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India's Economic Growth Dissected

India's Turn: Understanding the Economic Transformation by Arvind Subramanian

Economic & Political Weekly EPW october 11, 200831book reviewIndia’s Economic Growth DissectedAditya BhattacharjeaIndia’s Turn: Understanding the Economic Transformationby Arvind Subramanian;Oxford University Press, New Delhi, 2008; pp xlii+235, Rs 595.It is unusual, to say the least, for a sen-ior official of the International Mone-tary Fund (IMF) to question the case for capital account convertibility on the grounds that might hamper industrialisa-tion, to give any credit whatsoever to Nehruvian economic policies, or to decry the tyranny of economic ideology and cor-porate interests which suppress incon-venient research findings. IMF officials are also not known for taking inequality and non-economic institutions seriously, or discussing the work of political scien-tists. Arvind Subramanian does all this and more in this collection of hisprevi-ously published articles (including some that originally appeared inEPW). He is therefore something of a maverick,which is not to say that he is a closet radical, or that his arguments are always persuasive.Articles in the first part of the book, all published between 2004 and 2007, analyse the timing, nature, and causes of India’s growth acceleration. The academic papers are followed by short non-technical arti-cles on the same subject written for news-papers and magazines. This two-tier format is rather effective in conveying the author’s message. Subramanian begins with his well-known paper written in collaboration with Dani Rodrik, which argued that the acceleration in Indian growth occurred in the early 1980s rather than as a result of the reforms of 1991. The authors acknowledged that they were not the first to make this argument, and of course since their paper first appeared there has been an outpour-ing of empirical research on the subject, much of it in the pages of this journal [see Balakrishnan and Parameswaran 2007 for a sophisticated recent exercise]. It is now established beyond doubt that the upturn in the economy’s growth rate occurred around 1980, much to the discomfiture of those who believe that it was only the reforms of 1991 that brought India out of the dark ages. Rodrik and Subramanian acknowledge, however, that growth would not have been sustained had it not been for the 1990s reforms. The authors refute quite effectively the arguments that the 1980s acceleration was driven by fiscal irresponsibility or external liberalisation. Their preferred explanation runs in terms of a shift in the government’s attitude, resulting in “pro-business” policies that strengthened in-cumbent private producers, rather than “pro-market” policies that promoted for-eign and domestic competition. I find this unconvincing. At least in the area of labour regulation which I have studied inten-sively, legislation took an anti-business turn in the early 1980s. ChapterV-B of the Industrial Disputes Act was amended in 1982 so as to get around an adverse Supreme Court judgment and to reduce from 300 to 100 the employment thresholdatwhich establishments requiregovernment per-mission for lay-off, retrenchment or clo-sure. Of course, there hasalwaysbeena huge gap between legislation and imple-mentation, and the government’s pro-business attitude could have taken the form of slackening enforcement. But eco-nomic analysis requires empirical evidence rather than an appeal to an attitudinal shift, which otherwise – like exogenous technical progress in the oldermodelsof economic growth – remainsaconvenient label for an unexplained residual. In his introduction to the present volume Subramanian acknowledges “the lack of positive evidence in the form of a paper trail of actual and significant policy changes”. The paper with Rodrik offered two bits of circumstantial evidence from the 1980s: a rise in private corporate in-vestment, and higher growth rates in states allied to the party ruling at the centre. But these are quite compatible with the old argument that private invest-ment responds to public investment,1 which also recovered during the 1980s and was likely to have been biased to-wards states allied to Delhi. Notably, the authors’ own econometric results cannot reject the hypothesis that the growth ac-celeration could have been the delayed result of a step-up in public investment.Importance of Pre-1980 PoliciesThe second chapter, which is by far the longest in the book, develops an observa-tion made in the first one: the importance of pre-1980 policies in explaining the economy’s growth acceleration and its in-creasing orientation towards services. In a paper co-authored with fourIMF colleagues, Subramanian deploys a succession of scatter plots