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Subir Gokarn | May 26, 2003
The World Bank's Annual Bank Conference on Development Economics was held in Bangalore last week. This was the first time it was held in a developing country.
Much was made about the appropriateness of Bangalore as the choice of location for this precedent-setting move away from Washington, DC, the traditional venue. The city has obviously entrenched itself on the international radar screen as the wellspring of India's IT capabilities.
But, there is more to it than that. Karnataka has been the star performer among Indian states during the 1990s, significantly accelerating its growth rate in agriculture, industry and services during the decade.
It appears to have been among the most successful in exploiting the opportunities provided by the economic liberalisation of the 1990s. Explaining its performance in terms of received development wisdom is a key test of the wisdom itself.
The theme of the conference was "accelerating development". Four plenaries and four parallel workshop sessions approached this theme from a variety of perspectives, ranging from the abstract macro-level to specific case studies.
Development programmes, the role of community participation in their effectiveness and the methodologies of systematically evaluating them for potential scaling up were debated.
The last day was spent exploring the Karnataka experience, in terms of what various government agencies have done to improve their service delivery as well as the role of civil society organisations in the process.
The proceedings will eventually be published and disseminated; in any case, this is too small a space to adequately review the contents of the programme. However, a couple of themes did provoke me and I would like to explore them in this column and perhaps in the future as well.
A paper by Robin Burgess and Anthony Venables of the London School of Economics, "Towards a Microeconomics of Growth", explored the disparity of regional growth performance. Their conceptual approach is based on the notion of 1st and 2nd advantages, concepts apparently borrowed from geographers.
In mainstream economic terms, the 1st advantage would cover issues like resource availability, market proximity and so on, all of which would influence the decisions of individual entrepreneurs to invest in a region.
The 2nd advantage essentially refers to externalities: factors that are not so much intrinsic to the region, but grow in magnitude and impact as the level of economic activity grows. These factors then become a source of enhanced competitiveness to all the firms in the area.
The basic hypothesis of the paper is that regional as well as sectoral development patterns are the result of a combination of 1st advantages, which are relatively straightforward and well understood and 2nd advantages, which are far more complex and unpredictable.
So, we can understand in hindsight why certain regions or sectors developed in a particular economy and others didn't, but because the very important 2nd advantages are "endogenous" to the process, we don't yet have a very good handle on policy interventions.
The paper presents some rather preliminary evidence about the positive impact of some possible 2nd advantages in the Indian context, but this is still some distance away from the clinch. But, that is another story.
What struck me was that Bangalore is a classic illustration of the virtuous combination of the two advantages. A large scientific establishment, both civilian and defence and public sector technology-oriented firms clearly provided the initial conditions -- the 1st advantage, which have been emphasised in several analyses of cluster effects -- for the IT boom.
However, this line of reasoning suggests that this was not necessarily enough. Institutional developments -- within the industry as well as in terms of the relationship between the industry and the city -- were probably significant in nurturing and sustaining the process. I will return to this point a little later.
David Dollar, of the World Bank, presented an update of results from the cross-country survey of firms that the Bank has been carrying out for some time. India is one of the countries covered by the exercise.
It has yielded quite precise quantifications of the cost disadvantages and the factors that account for them that Indian manufacturers of garments and electronic components suffer in relation to China and other East Asian countries.
But, apart from this comparison, a disadvantage that many would argue, can be wiped out by a large and rapid depreciation of the rupee, there is a deeper question that the survey is apparently not yet in a position to answer.
Despite the average cost disadvantage in relation to competitors from other countries, it is obvious that some Indian companies have done pretty well in the export game. They have somehow offset the disadvantages more effectively than others. How have they done this? Are these coping or offsetting strategies replicable by other firms?
And, in the context of the 1st and 2nd advantage approach, are there processes inherent to specific locations that engender successful offsetting strategies?
The clusters in Tiruppur and Ludhiana come readily to mind as examples, but a more systematic investigation of this phenomenon will lead to some understanding of the nature of these 2nd advantages and the role of policy interventions in reinforcing them.
Returning to the question of 2nd advantages in Bangalore, the presentations by state government officials on the last day showed how central the application of IT was in upgrading public services. Communication with the public, transparency and accountability, monitoring -- all essential processes in service delivery -- were clearly improved with the use of IT. Of course, these were all success stories and we didn't get to hear about failed experiments and abandoned schemes.
Nevertheless, even if a small number of critical programmes are successful in a sustainable way, one could perhaps give some credit to the fact that the country's IT powerhouse is in the same backyard. Replicability by other states is certainly not impossible, but will probably be a lot more difficult.
Presentations by civil society organisations on their development activities in the city and the state brought out very clearly how important the IT success had been in mobilising this force.
Financial resources, leadership, public credibility, access to government and organisational capabilities have all apparently come together to leverage the industry's success into more effective development strategy and programmes. At least we are moving from the realm of wishful thinking to distinct possibility.
But at the end of this, as one insightful comment from the floor pointed out, it appears that economics is gradually taking a back seat in favour of management. Strategy, systems and processes are displacing theory and empirics as the areas of concern.
Perhaps the next event will be labelled the Annual Bank Conference on Development Management. What, and ruin that perfectly beautiful acronym?