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(03/29/2006) Prestowitz in the Singapore Business Times

Business Times (Singapore)

Copyright 2006 Singapore Press Holdings Ltd

March 29, 2006

How democracy works for India's economy

Political freedom moderates the tempo and direction of economic reform
Yogi Aggarwal

INDIA'S noisy and sometimes messy political system has been something of an enigma for most outsiders. How can such a poor country, with so many languages, religions, mix of races and cultures remain a democracy when in most other developing countries in the world some form of authoritarian government prevails?

The answer to that is simple - if India hadn't provided the safety valves of protest and correction in policy that a vibrant democracy offers, it wouldn't have survived as one country. The wisdom or self-interest of the early leaders and subsequent politicians lay in realising this.

The related question of whether the economy would have grown at a faster pace in the absence of democracy is a little more complicated. The tradeoff between democracy and economic growth has been debated for half a century. The erstwhile Soviet Union under Stalin could grow faster but only at a great cost to its people. Later there was a similar tradeoff in East Asia when an emphasis on discipline rather than democracy was associated with the enormous success of the East Asian economies in the 1960s and 1970s.

But some economists don't think there is a link between a lack of democracy and economic growth. Nobel laureate Amartya Sen maintains in a recent essay: 'There is, in fact, no convincing general evidence that authoritarian governance and the suppression of political and civil rights are really beneficial to economic development. Indeed, the general statistical picture does not permit any such induction.'

Former World Bank economist Joseph E Stiglitz goes further: 'Experience over the past 45 years demonstrates that democracies are much more likely than other forms of government to enjoy stable and sustained growth, enabling them to accumulate assets and generate wealth more rapidly. This holds true in the developing world.'

So in what way has democracy in India impacted its economy? For much of the first three decades after Independence, the Indian economy grew at what is derisively known as the 'Hindu rate of growth' of between 3 and 3.5 per cent. This was the era when the dominant model was of import substitution, of the public sector controlling the 'commanding heights' of the economy and when businessmen were treated with suspicion and hamstrung with a plethora or regulations under the loathed 'license raj' system.

Despite these drawbacks, related to economic policy rather than the demands of democracy, there were some real benefits. Amartya Sen's essay reveals: 'In the terrible history of famines in the world, no substantial famine has ever occurred in any independent and democratic country with a relatively free press. We cannot find exceptions to this rule, no matter where we look.

'China, although it was in many ways doing much better economically than India, still managed to have the largest recorded famine in world history (in 1958-61). Faulty governmental policies remained uncorrected for three full years because there were no opposition parties in parliament, no free press, and no multiparty elections.'

Growth by way of democracy

The Indian democratic system has responded to perceived needs and demands of its poor population in some unique ways. One is by subsidising essential needs. Subsidies on food, fertilisers and electricity consume over 500 billion rupees (S$18 billion) of government revenue. They are thought to be populist measures but to remove them entirely would not be tolerated by the political class since their removal would lose votes.

All that can be hoped for is better targeting of the subsidy to only reach those who need them. A similar argument holds for rural credit. This needs 1.75 trillion rupees, is expensive to administer and recovery is not always easy. But any talk of cutting down on this would only lead to great hardship to farmers leading to suicides as happened in recent years.

Two other recent initiatives, one aimed at building rural infrastructure and the other for a rural employment guarantee scheme are being implemented because the ruling coalition doesn't want to repeat the mistakes of its predecessor.

Reforms, because they don't address the problems of the poor, are seen as elitist leading to a change of government in an election. Three state governments that were seen as active reformers by international agencies and global media - the TDP led by Chandrababu Naidu in Andhra Pradesh, Congress government led by Digvijay Singh in Madhya Pradesh and the Congress led by S M Krishna in Karnataka - were defeated in the 2004 elections. So was the BJP led alliance defeated at the centre.

An analysis of the 2004 election in a National Election Survey conducted by the New Delhi based Centre for the Study of Developing Societies (CSDS), goes into how reforms are perceived. Three-fourths of poor/very poor felt that their economic condition had deteriorated or remained same over the past five years, while 31 per cent of the middle classes and 39 per cent of the upper classes saw an improvement.

Market-led growth has a tendency to exclude the poorer sections and socially backward groups on the whole, while the benefits disproportionately go to those who are in a position to take advantage of the reforms. It has been observed that people who are excluded by the economics of the market are included by the politics of democracy. Says one observer: 'We are living in a peculiar situation where the masses want democracy while the elite are ambivalent about it.'

So democracy does moderate the tempo and direction of economic reform. There was a time when India's democracy was treated with condescension. Now as economic growth touches 8 per cent and likely to stay around that level India democracy is being seen as leading to stability.

For instance, Simon Jenkins wrote earlier this month in The Sunday Times from London: 'In India this process has been slower (than China) because democracies throw up barriers to unwelcome change. Yet such resistance is also a safety valve, democracy's way of regulating change. Democracy is not just a good in itself but a means of guiding change. It may take longer to effect change than in China, but in time the tortoise does overtake the hare.'

Long-term stability

This view has begun to be expressed in influential American circles. Before George Bush's visit to Delhi earlier this month, Clyde Prestowitz, President of the Economic Strategy Institute, said that although China is far ahead of India, with an economy that is twice as large and growing faster, it has vulnerabilities over the long term.

He wrote: 'The same lack of the rule of law and due process that allows it to quickly bulldoze homes for skyscrapers, for example, has also led to corruption, rising inequality and social unrest. And although India's democratic system can be cumbersome and slow, it is stable.'

And, senior editor Farid Zakaria wrote in Newsweek: 'If you ask the question 'What will India look like politically in 25 years?' we know the answer: like it does today - a democracy, probably with a coalition government. Democracy makes for populism, pandering and delays. But it also makes for long-term stability.'

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