and cross-country regres-sions to show that, compared to countries at a similar level of development, India in 1981 had smaller shares of output and employment in services and a larger share of manufacturing in skill-intensive and large-scale industries, as well as an unu-sually diversified industrial structure. One would have expected this artificially nur-tured manufacturing sector to shrink and become less diversified when the economy was opened up to foreign competition. But in fact, this pattern of industrialisation was reinforced during the next two decades, while the share of output contributed by services rose above that of the comparator countries. The authors’ explanation is that the skilled human capital created in the pre-reform years contributed to faster growth of both industry and services when enterprise was unshackled by reforms.Some evidence from the differential performance of Indian states is then mar-shalled in support of this argument. More scatter plots and regressions (cross-state this time) show that states that had more diversified industrial structures in 1982 subsequently exhibited faster growth of state domestic product as well as value added in services per capita. The latter is especially significant because it shows that industrial diversification created organi-sational skills and human capital that were not specific to industry. More regressions
BOOK REVIEWoctober 11, 2008 EPW Economic & Political Weekly32show that state-level industrial growth rates can be explained by indicators meas-uring infrastructure and institutions during the 1990s, but not earlier. This, according to the authors, shows that with the central government no longer allocating projects to ensure interstate equity, state-level poli-cies and institutions began to matter. They are concerned, however, about skilled la-bour emerging as a bottleneck because of the dismal state of higher education. This contributes to further interstate divergence as skilled workers and entrepreneurs move from the lagging to the dynamic states.Some QuestionsWhile I agree with the broad contours of the authors’ argument, and admire their creative and painstaking empirical analysis of masses of data, a few points need to be made. First, visual inspection of some of the scatter plots does not suggest the strong relationships the authors claim, and they do not report the R-squared for the regression lines that they draw. Second, they do not recognise that the gradual pace of import liberalisation during the 1990s, reversed towards the end of the decade by addition-al duties and generous anti-dumping pro-tection, perhaps staved off the expected restructuring of Indian manufacturing. Third, the chapter does not provide sourc-es for many of the indicators of state-level institutions that it uses. Such indicators are often extremely subjective, as Subra-manian himself notes in a later essay. One indicator for which the authors do cite a source is the Besley-Burgess index of la-bour regulation. Like Besley and Burgess, they believe that excessively pro-worker legislation has retarded the growth of la-bour-intensive industry. Elsewhere, I have criticised both the index and the literature which has used it to support this kind of argument: see Bhattacharjea (2006). Finally, the authors should have taken note of the so-called “new economic geo-graphy”, which shows how industrial diver-sification and growth are mutually rein-forcing through various mechanisms other than the creation of human capital. This framework has been applied to India by Lall and Chakravorty (2005, 2007), who also show that state-level characteristics (includ-ing prior industrial diversification) con-tributed to widening interstate disparities in the 1990s when central government investment declined.Institutions and GrowthThe third chapter, by Subramanian alone, further develops a theme that played an important but subsidiary role in the first two: the interaction of institutions and economic growth. It is routine for column-ists, bloggers and ordinary citizens to be-moan the decline of public institutions in India, but it needs some ingenuity to con-struct indicators which are comparable over two decades or more. Subramanian computes trends in power theft, disposal and conviction rates in criminal cases, evasion of customs duties, and a percep-tion-based measure which was explained too tersely for at least this reviewer’s com-prehension. All tell a tale of stagnation or decline, but this begs two questions. First, what explains India’s growth acceleration despite institutional decay? Subramani-an’s answer is that cross-country regres-sions show that around 1980, the Indian economy was underperforming relative to its institutions (here again, I could not un-derstand how these were measured in the