South Asia

India’s economic growth rate in the past decade has been nothing short of spectacular.  With its GDP growth around 7 to 9 percent per year, India is the second-fastest-growing large economy in the world.  However, the country’s manufacturing sector accounts for a dismal 17 percent of its employment opportunities, as compared to 60 percent in agriculture and 23 percent in services.[1]This summer, the World Bank’s Indian Visiting Scholars Program* invited two leading academics from Harvard University to visit India and to articulate potential pathways to sustain the country’s growth trajectory. These 2 scholars are Ricardo Hausmann, Professor of Economic Development at the John F. Kennedy School of Government and Director of Harvard’s Center of International Development and Dani Rodrik, Professor of International Political Economy at the Kennedy School. While there, they interacted with the private sector and key policymakers, including senior officials of the Department of Industrial Policy and Promotion, the Planning Commission, and the Ministry of Finance.

There is an ongoing conversation in the development community, certainly amongst donors, about the need to make sure that aid is well spent and reaches the people it is intended to help. Most recently the UK shared its vision for international development, highlighting Value for Money and the use of results-based approaches. Output-based aid (OBA) is one such results-based approach, intended to provide access to basic services – such as infrastructure, healthcare, and education – for the poor in developing countries.

Over 77,000 people from 25 villages have gained access to a clean water supply from the Improved Rural Community Water project in Andhra Pradesh, India.

The approach is innovative and the logic simple – unlike traditional approaches, OBA links the payment of aid to the delivery of specific services or “outputs” like connection of poor households to electricity grids or water and sanitation systems. The service delivery is contracted out to a third party, usually a private firm, which receives a subsidy to complement or replace the user fees once delivery of the pre-agreed output is independently verified.

Ziv on the India Development Blog makes the case:

While having MFIs hold deposits may be too drastic of a change to their business model for now, and it would introduce too much risk too soon, allowing them to offer a basic BC [business correspondent] service is an easy step that would have a large positive impact. As for accountability concerns, banks can use their discretion in selecting MFIs as BCs, working only with those having good track-records on process control. NBFCs are already entrusted with handling a large amount of bank cash through the SHG linkage framework, and misconduct has not emerged as a major interference.

Also see a related post on the PSD Blog about the efforts of the Gates Foundation to solve the microfinance savings riddle.

Responding to a post on Duncan Green's excellent From Poverty to Power blog, World Bank Chief Economist Justin Lin argues that his proposal for an updated version of industrial policy does not assume exceptional talent on the part of government institutions:

I certainly do not assume that “states possess a well informed, effective bureaucracy”. In fact development is a challenging process everywhere and all types of public policies and strategies—from education to health, from structuralist import substitution to Washington Consensus reforms—require some government capacity. However, the required capacity for the proposed Growth Identification and Facilitation framework is relatively minimal, compared to almost any other policy proposal: many of the specific instruments recommended in the paper are far easier to implement in low-capacity environments: setting up an export-processing zone for instance requires much less capacity than building infrastructure for the whole country as often advocated; implementing tax exemption schemes for a few years to attract investments in industries with latent comparative advantage is easier than collecting large tax revenues or repressing the financial system to subsidize nonviable firms for endless years in industries that are inconsistent with a country’s comparative advantage.