Economic Growth in India and Bangalore
An Analysis of Structural Change
7/30/2010
Economic History Master Thesis
Caroline Louie
ABSTRACT
The goal of this paper is to investigate the changing nature of India’s and Bangalore’s economy.
This study will assess India’s change in the allotment of resources between different sectors within
the state and country. To investigate the shifts, this paper will disaggregate the economy into three
broad sectors, primary secondary and tertiary. It is expected that the much of the success of India
at present is a result of labour moving from low value added sectors into areas of high value added.
To determine whether this is in fact the case, a shift share analysis of India will be conducted to
determine the underlying reasons for the changing economy. From these results, inferences about
Bangalore’s economy will be made. The analysis will be conducted through the lens of the Schön
Cycle. The results will shed light on policy implications, as and will add to the discussion of
convergence and divergence.
Contents
I.
Introduction .......................................................................................................................................... 3
I.I
Aim and Justification ......................................................................................................................... 3
I.II
Contribution .................................................................................................................................. 5
I.III
Scope And Limitation .................................................................................................................... 6
I.IV
Outline........................................................................................................................................... 6
II.
Theoretical Background ........................................................................................................................ 8
II. I
Development of Economic Growth and Innovation Theories ...................................................... 8
II.II
Structural Change........................................................................................................................ 11
III.
Historical Background ..................................................................................................................... 14
III.I
The Development of the Indian Economy and the Growth of IT ................................................ 14
III.II
THe Growth and DeveLopment of Bangalore’s Economy .......................................................... 16
III.III
The Changing Economy: Comparing India To Bangalore ............................................................ 18
IV.
Method ........................................................................................................................................... 26
IV.I
Shift Share Analysis ..................................................................................................................... 26
IV.II
A note on the Data ...................................................................................................................... 29
V.
Results ................................................................................................................................................. 30
V.I
Structural Change........................................................................................................................ 30
V.II
Total Factor Productivity ............................................................................................................. 35
V.III
Investments................................................................................................................................. 36
VI.
Discussion........................................................................................................................................ 39
VI.I
The Schön Cycle .......................................................................................................................... 39
VI.II
The Inferences for Bangalore ...................................................................................................... 40
VI.III
Convergence or Divergence ........................................................................................................ 41
VI.IV
Policy Implications ...................................................................................................................... 43
VI.V
Future Studies ............................................................................................................................. 46
VII.
Conclusion ....................................................................................................................................... 47
Bibliography ................................................................................................................................................ 48
1
Table of Equations
Equation 1: Aggregate Production Function Model ......................................................................................................9
Equation 2: Labour Productivity ..................................................................................................................................26
Equation 3: Counterfactual Production if Employment is Kept Constant ...................................................................27
Equation 4: Counterfactual Labour Productivity if Employment is Kept Constant ......................................................27
Equation 5: Counterfactual Production if Structure is Kept Constant .........................................................................27
Equation 6: Counterfactual Labour Productivity if Structure is Kept Constant ...........................................................28
Equation 7: Counterfactual Labour productivity .........................................................................................................28
Equation 8: Strucutal Change ......................................................................................................................................28
Equation 9: Percentage of Structural Change..............................................................................................................28
Equation 10: Total factor productivity .........................................................................................................................35
Table of Figures
Figure 1: GDP Growth RATE (%) With 5 Year Moving Average Between 1950-2008 ..................................................14
Figure 2: Labour Productivity in India Between 1960-2004 ........................................................................................19
Figure 3: India Value Added Between 1950-2005. At Constant 1993-1994 Prices. 9 Sectors .....................................20
Figure 4: Indian Value Added Between 1950-2005, At Constant 1993-1994 Prices. 3 Sectors ...................................21
Figure 5: Percentage Contribution of Workforce. India 1970-2004. ...........................................................................22
Figure 6: Sector Share of GDP Bangalore vs. India (%) ................................................................................................24
Figure 7: Structural Change of Indian Economy Between 1970-2002 Using 1970 as a Base Year ..............................31
Figure 8: Annual Structual Change of the Indian Economy Between 1970-2002 ........................................................32
Figure 9: The Structural Change of the Indian Ecomony with and without the Tertiary Sector 1970-2002 ...............33
Figure 10: The Structural Change in the Indian Economy Due to the TERTIARY SECTOR: 1970-2001........................34
Figure 11: Capital-Output Ratio in the Indian Economy 1950-2007 at Fixed 1999 in INR prices. Index 1990=1.........37
Figure 12: Indian GDP per Capita in Reation to World GDP per Captia 1960-2008. Constant 2000 USD PRICES........42
Table of Tables
Table 1: Annual Growth Rates, India Vs. Bangalore ....................................................................................................18
Table 2: Sector share of GDP Bangalore Vs. India (%) .................................................................................................24
Table 3: Structural Change With and Without Tertiary Sector ....................................................................................34
Table 4: Total Factor Productivity in India- Aggregated and Sectoral Contributions ..................................................36
Table 5: Investment in Bangalore (Rs. Billion) .............................................................................................................38
Table 6: Share of Investment in Bangalore (%)............................................................................................................38
2
I.
I.I
INTRODUCTION
AIM AND JUSTIFICATION
The prodigious rate of industrialization in Asia is a prominent issue in many areas of
academia and policy. The effects of rapid growth are felt among many levels of analysis- intraregionally, nationally and internationally- and are seen as a consequence of globalization. The
phenomenon of ‘Globalization’ has increased interaction and connectedness internationally;
however, it has also led to uneven growth patterns, stratifying the world into developed and
developing nations. These complex attributes have caused two divergent views on globalization to
surface. One school of thought emphasizes that the process of globalization integrates the world by
creating a synchronized economy, while the other views this process as a mechanism for
exploitation of resources, causing inequities in socio-economic status and cultural norms (Kalra
2007).
With such contrasting interpretations of the costs and benefits of globalization, it is not
surprising that this debate influences national as well as regional government policies.
The
integration of the Indian economy with the global economy has manifested several spatial changes.
These changes include; ‘the increasing specialization of urban regions, growing urban
interdependencies, new patterns in the spread of technologies, changes in the product-mix of
regions and changes in the sector mix of the economy’ (Kalra, 2007, p. 2).
Within the Western world, IT technology was introduced in the 1970’s, but it was not until
the 1990s that the dot.com boom arrived (Wright 2006). The IT Revolution was felt broadly
throughout the society, but especially in the service sector. The benefits were felt in many diverse
industries and caused many new improvements, both in the process of production and product
itself. This essay aims to determine whether a similar experience is occurring within Bangalore and
India. India has led South Asia’s growth for the past three decades (Chowdhury and Mahmud 2008).
During the 1980’s, India began a series of reforms which shifted the country into a much more
market oriented economy.
The benefits of moving into an open economy have been greatly
debated. The different arguments will be outlined in the subsequent research section. Regardless,
3
the growth rate of the Gross Domestic Product (GDP) has been rapid and undeniable. However, in
order to understand the rapid GDP growth, urbanization and changing nature of the region, one
must disaggregate different aspects of the economy.
Economic growth is used to describe a higher standard of living, on average, for the average
citizen. The GDP represents the wealth of a nation and is a function of its inputs (labour, and
capital). It was once thought that if the number of machines grew at a faster rate than the labour
force, then the productivity would increase, since machines make people more efficient. However,
what Robert Solow observed, was that the investment in machinery had diminishing returns.
Therefore, when machines increased relative to workers, the value added of each additional
machine decreased.
Furthermore, the impact of each additional ingredient depends on its
importance to the production (Easterly 2002). Solow calculated the share of capital input in
comparison to worker input to be 1/3 to 2/3 respectively; therefore, machines, relative to labour,
had a low contribution to the total GDP. Solow’s conclusion went against the conventional belief of
capital fundamentalism, which viewed investment in machinery as the prime determinant for
growth. While it was clear to Solow that investment in machinery was not the reason behind
sustained economic growth, the United State had been advancing for two centuries. Thus the
question then arose: How did the US continue to sustain such growth? This question led Solow to
investigate this discrepancy in his renowned paper ‘Technical Change and the Aggregate Production
Function’. In this paper Solow concludes that the main source of growth was in fact technological
innovation (Easterly 2002). Technological change allowed the factor in fixed supply; labour, to
become more effective, without having to increase it in absolute terms.
When economic growth is accelerated, an economy’s backbone gets realigned. There is a
movement from necessity to luxury as wages increase and citizens have higher disposable incomes
(Kalra 2007). Thus with a rapidly expanding economy, it is expected for there to be a reallocation
of labour and resources. The economic structure of a city, region or nation, is comprised of
different ingredients which make up the economy; such as production, employment, consumption,
investment and trade. The structural change is thus a relative shift of these indicators from one
sector to another. Moshe Syrquin outlines three fundamental stages of structural transformation.
In the first stage the economy depends mainly on the primary sector, during the second stage the
reliance shifts to the secondary sector, and the final stage is when production is primarily due to the
tertiary sector (Syrquin 1988). The changes that are occurring in India reflect this transformation
into the final phase.
4
The rapid urbanization and economic growth that has been occurring in India will be
analyzed through the lens of the Schön Cycle, thus assuming that innovation is an impetus for
change. The purpose of this study is to investigate the changing structure of the Indian economy
and to deduce what is happening within Bangalore. This paper aims at providing some insight for
governmental policy, both regional and national, and to add some depth to the debate on
Convergence and Divergence.
