political economy of development the politics of rapid economic growth

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 C

apita

Net

Nat

iona

l Pr

oduc

t in

Rup

ees

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



• 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



• 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

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


• Prioritizing of economic growth as a state goal– New industrial policy statement Top priority: Maximization of production– Growth first development


• 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



• Especially difficult for champion of poor & workers – Mrs Gandhi

• But did curtail labor unrest, esp strikes



• 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.



• Supporting big business to achieve this goal


• 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)

012345678

1950-1964

1965-1979

1980-1990

1991-2004

1980-2004

Rate of Industrial Growth (in percentage per annum)


• 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 CapitalFormationPrivate CorporateSectorPublic Sector

Household Sector


• 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 : 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 ProductTotal 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

NDPPer 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)

05

1015202530

1950-5

1

1956-5

7

1962-6

3

1968-6

9

1974-7

5

1980-8

1

1986-8

7

1992-9

3

1998-9

9

Public sector Private sector Total

012345678

1950-1965 1965-1980 1980-2005

Industrial Growth in India (1950-2005)

Rate of Industrial Growth(in percentage perannum)

political economy of development the politics of rapid economic growth

Documents

high economic growth

basic growth data

hindu rate of growth

agricultural growth3

gdp growth3

industrial growth7

industrial production

gross investmentgdp131822