1

Global and Indian Economic

History

Module 1

Contemporary Themes in India’s

Economic Development and the Economic Survey

Arvind Subramanian

Chief Economic Adviser

Government of India

MINISTRY OF FINANCE

GOVERNMENT OF INDIA

2

Overview

• World Economic History

• Reversal of Fortune

• Post-War Experience of convergence and divergence

• Indian Economic History

• The Economic Outcomes

• Recommended Readings

3

World History in One Slide

Industrial

Revolution

|------Malthusian Stagnation -------| Slowly Exiting Malthusian

Stagnation

Source: Maddison Historical Series, World Development Indicator and Own Calculation

4

Cont…(World History in One Slide)

|----------Malthusian Stagnation -----------| Industrial

RevolutionSlowly Exiting Malthusian

Stagnation

Source: Maddison Historical Series, World Development Indicator and Own Calculation

5

History of Different Regions in One Slide

Post-Malthusian Stagnation |-----------Great Divergence ------------|

Source: Maddison Historical Series, World Development Indicator and Own Calculation

Convergence

Begins

6

Reversal of Fortune: The Colonized Rich in

1500 Are the Less Rich Today

Urbanisation in 1500

Lo

g G

DP

Pe

r C

ap

ita

, P

PP, 1

99

5

Lo

g G

DP

Pe

r C

ap

ita

, P

PP, 1

99

5Log Population density in 1500

Source: “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution” ; Daron

Acemoglu, Simon Johnson, James A. Robinson. The Quarterly Journal of Economics, Vol. 117, No. 4 (Nov., 2002), pp. 1231-

1294

9

Convergence and Divergence: Definition• Unconditional Convergence (Catch-up) : Growth rate over

some period) (on y-axis) negatively correlated with initial value of

outcome (on x-axis): Poorer you start off the faster you grow

subsequently

• Regression fit line with negative slope (negative β) suggests

convergence otherwise suggests non-convergence or

divergence

• Slope is average catch-up rate assumed to be about 2% in

general

• If catch-up rate is 2% (5%), average poor country closes half the

distance with the rich in 34 (14) years

10

Post-War Experience: Examples of

convergence and divergenceWithin rich countries All countries, 1960-1985

Source: Roy, S., Kessler, M., and Subramanian A. (2016). "Glimpsing the

End of Economic History? Unconditional Convergence and the Missing

Middle Income Trap", CGD Working Paper 438

Source: Barro and Sala-i-martin

12

World Bank Definition of Income Groups • Low income, $1,025 or less;

• The effective eligibility threshold for borrowing under IDA (concessional finance

window of World Bank) is $1,185 or less.

• Lower middle income, $1,026–4,035;

• Upper middle income, $4,036–12,475; and

• High income, $12,476 or more.

• But definition can also be relative: what fraction of per capita

GDP of say the United States?

13

World Bank Poverty Definition

• 2008-2015: $1.25 (PPP) per day

• As of October 2015: $1.90 (PPP) per day

– Rs 32.51 per day (2015) and Rs 28.71 per day (2011)

– 21.23% below poverty line ($1.90 poverty line, 2011)

– Official Poverty line (Tendulkar Committee)* Rs 39.5 per day

(2015-16) Rs 29.04 per day(2011-12)

• Global poverty: ~900 million people in 2011 of which 255

million in India

Note: * Estimated using Rural-Urban population weight and adjusting for inflation.

14

Since WWII, only 13/101 transitions to High

Income Status

Source: “China 2030 : Building a Modern, Harmonious, and Creative Society”, World Bank (2012)

16

The Elephant Curve: Indian and Chinese Middle Classes and

the Super-Rich in Advanced countries have done well. The poor

in poor countries and middle class in rich countries have done

poorly

Source: Global inequality: A new approach for the age of globalization A book talk Branko Milanovic May 1, 2016

17

Global Inequality: Today about 80% of inequality

stems from the accident of birth location

Source: Global inequality: A new approach for the age of globalization A book talk Branko Milanovic May 1, 2016

18

Ratio of Wage in US and Developing

Countries for Identical Workers

Source: “The Place Premium: Wage Differences for Identical Workers Across the US Border”; M A