I.II
CONTRIBUTION
This paper aims to determine if the Schön Cycle is applicable to the case of India. Through
the analysis of India, inferences for Bangalore will be made with the aim of providing depth to the
understanding of economic growth, both for the region and the nation. If these theories do in fact
pertain to this case study, then predictions for future growth can be given. Furthermore, regional
policy has recently shifted from a reactive measure towards the national economy, into a more
proactive role (Asheim and Coenen, 2005). Rather than restricting policy to pertaining only to
redistribution, governments now aim to stimulate and encourage innovative development and
investment within the economy. Therefore, if Bangalore follows the general trajectory of these
growth models, then policy suggestions can be drawn in order to both foster growth and prevent
the negative impacts of crisis. If the data does not give support to the theoretical framework, then
these models may not be appropriate for the development in Bangalore, and to a greater extent
Asia. The failure of this case study to follow the pattern of these models would suggest that other
factors not accounted for in the present theory must be addressed. Consequently, it may lead to
more studies to determine what types of alterations and improvements would need to occur in
order to have these theories better reflect the changes that are occurring. Whether the results
support or oppose the theory used, this knowledge will be helpful for a more comprehensive
understanding of the changes evolving in Bangalore, and India as a whole.
This essay will also touch upon the discussion of Convergence vs. Divergence. In order to
address this issue, three levels of analysis will be conducted; first an intra-regional look at the
changes in equality within Bangalore; second, the inter-regional differences between Bangalore and
the rest of India will be considered. Finally, there will be a global comparison between Bangalore
and other metropolitan cities. Through the macro analysis of Bangalore, this paper aims at adding
both breadth and depth to this multidimensional debate.
5
I.III
SCOPE AND LIMITATION
This paper will look at the structural change of Indian economy between 1970 and 2000. A
shift share analysis will be conducted to look at the change in structural patterns since the onset of
the IT Revolution in India to the present state of the economy. Due to insufficient data on labour
allocation, the shift share analysis could not be complete for Bangalore. Instead, the results for India
will be used as a guideline. Some generalizations will be made, which can be applicable to the
investigation of Bangalore’s economy.
This study will assess India’s change in the allotment of resources between different sectors
within the state and country. To investigate the shifts, this paper will disaggregate the economy
into three broad sectors, primary secondary and tertiary. These sectors: primary (agriculture, and
mining & quarrying), secondary (manufacturing, electricity, gas & water, and construction), and
tertiary (trade, hotel & restaurants, transportation & communication, finance services & retail
services, and other services) have been chosen in lieu of the nine sector approach. The major
reason for this tri-sector categorization is for simplicity. The aim of this paper is to investigate the
movement into a service based economy, therefore, these broad sectors allow for a clearer picture
than the nine tier categorization. This paper will address the changes that have been and are
occurring in India and Bangalore.
Furthermore, this study will limit itself to economic changes. Recently there have been
concerns in Bangalore over waste management, as well as water and power shortages (Basant
2006). While these are all areas of concern, the purpose of this paper is to document alternations in
the economy of India and Bangalore.
I.IV
OUTLINE
The primary goal of this paper is to address the economic growth of India and Bangalore. In
order to obtain this aim, this paper will be broken down into five major sections; Theoretical
Background, Historical Background, Method, Results and Discussion.
The Theoretical Background will provide the introduction and development of innovation
theories. It will touch on the major changes that have occurred within this realm of economic
history by outlining some of the most prominent research papers. Then the development of
different methods of analyzing structural change will be presented. In this section, an explanation
6
of the Schön Cycle will be provided, which will be later used for the analysis of results in the
Discussion section.
The Historical Background section will outline the development of the Indian economy.
This section will describe the introduction and development of IT and IT related technology within
the India’s economy in relation to changing government policies. It will then describe the growth of
Bangalore since independence and also trace the growth of the IT sector. Finally a comparison
between these two economies will be made, highlighting both their similarities and differences.
Through this comparison, the hypothesis of the results will be described and explained.
The Method section will describe the model that will be used to investigate the structural
change that has been occurring in India. The Results section will present the results calculated
using the method outlined in the previous section. The Results will also provide other indicators of
technology and growth including; Total Factor Productivity (TFP), Capital-Output Ratio, and
Investment patterns.
In the Discussion section, a variety of questions will be addressed. Firstly, the relevance of
the Schön Cycle and the theory around it will be tested for the case of India. If the Schön Cycle is
applicable, then government policies may be drawn. Then a discussion of Bangalore will be made.
Given the results, as well as the qualitative research done, some inferences will be made in an
attempt to better understand the economic situation of the city. Next a more holistic look will be
presented in order to see what these results suggest in the ongoing convergence and divergence
debate. Finally suggestions for future studies will be discussed.
7
II.
THEORETICAL BACKGROUND
The Theoretical Background section is broken into two related but distinct sections;
innovation theories and structural change. While structural change does depend on an impetus like
innovation and most innovation theories touch on structural change, for the purpose of clarity and
ease. The first will the development of economic growth and innovations theories. In this subsection a linear progression of the prominent theories on innovation and economic growth will be
presented. The purpose of this is twofold; first to establish the importance that innovation has
played in the realm of economic history as well as to create a better understanding of the
framework this paper will work within. The second sub-section deals with different theories and
methods used to measure structural change. This sub-section will set the stage for subsequent
sections; both the Methods and Discussion.
II. I
DEVELOPMENT OF ECONOMIC GROWTH AND INNOVATION THEORIES
The brief yet dense article ‘The economics of R&D and economic growth’ is an overview of the
history of development of economic growth theories. This paper is a literature review that provides
the beginnings and changes made in this area of economic history. It relates the importance of
technology to the growth of economics. This section of the paper will summarize the developments
discussed in the article and supplement the ideas with details from other relevant articles.
World War Two caused a renewed interest in economic expansion and policies that could
be made to generate growth (Link and Siegel, 2007). Abramovitz was one of the first theorists to
attribute the importance of technological change, an exogenous phenomenon, as a major source of
productivity growth (Link and Siegel, 2007). Abramovitz measured productivity as a function of
output verses input ratio. The changes in this ratio were thought to describe the changes in
efficiency over time, which Abramovitz attributed to technological advances.
In one study,
Abramovitz noted that the increase in productivity was not a result of more resources for labour,
but instead from a growth in stock knowledge (Link and Siegel, 2007).
Abramovitz coined the
phrase ‘measure of ignorance’ which refers to the determinants of productivity growth which
rested on improvements in stock knowledge, such as education or research and development.
Growth therefore also depends on the ability create new knowledge.
While Abramovitz was the first to postulate the importance of knowledge and technology,
Solow was the first to try to test this theory with a quantifiable equation (Link and Siegel, 2007).
8
Robert Solow, in his article ‘Technical Change and the Aggregate Production Function, attempts
‘segregating variations in output per head due to technical change and those due to changes in the
availability of capital per head’ (Solow, 1957, p.312). His equation, known as the Aggregate
Production Function Model made production a function of capital and labour thus giving one the
ability to measure the technological change.
EQUATION 1: AGGREGATE PRODUCTION FUNCTION MODEL
𝑄 = 𝐴(𝑡)𝐹(𝐾, 𝐿)
Where Q, K, and L represent output, capital and labour respectively and A(t) represented
this ‘measure of ignorance’ conceived by Abramovitz. Thus A(t) was a measure of the stock
knowledge and technological progress. However, Solow recognizes that ‘technological change’ is
being used in a very broad way. He explains
I am using the phrase ‘technological change’ as a short hand expression for any kind of shift
in the production function. Thus slowdowns, speedups, improvements in the education of
labor force, and all sorts of things will appear as technological change (Solow, 1957, p. 312).
Therefore, the A(t) may not truly represent the technological change; rather it depicts what cannot
be explained by labour or capital. Using this equation Solow concluded that between 1909 and
1949, ‘gross output per man hour doubled over the interval with 87 ½ per cent of the increase
contributable to technological change’ (Solow, 1957, p. 320). Thus only 12.5% of the United State’s
economic growth could be explained by capital and labour growth (Link and Siegel, 2007).
Furthermore, Solow reconfirmed the already accepted neo-classical assumption of diminishing
returns. The assumption of diminishing returns to capital implied that economies would reach a
steady state of growth (Link and Siegel, 2007). Therefore, the more backwards countries would
have the ability to ‘catch up’ as the economic growth of the advance countries plateau.
The problem with the belief in the catch up process was that the reality of the global
economic situation between 1950 and 1980 showed the opposite results.
Rather than poor
countries catching up, they were becoming more impoverished, and the divide was deepening. The
lack of physical support to the neo-classical theory caused some economists to question the model.
From these skeptics arose the New Growth Theory (Link and Siegel, 2007). Romer was one such
economist who proposed a series of revisions on the neo-classical growth model. Romer, unlike his
predecessors, ‘treated technological change as an endogenous factor of growth. This was an obvious
departure from old growth theory (Link and Siegel, 2007 p. 79).’
9
Aghion and Howitt (1990) introduced the Schumpeterian competition into this theory by
suggesting that technological change was an endogenous process where creative destruction
applied. Thus when a new technology is introduced, the old one gets displaced; therefore resulting
in both winners and losers, those who adapt quickly can capitalize on the success of the technology,
however those who have been educated and well trained in the old technology become obsolete.
These people are the ones who suffer the greatest loss, for both their jobs and their training are
replaced.
Romer also modified the neoclassical idea of diminishing returns in connection to
Abramovitz’s idea of ‘social capability’. Unlike goods, ideas are non-rival innovations, meaning that
once an idea is created, anyone with the proper training can take advantage of it. In contrast, most
goods that are exclusive, if one person is using the good, it prevents another from using that same
good. This difference between ideas and other goods has many other implications. Unlike rival
goods which work on a supply and demand curve, ideas have a fixed cost of initial production and
zero marginal costs (Jones 2002). Ideas must be inefficient, which means the cost of purchasing
must be higher than the marginal cost. This is because the initial cost is so high, and must be spread
out over the cost of all the products. However, once this initial cost in endured, there is an
increasing returns of scale, which means that doubling the investment will result in far more than
double the production (Jones 2002).
