Folk Economic beliefs
The Causes of Growth
The McKinsey Quarterly has an excellent article on the causes of growth (free, easy registration required).
It makes sense that economic growth comes in part from productivity growth. Total productivity is productivity per worker times the number of workers. As we have discussed recently, high taxes and labor policies can reduce labor participation, so even countries like France that have high productivity per worker have lowered productivity because fewer workers are working.
Growth also requires capital investment. But in general, capital has always gone where it can be profitably invested, and fled where it cannot. If the government allows it.
But there is more. Japan has high productivity, high labor participation (unemployment rate of 4.5%), and tons of capital investment. Yet the Japanese economy has been stagnant for a long time, with GDP growth rates of 2% rarely reached in last 15 years.
No, the problem Japan has is one of government regulations reducing competition. The reports says "In Japan, a combination of zoning laws, tax policies, and government subsidies has allowed the smallest, most inefficient retailers to thrive. Today they account for slightly over half of all retailing employment, compared with less than 20 percent in the United States."
No Walmarts, no growth.
Of course, it is hard to cry for the Japanese, but the same kind of anti-competitive regulations such as minimum wages, small-business subsidies, and other business policies also kill the growth potential of poor countries, as India discovered before the beginning of free market reform there in the 1980's.
In the poorest countries, of course, it isn't usually democratic forces that put these growth-killing policies into place, it is powerful and well-connected people in corrupt regimes practicing "crony capitalism" where the government sets up policies to provide monopoly rents to some companies in order to keep competitors at bay.
The piece ends with an excellent though about how to create real growth. You can't fake it, it needs to happen organically, from demand.
"How can countries muster the political will to do all these things? The answer lies in focusing on consumers, not producers. Many people think that production itself creates economic value—an idea that sometimes makes governments protect businesses regardless of their performance. This approach is mistaken. Such people and governments fail to understand the link between production and consumption. Goods have value only if consumers want them. Otherwise sheer production does little to raise standards of living."
Competition for Skills in India
Rediff has an article on the competition for skills in India.
There is now a shortfall of skills for high-tech jobs in India. There is demand for 8,000-10,000 engineers in the embedded software and chip design space, but the current supply is just a third of that. Technology and IT-enabled services industries recruit an average of 400 people every day. But the supply is growing slowly. Overall, India produces only 3,500 IIT engineers each year.
Things will get more interesting as India's software market gorws to $60 billion by 2010, employing more than 2.2 million people (Nasscom estimate). Even lower-tech industries will feel the pinch. Factories will need 73 million workers by 2015 (McKinsey estimate). There may be a shortage of 500,000 professionals overall in India in just four years (Ernst & Young).
With limited supply and higher demand comes higher prices for labor. Hewitt Associates reports average Indian salary increases of 13.9% in 2005, with IT employees seeing raises of 17.9%.