(This note draws extensively on the excellent work of Carlos Montes at The University of Cambridge Judge Business School, but all opinions are my own).
She is so happy to pay (Source: here)
Introduction
It used to be miserable to be Indian. In the 1970s, nearly 70% of Indians lived on less than two Dollars a day and more than 80% of the population earned less than three and a half Dollars a day (2011 PPP-adjusted Dollars). Today, those percentages have dropped to 0% and 21%, respectively. In the last fifteen years alone, 415 million Indians – equivalent to one third of the entire population of Africa – have been lifted out of poverty.
Extreme poverty in India has declined to zero (Source: here)
What changed in India to so dramatically improve human welfare? And to what extent can India’s experience be replicated elsewhere?
India's Digital Revolution
India’s digital revolution plays a large part in the story of India’s war on poverty. Fewer than two decades ago, a group of industry leaders joined up with members of the Indian government to launch an audacious plan: to improve the efficiency of Indian markets, support private sector innovation, include more poor people in the formal economy, and make government services more efficient.
India set out to achieve these diverse and lofty objectives by providing access for the entire Indian population to modern, comprehensive, and cheap digital technology. The result is what we today call Digital Public Infrastructure (DPI).
The best way to think of DPI is as foundational infrastructure, albeit for the digital world. In the same way roads, airports, seaports, sewage and water systems, the electric grid, and public transportation make up the foundational infrastructure of the real economy, so the components of DPI constitute the foundational infrastructure for digital services.
The main requirement for Indian DPI was that services should be universally accessible, because without universal accessibility it would not be possible to reach the country’s hundreds of millions of poor people.
DPI was therefore designed specifically to operate along the same principles as those underpinning the internet, mobile networks, and GPS. You may not have thought about this, but have you noticed how you can connect to anyone in the world on your mobile phone, regardless of which network they are using? Similarly, you can look at any website you want, regardless of which ISP is hosting the website. The same is true for GPS; you can get GPS coordinates regardless of which satellite company carries the signal. The same kind of universal access has been built into DPI to ensure that it, too, is available to all Indians, regardless of which mobile phone provider or bank they use.
DPI in India initially had three foundational components:
(1) A universal digital ID called Aadhaar available to every citizen in India, which is used to identify people for purposes of transactions, payment of taxes, and receipt of public services;
(b) A user-friendly and inexpensive payment system called Unified Payments Interface (UPI), which enables everyone to transact digitally with everyone else as well as with the government; and,
(c) A campaign to dramatically expand access to banking and financial services for the whole population, using Aadhaar and UPI.
The three components of Indian DPI (Source: here)
DPI has transformed India. As of July 2024, 95.5% of Indians had been issued with an Aadhaar ID (Source: here). In turn, this has improved tax collection and the delivery of public services, especially to the previously unreachable poorer sections of the population. As of June 2024, some 350 million Indians actively use UPI for payments and there over 340 million QR codes are in use at various merchant locations to facilitate payments (Source: here). Finally, the percentage of Indians above the age of 18 with bank accounts, or accounts at other financial institutions, or mobile money services providers, has soared to 92.4% for men and 86.3% for women compared to 44% in 2011. Moreover, penetration is nearly identical in urban and rural areas (Source: here).
However, the success of Indian DPI does not stop there. The provision of basic foundational digital infrastructure has facilitated a revolution in private sector commerce as well with the emergence of so-called Open Transaction Networks (OTNs). The best-known OTN in India is a ‘super Amazon’ online commercial space called ONDC, but OTNs are also up and running in other industries, including integrated networks of EV chargers, taxi services, educational tuition, bank loans, etc. (For more information on ONDC, see here)
OTNs are online market places in which everyone can buy and sell the full spectrum of services and consumer goods. Unlike the Amazons of this world, which require membership (for a fee) and severely restrict access for suppliers, there are no such limitations in OTNs. All buyers and sellers can enter, which means consumers can seamlessly discover a far larger range of suppliers, regardless of the apps or websites they use to gain access.