Another change to the neoclassical model is that technology is exogenous. The neo classical
theory does not address the importance of the diffusion process. There is evidence that stresses the
importance of ‘social, cultural and institutional foundations of local industrial growth’ (Asheim,
2003, p. 426).
In the 1986 article “Catching Up, Forging Ahead and Falling Behind” written by Moses
Abramovitz, one can see the merging of these two theories. Abramovitz still upholds the idea that
country’s have the potential to catch up, and the belief that this will eventually happen, however he
concedes that there are a number of qualifications that must be met for this to happen. The general
hypothesis of this article is that ‘productivity levels of countries tend to converge’ (Abramovitz,
1986, p. 385). Abramovitz establishes a leader (the USA) and the followers (all other countries). As
a country’s productivity gets closer to the productivity output of the USA, then ‘retardation in
productivity growth [is] suffered’ (Abramovitz, 1986, p. 385).
10
Abramovitz assigned much of the advancement on technology and relies heavily on the idea
of substitution; ie. when a new stock of technology is introduced, the old stock is discarded.
Therefore, the hypothesis implies that the further behind a country is,, the higher the potential
there is for said country to improve. Similarly, as the following country converges with its leader,
the potential for gains weakens. However, the author recognizes the simplicity of this hypothesis
and makes some minor qualification. One such qualification mentioned is the ‘social capability’,
which refers to the ability of a country to absorb a new technology. Thus a county’s potential to
incorporate and exploit a new technology depends on it being both technologically advanced but
also socially advanced. There is, however, an inherent paradox in this idea though; the more
specialized a country becomes in the existing technology, the more resistant the society is to
change. This reaction is logical if the new technology is to replace the old.
II.II
STRUCTURAL CHANGE
Allen Fisher was one of the first economists to investigate structural change. In his paper
‘Production, Primary, Secondary and Tertiary’, Fisher divides the economy into three broad sectors;
primary, secondary and tertiary sectors (Fisher, 1939). The primary sector composes mainly
natural sectors including: agriculture, fishing, mining & quarrying, and forestry. The secondary
sector is industrially focused and is made up of: electricity, gas & water, construction and
manufacturing. Finally the tertiary sector is service oriented, composed of: wholesale and retail
trade, hotels and restaurants, transport, storage and communication, finance, insurance and real
estate, community, social and personal services, government services. This breakdown of the
economy will be used throughout this paper.
Stephen Broadberry, in his article ‘How Did the United States and Germany overtake Britain?
A Sectoral Analysis of Comparative Productivity Levels, 1870-1990,’ greatly developed a quantitative
method for measuring structural change. In this article Broadberry investigates the manufacturing
sectors in Germany and the United States in an attempt to pinpoint the reasons that these two
countries were able to surpass Britain. Previous to Broadberry’s article, most research had
concluded that the labour productivity of Germany and the US was greater than that of Britain. This
research had been conducted on an aggregate level and then made the assumption that these
improvements were mainly caused by greater labour productivity in the manufacturing sector
(Broadberry, 1998).
Broadberry convincingly argues the importance of disaggregating the
economy into sectors. Through the disaggregation Broadberry discovers that the manufacturing
11
sector had remained quite stable over the last 150 years (Broadberry, 1998).
Broadberry
concludes that ‘Both Germany and the United States overtook Britain in terms of aggregate labor
productivity largely by shifting resources out of agriculture and by improving comparative labor
productivity in manufacturing’ (Broadberry, 1998, p. 376).
Broadberry’s approach to structural change is done quantitatively through a shift share
analysis. While there are a variety of models in economic history to measure structural change,
Broadberry is the first to utilize a counterfactual.
Using the aggregate method of approach
concluded that very little of the improvements were due to structural change, however, with the
modified shift-share analysis introduced by Broadberry found ‘that structural change accounts for a
significant portion of aggregate labor-productivity growth’ (Broadberry, 1998, p. 389).
Furthermore, the cause for German and American success over the British was not due to
manufacturing at all but rather to the service sector. Broadberry attributes the American and
German ability to overtake Britain largely to the ‘shifting of resources out of agriculture and
improving their relative productivity position in services rather than by improving their position in
manufacturing’ (Broadberry, 1998, p. 400).
Lennart Schön employed a cyclical model for understanding economic growth and
structural change.
In his article ‘Technological Waves and Economic Growth- Sweden in an
International Perspective 1850-2005’, Schön identifies distinct periods of crisis, transformation and
rationalization. Schön’s understanding of the development of the Swedish economy in a historical
perspective relies on both Erik Dahmén and Joseph Schumpeter. The introduction of the initial
innovation causes a structural change- a movement of labour and resources- in order to adapt to
the technological transformation. The cycles described by Schön are seen through a Schumpeterian
lens. Schön identifies the shifts as reactions to what has been building up. This Development Block
Theory was later expanded upon by Lennart Schön, who describes the cyclical pattern of economic
development. This theory assumes that there are radical innovations; known as General Purpose
Technologies (GPT’s). Unlike other advancements, GPT’s influence the society completely. Schön
observed the innate paradigm that societies undergo in accordance to the introduction and
diffusion of General Purpose Technologies (GPT’s) (Schön, 2008). Schön defines crisis from normal
business downswings to be ‘connected with changes in long term on structural conditions’ (Schön,
1998). He argues that crisis is a significant component to economic growth; economic crisis is thus
creative destruction. The model is based on a cycle consisting of transformation, rationalization
and crisis. At the onset of an invention, transformation occurs, bringing changes in institutions and
12
organizational structures (Schön, 1998). At this point investments tend to be high and directed
towards long term aims.
After the innovation has been integrated into society, the next phase
begins. During the rationalization phase, Schön explains that the investments move from long term
to short term investments (Schön, 1998). Thus the quality of the innovation increases. However,
what is more critical to understand is that more is being invested than produced. The progress
caused by the implementation of the new technology ‘shifts [the growth] of demand into new
directions and/or changes relative profitability in a way that causes crisis’ (Schön, 1998).
Therefore there is a paradox, while growth requires stability, it also causes changes in market
conditions and crisis ensues.
Therefore, during the first phase, transformation, new inequality
occurs as some gain at the cost of others, however during the second phase, there is a convergence,
as the benefits of the new technology infiltrate all sectors of the economy.
13
III.
HISTORICAL BACKGROUND
The Historical Background section of this paper will provide the development of the Indian
and Bangalore’s economy since Independence. There will first be a separate description of each
economy, with an emphasis on the introduction and development of the IT sector and government
policies. Through the historical background of the both economies, this section aims at providing
context and depth to how the IT sector can be understood. Then in the third subsection, a
comparison will be made between Bangalore and India. In this subsection, the sectoral changes that
have occurred in Bangalore and India between 1980 and 2005 will be investigated. The purpose of
this comparison is to highlight the differences in growth that have been, and are occurring between
the city and country.
III.I
THE DEVELOPMENT OF THE INDIAN ECONOMY AND THE GROWTH OF IT
One way to measure prosperity is the growth rates of a country or region. The annual
growth rates indicate how much a country’s GDP grows each year.
Figure 1 illustrates the GDP
growth rate in India between 1950 and 2008. The red line is a five year moving average.
FIGURE 1: GDP GROWTH RATE (%) WITH 5 YEARS MOVING AVERAGE BETWEEN 1950-2008
12
10
8
6
4
2
Growth Rate of
GDP
5 Year Moving
Average
-2
1950-51
1953-54
1956-57
1959-60
1962-63
1965-66
1968-69
1971-72
1974-75
1977-78
1980-81
1983-84
1986-87
1989-90
1992-93
1995-96
1998-99
2001-02
2004-05
2007-08
0
-4
-6
Source: Calculated by author from GDP data in constant 1999-2000 prices from Handbook of India.
14
From Figure 1, one can see changes in the rate of growth over time. Between 1950 and
1984, the growth was stagnant. Fluctuations become apparent between 1960 and 1984, where one
can see three distinct cycles, however, the growth rate remains around 3.8%. From 1984-1991, the
growth rate improves as it reaches approximately 5.4% per annum. The period from 1991 to 2008
sees an acceleration as the growth rate averages an outstanding 6.5% per year. These three
different time periods that can be seen in Figure 1 reflect the political changes that occurred in
India over the second half of the 20th century and the beginning of the 21st century. The history of
the Indian economy’s development and growth was described in reference material such as: The
Handbook on the Indian Economy and The Oxford Companion to the Indian Economy as well as a
number of journal articles.
The Indian economy which had been left by the British to a newly Independent state in
1947 was inefficient, highly centralized and inward looking (Basu 2007). The economic policy that
arose during the early years of Independence can be seen as a reaction to the colonial period. The
Indian government did not trust the British and by extension the West, and therefore implemented
a very inward, and protectionist path of development (Mathur, 2005). During the 1950’s, many key
industries such as: water, telecommunications, steel and mining were nationalized (Dev, 2008)
(source). The economy ‘relied heavily on the public sector to supply the infrastructure, provide
direction and aid development’ (Basu, 2007, p.518); essentially the state acted as the
‘Schumpeterian Entrepreneur’.
The economy relied on import substitution, which was intended to encourage the domestic
markets, but greatly hindered international trade (Mathur, 2005). The tariffs were among the
highest in the world, averaging at 125% (Mathur 2005) on imports, while all manufacturing goods
were banned (Basu, 2007). The policies regarding Foreign Direct Investment (FDI) were restrictive
and protective.
Thus between 1950 and 1980, trade and investment was greatly stifled by
government policy. These policies acted as obstacles and forced the India economy to rely mainly
on domestic goods and services, as their sources of innovation. The Foreign Exchange Regulation
Act (FERA) was introduced in 1973. FERA dictated that no foreign company could own more than
40% of the shares of a firm operating in India (Harding, 1989). The strict and unwavering
protectionist policies outlined in the FERA policy encouraged huge corporations to pull out of the
Indian market and re-orient themselves in other areas. IBM is just one such example; the company
left India in 1977 when the government ‘mandated 60% domestic ownership of IBM’s Indian
15
Operations’ (Harding, 1989, p. 32).
