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The 'invisible hand' - of Government

Last Updated: Thu, Mar 21, 2013 02:10 hrs
A worker is pictured behind a logo at the IBM stand on the CeBIT computer fair in Hanover

When we have 30,000-plus colleges and scores of research labs, why is it that we do not produce a steady stream of Nobel Prize winners? Why aren't we the leaders in creating whole new industries, such as the internet? Why can't we make all the cutting-edge equipment for our defence needs? These questions have started ricocheting around Indian policy circles. Blue-ribbon committees led by much-admired people such as Narayana Murthy and Anil Kakodkar have studied this matter; editorial writers have lamented it; and academicians have wrung their hands. Why don't Indian universities (and the Indian Institutes of Technology, Indian Institutes of Management and the All-India Institute of Medical Sciences) and Indian businesses converse with each other, define research problems and quickly produce the stream of inventions that will lead to explosive growth and completely new industries?

I sat in on one of these soul-searching sessions a fortnight ago in Delhi. I heard analysis and prescriptions such as "Indian academia and businesses do not have confidence in each other"; "Increase the availability of venture capital funds"; "Industry must pose researchable problems to academia"; "Tighten the promotion policy of professors so that only genuinely research-oriented ones are promoted"; "Academia must market themselves to industry"; and "Start a few national research missions". In such gatherings we glance enviously at America and how it has produced a stream of industry-creating companies (Boeing, IBM and Pfizer in an earlier era, and Google, Facebook and Amazon in the current); at Japan and its Sonys and Hondas; at Korea for its Samsung; even at France for its Airbus and nuclear reactors; or at Germany for its Siemens.

It is only when we look deeper that we discover that behind every one of these stellar corporations lies some set of policy initiatives launched by their respective governments. For instance, in the United States, where we would least expect to find the "invisible hand" of the government, we find that much of American innovation can be traced to massive and well-thought-out research funding from the US Federal government channelled through institutions such as the Defence Advanced Research Projects Agency, the National Science Foundation and the National Institutes of Health.

Do we have examples of our own of successful government policy initiatives? The first such case is the story of the Indian pharmaceutical industry, which produces medicines worth $20 billion, exports half of these, and is confident of doubling this export figure in the next few years. This success is often portrayed in the business press as the result of the acts of heroic entrepreneurs; but the playing field for these entrepreneurs was created by a courageous and visionary policy initiative: the modernisation in 1970 of the Indian Patent Act, whereby product patents for food, pharmaceuticals and chemicals were abolished. This enabled Indian entrepreneurs to launch pharmaceutical products that served the same function as the products of western pharmaceutical firms so long as they manufactured them through a different and new process. Even these process patents' validity was restricted in its duration. At that time, it took a great deal of courage on the part of the government to get this done, resisting the immense pressure of multinational pharmaceutical firms. Once Indian industry was on its feet, policy initiatives were taken in 2005 to bring back a version of the product patent system. The Indian pharmaceutical industry is a success story not only for its revenue and employment record, but also for making available medicines at prices the average Indian could afford.

The second Indian case is that of India's IT services industry, which is now close to $100 billion, much of which can be attributed to exports. Here, again, the business press has portrayed this success as solely the result of the efforts of heroic entrepreneurs - again, the truth is otherwise. The policy trigger for the Indian software services industry was the large-scale government-sponsored computerization projects of the late 1980s for the nationalised banking system and the Indian Railways. In executing these projects, far-sighted government policy makers mandated the use of then relatively unknown technologies such as the Unix operating system and relational databases. This was fortuitous because the world was getting ready for a paradigm change that would unleash an insatiable wave of demand for computer programmers well versed in Unix and relational database management systems - the so-called "client server" revolution, the switch from giant mainframes to smaller, cheaper PCs and Unix workstations. Smart and entrepreneurial start-up Indian software companies leapt at this opportunity because India was just about the only country with large enough numbers of programmers with these technical skills. That is what triggered the Indian IT services revolution.

When explosive growth came about in these two industries, it triggered off a massive expansion in the higher education, professional service firms, construction and myriad other businesses that served these industries. Very little direct government expenditure was incurred - success was relatively costless. But the "invisible hand" of the government is rarely acknowledged in popular accounts.

Depending merely on Adam Smith's invisible hand, the market, transforming an individual's pursuit of his own again into a societal gain may not go far in these matters. Thousands of heroic entrepreneurs in hundreds of industries could be energised with similar costless policy initiatives. These policy initiatives are the invisible hand of our time.

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