From ‘Nehru Growth’ to Productivity Surge

It is common knowledge that the Indian economy which was securely imprisoned since independence in 1947 has undergone a radical transformation and has seen a departure from its dismal 3 percent “Nehru Growth” to a more respectable 6 percent and more since the 1980s. There is little room for debate on that fact. What observers appear to disagree on is what were the factors that led to the transition from the “Nehru Growth” to the present.

Very broadly speaking, here is a thumb-rule I use to figure out what factors led to the Indian economic growth 1980s onwards. List every policy—domestic, international, industrial, education, health, banking, etc—that Nehru and his descendents imposed on the economy. Systematically reverse the policy and as you do so, you see the economy accelerating. In other words, if your goal is to create a set of policies that would ensure economic stagnation and deepening poverty of a large economy, the shortest route for you would be wholesale adoption of all the Nehruvian policies. Conversely, the quickest method of figuring out what to do to for economic growth, is to take any component of the Nehruvian policy prescription and apply the reverse.

To the extent that Nehruvian policies have been reversed, India’s economy is prospering. If the economy has not attained its potential growth rate yet, it is because not all of the mindless Nehruvian (but I repeat myself) policies have been discarded yet. I have no doubt that the nation will become slowly wise eventually. How many hundreds of millions will suffer poverty in the meanwhile is a question that is best not contemplated.

What got me thinking about the “Nehru Growth” rate is a recent paper in “IMFstaffpapers: A journal of the IMF” by Rodrik and Subramanian “From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition.”

Before anything else, let me address a point about nomenclature. As far as I can tell, Nehru was vehemently anti-Hindu. He was by no stretch of the imagination a Hindu nationalist. So why is the growth rate arising from his policies labeled “Hindu growth” is somewhat of a mystery. After all, Hindus suffered as a result of Nehruvian policies seeing as that they comprise about 80 percent of India’s population. So labeling the Nehru growth rate as “Hindu” is adding insult to injury.

Also, what does it mean that a growth rate is “Hindu”? Does economic growth rate have a religion? We have never heard of the growth rate of the Indian economy in the first half of the 20th century as the “Christian growth” rate, have we? You may ask what was that Christian growth rate: it was negative 2 percent per year on average.

As a Hindu I am offended at the attempt by the Nehruvian apologists at transferring the blame to Hindus for Nehru’s failures. And it is not just Hindus that are the target of the defamation; the religion is at fault. Here is the opening paragraph of the IMF article:

India’s economic performance during the first three decades after independence in 1947 was christened the “Hindu” rate of growth, a term connoting a disappointing but not disastrous outcome and the acquiescence in the present that the religion supposedly imbues, because of its greater emphasis on the hereafter.

I am sure that the authors’ grasp of economics is much better than their feeble grasp on what Hinduism is.

Hindu bashing continues on pg 196 when they write:

A key fact that we establish at the outset of this paper is that the turnaround in this performance—the decisive break with the Hindu past—occurred around 1980 and not in the 1990s as most accounts have it.

I sympathize with the authors’ apparent desire for India to discard its Hindu past. The earlier Pope was much more direct in his condemnation of Hinduism when he publicly declared in India that the area of darkness that is India has to be illuminated by the cross.

The paper does have something of substance once the gratuitous insulting of Hindus and Hinduism is out of the way. The paper is about India’s growth transition which they claim began early in the 1980s rather than in the years following the macroeconomic crisis of 1991. They claim that there was a perception change in the private sector that the government’s attitude towards industrial licensing had changed. This shift resulted in large productivity gains because the economy was far below its income-possibility frontier.

To Rodrik and Subramanian, what is important is not whether the reforms started in the 1980s or not but how it happened. The reforms, they contend, was “probusiness in the sense that they boosted the profits of existing businesses without threatening them with real competition because external barriers remained largely in place” and not “proliberalization.” They make a distinction between probusiness and promarket/procompetition and they claim that the latter has a greater focus on internal reforms and was the approach adopted in the 1990s.

