Monday, January 10, 2005

Does India Need a Shining Mindset?

Here is an interesting thought from the IMF’s director of research: Does convergence require the right mindset?

A mindset is defined as follows:

there are times in the life of nations when they feel confident that they can take on the world, that they are capable of meeting any challenge, achieving any dream. If properly channeled, such a spirit can be an enormous aid to growth. In fact, some sociologists argue that such a spirit, a national "atma vishwas" so to speak, is critical to the kind of explosive growth that we saw in Japan in the 1950s and 1960s, in Korea in the 1970s, and in China today.1 It is the spirit that moved South Korea from having a per capita income on par with India's to the ranks of the OECD in just four decades, the spirit that built a sleek futuristic city in Pudong, Shanghai out of an area that was largely farmland just a decade ago, and the spirit that is currently building the New Delhi Metro to world standards and on time. It is the spirit that asks "why not?" instead of "why".

One reason such a mindset is important is that it creates an intolerance for laziness, for shoddy products, for open corruption, and for the usual excuses—when people have a strong conviction that they can achieve the possibilities of the future, it makes them less tolerant of impediments in their way to it. It also makes generations willing to sacrifice their present, even working themselves to death—a phenomenon that in Japanese has its own special word, "karoshi"—for the opportunities they can see they are creating for their children.
But, does India have the right mindset for development?

On the IMF's trade restrictiveness index, India has a score of 8, which places it amongst the most restrictive countries. India's GDP accounted for 1.6 percent of world GDP in 2003 but its trade accounted for only .94 percent of world trade.2 And it holds the dubious record of instigating the maximum number of anti-dumping cases under the WTO in the period between 1995 and 2003.3 India's capital account is still closed. It still place restrictions on foreign entry and participation in various areas of the economy, even those that have little implication for national defense. And it still is extremely wary of advice that may be associated with a foreign hand.
What retards the formation of the right mindset?
One [factor] is the politician, aided or abetted by the bureaucrat. Not only are foreigners much harder to control but also they do not vote, so they are an appealing lot to discriminate against. But India is not special in this regard—whether it be Nordic politicians resisting the takeover of their banks by other European banks or French politicians creating national champions or US politicians complaining about outsourcing—politicians the world over, with a few notable exceptions find it convenient to rail against openness.

But politicians do not act in a vacuum. They are particularly effective when they cater to strong constituencies. With large corporations becoming more open-minded, sotospeak, could it be the people who are against competition?

And, if India doesn’t yet have the right mindset, what can help her get it?
Two factors have been particularly important, I believe, in helping us break out of this vicious cycle where the lack of competition bred corporate indifference towards the efficient provision of factors like power and finance, which in turn reinforced resistance towards liberalization. First, companies like Infosys, TCS, and Wipro showed that it was possible for Indian firms to compete effectively on the world stage and that the profits from doing so were enormous. Second, creeping liberalization, initiated by crisis but then gaining a momentum of its own, forced competition on the rest. When challenged to improve productivity, Indian firms found that despite the inefficiencies of the system, there were unique sources of Indian comparative advantage, even in manufacturing.


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