The end result of these policies was a large, inefficient
bureaucracy and an isolated economy.
Changes in these policies did not begin until 1984, when the newly elected Prime Minister
Rajiv Gandhi entered office. Gandhi introduced the ‘New Computer Policy’ in 1984, which reduced
some tariffs and nurtured the growth of telecommunication and software companies (Dev, 2008).
With these new tolerances, more companies began to enter and invest in India. Texas Instruments
(TI) was the first American company to be granted 100% of its shares (Basant, 2006).
Although many of the restrictive policies were loosened throughout the 1980’s, not all were
reversed until India faced an economic crisis at the end of this decade. The isolation from the global
market that had been created by political policies came to a close due to ‘unsustainable spending
during the 1980’s and a sharp fall in foreign exchange reserves, combined with the possibility of a
default on repayment of external debt’ (Mathur, 2005, p.45). Thus the government reassessed its
policies and attempted to realign itself on the global stage through structural adjustment. In order
to make this adjustment, core policies were altered in 1991; the rupee was devalued, trade
regulations were liberalized, import substitution was replaced with export orientation, FDI
restrictions were relaxed, privatization occurred and publically administrated pricing was removed
(Chowdhury and Mahmud 2008). These changes were initiated to improve productivity and
competitiveness on the global stage.
III.II THE GROWTH AND DEVELOPMENT OF BANGALORE’S ECONOMY
Bangalore was industrialized under the ruling of the British, who set up a number of
corporations to help their war efforts and created a state owned Radio and Electric manufacturing
company (Dittrich 2007).
After Independence in 1947, the national government invested in
Bangalore due to its strategic position; far enough inland to be vulnerable to attack (Basant, 2006).
These investments were mainly in industrial and defense sectors; however the public sector also
received funds, which is manifested in the establishment of universities.
In 1972 the Software Export Scheme was launched which gave concessions to software
exports and low tariffs to hardware imports (Basant 2006).
Despite this encouragement of
software, in the mid 1970s the government introduced the Foreign Exchange Regulation. This
policy was designed to reduce the percentage of ownership a foreign firm could have within India.
16
This policy saw the departure of corporations such as IBM, leaving a large number of highly
qualified people unemployed (Basant 2006).
Although the restrictive attitude toward Foreign Investment continued throughout the
1970s and 1980s, the national government wanted to promote the electronic industry. The state
also tried to encourage the growth with the creation of the Karnataka State Electronics
Development Corporation (KEONICS) in 1976 and the establishment of the Electric Park.
The
Electric Park, the first Software Technology Park (STP) in India, was then established in Bangalore.
Bangalore is a prime example of how developing cities can leap forward and enhance their
growth through technological endeavors. The development of the clusters in Bangalore city are not
products of natural growth, rather these areas have been formed through conscious government
policy (Singh, Vijayabaskar and Krishnaswany, van Dijk). It is important to acknowledge the policy
decisions were instrumental in the development of the Bangalore cluster and that growth was
thought to be obtained through the imitation of Silicon Valley. The STP was constructed to mirror
Silicon Valley. Silicon Valley is a region in California where a number of high technology firms have
clustered together. This area has become extremely profitable and innovative. Silicon Valley’s
growth, since the 1970’s, has relied on entrepreneurial activities through a division of labor and
open information exchange (Saxenian 2006). This region is a prototype for the clustering affect
where firms that compete can also complement each other. Through cooperation with other firms,
the risk taken by new companies is diminished and the ability to learn becomes much higher. What
is special about Silicon Valley, in contrast to other areas of corporate competition, is that an
informal sharing of information was institutionalized in its early phases (Saxenian 2006).
Furthermore, because the burden of failure is a shared cost, collective learning occurs and creative
destruction, as envisioned by Schumpeter, is the result of each failure. Another aspect that is
unique to Silicon Valley is the implementation of a meritocracy, in which individual skills and
capabilities are valued over any other feature. Thus it quickly became a mosaic of different cultures
with a similar goal of advancing technology and knowledge.
The success of Silicon Valley has prompted governments in both the developed and
developing worlds to use this cluster as a prototype for their own economic growth (Grondeau,
2007). Since the mid 1980’s, developing countries have initiated many science parks in hopes of
mimicking the Silicon Valley success (Grondeau, 2007). The city council in Bangalore is not isolated
in believing that through the imitation of Silicon Valley model will bring prosperity and wealth
17
through rapid urbanization. Intrinsic in this belief, is a faith in innovations and technology as a
source of growth. The trust in technology as the prime motivator has been outlined in the
Theoretical Background section of this paper.
Although Bangalore became open to investments and encouraged the presence of foreign
firms throughout the 1980’s, the socio-political realities of India as a whole acted as an obstacle.
The central Indian government tended to favor restrictive policies and was obstructive to extensive
investments from foreign corporations.
While there were a number of relaxations of these
restrictions, the liberalization of India was marked by the entry of Texas Instruments in 1985
(Basant 2006). Furthermore, the devaluation of the rupee in 1991 has added to the cost advantage
of off-shoring in India (Basant 2006).
Since the introduction of the Science Park in 1976, Bangalore has stepped into the centre
stage of the global system.
It has become important for Information Technology (IT) and
Biotechnology (BT) development and is the source of much off shore work. The rapid development
that is occurring has raised issues that affect citizens, and interest academics. Many observers have
mentioned the dualistic characteristics that are appearing in the city as malls, golf courses and bars
are sprouting up juxtaposed to temples and bazaars. The appearance of these new infrastructures
demonstrates the tangible conflict between India’s oriental history, and way of its modern citizen’s
expectations for the future.
III.III THE CHANGING ECONOMY: COMPARING INDIA TO BANGALORE
The annual growth rates of Bangalore have mirrored those of India, but to a much more
intense degree. The growth rates provided below show the annual growth rate of the GDP of
Bangalore compared to India.
TABLE 1: ANNUAL GROWTH RATES, INDIA VS. BANGALORE
India
Bangalore
1980-1993
6.55
6.86
1993-2004
7.93
20.76
Source: Calculated by author from data from The Handbook of India (India) and Narayana, 2008, p. 42 (Bangalore)
18
Between the periods 1980 to 1993, the average growth rate in India was 6.55, while in
Bangalore it was 6.86% per annum. Therefore, even during the 1980’s the economy of Bangalore
was growing at faster rate than India but not impressively faster. However, what is truly
astonishing is that between 1993 and 2004, the Bangalore economy grew at an approximate
20.76% per annum. From the annual growth rates it is clear that Bangalore is growing much faster
than India, however, these results do not describe where this why it is doing better. In order to
determine if the economy is becoming more efficient, labour productivity must be investigated. The
aggregate labour productivity has been increasing steadily in India. Figure 2 illustrates the labour
productivity in India between 1960-2004.
It is clear that the productivity increases slightly
between 1960 and 1980 but after 1980 takes off rising at a much faster rate.
FIGURE 2: LABOUR PRODUCTIVITY IN INDIA BETWEEN 1960-2004
60000
50000
40000
30000
Labour Productivity
20000
10000
2002-03
1999-00
1996-97
1993-94
1990-91
1987-88
1984-85
1981-82
1978-79
1975-76
1972-73
1969-70
1966-67
1963-64
1960-61
0
Source: Calculated by author using data from Central Statistical Organization and (Timmer and de Vries, 2007).
Figure 2 shows that the aggregate labour productivity in India has increased steadily since
1981-1982. While there is not data for Bangalore labour productivity over time, in 2004, the city
was 21.5% higher labour productivity than India (Narayana, 2008). Therefore, it may be assumed
that Bangalore is more productive, and more efficient in producing than India.
The purpose of this essay is to determine whether the improved labour productivity is a
result of successfully reallocating labour or if it is due to another reason. To determine the cause of
19
the labour productivity increase, the economy must be disaggregated into its sectors. For the
reallocation to be positive there must be a movement of labour from the least productive areas of
the economy into the most productive. The most effective sectors of the society can be seen
through an analysis of the value added contributions. Figure 3 presents the value added of a sector
relative to the sum of all sectors. From the figure below it is apparent that the importance of
agriculture has been steadily decreasing over this time period: 1950-2005.
FIGURE 3: INDIA VALUE ADDED BETWEEN 1950-2005. AT CONSTANT 1993-1994 PRICES. 9 SECTORS
100%
90%
Community, Social and Personal
Services, Government Services
80%
Finance, Insurance, and Real
Estate (b)
70%
Transport, Storage, and
Communication
60%
Wholesale and Retail Trade, Hotels
and Restaurants
50%
Construction
40%
Public Utilities
30%
Manufacturing
20%
Mining and Quarrying
10%
Agriculture, Forestry, and Fishing
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
0%
Source: Calculated by author using data from (Timmer and de Vries, 2007).
Just as a reminder, while there are variety of ways in which a researcher can study and
evaluate the structural change of an economy, this paper will use the broad categorization outlined
by Fisher; primary, secondary and tertiary sectors (Fisher, 1939). The government of India has
segregated these sectors into 9 subdivisions, as seen in Figure 3. However, for ease and clarity, this
study will divide the economy into three sectors:
20
i)
Primary (Natural)- agriculture, fishing, mining & quarrying, and forestry
ii)
Secondary (Industry)- electricity, gas & water, construction and manufacturing
iii)
Tertiary (Services)- wholesale and retail trade, hotels and restaurants, transport,
storage and communication, finance, insurance and real estate, community, social
and personal services, government services
In Figure 4 sectors are aggregated into the three sectors that are emphasized in this paper:
primary secondary and tertiary.
