TECH TALK: As India Develops: A Tutorial on Development (Part 2)

Atanu writes that credit constraint is the most important constraint that keeps an economy from developing:

Economics concerns itself with one fundamental problem, that of allocating scarce resources efficiently and optimally. The most succinct definition of the economic problem is therefore a constrained maximization problem. Constraints are all over the place. Physical resources are limited. It is interesting to ask if there is one single physical resource which if not constrained would release all other constraints. There are some basic limited resources such as land, labor, energy, water, etc. Of these, energy is that resource which if it were unconstrained, all the other basic resources constraints will be released.

If you had sufficient energy, you could transform whatever you had into whatever you wanted and recycle old stuff into new stuff. For instance, water. Using energy, clean the water; use the water; and then clean and reuse the water. You can use energy to desalinate sea water (lots of that around) and grow food hydroponically (don’t need too much land). You need basic minerals and metals? Use energy to get it by the millions of tons from the sea. Bottom line: if you had unlimited energy, you don’t have any real scarcity.

Consider the problem of economic development. There are constraints that bind an economy and keep it from developing. I asked myself if there is one fundamental constraint that if released, will free an underdeveloped economy. The answer I arrive at is yes, it is the credit constraint.

Atanu suggests that to get out of the low-level equilibrium trap of high population growth and low educational attainment, India needs to provide access to credit for its poor people, along with female empowerment, universal literacy at the minimum, and reduced population growth rates. He elaborates on the credit constraint issue: The single most important and binding constraint in this situation is the credit constraint. Given access to credit, a poor household would be able to invest in factors that systematically reduce the need for having a large number of children and also educate the children that they have adequately. If a household could pay for health care, for instance, childhood mortality rates would be low and hence the need to over-insure against childhood death would be mitigated. Having access to credit would also allow families to invest in education and the returns on education could be higher than the cost of education. Higher educational attainment would imply higher household incomes and thus lower incentives to have more children in the next generation. Higher household incomes would on the aggregate translate to greater availability of social security and thus a lower need for children for old-age insurance.

Atanu writes that we cannot ignore the rural populace: India is a two-sector economy: the urban educated sector and the rural uneducated sector. The latter forms the base of the huge pyramid and toils away at a subsistence existence. The urban sector is seeing a boom what with BPO and ITES and all sorts of stuff. Policy makers, politicians, journalists, management gurus, TV reporters, and everyone and his brother are totally wrapped up in this incredible phenomenon. India, they all scream, has arrived. Having convinced themselves of that, they focus entirely on that part of the urban sector that is involved in the boom. This leads to a shocking neglect of the larger rural sector. Then when the boom runs out of steam, the country is worse off than what it would have been without the boom at all.

On the need for education, Atanu writes: The urbanization of India is not taking place because the rural population does not have access to education. Thus when forced to move, they migrate to urban India to be employed at menial jobs and live in mega slums. This has got to change if India is to develop. No amount of BPO and ITES is going to cut it: the only hope is to educate the rural population and do so efficiently and with no loss of time. IT has the potential to do just that: bring education to the hundreds of millions in rural India.

Next Week: As India Develops (continued)

TECH TALK As India Develops+T

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.