How the Raj shaped India’s economy

Did the British Empire make India richer or poorer? The question has been around since 1900 when writers and publicists like Dadabhai Naoroji and Romesh Dutt first asked it. Even now many people would want to read about the economic history of India to answer this question.

But the discussion on this question is not always well-informed or based on evidence. What is the evidence? What was the record of economic change in India in the late nineteenth century and the early twentieth century? What facts are we explaining?

What facts are we explaining?

Ventures like these usually start with a look at the national income data. The table below draws on the statistical work of Moni Mukherjee, Alan Heston, and S. Sivasubramonian to show that the growth rate of real national income between 1860 and 1947 was low, and that population growth made this low rate even lower over time. This is a depressing conclusion, though we should remember that average growth rates in the world outside Europe and North America in these years were not much higher than these figures. The whole world grew a lot more slowly then that it does now.

National income (% per year) Population (% per year) Per head income (% per year)
1860-1885

1885-1900

1900-1914

1914-1947

 1.76

1.01

1.45

1.14

 0.53

0.55

0.45

1.08

1.23

0.46

1.00

0.06

The table tells us that we should be explaining why the economy under the Raj was stagnating, when the western world forged ahead. We should ask: Was the Raj responsible for the falling behind? This type of debate the world economic historians, encouraged by Angus Maddison’s data, have turned into a craze.

But this is the wrong question to ask. To see why, look at the pair of graphs below. The graphs divide up real national income into two parts – what the peasants earned (green line), and what the merchants, industrialists, service workers, and bankers earned (red line). The graph at the left tracks total income in million rupees, and the graph at the right tracks income per worker in rupees, both at 1938-9 prices.

The graphs do not tell us that the economy under the Raj was stagnating. They show that one part of the economy was forging ahead and almost certainly catching up with the Western World, whereas another part was stagnating and falling behind. The business sector was doing very well, gaining in income and in productivity. The right question to ask is: Why was there more inequality in the colonial economy? Were the Raj’s policies responsible?

Figure 1 Indian data

How well have these facts been explained?

Most general discussion on the economic history of colonial India looks at average incomes, misses the inequality, and therefore asks the wrong question, which is, why the economy faced stagnation. The answer follows the classics or the moderns, and both blame the Raj for pursuing policies that made India poor.

The classics like Naoroji and Dutt attacked openness and globalization. The British Raj did not really have an economic policy. But it behaved as if it did, and the policy was to keep markets open. Dutt said that free trade destroyed the handicrafts and made Indians poorer. Naoroji’s target was factor market transactions. He said that India purchased many services from Britain, the payment for which were a ‘drain’ of resources. By draining saving and investment away, the empire made India poorer. Their criticism was very influential in shaping development policy after India gained independence, when the new state rejected openness with religious zeal.

The modern version of why India stagnated attacks capitalism (Marxists) or agrarian property rights (institutionists).

The classics got it wrong. The business sector, which included industry, thrived despite drain and industrial decline. Perhaps far from being a drain, the services purchased abroad helped businesses grow? Marxists might not find the evidence on inequality surprising, and suggest that it shows how capitalism caused a redistribution from the poor to the rich. In fact, the red line contains too many different professions to support that conclusion. For example, it includes the artisans and the factories together. Institutional economic history does not explain why under the same state and the same institutional regime, two segments in the economy could have dissimilar experiences.

How should we explain these facts?

There is a very simple explanation of inequality in colonial India. The open economy was good for business, but it could not alter production conditions in agriculture, which are generally poor in the tropical zones.

Although India exported a lot of agricultural goods, agricultural productivity was low throughout because the major part of the land is arid or semi-arid, where monsoon rains permitted growing one main seasonal crop but acute water scarcity in the rest of the year prohibited intensive and multiple cropping. Small peasants and labourers in the dryland and upland areas, and the overpopulated eastern Gangetic Basin did not become rich even as agricultural production increased. And they received little more than friendly gestures from the British Indian state. Transforming tropical agriculture required large-scale investment in water supply systems, often at serious environmental cost. Neither the geography nor the capacity of the state made taking that step easy.