FIGURE 4: INDIAN VALUE ADDED BETWEEN 1950-2005, AT CONSTANT 1993-1994 PRICES. 3 SECTORS
100%
90%
80%
70%
60%
Tertiary
50%
Secondary
40%
Primary
30%
20%
10%
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
0%
Source: Calculated by author using data from (Timmer and de Vries, 2007).
From this figure it becomes even clearer that the tertiary sector has grown in India, mainly
at the expense of the primary sector. While the secondary sector has increased slightly, the greatest
changes can be seen in the primary and tertiary sectors. As discussed in Broadberry’s article ‘How
Did the United States and Germany Overtake Britain? A Sectoral Analysis of Comparative Productivity
Levels, 1870-1990’, the value added plays an important role in the success of a country’s economy.
Broadberry states ‘a country with a larger share of its labor force in sectors with high value added
21
per employee has an advantage over a country with its labor force concentrated in low value-added
sectors’ (Broadberry, 1998, p. 386). Therefore, from the above figure, one would expect the labour
to be flowing out of the primary into the tertiary sector.
Within India this is indeed occurring. The graph below depicts the changes three sectors
contribution to the total workforce. As expected, there has been a movement out of the primary
sector and into the secondary and tertiary sectors. However, this move has been much slower than
one would predict given the dropping importance of the primary sector relative to the other two in
GDP contribution.
FIGURE 5: PERCENTAGE CONTRIBUTION OF WORKFORCE. INDIA 1970-2004.
80%
70%
60%
50%
Primary
40%
Secondary
30%
Tertiary
20%
10%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
0%
Source: Calculated by author using data from (Timmer and de Vries, 2007).
From this graph it is clear that the employment in the primary sector remained around 72%
or 73% until the early 1980’s. Similarly, the secondary and tertiary sectors danced around 11%
and 17% over the same time frame. It was therefore not until the early to mid 1980’s when labour
began to move out of the primary sector and into the other two areas. The movement of labour
from less productive areas of the economy into higher value added sectors (see Figure 4) at the
around 1981 marks the beginning of structural change.
22
In India there is a clear reallocation of labour. The primary sector is steadily losing
workers, while the secondary and tertiary are growing. The affects of this labour reallocation will
be investigated through the shift share analysis on structural change.
Due to the nature of the data, the comparison between Bangalore and India cannot use
value added, rather, the comparison is made by share of GDP. Bangalore followed a similar, but
much more intense shift away from the primary sector. The importance of agriculture is much
more pronounced for all of India than it is for the city of Bangalore. Although there is a huge
decrease in the prominence of agriculture in India, from almost 40% in 1980 to less than 22.5% of
the GDP in 2004, when compared to Bangalore this shrinking of the primary sector is not that
impressive. The primary sector of Bangalore decreased 69% in its share of the Gross District
Product of Bangalore between 1980 and 1993.
This illustrates the movement away from
agriculture and the new emphasis on the secondary and tertiary sectors. The share of production
that the primary sector provides has been steadily decreasing over these twenty five years. In
1980, the primary sector consisted of about 10% of the city’s economy while in 2004 it contributed
less than 2%. The decreasing share in production for the primary sector has resulted in an
increased share in the secondary and tertiary sectors, but mainly the tertiary. The share of the
secondary sector has also decreased over this time period, consequently, the tertiary has increased
greatly. The tertiary sector supplied about 48% of Bangalore’s production in 1980 and almost 63%
in 2004. Thus, there has been a shift in importance of the tertiary sector’s contribution to the
growth of Bangalore’s economy.
The table and figure below depict the changes in the economy over between 1980-2005.
Through this comparison it is clear that the changes that have occurred in Bangalore have been
more intense and radical.
23
FIGURE 6: SECTOR SHARE OF GDP BANGALORE VS. INDIA (%)
120
100
80
47.53
38.04
47.96 44.84
56.72
49.69
62.91
53.55
60
Tertiary
22.03
Secondary
22.65
40
42.44
20
0
48.92
39.93
10.03
1980-1981
39.23
32.51
3.12
1993-1994
Primary
22.99
24.03
35.41
27.32
22.42
4.05
1.68
1999-2000
2004-2005
Source: Calculated by author using data from:
For India: Central Statistical Organization
For Bangalore: Narayana 2008
TABLE 2: SECTOR SHARE OF GDP BANGALORE VS. INDIA (%)
Year
Primary
Secondary
Tertiary
1980-1981
Bangalore
India
10.03
39.93
42.44
22.03
47.53
38.04
1993-1994
Bangalore India
3.12
32.51
48.92
22.65
47.96
44.84
1999-2000
Bangalore India
4.05
27.32
39.23
22.99
56.72
49.69
2004-2005
Bangalore India
1.68
22.42
35.41
24.03
62.91
53.55
Source: Calculated by author using data from:
For India: Central Statistical Organization
For Bangalore: Narayana 2008
The annual growth rates help to show how the economy in Bangalore has developed over
these twenty five years. It can be seen that the major contribution to growth has been from the
secondary and tertiary sectors, which have had positive growth throughout the study period.
24
Furthermore, the tertiary sector has grown much faster than the secondary, suggesting that it can
be seen as the major force behind Bangalore’s success.
25
IV.
METHOD
The Method section describes the measures and method used to analyze the structural
change that has occurred in India and Bangalore. The model used is a shift share analysis which
will be described in detail below. This method mirrors that of Broadberry in his article ‘Why the
United State and Germany overtook Britain’, in that a counterfactual is produced in order to compare
what occurred and what would have occurred had things stayed the same. The structural change of
India will be calculated both in relation to the previous year. The shift share will be done over the
time period of when IT was introduced in India, approximately 1970, until 2000. From the results
on India, inferences will be made for how Bangalore’s economy is developing. The economy of
Bangalore will be assessed in the Discussion section of this paper.
IV.I
SHIFT SHARE ANALYSIS
The purpose of a shift-share analysis is to determine the changes in labour productivity at a
sectoral level of the society. Through a shift-share analysis, a counterfactual number is calculated.
The counterfactual represents what would have been had the economy stayed the same.
To determine the amount of structural change, I will first calculate the sector specific
employment (Lo) and production (QAo) for 1988.
Then I will calculate the labour productivity (Po) for each base year:
EQUATION 2: LABOUR PRODUCTIVITY
i 1 Qi
n
i 1 Li
n
P
In the next step, I will calculate the sector specific employment (Lt) and Production (QAt) at
second year and then the labour productivity (Pt) will be determined.
Next a counterfactual production (Qflt), what would have been produced had the labour
remained constant for the second year will be calculated for each sector. The (Qflt) is thus the
hypothetical production in each sector if the employment stayed constant.
26
EQUATION 3: COUNTERFACTUAL PRODUCTION IF EMPLOYMENT IS KEPT CONSTANT
 QAt 
Qflt  Lo * 

 Lt 
Where:
Qflt= the counterfactual output at constant employment
QAt= the actual output at second period of time
Lt= labour second period of time
Lo= labour at the first period of time
The Pfl production will be the sum of the calculated Qflt in each sector. And the
counterfactual labour productivity will be calculated:
EQUATION 4: COUNTERFACTUAL LABOUR PRODUCTIVITY IF EMPLOYMENT IS KEPT CONSTANT
 n Qfl , lt 

Pfl   in1


 i 1 Lo , lt 
I will also create a counterfactual production (Qfst) if the structure had remained constant
within each sector.
EQUATION 5: COUNTERFACTUAL PRODUCTION IF STRUCTURE IS KEPT CONSTANT
 Lo
 QAt
n



Qf ( st ) 
*
Li , t  *
 n Li , o i 1   Lt 
 i 1

Where:
Qfst= the counterfactual output at constant structure
Lo= labour at the first period of time
QAt= the actual output at second period of time
Lt= labour second period of time
The production will be the sum of the calculated Qfst in each sector. And the counterfactual
labour productivity Pfs will be calculated:
27
EQUATION 6: COUNTERFACTUAL LABOUR PRODUCTIVITY IF STRUCTURE IS KEPT CONSTANT
 Qfi, st
Pfs  i n1
i 1 Li , t
n
The counterfactual labour productivity keeping the labour constant should be equivalent to
the labour productivity keeping the structure constant. Thus:
EQUATION 7: COUNTERFACTUAL LABOUR PRODUCTIVITY
Pf  Pfl  Pfs
Where:
Pf= Counterfactual productivity
Pfl= Counterfactual productivity with constant employment
Pfs= Counterfactual productivity with constant structure
Then calculate the total production growth (Qg) and total employment growth (Lg) and
total productivity growth (Pg)
The structural change represents the change that has occurred in comparison to what
would have been had the economy stayed the same. Therefore the structural change is calculated
by taking the difference between the actual growth in the economy (Pt/Po) and the counterfactual
growth of the economy (Pf/Po).
EQUATION 8: STRUCUTAL CHANGE
S
Pt Pf

Po Po
Finally to calculate the percentage of productivity improvement due to structural change:
EQUATION 9: PERCENTAGE OF STRUCTURAL CHANGE
%S 
S
Pt Po  1
28
With the Shift Share Analysis, it can be determined how much long-term structural change
is occurring.
IV.II A NOTE ON THE DATA
The data collected is secondary in nature. For the shift share analysis, the data was obtained
from the Groningen Growth and Development Centre Research Memorandum. This data was
complied by Marcel Timmer and Gaaitzen de Vries in 2007 and can be obtained from the website:
http://www.ggdc.net/databases/10_sector.htm.
The data was presented in a nine sector economy: agriculture, mining, manufacturing,
construction, public utilities, retail and wholesale trade & transport and communication, finance
and business services, other market services and government services. The sectoral data set from
1950 to 2004 provides the value added at 1993-1994 constant national prices. The lack of data on
employment hours, forced the labour productivity to be calculated in value added over the number
of employees.
