How British Rule Changed India’s Economy: The Paradox of the Raj

How did British colonial rule shape the economic development (or underdevelopment) of South Asia? My new book answers the question.

Those who wish to find an answer to this question have two choices. First, they can read books and articles that tell a story. The story is this: the British government extracted resources from India and insisted on foreign trade being free. The policy enriched Britain and impoverished India. Thus, colonialism reduced a rich region to poverty. The advocates of this narrative include a collection of Marxists, politicians like Shashi Tharoor who dabble in history, blog-writers, and economists seeking the holy grail of an explanation of world inequality.

Second, they can read books and articles the professional historians of India write, which are more reliably evidence-based than the former set and reject many of the claims the former set makes: for example, that India was once a prosperous land, or that the state extracted resources. But this scholarship does not suggest another paradigm. It goes deep into the working of the state and the economy, so deep that it loses its way in detail. Few of these works get noticed.

My new book steps in to meet the gap that the historians leave behind. It is evidence-based, and it tells a story. What story is that?

HBRCIE

The evidence tells us three things. First, the open economy the British Raj sponsored delivered two extraordinary benefits to the Indians: it stimulated business and reduced mortality rates. Second, the state’s fiscal capacity was too small for it to make a difference in any other way. And third, some of the most stressed peoples in the region – most peasants, lower castes, and women – did not become better-off in this time. They needed the state, but the state was not there for them. The story is that colonialism led to more inequality while it helped private enterprise grow. The book shows why the outcome of colonialism was such a paradoxical mixture of success and failure.

The story shows how difficult it is to sum up or represent India’s development trajectory in the colonial times with a benchmark like an average (per capita) income. Economists overlook the difficulty, behave as if the region’s experience can be represented by one average income dataset. The dataset shows that India fell behind the West in income growth, suggesting that we must all try to answer why Indian development was such a tragic case of falling behind the West. This is a non-problem, and a misreading of the region’s history. It fails to notice that Indian economic history is in fact marked by a very diverse pattern of change, extraordinary growth in business and extraordinary stagnation in agriculture and social development.

The article that changed my life

I was recently asked to discuss a piece of writing that “changed my life.” I am going to discuss an article that I read as a student and reread many times. It is not the best article I have read. It is quite speculative, and if submitted to a journal today, may not pass the referees. It is, however, one of the most cited articles in the economic history of India. I will explain why it is so influential.

The article is “Towards a reinterpretation of nineteenth-century Indian economic history.” It was published in the Journal of Economic History in 1963. The author was an American scholar named Morris David Morris. Before I talk about the article, let me talk a little about its author.

Morris (1921-2011) was a member of that generation of American social scientists who chose India as their main field of research and contributed to developing South Asian studies in the USA. His first major work was a history of the industrial workers in Bombay city, for which he did fieldwork in the 1950s. He lived in Bombay city long enough to know many of India’s business leaders of that time. These people owned textile mills, were rich for generations, some were educated in international schools, and were sponsors of colleges, hospitals, charities, associations, music, and theatre. Some of them were conservative in their private lives, but in their public life, were modern and outward-looking.

Socializing in this milieu, Morris understood that there was a capitalist India that was cosmopolitan, global, wealthy, modern and confident. Still, most Indians were poor. Why wasn’t all of India like Bombay? Why weren’t all Indians like Bombay’s business elite that he met? What made most Indians poor?

When Morris started to write, about 1960, there were two answers to this question. One of these answers had been developed by Morris’ colleagues in the North American sociology departments and later became known as the modernization school. They said that poor countries were poor because their societies lacked modernity, like capacity for hard work, working for material gain, individualism, and enterprise. These qualities had made western societies rich, the poorer societies needed to copy them to get richer. The second answer to the question came from the poorer countries themselves. Here, radical thinkers and activists said that poor societies became poor because the western countries had exploited them through trade and colonial rule.

Morris’ exposure in Bombay must have shown him that both answers were wrong. India’s business elite was as modern as anywhere. That they were sometimes traditionalist or religious in their private lives made no difference to the quality of their enterprise. And many of these families got rich by trading within the British Empire, so it cannot be true that trade and colonial rule made the Indians poor.