What about merchants, industrialists, bankers, and shippers? The seaboard and market towns in the interior had been trading from a very long time. These enterprises gained from the nineteenth century globalization that the Raj was keen to maintain. The gains were dramatic. The volume of long-distance trade in India grew from roughly 1 million tons in 1840 to 160 million in 1940. As profits in trade were reinvested, India led the contemporary developing world in two leading industries of the industrial revolution, cotton textiles and iron and steel. Not only factory industries like steel and cotton, even the handicraft industries did well in the early twentieth century. Cotton cloth weaving on hand-powered looms, saw a more than doubling of the production of cloth between 1901 and 1939.

At independence in 1947, the port cities were homes to some of the best schools, colleges, hospitals, universities, banks, insurance companies, charities, and learned societies available outside the western world, much of it built with capitalist profits. This extraordinary development would be unthinkable without the open economy, the cosmopolitanism of the port cities, and the knowledge and the skills that entered India through the open borders. The nationalists called the cost of buying this knowledge ‘drain.’ They were being cynical.

Was the state blameless?

The state wanted openness, and openness delivered. Was it the best kind of state India could have? Certainly not. The state needed to spend a huge amount of money to lift agriculture from stagnation. An independent state did just that from the 1970s onward, without that commitment the Green Revolution would not happen.

The Raj was too weak, too conservative, and too uncommitted a state to design a radical development policy that would have to begin with the agricultural problem. Why was it so weak a force? The answer lies in the way it managed the fiscal and the monetary systems. I will answer the question in a later essay.

Tirthankar Roy

Professor of Economic History

London School of Economics

What is Emergence? Can economic history explain emergence?

More than half the world’s population live in societies that economists call “emerging economies”. The phenomenon of emergence is by far the most exciting long-term economic process that the world has been living through. One would expect that economic historians would be busy debating what emergence is, and why it happens. They are not. Neither is economic history a living thriving discipline in the emerging economies, nor are economic historians based in the developed world asking such questions, which leads to this essay.

What is emergence? We use the term when a poor (and usually large) country grows much faster than the world average growth. Consider the Figure below about South Asian growth to see what is meant. The red line in the Figure is the trend-line that tracks annual growth rates in South Asia. The blue line tracks world annual growth. The former was below the latter until the early-1980s, and then there was a reversal.

Figure 2 Convergence

Figure 1. Relative Growth Rates: South Asia and the World 1960-2016

The Figure immediately raises a problem that makes explaining emergence a complicated task. Emergence entails a sharp turnaround, a shift of trend, a sudden reversal from falling-behind to speeding ahead. It is not just any economic growth, but a burst of growth that follows years of stagnation. Because it is a burst of growth, conventional economic growth theory – which stresses accumulation of some sort of capital – does not help us understand emergence. Conventional theory does not account for bursts as such. In fact, accumulation of capital is usually a slow process.

What, then, explains emergence? Economic history seems to offer three types of answer, which I will call Smithian, Institutionist, and Statist.

Smithian or classical growth is a well-used term in economic history. It refers to the situation where a market opportunity opens up for a so-far isolated region that has a lot of underutilized resources like land and labour. The initial shock could come from a change in transportation technology, or political unification, or technological change that creates new demand for a resource. Adam Smith, after whom Smithian growth is named, understood that the process could generate incentives to invest in productivity. If all circumstances are favourable, the shock could lead to a burst of growth.

The Burmese-British economist Hla Myint explained tropical growth in the nineteenth century as an episode of Smithian growth. That India’s emergence (or China’s from a few years before) did have a Smithian element cannot be denied. In both, labour was abundant, underemployment rife, and labour-intensive services or manufacturing led the turnaround. But both countries have quickly moved into using high levels of technology (India leads the non-western world in information technology or pharmaceutical production, for example), which does not fit the Smithian pattern.

The institutionist story appeared to explain Western Europe’s emergence 200 years ago, and stresses the contribution of business-friendly law, good governance, or incentive systems in causing a sharp turnaround in Europe’s growth from the 1820s. Might a similar story be told for Asia and Africa in the late-twentieth century? This remains very doubtful. The more recent turnaround happened in the absence of a prior improvement in the measurable indicators of good institutions. India, for example, gets very bad scores on Global Competitiveness index, and the Ease of Doing Business index a quarter century after its emergence began. Institutions are out too.

