Political Economy of Development The Politics of Rapid Economic
Growth
Gov 1255Politics of India
Prof 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
Cap
ita
Net
Nat
ion
al
Pro
du
ct in
Ru
pee
s
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-
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.
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
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.
Pro-market • 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
Pro-Business• 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.
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 goal– New industrial policy statement Top priority: Maximization of production– Growth 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 credit– Tax 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)
0
1
2
3
4
5
6
7
8
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 CapitalFormation
Private CorporateSector
Public 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 Scandinaviathe 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 Scandinaviathe 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 Product
Total 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
NDP
Per 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)
0
5
10
15
20
25
30
1950
-51
1956
-57
1962
-63
1968
-69
1974
-75
1980
-81
1986
-87
1992
-93
1998
-99
Public sector
Private sector
Total
0
1
2
3
4
5
6
7
8
1950-1965 1965-1980 1980-2005
Industrial Growth in India (1950-2005)
Rate of Industrial Growth(in percentage perannum)
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