Open access may not seem like such a big deal, but does in fact constitute a massive change in commerce. Imagine, say, your local supermarket erected gates at each end of your local high street and then proceeded to not only charge you for entry, but also decided which other shops are allowed to trade on the high street and at what prices they can sell their wares. That is basically what the big online e-commerce giants do today.
The e-commerce giants are able to exercise this kind of power, because back in the day when the internet was first launched the one area, where universal access was never implemented was online commerce.
A few early movers soon realised they could launch platforms to facilitate trading, and by controlling access to those platforms as they grew larger and benefitted more from economies of scale they would increasingly gain market power. Eventually, they would be able to out-compete everyone else on price. All transactions on the internet today take place on such closely guarded de facto monopolistic platforms, which control entire market places, just like Amazon.
India’s decision to provide interoperable open access trading spaces with strong consumer protection to digital transactions direct challenges the monopolistic platforms approach to e-commerce. In OTNs, everyone can find and transact anything with anyone. Free entry by suppliers ensures competition, which in turn obviates the need for intrusive and expensive central government regulation. Safeguards are also built into the transaction software behind OTNs – a protocol called Beckn – which ensures that individual users control their own data (to learn more about Beckn see here)
Let me go one step further to illustrate the difference between an open OTN-style market and traditional closed Western-style e-commerce market. Take the popular Uber ride-hailing app. Currently, Uber restricts use of its app to only include drivers, who have contracted directly with Uber. Consumers, who use the app, only have access to the limited number of Uber’s approved drivers. Uber retains all transactional data produced in the course of business, which gives Uber a valuable overview of the whole taxi market, which in turn is a major competitive advantage over smaller competitors and individual drivers. Size is power in e-commerce.
On the other hand, if Uber operated in an OTN-style market - as, in fact, it now does in a number of Indian cities - it’s app must display all drivers, not just those contracted to Uber itself. Uber’s app must also display other available transportation options, such as private taxis, buses, scooters, or rickshaws, if available. In addition, Uber no longer has control over consumers’ and drivers’ data, which, under OTN rules, belong to the consumers and the drivers, thereby eliminating an important source of market power for Uber.
Clearly, OTNs are not just another market, they are a design for increasing participation, competition, and efficiency. They undermine monopoly power by allowing everyone to enter and trade. Participants own and control their own commercial data. Suppliers own and run their business exactly as they see fit, but no one is allowed to own the market place itself.
These features make OTNs far more complete, transparent, and efficient than both conventional ‘real-world’ markets and Western-style online e-commerce platforms. Search costs are lower, barriers to entry non-existent, and supply chains can be completely unbundled to guarantee far wider participation and therefore greater competition.
Because OTNs do not restrict access to the market, it follows that small and medium-sized businesses – and therefore employment – are the biggest beneficiaries. Consumers obviously also benefit significantly, because they can access a far wider range of goods and services, at much more competitive prices. The big losers are the erstwhile e-commerce monopolies, but, surely, that is a good thing!
Why India?
The vision behind DPI and the scale of India’s DPI project are audacious. Indian DPI puts similar initiatives in more advanced economies in the shade, including Estonia’s X-Road, Brazil’s PIX, and various initiatives in Taiwan.
But why did DPI emerge in India?
DPI emerged in India, because a number of very specific pre-conditions for success were present in the country at the time. Together, they enabled the country’s technology thought-leaders to put their vision into practice, with the strong public approval – but only limited backing in terms of finance and direct involvement – from the Indian government.
There are seven specific pre-conditions that were especially pertinent to making DPI possible in India at the time. First, at the most basic level India’s constitution requires the State not to discriminate on the grounds of religion, race, caste, sex, and place of birth. All people are equal before the law (Article 14 - see here).
Second, while such broad constitutional commitments are often ignored in many countries, in India the Constitution happens to be complemented by a very strong democratic tradition with regular elections and the rule of law.
Third, India happens to have very diverse and competitive elites, which makes it difficult for any single political force to take control for very long periods.
Fourth, there is intense political competition in India, so politicians are incentivised to a greater extent than elsewhere to address societal problems.
