The economic growth of India since 1947 has been disappointingly low. Many countries—such as Hong Kong, South Korea, China—starting with comparable low levels of per capita GDP as India in the 1950s have over the last 75 years or so made phenomenal economic progress. Broadly speaking, those countries escaped poverty primarily because their political leaders were able to formulate and implement policies that promoted growth. In contrast to them, India stagnated.
India has been struggling to escape the long-run around 2 percent annual growth rate in real per capita GDP, the so-called “Nehru rate of growth.” If instead of that, India’s annual growth rate of real per capita GDP had been around 5 percent over the last 75 years, India would have had a per capita annual GDP of around $20,000, instead of the current $2,000.[1] Forget having hundreds of millions struggling to survive, India’s economy would have been a major force powering global prosperity.
We are faced with this simple question. Could India have grown at a modest 5 percent? Yes because it had access to all the factors that are conducive to growth — human and financial capital, access to technology, credit markets, international trade, natural resources, etc. India did not suffer chronic civil unrest, extended wars, or periodic massively disruptive natural disasters that could have prevented it from reaching its economic potential.
Let’s briefly consider some of the commonly encountered justification for India’s economic failures. We note, for example, that Singapore did spectacularly well, moving from “third world to first” within a generation. Its success is mostly due to Lee Kuan Yew’s governance and economic policies. But then, the response is, Singapore is a very tiny country (a few million people), whereas India’s population was 400 million in 1950. So Singapore’s achievements cannot be compared to India’s failure.
Well then let’s consider China, a very large country. In 1978, India was in fact economically ahead of China, although marginally so. But since then China has maintained a double digit growth rate for nearly all of four decades. The comparison with China is dismissed by noting that it is not a democracy, which India is. Meaning India’s democracy is the handicap. But the United States has been rich and prosperous for over a century — even though like India it is both large and a democracy.
Therefore neither India’s size nor its democratic politics can be reasons for its failure to become a rich country. There must be something else.
Indians are not systematically handicapped in any way compared to other large groups in the world. This is evidently so because the Indian diaspora, which is arguably a very large sample, does phenomenally well in the developed countries. What primarily distinguishes developed from under-developed countries is economic policies. Therefore there’s something within India that hinders Indians from creating the wealth that they are capable of creating. The argument here hinges on the claim that the biggest barrier to India’s progress is its government and the policies it implements.
Economic policies fundamentally determine economic growth. Governments ultimately choose the policies and implement them for better or for worse. China suffered massively because of socialist economic policies pre-1979. Deng Xiaopeng’s economic policies differed dramatically from his predecessors’ and transformed China by allowing it to grow at a long-run average of 10 percent per year. China’s remarkable post-1980 success is as much a result of government policies as its pre-1979 failures were because of government policies. Economic policies matter enormously.
The Chinese government decided to open the Chinese economy to foreign investment. The favorable external factor was that US corportations determined to move their manufacturing to China and gain from low-wage China. Also in China’s favor was its high literacy. Economic growth is not guaranteed; there are contingent factors that help or hinder growth.
Therefore, good economic policies are not by themselves sufficient for economic prosperity; other factors matter too. However, bad economic policies are sufficient to doom a country. There is an abundance of examples that illustrate this basic point. Compare North and South Korea today, or East and West Germany between 1945 and 1990. The countries in each pair had essentially the same endowments — history, geography, climate, culture, and natural resources. They differed only in the policies they adopted and that made all the difference.
The question then is: why do countries choose bad economic policies? (But note that in reality countries do not choose. Countries are abstract aggregates and not individuals with will and volition. Individuals or groups of individuals in positions of power choose.) The proper question is, why do some policy makers choose bad policies? Is it due to ignorance or is it due to malice?
We can rule out ignorance since knowledge of what good economic policies are, and the proper way to implement them, is abundantly available. We can also rule out pure malice as the motivating factor in choosing policies that result in hundreds of millions suffering immense avoidable misery. The policy makers are not all sociopaths (though some may certainly be) who enjoy inflicting pain on others.
The one factor that motivates the vast majority of people is self-interest. Self-interest is not a pathology because it’s a normal and unalterable aspect of human nature. It’s not a bug in human nature but is actually a feature. Indeed, self-interest broadly construed — enlightened self-interest — is what accounts for the advancement of civilization itself. People work hard to better the circumstances of themselves and those they care about, and in doing so advance the greater good even without intending to. This had been recognized two and a half centuries ago by Adam Smith and others.
[Continued in Part 2.]
NOTES:
[1] It’s the power of compounding that makes the difference.
“In the early 1960s, South Korea was as poor as much of sub-Saharan Africa, but since then compound returns have made for a huge difference. Or considering the years 1870 to 1990, if the United States had grown one percentage point less per year, the country would in 1990 have had the same standard of living as Mexico. More abstractly, if you can boost the growth rate by two percentage points a year (by no means a utopian scenario for many emerging economies), after a time horizon of 55.5 years income will be three times higher than it otherwise would have been. Compound growth truly matters.”
[Tyler Cowen. The Case for the Longer Term. January 2019. Cato Unbound.]
Atanu Dey : Life is a Random Draw 
The economic development of a country,particularly a large one like India, is consequence of cultural/civilisational and geopolitical complex. Since the 1950s, a number of asian countries jump started their urbanisation and economic growth by low values added/labour intensive manufacture, from Japan….to China, lastly to Vietnam and Bangladesh..
As they grew and per/cap income increased, they moved up along the supply chain..like Japan right now leads the carbon/pan fibre industry.
Seems India is following a different path. A few years ago, I read an article written by Swaminathan Aiyar(@http://swaminomics.org)(dated 1995 but now deleted)that India was already, back in 1995, in the’post-industrial’ era. He had really pointed out the career goals of the more educated indians: go for SW enabled jobs, like programming or call-centre jobs then migrated to developed countries.
However, most of the above are passe, humanity is entering the new era of A.I. and humanoid robots. Decades from now, homosapriens might be all converted to to cyborgs…’race’,language’, religion,gender…will become plug and play.
LikeLike