1. As India’s economic growth stumbles, Modi has failed to live up to his promise as an economic modernizer

As India’s economic growth stumbles, Modi has failed to live up to his promise as an economic modernizer

No country has more potential for the improvement of the human condition than India. Home to more than 1.3 billion people and soon to overtake China as the world’s most populous country, India is also still desperately poor -- its gross domestic product per capita is less than $6,000 in purchasing power parity terms, less than half that of China and barely a tenth of the US.

By: | Published: June 8, 2017 10:50 AM
india's economic growth, modi's failure, india's present gdp, indian economy, narendra modi, modi's reforms The real question is, why did analysts and the economics press have such high expections for Modi in the first place? (Reuters)

No country has more potential for the improvement of the human condition than India. Home to more than 1.3 billion people and soon to overtake China as the world’s most populous country, India is also still desperately poor — its gross domestic product per capita is less than $6,000 in purchasing power parity terms, less than half that of China and barely a tenth of the US. So it’s disappointing to see its high-profile prime minister, Narendra Modi, failing to live up to his promise as an economic modernizer. As Bloomberg View’s Mihir Sharma reports, employment growth has slowed to a crawl. Many fewer Indians are employed in the formal sector than in the early 2000s:

Meanwhile, India’s economic growth has stumbled in recent months. And Modi’s attempt at reducing the use of cash in the country’s economy appears to have backfired. Some economists suspect the integrity of India’s economic statistics to be slipping. And though the prime minister has made some improvements to infrastructure — a long-standing sore spot in India — it remains to be seen how consequential those will be.

But to be fair, few leaders are visionary reformers. The real question is, why did analysts and the economics press have such high expections for Modi in the first place? Part of it might be a sense of momentum — a feeling that India’s recent success in enacting economic reform and boosting growth rates would continue. But I suspect that part of it was due to Modi’s somewhat authoritarian approach to governance. Modi is no dictator, but he seems to be taking a more heavy-handed approach to policy making. That kind of flexing of executive power is probably taken as a positive sign by many economists who, despite evidence to the contrary, remain enamored of the idea of an enlightened despot forcibly modernizing a poor country’s economy.

The idea of a beneficent autocrat isn’t new — it dates back at least to Plato’s idea of “philosopher kings.” Nowadays, the idea is often implicit in economists’ models. With some noted exceptions, most theories focus on efficiency, rather than social welfare. There is often little discussion of what types of political mechanisms might lead to those efficient policies — it’s sort of assumed that good policies just happen by fiat.

Those economists who do think about how to make policy work in practice often run into the problem that there’s no perfect system for giving people what they want. The great economist Kenneth Arrow concluded that under certain reasonable conditions, it’s impossible to create a democratic system that reliably maximizes human welfare in every situation.

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That result seems to leave open the tantalizing possibility that a benevolent dictator could solve the problem. Economists themselves have often been optimistic about dictators who seemed to want to push their countries toward better economic policies. The Nobel Prize-winning economists Milton Friedman and Friedrich Hayek expressed optimism about the economic policies of Chilean dictator Augusto Pinochet, who ruled that country from 1973 to 1990. And many Chilean economists who had studied in the U.S. eagerly offered Pinochet their advice.

To this day, some people still believe that Pinochet’s free-market policies created an economic “miracle” in Chile. In actuality, the dictator’s record was somewhat underwhelming. Here’s a picture of how Chile’s real per-capita GDP has grown during the past few decades:

During Pinochet’s 16 1/2-year term as president, real per capita income grew at a rate of a little more than 2 percent a year — about the same as an advanced economy like the U. S., which in theory should grow more slowly. But in the 16-year period after Pinochet’s exit and the restoration of democracy, growth doubled to about 4 percent a year. That’s hardly a stellar result for enlightened despotism.

That’s just one example, but the evidence of history confirms the disappointing performance of dictators. A recent paper by top economists Daron Acemoglu, Suresh Naidu, James Robinson and Pascual Restrepo estimates that switching from authoritarian government to democracy tends to increase a country’s economic growth rate by around 20 percent.

The biggest exception to this rule, of course, is Chinese leader Deng Xiaoping. Deng, who crushed the pro-democracy protests in Tiananmen Square in 1989, was unquestionably a heavy-handed despot. But under his iron fist, China made free-market reforms and opened its economy to the world, paving the way for one of history’s greatest bursts of economic development.

But even in the case of Deng, it’s crucial to note that his rule followed that of an even more powerful despot, Mao Zedong, whose catastrophic policies shattered the Chinese economy and starved tens of millions of people to death. That illustrates one of the key truths about tyranny — there’s no way to ensure that you get the enlightened kind. Because authoritarian rulers have little check on their power, the country is subject to their whims. Sometimes those whims produce spectacular results, but as Acemoglu et al.’s research shows, on average they do more harm than good.

So poor countries like India should resist the authoritarian temptation. Instead of investing their hopes in strongmen, developing nations should stick to pushing smart reforms through the democratic process. Actually, that’s good advice for developed countries as well.

