India and the two-speed economy

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In India, unskilled and low-skilled labour is cheap. As expected, this leads to substitution. For example, if you get a job which supplies a car as part of your package, then it may be easier to just hire a driver to look after the car (about $130 per month in Mumbai at current rates) than to find the time to learn to drive.
This also leads to some interesting cultural effects. For example, the service in the shops is unbelievably good. My wife counted 15 people serving in one small shop the other day – with two customers. For an Australian, used to having to pack a lunch to find a shop assistant, the service can be a bit disconcerting.

I really am only browsing. No, please don’t unpack that shirt just so I can see it better (then pass it on to someone else to repack). I really don’t want to cause a fuss.

On the other hand, labour-intensive workmanship often seems poor by Australian standards (e.g. the interior finish on newly constructed dwellings).

Again I suspect this is driven by the low-pay for semi-skilled labour.

In Australia, once you get a trades-person on site, it is better just to pay the bit more and get a finished job that will last a long time. In India, it is expected that you will get workers back every year or so to fix up the problems or redo the job.

Low paid service jobs are the ‘other side’ of the Indian growth miracle. The side the West sees is the high-skilled exportable service jobs. This is discussed in the Economist.

The Economist quotes from the World Bank noting:

South Asia resembles the growth patterns of Ireland and Norway, rather than that of China and Malaysia.

Given the current state of the Irish economy, I hope the author from the World Bank is wrong. But there may be parallels to the ‘two-speed economy’ issues facing Australia.

India has a large, well-educated, English-speaking middle class. The various ‘guesses’ put the Indian middle class at between 50 to 150 million people. So I will settle on 100m as a round-guesstimate.

Technological advance in telecommunications means that this 100 million or so Indians can now sell services in IT, finance, call-centres, design, and so on to rich Western countries. Competition keeps the wages in these high skill areas low by international standards, although high by Indian standards. These service exports underpin India’s growth.

However, the risk in ‘service led growth’ is the creation of a two-speed economy. The educated few (in a country of 1b people, 100 m is ‘a few’) accelerate ahead but the majority of Indians appear to rely on trickle down effects. Unlike manufacturing, services industries don’t pull in the unskilled and semi-skilled labour and bid up these workers’ wages. Rather, low-skilled workers rely on demand by the newly rich group of Indians to pull up their standard of living.

This happens to a degree. For example, the market for household labour in Mumbai is tight – but as rural dwellers flood into Mumbai, this temporary shortage will probably lead to only a small long-term increase in wages. And the living standards of the low-skilled workers in Mumbai, where two-bedroom apartments sell for upwards of $500,000 (Australian Dollars, not Indian Rupee), are appalling by Western standards.

It is far from clear that India’s service led growth will be able to translate from a two-speed to a one-speed, rapidly growing country, without more manufacturing exports. But the outlook for manufacturing is rather gloomy. A mix of regulation and bureaucracy means that the international companies whose investment could underpin manufacturing growth tend to put India in the ‘too hard’ basket.

So, I guess I end up with the same conclusion as the piece in the Economist. You will notice that neither the magazine nor I offer an answer.

3 Responses to "India and the two-speed economy"
  1. I have an answer for why the following might be the case:
    “On the other hand, labour-intensive workmanship often seems poor by Australian standards (e.g. the interior finish on newly constructed dwellings).”
    This is because while “painting” for example might seem to be a labor intensive job, australian firms use advanced machinery in order to get the job done. (it is quite common for most paint-job in India to still use nothing but a brush, paint, and some rollers.)
    The difference in the quality of tools that the two sets of workers use is stark. Why don’t the firms in India use similar tools? They are relatively expensive to procure because they are not locally produced (why not? something to do with “lack of know how”?). This difference is driven by technology and not by labor costs or labor “sophistication”.
     

  2. India’s seemingly “two-speed” economy is actually an example of an economy where government has totally failed in ensuring school education of good quality to the millions of children of India.

    As former senior civil servant (Secretary in a state government education department) I know how badly the “government” school system works.  Politicians are busy making money from the system by charging bribes for transfers and postings.  Many teachers get paid even if they don’t attend school.

    The point being that the government spent a lot of money on higher education (to give free education to the children of senior bureaucrats and politicians) and virtually nothing on school education. The result is this huge disconnect between the two “categories” of Indians. 

    I don’t think therefore that there is any deliberate intent to have a services driven economy in India. It is just the natural consequence of India’s bad policies.

    Some solutions are outlined in my book, Breaking Free of Nehru (http://bfn.sabhlokcity.com/) particularly the last chapter.

    And yet, the good news is that India is today basically the world’s greatest-ever experiment in the free market. That is dramatically changing things as even the poor pay for their their children to attend private schools (e.g see my article at: http://sabhlokcity.com/2009/07/educating-our-children-a-free-market-in-schools/ and also http://sabhlokcity.com/2010/08/india-the-worlds-free-market-laboratory)

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