Sharing a rich experience on his views on Competitiveness, Michael Porter, Professor, Harvard Business School says that to become a pro-prosperity nation, India must not remain anti-business.
One of the biggest problems that countries face today in increasing their competitiveness and prosperity is that there are always different ideologies and perspectives.
For a country to be prosperous, a business must be successful while taking the average citizen along in improving their standard of living.
India has a special place in the world. The country is special with respect to a legacy that has been characterized by colonialism, bureaucracy, socialism, and interventionism. However, it is not difficult to see that all these legacies have been challenging for building India’s competitiveness and prosperity over time. Now encompassing more than a billion people with her, it is a country that we all want to succeed, and the important part is that change has already begun to happen.
One thing that we all know about building prosperity is that it is not a short race to complete but a marathon to run for that takes decades to transform a country’s potential and prosperity truly. There is no single government which can perform this task alone. We have had examples and are also presently witnessing where countries are doing their best to make and sustain rapid progress. However, one thing which is common is that they all operate on a basis of shared understanding amongst themselves where each government in a country creates an ability to continue to pursue priorities and strategies stretching over long periods of time. So, it becomes crucial for India to think beyond a single government and have a shared understanding of what success looks like. Right now, the country is presented with an unprecedented opportunity to make progress, and the only way to secure this is to think strategically about it.
Over the last 20 to 30 years, the world has had a revolution in thinking about what competitiveness looks like. One of the most significant problems that countries face today in increasing their competitiveness and prosperity is that there are always different ideologies and perspectives. A common pragmatic understanding of what it takes to win is perhaps what is missing in countries seeking to raise their standards of living. Then the question is: How do we get away from little pieces that do not capture the whole? How do we deal with all the complexities that go on defining any economy like for example, India? If we think we are on a path then are we truly aware of what that path is? All these quintessential questions lead us to understand what has come to define the modern-day real world in a much more meaningful way which is competitiveness.
When a company can meet a need, create a product efficiently and productively at a profit, then wealth gets created in a true sense.
One of the many great puzzles of humanity today is the tremendous difference in prosperity that we see among the countries of the world. There are a bunch of countries that have been and continue to perform exceptionally well while at the same there is also a set of countries declining in prosperity. A natural question is: What can be the real cause of such vast differences? This issue of how to drive improvements and sustain on improving prosperity is the fundamental question of today’s age. Looking at India’s position, one can quickly find out that progress is in order. Growth that has been taking place is turning out to be meaningful and significant so that the country is starting to make a mark in the global prosperity scenario. An important point here is that how will it be possible for the country to take the mantle further, i.e., how can India move on to become a high-income country? The only answer in getting India aligned to spread her prosperity more broadly across all the citizens lies in increased competitiveness. Since there are several definitions concerning competitiveness, one must first be made familiar with what exactly do we mean by the term “competitiveness”.
The need is to get each state and region thinking about its unique situation and its own strategy.
For a country to be prosperous, a business must be successful while taking the average citizen along in improving their standard of living. If a nation can thrive on doing both things at the same time, then it is eligible for being termed as a competitive nation. A competitive economy is one where an environment is created for all the firms to compete successfully in domestic as well as international markets and where citizens can perform better. Quite often, countries are seen getting caught in one of these sides and hence fail to raise their overall prosperity. So, when we have both the parties winning and not succeeding at the expense of one another, competitiveness is achieved. For the creation of this unique ability for both the citizens and the businesses to win, conditions must prevail that requires us to become productive. By productivity, one refers to the amount of valuable output produced per day of work. The more value you create, the more your average income will be. Therefore, the central challenge for any economy that wishes to be competitive is to build productivity for everyone. One thing that is worth mentioning is that competitiveness and hence productivity must not be focused only on the existing businesses and the existing people that are working. An economic plan that pushes for getting as many people that are wanting to participate and work in the productive workforce can reverse all the forces holding down income in any society. This issue of workforce participation is nonetheless apparent in case of India indicating that the current system is not working fine for some sections.
