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Thus writes Daniel Griswold in \”Plumbing America’s Balance of Trade,\” a paper published for the Mercatus Center at George Mason University. For noneconomist readers, Griswold\’s statements may seem ideological or controversial. For those who needed to learn about trade statistics at some point, his statements are so obviously true–true as a matter of how the underlying terms are defined–that even writing them down feels pointless. To steal a phrase from Alan Walters (who was writing about how Milton Friedman\’s effort to revise monetarism was perceived during the 1950s), it\’s like \”flogging a decomposing horse.\”  Here, I\’ll take a stroll through the US trade statistics for 2016 as published by the US Bureau of Labor Statistics, making heavy use of Griswold\’s explanations. Even for those familiar with basic trade statistics, flogging this particular decomposing horse may offer a few insights or surprises.

Here is the data for 2016 on the US current account and capital account (terms to be explained in a moment) from the US Bureau of Economic Analysis:

Start in the first row, with imports and exports of goods. In 2016, imports of goods exceeded exports by $750 billion, which is sometimes called the \”merchandise trade deficit.\” Griswold breaks this down into categories and notes that most of this trade in goods is about industrial supplies and inputs, not consumer products:

\”The top two major categories of imports were (1) industrial supplies and materials and (2) capital goods except automotive goods. Together they account for 54 percent of US merchandise imports. Consumer goods account for 24 percent more, and automotive vehicles, parts, and engines were 13 percent of imports. … On the export side, the biggest inflow of dollars from abroad was to buy US industrial supplies and materials, followed by capital goods (except automotive goods); together they account for almost two-thirds of US exports. Consumer goods accounted for another 12 percent, and automobiles and auto parts for about 10 percent.\”

In the category of services, the US ran a trade surplus in 2016 of $249 billion. Tourism is a major industry in the international trade of services: for example, a German tourist visiting the US is the economic equivalent of an export, because someone from another country is buying hotel and travel and tourist services produced in the US. Again, here\’s the breakdown from Griswold:

\”The largest outflow of dollars for services was from Americans traveling abroad: 82 percent for personal travel and the rest for business travel. The next-largest category was “other business services,” which includes business and management consulting and public relations, as well as technical services such as architectural and industrial engineering. A close third for spending on imported services was transportation, primarily ocean freight and air passenger services.10 On the export (credit) side of the services ledger, the largest inflow of dollars was also generated by travel, three-quarters for personal travel to the United States, including travel for education. The next largest generator of inflowing dollars was charges for the use of intellectual property, chiefly for industrial processes, computer software, trademarks, and movies and television programming. Close behind were other business services, primarily business and management consulting and public relations services, research and development (R&D) services, and technical services. Other major service exports are transportation, with almost half of the dollar inflow generated by air passenger services, and financial services such as financial management and credit card and other credit-related services.

Economists also view income from investments made in other countries as a form of trade. Instead of someone from another country buying a good or service, they are paying for the use of US investment capital. As Griswold points out, an interesting pattern here is that the absolute size of foreign investment in the US economy is bigger that the absolute size of US investment in other countries, but the investment income received by US investors is larger that the investment income received by foreign investors. The underlying reason is that foreign investors are more likely to turn to the US markets for fairly safe assets, with a correspondingly low rate of return, while US investors are more likely to take on risk when investing abroad, for which they are compensated with a higher return. Griswold writes:

\”Americans earn a surplus on investment income even though the stock of foreign investment in the United States is about one-quarter larger than the stock of what Americans own abroad. Across all categories of assets, Americans earn a higher rate of return on their overseas investments than foreigners earn on their investments in the United States. In total investment returns, Americans earned 3.3 percent annually on the annual average of $23.4 trillion in assets they owned abroad during the 2011–2015 period. They earned 7.2 percent on their direct investments, 3.2 percent on portfolio investments, and 0.4 percent on all other investments abroad, including bank deposits and loans.15 Compare that to the more modest 1.9 percent that foreign savers earned each year on the stock of $29.1 trillion they owned in US assets on average for each year during the same period. They earned 3.2 percent on their direct investments, 2.4 percent on portfolio investments, and 0.2 percent on all other investments—all lower returns than Americans earned on their overseas investments in the same class of assets. We see the financial and capital accounts offering the same win-win benefits of trade as the current account. Foreign savers are willing to settle for a lower return on their investments in the United States in exchange for the security and liquidity offered by the US capital markets. American savers, in turn, are able to realize greater returns on their investments in exchange for their willingness to take more risk in overseas assets.\”