About the reforms of the 1990s, they argue that “[it] may well be that the performance of the 1980s would have run out of steam and that the “true” reforms of the 1990s were essential to keep productivity growth alive.” The conclude:

The reforms of the 1990s were, of course, triggered by the crisis of 1991. The quick rebound fro the crisis has been almost entirely attributed to the decisive break from the dirigiste past. But if the 1980s experience was as successful as we think it might have been in creating a strong base of manufacturing and productivity growth, it is hard not to draw the conclusion that the quick rebound was also rendered possible by the strength of the 1980s performance. In some ways, although India was reforming in response to a macroeconomic crisis, it was reforming from a position of strength in the real sector of the economy.”

I liked the paper by Rodrik and Subramanium. I generally agree with their conclusions. But TN Srinivasan, as a discussant of the paper opens his comments thus:

This is a disappointing paper. It sees a mystery and fails to convince through analysis why it does. Had the authors been familiar with Indian economic literature, they might have note written it! The literature has not only noted the growth acceleration in the 1980s but has also questioned its sustainability on the grounds of its possibly being debt-led and fueled by employment and real wage expansion in the public sector.

TN is always very incisive and rarely minces his words. The comment is worth reading, as is the original paper and the response to the comments by Rodrik and Subramanium. Here is TN at his most generous:

The only new idea in the paper is the anecdotal hypothesis that around 1980 there was an “attitudinal shift” toward private business on the part of the national government,9 which triggered a permanent change in the growth process.

But then he quickly trashes one of the important points that R&S make by writing:

The distinction between promarket and probusiness orientation is overdrawn and incoherent. The authors consider trade liberalization an archetypal market-oriented policy without considering the implication of the facts that trade liberalization covered only imports of intermediate goods and equipment, and that industrial licensing remained in place. Clearly, such liberalization, by allowing greater flexibility in the use of their licensed capacity, favored incumbent producers but not consumers and potential entrants. By the same token, any policy (for example, reduction of corporate taxes) that raises the profits of incumbents also raises those of potential entrants, if they are allowed to enter. In short, the distinction made by the authors has no economic logic behind it.

I think TN is just being contrary for the record. The most surprising line I have recently read belongs to TN when he says that “[a]t independence on August 15, 1947, India had an incorruptible political leadership committed to development and an efficient, independent civil service.” Incorruptible? Possibly. Incompetent? Absolutely. I cannot agree more with his last statement—

By sticking to a dysfunctional development strategy for far too long, India’s policymakers ensured that the Indian economy performed far below its potential and that India’s poor remained poor for an avoidably long time.

Well, that is not the end of that debate, as I said earlier. R&S respond to the comments by TN.

They first note the areas of agreement between TN and them:

(1) India’s economic growth rate rose significantly around 1980, and the pace of economic expansion and productivity increase during the 1980s was on the whole indistinguishable from that experienced during the 1990s. (This may have been well known to economists in India, but it certainly has not been common knowledge among reasonably well informed analysts of economic growth and economic reform elsewhere.)
(2) India’s major liberalizing reforms came after 1991. Before that date, India was a practically closed economy.
(3) While there was some liberalization during the latter part of the 1980s, it was not significant enough to have been the driving force behind the higher growth of the 1980s.
(4) Manufacturing played a key role in the increase in growth in the 1980s.
(5) The quality of India’s institutions can support a much higher level of income than what the country had until recently.

They address TN’s objections of course. I’d like to quote them on the distinction between promarket and probusiness policy orientation:

We are puzzled by the discussant’s claim that the distinction between promarket and probusiness policy orientations is incoherent. It seems to us that the distinction is analytically quite clear, and in practice quite useful. Suharto’s economic policies were probusiness, but hardly promarket. We made clear that policies that would help incumbents without allowing newcomers to share in the increased profitability would count as probusiness rather than promarket. We do not disagree with the discussant’s point that “any policy … which raises the profits of incumbents also raises that of potential entrants, if allowed to enter” (our emphasis), but we maintain that it is possible to enhance incumbents’ profits without allowing entry (a possibility that the discussant himself allows with his qualifier).

One can learn a lot from an academic paper. But for real learning, it is good to follow the debate among serious academics. It is not only instructive, but it is also entertaining.

Just as a followup, I would recommend Brad DeLong’s post on the subject and the comments following it.

Crossposted at IndianEconomy.org.