Economy Jun 27, 2011
Suppose we go back to 1870 and envision future scenarios for four interesting and promising countries.
Britain: The incumbent, the pioneer of the industrial revolution, home of Newton and Darwin, with a head start on building institutions, with sound economic policy and deep integration with a global empire.
Germany: The rising power of Europe, rapidly catching up with the frontier (and ahead of Britain in some fields). More centralisation of power, which perhaps gave an edge in certain things.
The US: A vast country blessed with a great constitution, inhabited by a colourful cast of characters drawn from the mavericks, misfits, nutcases and adventurers of Europe.
Argentina: A vast country with boundless prospects, sound policies after 1852, and tightly integrated into globalisation on both trade and capital.
You're probably thinking: 'Argentina?' But in the middle of the 19th century, there were many people who thought that Argentina had better prospects than the US. From 1850 to 1930, Argentina did astonishingly well. In particular, from 1880 to 1905, GDP growth averaged 8% over 25 years, which was unheard of in those years.
With the benefit of hindsight, we know what happened. Argentina collapsed into illiberal populism (first into socialism/fascism (1930) and then into Peronism (1946)). Germany collapsed into nationalism and militarism. The US and the UK managed to build liberal democracies.
With this framing, let's ask about how India and China will work out in coming decades.
Will India make it to good institutions, like the UK or the US? Or will India collapse into illiberal populism, much like Argentina did? All too often, the Indian elite tends to take good outcomes in the deep future for granted. I am not so sure and it is worth worrying about the foundations of liberal democracy and a market economy.
Given the weak foundations of liberal ideas in India, political freedom is not something to take for granted. Given the weak foundations of market economics in India, economic freedom is not something to take for granted. Argentina's binge of welfare programmes and populism is uncomfortably close to the instincts of most Indian politicians.
Will China make it to good institutions, like the UK or the US? Or will China descend into nationalism and militarism, much like Germany did?
The story of Argentina and Germany, from 1870 to 1914, reminds us that what works in a country for a short time is often not enough to carry the country through to a happy ending. Germany did very well from 1870 to 1914 (a full 44 years). Argentina did very well from 1850 to 1930 (a full 80 years) of which 50 years had really high growth.
To many people, the sustained success that we have seen in India has generated complacence. We have started trusting in our governance DNA, thinking that it has delivered results after 1979 and particularly after 1993. This complacence hinders the process of identifying incipient problems, criticising the status quo, and changing course.
The fact that a economic/political recipe worked well for a few decades does not mean that this recipe will continue to deliver. For a country to work out in the long run, it has to constantly nurture the foundations of liberal democracy and the market economy, and repeatedly reinvent itself.
In the late 19th century, growth rates were low in absolute terms, other than outlandish episodes like Argentina (1880-1905). Germany was the star performer of Europe over 1870-1914, with GDP growth of 2.9%. The UK did just 1.9% in this period. At 2.9% growth, GDP doubles each 24 years. In other words, the economy and the political system need to be reinvented in each generation.
At 7% growth, in India, we are getting a doubling of GDP every decade. This requires a reinvention of the economy and the political system every decade. But India presents a stark contrast with what's required: we have grossly failed on modifying laws, government agencies, policy frameworks and world views at a rapid pace.
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