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Friday, May 09, 2008

Services-led growth in India

Many economists bemoan India's strength in producing services and weaknesses in producing goods. It is argued that the only trajectory of development is one where a country graduates from agriculture to industry to services.

Stephen Broadberry and Bishnupriya Gupta of the University of Warwick have a fascinating piece on voxeu on this, where they point out that India's strengths in services production go back to the late 19th century. Based on an analysis of data over 1870-2000, they say:

Only in services has there been an improvement in comparative India/UK labour productivity, from around 15% in the late nineteenth century to around 30% by the end of the twentieth century. Services have thus played a positive role in Indias productivity performance throughout the period, limiting Indian relative decline before 1870 and leading the process of catching-up from the 1970s.


...Indias service-led development may be a strength rather than a weakness. The emphasis on manufacturing as the key sector for growth and the neglect of services has now largely disappeared in the analysis of economic performance in the developed world, but continues to hold sway in the analysis of developing countries.

If India had some innate advantages in services production to start with, then it was the greatest windfall imaginable for India when, in the 1990s, many services went from being non-tradeable to being tradeable. This then gave a growth acceleration, a shift in resource allocation towards producing these services and hence away from some other sectors, a real appreciation of the exchange rate, etc.

I see the `goods illusion' as only one of the many holy cows that the Indian economic discourse clings to, which have largely disappeared in the economic performance in the developed world, but continue to hold sway in the analysis of developing countries.

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