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  1. M
    Jun 12, 2017 at 12:39 pm
    Demonetisation was a biggest fraud of this govt. Their only intension was to win all elections by any means in which they succeeded also. To give an example modi himself said in the u. P. election if his party comes to the power farm loans will be waived. I was shocked to hear this. Simply because all the other states will ask for the waiver and the same is happening now. It is a catch 22 situation for modi because if the farm loans are waived of all the states economy will stumble and if not waived law and order situation will arise. Besides I. T., telecoms,power steel, banking all are bleeding badly. Forget gdp which is manipulated by change of formula, increasing public spending look at gva which is down 7 points down from 10.7 to 3.7 . Where are reforms like uniform civil code, lokpal, hum do hamare do, ease of doing business, state govt corruption politics etc. Whatever now no reforms will help this govt oh sorry us (common man). Our country will slid down to recession.
    1. S
      Jun 9, 2017 at 12:56 am
      India was actually high on "Crony capitalism" where ambani's birlas tatas adanis mahindras would "never" default irrespective of their business module. Since I lived in US for 10 years and then returned home... I am okay with our NPA's figure of 10 lakh crore rupees... atleast rajan had balls to tell the truth to indian people whether they like it or not. Look at vijay mallya.... look at bollywood stars, cricketers, vijay mallya.... realty developers who makes crores and dont bother to pay taxes or have keep their money in tax haven all this has to go today. New India under modi is high paying jobs for each one of us those who are qualified for providing their premium services of lawyers, doctors, scientist, engineers and offcourse true capitalistic society is the one where there is credit flow to those entrepreneurs who plays by the fair rule like what usa corporation has... each one of those entrepreneurs has created wealth by sel their products which are tangible in nature.
      1. V
        Virender Sehwag
        Jun 8, 2017 at 3:19 pm
        Bloomberg articles sell only Modi products. But this article is from Su Swamy
        1. S
          Jun 8, 2017 at 2:30 pm
          This is classic Mihir Sharma... he was so a scared of putting his name on the article... used subterfuge hiding behind Bloomberg
          1. T
            Jun 8, 2017 at 12:58 pm
            Modi has tightened Bloomberg's s somewhere ! The puppets and just writing what their masters seek to read ....
            1. P
              Jun 8, 2017 at 12:46 pm
              Not a convincing news item - did not really expect this from Bloomberg. This is just a contrarion call and he just one another Modi bashing! Hope enlightenment happens for the writer.
              1. Harvinder Maini
                Jun 8, 2017 at 12:28 pm
                This is what Modi a modern day CHANAKYA and his capability. Only shouting, abusing, lengthy falls statements and promises, but nothing productive on ground level
                1. Jayasankar
                  Jun 8, 2017 at 12:02 pm
                  You last Paragrapgh ssaying India is Poor Country is Wrong. India is Rich country with Poor people to an extent. India remained poor till 2014. 60 Years of corrupt rule had rotten the very root of our Economy.. People were kept in the Dark. Corrupt Media supporting Most Corrupt rule India had ever seen , since Independence;; Entire Congi machinery was corrupt. to repair all these thing it will take at least 5 years for any HONEST AND CLEAN PM.. if you house is not cleaned for years and rotten smell is coming , will till not take days to clean it?, then what about Huge nation like India. Please stop writing such things. It clearly shows you are a Press ute and Sold media. PM Modiji is the best PM we had ever seen. He should be given another madate in 2019 to bring back richness of nation . till then please support this Govt not the Corrupt and Robbers
                  1. Umeshchandra Mishra
                    Jun 8, 2017 at 11:56 am
                    The author seems confused about what he wants to state. It is well known that in a federal democracy it is not easy to push through policies as in aauthoritarian regimes. The author concludes that Modi has failed to live upto eexpectations. Just because the latest GDP data was below expectations. Some effect of note ban was expected and govt was prepared to take the risk of temporary low growth for a larger objective. The so called experts are themselves no more than astrologers, they predicted a better growth ! Its very easy fornthese arm chair experts to pontificate after the event !
                    1. Dr Maxwel
                      Jun 8, 2017 at 11:51 am
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                      1. Satish Chandran
                        Jun 8, 2017 at 11:36 am
                        true comments ... nonperforming ... dictactorship ...powering government
                        1. R
                          Jun 8, 2017 at 11:32 am
                          You can blame the Modi government for some things but please don't try to politicize India's growth. You pick any economic report by the IMF or World Bank or the Indian statistics service, you will realize that growth has only slowed for this quarter, with India retaining the tag for the fastest growing economy next quarter. And now that India's macroeconomic fundamentals are strong, India is predicted to get sustainable economic growth between 7-8 for the next decade
                          1. Ramakrishna Malya
                            Jun 8, 2017 at 11:25 am
                            yes, did not win in that one
                            1. R
                              Jun 8, 2017 at 11:18 am
                              Article is comparing an elected leader of world's biggest democracy with the dictators like Stalin & Deng , ironic and strange, this is seemingly biased and politically motivated.
                              1. C
                                Jun 8, 2017 at 11:04 am
                                Mihir is biased and his views are worthless
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