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Sunday, June 26, 2011

Envisioning future scenarios for India and China

Suppose we go back to 1870 and envision future scenarios for four interesting and promising countries.

Britain: the incumbent, the pioneer of the industrial revolution, home of Newton and Darwin, with a head start on building institutions, with sound economic policy and deep integration with a global empire.

Germany: the rising power of Europe, rapidly catching up with the frontier (and ahead of Britain in some fields). More centralisation of power, which perhaps gave an edge in certain things.

The US: a vast country blessed with a great constitution, inhabited by a colourful cast of characters drawn from the mavericks, misfits, nutcases and adventurers of Europe.

Argentina: a vast country with boundless prospects, sound policies after 1852, and tightly integrated into globalisation on both trade and capital.

You're probably thinking: `Argentina?' But in the middle of the 19th century, there were many people who thought that Argentina had better prospects than the US. From 1850 to 1930, Argentina did astonishingly well. In particular, from 1880 to 1905, GDP growth averaged 8 per cent over 25 years, which was unheard of in those years.

With the benefit of hindsight, we know what happened. Argentina collapsed into illiberal populism (first into socialism/fascism (1930) and then into Peronism (1946)). Germany collapsed into nationalism and militarism. The US and the UK managed to build liberal democracies.

With this framing, let's ask about how India and China will work out in coming decades.

Will India make it to good institutions, like the UK or the US? Or will India collapse into illiberal populism, much like Argentina did? All too often, the Indian elite tends to take good outcomes in the deep future for granted. I am not so sure and it is worth worrying about the foundations of liberal democracy and a market economy. Given the weak foundations of liberal ideas in India, political freedom is not something to take for granted. Given the weak foundations of market economics in India, economic freedom is not something to take for granted. Argentina's binge of welfare programs and populism is uncomfortably close to the instincts of most Indian politicians.

Will China make it to good institutions, like the UK or the US? Or will China descend into nationalism and militarism, much like Germany did?

The story of Argentina and Germany, from 1870 to 1914, reminds us that what works in a country for a short time is often not enough to carry the country through to a happy ending. Germany did very well from 1870 to 1914 (a full 44 years). Argentina did very well from 1850 to 1930 (a full 80 years) of which 50 years had really high growth.

To many people, sustained success that we have seen in India has generated complacence. We have started trusting in our governance DNA, thinking that it has delivered results after 1979 and particularly after 1993. This complacence hinders the process of identifying incipient problems, criticising the status quo, and changing course. The fact that a economic/political recipe worked well for a few decades does not mean that this recipe will continue to deliver. For a country to work out in the long run, it has to constantly nurture the foundations of liberal democracy and the market economy, and repeatedly reinvent itself.

In the late 19th century, growth rates were low in absolute terms, other than outlandish episodes like Argentina (1880-1905). Germany was the star performer of Europe over 1870-1914, with GDP growth of 2.9 per cent. The UK did just 1.9 per cent in this period. At 2.9 per cent growth, GDP doubles each 24 years. In other words, the economy and the political system need to be reinvented in each generation.

At 7 per cent growth, in India, we are getting a doubling of GDP every decade. This requires a reinvention of the economy and the political system every decade. But India presents a stark contrast with what's required: we have grossly failed on modifying laws, government agencies, policy frameworks and world views at a rapid pace.


  1. Dear Ajay,

    The Economist has come out with a special report in this week's(June 25th) issue.

    With regards

  2. Good thoughts. I would like to point out only two things... what happened after emergency and how people are reacting now regarding corruption(read Anna Hajare & Baba Ramdeo). We have tendency to course-correct ...witness the history of last 5000+ years.

  3. Dear Ajay,

    This short history of the world could not be better timed and accurately analayzes the state of the Indian state currently. Most Indians are smug in the belief that India is "bound" to grow at 8%+ in the many years ahead without realizing the various factors that make this growth possible. Complacency is the worst mistake anyone can commit, History is the best teacher, only if we pay enough attention to it.

    with regards,


  4. Ajay - excellent analysis and I echo your views that India cannot remain complacent. The policy makers must step up to the next level of development, particularly to transparency and accountability.

  5. That India needs to strengthen existing institutions and develop new ones needs iteration repeatedly, because most decision makers still have the mythological proclivity of a heroic figure rescuing the lesser mortals. The recent surge of hope about Anna Hazare's initiative rests on that assumption. On the other hand, the major beneficiaries of peace and stability in the country do not show enough willingness to stimulate the independent thinking process. Any such attempt has to come from the civil society itself, but can be catalysed by the private sector through setting up think tanks on different focused themes and letting them shape the discourse. One does not see any such awareness among the captains of the industry.

  6. Germany is still doing well and in case of Argentina, you put the cart before the horse. In both cases, there is a common thread - the accumulation or lack thereof of knowledge and skills.