The category of unilateral transfers refers to both government and private transfers, including foreign aid, charitable donations that cross borders, and remittances that workers in one country send back to family and relatives in another country. Griswold gives details:

\”Year after year since World War II, the United States has unilaterally sent more goods, services, and assets (or their dollar equivalent) abroad than it has received. The one exception was 1991, when the United States received more than $30 billion in contribution payments from allies in the Gulf War, tipping unilateral transfers to a surplus. In the half decade of 2011–2015, the United States sent an annual average of $252 billion abroad in unilateral transfers and received $121 billion, for an annual deficit of $131 billion. More than three-quarters of the outflow of dollars was for private transfers, chief among them insurance-related transfers; withholding taxes paid by US companies; charitable donations by US entities; and remittances, which are personal transfers from US resident immigrants to foreign residents. The rest of the unilateral transfers were US government transfers, primarily nonmilitary and military assistance provided to foreigners in the form of goods, services, or cash under programs enacted by the US Congress. Other government transfers include Social Security and retirement benefits paid to former US residents who live abroad, and contributions to international organizations and commissions to meet the financial obligations of membership and to fund United Nations peacekeeping operations. The smaller inflow of dollars for unilateral transfers is also mostly private receipts. According to the US Department of Commerce, the private inflow consists primarily of insurance-related transfers; pensions and benefits received principally from Canada, Germany, and the United Kingdom; antitrust-related class-action lawsuits; and remittances received by US residents. The rest of the transfers come to the US government primarily in the form of withholding taxes received and fines levied by US government agencies.\”

Add these four lines up, and you get the \”current account balance,\” which is clearly a broader view of the US balance of trade than just looking at the merchandise trade deficit. In 2016, the US had a current account deficit of  -$481 billion.

But the current account balance is still only a portion of the overall picture. It captures flows of goods and services, investment income and unilateral transfers, but it doesn\’t include actual flows of investment themselves. This portion of the statistics on international transactions is called the \”capital account.\” As a matter of definition and logic, the current account and the capital account are yin and yang, inteconnected and interdependent. When an foreign exporter sells in the US, and earns US dollars as a result, there are only two possible ultimate uses of those US dollars: either they are used to purchase dollar-denominated goods and services, or they are invested in a US-dollar denominated asset. Of course, the foreign exporting firm that earns the US dollars may not take these actions itself: it may just trade the US dollars for its home currency in foreign exchange markets. But the party that ends up with these US dollars must make the same choice of either buying US products or investing in US financial assets. Of course, this same process operates when US exporters sell in other countries and earn foreign currency.

The result of this pattern is that any current account deficit is always matched by a capital account surplus, and vice versa. As the quotation at the start said: \”\”America’s commerce with the rest of the world must be and always is balanced when taking into account investment flows as well as the exchange of goods and services …\” So what are these capital account flows for the US economy?

In looking at the different forms of capital account flows, it\’s important to notice that each one is described as a \”net\” flow. When it comes to international investment in stocks and bonds, for example, there are enormous amounts of \”gross investment\” thundering around the world every minute of every day. The capital account measurements don\’t measure these gross flows of capital; instead, they measure at the end of a given time period (a quarter or a year) how the overall size of these investments has changed. If the inflows and outflows of investment capital balance each other, the gross flows can be very large while the net flow is zero.

Direct investment refers to a situation where the investor has a substantial degree of input into the management of the asset. As Griswold emphasizes, foreign direct investment by US firms, or FDI, is typically a way for US firms to expand their sales in foreign markets:

