INDIA, which has lagged well behind Africa in economic reform, has nevertheless fared much better. Most Indian reforms occurred well before the spurt in GDP growth from 6% to 9%. British academic James Manor says that thoughtful people in Ghana and South Africa have asked him “How do the Indians do it? They have liberalised less than we have, but they have higher growth rates — and plenty of social stability.”
Let me attempt an answer. Economic success depends not just on economic reform but on institutional strength and historical skills — what economists call ‘initial conditions’. India and China are historical superpowers that accounted for 70% of world industrial production before the Industrial Revolution.
They declined during 300 years of western colonialism, but are now clawing themselves back to their initial high position. Indian bankers and traders in the 17th century were bigger than the East India Company.
Robert Clive thought that Murshidabad, which he entered after the Battle of Plassey, was richer than London in his time. Shajahan had the money and skills to build the Taj Mahal: his European contemporaries did not.
Seen in this light, the decline of India and China in the last 300 years was a temporary blip. Africa and Latin America will find it difficult to replicate the growth spurt in China and India because of very different initial conditions.
Lumping nations of Africa and Asia together into something called ‘developing countries’ is a political gimmick. In Africa, most agriculture was still slash-and-burn cultivation as recently as the 1970s. But most of Asia moved from slash-and-burn to permanent cultivation 3,000 years ago.
This provided leisure and opportunity for the ruling classes to develop considerable engineering and other skills. The exploited peasantry of 3,000 years also developed a cornucopia of skills and innovative techniques for survival. Africans emerging from slash-and-burn cultivators lack such skills: their economy had no markets or mercantile skills. Indians are not inherently superior in any way.
This is proved dramatically in India’s tribal areas, which have just evolved from shifting to permanent cultivation. As in Africa, Indian tribal belts lack skills and mercantile attitudes. Plainsmen can easily dupe tribals into giving up their land.
The whole of Africa is not historically disadvantaged. Ancient agricultural countries like Egypt , Tunisia and Algeria are fully on par with India in growth potential, and in fact, are much richer than India today. But sub-Saharan Africa is disadvantaged compared to both India and Egypt. Progress in Indian tribal belts has been as difficult as in Africa. It is said that if a village committee in a tribal area has 11 tribals and one non-tribal, the non-tribal will dominate all decisionmaking: he alone will have the skills and resources.
It will take a couple of generations of good education and skill-building to close the gap. Many African countries are ahead of India in literacy. But they lag behind in institutional strength: many have been ruled and ruined by thugs.
The Nehruvian era was one of chronic economic underperformance. But it was also an era when institutional strength developed — democracy, independent judiciary, limits on arbitrary state action, high quality varsities and technical institutes.
THE private sector remained vibrant even when the state dominated the commanding heights of the economy. Businessmen who survived the licence-permit raj developed such skills of functioning in difficult conditions that they were able to skyrocket once they were liberated from the shackles of industrial and import licensing.
Most African and Latin American countries lack not only institutional strength but India’s scale economies, too. India has a thin upper crust of world class innovators and managers, overlying a huge poorly educated and skilled mass. But an upper crust of 1% in India means 12 million people, enough to spark an economic miracle. No African or Latin American country can produce 500,000 engineers a year, as India does. Of these 500,000, half are substandard, but a quarter are usable and another quarter are world class.
Economic reform in Africa was driven mainly by donors of aid, and resisted stiffly by local elites. So, much political effort went into sabotaging rather than embracing reform. In India, however, Narasimha Rao was serious about reform. This ownership of reform meant the pace was gradual and erratic, but reform was nevertheless home grown. The early success of industrial and trade reform gave reform a good name, and made it irreversible.
Narasimha Rao implemented radical reforms although he lacked a parliamentary majority, and faced opposition parties swearing to reverse the reforms when they came to power. This showed immense institutional strength on India’s part.
Donor-driven reform in Africa was wholesale, creating a host of losers outnumbering winners. This gave reform a bad name. By contrast, Indian politicians sought liberalisation that minimised losers.
So, when farmers and bank unions threatened to take to the streets if their sectors were liberalised, Narasimha Rao assured them this would not happen. He refused to downsize government staff. Conventional economic wisdom suggested that a crisis was the best time for painful measures (like labour reform).
But Rao followed political democratic priorities, not those of foreign economists. He focused on areas where he could get quick gains while creating few losers — abolishing industrial licensing and monopolies clearance, reducing import duties gradually, moving to a market determined exchange rate that eventually killed the black market in foreign exchange.
The World Bank later concluded that its own policies in Africa and Latin America had been wrong in seeking wholesale reforms across the board: instead it should have focused on removing just the binding constraints. This was close to the policy Rao followed, not through academic research but because it flowed from the institutional imperatives of democracy.
In sum, India’s 8-9% growth is not just the result of recent reforms. Its strong initial conditions range from skills developed over 3,000 years to institutional strength developed over the last 60 years. Countries without these initial conditions will find it difficult to replicate India’s performance.