March 03, 2002

India's Growth Acceleration

I'm spending more and more time thinking about the economic history of India recently, and winding up more and more puzzled.

First, the speed with which growth accelerated in the mid-1980s after relatively small economic reforms under Rajiv Gandhi's regime--the last government of the Nehru dynasty--raises the possibility that the Rajiv Gandhi reforms were in some sense truly "strategic" for economic growth. Growth theory tells us that the speed of growth is proportional to the magnitude of the gap between the economy's current position and its steady-state growth path. The acceleration of growth in the mid-1980s suggests that a very large gap was opened by Rajiv Gandhi's reforms--that it shifted the economy's steady-state growth path upward by a remarkable amount. The lack of subsequent acceleration suggests that subsequent policy reforms have had much smaller long-run effects. Rajiv Gandhi focused on opening up financing for investment, and on freeing up the importation of capital goods. Are these truly strategic reforms for economic growth? How could we tell?

Second, there is the remarkable disjunction between the rapid growth produced by small steps toward neoliberal policies since the mid-1980s, and the slow growth produced by thorough-going classical liberal policies before 1947. It is possible to sketch out how this might be inconsistent. One could argue that despite market-oriented and commerce-encouraging British imperial policies, pre-independence growth in India was slow because of:

  • caste, gender, and race.
  • a delayed demographic transition and the resulting heavy demographic burden placed on physical capital and natural resources.
  • low rates of private investment and public investment in infrastructure.
  • excessively low rates of schooling.

One can then account for how growth remained slow during the Nehru dynasty in spite of significant attempts to repair the institutional deficiences that existed under British rule because of a number of reasons:

  • the "license Raj."
  • the turn away from exports just as world trade was about to boom as never before.
  • excessive enthusiasm for Soviet or British Labour Party models.
  • et cetera.

But can all of this be assembled to make sense? Doesn't it implicitly need to claim that vast institutional improvements were made during the Nehru Dynasty's "license raj." The cultural changes of the Nehru dynasty years have removed many of the pre-independence blockages to growth (at least in large parts of Gujerat, Maharashtra, Karnataka…)?…

Posted by DeLong at March 3, 2002 09:52 PM | TrackBack

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