Though the Sensex breached the 12,000-point mark in intra-day trading on Thursday, this renewed interest in stock markets is not unique to India. Several markets across the world are making a comeback led by the recovery in the US market, where the Dow Jones and the S&P 500 are within touching distance of their highs in May. Markets in Hong Kong, China, Switzerland and Malaysia have already crossed the highs made in the first half of 2006. Sentiment in the developed markets began improving when there were indications that the US Federal Reserve would stop hiking interest rates and now, crude oil prices have also corrected. In Asia, IMF has upped its forecast with 8.3 per cent growth in 2006 and 8.2 per cent in 2007. IMF expects India to grow at 8.3 per cent in the next year. This has led investors to take a fresh look at equities.

More on IMF report Raghuram Rajan is all set to leave his job as economic counsellor and director of research at the International Monetary Fund (IMF) and return to academia. The new World Economic Outlook, parts of which were released this month on the IMF website, is thus the last global economy report card written under his overall guidance.

One chapter in the report, ‘Asia Rising: Patterns of Economic Development and Growth’, asks whether the economic dynamism in the region — from Japan to India — is because of perspiration or inspiration. In other words, what has been more important in Asia’s economic success: the use of more inputs or greater productivity?

The IMF believes that growth differentials between various Asian countries and between Asia and other developing countries largely result from differences in labour productivity. The reason, according to the IMF is that “during 1970-2005, Asia enjoyed faster physical capital accumulation and total factor productivity growth than other developing economies. In contrast, Asia’s catch-up with advanced economies largely reflected capital accumulation.” In other words, high investment rates helped Asia catch-up with the rich world.

The challenges ahead were defined by Rajan during a press meet. He says: “In China and India, where the typical citizen is still a farmer and not an assembly line worker or a call centre employee, continued productivity growth will come from the shift out of agriculture, but because a substantial portion of the population will still be employed in agriculture in these poor Asian economies for some time, an important objective of policy should be to improve agricultural productivity. For the richer countries, the typical worker will be a stockbroker or a shop assistant, not a manufacturing worker. The focus should be on improving service sector productivity. Again, while governments should create an enabling environment for productivity growth by providing citizens broad-based access to education and finance as well as securing private property, they should also open to agriculture and services, and especially open these to foreign as well as domestic competition, so that these sectors get a chance to generate the same strong productivity growth that manufacturing has done in much of Asia.”

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