FDI occurs when a foreign investor acquires a controlling interest in the affiliate—defined as an equity stake of 10 percent or more. The gross flows of FDI are far smaller than portfolio investment because FDI investments are longer term, but FDI is hugely important because it represents not only a transfer of capital but also of management expertise and technology. … Contrary to a popular perception, US companies do not locate productive operations abroad primarily to export products back to the United States but instead to reach more customers abroad. A presence in the local market can help US affiliates refine their final products to meet local demand, to reduce transportation costs, and to better protect their brand name and intellectual property. Many types of services cannot be exported but must be delivered in the local market. In today’s global economy, US companies sell far more of their branded goods and services through foreign-based affiliates than by exporting from the United States. In 2014, US-owned affiliates supplied $4.49 trillion in goods to foreign customers compared to $1.63 trillion in exported goods. That same year, US-owned affiliates provided $1.66 trillion in services to foreign customers compared to $743 billion in services exports.29 That means that US producers earn almost three times more from the sale of goods through their affiliates abroad than they do by exporting from the United States, and they earn more than twice as much from the sale of services. Goods and services produced abroad by US-owned affiliates are overwhelmingly sold abroad. Of the more than $4 trillion in goods that foreign-owned affiliates supplied in 2014, 8 percent were sold as imports to the United States while 92 percent were sold in the host country or in third countries.

\”The financial account measures transactions for portfolio investment, which is passive, noncontrolling ownership of common stocks, bonds, or Treasury bills; for bank deposits or direct loans; and for direct investment, which involves the direct control of an asset by the investor. … Portfolio investment is defined as cross-border transactions and positions involving debt or equity securities other than those included in direct investment or reserve assets held by central banks. In the half decade of 2011–2015, foreign investors increased their holdings of US portfolio securities by an average of $504 billion a year, while American investors increased their holdings of foreign securities by an average of $310 billion, for a net annual inflow of $194 billion. Of the annual inflow of portfolio investment, 90 percent flowed into US debt securities, such as Treasury bills, and the rest flowed into equities, such as stocks and mutual funds. Of the annual outflow of portfolio investment, two-thirds flowed into foreign equity investment and one-third into debt securities.\”

The other substantial category  here is \”other,\” which as Griswold explains is mainly bank deposits and loans. There are also categories for financial derivatives and central bank reserve assets:

Another category of financial flows includes the sale of assets not included in portfolio investment or direct investment. The major sources of these flows are bank deposits and loans. In the 2011–2015 period, the average annual net inflow of dollars for deposits in US institutions or principle for loans from overseas was $42 billion—with a large inflow for bank deposits partially offset by an outflow for loan principle. The net annual outflow of dollars from the United States for loans and deposits during that same period was a negative $218 billion, which represents a net withdrawal from deposits that had been made abroad. That means that a pipe that would normally be expected to carry dollars from the United States to banks and other institutions abroad instead carried a net flow of dollars back to the United States during 2011–2015. Other categories of financial flows outside portfolio and direct investment are financial derivatives and reserve assets. Financial derivatives are instruments whose value is linked to the prices of underlying items, such as an asset or index. In the 2011–2015 period, an average annual net of $21 billion flowed out of the United States to buy financial derivatives. Reserve assets are cross-border assets that are generally owned by monetary authorities for direct financing of payment imbalances. These transactions are a small part of the overall balance of payments, averaging a net annual $1.5 billion in outflows in 2011–2015.

Taking these together, the US ran a capital account surplus of $406 billion in 2016. Conceptually, the capital account surplus should equal the current account deficit. But in the real world, the actual data on trade in goods and service, investment income, transfers, ownership of portfolio assets, foreign direct investment, and international bank accounts all come from different sources, and so it\’s no surprise that they don\’t match up directly. There\’s always a \”statistical discrepancy\” as shown in the table. Griswold explains:

\”The most likely categories contributing to the errors and omissions involve trade in services, delays in payments between reporting periods, interest and dividend receipts, and the temptation companies face to understate the value of exports or to overstate the value of imports in order to reduce tax liability. … In the 2011–2015 period, the average annual net inflow of dollars through the capital account was $1.5 billion and the average net outflow was $0.5 billion. … Statistical discrepancies were a small 1.5 percent of total annual inflows during 2011–2015.\”

I won\’t dive into the arguments about the causes and effects of current account trade deficits or capital account surpluses here. My point here is just that these categories are all inextricably interrelated, and any serious discussion of US international transactions needs to show some awareness of this entire picture. 

So argues Nicholas Bloom in his essay, \”Corporations in the Age of Inequality,\” which appears as a cover story in the March 2017 issue of the Harvard Business Review.  The basic idea won\’t be new to long-time readers of this blog. For example, I discussed some earlier work by Bloom together with co-authors Jae Song, David J. Price, Fatih Guvenen in \”Earnings Inequality Between Companies\” (July 6, 2015) and a study by the OECD on this subject in \”Productivity Growth and the Diffusion Problem\” (July 14, 2015).  But this essay is a very nice compact and readable overview of the work. 

