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 “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 heavens, 70 per cent 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 turn of the 19th 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 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 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 it is inclusive political and economic institutions (as distinct from 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, the theory provides no practical path to messy and poor democracies, where 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 — a 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. This is the common thread running through the extraordinary growth of all four major successes of the 20th century: Japan, South Korea, Taiwan, and China. It also powered England in the 18th century and the United States 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 run them with the same zeal as China did; 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 perfect form. They start with some 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. In 1968, South Korea set up the Pohang Iron and Steel Plant, which became a world-beater. When inefficiencies and corruption started creeping into India’s “planned” economy there was no course correction, no culling of the inefficient and incentives for the efficient. Sadly, we have not found a solution to this.
The author is editor of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers
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