What then made the average Indian poor? Morris’ writings reflect a belief that there were two different Indias, one entrepreneurial, urban, cosmopolitan and dynamic, and another trapped in poverty. The 1963 article was an attempt to explain this dualism. He started by saying that India was backward or poor not because its society, or the British Empire, or nineteenth-century trade was at fault. These very forces still produced an industrial hub like Bombay. However, much of India was agricultural, and land did not produce enough value. Thus, there were two Indias.

When Morris published the essay in 1963, many established academics based in India reacted to it very critically, sometimes suggesting (as Tapan Raychaudhuri almost openly did) that Morris had a hidden purpose in writing the essay, that he wanted to show that British colonial rule in India was not so exploitative as the radicals had claimed. His paper was a disguised defence of colonialism.morris

But beyond such feral response, there was another more constructive one. Morris made his case with several informed conjectures. Many younger scholars felt that these conjectures needed to be tested with statistical data. For example, he said that nineteenth-century trade wasn’t such a bad thing for India after all. Was he right? We need national income data and trade data to test if he was. As a result of that enterprise, the first and most reliable set of national income for colonial India was produced.

Let me end with my encounter with this article. When I did my first course in economic history, Morris and his critics were essential reading. Marxist radicals and nationalists, the people who dismissed Morris, were our gurus. I was convinced that Morris was an evil apologist of British rule in India.

Like other students in my field in the 1980s, my doctoral dissertation tested one of Morris’ conjectures, that the nineteenth-century free trade did not have a universally destructive impact of India’s artisanal industry. When I finished my work, my findings supported Morris’ conjecture. This was a bit of a surprise. A few years after this I met him in the USA and found him to be a rather different kind of character from the way he was portrayed by Indian radical historians. Senior figures in the Indian history establishment of my student days were generally aggressive, bad-tempered, ideological, and bullied students. Unlike them, Morris was a warm-hearted fun-loving liberal with a sense of humour who did a lot of charity work in poor countries.

I re-read the article and found that its basic insight that India was a divided society was powerful if a speculative one. A great deal of my own later work confirmed this big picture of a society that was structurally unequal, and not one made unequal or backward by some outside force like trade and colonialism.

Why is India’s business history important?

In September last year, Professor Dwijendra Tripathi passed away. Until recently, he was the only business historian of India whose works were internationally recognized and respected. In the last twenty years, he produced as author or co-author a set of books, the Oxford History of Indian Business. The deep knowledge of the facts, love of the field, and a direct writing style, for which Tripathi was known, are in full display in these books.
I had interacted with Professor Tripathi closely in the 1990s, reviewed his books, visited his home, and admired him for his warm personality, scholarship, and his distance from ideological camps. On the last occasion we were in touch (7th July 2017), I emailed him the draft of a paper where there was a reference to Tripathi and Jumani in a mildly critical fashion, asking him if he would think that my criticism was unfair. He wrote: “Please go ahead with your paper; criticism is the life blood of scholarship.” Few Indian scholars I know of are so sporting.
With Tripathi’s benchmark books in existence, why write another book called business history of India? For that is what I did earlier last year (Cambridge University Press, 2018).business history book cover