This pattern is also apparent within industries: that is, if you just look at manufacturing firms, or just look at services firms, the labor productivity of the top firms is pulling away from the labor productivity of other firms. Here\’s a figure from Bloom\’s essay, drawing on the OECD study mentioned earlier.

Bloom summarizes what is happening this way:

\”In other words, the increasing inequality we’ve seen for individuals is mirrored by increasing inequality between firms. But the wage gap is not increasing as much inside firms, our research shows. This may tend to make inequality less visible, because people do not see it rising in their own workplace. This means that the rising gap in pay between firms accounts for the large majority of the increase in income inequality in the United States. It also accounts for at least a substantial part in other countries, as research conducted in the UK, Germany, and Sweden demonstrates. … I believe that much of the rise of between-firm inequality, and therefore inequality in general, can be attributed to three factors: the rise of outsourcing, the adoption of IT, and the cumulative effects of winner-take-most competition.\”

In other words, a number of leading companies are now focusing on a very specific core competence. For other services, they hire outside contractors (either locally or long-distance). Bloom writes:

\”Employees inside winning companies enjoy rising incomes and interesting cognitive challenges. Workers outside this charmed circle experience something quite different. For example, contract janitors no longer receive the benefits or pay premium tied to a job at a big company. Their wages have been squeezed as their employers routinely bid to retain outsourcing contracts, a process ensuring that labor costs remain low or go ever lower. Their earnings have also come under pressure as the pool of less-skilled job seekers has expanded, due to automation, trade, and the Great Recession. In the process, work has begun to mirror neighborhoods — sharply segregated along economic and educational lines.\”

The rise of between-firm inequality raises some social questions that go beyond the general issue of inequality between individuals. For example, it suggests that in the past, successful firms were more likely to have played a role in redistributing income, in the sense that all the employees of a successful firm tended to share, at least to some extent, in the firm\’s success. In the past, successful firms could offer a kind of career ladder, where a combination of experience and training helped some of their entry-level workers move up to middle-class jobs. In the past, successful companies offered a kind of integration across high-wage and low-wage jobs, because people in all kinds of jobs were more likely to have a common employer.

In contrast, a rise in between-firm inequality suggests that the US and other leading economies are becoming a more economically segregated, in the sense that those with high pay and those with lower pay are becoming less likely to have the same employer. It means that the classic \”American dream\” success story, of someone being hired in the mailroom or as a secretary or janitor, and then getting promoted up the company ladder, is less likely to occur. Nowadays, those jobs in the mailroom or the secretarial pool or the janitorial work are more likely to involve working for an outside contractor. In that sense, some of the rungs on the bottom of the ladder of success have been sawed off. 

They point out that total federal spending on statistics is about 0.18% of the federal budget–and just to be clear, that\’s not 18%, but rather a little less than one-fifth of 1 percent.  As the authors point out in detail, with examples, the potential benefits of this information are considerable. The federal budget is about $3.6 trillion, and of course the federal regulatory apparatus imposes additional costs. Information helps to direct government spending, taxes, and regulations, and it helps citizens to hold their government accountable. In addition, businesses and households often build on government statistics when making their own plans and decisions, thus allowing the economy to function more smoothly than if this information was only available, in partial chunks, from private providers.

But these arguments for the value of government statistics are old and well-known; indeed, they date back to the legislation involved in the first Census, back in 1790. Section 2 of the just-adopted US Constitution called for an enumeration of people to determine the number of members each state would have in the House of Representatives: \”The actual Enumeration shall be made within three Years after the first Meeting of the Congress of the United States, and within every subsequent Term of ten Years, in such Manner as they shall by Law direct.\” But when the bill to enact the first Census came up in 1790, James Madison (then a member of the House of Representatives) argued that there was a great opportunity here to do more than just counting heads, and that it would be useful to gather more information. Our records of Congressional debates from that time do not quote exactly verbatim, but instead are paraphrased. The fuller comments attributed to Madison are below, but here\’s are some highlights of what he had to say on January 25 and then on  February 2, 1790:

\”This kind of information, he observed, all Legislatures had wished for; but this kind of information had never been obtained in any country. … If the plan was pursued in taking every future census, it would give them an opportunity of marking the progress of the society, and distinguishing the growth of every interest. This would furnish ground for many useful calculations, and at the same time answer the purpose of a check on the officers who were employed to make the enumeration … And I am very sensible, Mr. Speaker, that there will be more difficulty attendant on the taking the census, in the way required by the constitution, and which we are obliged to perform, than there will be in the additional trouble of making all the distinctions contemplated in the bill. … I take it, sir, that in order to accommodate our laws to the real situation of our constituents, we ought to be acquainted with that situation. It may be impossible to ascertain it as far as I wish, but we may ascertain it so far as to be extremely useful …  If gentlemen have any doubts with respect to its utility, I cannot satisfy them in a better manner, than by referring them to the debates which took place upon the bills, intend, collaterally, to benefit the agricultural, commercial, and manufacturing parts of the community. Did they not wish then to know the relative proportion of each, and the exact number of every division, in order that they might rest their arguments on facts, instead of assertions and conjectures?\”

The modern arguments for government statistics are pretty much all there. From my perspective, I would only add that it\’s very useful to have statistics that are publicly available, and where the methods are openly discussed. You might not like, say, exactly how the poverty line is defined, or how the government statistics draw the line between those counted as unemployed and those counted as \”out of the labor force,\” but at least the method is clear and the same method is used over time. The process is isolated from politics in various ways. For example, the many tasks involved in producing government statistics are typically divided up so that no one person can tell what the results will be until the end. Groups of outside experts are called in on a regular basis to evaluate and critique. Politicians have limited input to the actual data process. For example, \”In the case of the BEA [Bureau of Economic Analysis], political appointees have very limited access to the data until after journalists receive them—one hour before the estimates are made public— further ensuring the impartiality of the process ..\”

I\’m all for managing every little sliver of the budget as effectively as we can. But to me, government statistical programs are part of what makes citizenship possible.

\”I use Nielsen Consumer Panel data to design and run my own survey on households to measure the effect of what was then the second of these large randomized experiments run by the U.S. government, the economic stimulus program of 2008. The key feature of that program was that the timing of the distribution of payments was determined by the last two digits of the Social Security number of the taxpayer, numbers that are essentially randomly assigned. So the government effectively ran a $100 billion natural experiment in 2008, distributing money randomly across time to people, and this policy provides a way to measure quite cleanly how people respond to infusions of liquidity. …

\”The first thing I found out is that illiquidity is still a tremendous predictor of who spends more when a predictable payment arrives. But it\’s not only liquidity. People with low income have a very high propensity to spend, and not just people who have low income today, as would be associated with the standard buffer-stock model. You can imagine a situation where you\’ve had a bad income shock, you happen to have low liquidity, and you spend a lot. But illiquidity one or even two years prior to the payment is just as strongly associated with a propensity to spend out of liquidity, as illiquidity at the time of the payment. This same set of people who have persistently high propensities to consume are also the people who characterize themselves as the type of people who spend for today rather than save for tomorrow when I asked them specifically about their type, not their situation. They are also the people who report that they have not sat down and made financial plans. … Low liquidity, or low financial wealth, is a very persistent state across households, suggesting the propensity to spend is not purely situational. A lot of it is closer to an individual-specific permanent effect than something transient due to temporary income shocks. … 

\”So the question is how many people are influenced by constraints in practice. Is their marginal propensity to consume noticeably influenced by the fact that they might be constrained next month or in six months? I would say that\’s quantitatively important for roughly half of the population. … I don\’t think there\’s a lot of transition between the people who would consistently hit these constraints or be concerned about them and the people for whom they\’re not that relevant.\”

Tradeoffs in the coming revisions in the Consumer Expenditure Survey

\”The BLS [Bureau of Economic Statistics] is revising the CE Survey now. It\’s called the Gemini Project, and I have been involved a little with advising how to revamp it. Surveys in general have been experiencing problems with participation and reporting. The CE is suffering from these problems, and so the Gemini Project is trying to address them. The CE has the huge benefit of being a nationally representative survey done by the Census Bureau; almost all of the alternative datasets that we\’re using from administrative sources that are not strictly survey datasets are less representative. So reducing the CE\’s problems with participation and reporting could potentially have a very large payoff. Of course, the cost of the change is that the CE Survey as it stands now is a very long panel dataset that has had the same format throughout the whole time. So we\’re going to break that and no longer be adding new time periods to an intertemporally comparable dataset. But I think that\’s probably a cost worth paying at this point.

