Source: Ideas and Institutions Issue #13
Analysis
Looking at Lucas’s Question After Seventy-five Years of India’s Independence
Note: Unless stated otherwise, all data are from the Maddison Project Database, which provides comparable national accounts statistics in purchasing power parity terms. For years before 1950, very few countries’ data are available, and the latest year for which data are available in the current iteration is 2018.
As India marks seventy-five years of independence, it is worth reflecting on this famous quote from a paper by Robert Lucas: “Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia's or Egypt's? If so, what, exactly? If not, what is it about the ‘nature of India' that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.”
Lucas was right to worry about India when he published this paper in 1988. In the colonial era, there was no growth in India’s GDP per capita (GPC). While India did achieve a growth acceleration post independence, in the forty years between 1947 and 1987, India’s GPC at constant prices increased by only 0.8 times, at a rate of 1.6 percent per annum. Although growth had accelerated to a moderate rate in the 1980s, India had not yet begun a high growth episode, as discussed in a previous issue of this newsletter. Lucas contrasted India with Indonesia and Egypt because in the two decades just before he published this paper, their GPC had grown at 4.2 percent and 3.9 percent, respectively, while India’s had grown at only 1.7 percent. But just a few years after Lucas posed this question, India’s growth accelerated. Over the following three decades, India’s GPC quadrupled, growing at an average of 4.4 percent.
Lucas took India itself as the unit of analysis, implying that something needed to change at the national level to help the economy grow rapidly. The nation-state remains the most important unit of analysis for economic growth and development. Actions and features of individuals, families, communities, firms, and sub-national governments matter, but the more important differences exist across, rather than within, countries. For instance, most women in a developed country are financially far better off than most men in a poor country. Many families in higher income group in a low-income or lower-middle-income country are at par with or worse off than many families in lower income group in rich countries. In 2021, CMIE’s household survey found that a household at the 90th percentile in India earned about Rs. 41,500 per month or Rs. 5 lakh per annum, which is about $21,500 in purchasing power parity terms. In the U.S., this is the income of a household at the 15th percentile. Similarly, the GPC of the poorest state in most rich countries is much higher than that in the richest state in most poor countries.
Lucas also implied that a comparative perspective across nations is fruitful. A nation should not be satisfied by improving on its own past performance. It should also look around. As nations have their own paths, comparisons are somewhat unfair, but they can help us see the possibilities.
First, consider our two big neighbors—Pakistan and China. Back in 1950, Pakistan’s GPC was about 4 percent higher than India’s. In the 1950s, India’s economy grew at a low rate, but Pakistan’s economy stagnated. So, by 1960, India’s GPC was about 17 percent higher than Pakistan’s. In the 1960s and 1970s, India’s growth slowed down even further, while Pakistan’s accelerated. By 1980, Pakistan’s GPC was about 24 percent higher than India’s. Both economies had similar growth performance in the 1980s. In the 1990s, India’s growth performance was better than Pakistan’s but not by a lot. In the 2000s, India’s economic growth accelerated further. Only in 2010, India’s GPC crossed Pakistan’s. In the 2010s, this trend continued, and by 2018, India’s GPC was 24 percent higher than Pakistan’s. The comparison with China is more one-sided. In 1950, India’s GPC was 24 percent higher than China’s. But China’s growth has outpaced India’s in each decade since then. Since 1970, China’s GPC has been higher than India’s. In 2018, China’s GPC was about double that of India.
Second, consider three regions—East Asia, Latin America, and Sub-Saharan Africa.
- In 1950, the GPC of East Asia was only 14 percent higher than India’s. But by 2000, it was triple of India’s GPC. The growth in many countries in the region regressed to the mean, but still, region’s GPC was about 2.4 times that of India in 2018.
- In 1950, Latin America’s GPC was already about 4 times that of India. Many economies in the region grew rapidly while India’s economy languished, and by 1980, the region’s GPC was about six times that of India. But as India’s growth picked up, many Latin American economies slowed down, and in 2018, the region’s GPC was double that of India.
- The GPC of sub-Saharan Africa was 34 percent higher than India’s in 1950. The region grew more rapidly than India during the 1950s and 1960s, and by 1970, its GPC was 41 percent more than India’s. However, the region then stagnated for three decades. By 2000, the region’s GPC was 72 percent of India’s. Since then, the region has achieved some growth, but not as much as India. In 2018, the region’s GPC was about half of India’s.
Third, we make comparisons with developed countries to understand how the frontier is shifting and how far we are from it. Consider the U.S. and Western Europe. In 1950, India’s GPC was about 6.5 percent of U.S.’s. By 1980, this had fallen to only 5 percent. Then the trend reversed. By 2018, India’s GPC was 12.3 percent of the U.S.’s. In 1950, much of Western Europe was still recovering from the catastrophic 1940s. Still, India’s GPC was only 13.6 percent of Western Europe’s. As the region did well in post-war recovery, India’s GPC fell to only 7.1 percent of the region’s GPC in 1980. It then rose to 17.1 percent in 2018. So, India’s GPC is still only one-eighth of the U.S.’s, and one-sixth of Western Europe’s. Another way of seeing this is that India’s GPC is what Western Europe’s was in the 1930s and U.S.’s was in the 1890s.
