Friday, April 09, 2004
Stephen Roach on India
For a couple of days last week, all that Indian business newspapers and TV channels could talk about was optimist extraordinaire Stephen Roach's first visit to India (after 25 odd visits to China). I saw a couple of interviews with the man and he seemed somewhat impressed with what he had seen. Here is what he wrote at his Morgan Stanley site upon returning to the United States.
Quite simply, I was blown away by what I saw on my first trip to India. It’s a land of great contrasts, to be sure -- strength in human capital and technology coexisting with backward infrastructure and heart-wrenching poverty. But there is no doubt in my mind that the balance has shifted. After decades of stop and go, the critical mass of a new approach to Indian economic development now appears to have been attained. If I’m right, not only would that have enormous implications for the world’s second most populous nation, but it could have profound implications for the Asian and broader global economy.
It’s tempting to make the China-India comparison -- trying to figure out which of these two Asian giants has the better approach to economic development. I see no reason to frame this in such black and white terms. In fact, I am inclined to argue that it’s not China or India but, in fact, China and India. Each of these two nations has a distinctly different recipe for economic development -- recipes that are complements rather than substitutes as they fit into the broad mosaic of globalization. To be sure, China has come first in the sequencing, but this breakthrough has served India well. As the rest of the world has finally come to accept the China miracle, that realization has opened the door for acceptance of the India miracle. As one Indian leader put it to me, “It’s the flying-geese pattern of Asian development.”
But for Indian IT companies, the real breakthroughs come from the development of customized integrated systems solutions. The BPO business is basically the “Trojan Horse” -- driven initially by the cost arbitrage that makes outsourcing extremely attractive as a means to enhance corporate efficiency in high-cost countries. But India’s IT-enabled service companies have been quick to take this opportunity to the next level -- going beyond the functional “silo approach” that has long plagued corporate structures and exploiting the synergies that can be realized through collaborative solutions that span previously segmented functions. And they attack these integrated systems problems with seamless global networks that pass the management and control functions around the world every 24 hours. This revolutionizes the high-cost “cluster model” of the global services company made famous by Harvard’s Michael Porter (see The Competitive Advantage of Nations, Free Press, 1998). Porter argued that since services had to be delivered on site, in person, well-supported subsidiaries of global service firms had to be located in close proximity to major customer bases. India’s IT-enabled services model turns this concept inside out. These are real companies, with powerful new strategies and execution models that go well beyond the arbitrage play.
Surprisingly, Roach claims that manufacturing is not all that important and that India can get ahead riding on the back of services alone. Now, either I dont understand what Roach's definition of services is, or Roach does not know what he is talking about. I cannot see any way in which the services sector in India can generate the sort of employment required, even if one were to attribute generous multiplier effects to the services sector.
But it still believes that manufacturing ultimately holds the key to prosperity. Repeatedly, I heard the argument that manufacturing is critical to resolving India’s long-term unemployment problems. I find this response puzzling. Over the past 50 years, technological change has spurred capital-labor substitution and turned manufacturing into an increasingly labor-saving activity. Services, by contrast, are far more labor intensive, especially in the knowledge-based production activities of the Information Age. For a huge country like India, a services-driven development model seems tailor made both to its greatest strengths (human capital) and its greatest needs (employment and coping with poverty). And the new IT-enabled tradability of services is the icing on the cake. Many moons ago in grad school, I was very impressed by the elegance of India’s manufacturing-based development models. For lots of reasons they never really delivered. India’s new services-based approach is an exciting alternative, but it runs very much against the grain of these powerful legacy effects.
Sure, services are labour intensive, but it consumes labour at the higher end of the skills pyramid. I am not sure the upgradation of India's workforce to that level of skill is an easy task.
What impressed me the most about India is a new sense of focus and determination. Plagued by decades of false starts and government missteps, this Asian giant has now, in the words of one of India’s leading corporate executives, finally absorbed the “fixed costs of democracy.” Reforms began in earnest in the early 1990s and momentum has built steadily in the years since. India still suffers by comparison with China. But unlike China, India has a well developed banking system, vibrant capital markets, and a new generation of indigenous world-class companies. China has an outward-looking development model with the hope that the benefits will spread inward into home markets. India has much more of a home-grown development model that is now gaining global reach. Both approaches have their virtues and shortcomings. And yet the most fascinating thing is that they both may work. I have long been a big fan of China’s remarkable accomplishments. India’s awakening is equally impressive.