Fifth, India has a long history of collaboration between the government and the private sector, which creates some room for impactful private sector initiatives occasionally to flourish.
Sixth, India has a unique tech sector worth $250 billion, which employs a staggering 5.4 million people and contributes nearly 8% of GDP (see here).
Finally, the recent crop of tech leaders happen to share with the Modi Administration a willingness to experiment with new technologies that challenge existing power structures.
The confluence of these seven conditions meant that DPI in India could emerge in an entirely organic and endogenous manner. It was broad-based and inclusive from the design stage, carried out by Indians, for Indians. DPI evolved the way Indians conceived it to evolve.
Can Indian DPI be replicated in other countries?
Due to its spectacular success, many have naturally asked if Indian DPI can be replicated in other countries. In other words, is DPI a 'technocratic' silver bullet for global development?
I think it is highly unlikely DPI can be replicated universally with the same success as in India. After all, DPI is not simply a standard software package, which can readily be installed and off you go!
Introducing DPI without fully appreciating the importance of suitability is likely risks producing yet another expensive 'white elephant' to add to the already long line of failed development projects in the developing world.
Worse, due to the intrusive nature of digital technology, DPI may, if applied in less accountable countries end up equipping abusive governments with the digital means to control the population and oppress political opponents.
The most important take-away from India’s experience with DPI is that success requires a societal mindset determined to overcome resistance to change from entrenched vested interests and elites.
Meeting this requirement, needless to say, will be extremely challenging in most developing countries, where such mindsets – and, more importantly, the means to back them up with action – are sorely lacking.
Successful DPI also requires the presence of entrepreneurs, who stand ready take advantage when existing economic and political market structures are disrupted. This can be extremely risky. So risky, in fact, that it is rarely observed in countries unless they have robust political institutions, including democratic accountability, and the rule of law.
Finally, it is not clear there is a role for foreigners in the establishment of DPI, because the factors that determine it’s success or failure are chiefly domestic. It is critical for sustainability that DPI emerges organically and endogenously; it must at all times respond to local needs and reflect local capabilities. The role of donors is best kept to a minimum, perhaps restricted to supporting the dissemination of ideas and backing private sector thought-leaders and innovators. Donor support to governments should rarely, if ever, take place.
Which leads us to the question how many countries satisfy these requirements? Not many, in my humble opinion. In the past six decades, only a very small handful of countries have achieved genuine freedom and prosperity. They include Ireland, Portugal, South Korea, Uruguay, and Estonia. They succeeded not because of foreign assistance or resource abundance, but because they adhered to basic development principles. They have open and competitive markets that create opportunities for everyone. They have robust rule of law, which places limits on the excessive power elites might otherwise wield, including regulation to limit the rise of monopolies. They have democratic accountability, with in-built protection for minority rights, which enables the competent to rise to power in an environment that safeguards them from abuse by incumbents.
Why do some countries develop?
It is difficult to escape poverty. India’s achievement is highly unusual. The fact that so many countries continue to linger in poverty, often for decades, even centuries, testifies to existence of very powerful forces that actively fight against freedom and prosperity for the masses.
Perhaps the single most important force against progress is a country’s economic and political elites. Friedrich Hayek, an ultra-libertarian economics Nobel Prize Laureate, was one of the first to argue that the path to freedom and prosperity is necessarily arduous, because economic and political elites strongly resist attempts to dismantle their rent-seeking privileges and patrimonialism, meaning the system of government in which all power flows directly from them. Hayek maintained that, as a general rule, elites only consent to reforms that leave their power and wealth intact. In which case, of course, the reforms are generally useless.
Douglas North, another Economics Nobel Prize Laureate, proposed that the rent-seeking and patrimonialism of Hayek’s reactionary elites are best overcome by opening up access to economic and political markets, that is, by increasing competition for rent and power.
“Not enough!”, said Francis Fukuyama, a political economist. He argued that it is also critical to have rule of law, democratic accountability, and state capacity to ensure that the gains from opening markets for business and politics translate can be sustained.