\”What the BLS is planning is to change dramatically the way the CE Survey is conducted. They\’re going to gather data in quite different ways than they have in the past, including some spending categories that will almost have so-called administrative sources. What I have been pushing for is maintaining some panel dimension in the new version of the CE Survey. If you don\’t have a panel dimension, then for lots of macro-type questions, you can track people only at the group level. And since groups are usually affected differently by other things going on in the world, you lose a lot of ability to identify stuff that might be interesting — tracking someone who had a specific policy exposure in one period and seeing how they\’re doing a month or a year later. If the BLS eliminates the panel dimension, researchers couldn\’t do anything like I did with my tax rebates work, nor any other work that looks at treatments that are happening at the individual level. But I\’m hoping that the new, state-of-the-art version of the CE Survey will last another 35 years and be just as good.\”

A main theme of the report the problems that India needs to overcome to lay a firm foundation for sustained economic growth into the future. While the report often takes a moderately optimistic glass-half-full tone, discussing what policies are being undertaken, I found that I was more struck by the glass-half-empty interpretation–that is, the depth and severity of many of these issues. Here are some examples (with footnotes omitted throughout for readability).

India\’s education system has gotten children into school, but is failing to teach them

\”If education were only about schools, about physical infrastructure, materials, and ensuring universal enrollment, then India has succeeded spectacularly. Every large population center has a school; most schools have buildings and teachers assigned; and students have study materials. It was hoped or assumed that once the schooling inputs were in place, education and learning outcomes would somehow follow automatically. But this has proved not to be the case. Lant Pritchett, an education researcher with Harvard’s Kennedy School of Government, has evocatively described the situation as `schooling ain’t learning.\’ And schooling without learning leads to very poor educational outcomes, a finding supported by the 2014 Annual Status of Education Report, the largest nongovernmental household survey undertaken in rural India:

\”`51.9% of Class 5 children in rural India cannot read a Class 2 text; only 25% of children in Class 5 and 46.8% in Class 8 could read simple English sentences; just 25.3% of Class 3 children could do a two-digit subtraction, 26.1% of Class 5 children and 44.1% of Class 8 students could do division. …\’

\”A 2010 study by the Tata Institute of Social Sciences in Mumbai found that only 10 percent of new graduates and 25 percent of graduates of engineering and MBA programs had adequate skills to be employable. Numerous other surveys have confirmed the results.\”

Female labor force participation in India is strikingly low

\”A … major labor market deficiency is the country’s shockingly low female workforce participation rate. At 24 percent in 2014, it was comparable to levels in the Middle East and North Africa, and just half that in Indonesia. A 2015 report from the McKinsey Global Institute showed that the female contribution to India’s GDP, at 17 percent, is the lowest in the world among a sample constituted of countries and regions, and less than half the global female share of GDP at 37 percent. The report estimates that if India did as well as the best-performing country in South Asia on this metric, by 2025 its incremental output would be higher by 16 percent, or $700 billion. But this would require, even more than enabling public policies, a social transformation on a scale equivalent to that which led to the weakening of caste barriers in Indian society in the latter part of nineteenth century and the early twentieth century.\”

India has a small number of large firms, a huge number of tiny firms, and little in the middle

\”The number and proportion of small and microenterprises are staggeringly high. Their contribution to output and employment is infinitesimally small. Yet romanticism in policy circles with micro and small has endured far longer than is justified by their economic value added. Small has not been beautiful, as the capital and labor locked up in these unproductive enterprises represent lost economic opportunity. Furthermore, most such enterprises are informal and operate beneath the radar of tax
authorities and other regulators. … India’s industrial base has a gaping hole in the middle. Specifically, India has a preponderance of microenterprises and a tiny set of large enterprises. It has neither small nor medium-sized enterprises.\”

The size of of farms is small and declining, making investment and economies of scale 

