The Hindu Business Line : Role of economic geography and state policy in industrialisation

The modern city is an industrial city, aver the authors of Made in India, a book that looks at what lies behind industrialisation. Stefano Pelle explores the BRIC business in Understanding Emerging Markets. And Environmental Requirements and Market Access discusses how ecological and health standards impact South Asian trade.

What do you see behind modern economic growth? Industrialisation, say Sanjoy Chakravorty and Somik V. Lall, in Made in India, from Oxford University Press (www.oup.com). Barring `isolated cases of cities that are entirely based on a local resource such as a natural attraction or a specialised agricultural product,' the modern city is an industrial city, aver the authors.

And, what lie behind industrialisation are the local region and the state. "Success, failure, and intermediate outcomes are the result of some factors of economic geography such as proximity to resources and markets, transportation costs, localisation and urbanisation economies," plus other market-based factors. These, apart from "factors of political economy such as historical path dependence, policy decisions on infrastructure, exchange rates, land use, globalisation," and similar factors that are strongly influenced by the state.

Interestingly, the pattern of industrial investment in India is "quite distinct from `spread' or `polarisation reversal'," notes the book. "There is increasing inter-regional polarisation of industry at the same time that there is intra-regional dispersal in the leading regions." A case of `concentration with dispersal,' or `concentrated decentralisation,' where the new growth centres are in the advanced regions rather than in the lagging ones, explain the authors. The apparently oxymoronic phrase, as used in growth literature, refers to situations where scarce investment resources are not scattered around equally, but instead `small centres or cores are set up in the periphery, thus to some extent distributing investment but also taking some advantage of urbanisation economics.'

There are `intangibles' too, as elements of local political economy. Examples that Chakravorty and Lall mention are `Gujarat's entrepreneurial culture, virtual statelessness in Bihar, extreme labour militancy in West Bengal, and knowledge-based cultures in the South.'

Industrial location decision is a two-step process, analyse the authors. "First comes the decision on which general region to invest in, followed by the decision on the specific location within the selected region." Political economy can influence the first decision, and thus lead to inter-regional divergence. The second decision leads to intra-regional convergence. "In India, the key is to devise strategies that will influence the first decision."

Dissecting intra-regional differences, the authors find that two things really matter, as follows: "The existence and size of investment from the pre-reform period, and the existence and size of new investment in the neighbouring districts."

But why pre-reform investment? Because, it `implies continuity,' and is `evidence of a historical process of investment location.' And the second factor signifies clustering, which is where geography guides investment.

An insight of importance is that though districts successful earlier continue to receive new investment, "degree of past success is not the best indicator of the degree of current success." For instance, "Greater Bombay is still successful in attracting investment, but not to the extent it was earlier; its neighbours, Raigarh and Thane, are now the preferred investment destinations."

What can poke a spoke into economic analysis is `the district level incentive system that is common in most States.' There are three to five tier incentive systems, "whereby there are tax breaks for locating in lagging districts." It is difficult to use this information in a modelling framework, mainly because the incentive structures vary so much from State to State, rue the authors. "This is a serious policy issue," they observe.

Two strands of locational logic that the book explains are of the private sector and the public. "Private sector investments are seen to favour existing industrial clusters, and coastal districts, and are seen to be averse to communist or socialist States."

On the contrary, central government investments `appear not to be guided by any clear spatial considerations.'

Increasing industrial divergence in India is due to `these two logical systems of investment distribution,' state the authors.

For Bihar, which is `arguably one of India's most backward States in terms of development indicators and has the highest poverty incidence', there are suggestions towards the end of the book. The prescription of priorities for the State begins with reducing the volatility of agricultural output and increasing its productivity. "Development of an agro-based industrial strategy may be worth considering, as it would stimulate the development of upstream and downstream industries," urge the authors.

Stimulating read.

BRIC-work

To those who want to build business `BRIC by brick', here is help from Stefano Pelle, in Understanding Emerging Markets, from Response (www.indiasage.com). "Western countries seem to have finally realised that places like India and China are not only exotic locations to spend holiday time," notes the intro. BRIC, for starters, was coined by Goldman Sachs in 2003. "This acronym puts together four of the countries which have shown, during the last few years, a particularly promising development potential, namely, Brazil, Russia, India and China."

The share of these four countries in the global capital market is currently less than 4 per cent, and their weight in the world economy is just about a tenth. But with an average annual GDP growth in excess of 6 per cent, as against the world average of 3.7 per cent, BRIC's share of the world growth is estimated to double to 40 per cent, over the next two decades. "The per capita income should range in the same period between $2,300 and $16,600, thus becoming four times of what they are now; their weight in the world economy should double to 20 per cent and the share of the world capital market could exceed 15 per cent," writes Pelle.

To guide the wannabe BRIC-goers, the book has a chapter on `starting off', which thankfully begins with `common mistakes,' both in the desk work and in the action phase. One such mistake is the wrong assumption that `a successful model in the country of origin could be easily replicated with minimal changes in an EM (emerging market)'. Pelle cites, as example, the case of Fiat Palio, which was launched in the mid-1990s in Brazil, to good success. But problems surfaced when Fiat attempted to replicate the success in India. "After a few months of initial success, the sales of the car dropped dramatically." Why so? "Possible explanations could be found in petrol consumption, which was considered to be too high in India, as well as the absence of an after-sales infrastructure, which created long delays in the maintenance and repairing of the cars... "

A book that can add speed to ventures headed the BRIC way.

Environment scan

Nagesh Kumar and Sachin Chaturvedi have edited Environmental Requirements and Market Access, from Academic Foundation (www.academicfoundation.com). The book discusses SPS (sanitary and phyto-sanitary) measures and TBT (technical barriers to trade), as also how environmental and health related standards adversely impact South Asian trade, by being discriminatory and adding to compliance costs.

A chapter titled `case study of India' speaks, among other things, about the electronic industry, which used to be traditionally thought of as `a relatively clean industry.' There are increasing worries about the disposal of electronic waste, point out the editors. "In this regard, the EU (European Union) Directives are expected to come into force in 2008 and this will have serious implications on the production process of component manufacturers, exporting to the EU," foresees the book. "A recent study shows that so far there is very little awareness amongst the Indian electronic component manufacturers about the EU Directives... " A wake-up call, this is, at least at the eleventh hour.

Market reads that merit industrious read during the week.

http://BookPeek.blogspot.com

D. Murali

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