Why did India's growth accelerate so much in the 1980s? And was there a sense in which India's rapid growth in the 1980s was 'unsustainable' while growth in the 1990s was 'sustainable'? Rodrik and Subramanian don't think their critics have put their finger on it:
IMF Staff Papers - Volume 52, Number 2, 2005 - Reply to Comments by T. N. Srinivasan by Dani Rodrik and Arvind Subramanian: Since our discussant's intemperate remarks risk detracting attention from the interesting questions at hand, let us try to clarify where the important disagreements are so that the reader can make up his or her own mind.
First, it is worth listing the areas of agreement. Our discussant does not deny any of the following important points we make in the paper:
(1) India's economic growth rate rose significantly around 1980, and the pace of economic expansion and productivity increase during the 1980s was on the whole indistinguishable from that experienced during the 1990s. (This may have been well known to economists in India, but it certainly has not been common knowledge among reasonably well informed analysts of economic growth and economic reform elsewhere.)
(2) India's major liberalizing reforms came after 1991. Before that date, India was a practically closed economy.
(3) While there was some liberalization during the latter part of the 1980s, it was not significant enough to have been the driving force behind the higher growth of the 1980s.
(4) Manufacturing played a key role in the increase in growth in the 1980s.
(5) The quality of India's institutions can support a much higher level of income than what the country had until recently.
Our discussant's main argument is that growth during the 1980s was driven by fiscal expansion and hence is unsustainable. We did discuss this possibility in our paper and found it wanting. Briefly, we argued that the demand-pull argument is inadequate to explain the large increase in trend productivity, even under the most favorable circumstances for that argument. The rise in capacity utilization, such as it was, cannot explain more than part of the increase in labor or total factor productivity. We can adduce additional evidence to support our point of view. Consider the Latin American experience prior to the 1982 debt crisis. Fiscal-expansion-led growth there hardly produced an increase in productivity growth.
Moreover, we do not consider India's 1991 balance of payments crisis to constitute compelling evidence that the growth of the 1980s was unsustainable. Countries can make macro policy mistakes both when they are stagnating and when they are growing rapidly. Once more, comparative evidence is useful: How many analysts seriously believe that the Asian financial crisis of 1997–98, arguably much bigger in magnitude than India's in 1991, proves that the rapid growth of Republic of Korea, Thailand, Malaysia, and Indonesia in the decades prior was unsustainable? And we have seen few analysts arguing that the crises in Latin America (Mexico in 1994, Argentina in 2000, or Brazil in 1998–99) call for a change in the market-based reforms preceding the crises on the grounds that they were unsustainable!
In any event, the case that growth in the 1980s was fiscally driven and unsustainable needs to be made; it is not enough to assert it. Indeed, it would have been extremely useful if the discussant had discussed why our methodology for demonstrating that growth in the 1980s was not fiscally driven was flawed or inadequate. We suspect that there is a tendency to dismiss the growth of the 1980s because it makes the subsequent reforms less impressive ("since the system was not reformed, any growth that came out should have been unsustainable—i.e., bad growth"). But that would be just ideology, not analysis.
We also need to correct a misunderstanding. We did not argue that the attitudinal shift of the early 1980s led to a "once-and-for-all" increase in growth. We argued that the attitudinal shift was a plausible reason for the increase in growth during the 1980s. We explicitly mentioned the possibility that, without the reforms of the 1990s, growth might have petered out.
We are puzzled by the discussant's claim that the distinction between promarket and probusiness policy orientations is incoherent. It seems to us that the distinction is analytically quite clear, and in practice quite useful. Suharto's economic policies were probusiness, but hardly promarket. We made clear that policies that would help incumbents without allowing newcomers to share in the increased profitability would count as probusiness rather than promarket. We do not disagree with the discussant's point that "any policy ... which raises the profits of incumbents also raises that of potential entrants, if allowed to enter" (our emphasis), but we maintain that it is possible to enhance incumbents' profits without allowing entry (a possibility that the discussant himself allows with his qualifier).
Finally, the discussant takes issue with us for not providing any direct evidence for the attitudinal shift on the part of government toward the organized private sector. We would be the first to agree that our explanation is speculative and based (necessarily) on indirect evidence. But let us also be clear that we were driven to this hypothesis by the paucity of other plausible stories. The increase in growth is too large to attribute exclusively to the minor tinkering in policies (regulatory or fiscal) that took place at the time.
In his recent book The World is Flat, Thomas Friedman reports an interview with Tarun Das, who was the long-time director of the Confederation of Indian Industry. After detailing the cumbersome bureaucratic rules and pervasive state ownership that suffocated the Indian private sector, Das says this about the 1991 reforms:
'Our Berlin Wall fell,' said Das, 'and it was like unleashing a caged tiger. Trade controls were abolished. We were always at 3 percent growth, the so-called Hindu rate of growth—slow, cautious, and conservative. To make [better returns], you had to go to America. Well, three years later [after the 1991 reforms] we were at 7 percent rate of growth.' (Friedman 2005, p. 50)
Das's comments as well as Friedman's unquestioning acceptance of them reveal how widespread is the erroneous view that links India's growth since the early 1980s to the liberalizing reforms of 1991. They underscore the need to open up the debate on the origins of India's exceptional performance.