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

By: | Published: June 8, 2017 10:50 AM

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.

india's economic growth, modi's failure, india's present gdp, indian economy, narendra modi, modi's reformsThe 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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