Quite simply, I was blown away by what I saw on my first trip to India. It’s a land of great contrasts, to be sure -- strength in human capital and technology coexisting with backward infrastructure and heart-wrenching poverty. But there is no doubt in my mind that the balance has shifted. After decades of stop and go, the critical mass of a new approach to Indian economic development now appears to have been attained. If I’m right, not only would that have enormous implications for the world’s second most populous nation, but it could have profound implications for the Asian and broader global economy.
It’s tempting to make the China-India comparison -- trying to figure out which of these two Asian giants has the better approach to economic development. I see no reason to frame this in such black and white terms. In fact, I am inclined to argue that it’s not China or India but, in fact, China and India. Each of these two nations has a distinctly different recipe for economic development -- recipes that are complements rather than substitutes as they fit into the broad mosaic of globalization. To be sure, China has come first in the sequencing, but this breakthrough has served India well. As the rest of the world has finally come to accept the China miracle, that realization has opened the door for acceptance of the India miracle. As one Indian leader put it to me, “It’s the flying-geese pattern of Asian development.”
But for Indian IT companies, the real breakthroughs come from the development of customized integrated systems solutions. The BPO business is basically the “Trojan Horse” -- driven initially by the cost arbitrage that makes outsourcing extremely attractive as a means to enhance corporate efficiency in high-cost countries. But India’s IT-enabled service companies have been quick to take this opportunity to the next level -- going beyond the functional “silo approach” that has long plagued corporate structures and exploiting the synergies that can be realized through collaborative solutions that span previously segmented functions. And they attack these integrated systems problems with seamless global networks that pass the management and control functions around the world every 24 hours. This revolutionizes the high-cost “cluster model” of the global services company made famous by Harvard’s Michael Porter (see The Competitive Advantage of Nations, Free Press, 1998). Porter argued that since services had to be delivered on site, in person, well-supported subsidiaries of global service firms had to be located in close proximity to major customer bases. India’s IT-enabled services model turns this concept inside out. These are real companies, with powerful new strategies and execution models that go well beyond the arbitrage play.
Surprisingly, Roach claims that manufacturing is not all that important and that India can get ahead riding on the back of services alone. Now, either I dont understand what Roach's definition of services is, or Roach does not know what he is talking about. I cannot see any way in which the services sector in India can generate the sort of employment required, even if one were to attribute generous multiplier effects to the services sector.
But it still believes that manufacturing ultimately holds the key to prosperity. Repeatedly, I heard the argument that manufacturing is critical to resolving India’s long-term unemployment problems. I find this response puzzling. Over the past 50 years, technological change has spurred capital-labor substitution and turned manufacturing into an increasingly labor-saving activity. Services, by contrast, are far more labor intensive, especially in the knowledge-based production activities of the Information Age. For a huge country like India, a services-driven development model seems tailor made both to its greatest strengths (human capital) and its greatest needs (employment and coping with poverty). And the new IT-enabled tradability of services is the icing on the cake. Many moons ago in grad school, I was very impressed by the elegance of India’s manufacturing-based development models. For lots of reasons they never really delivered. India’s new services-based approach is an exciting alternative, but it runs very much against the grain of these powerful legacy effects.
Sure, services are labour intensive, but it consumes labour at the higher end of the skills pyramid. I am not sure the upgradation of India's workforce to that level of skill is an easy task.
What impressed me the most about India is a new sense of focus and determination. Plagued by decades of false starts and government missteps, this Asian giant has now, in the words of one of India’s leading corporate executives, finally absorbed the “fixed costs of democracy.” Reforms began in earnest in the early 1990s and momentum has built steadily in the years since. India still suffers by comparison with China. But unlike China, India has a well developed banking system, vibrant capital markets, and a new generation of indigenous world-class companies. China has an outward-looking development model with the hope that the benefits will spread inward into home markets. India has much more of a home-grown development model that is now gaining global reach. Both approaches have their virtues and shortcomings. And yet the most fascinating thing is that they both may work. I have long been a big fan of China’s remarkable accomplishments. India’s awakening is equally impressive.
