Guest post from Srinivas Thiruvadanthai, Chief Economist (Levy Forecasting Institute). These are his personal views.
BTW, I agree with your article.
Ha-Joon Chang’s previous book–The Bad Samaritans is even better. There he makes the point about how the rise of Britain was predicated on protectionism. They imposed export ban on raw wool to promote domestic garment industry. They killed their Continental competition and came to dominate the textile industry. Free market ideas came to dominate the UK discourse only after UK had achieved a dominant position in trade and wanted others not to follow their strategy. Also, some of the free market reform was driven by the desire to keep domestic wages low by driving down food prices—repeal of the Corn Law.
In fact, I cannot think of a country that has developed without following some form explicit or implicit trade protection and promotion at their formative stage. The problem in India was that trade protection was never tried with capitalism. Also, license permit raj meant that more money was made by managing the environment than by producing great goods and services. In addition, there has never been any country that developed without the active hand of the state. Britain actively encouraged piracy. They then encouraged monopolies, such as the east India Company, which worked hand in glove with the government. In the US, the apart from trade protection, you had massive infrastructure projects, the use of military threat to further business interests, the active hand of government in removal of Native Americans. The East Asians are of course legendary. Even in ancient India, the governments that delivered relatively high prosperity–for example, Cholas–taxed relatively lightly. The Cholas actively promoted trade and used their navy to protect trade interests. The Mughals on the other hand ceded naval supremacy to the Europeans and impoverished the rural population through high taxation.
In ‘Bad Samaritans’, he has a chapter there about “Lazy Japanese and Thieving Germans” which makes the point that one should be sceptical of “culture” based arguments. This is especially true for India, when people make sweeping comments about corruption, chalta hai attitude etc. being part of Indian culture. I think these are all part of the overall economic context, not part of the DNA.
Development is complex topic—it has been hijacked by two warring camps without much to offer. The first camp is caught up in worthless shibboleths like free trade, free capital markets, financial deepening, etc. The second camp is caught is anti-capitalist prejudice. Outside of East Asia there are few supporters of capitalism who are also not neoliberals.
Also, Reagan is much deified. What he achieved was modest. At least with Thatcher you could say she took some bold actions, whether for the better or worse one can debate. With Reagan, the USSR was already tottering—it would have collapsed on its own. Basically, the USSR by the early 1970s was in trouble but got bailed out by the spike in oil prices (the US also bailed them out with wheat shipments!), which helped it pay for its imports. Once oil and gold collapsed in the early 1980s, the USSR was in trouble. Reagan cut taxes for the upper end but increased social security taxes. Basically, he took regressive measures. He also sold out the blue collar “Reagan democrats” in the sense that he did nothing to stem the drain of manufacturing jobs. Lastly, he pandered to the racists—he started his campaign from Neshoba County Fair in Mississippi, where civil rights workers had been lynched, talking about states’ rights. He also resisted sanctions against South Africa and awarding a holiday in memory of Martin Luther King.
Thatcher, unlike Reagan, was actually intelligent and at least prescient with regard to the euro or the European Project in general.
Coming to India, the import elasticity of demand is greater than 1. So, whenever we get strong GDP growth, imports grow even faster. We have to finance that import or at least have exports grow rapidly enough that the current account balance remains manageable. In a world of weak growth in developed markets and every country trying to grab export share, how exactly is India going to do that? India needs to find ways urgently to reduce its import intensity. Until then, our growth will be constrained by the BoP. What used to be called the BoP-constrained growth is a reality for India now.