GDP growth slipped to 4% from 9% in just eight fiscal quarters. It has never
been more important, as the country’s economy languishes, to improve
productivity across the public, private, and social sectors.
A Chicago Booth panel discussion on the topic—organized
as part of the celebrations to mark the opening of the University of Chicago Center
in Delhi—gave rise to some solutions.
Steven J. Davis, William H. Abbott Professor of
International Business and Economics at Chicago Booth, discussed a field
experiment conducted by the University of Stanford and the World Bank on 28
large textile plants near Mumbai. Small improvements in basic management
practices made a big difference. By introducing better quality control,
inventory management, human resources management, sales management, and so on,
the researchers saw dramatic results within a year: defects reduced by 50%,
while overall productivity rose by 20%.
These changes seem obvious in the context of
more developed economies. Why, then, do poorly managed firms continue to
operate as they do, and why do they exist at all? There are several reasons: Firms
often don’t have information about global best practices, or do not believe
these practices can make a difference; family-owned firms are resistant to outside
managers; there are restrictions on competition such as trade barriers or entry
barriers for new firms (lack of financing or difficulty in obtaining licenses,
for example); and there are barriers to expansion by highly productive firms
(due to family size, for example).
Marianne Bertrand, Chris P. Dialynas
Distinguished Service Professor of Economics at Chicago Booth has been studying
the workings of the Indian Administrative Service (IAS). She said the solution
to improving the productivity of Indian bureaucrats lies in introducing
accountability and incentives into the system, as well as improving the
selection process to ensure that people who are better motivated for public
service join the IAS.
Bertrand said no single metric—compensation,
selection criteria, internal assessment, and so on—can explain the huge
variation in how effective or honest a civil servant is perceived to be. At the
same time, she said, the government can improve productivity by simply getting
out of sectors where the private sector can deliver more bang for the buck given
the right motivation and proper regulation.
Luis Miranda, MBA ’89, senior advisor, Morgan
Stanley Infrastructure and chairman of the board of advisors at the Centre for
Civil Society, said India's large unorganized sector—where 80% of economic
activity takes place—is a big drag on productivity. He cited studies that show
that in sectors where the private sector has been allowed to compete with the
government—such as education and ports—people and businesses are increasingly
choosing the private sector for its efficiency.
Miranda cited the example of OpASHA, a
public-private partnership led by UChicago to provide treatment to tuberculosis
patients. He said that the program has reduced the cost of treatment to just 6%
of what it costs the government, and has improved the success rate to 89% from
32%. And it has achieved all this just by using technology, community
volunteers, and conveniently located treatment centers so that people don’t
have to miss work to visit the distant government health center.
The key learnings, he said, are that the
government must support economic freedom and remove barriers on
entrepreneurship and innovation. It must encourage competition. There is
evidence, he said, that since FDI was allowed into India in the early 1990s,
productivity has shot by 2.5-3 times. And finally, it must put in place an
ecosystem that supports scale.
The writing is on the wall. The question is:
will India be able to elect a strong government in the national elections in
April and May that has the mandate to take these steps?
Cat: Policy, Business,Sub: Economics,