The Persistence of Growth

THE YEAR WAS 1958 AND THE AMERICAN economist Walt Whitman Rostow was lecturing a Cambridge audience about the ingredients that make countries wealthy. He had a famous five-stage theory of economic “take-off” where societies progress from being “traditional” all the way to “high mass consumption” populations. In Rostow’s world, economic institutions made all the difference. It made sense. The year 1958 was one of the dangerous years of the Cold War and two years later, Rostow would go on to become America’s first deputy national secu­rity advisor. Any government in the decolonised countries that was left-leaning, and in favour of nationalising resources and institutions, was considered unacceptable to the “free world”. The five stages theory, irrespective of its economic content, provided a neat ideological gloss for the time.

But time is cruel. Forty-three years after Rostow’s neat economic map, Daron Acemoglu, Simon Johnson and James A Robinson, this year’s winners of the Bank of Sweden Prize in Economic Sciences (the economics Nobel), pub­lished a landmark paper ‘The Colonial Origins of Compara­tive Development: An Empirical Investigation’ that exam­ined the long-term forces that lay behind relative prosperity and poverty. It remains one of the most-cited papers in the history of economics. The trio made a case for the quality of economic institutions as a determinant of economic growth (per capita GDP). Good-quality economic institutions include protection of private property and enforcement of contracts, among others. Those countries that possess, or acquire, these institutions do well. Those that do not, remain mired in multiple problems, including poverty.

But then, the three laureates went further and argued that these institutions, in turn, were determined by the quality of political institutions. Countries where political power was concentrated—authoritarian countries, dictatorships and other political pathologies—witnessed economic stagnation while those where political power was “dispersed”, prospered. This argument was made 11 years after the ‘Colonial Origins’ paper in Why Nations Fail, written by Acemoglu and Robinson and pub­lished in 2012. Concentrated political power leads to “extractive institutions” where a small group of people who wield power end up getting the most in an economy. Dispersed political power leads to “inclusive institutions” where the benefits of economic growth accrue to a much larger set of people. Coun­tries with inclusive political institutions are more prosperous in the long run.

The claims made in Why Nations Fail did not go unchal­lenged. In one critical review, former Chief Economic Advisor (CEA) Arvind Subramanian questioned the link between politi­cal institutions and economic growth. His examples were China and India. Sub­ramanian, in an article published in Ideas For India, proxied political institutions by using Polity IV rankings for China and India. These rankings are a measure of how democratic or autocratic a country is. He then went on to plot these rankings against per capita GDP at purchasing power parity (PPP, log scale) as a proxy for economic development. Unsurprisingly, China and India were outliers. China, with its authoritarian system exhibited strong economic development while India with its robust democracy was not doing as great as a democracy should have (see Figure 1).

The reality, as always, is more complicated than clever and sophisticated analyses outlined at any particular time. What is the situation today more than a decade after Subramanian sketched his criticism in 2013? One can play devil’s advocate from the same liberal perspective that Subramanian has. India’s democracy rankings have steadily collapsed since 2014 to the point that it is no longer classed as democracy by the most influential political rankings (V-Dem Institute and Freedom House, to cite two) and China’s economy has seen mounting troubles to the point that its GDP growth has gone down from 7.8 per cent in 2013 to 5.2 per cent in 2023 (World Bank data). At one time even the talk of a consumption stimulus was heresy for China’s rulers; they recently adopted a modest programme for that purpose. One could say both developments were foreseen by Subramanian and go against what was claimed in Why Nations Fail.

To parse India’s story along a single dimension is likely to lead to misleading conclusions. Economic institutions matter but political institutions matter even more

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But is this true? Consider India. A look at Figure 1 suggests something else. If India’s democracy rankings have indeed collapsed over time, it should have seen a sharp downward movement in India’s position in the graph in the south-west direction from its current position. India’s economy has in­deed seen a wobble over the past two decades but its per capita income has grown by 1.7 times since 2013 (in current dollar terms, World Bank data). One can question this conclusion as Subramanian uses the log per capita GDP PPP scale and that poses questions of comparability. But the trend is unmistak­able and runs counter to the “democratic collapse” theory: India’s democracy has, allegedly, eroded on paper but its per capita income continues to go up, not sharply like that of China in an earlier age but in a typically muddled Indian fashion. This is not the story of democratic collapse. In India democracy matters for the economic fortunes of every­one, from the rich to the poor, for whom free government foodgrains make all the difference. A more plausible story is that India’s economic growth has seen large swings recently due to a combination of tax reforms (GST in 2017) and the pandemic (2020-22). Political variables do not enter the equation here, at least in the short run.

