Contributed Review

   India Unbound by Gurcharan Das is a hypothesis about how a rich nation became poor and how it will become rich again.  Speaking at the Wharton school, the former CEO of Proctor & Gamble waxed eloquent about his vision for India in the new millennium.

   Das began by revisiting some themes from the past.  Was India fabulously rich in the past?  Yes, he says, Columbus was right when he said he set out to look for the wealthiest land in the world (and hit America instead).  It was left to Vasco da Gama the Portuguese explorer who 5 years later reached India and discovered a land of untold wealth.  Historians estimate that the emperor of India, Aurangzeb was ten times richer than Louis IV^th who was then the richest monarch in the West.  In fact in 1700, India had 22.6% of the world’s GDP and 25% of the global textile market which was then the major industry.

   Das claimed that, contrary to popular belief, it was not the British who made India poor.  If anything, he says that Britain failed to exploit India enough!  He attributes the country’s decline to technological obsolescence.  First with the industrial revolution changing the textile business and then more importantly with Jawaharlal Nehru’s and his daughter Indira Gandhi’s faulty industrial visions.  He believes that Nehru’s failings were excusable because socialism was very much the thought of the day, applauded by most major economists with the notable exception of Friedman.  But he felt that by Indira’s time, the early 1970’s, the world knew better.  Russia was on a decline and Japan, Korea and Taiwan were demonstrating that there were better alternatives to socialism.  For India to persist with socialism was Indira’s big fault and deprived a generation of a better life.

   1991 was the beginning of the end of the follies of the past.  While in August 1947, India won political freedom, it was only in 1991 that India won economic freedom.  In that year, Narasimha Rao’s government made far-reaching changes to India’s industrial framework that set the country down an irreversible path of economic reform.

   In a bold and controversial assertion Das states that in this generation, India will solve the age-old problem of poverty, albeit with a geographical bias.  In any society, 15-20% of the population will succeed and about the same proportion will fail.  If a majority of the remaining 60-70% of the population is in the middle class, then an economy is successful.  In India’s case, in 1980 only 8% of the population was in the middle class.  Today it is about 18%.  Das believes that if you draw a line from North to South through Kanpur in the North and Madras (Chennai) in the South, 50% of the population to the West of this line will enter the middle class by 2020 and 50% of the population to the East of this line will enter the middle class by 2040.  When the balance shifts and the middle class becomes a majority, the politics of the country will change dramatically.

   To support this hypothesis, the speaker borrows from Adam Smith to say that when the rich and the poor trade, there will be a convergence of the standard of living.  In the present context, the rich nations have taken 50 years to develop and apply advances such as information technology and advanced telecommunications to improve productivity.  Poor nations can adopt these advantages in a few years and begin the process of convergence.  This is possible today because of global trade.  Since the collapse of the Berlin wall, the world has opened up to global trade.  This has been driven by a liberal revolution manifested by the increasing dominance of market democracies. In 1970 there were only 30 market democracies while today of the 119 countries that claim to be market democracies as many as 87 are recognized by economists as making the cut.  In the last 50 years, now is the first time that the rich and poor countries of the world are truly linked in trade.  After the second world war, the first world nations traded among themselves and progressed rapidly.  The communist doctrine let the second world down and the third world remained closed and poor.  In a 25 year study of 87 countries, economists Sachs and Warner show that the 13 ‘open’ economies among these countries grew 7 times faster than the 74 ‘closed’ economies; 4.5% vs. 0.7%.  While in 1970 only 20% of the world’s population lived in connected economies, today the proportion is 4 times that.  The Sachs and Warner study therefore suggests that today’s global economy will lift the poor countries.

   It is ironical that it is the poor countries that oppose WTO.  Das argues that India has benefited enormously from opening its economy. After the reforms of 1991, exports jumped 20% and the average growth rate leapt to 7.5% a year for the next 3 years.  Foreign investment increased by a factor of 30 and foreign exchange reserves which were perilously low have rocketed to close to $40 billion.  With a projected real economic growth of about 7% a year and a population growth rate of about 1.5%, we will see approximately 5.5% annual per capita real growth.  This compares with a rate of 4% for most industrial revolutions.

   Another silver lining is the improvement in the literacy rate.  Literacy has improved to 62% in 1996-97 from 52% just 5 years before that.  What is most encouraging is that the largest gains are in the poor states and among girls.  An important factor has been the spread of mass media particularly cable television.

   It does not matter who rules the country, Vajpayee, Sonia or Laloo.  The last decade has liberated India from state control.  India unbound unshackles the energies of private individuals.  This freedom is translating into prosperity.  There is still a role for government though but it is not in running hotels and airlines; it is in ensuring primary education and healthcare for all.

   Many factors discussed so far apply to many developing countries.  Then why does Das believe that this is India’s generation.  The answer lies in his next significant observation.  India missed the industrial revolution but as the world moves from an industrial economy to a service economy and in particular a knowledge economy, intellectual capital becomes more important than other factors of production.  India’s brahmanical heritage was a disadvantage in the industrial period.  The historical contempt for manual labor was taken up by other classes, including the bania class, resulted in a nation bereft of tinkerers.  Tinkering is the application of knowledge and curiosity to manual work and results in innovation.  India’s industrialists shared this contempt for manual labor.  Another factor leading to the poor performance of our industrial sector was the lack of competition.  Today, however, that same heritage that developed the concept of the zero is a great advantage.  There is a reverence for abstract thought.  Spiritual space is very similar to cyberspace; abstract, invisible, omnipresent. 

   Economic historians who have studied the transformations of the economies that were to become today’s leaders note that all such revolutions are fuelled by one sector.  The 19^th century transformations were led by the textile sector in Britain, the timber business in Sweden, the dairy business in Denmark and the railroads in the US.

   He points to India’s success in software exports as a harbinger of India’s IT led transformation in the current generation.  The country’s software exports have grown at a compound annual rate of 65% for 10 years.  At the current projected growth rate, India’s software exports will exceed $50 billion by about 2008.  Compare this to India’s total exports today at $40 billion.

   The increased earning led by the growth of the information economy will enable India to skip the industrial economy and move straight to the knowledge economy. 

   One concern earlier was our ability to feed our population.  Das sees new genetically modified seeds resulting in a green revolution in India and solving this problem.  Other big issues remain though.  Lack of infrastructure such as dams, ports, roads, airports and problems relating to poor legal enforcement, black money and corruption are impediments.  However, as an increasingly literate population moves into the middle class and begins to demand accountability from India’s politicians, there is a move to resolve these issues. 

   Das is optimistic that it is only a matter of time.  He believes that India is on a tidal wave of progress and that there is no turning back regardless of which political group seizes power.  Let’s hope that he is proved correct. 

   India and the US are the only two countries in the world that adopted democracy first and capitalism later.  This inversion results in a more peaceful and negotiated transition to a market economy and avoids the harmful effects evidenced in countries such as Russia. 

Contributed Review:
Nikhil Bhojwani

* Ideas expressed in contributing articles do not necessarily represent those of the economists of theshortrun. 

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