'A Productivity Conundrum', 12 April, 2004.

Surveying the economy some years ago Robert Solow - the doyen of America's economists - had remarked that one could see the computer everywhere except in the productivity statistics. His comment must be seen in the context of the then widespread belief that computers are productivity enhancing or increase the productivity of labour. It was made sometime before 1996 since which date there is evidence of an higher rate of growth of productivity in the US economy. Recall that 1996 is significant as the date of the commercialisation of the Internet. Of course, the precise mechanism by which the internet increases the growth of productivity has not been spelt out as yet even as the view may find many enthusiasts.   Some similar sort of puzzle as the one Solow was alluding to appears to hold with respect to the policy shocks addressed to Indian industry. The more discerning, and less partisan, among our economists have for some time now been pointing out that the economic reforms initiated in the 1980s have not had the promised consequence of raising the rate of growth of productivity in India. More recently, while presenting the findings of an important research project, the economist Deb Kusum Das has summarised the situation as follows: estimates of industrial productivity growth in India are invariant across trade policy-regimes. I might mention that his results extend also to the industrial policy-regime as this too has varied in India over the last two and a half decades. However, as so much of faith is reposed in the efficiency-enhancing role of international trade, Das's particular characterisation is useful as it leads us to focus on the role of trade in the economy.  There can be little doubt in theory that international trade may have a significant impact on the performance of domestic industry. We can think of two routes. First the increased potential competition emerging out of trade liberalisation may itself spur managers to raise domestic productivity levels to the international one out of a fear of being competed out. Secondly, cheaper imported industrial inputs would show up as higher net output in domestic prices. But note that both these are what economists refer to as 'level effects' and essentially one-shot ones. They do not persist, and cannot therefore influence the rate of growth of productivity in the long run. Even apart from trade per se, mere openness of an economy is said to lead to technological infusion via international benchmarking. This is not implausible, and while this effect is not trade dependent, trade may well serve as a transmission belt in this exchange. Historically there are several examples of this, from the spread of European steel-making technology to the United States as late as the second half of the twentieth century to the adoption of Japanese rice cultivation practices in Indian agriculture. Undoubtedly, openness allows you to cotton on to technological progress elsewhere in the world sooner.  So, if there are these potential productivity consequences of trade why do we find them not taking root in India since 1991 when the trade regime saw nothing short of a radical shake-up? This is a question of some interest to economists. Indeed it poses a challenge. I believe that some advance is possible by comprehending the history of other economies. In trying to relate the somewhat dismal productivity statistics associated with the coming of commercial age of internet, the American economist Robert Gordon posed the interesting question of whether the Net measures up to the great scientific inventions of the past. The criterion by which the 'measurement' was to be judged was the contribution of each of these to productivity growth. Gordon identified five clusters of invention since the Industrial Revolution that have been decisive in fuelling human progress, more or less equally. These range from the internal combustion engine - perhaps everybody's favourite - to indoor plumbing. Indoor plumbing symbolises the entire complex of built-up infrastructure that constitute the material conditions of life. While the life-enhancing properties of indoor plumbing cannot be exaggerated in the colder climates of the upper Northern hemisphere its contribution to human well-being in our own backyard cannot be much less. To indoor plumbing may be added all the other civic amenities ranging from garbage disposal to pedestrian footpaths in our cities. The largely macroeconomic manouvring that has characterised the Indian economic reforms over the past two decades is not equipped to deal with some of the fundamental deprivations that a large section of India's population must deal with daily. Healthy, educated and sheltered workers are central to a productive economy. The productivity statistics from a by-now more globalised India may well be signalling just this. The drivers of productivity growth may be located as much in society as within the firm. In the discussions of the economy this has mostly been overlooked.