One Polity, Many Countries: Economic Growth in India, 1873-2000

Topics: India, States and territories of India, Economics Pages: 31 (10089 words) Published: April 18, 2013
One Polity, Many Countries: Economic Growth in India, 1873-2000 Gregory Clark, University of California, Davis Susan Wolcott, University of Mississippi We argue, based on Indian experience, that the major determinants of economic growth are not political and economic institutions. Through the laissez faire Colonial regime, and the interventionist economy of Independent India income per capita declined relative to advanced economies until the 1980s. And though economic growth has been impressive since 1986, the upturn pre-dates even the modest economic reforms of 1991. Further there is increasing regional variation in income per capita across states in India despite the dominance of national economic policies. Some states’ growth rates have declined since the reforms. Yet labor has moved little within India from the regions of persistent low incomes to those of high incomes. The experience of Europe and the USA suggests that encouraging migration of workers to high productivity areas within India is the only policy we know will improve overall income per capita. Introduction India is perhaps the most interesting of all economies for those interested in economic growth. For it is one of the poorer countries of the world, and has even seen an erosion of its income per capita relative to the economically advanced economies such as the USA since we have the first reasonable data in 1873. But this has occurred in an institutional environment that has been very favorable for most of this period. Indeed from an economist’s perspective the institutional environment in the Colonialist years from 1873-1947 – secure property rights, free trade, fixed exchange rates, and open capital markets - was close to ideal. So India captures the twentieth century paradox of a world of ever more rapid and easy movement of information and goods combined with large and often increasing disparities in living conditions. Figure 1 shows calculated GDP per capita in India from 1873 to 1998 measured relative to the USA and Britain. India did show a substantial increase in absolute GDP per capita over these years. Real incomes per capita in 1998 were 3.6 times those estimated for 1873. But relative to both Britain and the USA Indian income per person fell from 1873 to the mid-1980s,

Figure 1: Indian GDP per Capita relative to Britain and the USA, 1873 to 1998

Sources: India. Pre-1947, Heston (1983). 1950-1980, Penn World Tables (PWT 5.6). 19811998, Statesforum. USA. 1873-1929, Balke and Gordon (1992). Economic Report of the President (2001). United Kingdom/Britain. 1873-1965, Feinstein (1972), 1965-1998, United Kingdom, National Statistical Office.

before rising from 1987 to the present. The rapid growth of Indian income per capita in the last 14 years has led some economists to optimistically predict that modest institutional reforms have provided a speedy remedy to India’s problems, and that India is finally about to join the advanced economies (see DeLong, this volume).1 But Indian income levels relative to the US in 1998 at 8% were still below even those of the early nineteen sixties. And growth has been very uneven within the Indian economy, so that in some states income per capita has continued to decline relative to the US. Income per capita in Bihar, with a population of over 100 million, is currently about 4% of that in the US, and still falling relative to US incomes. And since we have little understanding of what caused the erosion of India’s economic position from 1873 to 1987, it is premature to say we know that a moderate degree of political intervention in the Indian economy was responsible for a decline of income to 7% of potential. Many other countries that have witnessed a declining relative income level have done so in circumstances where political and social institutions have suffered breakdowns. Thus many of the countries of Africa which are now among the world’s poorest have suffered from ethnic strife, and the collapse of...
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