Opinion | Lessons from how Western economies got ahead of us4 min read . Updated: 10 Feb 2020, 11:41 PM IST
India must not shy away from restricting trade but local industry needs to up its productivity
The coronavirus is a capitalist conspiracy to stop the convergence of the Chinese economy with that of the developed West" is a possible headline one of these days. Regardless of whether or not it is a capitalist conspiracy against China, the outbreak of the virus and the response of all countries illustrates the risks that today’s developing countries face. It could be an upper middle-income country like China, or India, which is still trying to achieve that status. They face a tougher task to converge towards high income status.
Then, there is climate change. Some of the workhorse models of global warming are now showing a higher degree of global warming that modellers are unable to understand. They hope that this is a case of models misbehaving and that they would start behaving normally soon. However, climate change concerns, threats and environmental as well as ecological degradation are occurring for developing countries well before they have caught up with the living standards in West.
The topics of divergence and convergence have fascinated scholars over the years. How did Western nations pull away? After all, in aggregate terms, India and China were bigger economies than Western economies until the beginning of the 19th century. Peer Vries’ State, Economy And The Great Divergence: Great Britain And China 1680-1850 is one such work. According to him, the importance, role and function of the state was the differentiating factor in explaining the divergence between the West and the rest, though he had taken Britain and China to illustrate his point. He finds the explanations of Deirdre McCloskey, Daron Acemoglu, Joan Robinson, and several others, at best, partial and incomplete and, at worst, naïve.
“What is lacking so far in most analyses by institutionalist economists are explicit, systematic thoughts on any potential positive effects on economic life of proactive, interventionist government policies that are not focusing on getting the prices right." One thing that enabled Britain to develop was that the British state was, first and foremost, a war machine. This statement by William Ashworth cited by Vries is relevant in this context: “If there was a unique English/British pathway of industrialization, it was less a distinct entrepreneurial and technocentric culture than one predominantly defined within an institutional framework spearheaded by the excise and a wall of tariffs."
In modern times, military conflicts between existing and rising powers are, thankfully, somewhat rare. However, war machines are fine-tuned in other areas. It could be germs and viruses, both of the biological and the cyber varieties. Actually, the West weaponized trade too. When Western nations were graduating from agrarian states to industrial states, tariffs and restrictive trade practices were the norm. Once they grew and developed capacities, they batted for free trade. When they became less competitive in manufacturing because wages had risen along with economic prosperity, they championed free trade in services, including in financial services. Free and unrestricted capital flows became as axiomatic as free trade in goods. However, the point is that free trade in goods was never axiomatic but episodic and deployed according to convenience when the West was rising.
Ashworth mentions the following ingredients of the British formula for industrial development: “nurturing domestic industry behind a wall of tariffs, skill in imitating and subsequently transforming foreign (especially Asian) products, unparalleled exploitation of African slave labour, rich resources of coal, monopoly of trade with British North America, aggressive military prowess and, not least, a relatively efficient body for the collection of inland revenues."
It is remarkable that the East Asian economic transformation led by Japan had adopted several of the above. In the case of China, there is a higher degree of emulation of the above, with the country having lagged behind in the period of examination by Peer Vries.
India needs to learn that it cannot fight shy of adopting restrictive trade practices when needed. The Union budget for 2020-21 does it well. At the same time, nurturing domestic industry should be understood as demanding performance in terms of productivity, and responsible corporate citizenship in return for protection from external competition. Also, India needs to invest in state capacity at all levels. The government has begun considering lateral hiring. It is a trickle. The country needs a deluge. That includes not only appointing private sector talent in civil services but also engaging them in task forces, in imagining industries and growth engines of the future and in shaping regulation for the 21st century. Further, building state capacity means enforcing accountability. This means ushering in a culture of goal-setting and performance measurement.
The current economic slowdown will reverse itself soon enough but without a strong and capable state, a sustainably strong economy will continue to elude India.
V. Anantha Nageswaran is the co-author of ‘The Rise Of Finance’ and ‘Can India Grow?’.These are the author’s personal views