Clemens, C E Montenegro, Lant Pritchett

19

Despite Divergence of Incomes, Convergence

of Life Expectancy 1960-2015

Source: World Development Indicator and Own Calculation

20

Indian Economic History

21

Precocious Democracy: Sustained Political

Openness at Low Levels of Income

Source: Data from Rodrik 2013 and Polity IV. India growth data from WDI for 1979-2015

22

Precocious and Cleavaged Democracy: Sustained

Political Openness Despite Social Cleavages

Source: Banerjee & Somanathan, 2007 and Own Calculations

23

Three Development “Choices”

• Political: Democracy versus Autocracy

• Economic: Markets versus State

• Social: Guarantees versus Opportunities

24

Background: IndividualsCompeting visions of Nehru, Gandhi, and Patel

Mahatma Gandhi:

Self-reliance,

village communities,

“industrialize and perish”

Vallabhai Patel:

Pro-agricultural landlords

and business

Jawaharlal Nehru:

Self-reliance,

“industrialize or perish”,

importance of state

Photo is from “http://image.indiaopines.com/wp-content/uploads/2014/02/Nehru_Gandhi_and_Patel_1946.jpg”

25

Cont…(Background: Ideology)

• Zeitgeist (abroad): Inspired by Russia and Japan;

Great Depression but also post-war Europe’s move

toward the Welfare State

26Video is from youtude.

27

Cont…(Background: Ideology)

• Zeitgeist (abroad): Inspired by Russia and Japan;

Great Depression but also post-war Europe’s move

toward the Welfare State

• Zeitgeist (home): Bombay Plan of mid-1944 (Leading

industrialists) proposed State-led industrialization and

protection from foreign competition

28

Democracy versus Autocracy-The Cruel Choice

• Need higher investment and resources for investment

• Autocracies are better able to extract resources (taxing or

expropriating, especially agriculture)

• Russia and China: Industrialize by taxing agriculture

Collectivization in Russia and Great Leap Forward in China

• India: Agricultural policies constrained by decentralized

democracy (“Cruel Choice”)

29

Cont… (Democracy versus Autocracy-The Cruel Choice)

• Political consequence: Help from outside, especially US, in

the 1950s and early 1960s, in the form of foreign aid

(especially food aid, PL 480). About 25% of Plan financed

by foreign aid in 1960s.

30

Markets Versus State: What did India Do?

• Commanding heights but mixed economy

• Industrialization via import substitution

• Prevent big actors/strive for equity;

• Self-sufficiency in scientific and research capacity

31

State and Industrialization (“Licence-Quota-Permit Raj”)

• Industrial Policy Resolution, 1956

• Commanding heights

– Investment in heavy industries by government

alone

• But mixed economy

– Other sectors open to public and private sectors

32

Cont… (State and Industrialization)

• Agriculture suffered because of industrialization

– Share of public expenditure on agriculture and irrigation

declined from 33% to 20%

– Land redistribution efforts reform of tenants rights less

successful

33

Self-Reliance/Import Substitution

• Intellectual origins

– Colonialism

– Prebisch-Singer (1950) hypothesis: Specializing in

agriculture/commodities bad because their prices will

keep falling. Justified the development of import

substitution

• Limits on foreign trade, exchange and investment

34

Equity/Phobia against size• Industrial licensing (1951 and 1973): Permission either

mandatory or required for investments above a certain level

• Control of big business : Monopoly and Restrictive Trade Practices Act (MRTP) which regulated activities of large firms

• Labor Laws: For example, Industrial Disputes Act, 1947 and 1982 requiring government permission for dismissing workers beyond specified employment levels

• Small scale reservations: Reservation that certain goods will be produced by this sector. Also tax concession and preferential credit access for small firms

35

Import Substitution and Licensing with

Indian Characteristics

P1 P2 P3

Q1

Q2

Q3

36

Guarantees versus opportunities• Neglect of basic education:

– Basic education a state subject (until 1976) and then transferred to Concurrent List

– Higher education a central subject

– Spending on education about 3% of GDP. But share to primary education declined from 56 % in early 50s to 30% in early 1960s (Weiner)

• Reservations

– 22.5 percent of public sector jobs and enrollments in government-financed institutes of higher education set aside for “Scheduled Caste and Schedules Tribe”

– (Also, they got guaranteed seats (15 %) in the legislatures)

– In 1989, reservations expanded to include “Other Backward Classes” and now account for about 50%

