There is a lot of chatter about how India can become prosperous, ever since the current regime decided to offer one more slogan for us to live by: Viksit Bharat or a developed India by 2047. How countries become rich is a huge topic of debate, not just in India, but all over the world. That is because there are only a few rich countries, surrounded by a sea of struggling nations.
The World Bank classifies countries as low-income, lower middle-income, upper middle-income and high-income. There are 58 high-income countries, although there are big differences among them; 28 other countries are also considered high-income, but they are not relevant to our discussion since they include tiny islands, European principalities, overseas dominions of European countries or tax havens.
About 26 countries mostly in Africa and parts of Asia—Congo, Rwanda, Somalia, Mozambique, Yemen, Afghanistan and North Korea–are categorised as low-income and are mostly failed states. India is among 52 countries tagged as lower middle-income along with Bangladesh, Myanmar, Pakistan and Sri Lanka and 54 are upper middle-income countries.
In short, excluding tiny islands and offshore havens, 70% of the world is not rich. The rich ones are geographically concentrated in Europe, North America and East Asia. In short, getting to become a rich nation is not the rule; it is the exception. Can India defy historical odds and join the ranks of developed countries?
Historically, most nations have managed to move only one income bracket higher over the past 80 years. Countries that are rich became so by the 18th century, and—all credit to them—they have maintained their status. Fact is, just as West European countries have not collapsed into middle-income status, it has been nearly impossible for the lower-income nations to make a leap into the league of high-income ones.
Since World War II, only four countries managed to grow their economy fast enough and long enough to pull themselves out of poverty or the ruins of the war and become rich nations. They are: Taiwan, South Korea, Japan and Singapore.
China is not yet a rich country; it is upper-middle. Its growth has slowed down and it is desperately trying to avoid what is called the ‘middle-income trap’.
Some countries have moved up to upper-middle income status but failed to break into developed world status. Is there any reason to believe that India can achieve what scores of countries like Malaysia, Indonesia, Thailand, South Africa, Turkiye and Mexico have not?
What is the highway to high growth? The World Bank and International Monetary Fund (IMF) advise fiscal discipline, trade and financial liberalisation, privatisation, open markets and competition—all collectively called the ‘Washington Consensus’. However, not a single country has ever prospered by applying this recipe.
In Why Nations Fail, Daron Acemoglu and James Robinson argue that it is inclusive political and economic institutions (as opposed to extractive ones) that determine growth. Last year, they and Simon Johnson won the Nobel Prize for their work.
Applying this framework, we realise that India has an extractive State and poor institutions which will undermine our potential. But South Korea (a colony of Japan and as poor as India in the 1950s), did not have any stronger institutions than, say, Argentina, when Park Chung Hee imposed military dictatorship and fathered an unparalleled economic miracle over 25 years.
And what of China which has forged ahead without Western-style inclusive institutions? In any case, this theory provides no practical path to messy and poor democracies, where the pressures of competitive populism may keep institutions weak and the state extractive.
The model that best explains rapid economic growth is a very specific version of economic nationalism— blend of protectionism for young industries to grow, selective import of technology to learn from the best and fostering strong domestic competition so that the best of them survive and eventually become export champions. Countries have to be open (to the best ideas) and closed (to exploitation by foreign trade and capital) at the same.
This is the common thread running through the extraordinary growth of all four major successes of the 20th century: Japan, Korea, Taiwan and China. It also powered England in the 18th century and the US and Germany in the 19th century, apart from strong innovation. The most crucial element in this model is culling inefficient entities, whether in the private or public sector, to ensure that only the most competitive ones remain.
Course Correction Is the Key
Fact is, all countries have tried variations of this economic policy but only in parts, and mostly in a half-hearted manner and so they have fallen far short of achieving high growth. India had industrial protection but ended up with low domestic competition or no competition until 1991.
While China made local governments compete fiercely, India followed an equitable ‘backward area development’ model. India launched export processing zones but failed to implement them with the same zeal as China; some of them were pure land grab exercises under the Congress regime.
Thailand, Malaysia, Indonesia and India have all invited foreign technology but not with a focused strategy to create local export champions.
Most importantly, no policy can be conceived in a perfect form. They start with several flaws; to work in the messy laboratory of real life we need accountability, genuine feedback and rapid course correction. This is what separates winners and losers. The Indian government set up steel plants in the 1950s which became white elephants. South Korea set up Pohang Iron and Steel Plant in 1968 which became a world-beater.
Starting with a 'planned' economy may have been the better option in the 1950s because India’s private sector was stunted at the time. But then there was no course correction, no culling of the inefficient and incentives for the efficient, without which any policy will fail. Sadly, such course correction and culling of the inefficient is not on the agenda even now.
(This article first appeared in Business Standard newspaper)
Comments
palanisamygtl
1 month ago
Make in India is out and Viksit Bharat is in.
No one is answering what happened to Make in India.
And most of us will not be there in 2047 to question or answer about this Visit Bharat.
So Modiji and his coterie can boldly tell anything now.
Excellent write up! But I didnt see any solution being proposed… Anyways, let’s use your own framing of ‘who will do it and why?’
1) Politicians: their main incentive is to gain votes and extract max power! Unfortunately, long term measures don’s attract votes.
2) Bureaucracy: Less said the better. As someone said, complexity is bureaucratic delight and public’s nightmare. They are busy in rent seeking and extracting power.
3) Public (voters): Some 2% would be happy with long term structural reforms while 98% are voting based on Freebies, caste, religion and relionalism!
Who else can do it and why? Where are the incevntives?
All announcements and aspirational targets by BJP and Govt. are for dumb masses. Surprised that Moneylife has joined masses to believe in fake promises.
I think what is needed a scientific temperament (or "consensus"). That entails having a mind open to the best ideas, no matter where or who they come from. A "compassionate capitalism" model would ensure that resources are deployed efficiently (courtesy capitalism) for high growth and the "compassionate" part would ensure that the poor are protected/invested in. Divisive issues - religion, caste - have no place at all for the next 50 years (or ever). It's simple really....till we complicate it
Many people seem bewildered by the sudden slowdown in India's economic growth. But, had you kept your gaze firmly fixed on India's policy-making, the slowdown would hardly be surprising, let alone inexplicable. Since public memory is...
As India gears up for the Union Budget on 1st February, the lofty slogans and promises of ‘Viksit Bharat’ (developed India) are looking increasingly hollow. After a decade of ‘rapid progress,’ the middle class, considered the backbone...
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No one is answering what happened to Make in India.
And most of us will not be there in 2047 to question or answer about this Visit Bharat.
So Modiji and his coterie can boldly tell anything now.
Excellent write up! But I didnt see any solution being proposed… Anyways, let’s use your own framing of ‘who will do it and why?’
1) Politicians: their main incentive is to gain votes and extract max power! Unfortunately, long term measures don’s attract votes.
2) Bureaucracy: Less said the better. As someone said, complexity is bureaucratic delight and public’s nightmare. They are busy in rent seeking and extracting power.
3) Public (voters): Some 2% would be happy with long term structural reforms while 98% are voting based on Freebies, caste, religion and relionalism!
Who else can do it and why? Where are the incevntives?