A striking high share of India\’s workers are in the informal economy

\”A statistical update on employment in the informal economy published by the International Labor Organization in 2012 showed that India has one of the world’s largest informal sectors. At 83.6 percent, the share of informal employment in  the country’s overall nonagricultural employment total is the highest in the world. Furthermore, India’s labor force participation rate is one of the lowest in the world. Only Egypt and Honduras fare worse.\”

Domestic savings and capital accumulation in India have been low

\”The economic historian Robert Allen has documented India’s capital accumulation shortfall. He writes, “Between 1860 and 1990, it [India] accumulated little capital and achieved little growth. Its capital-labor ratio in 1990 ($1,946) and labor productivity ($3,235) were like Britain’s in 1820 ($1,841 and $4,408, respectively).” Comparing the development trajectories of seventeen countries in the 1820–1990 period, he argues that developing countries such as India “need to accumulate capital in the massive way that  East Asian economies have done since 1960 in order to close the gap with the West.” That gap is a huge one to close. Unfortunately, India is constrained by its low savings rate and narrow capital base, both of which constrain it from generating the capital required to sustain a high economic growth rate for a sufficiently long period.\”

India\’s government depends on a narrow slice of the population for its tax base

\”The narrow industrial base and limited pool of middle-class taxpayers is nowhere reflected more starkly than in the country’s very low tax-to-GDP ratio. India has one of the lowest ratios among the G20 countries—far lower than Brazil’s, for example. Despite India’s large population, the country’s income tax base is comparable to that of a small European country. In 2012–2013 there were just 31.19 million assessees, or less than 3 percent of the 1.2 billion population, in contrast to 147 million assessees in 2013 among 316 million people in the United States.\”

India\’s public spending on infrastucture has been falling as a share of GDP



India\’s government and government-run programs are often dysfunctional

\”The inability to implement government programs is pervasive and dominates the public’s perception of weak governance. India’s government-run schools are noteworthy for neglect and apathy. Teacher absenteeism is rampant; learning levels are abysmal; toilets, where available, are mostly nonfunctional; and so on. In healthcare, doctor and nurse absenteeism is very high, and the quality of primary care services is unacceptable. Even when resources and personnel are made available, most large government-run hospitals remain badly managed. In both sectors, well-designed national programs with adequate implementation flexibility have fallen far short of expectations when subjected to the field test of implementation.

\”Inordinate delays in fixing a leaking pipeline or repairing potholes, let alone building new roads or drilling wells, and slow garbage collection are frustrations familiar to most Indians. The execution of small panchayat (the unit of administration at the village level) works, even when contracted and the money made available, takes months to years. And despite the existence of progressive and comprehensive legislation on social protection, atrocities against lower castes, children, and women continue unabated.

\”Supervisory systems, even when not compromised, struggle to enforce regulations. The commanding sectors of modern India, infrastructure and urban facilities, are marred by the same malaise. The capacity to design and document projects, manage procurements, mobilize financial resources, finalize contracts, and manage the execution effectively is sorely lacking even at the highest levels of state and national government. It is no surprise that contracting corruption, execution delays, and renegotiations have become quotidian in these sectors.\”

The pathway to export-led growth through low-wage manufacturing seems to be less available

\”One of the defining features of successful economic growth over long periods in the recent past has been the central role of exports. The most prominent example is that of East Asia, where long periods of economic growth were sustained by strong export growth, in particular driven by the manufacturing sector. India clearly exports a far smaller share of its output than did any of the East Asian economies during their high-growth periods. The prospects for the manufacturing sector becoming the engine of India’s growth do not appear promising, owing to the structural shifts taking place in the global economy and the concomitant trend of premature deindustrialization. More worryingly, the prospect of exports becoming a main driver of economic growth also looks bleak.\”

These issues mostly suggest their own solutions, but implementation isn\’t easy or straightforward. The bottom line of the report is that India\’s economy has enough strong areas that 4-5% annual GDP growth remains quite possible. But it\’s worth remembering that when it comes to per capita GDP, India ranks 150th among the countries of the world, at a level similar to Nigeria and Congo. Annual growth rates of 4-5% would mean that India barely keeps pace with other emerging market economies like China, or gradually falls behind.

For another recent post on India\’s economy, see my overview of the most recent Economic Survey from India\’s Ministry of Finance in \”The Economic Vision for Precocious, Cleavaged India\” (February 16, 2017).