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

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