Sat, 12 May 2007

India, Productivity, and Capital

I originally wrote this on 06 Jan 2007. On my eighth trip to India in April, I saw a cleaner using a v-shaped push broom which could collapse on itself to become narrower. Hooray, Chatrapati Shivaji International Airport! Good for you! Doesn't mean that the whole country has learned their lesson, but drop by drop a flood is born.

This is my seventh trip to India. Between them all, I've spent at least two months in India, starting in 1999. That doesn't make me an expert on India, but I have noticed a few things which are true regardless of the country.

Indians seem afraid of improvements in productivity. They very much seem to have the idea that there is a fixed amount of work. Improvements in productivity would destroy some of that work, and make the country poorer. Or perhaps more accurately, it would destroy the employment of enough voters that they resist change.

Some Indians see this perfectly. The Times of India is running an India Poised campaign for 2007. They printed that as a full-page ad in the January 2nd issue.

Intellectually, it's easy to see that improvements in productivity don't destroy work. Instead, they create the wealth that allows people to pay for more work. After all, there is always an infinite amount of work -- what is lacking is the wealth to pay for it. Emotionally, this is harder to feel, particularly when you are employed in a field in which productivity improvements destroy your job.

All over Mumbai, I have observed cleaners using these wimpy little brooms. In the USA, they would hardly even count as being a whisk broom, and yet in India, they are used to sweep vast areas. A very small capital investment in a push broom would enable them to clean in much less time. This would allow them to clean more often, or more likely, cause some of the cleaners to lose their jobs.

So where do these improvements in productivity come from? They come from investments. Capitalists spend their money on something to help people do their jobs better, and expect to receive a fraction of the improvement in productivity.

Historically, the risk-free rate of return on capital has been 5% per year. This is the compensation that capitalists demand in return for spending their money on you, not them. Naturally, some capitalists are willing to take greater risks and get a much higher return. The successful ones get lauded, while the losers are forgotten. This has the unpleasant effect of making capitalists appear to earn money from doing nothing. They're not. They're suspending their desire to spend their money (which is worth compensating them), and they're taking a chance on not getting their money back (also worth compensating them.)

India tried going without capital during their Soviet Socialist fanboy days. They're not likely to make that mistake again. Fifty years of development (more than two generations) of wealth building lost. And since wealth is correlated with longer lifespan, this has a very human face on it.

Posted [11:16] [Filed in: economics] [permalink] [Google for the title] [digg this]