Debunking Myths on Competitiveness
Competitiveness is not low wages per se. In fact, the end goal of competitiveness is to produce high wages, i.e., higher avenues available for all. Similarly, competitiveness must not be confused with issues related to national currencies. Of course, if India’s currency is worth a lot, then that will fetch lower prices for goods and other materials that the country buys from abroad and vice versa. So yes, a strong currency is what is desirable because nations that get wealthier are the ones where their currency gets stronger, but it is also important to remember here that to support such a strong currency they are productive enough to produce their goods and services at a much higher quality. Therefore, it is the kind of environment that we create for our business and for our citizens that enables them to be productive while engaging in the economic activities. It is this level playing field which captures the essence of competitiveness.
One of the things that are vital to the discussions of competitiveness is the need to understand the role of business in society. There have been instances where business has not delivered on what was required out of it and ended up hurting those for whom it came into existence, i.e., its customers. Hence, apprehensions are understandable, but it is also true that businesses are the only institutions in society that can create wealth. When a company can meet a need, create a product efficiently and productively at a profit, then wealth gets created in a real sense. While the role of governments is to act as a facilitator, most of the NGOs help in dealing with many societal needs but are not able to create prosperity and wealth. Thus, the ideology of being anti-business but being pro-prosperity needs to be changed. It is about creating a productive society in which everybody that wants to can participate. Every country must figure out ways to design such a society for its citizens.
Given this background, India has made significant economic progress over the last few years. The policy choices under the new government are starting to deal with some of the real fundamental problems that this country has had for a long time. The overall global outlook is coming out to be positive and more opportunities are getting opened up which shows that India is starting to make headways against all the odds. The real challenge, however, is that: Where do we go from here? Of course, there has been an unleashing of economic success with the spread effects being felt at the lowest level as well. Nevertheless, the country seems far from done on various fronts. This includes progress on poverty, health, education, and infrastructure. Although the economy has overcome tremendous complexities in its bureaucracy, the cost of formality remains still high in most parts of the country. It is important to make it enticing and attractive for businesses to go formal and get the benefits as well as the support that comes from being a real company that is registered.
Therefore, for India to be on a continued path of progress, three things must be taken care of. The first relates to a shared understanding amongst all towards the role of different institutions of which a society is made up of. The second one emphasizes the need to have a strategy and the third point is with regards to the implementation of all the policy decisions taken considering the national interest.
In a process to build a productive economy that drives prosperity, one cannot also think narrowly about the concept of economic development. The reason is that there is a fundamental connection between economic development and what is known as social development. What use does economic success and productivity of India have if they cause many people to remain sick and uneducated? Therefore, the two must not be viewed as different but synergistic, and India has undoubtedly embarked upon a path to achieve both by starting to measure social progress state by state with multiple dimensions under its Social Progress Initiative.
What then is Competitiveness?
To understand competitiveness, one must look at a broad and holistic framework covered at three levels. Firstly, competitiveness in any country or region or state starts with what is known as endowments. They are the conditions that a country inherits from the past, for example, its geographical location, culture, natural resources, etc. Although possession of favorable endowments helps create prosperity, merely relying on such inherited endowments does not usually entail greater good. It is particularly the case with natural resources. For instance, Venezuela has not been performing well for some years now even though the country is rich in many oil resources. It is not the endowments then that a country owns but how that country can utilize its endowments productively to turn them into strengths to improve the business environment. The idea is to figure out what unique endowments are present in a country to draw on and hence bank upon to bring out their productivity. However, this alone is not going to lead countries to prosperity.
The second layer which is to be added here is that of macroeconomic competitiveness. It is related to a sound and stable set of macroeconomic circumstances that cuts across the entire economy. This includes both the monetary and the fiscal policy. India, as such is making good progress on the macroeconomic side but concerns remain. Public spending at the state level is not quite as balanced with revenues as it is at the federal level. Hence, there is a need to extend that progress more broadly. In as much as high inflation and economic instability can prove to be a stoppage on productivity, neglect towards human development and formation of effective public institutions can also lead to an unproductive society. Thus, for people to have access to whatever they need to equip themselves to be a productive member of the economy, human development and public institutions matter.
A third layer through which comes true prosperity in any economy is the microeconomic competitiveness which starts with the companies. Keeping in mind the iron rule that prosperity depends on productivity, firms must be good at everything ranging from operations to manufacturing to being efficient in utilizing their employees, etc. The solution is not relying on government policy but to raise the bar for ourselves including both the smaller companies and the newer formal companies since you are only going to pay yourself based on how productive you are. It must be noted that even if companies are performing well enough, they can get squashed if provided with a lousy business environment. Then, for them to be productive and successful, we must ensure that the business environment is conducive to their overall requirements.
