Atanu Dey On India's Development

Economic Policies Matter

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A short century ago the US and Argentina were rivals. Both were riding the first wave of globalisation at the turn of the 20th century. Both were young, dynamic nations with fertile farmlands and confident exporters. Both brought the beef of the New World to the tables of their European colonial forebears. Before the Great Depression of the 1930s, Argentina was among the 10 richest economies in the world.

That’s from a fascinating article by Alan Beattie in the Financial Times of May 23rd titled “Argentina: The superpower that never was.” The article continues with —

A hundred years later there was no choice at all. One had gone on to be among the most successful economies ever. The other was a broken husk.

There was no individual event at which Argentina’s path was set on a permanent divergence from that of the United States of America. But there was a series of mistakes and missteps that fit a general pattern. The countries were dealt quite similar hands but played them very differently. The similarities between the two in the second half of the 19th century, and in fact up to 1939, were neither fictional nor superficial. [Emphasis mine.]

It’s a very well-written and instructive article. Pankaj Narula sent me the link and wrote that his favorite part of the essay was —

Economies rarely get rich on agriculture alone and Britain had shown the world the next stage, industrialisation. America grasped that building a manufacturing industry would allow it to benefit from better technologies, while trying to squeeze a little more grain out of the same fields would not. It was not as if Argentina consciously rejected the same course. It could scarcely avoid growing its own manufacturing industry. But when industrialisation did come, prevailing prejudices ensured it was limited and late. Argentina’s elites saw no reason to risk their status and livelihoods in the fickle new sphere and anyway there were not enough new workers to fill the factories. Argentina brought the same tendencies that it had to the ossified agricultural sector, preferring cosy, safe monopolies to the brutal riskiness of competition. Its wellbeing rested on farm prices holding their own against the prices of manufactured goods, and on global markets remaining open.

While reading the piece, I could not resist thinking about India and China. In about 20 years or so, say in 2030, someone will surely write a similar article. They would note the similarities between the two: ancient civilizations, deep culture, large populations, somewhat equally endowed with natural resources, etc. They will note that around 1978, India was just a bit ahead of China. Then China changed its policies and took the path to development.

That future article will note that India continued with Nehruvian socialist policies that retarded economic growth and grew at the “Nehru rate of growth” which made it fall behind China. By 2008, China’s per capita income was three times that of India’s. By 2030, the gap had increased to 10 times. India continued with Nehruvian socialism, which is another name for the process which enriches the government officials and impoverishes the economy. China had learnt its lessons that socialism is a guaranteed path to poverty and changed its course.

It does not bode well for India. The political party that made the policies that shackled India to the “Nehru rate of growth” are unfortunately in the driver’s seat like they have been for most of India’s post-independence history. They cannot change because that would be tantamount to admitting that Nehruvian socialism failed. They cannot tell the people that their poverty was engineered by the party. The party depends on the poor and illiterate to continue to rule.

C’est la vie, and all that sort of thing.