Fourth, we track India’s standing in the world. The table below gives the rankings for India and ten other countries based on GPC. In 1950, India was at the 21st percentile - 115th among 145 countries for which data is available. Its relative position remained about the same in the 1950s but worsened in the 1960s and 1970s. In 1980, it was at the 15th percentile. Things improved, and in 2018 India was at the 32nd percentile. This improvement is good, but being in the bottom third is nothing to feel complacent about. There is a long way to go, but India’s experience shows that we can achieve and sustain rapid growth.
| Table 1: Ranking of select countries based on real GDP per capita | |||||||||
| Year | 1950 | 1960 | 1970 | 1980 | 1990 | 2000 | 2010 | 2018 | |
| No. of countries with data available | 145 | 152 | 153 | 167 | 169 | 169 | 169 | 169 | |
| Rank | India | 115 | 122 | 130 | 142 | 127 | 124 | 122 | 115 |
| Pakistan | 110 | 133 | 121 | 130 | 119 | 119 | 123 | 121 | |
| China | 126 | 132 | 127 | 128 | 117 | 106 | 90 | 81 | |
| Republic of Korea | 113 | 107 | 89 | 88 | 37 | 33 | 33 | 27 | |
| Brazil | 71 | 69 | 71 | 67 | 71 | 63 | 74 | 78 | |
| Indonesia | 99 | 103 | 111 | 117 | 104 | 97 | 98 | 90 | |
| South Africa | 32 | 47 | 54 | 73 | 83 | 78 | 82 | 86 | |
| Japan | 53 | 31 | 20 | 17 | 5 | 19 | 26 | 24 | |
| Mexico | 42 | 48 | 47 | 53 | 60 | 55 | 69 | 68 | |
| Nigeria | 102 | 117 | 112 | 123 | 136 | 129 | 117 | 122 | |
| USA | 4 | 4 | 4 | 3 | 1 | 4 | 8 | 9 | |
| Source: Author’s analysis based on Maddison Project Database 2020 | |||||||||
Lucas’s question about something about the “nature” of a country that may prevent it from growing rapidly was already being answered when he raised it and has since been answered more clearly. The list of countries that have achieved some measure of economic success has grown. It is a remarkable possibility, but the experience of countries that have succeeded shows that any country can prosper. Countries with very different geographical, demographical, historical, political, cultural, and natural resource settings have been able to do well. From Malaysia to South Korea, Botswana to China, the sheer diversity of countries that have succeeded gives one hope. Further, a country catching up on productivity can grow much faster than a country pushing the productivity frontier. It took South Korea three decades or one generation—1966 to 1996—to go from a GPC of two thousand dollars to that of twenty thousand dollars (in 2011 prices). The same journey took Denmark 150 years—from 1820 to 1970. The flip side of this hope is the anguish about so many countries not doing better. More than half of the people in this world live in low income or lower-middle-income countries.
Lucas’s question emphasized the role of the government in improving growth. This seems puzzling, since growth is generated mainly by the markets. But this is a recognition that something needed to change in the way the government in India acted vis-à-vis the rest of the economy. The comparisons discussed above show that nations are economically consequential political units, because the political and governance systems have a considerable bearing on economic outcomes. Depending on what they do, political and governance institutions can enable or impede the working of well-functioning markets. But all governments are not the same.
Lucas chose Indonesia and Egypt as role models because at that time, their economies were growing well. But they also had authoritarian governments—under Suharto and Mubarak, respectively. They happened to be among the small subset of authoritarian regimes that have delivered rapid economic growth. From the 1990s, India has delivered rapid growth while preserving the democratic character of its polity. In fact, national politics in India in the 1990s and 2000s was marked by coalition rule. Most states also had highly competitive politics. India’s rapid growth happened in a complex political economy characterized by fractious democratic politics, vertical and horizontal distribution of power in the governance system, a permanent civil service, raucous civil society and media, uppity unelected institutions, industrialists who gained from dirigisme, and so on. A broad conception of development would include some political freedoms, and India did not need to give up this aspect of development while achieving rapid growth. While claims about the necessity of single-party governments and strong leaders for economic growth refuse to go away, they are not rooted in India’s experience.
Essays like this typically deploy a variety of indicators, but we have focused only on one—GDP per capita. Although economic growth is not sufficient, it is necessary for India. As we look back, India’s achievement on this count has been modest. For about three decades following independence, India’s relative standing on GDP per capita declined. What has happened since is worthy of some celebration, but there is much work to be done. Lucas was right about the staggering welfare consequences of economic growth and the remarkable hold that this thought has once we focus on it. Looking at the economic insecurities with which a vast majority of Indians live, it is indeed hard to think about anything else.
