Jagdish Bhagwati - Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries

Why Growth Matters

WHY
GROWTH
MATTERS

How Economic Growth in India
Reduced Poverty and the Lessons for
Other Developing Countries

JAGDISH BHAGWATI
ARVIND PANAGARIYA

A Council on Foreign Relations Book

PUBLICAFFAIRS

New York

Copyright 2013 by Jagdish Bhagwati and Arvind Panagariya.

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A Council on Foreign Relations Book.

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Book Design by Jeff Williams

Library of Congress Cataloging-in-Publication Data Bhagwati, Jagdish N., 1934

Why growth matters : how economic growth in India reduced poverty and the lessons for other developing countries / Jagdish Bhagwati, Arvind Panagariya.First edition.

pages cm

Includes bibliographical references and index.

ISBN 978-1-61039-271-6 (hardcover)ISBN 978-1-61039-272-3 (e-book) 1. PovertyIndia. 2. PovertyDeveloping countries. 3. Economic developmentIndia. 4. Economic developmentDeveloping countries. 5. IndiaEconomic policy. 6. Developing countriesEconomic policy. I. Panagariya, Arvind. II. Title.

HC440.P6B45 2013
339.4'60954dc23

2012042283

10 9 8 7 6 5 4 3 2 1

In the 1950s, as developmental economists began to consider which countries would break out of the pack and become role models for other developing nations for their developmental strategies, India and China were regarded as certain bets. These giants would awaken after a long slumber.

India enjoyed an advantage on some dimensions but a handicap on others: India had inherited a splendid civil service, a fiercely independent judiciary, a relatively free press, and above all, politicians who had fought for independence and put social good ahead of personal profit. These attributes, which are now called institutions and define the underlying elements of good governance, were rare among most of the countries that reached independence as the Second World War ended.

The agronomer Rene Dumont, in A False Start in Africa, famously denounced the lifestyle of the African rulers who took over from the departing French, comparing it with that of the French court of the Bourbons! Indeed, pretty soon India was the only major postcolonial developing nation left standing as a democracy, even what we call now a liberal democracy characterized by the institutions of free elections, a free press, and an independent judiciary. Few development economists would have discounted the favorable implications of Indias political exceptionalism.

By contrast, China had emerged from the Long March and a fiercely contested civil war, and the liquidation of the kulaks in the process. If the Soviet Union under Stalin was any guide, the prospects for growth were shrouded in political uncertainties. In fact, the Great Famine and the Cultural Revolution were upheavals that underlined the legitimacy of these doubts about China. Until the 1980s, the Chinese giant therefore did not awaken; it continued snoring.

Yet, developmental economists in the 1950s favored the prospects of China over those of India. Why? The reason lay in the fact that development economists typically deploy simple models to arrive at judgments about development outcomes. At the time, the favorite developmental model shared widely by the economists depicted growth as dependent on two parameters: how much you saved (and invested) and how much you got out of that investment. As it happened, it was customary to assume that the savings rate could vary, and was subject to policy manipulationtypically, the government could use taxes to raise the domestic savings ratebut that the productivity of that investment, which was reflected in the capital-to-output ratio, was not significantly variable and was treated as a technological datum.

So, with the productivity factor neutralized, it was inferred that India would lose out to China simply because India, being a democracy, could not raise its savings rate through taxation as fast and as much as China, which was authoritarian and could extract savingsor what Marxists call a surplusthrough draconian means from the population. India, left on its own, would lose the developmental race to China.

But the fact that India was democratic meant that in the 1950s the West was rooting for its success against the communist behemoth, China. Its inability to match Chinas savings effort thus had to be matched by the Wests making up through foreign aid Indias handicap in raising savings and hence investment.

So, India became a recipient of substantial foreign aid and should have grown rapidly, in consequence. Yet, it did not. The Indian giant also continued to slumber and snore.

Both India and China were unable to grow very much during nearly three decades: China because of ruinous politics with disastrous economic policies prompted by Marxist doctrines that required autarky and regimentation of the economy, and India because of a disastrous economic policy framework that undermined the productivity of its investment efforts.