37

Reforms of 1991

• Macro-economic stabilization

• Exchange rate devaluation

• Trade and FDI reforms

• Dismantling industrial licensing

38

The Economic

Outcomes

39

Indian Growth History: 50-50 (Hindu

versus Rapid Growth)

9.0

9.5

10.0

10.5

11.0

11.51950-5

1

1952-5

3

1954-5

5

1956-5

7

1958-5

9

1960-6

1

1962-6

3

1964-6

5

1966-6

7

1968-6

9

1970-7

1

1972-7

3

1974-7

5

1976-7

7

1978-7

9

1980-8

1

1982-8

3

1984-8

5

1986-8

7

1988-8

9

1990-9

1

1992-9

3

1994-9

5

1996-9

7

1998-9

9

2000-0

1

2002-0

3

2004-0

5

2006-0

7

2008-0

9

2010-1

1

2012-1

3

2014-1

5

2016-1

7

|--------Hindu Rate of Growth----------|

|--------------Take off----------------|

1991 Crisis Boom

Log

GD

P a

t co

nsta

nt

price

s

40

Chindia From 1900-1980

41

Reversal of Fortune Between China and

India

42

Steady Decline in Poverty

Poverty Ratio No. of Poor (million)

Rural Urban Total Rural Urban Total

1973-74 56.4 49 54.9 261.3 60 321.3

URP

1977-78 53.1 45.2 51.3 264.3 64.6 328.9

1983 45.7 40.8 44.5 252 70.9 322.9

1987-88 39.1 38.2 38.9 231.9 75.2 307.1

1993-94 37.3 32.4 36 244 76.3 320.3

2004-05 28.3 25.7 27.5 220.9 80.8 301.7

1993-94 50.1 31.8 45.3 328.6 74.5 403.7

MRP2004-05 41.8 25.7 37.2 326.3 80.8 407.1

2009-10 33.8 20.9 29.8 278.2 76.5 354.7

2011-12 25.7 13.7 21.9 216.7 53.1 269.8

43

Growth and democracy have led to seismic

social transformations

Western Uttar Pradesh Eastern Uttar Pradesh

1990 2007 Change 1990 2007 Change

Dalits not seated separately at non-Dalit

weddings26.9% 82.1% 55.1% 22.7% 91.1% 68.3%

Non-Dalits visiting Dalit homes eat/drink

tea/water if offered 4.1% 62.6% 58.5% 1.1% 72.6% 71.6%

Government non-Dalit midwifes come to

Dalit homes to deliver babies0.0% 2.2% 2.2% 5.7% 54.3% 48.6%

Only Dalits lift dead animals 72.6% 5.3% -67.3% 19.1% 5.6% -13.5%

Source: Kapur et. al. 2011

44

Precocious Indian Model: Services-Intensive

Not Manufacturing-Intensive Pattern

0

10

20

30

40

50

60

70

80

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

India

Agriculture Manufacturing Services

0

10

20

30

40

50

60

70

80

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

China

Agriculture

Manufacturing

Services0

10

20

30

40

50

60

70

80

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

World

Agriculture

Manufacturing

Services

Source: World Development Indicator and Own Calculations

45

Prematurest De-Industrializer

Source: Premature Deindustrialization; Dani Rodrik

46

Large Exporter of FDI (Skill)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

FDI Gross Inflow (% of GDP)

China India

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

FDI Gross Outflow (% of GDP)

China India

Source: International Monetary Fund and Own Calculations

47

Highly Skill Intensive Pattern of Specialization

Source: India’s Pattern of Development: What Happened, What Follows?; Kalpana

Kochhar, Utsav Kumar, Raghuram Rajan, Arvind Subramanian, and Ioannis Tokatlidis

48

Recommended Readings• Branko Milanovic, “Global inequality: A new approach for the age of

globalization”https://piie.com/system/files/documents/milanovic20160509ppt.pdf

• Dani Rodrik and Arvind Subramanian, “From ‘Hindu Growth’ to Productivity

Surge: The Mystery of the Indian Growth Transition.” IMF Staff Papers, vol. 52,

no. 2, 2005, pp. 193–228. www.jstor.org/stable/30035894.

• Daron Acemoglu, June 2003, “Finance and Development”, IMF

• Ian Morris, “Why the West Rules for Now”

• Jared Diamond, “Guns, Germs, and Steel”

• Lant Pritchett, 1997, “Divergence, Big Time,” - NYU Economics