These three basic insights should make intuitive sense to anyone, who has worked within the political economy of low-income countries, especially those in receipt of foreign aid and/or natural resource rents.
Every year, for decades now, about a quarter trillion of Dollars of development assistance flow to developing countries. Yet, freedom and prosperity remain as elusive as ever in most of the countries receiving the aid.
Today, we understand well why foreign aid and resource rents rarely foster freedom or prosperity. It is not because they are not useful. Rather, it is because in practice – and in spite of good intentions – they tend to end up in the hands of elites, who use the proceeds to maintain or even strengthen their grip on power.
Donors have been very reluctant to accept this reality. Instead, they have sought to detract attention away from the repeated failures of aid by pretending to be learning from experiments, a bit like scientists do. Since the 1960s, the development industry has thus lurched from one 'technocratic' development panacea to the next. In the 1960s, it pushed large capital infusions as the key to advancement. This approach clearly failed to alleviate poverty, so by the 1970s the emphasis shifted away from big capital projects to direct poverty alleviation. This, too, failed, because developing economies were not growing, so in the 1980s the development industry began to flog the idea of liberalisation as the key to success. This too proved ineffective, however, so all bets were suddenly placed on good governance (1990s). Later, in the 2000s, the aid industry began to promoting women, human capital, education, climate, etc.
Themes of the annual World Development Reports of the World Bank (Source: here)
This is nothing other than an expensive game of whack-a-mole. Individually, the approaches all failed. Not because they are not important, but because the political and economic elites in developing countries undermine their effectiveness. Elites feign support for ‘development fads’ and readily embrace buzzwords like ‘liberalisation’, ‘judicial independence’, and ‘empowerment’ to ensure a steady flow of foreign aid, but at the same time they refuse to dismantle the core structures that enable them to extract rent from aid to preserve their power.
The fact that aid has continued to flow in spite of these failures can only be explained in terms of a desire on the part of donors to be able to claim to fight poverty, while at the same time exercise geopolitical clout and support their aid-dependent home industries.
The same dynamics that play out in aid recipient countries also occur in resource-dependent countries, with the notable difference that the source of funds is commodity booms instead of donor money.
There is solid empirical evidence that windfalls from positive commodity price shocks fail to produce lasting growth effects (Source: here). The most likely explanation is that windfalls are usurped by elites. This is consistent with the observation that most resource-abundant countries in the world – with the notable exception of Norway – tend to be stuck for decades with corrupt and obscenely rich dictators even as the vast majority of people live in abject poverty.
Back to India
I want to end this little note with a word of caution regarding India. In India’s recent general election, the Modi Administration suffered a severe setback. It lost its majority and must now work with coalition partners in order to govern. This, in my view, is very good news. It shows that no one has a monopoly on power in India.
Still, fifteen years is a very short time in development. While India’s achievements over this period have been impressive, it is probably too early to state categorically that India has turned a corner. There remain many hazards. India still ranks very poorly both in terms of rule of law and patrimonialism (79 out of 142 countries and 56 out of 160 in the WJP Rule of Law and V-Dem Neo-Patrimonial Rule indices, respectively). Backsliding into government abuse cannot be ruled out, even though DPI itself has strong privacy and transparency safeguards.
Personally, I am optimistic about India’s future. The coming years are likely to see India – aided by DPI – advance up the economic freedom rankings, where the country currently occupies a measly position of 126 out 184 countries (according to the Heritage Foundation index).
The main reason for my optimism is that India has such a strong democracy ranking – 41 out of 167 countries (according to the Economist Intelligence Unit's Democracy Index). India’s uninterrupted democratic tradition since Independence as well as the country’s decentralised power structure, along with the highly competitive political landscape go a long way towards mitigating government-related risks, in my view.
As for other developing countries, I see fewer reasons for optimism. Not many appear to have in place the conditions that make them suitable for a DPI-led development spurt. It is futile to provide support to countries with weak rule of law, poor democratic accountability, and self-serving elites.
Which leaves us with the most challenging of all questions in international development: how best to help the poor in countries, which do not have the organic and endogenous means to escape the poverty traps created by their own elites?
The End
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