POLITICAL ECONOMY OF DEVELOPMENT THE POLITICS OF RAPID ECONOMIC GROWTH

Gov 1255Politics of IndiaProf Prerna Singh

Facts:From ‘Hindu rate of growth’ to economic boomGrowth rate of approx 5-6% for past 25 years

Conventional Explanation:Pro-Market Economic liberalization circa 1991

PROBLEMS WITH CONVENTIONAL PRO-MARKET INTERPRETATION Economic growth started accelerating in 1980s - a

full decade prior to liberalization of 1991.

Economic Performance in India, 1960-2004

02000400060008000

100001200014000

1950

-51

1960

-61

1970

-71

1980

-81

1990

-91

2000

-200

1

2003

-200

4Years

Per C

apita

Net

Nat

iona

l Pr

oduc

t in

Rup

ees

Per Capita Netnational product in Rupees

SOME BASIC GROWTH DATA, 1950-2004(ALL FIGURES IN PERCENTAGE PER ANNUM)

1950-1964

1965-1979

1980-

1990

1991-

2004

1980-

2004GDP Growth

3.7 2.9 5.8 5.6 5.7

Industrial Growth

7.4 3.8 6.5 5.8 6.1

Agricultural Growth

3.1 2.3 3.9 3.0 3.4

Gross Investment/GDP

13 18 22.8 22.3 22.5

PROBLEMS WITH CONVENTIONAL PRO-MARKET INTERPRETATION Economic growth started accelerating in 1980s - a

full decade prior to liberalization of 1991. Industrial production in India—a key object of

reforms—did not accelerate (and in fact declined) following the liberalizing reforms.

SOME BASIC GROWTH DATA, 1950-2004(ALL FIGURES IN PERCENTAGE PER ANNUM)

1950-

1964

1965-

1979

1980-

1990

1991-

2004

1980-2004

GDP Growth

3.7 2.9 5.8 5.6 5.7

Industrial Growth

7.4 3.8 6.5 5.8 6.1

Agricultural Growth

3.1 2.3 3.9 3.0 3.4

Gross Investment/GDP

13 18 22.8 22.3 22.5

PROBLEMS WITH CONVENTIONAL PRO-MARKET INTERPRETATION Economic growth started accelerating in 1980s - a

full decade prior to liberalization of 1991. Industrial production in India—a key object of

reforms—did not accelerate (and in fact declined) following the liberalizing reforms.

India’s record in a broader comparative context “Modest” embrace of the global economy For example, mixed record of other liberalized,

developing countries (Latin America & Sub-saharan Africa)

ALTERNATIVE EXPLANATION: PRO-BUSINESS Emphasizes the state’s changing role since

1980: the abandonment of populism, prioritizing of economic growth, and a slow but steady embrace of Indian capital

as the main ruling ally.

Minimal State Intervention

Free play of markets will lead to efficient allocation of resources, as well as promote competitiveness, hence boosting production and growth (‘Washington Consensus’)

Supports new entrants and consumers

Derived from strands of neoclassical economics

Emphasizes quality and not degree of state intervention

State commitment to high economic growth by developing trade & industry with well-deigned and thoroughly implemented state intervention

Supports established producers

Developed via real-world experience, especially success of East Asian tigers.

Pro-market Pro-Business

THREE PHASES IN THE POLITICAL ECONOMY OF DEVELOPMENT IN INDIA

Pre-1980s-: Pro-redistribution 1980s: Pro- growth/ Pro-business

1991- Pro-business + Pro-market

THREE PHASES IN THE POLITICAL ECONOMY OF DEVELOPMENT IN INDIA

Pre-1980s-: Pro-redistribution 1980s: Pro- growth/ Pro-business

1991- Pro-business + Pro-market

THE PRE-EMERGENCY, LEFT-LEANING INDIRA GANDHI VS.THE POST-EMERGENCY, RIGHT-LEANING INDIRA GANDHI

THE POST-EMERGENCY, RIGHT-LEANING INDIRA GANDHI

Prioritizing of economic growth as a state goal.

Supporting big business to achieve this goal

Taming labor as a necessary aspect of this strategy

THE POST-EMERGENCY, RIGHT-LEANING INDIRA GANDHI

Prioritizing of economic growth as a state goalNew industrial policy statement Top priority: Maximization of

productionGrowth first development

THE POST-EMERGENCY, RIGHT-LEANING INDIRA GANDHI Supporting big business to achieve this

goal Withdrawal of important constraints on

expansion & encouragement to big business to enter areas that had hitherto been reserved for the public sector

Financing the expansion.Liberalized creditTax relief Altered the legal framework to

encourage private sector to finance new investments by raising resources directly from the public

THE POST-EMERGENCY, RIGHT-LEANING INDIRA GANDHI

Taming labor as a necessary aspect of this strategy

Especially difficult for champion of poor & workers – Mrs Gandhi

But did curtail labor unrest, esp strikes

THE POST-EMERGENCY, RIGHT-LEANING INDIRA GANDHI

Prioritizing of economic growth as a state goal.

Supporting big business to achieve this goal

Taming labor as a necessary aspect of this strategy

Government restructured its own role: Halted the growth of public sector industries Demoted the significance of economic planning and the

planning commission.

THE POST-EMERGENCY, RIGHT-LEANING INDIRA GANDHI

Prioritizing of economic growth as a state goal.