The statist story became popular between 1980 and 1997 to explain the emergence of what were called the newly-industrializing economies of East Asia, like South Korea. The argument was that the political elite of a country that consciously tries to catch up with a leader, needs its state to play a developmental role. The role could take many forms, direct investment, regulation of allocation of capital, or protectionism. The statist model had its origins in the writings of the Harvard economic historian Alexander Gerschenkron, was initially applied to Germany and Imperial Russia, later to Meiji Japan and postwar Japan, and one of its variants became known as the late-industrialization or late-development model that drew its main evidence from East Asia.

The statist model of emergence was a sort of orthodoxy on emergence until the Asian crisis of 1997 took some wind off its sails. The statist model too is unconvincing as a tool to do global economic history. Consider Figure 1 again. During much of the 1950s, 1960s, and the 1970s, India had as much of a developmental state as any other country in the world, and its political class was hugely proud of that fact, but the state did not deliver emergence, it delivered a regression instead.

I will define and explain emergence differently from all three, but after doing so, will also draw on some fundamental insight of all three to enrich the definition.

Emergence, in my definition, is a re-balancing of the relationship between the world economy and the national economy such that a poor country can buy useful knowledge from the world by selling something that it has in abundance. The key to emergence is not in unutilized resources (as in Smithian growth), institutional engineering (as in Institutionism) or public finance (as in Statism). The key is in the balance of payments. It doesn’t matter if you sell services as Indians do or industrial goods as the Chinese do, but it does matter that these sales create the prospect of an inflow of knowledge in the shape of machines and skilled people.

Smithian growth is relevant, because the pace of inflow of knowledge depends on resource endowments that shape the power to purchase knowledge. State is important because it is the State that decides to keep markets open. If this is relatively easy with trade, keeping factor markets open is much harder to achieve politically. But this is important. Technological change happens when people who embody complementary skills can interact freely. Not many States are open to the idea of free movements of people. India, despite openness in some areas, is still cagey about skilled foreigners coming into work in India. Institutions are important because if corruption and bad governance persist, sooner or later the benefits of emergence would dry up.

But the foundation of emergence itself is a transaction on a global scale. In principle, South Asia, the region shown in the Figure but it is only one example, could potentially achieve this transaction in the 1950s instead of the 1990s. So could China. They deliberately blocked the prospect, thinking that hermetic isolation was the best way to develop capability. Nothing could be further from the truth. Knowledge grows by exchange. Cosmopolitanism is necessary for the task.

Tirthankar Roy

Professor of Economic History, London School of Economics

October 2018

 

 

Are economic historians wasting time on “divergence”?

What is the divergence question?
From around 1820, possibly well before, the world witnessed increasing inequality between countries and regions. Modern economic growth – growth led by productivity increases – transformed Western Europe and North America, but it appeared in other regions much later. These facts lead us to one of the central questions for economic history: “Why do some countries grow rich while others stay poor”?
The question is as old as modern economic growth itself. Karl Marx and Max Weber, among others, tried to answer it. In the last twenty years, the debate around the question has revived, thanks to dialogue between economists and historians. The current short-hand for the question, “divergence”, comes from the title of a book (by Kenneth Pomeranz) that has played a part in the revival.
Economic theorists are encouraged by new theoretical approaches, and the availability of large datasets. Conventional theory of economic growth was not comfortable with cultural and political explanations of modern economic growth. New institutional economic history, associated with Douglass North and others, showed a way to bring in these variables into growth theory. In the early-2000s, historians criticized institutionalism. The current phase of the divergence debate began with these criticisms and responses to these criticisms.
Cross-country historical income datasets became available from the 1990s, thanks to Angus Maddison’s work. Maddison collected and processed the data, often from detailed building blocks (like income from agriculture, trade, industry, etc.), but reported mainly one set of results, per capita or average real income by country for centuries. The simple format of reporting drew attention to inequality between countries.
Where do I fit in in the divergence debate? From time to time, those who took part in the debate would look at historians who specialized in regions, and ask questions like, “what about India?” For a region-specialist like me, the invitation to offer one’s expertise to answer a big question like this one was too strong to resist. But that fascination wore off. Increasingly, I have come to believe that the debate has had a stunting influence on economic history as a field.
My scepticism is based on seven arguments.

1. The debate has a built-in tendency to simplify the economic history of the non-western world
Making inequality-between-countries the core problem works badly for many countries. This is so because there is only one way in which one can use a country’s history to answer why some countries grew rich while others stayed poor, that is to show either why it grew rich or why it stayed poor. There is only one way that Indian evidence can inform the debate – and that is to show why India stayed poor. But this is not the most important or interesting question about India, and it misreads Indian history (see below).