29
V.
RESULTS
The Results will display what was calculated through using the aforesaid method. The
results will be presented in the form of tables and graphs, with some interpretation of the data.
This section will mainly be descriptive and explanatory; most of the analysis in concert with the
theory will be done in the Discussion section. The Results section will be divided into a number of
subsections. The first subsection will present the structural change calculated using the procedure
described in the Methods section. The other three sections will to support these results through
economic indicators including; total factor productivity, capital-output ratio, and investments.
V.I
STRUCTURAL CHANGE
As discussed in the Background section of this paper, the IT industry has had an increasing
significance in the economic prosperity of India, and to an even greater extent, Bangalore. In Figure
7 the growth of structural change is graphed between 1970 and 2000. The structural change has
been calculated using the value added (at 1993-1994 constant prices) divided by the number of
employees for each of the nine sectors in the economy. Then the difference between the actual
productivity from the counterfactual productivity, what would have been had the economy
remained constant has been calculated. The first figure, Figure 7, shows the structural change in
relation to 1971. Therefore, Figure 7 shows the growth in the importance of structural change over
time. The second figure in this section, Figure 8, shows how much more or less the economy
produced due to the structural changes that occurred in relation to the previous year.
30
FIGURE 7: STRUCTURAL CHANGE OF INDIAN ECONOMY BETWEEN 1970-2000 USING 1970 AS A BASE YEAR
18
16
14
12
10
8
6
4
2
0
Source: Calculated by author using data from (Timmer and de Vries, 2007).
This graph illustrates the change in structural growth between 1970 and 2001, using 1970
as a base year. This means the amount of economic improvement that has occurred in the Indian
economy between 1970 and 2001 is 13.75%. The overall illustration of this figure is one of
increasing positive structural change. That is, if reallocation of labour had not occurred, the
productivity would have been less. Furthermore the importance of structural change is increasing
over time. From this figure it can be seen that there are three distinct periods of importance for
structural change, and two downturns. In 1979 and 1992, it appears that structural change played a
decreasing importance to Indian production than other years. When the structural change is
looked at on a yearly scale, the dips in the importance of structural change are further highlighted.
Figure 8 will show the annual structural changes in the Indian economy between 1971 and 2002.
31
FIGURE 8: ANNUAL STRUCTURAL CHANGE OF INDIAN ECONOMY BETWEEN 1971-2002
6
5
4
3
2
1
0
Source: Calculated by author using data from (Timmer and de Vries, 2007).
This graph shows the structural change that occurred on a yearly basis. For example, in
1976, the graph is at 4%, this means that due to the structural changes the economy improved 4%
since 1975. As evident from this graph, the structural changes positive throughout the time period
with higher averages, and less fluctuations in the later years. To see how the tertiary sector has
contributed to the structural change, the same calculations were done but without including the
four sectors that are tertiary in nature; Wholesale and retail trade, hotels and restaurants,
transport, storage, and communication, finance, insurance and real estate, community, social and
personal services, and government services. Figure 8 illustrates the structural change with and
without the tertiary sector from 1970 to 2002.
32
FIGURE 9: STRUCTURAL CHANGE OF THE INDIAN ECONOMY WITH AND WITHOUT THE TERTIARY SECTOR:
1970-2002
10
8
6
Structual Change (%)
4
Strucutal Change
without Tertiary (%)
2
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
0
-2
Source: Calculated by author using data from (Timmer and de Vries, 2007).
From Figure 9, it is apparent that these two variables follow very similar trajectories. These
figures are almost identical during the 1970’s, and do not really diverge until after 1981. There is a
spike in the late 1970’s that suggests that the economy would have done better had the tertiary
sector not existed. This suggests that the tertiary sector, in the mid to late 1970’s was absorbing
more capital than it was producing. However, from 1981 until 2002, the economy with the tertiary
sector included (the blue line), was more productive. Therefore it can be concluded that the
reallocation of labour into the tertiary sector had a positive effect on the economy. To see the
effects of the tertiary sector more clearly, Figure 10 displays this information looking only at the
tertiary sector. The structural change without the tertiary sector is thus subtracted from the entire
structural change, leaving on the change that can be attributed to the tertiary sector.
33
FIGURE 10: THE STRUCTURAL CHANGE IN THE INDIAN ECONOMY DUE TO THE TERTIARY SECTOR: 19702002
2
1
-1
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
0
Structural Change due
to Tertiary
-2
5 year Centre Moving
Average
-3
-4
-5
-6
Source: Calculated by author using data from (Timmer and de Vries, 2007).
As the graph above describes, there was a sharp decrease in structural change due to the
tertiary sector during the late 1970s, however, from the early 1980s, the structural change due to
the tertiary sector has been positive. This initial dip in the graph is most likely due to productivity
lag, which is caused by the adaptation and diffusion of the new technology. When the structural
change is calculated (in Table 3), it is seen that the structural change is negative during the 1970s.
Furthermore, the importance of the tertiary sector becomes highlighted when the data is described
in table format. The table below shows the structural change of India, with and without the tertiary
sector. The final column has calculated the percent that can be attributed to the tertiary sector.
TABLE 3: STRUCTURAL CHANGE WITH AND WITHOUT TERTIARY SECTOR, PERCENTAGE DUE TO THE
TERTIARY SECTOR. BY DECADE FROM 1970-2004.
Structural Change
Without Tertiary
% due to Tertiary
Yearly Average
1971-1978
0.058
0.116
-100.37
-12.5%
1979-1987
0.047
0.035
24.76
2..75%
1987-1993
0.050
0.044
11.85
1.96%
1994-2000
0.053
0.035
33.49
4.16%
Source: Calculated by author using data from (Timmer and de Vries, 2007).
34
The negative contribution of the tertiary sector is expected during the 1970’s. With GPT’s
there is a productivity lag, where it takes time for a country and/or region to absorb and adapt the
new technology. During the onset of a new technology, there is an initial cost, which accounts for
reorganization, re-education and redistribution of resources. Since 1980, the structural change has
becoming more effective, suggesting that the reallocation of labour is having a positive effect on the
society. Furthermore, the tertiary sector, which was negatively affecting the economy in the 1970’s,
has become a great contributor to the structural change during the 1980’s and 1990’s. The most
profound effects of the tertiary sector on the economy have occurred between 1994 and 2000,
where 33.5% of structural change can be attributed to the service sector.
V.II
TOTAL FACTOR PRODUCTIVITY
As discussed in the Theoretical Background section, technology is seen by economic
historians as the prime impetus for structural change. One way to investigate technological change
in economic history is to look at the total factor productivity (TFP). This number is a residual; it is
what labour and capital cannot account for in the output. Since it is a residual, it is not definite that
it is due to technology.
The difficulties surrounding the strength of TFP coupled with data
complications, have kept the TFP out of the scope of this essay. However, the author recognizes the
importance given to TFP in the realm of economic history and believes that it would be a valuable
future addition to this essay.
The total factor productivity is a measurement of technological progress. It is the amount of
growth that cannot be accounted for by labour and machinery. This number is a residual:
EQUATION 10: TOTAL FACTOR PRODUCTIVITY
𝑌 = 𝐴*𝐾 A ∗ 𝐿B
Where:
Y= GDP
A= TFP
a= Capital elasticity (.3)
b= Labour elasticity (.7)
K= Capital input
L= Labour input
There have been many criticisms of the use of TFP as an indicator of technological change.
The main concern has been that since it is a residual, it reflects everything that is not accounted for
by labour and machinery, ie. fluctuations in weather…. However, when the TFP is looked at on the
long term, these fluctuations even out. Therefore, I believe that when taking an average over a long
period of time, the TFP represents mainly technological change.
When a new technology is
35
introduced into a society, we expect there to be changes to occur in order to adapt and adopt the
new innovation.
TABLE 4: TOTAL FACTOR PRODUCTIVITY IN INDIA- AGGREGATED AND SECTORAL CONTRIBUTIONS
Sector/Period
Year
GDP
GDP/Worker
Total
Economy
1960-81
1981-00
3.4
5.8
1.3
3.8
Capital
1.0
1.4
Agriculture
1960-81
1981-00
1960-81
1981-00
1960-81
1981-00
1.9
2.8
4.7
6.4
4.9
7.6
0.1
1.8
1.6
2.9
2.0
4.0
0.2
0.5
1.8
1.6
1.1
0.7
Industry
Services
Contribution of:
Land
Education
-0.2
0.2
0.0
0.4
TFP
0.2
2.0
-0.2
-0.1
-
-0.1
1.1
-0.4
1.0
0.4
2.9
0.1
0.3
0.3
0.3
0.5
0.4
Source: ( Boswort, Collis, Vlramani, 2007)
From the results that Boswort, Colis and Vramani it is clear that the TFP became a
significant source of growth after the 1980’s.
The high TFP suggests that ‘knowledge and
competence have diffused among the employees, leading to improved conditions to technological
diffusion’ (Schön, 2008, p.16). In short, the people have become more competent at exploiting the
technology and this has in turn accelerated the new technologies importance in society. In this case
the TFP contributes to more than 1/3 of India’s GDP growth. It is also important to note from Table
4 is the differences at a sectoral level in the TFP results. The TFP contribution was most impressive
in the service sector at 2.9%. Therefore, the total economy is benefiting from the technology
between 1981 and 2000; the advantages are felt greatest in the service sector.
V.III INVESTMENTS
To analyze the investment pattern in India the capital-output ratio was calculated and
presented in Figure 9. The Capital-Output Ratio depicts the amount of investment (in fixed capital)
in relation to the overall output (GDP). Therefore, when the curve is rising, it means that more is
being invested into the economy than is being produced. Similarly, where the figure is decreasing,
the GDP is higher than the investments. The graph is shown in constant 1999 INR prices with 1990
being the base year; equaling one. Thus each of the values can be seen in relation to the base year of
1990.