international comparison), but the subse-quent economic reforms unlocked its growth potential. He warns, however, that this slack is rapidly getting exhausted. This leads him to the second question: why, contrary to the international patterns discerned by economists and political sci-entists, is growth not leading to better in-stitutions? Here his answer is more jour-nalistic. Uneven growth enables the elite to secede from public institutions, leading to diminished pressure for improvement, and to diversion of skilled personnel from the public to the private sector, contributing to deteriorating performance in the former. Growing inequality, Subramanian believes, is promoting social unrest and attenuating the positive feedback from growth to insti-tutions. Quite so, but having welcomed economic reforms, what would he have India do differently?GlobalisationArticles in the second part of the book deal with various aspects of India’s inter-national linkages – trade, intellectual property, and capital flows. They are much shorter and, with one exception, much older. The earliest dates back to 1992, when two relatively junior officials of the GATT secretariat anonymously published a paper inEPW, arguing that India should stop posturing as the leader of the devel-oping world and become a proactive nego-tiator for its own interests in the Uruguay Round, agreeing to liberalise in order to obtain reciprocal market access for its ex-ports in developed-country markets. That paper is published here, with the authors’ identities revealed: one was Subramanian, the other Harsha Vardhan Singh, now deputy director-general of the WTO. They did set right some misconceptions about the controversial Dunkel Draft, and warned against the consequences of heed-ing the reckless suggestions that were be-ing made at the time that India should stay out of the proposedWTO. But two of the remaining essays in the book show that Subramanian himself had second thoughts on aspects of the Uruguay Round.2 In 1995, while still on theGATT/WTO staff, he pub-lished a paper which estimated the huge costs that enhanced protection of pharma-ceuticals under the TRIPS Agreement would inflict on India. Simple oligopoly and monopoly models were deftly deployed to estimate the loss in consumer surplus and the profits of domestic firms under various scenarios. But by then, as he notes in the Introduction to this book, the battle had already been lost, and TRIPS had become one of the Uruguay Round Agreements. A few years later, it became clear that neither multilateral nor regional trade agreements would provide market access benefits tangible enough to enthuse Indi-an export interests, whose support was es-sential to outweigh the forces opposed to further import liberalisation. In a 2002 book review inEPW, Subramanian and Aaditya Mattoo made a case instead for an Indo-US bilateral free trade agreement, on the grounds that access to the American market would then not have to be shared with other countries. The problem is that the US is actively negotiating similar agreements with many other developing countries which are India’s competitors, so preferential access would be evanescent.Also, the authors are insufficiently perturbed by the possibility of welfare-reducing tradediver-sion, or by the onerous environmental and labour standards are standard inUSFTAs.
BOOK REVIEWEconomic & Political Weekly EPW october 11, 200833The final chapter, on capital account convertibility (CAC), was published last year inEPW. Departing from his usual ur-bane prose style, Subramanian dubs the superficial treatment of exchange rate management in both Tarapore Committee reports onCAC as “shocking”. He points out that rupee appreciation caused by in-flows of portfolio investment has adverse effects on the tradable sectors, but this is hardly the “neglected consideration” that the title of the chapter makes it out to be: see Sen (2005) for a similar argument. Both Sen and Subramanian note that this predicament resembles the well-known Dutch Disease, which arose from oil export revenues. Earlier in the volume, Subramanian had named the correspond-ing Indian phenomenon the “Bangalore Bug”, attributing it to the rapid growth of information technology exports. But if the true cause of rupee overvaluation is foreign investment in India’s capital markets, then perhaps it should be called the “Mumbai Malady”!Subramanian is now on an extended sabbatical from the IMF, writing news-paper columns and, one hopes, further de-veloping some of the ideas articulated in this book. Plugging some of the gaps in the empirical analysis and updating it to cover the last five years of record-breaking growth would be a worthwhile endeavour. But he might want to choose a different publisher next time, for the book is marred by some truly