Supporting big business to achieve this goal

Taming labor as a necessary aspect of this strategy

Government restructured its own role

Changes in India’s economic relations with the world

RAJIV GANDHI “Break from the past” Government's commitment first and

foremost to economic growth and only in abstract notions to openness or laissez faire.

Policy pattern much more pro-business, specially pro big Indian business, rather than anything else

RESULTS OF PRO-BUSINESS GROWTH STRATEGY Positive:High rates of investment + in efficiency of

investment Growth rate, esp in industry

Negative:Political ProblemsPolitical Economy problems

ECONOMIC “CRISIS” OF 1991 & NEOLIBERAL REFORMS Growth rate of manufacturing industry not

influenced all that greatly by the reforms.

INDUSTRIAL GROWTH IN INDIA (1950-2004)

012345678

1950-1964

1965-1979

1980-1990

1991-2004

1980-2004

Rate of Industrial Growth (in percentage per annum)

ECONOMIC “CRISIS” OF 1991 & NEOLIBERAL REFORMS Growth rate of manufacturing industry not

influenced Rate of capital formation not significantly

influenced

PATTERNS OF CAPITAL FORMATION IN INDIA, BY SECTOR (1970-2002)

0

5

10

15

20

25

30

1970-1975

1975-1980

1980-1985

1985-1990

1990-1995

1995-2000

2000-2002

Total Gross CapitalFormationPrivate CorporateSectorPublic Sector

Household Sector

ECONOMIC “CRISIS” OF 1991 & NEOLIBERAL REFORMS Growth rate of manufacturing industry not

influenced Rate of capital formation not significantly

influenced Changing composition of investment

REFORMS OF THE 1990S Delicensing Tax concessions Opening of yet newer areas hitherto reserved for

the public sector Taming labour unrest

REFORMS OF THE 1990SContinuation of reforms of the 1980s: Not surprising Delicensing Tax concessions Opening of yet newer areas hitherto reserved for

the public sector Taming labour unrest

REFORMS OF THE 1990SBreak from reforms of the 1980s: Surprising Opening up of the economy Import quotas were reduced Tariffs came down slowly but surely Currency was devalued Foreign investment regime was liberalized Restrictions on external financial transactions

were eased.

WHY DID THE SAME SET OF REFORMS THAT PROVED DIFFICULT TO PURSUE DURING THE 1980S BECOME MORE LIKELY IN THE EARLY 1990S?

External factors: Decline and the disintegration of the Soviet Union

Decline of a model of development Loss of most important trading partner Loss of most important political & military ally

Growing availability of investible sources in foreign exchange

WTO coming

Internal factors: Softening of resistance of Indian business to

opening of economy Split of position of Indian business over

opening of the economy in 1980s

REFORMS Internal deregulation of IndustryGone the furthest

Attempts to tame budgetary deficitLeast successful

External openingControversial but slow & steady

Why distinguish Pro-market vs Pro-Business policies?

What is at stake? Scholarly – Get Causal Arrows Right Normative – What is Fair & Just

MOST DESIRABLE FORM OF ORGANIZATION OF:Polity : Democracy

Economy: Capitalism

Debate about “varieties of capitalism”:the neo-liberal model of Anglo-America

the social democratic model of Scandinaviathe statist model of Japan

Q for developing countries: Which model is best to emulate?

MOST DESIRABLE FORM OF ORGANIZATION OF:Polity : Democracy

Economy: Capitalism

Debate about “varieties of capitalism”:the neo-liberal model of Anglo-America the social democratic model of Scandinavia

the statist model of Japan

Q for developing countries: Which model is best to emulate?

MOST DESIRABLE FORM OF ORGANIZATION OF:

Polity : DemocracyEconomy: Capitalism

Debate about “varieties of capitalism”:the neo-liberal model of Anglo-America

the social democratic model of Scandinavia

the statist model of Japan

Q for developing countries: Which model is best to emulate?

How successful have these policies been?

BOOMING INDIA

Neoliberals Statist scholars(Atul Kohli)

All good things go together

Trade-offs of development

DIFFICULT QS FOR INDIA’S MODEL OF DEVELOPMENT

Why should the common people in a democracy accept a narrow ruling alliance at the helm?

Is ethnic mobilization a substitute for pro-poor politics?

Is India increasingly stuck with a two track democracy, in which common people are only needed at the time of elections, and then it is best that they all go home, forget politics, and let the “rational” elite quietly run a pro-business show?

-1

0

1

2

3

4

5

6

7

1950s 1960s 1970s 1980s 1990s 2000s

Net Domestic Product

Per Worker NetDomestic ProductTotal Factor Productivity

Economic Growth Rates in India 1950-2004

0

1

2

3

4

5

6

7

1950-1965 1965-80 1980-1992 1992-2004

NDPPer Capita NDP

Per Worker NDP

Capital Formation in India (1950-2004)

0

5

10

15

20

25

30

1950-51 1960-61 1970-71 1980-81 1990-91 1999-00 2000-01 2001-02 2002-03 2003-04

Gross DomesticCapital Formation(as percentage ofGDP)

Gross Fixed Capital Formation in India 1950-2004 (as percentage of GDP)

05

1015202530

1950-5

1

1956-5

7

1962-6

3

1968-6

9

1974-7

5

1980-8

1

1986-8

7

1992-9

3

1998-9

9

Public sector Private sector Total

012345678

1950-1965 1965-1980 1980-2005

Industrial Growth in India (1950-2005)

Rate of Industrial Growth(in percentage perannum)