Political Economy of Development The Politics of Rapid Economic Growth

Political Economy of Development The Politics of Rapid Economic Growth Gov 1255 Politics of India Prof Prerna Singh

Facts: From ‘Hindu rate of growth’ to economic boom Growth 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.

Some Basic Growth Data, 1950-2004(All figures in percentage per annum)

Problems with conventional pro-market interpretation • Economic growth started accelerating in 1980s - a full decade prior to liberalization of 1991. • 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)

Problems with conventional pro-market interpretation • Economic growth started accelerating in 1980s - a full decade prior to liberalization of 1991. • 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 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. • 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

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-leaningIndira 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

The post-Emergency, Right-leaning Indira Gandhi • Prioritizing of economic growth as a state goal • New industrial policy statement Top priority: Maximization of production • Growth first development

The post-Emergency, Right-leaning Indira Gandhi • 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

The post-Emergency, Right-leaning Indira Gandhi • Taming labor as a necessary aspect of this strategy • Especially difficult for champion of poor & workers – Mrs Gandhi • But did curtail labor unrest, esp strikes

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 • Government restructured its own role: • Halted the growth of public sector industries • Demoted the significance of economic planning and the planning commission.

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 • 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, espin industry Negative: Political Problems Political 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)

Economic “Crisis” of 1991 & Neoliberal Reforms • Growth rate of manufacturing industry not influenced • Rate of capital formation not significantly influenced

Patterns of Capital Formation in India, by sector (1970-2002)

Economic “Crisis” of 1991 & Neoliberal Reforms • 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 labourunrest

Reforms of the 1990s Continuation of reforms of the 1980s: Not surprising • Delicensing • Tax concessions • Opening of yet newer areas hitherto reserved for the public sector • Taming labourunrest

Reforms of the 1990s Break 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 Industry Gone the furthest • Attempts to tame budgetary deficit Least successful • External opening Controversial 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 Scandinavia the statist model of Japan Q for developing countries: Which model is best to emulate?

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 Scandinavia the 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 (AtulKohli) 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?

Political Economy of Development The Politics of Rapid Economic Growth