—By Suyash Rai
Review
Achieving Economic Growth by Negotiating Property Rights in China’s Cities
- Zhao Ziyang, Chinese Premier 1980-87, as quoted in Rithmire, Meg E., Land Bargains and Chinese Capitalism
How can economies like India unlock the value of land to grow rich? In India, the answers to this question often lie at two extremes of the property rights debate. There is the argument that strong individual property rights, clear land titles, and liberalization are essential for unlocking land markets. The opposite argument is that the developmental state requires eminent domain powers to manage the spatial allocation of productive forces within the economy. Both arguments focus on creating a property rights regime exogenously that can then be used by actors within society.
Meg E. Rithmire’s book Land Bargains and Chinese Capitalism (2015) demonstrates the opposite—an account of how China grew rich by developing several property rights regimes endogenously, through a process of local negotiation and experimentation, and within the overall framework of public ownership over land. Rithmire begins her book by introducing the idea that property rights in China were not only critical to its race to prosperity, but the rights themselves also kept evolving constantly as cities and provinces tried to grow in the late 1980s and 1990s. She studies the process through which three Chinese cities—Dalian, Harbin, and Changchun—pursued growth strategies by using land resources at their disposal.
Each city pursued a different course during a period where both the national Chinese government and local governments were dismantling socialism and building markets. Though there was a significant change in how land markets were considered at the national level (from a factor of production to a resource that could be capitalized), national laws were vague and allowed local interpretations and experimentation. At the local level, governments adopted many innovations, including land exchanges by rural land dwellers exchanging homestead land for urban citizenship, trading of land development rights between different jurisdictions, and forcible removal of peasants into high-rise, dense housing
The three cities’ governments used property rights in the service of economic growth but did so with a close sense of the local “economic order.” The fundamental differences in approaches and outcomes, according to Rithmire, was determined by how each city adapted to (a) differences in preferential policies handed down specifically to select cities by the national government, and (b) the “differential sequencing of economic reform and opening up to global capital.”
For Dalian, the early opening up to FDI and earlier access to preferential policies allowed its local government to monopolize the allocation of property rights. The Dalian government used this power to undertake market reforms and urbanization as a strategy for economic growth: “. . . the city of Dalian articulated a unified vision about the role and use of land in the city’s economic strategy.” This was achieved by sequencing economic reforms smartly—first attracting foreign capital as a counterweight to struggling domestic state-owned enterprises, and then reforming the SOEs.
The city government’s monopoly over land allocations was critical for enabling this transformation. Dalian, before most other cities, was able to commodify the land resources of the city by collecting lump-sum revenues from leases, trading land in the downtown areas for land in the special development zone, relocating factories and residents by allocating land rights, and so on. Land was basically treated as a state asset to be mobilized for economic growth.
Unlike Dalian, Harbin and Changchun opened up late to foreign capital and were late in receiving preferential treatment from Beijing. The Harbin government espoused no grand strategy and managed market reforms through ad hoc negotiations with residents, SOEs, and other interest groups. Changchun, known as the Detroit of China, managed market reforms through a process of constant negotiations with the leading car manufacturer in the city and its employee-residents.
In contrast to Dalian, the city of Harbin was not able to monopolize control over land resources. Informality and de facto land claims constrained the city government’s ability to regulate land. Therefore, the city of Harbin had to use land resources to create value for “firms and individuals rather than exclusively for the state.” The city of Changchun was not able to monopolize land resources, but it did succeed in establishing significant regulatory authority over land that it could mobilize.
Common to the three cities is the endogeneity or the contextual evolution of property rights in the service of economic growth. While national laws and policies shaped the overall framework, city governments clearly had considerable leeway to experiment, create, and modify institutions, declare new development zones, offer incentives, and negotiate both with industry and residents.
For policymakers in India, the question of endogenous development versus exogenous imposition is worth considering. Rithmire’s insight points to the fact that building markets requires giving full play to local interests and political factors: “. . . [in] places undergoing rapid and uncertain economic and political transitions in which local practice is not determined by a national legal framework, the nature of the property rights regime is a question of fact.”
The Chinese city governments were able to mobilize land resources for economic growth as well as local revenues because a) national land laws permitted experimentation and flexibility, b) city governments were extremely decentralized, c) there was a clear focus on economic growth, and d) the historical fact of public ownership of land made land mobilization easier in some cases.
Rithmire’s book is thus useful for understanding how governments, given the right incentives and objectives, can mobilize land resources not just for their own revenues but also in the service of economic growth and urbanization. The Delhi government’s lieutenant-governor recently stated that the Delhi Development Authority has liabilities exceeding Rs. 10,000 crores ($1.2 billion). China’s success in the commodification of land should give Indian urban authorities some hope.
—By Anirudh Burman