2. Divergence debate takes bad data too seriously
Maddison’s work shows growing inequality in average incomes between countries (Figure 1). The data is – to put it mildly – bad data. Look closely, you will see that the average income of India was USD533 for 1820-1870. Year after year for 50 years Indians earned exactly USD533 on average (and exactly USD550 for 320 years before that). These numbers contain no worthwhile information about Indian history. Such is the quality of the statistics on which the divergence debate has so far been based.

Figure 1 Divergence

3. The divergence question is based on an erroneous reading of the data
In this dataset (Figure 1), every country is represented by exactly one attribute, average income. Every country’s history is represented by one number. By considering only national income, the rise in international inequality becomes the only fact there is to explain. But this is not necessarily the right reading of the data.
Suppose that poor countries contain more arid lands in their domain, and that it is harder for arid zones to experience sustainable income growth than it is for temperate zones or seaboards. Modern economic growth had owed to overseas trade, which favoured the seaboard, and to agricultural revolution, which favoured the temperate zones. In these statistics, inequality between geographical regions and that between countries are mixed up, whereas what we should really do is study inequality between geographical zones, and not between countries.

4. Too much focus on inter-country inequality obscures inter-regional inequality
How might location matter? Consider this example. In 1900, Bombay was one of the most advanced port cities , a huge railway hub, with institutions and markets as good as in any city in Europe, some of the best colleges and schools of the tropics, and the fourth largest cotton mill industry of the world. About 500 miles to the east, in the central Indian uplands, Chanda district had no industry, only 15 per cent of its land under cultivation, practically no roads and railways, and a literacy rate of two per cent. The capital of this district, which was as large in area as Belgium, was a town of 17,000 people. For me, the big puzzle is why these two regions – both governed by the same state, the same formal institutional regime, with zero barriers to transactions between them – could have such diverse economic experience. Divergence, with its focus on country averages, cannot answer this question, in fact obscures many patterns of regional inequality from view.

5. The divergence question is based on the false assumption that national income and the nation are the right units of analysis
Maddison’s dataset reports national incomes when nations did not exist. This practice encourages historians to exaggerate the role of the state in world inequality, when states were of different kinds or just did not exist. In the eighteenth century, for example, India was ruled by hundreds of small and large states. With one or two partial exceptions, we have zero statistical data to show how these states functioned.

6. The rise of the western world is too overdetermined to explain world history
Why did Britain experience modern economic growth from 1800? By last count, there were sixteen answers to the question. These included knowledge and enlightenment, credible commitments and constraints on state power, common law, energy-intensity, marriage patterns, transformation in the handicrafts and in household labour, industrious revolution, expansionist and activist state, high wages, overseas trade, intergenerational transfer of cultural traits, financial revolution, protection and import substitution, consumer revolution, agricultural revolution, and violence and exploitation. World history, if we start from the British angle, offers a much too confusing bundle of lessons for the rest of the world.

7. Divergence models do not explain current convergence
The theoretical models that predict divergence cannot predict the present-day convergence in an easy way, and therefore, they are unreliable as theories about the past. Did the growth reversal in India in the last quarter-century happen because of an improvement in institutions, or a rise of the activist state? In fact, the state withdrew by some measures since 1990, and as the World Bank’s metrics show, the quality of institutions is just as bad after the growth reversal as it was before. Should we then have a different theory for every episode of growth in the world?

What question should world economic historians be asking?
Imagine I am lecturing a classroom of management or economics students in an Indian school about economic history (which I do often). I could start by saying that economic history is a fascinating because it tells us why India fell behind the rest of the world, or why it was at the wrong end of the growth game. It will not only be a wrong way to understand Indian history (remember that the fourth largest cotton mill industry emerged in India in the nineteenth century), it will also sound outlandish. In a region where seven per cent GDP growth has become the norm, my opening line will make economic history sound like a joke.
I should say instead that economic history is fascinating because it shows the historical roots of emergence in the developing world, except that economic history is not doing that. It cannot, because a preoccupation with divergence and an overdetermined explanation of the rise of the western world makes the field unable to explain the biggest economic revolution of the present times, the phenomenon of economic emergence.
More on the emergence question later.

