people are dependent on agriculture. How can India develop? We need to understand the process of development, and in the case of India, also rural India and poverty. These are complex topics the stuff that economists thrive on. But an understanding of the basics of development and the realities of India are important if we are going to understand the opportunities that will be created as India develops, and the role we can play in Indias development.

I present here a brief tutorial on development. Our guide is Atanu Dey. Besides being the driver for Deeshaa (in which I am also a participant), Atanu has a background in technology and development economics. More importantly, his latticework of mental models makes understanding of even the most complex topics easy. Atanu and I found each other via the Internet, through Reuben. Over the past six months, Atanu has been in India working to put together a venture to help transform rural India.

I have sourced Atanus writings from his weblog on Development.

Atanu takes us through the process of development: 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.

Irma Adelmans views on development are elaborated in a paper entitled Development History and its Implications for Development Theory: An Editorial, co-authored with Cynthia Taft Morris.

Atanu elaborates on the link between agriculture and development in the Indian context:

What does “moving away from an agricultural economy” mean? If by ‘agricultural economy’ one means an economy that is mainly agricultural, then clearly India’s being an agricultural economy is problematic. The reason is that India is a very large country population wise, compared to a country such as New Zealand. NZ can be an agricultural country and yet be developed because its production and consequent exports are sufficient to earn it a decent national income. India cannot be a developed nation and continue to be agricultural because it can never earn enough from agricultural exports to make a decent living. To illustrate this point, let’s do some arithmetic.

Let us assume that for a country to be developed, its per capita income must be $10,000 per year. Currently, India’s per capita annual income is about 5% of that, or about a 20th of the income required to be a developed nation. Our agricultural production accounts for about a quarter of our GDP. So for agriculture alone to raise India’s GDP to that of a developed country level, Indian agricultural production will have to increase 80 fold at least. Now of this 80 fold increase, we can only consume perhaps twice as much food as we currently produce and consume. So the rest of the humongous output will have to be exported. If one tries to export even a 10th of that amount, the world prices will crash close enough to zero that it will not be worth even picking the produce from the fields.

This is not the case with NZ because a couple of million people have to export only so much to get a decent income. Their exports do not affect their terms of trade so adversely that they become impoverished. A 1000 million people who wish to depend solely on their agricultural incomes to become developed cannot ever hope to do so because there is a limit to how much food humans can consume.

For India to develop, there is no way other than moving away from agriculture. By that I don’t mean that we give up agriculture or reduce our production. I only mean that instead of 66 percent of our labor force being in agriculture, we have to steadily reduce that to something like 10 or 20 percent at most in the medium term and to single digit percentages in the long term. When labor does make that transition, then the released labor has to be absorbed in manufacturing and services sectors. This is a natural progression, come to think of it.

Natural because first we need food. Then we need non-food stuff such as clothes and shelter and vehicles and roads and books and computers and shoes and ships and sealing wax etc. All that stuff has to be manufactured. Once we have food and manufactured stuff, we need services such as education and dentistry and dancing and musicals and movies and psychiatry and what nots. This entire edifice is built upon the agricultural sector because without it producing food, no manufacturing nor services would occur. Of course, if we got super good in manufacturing, we could export that and buy food. Or if we got super good in services (BPO or what have you), we could export that and buy food and manufactures. The trouble is that India has a very huge population. And therefore if we ever specialize (that is do only one thing), then we would be forced to produce in such great quantities to export the stuff that the world price of that (food, manufactures, services) will crash and we will not be able to survive.

The bottom line is this: A large economy has to be largely self-sufficient. It has to produce food, manufactures, and services domestically and it has to consume most of what it produces domestically as well. Only small economies can afford to specialize and survive through trade.

Tomorrow: A Tutorial on Development (continued)

TECH TALK As India Develops+T

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