Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries

269 Pages·2013·2.98 MB·English

by  Jagdish Bhagwati

Why Growth Matters
WHY
GROWTH
MATTERS
How Economic Growth in India
Reduced Poverty and the Lessons for
Other Developing Countries
JAGDISH BHAGWATI
ARVIND PANAGARIYA
A Council on Foreign Relations Book
PUBLICAFFAIRS
New York
Copyright © 2013 by Jagdish Bhagwati and Arvind Panagariya.
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Book Design by Jeff Williams
Library of Congress Cataloging-in-Publication Data Bhagwati, Jagdish N., 1934– Why growth matters :
how economic growth in India reduced poverty and the lessons for other developing countries / Jagdish
Bhagwati, Arvind Panagariya.—First edition.
pages cm
Includes bibliographical references and index.
ISBN 978-1-61039-271-6 (hardcover)—ISBN 978-1-61039-272-3 (e-book) 1. Poverty—India. 2. Poverty
—Developing countries. 3. Economic development—India. 4. Economic development—Developing
countries. 5. India—Economic policy. 6. Developing countries—Economic policy. I. Panagariya, Arvind. II.
Title.
HC440.P6B45 2013
339.4'60954—dc23
2012042283
10 9 8 7 6 5 4 3 2 1
Contents
Preface
Introduction The Tryst: The Vision and the Reality
PART I DEBUNKING THE MYTHS
1 Indian Socialism and the Myths of Growth and Poverty
2 Myths About the Early Development Strategy
3 Reforms and Their Impact on Growth and Poverty
4 Reforms and Inequality
5 Reforms and Their Impact on Health and Education
6 Yet Other Myths
PART II THE NEW CHALLENGES: TRACK I REFORMS FOR FASTER
AND BROADER GROWTH
7 Track I and Track II Reforms
8 A Multitude of Labor Laws and Their Reform
9 Land Acquisition
10 Infrastructure
11 Higher Education
12 Other Track I Reforms
PART III MORE EFFECTIVE AND INCLUSIVE REDISTRIBUTION:
TRACK II
13 Track II Reforms
14 Attacking Poverty by Guaranteeing Employment
15 Adult Nutrition and Food Security
16 Reforming Health Care
17 Elementary Education
India: Past and Future
Acknowledgments
Appendix 1 Socialism Under Nehru
Appendix 2 Measuring Inequality: The Gini Coefficient
Appendix 3 Key Provisions of the Right to Education Act, 2009
Appendix 4 Prime Ministers of India
Notes
References
Index
Preface
In the 1950s, as developmental economists began to consider which countries
would break out of the pack and become role models for other developing
nations for their developmental strategies, India and China were regarded as
certain bets. These giants would awaken after a long slumber.
India enjoyed an advantage on some dimensions but a handicap on others:
India had inherited a splendid civil service, a fiercely independent judiciary, a
relatively free press, and above all, politicians who had fought for independence
and put social good ahead of personal profit. These attributes, which are now
called institutions and define the underlying elements of good governance, were
rare among most of the countries that reached independence as the Second
World War ended.
The agronomer Rene Dumont, in A False Start in Africa, famously
denounced the lifestyle of the African rulers who took over from the departing
French, comparing it with that of the French court of the Bourbons! Indeed,
pretty soon India was the only major postcolonial developing nation left standing
as a democracy, even what we call now a “liberal” democracy characterized by
the institutions of free elections, a free press, and an independent judiciary. Few
development economists would have discounted the favorable implications of
India’s political “exceptionalism.”
By contrast, China had emerged from the Long March and a fiercely
contested civil war, and the liquidation of the kulaks in the process. If the Soviet
Union under Stalin was any guide, the prospects for growth were shrouded in
political uncertainties. In fact, the Great Famine and the Cultural Revolution
were upheavals that underlined the legitimacy of these doubts about China. Until
the 1980s, the Chinese giant therefore did not awaken; it continued snoring.
Yet, developmental economists in the 1950s favored the prospects of China
over those of India. Why? The reason lay in the fact that development
economists typically deploy simple models to arrive at judgments about
development outcomes. At the time, the favorite developmental model shared
widely by the economists depicted growth as dependent on two parameters: how
much you saved (and invested) and how much you got out of that investment. As
it happened, it was customary to assume that the savings rate could vary, and
was subject to policy manipulation—typically, the government could use taxes to
raise the domestic savings rate—but that the productivity of that investment,
which was reflected in the “capital-to-output” ratio, was not significantly
variable and was treated as a “technological datum.”
So, with the productivity factor neutralized, it was inferred that India would
lose out to China simply because India, being a democracy, could not raise its
savings rate through taxation as fast and as much as China, which was
authoritarian and could extract savings—or what Marxists call a surplus—
1
through draconian means from the population. India, left on its own, would lose
the developmental race to China.
But the fact that India was democratic meant that in the 1950s the West was
2
rooting for its success against the communist behemoth, China. Its inability to
match China’s savings effort thus had to be matched by the West’s making up
through foreign aid India’s handicap in raising savings and hence investment.
So, India became a recipient of substantial foreign aid and should have
grown rapidly, in consequence. Yet, it did not. The Indian giant also continued to
slumber and snore.
Both India and China were unable to grow very much during nearly three
decades: China because of ruinous politics with disastrous economic policies
prompted by Marxist doctrines that required autarky and regimentation of the
economy, and India because of a disastrous economic policy framework that
3
undermined the productivity of its investment efforts.
Productivity and Growth
India’s growth rate turned out to be abysmal because the underlying assumption,
that the productivity of the increased investment was a technical affair, turned