What is the idea of this new book?
This book is different because it asks two questions that I have not seen others ask before. The first question is, how does a study of history help us understand the resurgence of private enterprise in India in recent times? We can ask this question for all emerging economies, which have seen dramatic transformations led by private capital. What are the historical roots of this emergence? I will call this the emergence question and come back to it ahead.
The second question is this. In a Bengali essay from the 1980s, Ashin Dasgupta wrote, “the more I browse the history of the last 300 years, the more I believe that Indian business has certain Indian features.” Dasgupta was writing about the descendants of Akrur Datta, a Bengali merchant of the 18th century. If this is true, if capitalism – like human beings – have different personalities, we should ask, what is Indian about Indian capitalism?
When I was a student, we learnt a way to connect the present with the past, according to which India was a great place for business until the 18th century — a dark age unfolded when the British made money exploiting Indian resources, and Indians struggled to get a share of it — and after 1947, a new dawn broke out. Most professional historians do not believe in this epochal transition model, because its facts are mostly wrong. But what is the alternative model linking the present with the past?
Observe any emerging economy today, and what we should see are hubs of private enterprise that are wealthy, innovative, and institutionally advanced, against the backdrop of a poor countryside that is changing slowly, even regressing by some benchmarks. The past looked exactly like this. Hubs of dynamic, wealthy, innovative capitalists did business in the backdrop of a poor countryside. We find such hubs in the Mughal cities, in the 18th-century textile trade, in 19th-century port cities, and in the IT or garment clusters today. We can then connect the past with the present by asking, are these hubs similar or are they different? That is what the book does.
We see surprising parallels across time. The most dynamic business towns of the past and those in the present are cosmopolitan, outward-looking, globally-connected places. They traded with the world. Whether they exported textiles, or raw cotton, or software is a matter of detail. The people whom trade made rich had access to state-of-the-art knowledge and technology of their times and knew the value of such knowledge. As an example, without the rich Indian merchants of 19th-century selling cotton or indigo, you would not get the Presidency College of Calcutta (Kolkata) or the Elphinstone College of Bombay (Mumbai).
But this isn’t a happy story. Making money was a struggle against enormous odds. Interest rates were high, institutions were undeveloped, politics often unfriendly. Have these obstacles disappeared today? Hardly. Capital is still costly in India, all global metrics measuring institutional quality still place India towards the bottom of the list, and politics is still unpredictable. Why does capitalism work at all in an environment of expensive capital and dangers of expropriation by State agencies? The book answers, cosmopolitanism helped. And so did some very Indian resources, such as the idiom of caste or community, if only in some situations. These obstacles and the resources used to overcome them make Indian business history Indian.
This is my story.

Who am I writing it for?
Three types of audience: business historians, economic historians, and India-watchers.
Business history emerged in the US and until recently was North American in its choice of examples and theoretical frameworks. This is changing and there is a drive to include more emerging market examples. While the book was not written with that aim, it helps that project.
My own field, economic history, has been preoccupied with a different question. For us, the big question is, “why do some countries grow rich while others stay poor”? While the modern West forged ahead (from early-1800s), why did countries like India and China stagnate and fall behind? Writers like Daron Acemoglu and James Robinson call this one of the most important questions for social scientists. I am not sure of that, but certainly, the divergence has been the only game in town for some time.
I think this is a bad question to ask, for many reasons. Let me show only one reason here: The question prejudges India to be a basket case. Those who think this is the greatest question are forced to ignore and overlook the hubs of enterprise that I talked about above.
Business history does not judge. It does not carry the burden on its shoulder as economists do, that we must answer the greatest question in social science. It treats individual business decisions as context-bound, which is a more flexible approach to doing history.
My third intended reader is anyone interested in the historical roots of economic emergence. Many people try to answer the emergence question, and the answers can be odd. Around 2007, a team of 11 people published an article in the IIMA house journal about India’s emergence. The authors were top professionals, and like many thinking people, they felt compelled to say something about history. This is what they said. We should not be surprised that Indians are so good at buying and selling things, they have been doing that for centuries. Still, until now they failed in their historic mission to create a world-class capitalism thanks to “foreign invasions”. The authors wisely left the identity of the invaders open, you can write your favourite invader (Turks, Europeans, Mughals) in the blank space.
But this cannot be right. India has not had a foreign invasion in the last 70 years and still scores poorly on Ease of Doing Business index. Indeed, India has not been a cradle of capitalism, not now, not in the past. Doing business has always been a struggle to overcome obstacles. Economic history tends to exaggerate the obstacles. Business history shows the struggle as it was, and helps us understand the struggle today.
My book is about that endeavour.

The East India Company and India: Myths and real history

Popular history and serious history do not always tell the same story. The gap is big with the British East India Company. Popular history projects an image of the Company as the “bad foreigners” who enriched themselves at the expense of the “good locals”, that is ordinary Indians who lost wealth, status, and dignity.

In Britain especially, many people believe that holding anti-Western sentiment makes them morally superior and use trashy readings of Indian history to support their biases. The Company serves that sentiment.

Answering seven questions, I set the record straight.

Was the Company a political entity?

