Opinion The middle-income trap
Can India achieve prosperity in a generation? Analysis for the Emerging Markets Forum,held in Mumbai last week...
Can India achieve prosperity in a generation? Analysis for the Emerging Markets Forum,held in Mumbai last week,suggests that India could become an affluent country if it gets back to pre-crisis growth rates and then sustains them for 30 years. Some countries have followed such a trajectory notably Japan,Korea and Taiwan in recent decades. But the more common pattern is for countries to get stuck in a middle-income trap,growing rapidly for two to three decades and then stalling,as happened to Brazil and Mexico.
Whether India follows the trajectory of a Korea or a Brazil is likely to depend,in part,on how it manages inequalities. This may come as a surprise. Isnt India fairly equal by the standards of Latin America indeed,according to its household survey,more like some of the relatively equal East Asian societies? In any case,isnt the issue to solve the growth problem,and then distribute the benefits to all?
In fact,India has profound inequalities,some of which are inadequately captured by standard measures from the National Sample Survey.
Consider the following four indicators of structural inequality. First,there has been a surge in top incomes and wealth (not captured in the household survey). One measure of this is the extraordinary rise in billionaire wealth,to levels that far exceed Brazil,Mexico and the United States in relation to GDP. Second,despite decades of concerted effort,the average household spending of deprived groups notably scheduled castes,scheduled tribes,and Muslims hardly changed relative to the overall national average of household spending. Third,there has been a sharp rise in spatial inequalities,between urban and rural areas and across states. Gujarat and Tamil Nadu were around twice as rich as Bihar in 1990; they were almost four times richer by the mid-2000s. And education is becoming,or continuing to be,a major force for the reproduction of inequalities,as returns to the highly skilled soars and a significant fraction of the rural poor receive levels of education utterly inadequate for their future work-lives in the global economy. In 2008,some 44 per cent of rural children in Class 5 couldnt read a Class 2 text,according to the latest Annual Survey of Education Report.
Its easy to imagine that failures to tackle these structural inequalities could become major stumbling blocks on the path to prosperity. These are the risks:
Oligarchic capitalism: Dynamic business families,and big business houses,can be an important force for growth in developing countries,as they have been in India as indeed were the robber barons of the late-19th-century US Gilded Age,or the Japanese business conglomerates (zaibatsu) that laid the foundations for industrialisation there in the early part of the 20th century. But over the long term,there is a risk that oligarchic capitalism loses its vitality and distorts the functioning of the state through rent-seeking.
Group-based conflicts: Inter-group distributional fights can also undercut the functioning of the state and the environment for investment,both through the perpetuation of fights for government patronage as well as through the risk of outright violence whether in poor rural areas with a significant Naxalite presence or across a religious spectrum,with Hindu-Muslim tensions magnified by the South Asia context.
Deepening spatial differences: There are strong tendencies for spatial differences to deepen through the forces of economic agglomeration and institutional divergence. This is particularly a problem for India,since lagging states are also major population blocs. And this can affect national dynamics through the regional equivalent of populist policy,or through the social pressures of rising inter-state migration.
Failure of educational transformation: In the absence of the deep institutional reforms to get genuine equality of access to educational opportunity from basic to tertiary education,the system will continue to be a powerful mechanism for the reproduction of inequalities across generations. It will also fail to provide the broad skill base for broad-based industrial and services growth.
But the risks can be averted. It is also possible to imagine long-term transformational processes in each area,processes that support competitive capitalism,de-politicisation of group identity,spatial convergence driven by political and institutional change in lagging areas,and deep educational reform. To some extent separate issues,they have a common connection their links to the functioning of the state. Governance reforms,from political competition to an accountable and responsive administrative system and effective judicial system,are closely linked to specific measures to tackle structural inequalities.
If India is to undergo the transformational process intrinsic to real prosperity,tackling structural inequalities is likely to be essential. This is not a question of adding inclusion to growth. It is one of undertaking the deep institutional changes needed for long-term growth.
The author is at the Harvard Kennedy School,the Institute of Social & Economic Change,and the Centre for Policy Research express@expressindia.com
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