The tortoise and the hare
Business Standard, 9 December 2024
The tortoise of the advanced economies
Most people think of economic growth as the norm, as a steady state, as something that happens (on average) for a long time. This intuition is based on the experience of the first world, most notably the US and the UK. These countries have a remarkable experience with extremely stable, low average growth rates, over long periods of time.
They got there through the power of compounding: a 1.5% per capita real GDP growth for 200 years starting from 1820, which gave gains of about 20x. Surrounding this long-term average, they had ups and downs, of world wars and recessions and depressions. The intellectual and institutional capabilities of countries like the UK and the US were able to grapple with the challenges that came along, maintain social coherence, create conditions of safety and optimism for private persons, through which low stable growth was sustained across an astonishing array of challenges.
The hare of developing countries
For many of us in India, it is easy to slip into this illusion: the idea that there is a stable long-term growth rate which is baked in, and then around that we have business cycle fluctuations. However, this is not how underdevelopment works. The essence of development macroeconomics is the analogy with a hare and not a tortoise.
In the Indian story [EiE Ep10], there are clear phases which help us organise our thinking. At first, from 1947-1962 (15 years), we got a nice phase of growth. Some colonial repression was eased. The political and bureaucratic leadership was of very high quality. The repressive apparatus of Indian socialism was not yet in play. Growth accelerated compared with the 1757-1947 period.
And then, we got a batch of bad years. Wars in 1962, 1965 and 1971 were expensive and emotionally bruising. Nehru's death created political complexities. There were two droughts. Indian socialism was built out with repressive laws, and the slow emergence of state capability that actually enforced the laws. This gave a bad period for 1962-1976 (a period of 14 years). Indian exceptionalism was questioned, we looked more like a normal third world country with a government that crushed freedom and harmed economic growth. Growth slumped into the `Hindu rate of growth' of 3.5 per cent.
Under the Janata Party, the first liberalisation began with Morarji Desai, H M Patel and D T Lakdawala. This was carried forward by Indira Gandhi and Rajiv Gandhi. This gave a small growth acceleration 1979-1991 (12 years). And then, a better opening up to the world happened after 1991, giving a grand growth episode 1991-2011 (20 years). The best growth episode of India's history was 1991-2011, and Indian exceptionalism was firmly back.
These are large fluctuations of average growth, across the periods of 1947-1961, 1962-1976, 1977-1990 and then 1991-2011. This is not a mature society with stable political institutions, with stable elite bargains, where the engine of growth purrs away at a stable long-term compound growth rate. Instead, it's a society that sometimes got its act together with intellectual clarity and an elite bargain, and a growth episode happened.
Planing horizons in business and finance
In the world of business and finance, the horizons in the spreadsheet are about three to seven years. Short horizons are often baked into the residual time horizon of the CEO. In this environment, many miss the deeper phenomena that shape business and financial success. Particularly in India, where the tortoise is not assured, strategic thinking in the business world needs to contemplate the social forces, the conditions of the superstructure, that are conducive to a growth episode.
What makes growth episodes?
Let's peer into the start and end of each of these episodes. Growth episodes are complex social phenomena and resist monocausal explanations. Many things came together in each of them. Each successful period was fashioned by knowledge and community of the previous 20-40 years [EiE Ep36]. And, the mistakes made in the middle of successful growth episodes sowed the seeds of failure through which the growth episode petered out. As an example, consider a sharp demarcating date such as the 1962 China war. However, the growth episode did not end because of the war; the seeds of failure were well in place in the intellectual failures of the second plan (1956-61).
The grand question of the age: Is the tortoise unfazed?
The world today looks daunting. Seeds of political and economic policy changes that bode ill are visible worldwide. The president-elect of the US has a special relationship with Putin. The Internet and social media have significantly tilted power in favour of right wing populism and nationalism [EiE Ep42]. This is unusual when compared with the history of the West.
The intellectual and institutional capabilities of the advanced economies are facing unprecedented challenges in their attempt at maintaining social coherence, and creating conditions of safety and optimism for private persons. Will the tortoise persevere? Is this a small blip, comparable with the US Civil War of 1861-1865? Will trend growth in the advanced economies falter? This is the grand question of the age.
How will this affect the hare?
For growth episodes in India, the world economy matters. The world economy began into a great period at the fall of the Berlin wall (1989). There was a global `peace dividend' as defence expenditures went down. The organised assault on liberal democracy, that the Eastern bloc represented, came to an end. Fear subsided. Sensible economic policies emerged in many countries. In an increasingly globalised world, economic strength in each country bolstered that in others. The wise Indian moves in foreign policy and economics, by Narasimha Rao, A. B. Vajpayee and Manmohan Singh were shaped by that context: they saw the failure of communism and made the break with the USSR and with socialist policies. Unilateral opening up is always a good idea, and it helped that the world economy was faring well in those years.
Hence, as thinkers for India, we have to look at the remarkable global environment and wonder. Will the tortoise falter? How does this change our problem of creating conditions for a next growth episode? We have to think about the possible adverse impact of global economic difficulties, of the vulnerability to Chinese aggression, and about the domestic difficulties of intellectual and institutional quality.
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