    Argentina made a fundamental mistake in not allowing most of its immigrants to settle down. So guest workers from Italy would work in the farms and then return rather than settle down, invest and build new businesses/lives/professions. Argentina is closer to today's Australia than to any other country.

    Germany (and Japan) have been repeatedly able to return from disaster. This is because they have built up a huge skill base in complex engineering, logistics etc. It is very difficult to replicate this in a generation or even two.

    As a victim of British colonialism, we should be the last to consider Imperial Britain a liberal democracy. It was a colonial power that sucked out resources from other countries. Hardly anything liberal or democratic about it.

    What I worry about in case of India is that we are not building up sufficient amounts of complex skills. IT is the only sector where we have built world class capability. In everything else, we are mediocre. China on the other hand is slowly building up skills in manufacturing, logistics and what not. These skills will outlast any institution.

    At 75% literacy, we may be able to grow in a generation but we are at least one generation behind China.

  7. I just wanted to add. About Argentina, I described your take as putting the cart before the horse because Peronism etc were effects of poor policies lacking in sustainability that were pursued during the boom years. Also, the US redistributed land to all comers while Argentina maintained the hegemony of large landlords (and I think they still do).

    It is a good argument for land reform, something that was pursued by Japan, South Korea and Taiwan at various times.

    We haven't had land reforms in India.

  8. The fact that the commodity indices have been correlated with chinese/indian stock markets is a red flag to me. In fact I would allege that if you were to broaden your definition of inflation to include commodity/asset inflation there is hardly any growth! Sure, commodity inflation is volatile, etc so looking at just the peaks is not meaningful but nevertheless its a huge negative. The barabaric relic, Gold being the best asset class in the last decade is not a good indicator of the quality of growth in the last decade. When the Gold rally is all done (as it will be one day), it will be interesting to see where the BRICs are at that point (in other words it will be interesting to see when and how commodity indices un-correlate with the emerging stock markets).

    Secondly, I do not like an economy (both China/India) where the govt can come out and indicate what the growth will be for the next year (the govt ideally should have no clue). Neither do I like GDP growth fetish (and it is currently equivalent to a +ve asset inflation fetish) while ignoring things like HDI, policy environment, degree of crony capitalism, etc, etc. The quality of everything (from food to housing to roads to healthcare to education to legal systems) is just ridiculously low.

    And, then there was Krugman's paper in the 90s about what went wrong with Russian and the Asian tigers - the first phase of growth is easy because of mobilization of capital. The next round based on productivity is far, far tougher. India probably has a lot more capital it can mobilize before it runs into that, but this type of growth is hardly exciting for a middle class educated Indian. It has a lot of meaning to those in poverty, sure. But, urban India has been pathetic in the last decade and regresses because it can't keep up with the influx from rural India and as a result we have urban slums and pressures on urban systems.

    Labor arbitrage while great and essential isn't really as amazing as the computer age driven by decades of research in the West. With some exaggeration, it almost seems parasitic that emerging countries feed off of decades of computing and network research in the West to now bring down global wages. Sure, trade benefits both sides, etc, etc (I get that) but that holds only as long as both sides are true to the principles and culture of free trade, meritocracy and reciprocation. And, where there is some balance between the two sides. Where the gaps are huge, one side assumes almost a parasitic role until it develops which for India will take decades - sure, our kids will probably have a better India but in my lifetime India is going to struggle with things that the West struggled with 50 years ago and the Chinese struggled with 10-20 years ago. Hardly exciting having to fix basic problems at our scale. Its equivalent to replaying past scenes from other countries here. Boring...

    And, then there is Africa which will give competition at the lower end of the pyramid to start with. And, our businessmen will aid that, lets see how that works out.

    Anyway, end of rant.

  9. Though it is always a good idea to guard our freedoms more jealously (even in God's own USA), I am less worried than most people about the prospect of India degenerating into an illiberal polity. As Amartya Sen and also Guha have beautifully pointed out, India has a long and deep rooted tradition of public debate and tolerance of heterodoxy. Such tradition can rest easily only within a liberal and decentralized political setup, and the Indian democracy owes its staying power much to this tradition.

    Given in addition India's large diaspora and the tendency of the upwardly mobile Indians to identify with the Anglo-Americans rather than their peers in other parts of the world, I am much more optimistic about the future of liberal democracy in India.

  10. What has "liberal democracy" done for the poor in India? It is not even liberal and elections don't mean democracy when nearly 50% of the population are pretty much illiterate and another 40% don't share the values on which western-style democracy is built on. I know that I don't fully share them either. What we have a foreign system implanted in our country. In contrast, China has an indigenous system, which has been given the veneer of a western ideology.

    Somebody up there ranted about how boring development is. I think this is a problem with most middle class Indians. My hopes are pinned on the vast poor masses who are finally realizing what is possible. This might have been hastened through land reforms and other sorts of political empowerment rather than simply inheriting the British system.

  11. With each new bombing, the chances of Mumbai becoming a major financial centre are receding.

    The same goes for the economic growth of the country.


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