atrocious copy- editing and proof-reading. A table referred to in the Introduction is missing, words are miss-ing, diagrams are wrongly reproduced, and there are numerous spelling, punctu-ation and grammatical errors that were not there in the original articles. Evidence, perhaps, of the growing skill shortage that Subramanian is concerned about?Email: See Nagaraj (2003) for references.2 The Introduction suggests that Subramanian still stands by his dim view of developing-country soli-darity. True, it has repeatedly proved to be fragile, the latest instance being Brazil’s defection at the recent WTO ministerial. But the G-20 that Brazil helped put together for the 2003 Cancun ministe-rial has scored a few victories on agriculture, and did not India along with other developing and “least-developed” countries manage to kick three of the four ‘Singapore Issues” off the Doha Round agenda after Cancun?ReferencesBalakrishnan, P and M Parameswaran (2007): ‘Un-derstanding Economic Growth in India: A Pre-requisite’, EPW, July 14.Bhattacharjea, A (2006): ‘Labour Market Regulation and Industrial Performance in India: A Critical Review of the Empirical Evidence’,Indian Journal of Labour Economics, 39(2), pp 211-32. Lall, S V and S Chakravorty (2005): ‘Industrial Loca-tion and Spatial Inequality: Theory and Evidence from India’,Review of Development Economics, 9(1), pp 47-68. – (2007): Made in India: The Economic Geography and Political Economy of Industrialisation, Oxford University Press, New Delhi.Nagaraj, R (2003): ‘Industrial Policy and Performance since 1980: Which Way Now?’, EPW, August 30.Sen, P (2005): ‘India’s Foreign Exchange Reserves: An Embarrassment of Riches’, EPW, May 14.The Novelist as Conjuror: The Power of Make-Believe WorldsRuby LalThe Enchantress of Florence is a splendid new novel by Rushdie, in-tricately mixing history and leg-end, leaving the reader transported and captivated in worlds of another time – Mughal India and Renaissance Florence.It is easy to imagine that emperor Akbar, “the star of India”, is the hero of Rushdie’s tale. It is, in fact, Qara Köz Begum (even-tually renamed Angelica), the wondrously depicted beauty and her adventures in the middle east and Florence, and her life sto-ries as narrated by “Uccello”, the self-pro-claimed “Mogor dell’Amore” that enthral not only the emperor, but an extensive cast of Mughal women – as well as us. Akbar and his ‘haram’ come together to hear the saga that Uccello unfolds about his ancestry and that of the “secret” Mughal princess, Qara Köz. The inhabitants of Fatehpur Sikri, prostitutes, tradesmen, silversmiths, walkers by, those in the Hindu colony, in the Persian quarter, “and beyond that region of the Turanis and beyond that, in the vicinity of the giant gate of the Friday Mosque…” also learn that the yellow-haired foreigner has a story to tell. The news is all over Fatehpur Sikri. Several other tales are interlaced with that of the Enchantress; of the Mughal women, Mughal princes, members of the Mughal court at Fatehpur Sikri, as well as those in Florentine Italy, where Uccello belongs: of Machiavelli and Botticelli, Amerigo Vespucci, admiral Andrea Doria and Vlad the Impaler, not to forget several glorious Medicis. The anecdotes travel in many directions, often back and forth between Fatehpur Sikri and Florence: Uccello’s tales of escapes from cannibalism in Sumatra and of the egg-sized pearls of Brunei and of fleeing from the Great Turk up the Volga to Moscow in winter and of crossing the Red Sea, and the ultimate arrival in Akbar’s capital; back to Fatehpur Sikri, the fire lit by the ‘Deepak Raga’ of the great composer Miyan Tansen; back again to Italy, the three childhood friends and their destinies. Each time we “return” from the adjacent tales, it is always to the story of women. Story of WomenThere is the dynamic Khanzada Begum, remembered for the “sacrifice” she made by marrying the Uzbeg warlord Lord Warmwood “who demanded that she be given up to him” as the price for the safe conduct out of the city of the first Mughal king, Babur, Khanzada’s brother, whom she called “Beaver”. Khanzada was acknowl-edged by all her servants and courtiers to be the most beautiful woman in the world, until Qara Köz Begum, “an enchantress without compare”, is born. “From that day forward, Khanzada noticed a change in the timbre of her daily adoration, which began to contain a higher level of insin-cerity than was acceptable.” There is the wonder of the emperor’s imagination, Jodha Bai, whom the other wives resented. “How could the mighty emperor prefer the company of a woman who did not exist”? Rushdie’s Jodha phantom, not the quest for the real, touches The Enchantress of Florenceby Salman Rushdie; Jonathan Cape, 2008; pp 356, £ 18.99.

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