BackThe Asian drama
Can the Narendra Modi regime replicate the Asian economic success?
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One of the most sobering lessons from development economics is that it is far easier for a country to get on the path of rapid growth than it is to stay the course all the way out of mass poverty.
In 2004, Harvard economists Ricardo Hausmann, Lant Pritchett and Dani Rodrik identified 80 episodes of growth acceleration since the 1950s, or cases when a country increased its growth in per capita income by at least two percentage points as well as maintained its new trajectory for eight years or more. Most of these countries steam along the way.
However, a World Bank group headed by Nobel Prize economist Michael Spence said in its 2008 report that only 13 countries had managed to sustain growth for more than three decades so as to radically alter the living standards of their citizens. Nine out of these are in Asia: China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Singapore, Taiwan and Thailand. The others were Botswana, Brazil, Malta and Oman. The two countries mentioned as the most likely candidates to join this select group were also from Asia: India and Vietnam.
The radical economic reforms of 1991 were partly based on the hope that India would replicate the stunning success in many Asian countries. Manmohan Singh spoke in his first two budget speeches about how the reforms the Narasimha Rao government had unleashed will help hasten the structural transformation of the economy based on rapid industrialization.
Many analysts believe that Narendra Modi is now aiming to replicate the Asian model of development. “A clear and internally coherent model is emerging from Prime Minister Modi’s speeches and policy actions. The model includes export-oriented manufacturing, heavy infrastructure building and urbanization. In our view, this suggests a shift from India’s services driven growth trajectory to an East Asian growth model based on the mass deployment of labour and capital," economists at Deutsche Bank wrote in a recent report.
There are three significant policy issues here.
First, the Asian success stories were built on high investment rates rather than on productivity growth. Paul Krugman had presciently warned in a famous 1994 article, three years before the regional economic crisis, that there was trouble ahead for the Asian economies because of the nature of their economic growth strategies. Many bears are essentially repeating this argument when they criticize the manic building spree in China. The upshot: productivity growth is also an important driver of sustainable growth.
Second, there has been a lot of debate among economists whether the rapid growth of Asian economies was because of governments that directed investment into selected sectors. The World Bank had concluded in a detailed study of the Asian growth experience published in 1993 that it was export orientation rather than industrial policy that was the more important explanation. Most regional economies kept their currencies weak during their years of fast growth, not only making exports more competitive but also pulling investment into the tradables sector, especially industry.
Third, the successful Asian countries got several other things right. They generally maintained macroeconomic stability, though countries such as South Korea did have episodes of high inflation during their growth spurt. Government spending on primary education and health meant the quality of human capital improved even as demand for labour from industry grew rapidly, helping millions move from farms to factories.
Modi thus needs to make several strategic choices if he is indeed going to pursue the Asian development model: on economic reforms, trade policy, exchange rates, social sector spending, fiscal prudence, productivity growth and innovation, for example. The global situation is also interesting. India has a historic opportunity to build up its manufacturing power as China begins to exit some areas as its labour force peaks, exchange rate appreciates and its government begins to focus more on domestic consumption rather than exports as the primary engine of growth. But on the other hand the ability of the US to run large trade deficits so that it can absorb Asian exports is far weaker after the North Atlantic financial crisis.
Can India do what the so many Asian countries have done? And what if it cannot?
A lot of attention in India is currently focused on the strength of the cyclical recovery. But the more important question is whether India can grow rapidly over the next few decades so that is escapes the clutches of mass poverty. My colleague Sharad Raghavan has done some interesting data work on this issue.
India will need 60 years to achieve the living standards prevalent in the developed countries if it continues to grow at its current rate. But it can match the developed countries in 35 years in case it maintains an average growth rate of 7.94% a year. In other words, the current slowdown can put the prospects of an entire generation at risk.
Niranjan Rajadhyaksha is executive editor of Mint.
Comments are welcome at cafeeconomics@livemint.com. To read Niranjan Rajadhyaksha’s previous columns, go to www.livemint.com/cafeeconomics
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