Sunday, May 23, 2004
Stephen Roach continues to bet on services
In his latest piece on the doubts being expressed about the Indian and Chinese economies (election results and overheating respectively), Stephen Roach tries to assuage fears and remains optimistic of the prospects of both economies. Inexplicably though, Roach continues to believe that India should forget about manufacturing and concentrate on services.
On that count, I continue to believe that success or failure on the employment front will be determined by India's commitment to its unique services-based model of economic development. Manufacturing requires a heavy emphasis on infrastructure and foreign direct investment — long the missing ingredients in the Indian development equation. Services are different. These businesses sidestep India’s weaknesses and play to one of its greatest strengths — a highly educated work force. To the extent that India is now emerging as a world-class competitor in IT-enabled services, its outlook for job creation can only brighten. But shifting political winds have added a new wrinkle into the equation: The intrinsic strength of services may well be perceived as a source of tension — a narrowly based surge of job creation in the educated elite that leads to a widening of income disparities in the Indian workforce. Singh’s recent emphasis on putting a “human face” on reforms lays out an important marker for the new government in facing up to the distributional implications of reforms.
In my view, it would be very disappointing if the new government were to backtrack on its support to services and shift its focus back to a manufacturing-based development strategy. Manufacturing prowess these days is all about labor-saving technological breakthroughs, whereas knowledge-based services remain the quintessential labor-intensive endeavor. India's services sector has just crossed an important threshold — it now exceeds 50% of the nation's GDP. While that's up about 10 percentage points from 1991 and well in excess of China's 33% portion, it's well below the 65% shares more typical of developed economies. Given India’s potential as a high-quality, low-cost input in the developed world’s vast services-providing platform, I believe there is plenty of upside to India's labor-intensive services sector.
As I had expressed in an earlier post, I dont really understand how Roach arrives at this conclusion. India's service sector employs a minuscule fraction of the labour force (he never seems to go into employment numbers within the service sector), even accounting for multipliers. Even assuming a best-case scenario, I dont see how the sector can provide large-scale employment in a country where the vast majority of the population is under 30. I understand China is way ahead of India in the manufacturing game, but does that mean India cannot cater to its huge domestic market?
On that count, I continue to believe that success or failure on the employment front will be determined by India's commitment to its unique services-based model of economic development. Manufacturing requires a heavy emphasis on infrastructure and foreign direct investment — long the missing ingredients in the Indian development equation. Services are different. These businesses sidestep India’s weaknesses and play to one of its greatest strengths — a highly educated work force. To the extent that India is now emerging as a world-class competitor in IT-enabled services, its outlook for job creation can only brighten. But shifting political winds have added a new wrinkle into the equation: The intrinsic strength of services may well be perceived as a source of tension — a narrowly based surge of job creation in the educated elite that leads to a widening of income disparities in the Indian workforce. Singh’s recent emphasis on putting a “human face” on reforms lays out an important marker for the new government in facing up to the distributional implications of reforms.
In my view, it would be very disappointing if the new government were to backtrack on its support to services and shift its focus back to a manufacturing-based development strategy. Manufacturing prowess these days is all about labor-saving technological breakthroughs, whereas knowledge-based services remain the quintessential labor-intensive endeavor. India's services sector has just crossed an important threshold — it now exceeds 50% of the nation's GDP. While that's up about 10 percentage points from 1991 and well in excess of China's 33% portion, it's well below the 65% shares more typical of developed economies. Given India’s potential as a high-quality, low-cost input in the developed world’s vast services-providing platform, I believe there is plenty of upside to India's labor-intensive services sector.
As I had expressed in an earlier post, I dont really understand how Roach arrives at this conclusion. India's service sector employs a minuscule fraction of the labour force (he never seems to go into employment numbers within the service sector), even accounting for multipliers. Even assuming a best-case scenario, I dont see how the sector can provide large-scale employment in a country where the vast majority of the population is under 30. I understand China is way ahead of India in the manufacturing game, but does that mean India cannot cater to its huge domestic market?
