It turns out that last week’s hot spell came with some
additional travails: blackouts. As residents of New Delhi activated their air
conditioners, the peak load was too much for the system, and rolling power cuts
were the solution to prevent a major crash like the one in 2012 that left hundreds
of millions in the dark. In reality, power generation capacity has grown
significantly over the last two years, to a point where the current
infrastructure, although ramshackle in places, could provide power. However, because the price of power is kept
artificially low by law, cash-strapped power companies can’t keep pace with
demand when the price of coal rises; the net effect is that the generators run
at about 70 percent of total capacity.
The inability for India to run its generators as full tilt
is emblematic of one of the most critical issues in international development:
the friction between infrastructure and policy. Policy without infrastructure
is worth less than the letterhead on which it is printed. But infrastructure
without the correct policy is a recipe for dysfunction. Development economics
is focused on the provision of capital to expand the frontier of a given’s
country’s output. More sophisticated models include the harder-to-quantify productivity
of human capital and effects of technology, but ultimately remain deterministic
in their projections of economic expansion: greater amounts of capital,
physical, human, or technological, lead to greater economic production. While
economists will be the first to admit that any model is a gross simplification
of reality, when simplistic models drive policy recommendations, the outcome is
ambiguous.
Several years ago, the BRIC countries (Brazil, Russia,
India, and China) captured the attention of the developed world as the next
four big countries whose economic growth, if sustained, promised to add
enormous amounts of production to the global economy and pull hundreds of
millions of people out of poverty. While wildly diverse in the makeup of their
respective economies, these four countries did have something important in
common: each of these countries had all limited the ability of multinational
corporations to own companies operating inside their borders. In the late
1980’s and 1990’s, the IMF and World Bank pushed developing countries to open
their economies by lowering trade barriers. While the benefits of open trade
had their basis in Western economic theory, the recommendation was at some
level an attempt to ideologically bind these countries to the West and prevent
them from falling under the influence of the Soviet Union and global Communism.
After the fall of the Soviet Union, these policies were vindicated; the open
market had prevailed against central planning.
Unfortunately, many people in developing countries,
especially in Latin America, didn’t benefit from trade liberalization very much
at all. Farmers in developed countries were able to exempt agricultural goods
from the lowering of trade barriers, so developing countries were unable to
export their agricultural goods into the EU, America, or Japan, the worlds
biggest consumer markers. Meanwhile, many countries found their own nascent
industries eviscerated by cheap imports from rich economies.
Some countries resisted the call to liberalize their
economies. Brazil, after being bruised by the IMF’s previous recommendation of
development, import substitution industrialization (ISI), decided to protect their
local industries, however inefficient. Russia and communist China also kept
capital controls in place to protect national industries, many of which were
state owned enterprises (SOEs) at that time. As the brand new country of India
tried to find it’s international relations legs after World War II, it stuck to
a policy of remaining neutral between the Washington consensus and the Soviets.
In 1991, India started to undergo some major economic
reforms, including the modernization of its stock markets and banking
liberalization. Many of these reforms were spearheaded by then-minister of
finance, Manmohan Singh, who would later become prime minister of India from
2004 to 2014. These reforms created the enabling environment that unlocked much
of India’s potential and earned its place as the I in BRIC.
Much has changed since the emerging markets craze of the
early 2000’s (a.k.a. the aughties). International interest in Russia has soured
after Vladmir Putin’s Kremlin appropriated the Yukos oil fortune of MikhailKhodorkovsky and waxed belligerent in the Caucasus, Georgia, and most recently
in Ukraine. China’s economy is on the way to becoming the world’s largest, but
acute environmental degradation, and an aging workforce represent structural
risks to its continued growth. While the international community has blessed
dynamic Brazil with both the FIFA World Cup in 2014 and the Olympics in 2016,
the country remains deeply unequal, as recent protests for education,
healthcare, and affordable transportation attest.
What can be said of India? Growth has slowed, which is
especially worrying because double-digit growth is the minimum needed to
provide jobs for what will soon be the world’s largest workforce. Failure to
invest in infrastructure on a level many times larger than has been done to
date will cause India’s largest and most dynamic cities to stumble the weight
of millions of new inhabitants. This is true for drinking water, sewerage,
solid waste management, storm water management, power and transportation, both
private and mass. Hundreds of millions still lack access to basic services. As
large as these issues loom, the Indian government is coming to life under the
leadership of the newly elected prime minister, Nanendra Modi. Every Indian
person I have talked to is excited about the promise of progress Mr. Modi has
made to the country. As the former governor of Gujarat for 15 years, Mr. Modi
shepherded an incredible amount of domestic and international investment
through shrewd, business-friendly policy. Now he seeks to do the same across
India. But where to start? And how to pay for it?
Enter Japan. When anti-Japanese protesters in China set fire
to Japanese factories, Japanese companies started to look for another place to
locate production facilities. After high-level discussions between India and
Japan, in 2007, the Japanese International Cooperation Agency (JICA) announced
that it would invest in the construction of a Dedicated Freight Corridor from
Delhi to Mumbai, 922 miles. In order to get permission to build the six-lane
highway/freight rail track, each of the states through which the DFC would pass
would be eligible for some massive development projects. Like, brand-new,
million person cities of industry. Basically, the Japanese government is building
the key infrastructure to reduce transportation costs in India, thereby
enticing Japanese manufacturers to invest. Combined with highly skilled, low
cost labor, the Delhi-Mumbai Industrial Corridor (DMIC) will be great for
Japanese manufacturers.
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| (c) CarNama |
But will it be great for India? The infrastructure will be
in place, but infrastructure without policy is a recipe for dysfunction. In
order to open the gates for investment as wide as possible, Japanese (and
other) firms in most sectors are allowed to wholly operate as foreign
owned-entities, which means profits from operations will wholly flow to their
Japanese owners. Because six states are directly competing for investment by
footloose industrial companies, each has an incentive to offer the most
concessionary terms possible. Will this cause a race to the bottom, where the
only benefits for Indians are the wages paid to the several thousand factory
workers? (To be fair, these will be pretty great jobs for Indians and we are
talking job creation in the low six figures.) While India is poised to become
Japan’s industrial partner, key questions remain about how the benefits of this
relationship will be distributed.
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