In China’s case, there indeed has been a sharp downswing in its econom­ic fortunes and that period roughly coincides with the rise of Xi Jinping who has concentrated power even fur­ther in an already authoritarian system. It is interesting that in their response to Subramanian, Acemoglu and Robinson noted that China grew rapidly during a period of power vacuum and political infighting in the Chinese Communist Party (CCP); it has decelerated at a time when one man commands the destiny of that country. Their original claim, that political institutions determine whether growth creating economic institutions can be sustained, remains robust, even in the case of alleged outliers like India and China.

So what explains the Indian puzzle? One answer, one which critics have not noted, was provided by Acemoglu and Robinson seven years after Why Nations Fail, in a 2019 book, The Narrow Corridor: States, Societies and the Fate of Liberty. This book has a chapter on the “Indian exception” so to speak. The two write: “[W]hen democracy arrived after independence, castes defined the battle lines for political competition and sapped the energy of democratic competition… caste divisions made it impossible for society to get organized beyond the existing social hierarchy, keep politicians accountable, or induce the state to serve the people. Instead, caste politics often further eroded state capacity, as we have seen in Bihar.”

This story can be told in one picture (see Figure 2). India lies in a region where society is more powerful than the state. This might sound incredible to many observers given the vast developmental and coercive powers of the Indian state. But when seen from the perspective of the regular legitimation exercise through elections—an annual feature at some level or the other—there is very little governments can do: they have to listen to voters who often vote along lines of group identities, the bane of caste per Acemoglu and Robinson. Other economists have sliced and diced group identities along different lines—farmers, government employees, urban poor and others—and have come to essentially the same conclu­sion: after these groups have been “placated” there is precious little left to invest for growth. This was, at least until very recently, the state of affairs in the country. Even today, a large fraction of the Union Budget has to be devoted to “placating” one group or the other and when one goes down to the level of states, almost entire Budgets are consumed by keeping these groups happy in an increasingly anarchic democracy.

So what explains the continuing persistence of growth? There are several parts to the answer. Urbanisation has lessened the burden of caste to a great extent and urban voting patterns are different from those seen in rural areas. Urbanisation also allows for economies of agglomeration, impossible in rural areas. But there is another force at hand: increasingly, many of these caste divisions have been weakened by a super-ordinate identity: politics based on religious identity. That allows breath­ing room for the state to focus on development—investment in infrastructure and public goods—even as the need to spend vast sums, regularly, goes down. This keeps the growth engine humming at a speed that many countries can only envy. India is a complicated country and to parse its story along a single dimension is likely to lead to misleading conclusions. But through the thick-and-thin of its muddled existence, democra­cy has served India well and that part of the Acemoglu, Johnson and Robinson story shines through. Economic institutions matter but as any careful observer of the Indian situation can tell, political institutions matter even more.

The three laureates combine a rare trait that was once considered the hallmark of good economics: a combination of good theorising, an eye for data, and good intuition. ‘Colonial Origins’ and the two books are justly famous and have reached a wider audience. But there are dozens, if not hundreds, of papers on topics as diverse as growth theory, formation of coalitions in democracies and non-democracies, potential of artificial intelligence (AI) and labour economics, to cite a random sampling of topics. Specialisation in a single such topic with even a handful of papers would be an achievement for any economist. This combination of path-breaking papers in so many areas lifts Acemoglu, in particular, far above the ruck of an ordinary economist.

Without downplaying the achievements of other laureates over time, one can safely say this year’s economics Nobel shines far brighter than any given in a while. This has bred anger and reaction against them, Acemoglu in particular. This stems from the utter inability of contemporary economists to even acquire so many skills, let alone blend them in an imaginative way. Over and above that, all three laureates are exceptionally well-read and informed about the nuts and bolts of the history of many countries individually. This has provoked historians and other social scientists as well. This was bound to stir envy.

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Siddharth Singh

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