India has a problem. Too many people, young people in particular, lack regular, well-paid jobs. Most of India’s young people are working, but they are not working in reliable formal employment. Instead they are marginalized in the informal sector, which may account for as much as 80 percent of total employment in India.
With 356 million young people aged 10-24 entering or about to enter the labor force, many economists believe that the only way to put India’s massive youth population to work is by developing large-scale manufacturing industries. Nobel Prize-winning economist Paul Krugman agrees, arguing that India could become a leading economy, “but only if it also develops its manufacturing sector, not only the services one.”
Krugman reportedly told the News18 Rising India Summit that “India’s lack in the manufacturing sector could work against it, as it doesn’t have the jobs essential to sustain the projected growth in demography. You have to find jobs for people.” Other participants in the summit piled on, with Ruchir Sharma of Morgan Stanley promoting a “move to low-end manufacturing with low input costs.”
But are big factories employing armies of low-wage workers really the path to prosperity? All fingers point to China, which became the “workshop of the world” on its march to rapid GDP growth. But in fact, China’s manufacturing output as a percent of GDP reached its all time high in 1978, just before its reform and opening to the outside world. Expressed as a percentage of GDP, manufacturing in China has been falling ever since, according to data from the World Bank’s World Development Indicators (see Figure 1).
It may seem impossible to believe, but China relied more on manufacturing in 1978 than it does today: 41.1 percent of GDP in 1978 compared to 29.4 percent in 2015, according to the latest World Bank figures. Of course, Chinese manufacturing has expanded enormously over the last forty years. But other parts of the Chinese economy have expanded even more. The lesson is that China’s manufacturing output has been trailing overall economic growth, not leading it.
We are all familiar with 1990s stock photos of thousands of Chinese workers hand-assembling products for bargain-basement wages, but we shouldn’t let that image of personal industriousness cloud our understanding of China’s economic growth. Those enormous Chinese assembly plants generated very little value-added for the Chinese economy. And they were often horrific places to work.
As India replicates China’s growth miracle, it doesn’t just need more jobs — it needs better ones. If you look around India today, you won’t find hundreds of millions of young people lazing around without work. You’ll find hundreds of millions of young people working very hard indeed. The problem is that the work they do is too often poorly paid, poorly managed, low productivity, and even dangerous. In other words, it’s just like the kinds of low-wage factory work that dominated China’s exports in the 1980s and 1990s.
What India needs is to upgrade its economy, and the way to do that is to upgrade skills. In terms of GDP per capita, China and India were running neck and neck until around 1990. That’s when China’s skills dividend started to kick in, driving China toward middle income status. The biggest boost behind China’s skills dividend was simple fertility management: have fewer children, and you can bring them up better.
Data from the World Bank’s World Development Indicators (see Figure 2) show that China’s fertility rate dropped below India’s in 1970. Exactly 20 years later its economy started to overtake India’s. The secret to China’s growth wasn’t the expansion of manufacturing. It was the fertility reduction that was ultimately formalized into China’s one-child policy.
Today’s young Indian workers were born in the mid-1990s, when India’s fertility rate was around 3.6 children per family. That puts them about 20 years behind their Chinese peers in terms of family size. Assuming that parents in all countries care just as much about their children, Indian youth today received roughly as much parental attention as China’s job market entrants of the late 1990s.
China forced its fertility rate down through drastic restrictions on reproduction that would be impossible in a free and democratic country like India. But South Korea and Taiwan accomplished similar reductions through education and public health promotion. Fertility reduction does not require the kinds of extreme measures imposed by China.
To date, India has had some success in bringing down fertility rates through improved public health and public education, but it is still thirty years behind the successful economies of East Asia. It can and should do much more. India can solve its population problem, and with it the employment problem, with good social policy and increased women’s empowerment.
The necessary policies are no secret: eliminate child marriage, eliminate arranged marriages, educate young people on effective birth control, and educate parents about the evils of son preference. Most importantly, India must ensure equal opportunities for women of all castes and classes to stay in school and seek paid employment outside the home. All these measures are already official policy in India, but they are often implemented half-heartedly.
Today’s rapid economic growth in India is the fruit of its population successes of the 1980s and 1990s. But compared to China, India’s “demographic dividend” has been smaller and less widespread. Continued rapid growth in India depends on continued improvements in public health and gender equality.
The economic benefits of better population policy and increased women’s empowerment won’t show up in the next quarter’s growth figures, but they will show up in the next generation’s. Putting your children to work in dangerous, polluting, low-wage factories won’t make your country rich. Bringing them up smarter and more capable will.