36
FIGURE 11: CAPITAL-OUTPUT RATIO IN THE INDIAN ECONOMY 1950-2007 AT FIXED 1999 IN INR PRICES.
INDEX 1990=1
1.2
1.1
1
0.9
0.8
Capital Output
Ratio
0.7
0.6
0.5
0.4
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
0.3
Source: Calculated by author from Data found in Handbook of Statistics on the Indian Economy, Reserve Bank of India
2008-2009 p.5
From Figure 9 it is evident that between 1965 and 1984 there was a steady increase in
investments to output.
This suggests there is development in infrastructure, such as roads,
airports, science parks, and other infrastructure to support and encourage the growth of the new
technology. This high expenditure in physical capital is characteristic of the transformation stage, as
companies, firms and cities are forced to transform their economy to incorporate the newly
introduced General Purpose Technology into their fields.
From the mid-1980s, the investment is higher than the base year of 1990 however, it has
stabilized. While investment to output continues to grow, it is at a much slower rate of change.
This suggests a rationalization economic phase. The investment shifts from large, expensive
projects, to more small scale projects that improve the production and quality of what is already
being produced. Growth begins again in high investments in the early 2000’s. Since the curve stops
at 2007; it is difficult to make any real conclusive observations from this.
37
For Bangalore, the detailed data necessary to calculate the capital-output ratio was not
available. Instead to investigate investments in Bangalore, Foreign Direct Investment has been
chosen as an indicator. Below is a table of the major contributors to the investments in Bangalore:
TABLE 5: INVESTMENT IN BANGALORE (RS. BILLION)
Central Government
State Government
Private (Domestic)
Private(Foreign)
Total
1995
1.32
1996
1.32
1997
3.15
1998
3.15
0.08
0.45
1.85
2.43
3.85
7.6
3.86
3.85
12.17
4.29
3.85
12.59
1999
4.78
0.3
26.89
28.54
61.81
2000
4.78
0.3
31.34
40.1
78.2
2001
2002
2003
2004
5.53
7.03
9.21 10.93
1.09
2.36
2.76
3.46
39.66 45.61 52.39 56.38
43 49.93 67.17 68.13
90.95 116.13 142.72 150.11
Source: Shaw and Satish 2007
Over the 10 years, between 1995 and 2004, the FDI increased by 15,040 %. Furthermore,
since 1999, every year the amount of foreign domestic investment has been relatively higher than
private domestic investment. The table below compares the percentage share of these two forms of
investment in Bangalore:
TABLE 6: SHARE OF INVESTMENT IN BANGALORE (%)
Private (Domestic)
Private(Foreign)
1995
4.32
24.32
1996
31.97
50.66
1997
31.72
31.64
1998
34.07
30.58
1999
43.50
46.17
2000
40.08
51.28
2001
43.61
47.28
2002
39.27
42.99
2003
36.71
47.06
Source: Calculated by author using data from: Shaw and Satish 2007
The fact that FDI has a higher percentage share than any other form of investment is a
tribute to the influence that global forces have on Bangalore today. The potential that can be gained
from these investments in high; spillovers and transfers, both physical and knowledge based will
occur. However, if the FDI dominates investment, then the negative results of FDI are accentuated.
This becomes apparent in the structure of the nongovernment organizations. These groups have
been are described by Jalal as having an ‘increasing voice, weight and significances in the urban
area’ (Jalal, 2005). The non-government political influencers are supported by the elite, the middle
class and the ex-government officials, thus these voices have to the forefront. Some have argued
that this is good and that the middle class has been given a greater voice, while others have been
skeptical of this newly established undemocratic power (Shaw and Satish 2007)
38
2004
37.56
45.39
VI.
DISCUSSION
The Discussion aims at analyzing the results presented in the previous section, as well as
underlying the implications that arise from these results.
The first two subsections of the
Discussion will pertain to the analysis of the data, and the last two will make some generalizations
and potential policy implications. This analysis will be done through three broad categories. The
first will look at how applicable the Schön Cycle is to the case of India. The second subsection
assesses what inferences can be drawn for Bangalore given the calculated results. The third
subsection will touch on the implications that these results have on the convergence/divergence
debate.
The fourth subsection will discuss the implications that these results may have on
government policy. Finally, suggestions on future studies will be given.
VI.I
THE SCHÖN CYCLE
In the article ‘Technological Waves and Economic Growth- Sweden in an International
Perspective 1850-2005’, Lennart Schön states: ‘Innovations have come along with institution
changes and reorientation of economic policies’ (Schön, 2008, p. 10). Therefore, one may interpret
the reallocation of labour begins at the end of the 1970’s, and the opening of the economy in 1984
as a natural reaction to the GPT. From the results it is, however, unclear what stage of the Schön
Cycle India is currently in. The Total Factor Productivity results as well as the conclusions made
from the Capital-Output ratio indicator, suggest that India is currently undergoing Rationalization.
This is logical temporally to the introduction of the GTP. If we accept the Schön Cycle then the
Transformation phase should last approximately 25 years, and would have begun at the
introduction of a the GTP, around 1970. During those 25 years changes occurred in the economy,
investment was high in order to create the infrastructure and means to exploiting the new
technology.
Then around 1991-1995, the Rationalization phase should begin, where the
investments to capital stabilize, and the TFP is exceptionally high.
However, the results from the structural change do not reflect a phase of Rationalization,
rather it is similar to that of Transformation. Furthermore, if it is true that crisis brings about
innovation and initiates the Transformation stage, then one may interpret the crisis in 1991 as the
beginning of Transformation. The crisis that hit in India in 1991, causing the government to realign
itself has given way to new industries and potentials, specifically in the tertiary sector. The Indian
economy has shifted from crisis into expansion.
Throughout the 1990’s, labour has been
39
successfully being reallocated into areas with higher value added. Thus the productivity of the
economy has been rising at a rapid rate. Yet, this deduction does not really follow the theory, for
the structural change was still positive throughout the 1980’s, and accelerated in the 1990’s.
Therefore, using 1991 as the marking point of Transformation does not seem very logical. What is
apparent, however, is that the movement of labour has been strongest in the 1990’s, when it would
have been expected that the reallocation of labour would be most fruitful at the beginning stages of
Transformation (during the 1970’s). However, during the 1970’s there was almost no movement of
labour between sectors. This is most likely due to the over controlled, highly bureaucratic system
that was slow and ineffective. It was not until the economy opened up a little in 1984, that
movement between sectors can be seen.
These results therefore do not completely support the Schön Cycle.
This has two
implications; the first is that this study is flawed, and further research, for a longer period of time
will support the Schön Cycle. The alternative explanation is that the Schön Cycle is in fact not
applicable for all cases. While it describes the Swedish situation in a very compact and impressive
form, it is not however a universal model. If the Schön Cycle is not universal, and the phases cannot
be predicted, exactly, then policies suggestions become less simple to make.
VI.II THE INFERENCES FOR BANGALORE
From the results of India in the shift share analysis, it is clear that the movement of labour
since 1980, has had a positive effect on the economy. The structural change has increased in the
1990s even more so, suggesting that there are more people moving into areas of higher value added
sectors. As described in the Historical Background section, the movement of workers to high value
added sectors has been slow.
For city of Bangalore, it is believed that the movement of labour would have occurred faster
than other areas of India. This is because Bangalore is home to some of the best universities in the
country, the first research park was set up in Bangalore and the city has undergone
industrialization under British rule. For these reasons, it is thought that Bangalore would adopt to
value added shifts much faster than India as a whole. For example, in India there is a much faster
decline in agriculture’s contribution of GDP, from 40% in 1980 to 27% in 2004, as compared to the
movement of employment, from 73% in 1980 to 63% in 2004. This suggests that there are a higher
proportion of people dependent on agricultural incomes for their livelihood without any growth in
40
productivity. Thus there is higher reliance with less capital; this should consequently cause an
increase in poverty throughout the society. Furthermore, while the tertiary sector contributes 53%
of India’s GDP, in Bangalore, the tertiary sector supplies 63%. It is therefore clear that the tertiary
sector holds a greater importance in Bangalore than it does in India. While there is no data for
employment movement in Bangalore, it has been reported that 65.8% of the workforce were
participating in the tertiary sector (Narayana, 2008); this is significantly higher than India, where
approximately 22% of the workforce was engaged in tertiary activities. Therefore, it is logical to
conclude that Bangalore has been more effective in moving people from lower value added
industries into higher ones. If Broadberry’s conclusion, that movement of labour from low value
added jobs to high value added jobs results in a positive structural change and an increase in labour
productivity, then it should follow that Bangalore is also experiencing a structural change, but to a
greater degree than India as a whole.
VI.III CONVERGENCE OR DIVERGENCE
A major concern to global economists is whether there is a convergence or divergence
occurring around the world. One way to test this is to look at the relation of GDP per person within
a country to the world average.
41
FIGURE 120: INDIA GDP PER CAPITA IN RELATION TO WORLD GDP PER CAPITA 1960-2008. CONSTANT
2000 USD PRICES
0.13
0.12
0.11
0.1
0.09
India/World
0.08
0.07
0.06
0.05
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
0.04
Source: World Databank: http://databank.worldbank.org/ddp/home.do?Step=1&id=4 . Retrieved on June 15 2010.
From this graph it is evident that the Indian economy has grown significantly over the last two
decades. The GDP growth rates have been outstanding. There are two apparent trends that can be
seen from Figure 10. The first trend is a divergence that I s occurring where India’s GDP per capita
is decreasing relative to the world’s average GDP per capita between 1960-1979. Then there is a
steady convergence that occurs after 1980 and accelerates after 1991, and again after 2003.
Therefore, while the GDP per capital in India is still low in comparison to the World’s GDP per
capital, the gap has been steadily shrinking since 1981.