A framework that is well accepted for looking at the business environment called as the Diamond Framework is what is needed to understand this better. India has had too many companies having a legacy of not having to compete and hence were not very productive in lifting the economy. So, there is a call for local needs that get more and more demanding including those from governments. Some of the best governments around the world drive competitiveness well by using their purchasing power to move the economy forward not by the size of their purchases but because of demand for better goods. This is generally a way to raise the standard of the industry in question. Alongside are needed some supporting industries so that if you need a component for production then you have a supplier from whom you can buy that component. Inputs having the right incentives can create an environment where companies must compete and outperform their peers. Therefore, the business environment is concerned with questions like how good are our human resources? Do we have enough skills for our companies to hire people who will be efficient in work? Is there enough capital available to invest? Is the administrative and regulatory infrastructure in a right frame? Even if the answer is yes, the need is to make it better and better. The higher the quality of the business environment, the more productive can firms be. It means that the business environment in India must be assessed systematically with real data to get on the path of raising the bar. Problems associated with the cost of doing business, availability of credit, bankruptcy laws, etc. must be improved upon continuously. The current government is beginning on this path which is more than impressive but there is still a long way to go as far as prosperity is concerned.
The best success in economic development has to inspire the people ultimately.
A final concept in the microeconomic environment which is important in India is that of clusters. Now, what is a cluster? It is found that economic development and economic growth are accelerated where you can create a critical mass of companies and supporting industries in the same field and in the same geographic region. If we can build these clusters then this is nothing but the ticket to thermo charge and accelerate our competitiveness. We have some of these in India but need to build them in even greater numbers. If an economy has a strong cluster base then it will be much more productive than any other economy in this world. What these companies do is reinforce each other and if India can gather a cluster then she can have tremendously better productivity and innovation happening around. Also, public institutions like educational institutions that are going to train the people to work in different companies are needed. The pharmaceutical cluster is well established in India but we need more. The approach presents a new thinking of how to accelerate economic development by bringing in small companies as well to the forefront through a cluster-based policy.
Is Competitiveness only national?
Although looking at competitiveness at the national level is important, what matters even more is that competitiveness of the states and the regions is what makes up an economy. The need is to get each state and region thinking about its unique situation and its own strategy. What is our base of business? How can we build on those areas? How can we make ourselves more unique and raise the bar in the business environment? These are the questions that must be searched upon by every state and region to become competitive. The reason why we see tremendous differences across states and regions in prosperity is that the competitive circumstances are always different. So, what is required is to understand for every state and region as to where the priorities are right now. Here, a strategy must be built to address the multiple challenges that these regions and states are faced with on a daily basis. Generally, it is seen that the role of governments is fragmented. This is particularly true in case of India. An integrated strategy where all the parts of government are working in a coherent way to solve various problems is perhaps the need of the hour depending upon the circumstances prevailing in the economy. The private must also be made a part of this strategy to enhance the complete process of achieving national and regional competitiveness. There is an opportunity that India is currently presented with which she can leverage to her favor and become a highly competitive economy in the years to come.
Concluding Remarks: Given the unique circumstances that India has, a broad inclusive economic and a development strategy must be developed to tap the true potential of all the states and the regions. The result otherwise would be populism taking the country nowhere. A model that is more aligned to the need of development and change is the cluster-based model, which India needs to move on to so that businesses of all sizes and types get together to enhance India’s competitiveness. Further, clarifying the roles of the national and the state governments is also needed to accelerate the growth process, and a shared commitment on how to improve and outperform peers.
Encompassing a true capability of being a partner in development, the private sector can and will help the country to make significant progress over the coming years. All that is needed is the creation of a suitable environment- an environment where the citizens of this country get to understand what they can potentially become. The best success in economic development has to inspire the people ultimately. In a country having tremendous diversity and differences of views, religions, cultures, etc. what is required is a way to have a common view of what a good future would look like. In the end, everybody has got a role to play in this nation’s development. The only thing is how to start to see the way in which every citizen will fill in.