Thoughts on economics and liberty

India CAN’T cross over the West without fundamental reform of its governance

(I wrote a fairly longish blog post on this topic just now but because of a computer accident I've lost it all. So this will be a brief summary).

Essentially, let's first review this – something I wrote this 13 years ago, here:  

Let us assume that USA per capita income grows at 1.5%, 2%, 2.5% and 3% for the next 250 years (i.e., we have 4 different scenarios).

Given that India's per capita today is 20 times lesser than USA (in PPP terms), and we want India to catch up with USA in 50, 100, 150, 200, and 250 years, what are the growth rates in per capita we need to target in order to reach this cross-over point?
 
We have seen that growth rates of 8-9% in per capita per year are easily achievable (as China has done in the past 15 years), and given two facts:
a) We are at least as smart as anyone else, such as the Korean/Chinese
b) We have recorded all the lessons we learnt from the mistakes of these Asian countries, we can do 10-12% per year for long periods of time.
 
The question is: what is it going to take to beat the USA?
Well, here are the answers.
 
If USA per capita = 20, INDIA = 1, (using PPP), today
The table we need is:
Assumed USA growth rate
Years needed to cross over the USA 
 
50
100
150
200
250
1.5
7.8
4.6
3.6
3
2.7
2
8.3
5.1
4.1
3.5
3.2
2.5
8.8
5.6
4.6
4
3.7
3
9.4
6.1
5.1
4.5
4.2

The fundamental lesson to be learnt is that if we could do 9.4% p.a. we could catch up with the USA in ONLY 50 YEARS, even if it were growing at 3% p.a. That is out of the world, however, a growth rate of 9.4% for 50 years. Also, the USA will be unable to grow at more than 2.5% p.a. for the next 50 yrs. Therefore the target gr. rate for India, for a catch up with USA in 100 yrs, if it grows at 2.5%, is 5.6%.

 
Once more, economic theory and practice tells us that this rate is unsustainable for 100 years at a stretch. What can be done is to target very high gr. rates initially, at over 10% for about 20 yrs, and then the economy will in any case slow down, tapering off in the end to about 2% p.a.
 
[See the figures here]
 
Of course if we continue at the Socialist Growth Rate of 1.7% p.a. which we had since independence, even for another 100000 years also, we will never never catch up.
 
Today, the technology (institutional framework) needed to achieve this catch up is available with Economic science. We know that we have to set up minimally regulated markets, and encourage free enterprise, trade, and competition. We have to Banish Bureaucracy.
 
The question is essentially only one: who is going to bell the cat? It is in my self-interest and in your self-interest to only look after our own families. So, who is going to do the hard work required to reform the brilliant, but confused, Indian mind?
 
Who is going to tell the people of India that this is not a fool's fantasy – the catch up with USA, but a sheer inevitability, if we follow the lessons learnt in Economics over the past 250 years.
 
What is needed is political entrepreneurship of an unparalleled scale and magnitude.
 
Now back to today
Convergence is a simple prediction of growth models, and it has been broadly tested and found to hold. The problem is, however, that  growth rates of 10% or more are not sustainable for long without significant reform.
 
There is extensive literature on this subject, but also this recent paper by NBER (btw, if you are in India, please download and send it to me – it is free in India but costs me money to download from Australia). [When Fast Growing Economies Slow Down: International Evidence and Implications for China, by Barry Eichengreen, Donghyun Park, Kwanho Shin, NBER Working Paper No. 16919,  March 2011]
 
A recent article in The Economist summarised this paper and showed how it is almost inevitable that China will start slowing down in the coming decade. Further, I am certain that given India's extremely poor governance model, it will slow down even before reaching China's per capita GDP when it starts slowing down. India's spike in growth rates is very temporary.
 

My message for India

The 'high' growth rates seen in India today are nothing special. These should have happened anyway, 60 years ago – had the economy been let free. But unfortunately, these growth rates, attributable entirely to the 1990s reforms, are not sustainable. To reach the per capita GDP of the West (which would have further increased its GDP by then), India will need to DRASTICALLY REFORM ITS GOVERNANCE. There is simply no choice for India but to follow most of the suggestions in BFN.
 
Once again, let me repeat the same message I sent out 13 years ago: Please stand up to lead India to the future it deserves. Join the Freedom Team and prepare for a national political movement for reform. 

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