The East India Company is often described as a political or military outfit that set out to plunder India and subjugate its people. In fact, for the first 160-170 years of its existence (the Company started in 1600, and effectively ended in 1858), it was a business firm with no power to loot. If anything, it was often bullied by Indian kings, who did not go too far because the Company was a strong power in the seas.

rowlandson1808max[1]
Tea auction at India House, London, c 1800 (source columbia.edu)

Did Indians lose from the Company’s operations?

Their vast trading operation could never have survived without the collaboration and partnership of thousands of Indian merchants, agents, artisans, bankers, and transporters. The Company was the biggest business firm in the world of its time, and therefore, made many Indians fabulously rich. Some of the most famous entrepreneurs and business families of nineteenth-century India made their money trading with the Company or with European merchants. Palatial homes in the north of Calcutta attest to that wealth. These profits were much larger in scale than the profits the Company sent back to England.

 

rajbari-2[1]
Raja Nabakrishna Deb’s home in north Calcutta (source: aamarcity.com)

Did the Company cause an economic decline in India?

Claims that the Company presided over a period of national economic decline are spurious. My economic historian colleagues (Read Broadberry-Custodis-Gupta in Explorations in Economic History, 2015) have analysed India’s income and found that it fell sharply between 1600 and 1750, when Indians ruled, stabilized and started rising after 1810 when the British had consolidated their rule.

Was the Company state the bad foreign rule?

In the 1770s, few Indians would even have seen this as a ‘foreign rule’. When the Company started sharing power in Bengal, there was no such thing as an Indian nation or Indian citizens, as the country existed as a set of kingdoms. Bengal, where Company rule began, was ruled by a Nawab who spoke Persian, not Bengali. The most powerful of these kingdoms were embroiled in near-constant warfare, which worried wealthy Indian merchants. Many saw the East India Company as their benign force and plotted with them to overthrow the state and install the Company as the ruler of Bengal.

Did Indians resent Company rule?

At the time, Indians themselves had mixed feelings about the East India Company – and many viewed their rule as the least bad option. Prior to the Company’s takeover around 1757-65, the strongest military power in India belonged to the Maratha Empire. Just before Company takeover, Maratha forces invaded Bengal, killed and robbed merchants, destroyed crops, and raped women. Merchants fled from this horror to Calcutta, then under the Company’s possession. One of the biggest roads in the city today was built over a huge barrier created in defence of the city from the Marathas, called Maratha Ditch, later renamed Circular Road.

Certainly, the average Bengali or Marwari merchant of that time would have felt positively about the Company. Similar sentiment prevailed among the Parsis of Bombay and Surat, and the Telugu and Tamil merchants of Madras. The most influential Indians in the port cities like Calcutta, Bombay, and Madras actively welcomed Company’s rule over Indian ones. Of course, merchants gained an economic advantage. But many contemporary intellectuals and reformers supported Company rule, believing that it would bring the best elements of European and Indian cultures closer to each other.

One, Rammohun Roy of Calcutta – described as the ‘first modern Bengali’ – was inspired by the great works of scholarship on Indian language, law, literature, geography, and botany produced by Europeans in East India employ. The Company’s own law courts used Sanskrit and Persian law books. Wealthy and influential Indians who supported the Company pooled money to set up colleges that taught students following western curricula. Without the Company rule, Bombay’s Elphinstone College and Calcutta’s Presidency College, two of India’s best institutions, would not exist.

Rammohun Roy
Ram Mohun Roy (1772-1833)

 

Did the Company leave a destructive legacy in India?

By the time of independence in 1947, the port cities of India and Pakistan were home to some of the best schools, colleges, hospitals, universities, banks, insurance companies, and learned societies available outside the western world. A big part of that infrastructure was created by the Indians, with help from the state and with European manpower to run them. These developments had their origin in the East India Company’s rule.

eic
Fort St George from the sea

 

What is the ‘right’ history?

Well, we cannot generalize. Some Indians gained and some lost out. Those who gained did not just gain in money. Many felt they gained because the Company and its port cities in India represented a cosmopolitan culture. Some felt freer because the interior of India was steeped in religion, feudal loyalty, and a murderously brutal caste system. Their reasons are varied and diverse. One thing is for certain – branding Indians who lived under East India Company rule as ‘victims’ is just as reductive as portraying every foot soldier of the Company as a bloodthirsty oppress

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