Tirthankar Roy

Professor of Economic History, London School of Economics

July 2018

The South Asian miracle: Why did it happen? Is it sustainable?

South Asia contains five large countries (India, Pakistan, Bangladesh, Nepal, and Sri Lanka) and several smaller ones. Together, the region contains a sixth of the world’s population. its share in world income is smaller (less than five per cent), but increasing fast, thanks to an average growth rate that is almost double that of the world average.
Its size is not the most interesting feature of the recent economic history of South Asia. The more interesting feature is a dramatic reversal in its economic performance that took place around 1980-85. Between 1947-48, when British colonial rule ended in the region, and 1980-85, South Asia saw slow economic growth, followed by rapid economic growth. Alongside, there was another reversal, from a belief that nation states should manage and lead the process of economic development to a loss of that belief. Why was there a reversal? What, if anything, had the nation states to do with it?
Experts on India explain the turnaround by choices made by the political classes or economists. Such people, they say, decided to enlarge the states in the 1950s by collecting more money through taxes, aid and debt, and used the money to achieve state-led industrialization and redistribution to the poor. At the same time, they underestimated the power of the market and private enterprise to achieve investment and economic growth. Realizing this error, they took steps to reduce state intervention and increased the role of the market, and the miracle followed. The story differs in detail, but most country-specific accounts tend to be state-centric in this fashion.
There are two problems with a state-centric explanation. Politicians and their economic advisers differed a lot between the South Asian countries, and yet all experienced the reversal. Besides, there is no direct evidence to suggest that politicians had a change of heart around 1980-85. It is no more than a guess that they had.

I offer an alternative view in The Economy of South Asia: From 1950 to the Present (Palgrave Studies in Economic History, 2017). The alternative view is that the world economic conditions in which these countries functioned changed for the better around 1980-85. Politicians and economists in the region were always weaker than they imagined them to be. Even as national governments grew bigger and more interventionist, they still needed to buy technology and skills from the world. During the British colonialist era, South Asia exported agricultural commodities and purchased skills and knowhow from abroad with the proceeds. After 1947, this balance was upset. The shared enthusiasm for state-intervention and industrialization undermined the power of foreign trade and the export capacity of the region.

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The regimes after 1947-48, therefore, became more exposed to foreign exchange crises, and found it difficult to sustain state intervention. They responded by erecting even stricter control on foreign trade. The two oil shocks of 1973 and 1979 made conditions worse. Paradoxically, it was oil that saved South Asia. From the late-1970s, the region led the world in exporting the millions of wage-workers needed by the expanding Persian Gulf states. The remittances that followed made the politicians in the region willing to relax controls of foreign trade and allow import of technologies. The South Asian miracle began.

From the 1980s, China and South Asia both re-joined globalization offering a new basket of export articles, while buying technology with export earnings. There was a difference between the two regions, China’s basket contained more industrial goods, South Asia’s contained more services (Bangladesh is a partial exception). Still, the two regions had a common history. Both China and South Asia had, in their zeal for state-led development in the 1950s, 1960s and 1970s, neglected the power of trade. They exported less than before, and yet needed technology more than before. Both successfully reset the relationship between the regional economy and the world economy.
What promises does the South Asian miracle hold for the future of the region, and the future of the world? Given the huge size of the population of South Asia, a growth turnaround has tremendous positive potential for the people who live here. It also sends out strong vibes throughout the world economy.
But is it sustainable? Economically, yes, it is sustainable. Every emerging economy needs to perform a macroeconomic balancing act, export enough to buy knowledge and skills from abroad. South Asian countries managed this well, by exporting of services (like people, and software) and labour-intensive goods (like clothing) to import technology and skills. By getting this act right, they gave the miracle a stability.
Politically, the scenario is less certain. Any market-led economic growth is likely to be unequal, it favours those with goods and skills the world market demands. Those livelihoods which do not trade much suffer. In the region, agriculture is in a crisis, environment is under severe pressure, many remote regions have not seen much growth, poverty persists, gender inequality takes extreme forms because women still struggle to gain a share of the benefits, and often take enormous risk and trouble to work away from home. Discontents are rife and should temper any celebratory view that we may take about the miracle.

Tirthankar Roy
Professor of Economic History
London School of Economics and Political Science