The report by McKinsey which stresses on productivity, as the route to growth in India. The complete report, is available for download, once you have registered (which is free). It also gives access to all the other McKinsey reports. A summary of the article which appeared in McKinsey Quarterly, is available here.
The McKinsey Global Institute has been studying the barriers to economic growth in various countries for nearly a decade. The study on India which was released last week is the thirteenth in a series of fascinating country studies. There were studies conducted earlier in countries as diverse as Germany, Australia, Sweden, Korea and Brazil. The genesis of the research can be traced to some of the heated debates which raged in the US during the recession of 1990. The Japanese were on the rampage and US industry was on its knees. Expectedly, there were fears that America would be hollowed out and hence cries for protection.
The McKinsey Global Institute went deep into the issue and came up with an answer that was far ahead of its time. America need not worry. It's strengths in services and higher productivity would see off the Japanese attacks, it concluded. That was bang on target. The US Economy entered its longest post-war expansion while Japan sunk into a painful recession.
The project was on. The questions to be pursued inlater studies also became clear. What is it that makes some economies succeed? How important is productivity in driving growth? The McKinsey Global Institute brought in outside scholars to help. These included Robert Solow of MIT, Richard Cooper of Havard, Jose Scheinkman of the University of Chicago and many others. The outside expertise allowed the 13 country studies to blend the insights of two sciences: management and economics.
While there are differences in each country study, the broad conclusions are the same one that come out from the new one on India. One, higher productivity can drive economic growth. Two this will happen if markets are allowed to operate freely. Of course, this often leads to criticism that the consulting firm is merely mouthing the fashionable certainties of market fundamentalism.
What makes the entire international project important is the fact that it relentlessly focuses attention on the importance of higher productivity. This is something that governments don't necessarily understand. Hence the single-minded obsession with higher investments, an approach that helped destroy many economies in Asia in 1997. The real issue of contention is not whether McKinsey is correct in it's championing of higher productivity. What is debatable is whether it's a bit too optimistic about the possibilities of productivity-led growth. Can an economy like India's really start growing at 10% a year by 2005? That's where the main doubts creep in.