Recipe for growth

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Recipe for growth

Business Standard / New Delhi April 27,2004

The World Development Indicators, 2004, recently released by the World Bank, shows that the proportion of people living in absolute poverty in developing countries has almost halved in the 20 years between 1981 and 2001, from 40 per cent to 21 per cent of the global population. Rapid development in China and India has been the main reason for the improvement.

However, development has been very uneven, and while progress in reducing poverty has been extraordinary in East and South Asia, there hasn’t been much improvement in Latin America, while poverty levels have actually increased in sub-Saharan Africa.

The question that naturally arises from the experience of these 20 years is a simple one — what were the factors that enabled China and India to lift so many people out of poverty in so short a time?

The answer, of course, is economic growth. While China has been able to record growth rates rivalled only by Japan in the 1960s, India has been able to put its “Hindu rate of growth” behind it, and notch up GDP growth rates of around 6 per cent on an average.

What’s also crystal clear is that both China and India, the former far more than the latter, have opened up their economies over the period, freed the private sector, and embraced globalisation. The World Bank’s findings are, therefore, a ringing endorsement of liberalisation.

At the same time, a more nuanced reading of the record will show that merely liberalising the economy may not be enough. Political stability is important, a fact brought out clearly in many African countries. If the ruling class is predatory, engaged only in primitive accumulation, there’s little scope for development for the masses.

This would also explain to a large extent the rise of poverty in the former Soviet Union. The example of Russia also shows that too rapid a transition may also create problems.

As a matter of fact, a close look at both the Chinese and Indian economies shows that liberalisation has been gradual and calibrated — Indian customs duties are still very high and China became a member of the World Trade Organisation only recently. Many Latin American economies, in fact, are far more open, and yet haven’t been able to do well.

As a matter of fact, many economists now say that opening up the capital account too early could make a developing country vulnerable to hot money flows. Nor is size an issue — although India and China are both large countries, the South-east Asian nations are not, while a large country like Brazil has not been able to show robust growth.

The evidence seems to suggest that while a host of factors are important for growth — infrastructure, building skills, health, literacy, foreign investment — there is no magic bullet. Both India and China have certainly not reduced poverty by following a textbook approach. Rather, they have been able to take their own routes to reform.

The World Bank figures prove once again that while liberalisation and globalisation are powerful tools for development, countries need to learn how to use them.


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