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Which industries to pick is a challenge for industrial policy designers. The inability to ‘pick winners’ with certainty in a dynamically changing world is the principal argument of liberal economists who oppose the very idea of governments developing industrial policies.
Alarms are being rung warning that rapid development of digital technologies and automation will eliminate the competitive advantages of low labour cost countries. However, industrial change will not be linear: it will be dynamic.
New technologies can change the shapes of manufacturing processes and disrupt historical sources of competitive advantage. Customer preferences also change. Trade barriers can rise. However, when governments everywhere are being pressed to ensure jobs for their own citizens, they have to defend some sectors, as President Trump is, and promote sectors that will create jobs in the future, as President Xi is. For the Indian government, more job creation to prevent a ‘demographic disaster’, is an existential requirement. Picking the right, ‘labour intensive’ employment sectors to promote has become imperative for the Indian government.
Alarms are being rung warning that rapid development of digital technologies and automation will eliminate the competitive advantages of low labour cost countries. However, industrial change will not be linear: it will be dynamic. Labour intensive industries will not disappear; in fact, they may thrive.
Take the case of the shoe industry. Millions of jobs were created in China to supply shoes to Nike, Adidas, and other brands in rich countries. Reports of Adidas’s automated factories with 3-D printers in Germany, and reports that shoe manufacturing is reviving in the US to cater to the US market, are causing concern for the future of shoe manufacturing in India and other developing countries. However, a recent report in the Economist shows how the shoe industry is being reshaped. The advantage of 3-D printing is that products can be custom-made, and locally too. It is not cheap though. ECCO, the Danish company, is introducing 3-D technology in its stores to produce customised insoles for shoes. Customers will have to pay an additional $140. Demand for custom-made products—shoes, clothes, carpets, etc—increases with higher incomes. Lobb, the London shoe store, sells custom-made shoes for $5,500. An Italian company, Design Italian Shoes, who takes customers’ measurements digitally and then farms out the manufacturing to a cluster of small shoe manufacturers in Italy’s ‘shoe valley’ in Le Marche, is able to deliver the custom-made shoes at one-tenth Lobb’s price.
Sectoral policies made by extrapolations from the present into the future to determine what investments, and what numbers of people and with what skills, industries will need, will not work. Nevertheless, governments are compelled to focus economic policies to support sectors of economic activity that are likely to generate the most employment in their countries.
New technologies are enabling the needs of rich countries’ consumers’ to be met by production within their own countries. Who will cater to the increasing demand for shoes in India as its economy grows and incomes rise? What sort of shoes will Indians, with lower income levels, want? And, what manufacturing technologies, and what shapes of enterprises (large-scale factories, or clusters of small enterprises) will be best equipped to meet this growing demand?
When the future shapes of industries are becoming harder to predict, and when boundaries between manufacturing and service sectors have become blurred, too fine a selection cannot be made of which industrial (or service) sectors should be promoted. Sectoral policies made by extrapolations from the present into the future to determine what investments, and what numbers of people and with what skills, industries will need, will not work. Nevertheless, governments are compelled to focus economic policies to support sectors of economic activity that are likely to generate the most employment in their countries.
In a developing country with over a billion people, increasing domestic demand will provide large markets. However, it is a chicken and egg situation. If jobs and incomes do not increase faster, demand cannot increase. Therefore, engaging more Indians to produce for Indians will be the engine for growth of the Indian economy. Policy should focus on those sectors in which there will be increasing domestic demand. It is worth noting that demand from rural India has often boosted the revenues of companies that have focused on it even when overall economic growth has slowed down. While export demand can be a turbo-charger for India’s economic growth, the main engine of growth must be domestic demand.
Production systems, and business models, for catering to local demands must take advantage of new technologies. More importantly, they must also take advantage of the availability of large numbers of people to employ. The down-side of not employing more people would be slower economic growth and could even be a demographic disaster. The up-side is that the large pool of people available can be a source of sustainable competitive advantage for enterprises producing in India, for both domestic demand and exports, provided their production systems are designed innovatively to take advantage of it.
The main engine of growth for India must be clusters of enterprises, spread around the country, supplying to, as well as stimulating the growing domestic demand by creating more jobs. Labour-intensive clusters can compete in export markets too by supplying the demand for customised products with new technologies, as the Italian shoe clusters are, and some Indian clusters too, such as carpet manufacturers in Rajasthan.
Jobs cannot be planted into the economy in neatly planned industrial sectors. Jobs emerge from the growth of competitive ecosystems. Studies of successful industrial development, in Italy, Germany, Taiwan, China, the USA, and other countries too, reveal that clusters of enterprises, many small, who support each other, and compete with each other too, create healthy ecosystems. Cluster management associations can provide a formal interface for small, and informal, enterprises with the formal economy.
A model of industrial growth based on large, capital intensive factories is no longer viable. A strategy of laying out large clusters of enterprises along the coast (and some inland) to cater to export demands, which propelled China’s growth, can only be a supplemental strategy for India’s growth. Technologies are changing. Trade barriers are rising. The main engine of growth for India must be clusters of enterprises, spread around the country, supplying to, as well as stimulating the growing domestic demand by creating more jobs. Labour-intensive clusters can compete in export markets too by supplying the demand for customised products with new technologies, as the Italian shoe clusters are, and some Indian clusters too, such as carpet manufacturers in Rajasthan.
In summary, India’s industrial policy must focus on wide-spread job creation. It should focus on sectors in which there will be growing domestic demand. And it should support the growth of well managed clusters of enterprises. For their part, entrepreneurs should develop innovative production methods and business models to take advantage of a growing market in India, as well as its large pool of potential workers.
(The writer is a former member of the Planning Commission and author of the recently released book “Listening For Well-Being: Conversations with People Not Like Us”)