Moreover, since Bangalore is progressing at a much faster rate than India, it is logical that
there is a divergence going on within the country. While Bangalore ‘takes-off’ and moves into the
forefront of the global stage, there are other cities that do not succeed in the same way. The
divergence burrows deeper however. Bangalore has undergone a process of urban growth through
agglomeration. The formation of urban agglomerations causes the economic activity of the region to
concentrate and centralize. This clustering has attracted people from surrounding regions to shift
towards the economic centre and a stratification of urban verses periphery is formed. The disparity
is not limited to urban verses rural regions though: within the new agglomeration itself, inequality
42
also grows. Thus it is not only between Indian cities, but also within Bangalore, there are disparities
developing. Especially in areas that attract a lot of foreign investment, mainly the tertiary sector,
and the wages are higher, the benefits are greater and the Western influence is stronger. There is a
divergence occurring within Bangalore at present. However, as discussed above, there is an
expectation of self correction.
There appears to be a divergence within Bangalore, as well as between Bangalore and the
greater nation. Simultaneously, however, Bangalore seems to be converging with other global
cities, such as New York, London, and Berlin. Thus to address the convergence/divergence debate,
one must specify at what level to evaluate the data. On a regional and national level there is a
divergence, but at an international level the story of Bangalore reflects one of catch-up. Bangalore
is catching up to other global centers such as London and New York. The wages, especially in the IT
sector are converging to these metropolitans. The infrastructure and leisure activities reflect those
of the industrialized centers. The appearance of malls, golf courses and chic housing all allow
Bangalore to be mistaken for a Western city.
VI.IV POLICY IMPLICATIONS
The Indian economy can be seen as a pendulum swinging. Between 1950 and 1984, it was
an extremely closed economy slowly moving into a more liberal system. From 1984 on, we can see
the economy progressing as the protectionist laws have more or less disappeared. What is expected
from here is another swing back into a more government controlled system. However, with this
swing there is less velocity than last time, and the restrictions are expected to be less radical than
the ones previous to 1984. At present the Indian economy is being dictated by liberal values,
however as wages increase, it is likely that citizens will demand more social welfare, and safety
nets.
The initial introduction into the global market tends to erode the social network that
protects the citizens from global fluctuations: this has been the case for India. India especially,
since it had been highly state controlled before its movement into an integrated market, has seen its
social welfare systems fall short (Harvey, 1989). However, now that the government has had time
to adjust to the changes, a re-establishment of some of the state structures will probably occur. The
idea of the welfare state is not solely Western, but it appears that in order to initially integrate into
43
the global market, the state must loosen its restrictions and control. Once the integration is
complete however, many countries have successfully set up systems to protect the needs of its
citizens. The state creates these programs as a reaction to the demands from its citizens. Therefore,
with the increased incomes and interaction with the West, the demands, specifically in Bangalore,
are increasing for higher standards of care. As described by Barry Eichengreen in ‘Globalizing
Capital: A history of the International Monetary System’, as citizens of nations obtained more
power, and endured hardships, the demands on the government to provide security and comfort
increased, thus forcing governments to be increasingly accountable to the public (Eichengreen
2008). Therefore, we can assume that through social unrest and problems such as the overinflated
importance of the middle class (Harvey 1989), will be corrected over time.
It is important to recognize the significance that cultural and social norms have on the
diffusion and alteration of technology. In the Swedish example, discussed by Schön, Swedish
workers were able to effectively adopt and adapt the technology from Britain, as the two cultures
were quite similar. Thus using the Swedish model, has its flaws when analyzing Bangalore. Most of
the ‘revolutionary’ technologies were incremental; the product was not perfect when it entered the
market. Rather with time, these products diffused and were altered depending on the demands of
the society. The diffusion process is imperative to the innovation. It gives the innovation social and
economic significance and is the source for new innovation (Fagerberg 2005). During the diffusion
process, people must learn new techniques, new infrastructure gets erected, and a new
organizational framework of a firm or even a society may be necessary. Due to these differences,
innovations do not evolve uniformly when placed in different environments. Thus, there is a certain
amount of interaction and feedback that occurs between the innovation and the culture, media,
geography and government (Fagerberg 2005). Marketing has been highlighted as influential to the
diffusion process. The stress that has been put on the differences of innovations that develop due to
alterations made during the diffusion period has created a grey area. If innovations are considered
incremental then introducing an innovation to a new culture of geography could be perceived as an
innovation in itself.
In her Ph.D dissertation, ‘High Technology and Intra-Urban Transformations: A Case Study
of Bengaluru, India’, Rajrani Karla asserts the increasing export of software as an indicator of the
competitiveness of Bangalore’s scientific expertise, and capability in the knowledge economy. Yet
the increase in export is also a sign of a weak domestic market (Kalra 2007). As stated above, the
diffusion process proves to be very important to the development and improvements of an
44
innovation. The diffusion process allows for an innovation to be integrated into the society and
thus takes on characteristics that reflect the needs and wants of the region it is affecting. However,
this diffusion has occurred minimally within the city of Bangalore. Much of the work done on IT
and IT related goods is exported to other countries, thus preventing a domestic market from
arising. Without this domestic market, the potential benefits for the rationalization period will not
be met, for the technology will not be economically pervasive. Therefore, while the fact that
Bangalore has adopted an imitation technology is not inherently negative, however, without the
development and diffusion of a domestic market, the potential for growth is very limited.
Since the IT Revolution did not stem from Bangalore, or India, it means that the technology
must have been transferred. The transfer of technology, like all things, is governed by incentives
(Easterly 2002). Thus there had to be high incentives to leave the origin, as well as a comparative
advantage to come to India. As discussed by Abraham and Joseph, the main factor in investment in
Bangalore was a cheap, educated and large workforce that could speak English. As we can see from
the results, the amount of unemployment is diminishing, which means that the available labour
force is decreasing. Furthermore, as there is a smaller segment looking for work, the competition
between workers gets shifted to employers, which causes an increase in wages and benefits. The
wages, at least in the IT sector are increasing rapidly, and we can see a convergence in wages
between Bangalore and the Western world. As the wages increase and the supply of workers
decreases, Bangalore begins to lose her comparative advantage. There are two potential outcomes;
find a new comparative advantage, or watch the investments shift to other regions.
Unlike the Swedish example, discussed by Schön, neither Bangalore nor India have been
very successful at stimulating the domestic market. A domestic market not only creates capital, it
also creates entrepreneurs and innovators. If we assume that Solow is correct, and that technology
is the only source of long term economic growth, then the obvious policy implication is to
encourage investments in technology. In order for Bangalore to continue to be successful, it must
develop a domestic market that can create new goods and processes to complement the IT sector.
However, without this domestic market, it becomes unlikely for incremental innovations to be
created, thus forcing Bangalore to remain a supplier rather than an inventor. Overtime, investment
will move to other regions, and that new investment city will integrate into the global market while
simultaneously diverging from its local market.
Therefore, if India, and to a greater extent
Bangalore, want to keep their comparative advantages, both regional and national policies must be
introduced that encourage and nurture a domestic market.
45
VI.V
FUTURE STUDIES
The potential for future studies in this area of research is fruitful. At present, there is not
much data for economic indicators available. Therefore, it the first study that should be conducted
would be a compellation of economic indicators, using constant prices, and reliable sources. With
this supplemental data, there are a number of avenues that a research could follow. One suggestion
would be to replicate this study using the new data, and determine whether the conclusions and
inferences are in fact viable. Furthermore, the more complete data would provide a regional
comparison. There are two regional studies that come to mind for future research; one between
Bangalore and other cities undergoing a similar process, and one between Bangalore and cities that
have not clustered.
For the former research project, major cities in countries such as; Israel, Taiwan or China,
would be optimal. Since these countries have similar growth processes in relation to IT technology,
this analysis help to draw conclusions. If these centers followed similar economic growth then the
correlation between IT, and economic success is further strengthened, however, if these cities do
not follow similar growth then there is probably a third variable for Bangalore ‘forging ahead’. To
further test these conclusions a comparison between Bangalore and dissimilar cities should be
compared. It would be optimal to be able to compare Bangalore to a city that is the same in every
way except where clustering did not occur. There are inherent difficulties in finding such a city
since the fact that clustering did occur in Bangalore, as well as Hyderabad and Prune suggests that
these cities have a comparative advantage.
Therefore, it is unlikely that a comparison to a city
without clustering would truly be the same in every other aspect. The problem of the third variable
thus is much stronger in a cross-city analysis.
46
VII. CONCLUSION
From these results it is clear that both India, and to a greater extent Bangalore, have been
expanding and developing at a rapid rate. Throughout the 1990’s Bangalore has transformed into a
sophisticated high-tech centre. This city has become an exemplar of 21st century growth; it is a
newly globalized city which exemplifies the success and wealth that can be obtained through
liberalization. The structural change within India suggests that there has been a positive shift of the
economy from the primary sector into the secondary and tertiary sectors. Moreover, since the
tertiary sector has the highest value added, it can be assumed that the structural change is mainly a
product of labour movement into the tertiary sector. There has been a movement labour into the
tertiary sector, which has resulted in higher labour productivity. Because of the higher reliance of
Bangalore on the tertiary sector, it is expected that the structural change in the city has been much
more intense than India. The success of the IT sector in Bangalore is what sets the city apart from
the rest of the country. Therefore, it seems to be a logical deduction that the tertiary sector and
more specifically the IT sector that is driving the economy forward right now. However, the results
show a correlation between IT and economic growth. Therefore, without further research, it would
be incorrect to assert that the IT sector is the cause.
Bangalore has undergone an economic boom, which has given hope to other industrializing
megacities. However, the need for a domestic market appears to be necessary for Bangalore’s
future success. Furthermore, the inconsistent results question the relevance of the Schön Cycle and
highlights problems of generalizations and invoke a need for future research.
47
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