Dr. Raghuram G. Rajan, the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business and former Governor of the Reserve Bank of India, recently spoke at the Lubar College of Business’ Bradley Distinguished Lecture Series. His lecture, “Reimagining Development: Possible Lessons from India and Implications for the U.S.,” provided an insightful exploration of global development pathways and the future of economic growth.
India, the world’s most populous country, has emerged as the fifth-largest economy, and its unique challenges provide valuable lessons for other developing nations, Dr. Rajan said. His analysis offered a roadmap for development that contrasts with the traditional paths followed by countries like China and the “East Asian Tigers.”
The Challenges of Development in a Globalized World
Dr. Rajan opened his lecture by framing the current global context for development, focusing on the difficulties countries like India face in replicating the traditional manufacturing-led development model. He noted, “The world today is different. The traditional development path through low-skill, labor-intensive manufacturing is much harder.” Global supply chains, the rise of automation, and the competitive pressures from countries like China have made it more challenging for emerging economies to follow the same path.
He emphasized that while China liberalized its economy earlier and succeeded through its focus on manufacturing, India’s path has been more complex. “China liberalized 10 years earlier than India and captured much of the global manufacturing market, but India missed that bus,” Dr. Rajan said. Instead, India’s strengths lie in services, including IT and back-office operations, but this has left gaps in employment opportunities for the country’s growing population.
The Shift to a Service-Based Economy
One of the most critical points of Dr. Rajan’s lecture was India’s unique reliance on services rather than manufacturing as a driver of economic growth. This shift presents both opportunities and challenges. He said, “India has skipped the manufacturing stage, moving directly from agriculture to services.” This has been beneficial for sectors like IT, but a lack of broader industrial development has led to high levels of underemployment, particularly among the unskilled labor force.
“Jobs are India’s biggest problem,” he stated, emphasizing that millions of young people enter the workforce each year, but many are underemployed in low-skill, low-wage jobs. According to Dr. Rajan, India needs to create more high-quality jobs across the spectrum, from low-skill to high-skill roles, to maintain economic growth and address social challenges.
Lessons for the U.S.
Dr. Rajan also drew connections between India’s experiences and broader lessons for the United States. As automation and advanced technologies reshape industries, both countries must focus on creating opportunities across all skill levels.
One of the most provocative ideas he presented was the need for a “new development path” that considers the changing nature of work. “We’re entering an era where creativity, intellectual property, and services will generate most of the value. India must embrace this shift, and so should the U.S.,” Dr. Rajan said.
A Call for Policy Innovation
Throughout his lecture, Dr. Rajan stressed the importance of government policy in shaping development outcomes. He expressed concern over the trend of governments subsidizing industries that are unlikely to be globally competitive in the long run. Instead, he argued that both India and the U.S. should focus on building human capital, improving education, and fostering innovation.
“I am not against industrial policy,” Dr. Rajan said, “but I believe governments should focus on enabling people to succeed, not picking winning industries.” For India, this means investing in education, healthcare, and infrastructure. For the U.S., it means creating policies that encourage innovation while ensuring workers are equipped to thrive in a rapidly changing economy. According to him, India should seek benefits from greater value addition and growth in employment in the beginning (i.e., research/design phase) and ending (i.e., sales and distribution) phases of supply chains, and from sectors where manufacturing is intertwined with services.
A Global Perspective on Economic Development
Dr. Rajan stressed that countries like India, with large and youthful populations, must find ways to grow economically before they grow old. This need also applies to other developing countries in Africa and South Asia.
“India’s success will offer lessons to many nations that are grappling with the same challenges,” he said. By rethinking traditional development models and focusing on service-based economies, there is potential to create new paths to prosperity.
The Bradley Distinguished Lecture Series, sponsored by the Lubar College of Business and The Lynde and Harry Bradley Foundation, continues to provide thought-provoking discussions on global economic issues shaping the future.