Thursday, October 20, 2011

What Milton Friedman had to say about the Indian economy in 1955 and in 1963



Milton Friedman is not a good name to invoke when the global markets are in a mess, when liberals and economic policymakers all seem to be crying out "We are all Keynesians." Friedman is portrayed as one of the hardened monetarists, who is said to have argued that the state should lay its hands off the economy. That would be a silly position to hold in today's economic situation. But there is however a little secret known to some and tucked away safely in the dusty archives as far as public debates are concerned: that Milton Friedman visited India for two-month stretches each time  in 1955 and in 1963 and gave his assessment of the challenges and problems facing the Indian economy.

Whatever might be his monetarist orthodoxy, what Friedman had to say in the notes he prepared are absolutely relevant and that show him to be more pragmatic and broadminded than is made out.

A young and very bright Facebook friend, Vidya Prabhu, from Udipi/Bangalore, had sent me the electronic copies of these Friedman notes on India.

The 1955 paper is titled, "A Memorandum To the Government of India" In the first section called "Goal", Friedman makes the commonsensical and terrific observation: "The great untapped resource of technical and scientific knowledge available to India for the taking is the economic equivalent of the untapped continent available to the United States 150 years ago."

In the next section called 'Investment Policy', Friedman starts off saying: "There is a tendency not only in India but in most of the literature on economic development to regard the ratio of investment (to) national income as almost the only key to the rate of development, to take it for granted that there is a rigid and mechanical ratio between the amount of investment and additions to output. In the opinion of this writer, this seems a serious mistake. At the one extreme, output can increase even without investment; at the other too high a ratio of investment may actually produce a lower rate of increase in income. "

And the more important observation he makes is this: "In any economy, the major source of productive power is not machinery, equipment, buildings and other physical capital; it is the productive capacity of the human beings who compose the society. Yet what we call investment refers only to expenditures on physical capital; expenditures that improve the productive capacity of human beings are generally left entirely out of account. In the United States, for example, only about one-fifth of the total income is return to physical capital, four-fifths to human capital."

He strikes a high note of his argument when he says: "Destrpy the physical plant of the United States and leave the skills of the people and it would take but a few years to restore the initial position. Destroy the skills and leave the plant and the level of output would sink irretrievably. The cathedrals of medieval Europe, the pyramids of Egypt, the monuments of the Moghul Empire in India are all testimony to the possibility of a high rate of investment in physical capital without a growth in the standard of the living of the masses of the people. These considerations are especially important for India, precisely because its frontier  is the frontier of technical knowledge and skill."

Despite the high rhetoric of Indian planners and policymakers, the investment in people is still a far cry in the country, both in the public and in private sectors. There is a tendency to ignore and neglect to invest in human resources.

The other problem he points to is the excessive focus and investment in heavy industry on the one hand and on cottage industries on the other, neglecting light industry. "This policy threatens inefficient use of capital at the one extreme and combining with too little labour and an inefficient use of labour at the other extreme by combining it with too little capital."

In 1963, in a paper called "Indian Economic Planning First Draft May 6, 1963",
Friedman writes based on a sample survey carried out by the Indian Statistical Institute in Calcutta under Prof, P.C.Mahalanobis, "Per capita availability of food grains has fluctuated a good deal but with no steady upward trend: it was about the same in 1958 as in 1950, in 1960 as in 1955."

Sounds familiar?

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