India's Economic Growth as a "Virtuous Cycle"

India readying plan for China-like grip on US

India and knowledge economy

From The Statesman
ND Batra

Recently, Indian Prime Minister Manmohan Singh announced the establishment of a National Knowledge Commission, “on matters relating to institutions of knowledge production, knowledge use and knowledge dissemination”. Which is recognition of the fact that India like the USA and other developed countries is moving toward an information technology and knowledge-based economy.

According to the World Development Report 1999-2000, most advanced economies today are “truly knowledge-based”, in which “the balance between knowledge and resources has shifted so far towards the former that knowledge has become perhaps the most important factor determining the standard of living — more than land, tools and labour”. Today’s technologically advanced economy is a triangulation of knowledge, labour and capital. But the driving force is knowledge produced by information technology, innovations which make labour and capital more efficient, the kind of knowledge that is being generated in India’s technology parks in places like Bangalore, Hyderabad, Kolkata, Mumbai, Pune, Gurgaon and so on.

A handful of technology-based knowledge producing cities could lift the whole country through surging ripple effects. Technology-based knowledge, unlike capital and labour, is inexhaustible and is “non-rivalrous”, as economists say. Sharing knowledge does not diminish it, though patent and copyright protections may be essential. But there is a caveat. In a thought-provoking essays, “Beyond Information Revolution”, published in The Atlantic Monthly a few years ago, Peter Drucker said “bribing knowledge workers”, who are leading the Information Revolution, with stock options and other incentives may in the long run prove nonproductive and even disastrous in the 21st century. The dotcom bubble bust gave us much to think about.

Drucker talked about Victorian England, where some of the most important technologies of the Industrial Revolution were developed. Because of the British class system which valued a “gentleman” more than engineers, traders and entrepreneurs, the industrial leadership passed on to the USA and Germany in the 1850s. England raised Cecil Rhodes, Robert Clive, East India Company (a trading rather than a manufacturing venture) and commercial banks but no venture capitalist, like JP Morgan in the USA, a person “who has the means and mentality to finance the unexpected and unproven”. Drucker is right about venture capitalists who are mostly responsible for the information technology growth in the USA, though we should not forget the role of the federal government because initially The National Science Foundation and the Pentagon financed the Internet’s development. No less important than the venture capitalist, it is the idea of the Internet — open standards and communal sharing of software — which has bred the Information Revolution.

Drucker said that at the heart of the Information Revolution is not the computer, which at best is a tool to routinise information processes; nor is it software, which is nothing but “the reorganisation of traditional work, based on centuries of experience, through the application of knowledge and especially of systematic, logical analysis”. It is rather the creation of knowledge, which is fuelling the next wave of the Information Revolution. Paul M Kennedy of Yale speculated in his book The Rise and Fall of the Great Economic Powers (1989) that since the USA had become a global robocop and was spreading its economic resources too thinly, it too would meet the fate of the earlier imperial powers, which had declined by overextending themselves. But look what has actually happened. Instead of economic and political decline, the USA is going through a healthy economic growth period, in spite of the 9/11 terrorist attacks, the 2000 dotcom bust, outsourcing, and recent corporate scandals. The unemployment rate is 5.1 per cent, which is the envy of the world, thanks to technology-based knowledge and venture capitalism. The future economic growth, according to Drucker, would come not so much from the booming stock market and Internet industry; but from those industries where the knowledge worker would be as important as the financier or the capitalist, for example, biotechnology where the gestation period is long and rewards for workers cannot be stock-market driven.

He suggested that since “performance in these new knowledge industries will come to depend upon running the institution so as to attract, hold, and motivate knowledge workers”, we would have to do something else, something symbolic, for example, giving knowledge workers the status of “fellow executives and partners”. In the knowledge factories of the 21st century, there will be hired workers. You may call them principals and partners and give them flexible work hours or freedom to work-wherever-you-go with the wireless laptops. But there would still be the need for command and control and visions of venture capitalists.

While the mandate of the Knowledge Commission is to sharpen India’s “knowledge edge”, and “promote excellence in the education system to meet the knowledge challenges of the 21st Century”, the greater need is to create a system where entrepreneurs and venture capitalists grow and accept the challenge of “the unexpected and unproven”.

The Knowledge Commission should study how the marketplace, apart from the universities and the IITs, could be harnessed to create knowledge that generates innovations that can raise India’s growth permanently in a kind of what economists such as Stanford’s Paul Romer and others call as “a virtuous cycle”.