View: Why India may not become the next Asian economic miracle

There was a lot of buzz about how India should follow the East Asian model even before the Modi government explicitly embraced it in its latest Economic Survey, which argues that the rise of East Asian economies demonstrate that heavy investment and export manufacturing offer the clearest path for India, too, to achieve a long run of 8% growth.
It is true that Japan, South Korea, Taiwan and China invested and exported their way to prosperity. But what admirers of East Asian model miss is how alien many of its central tenets were to India’s deeply socialist and democratic culture.

Early on, when these countries were about at the same per capita income level as India is today – the East Asian economies were run by autocrats who favoured a powerful but small government focussed almost exclusively on supporting export manufacturers, which meant investing in roads and factories, not welfare for the poor and weak.

Chinese “state capitalism” promoted growth by steadily withdrawing the hand of the state from the economy, not intervening more heavily. Since the early 1980s, private Chinese companies have increased output five times faster than state companies, and have seen their share of GDP grow from 30% to 70%. When state companies stood in the way of growth, Beijing did not hesitate to cut them off at the knees. Between 1993 and 2005, Chinese state enterprises laid off 73 million people.

East Asia pursued state capitalism with a small s, embracing market forces. Asia scholar Joe Studwell has pointed out that leaders in South Korea didn’t pick industrial champions, they encouraged competition and then helped the winners become competitive in global markets. Governments helped build financial, technical and marketing skills, but even as the left-leaning Nobel laureate Joseph Stiglitz once put it, “in a way that promoted rather than thwarted the development of private entrepreneurship”.

Contrast those attitudes to India, where government is suspicious of the private sector, and elections are fought on promises of generous welfare benefits for the poor, the elderly, farmers and many others. In East Asia, welfare was conceived as a support system to keep industrial workers on the job. Helping the young, old and poor was seen as the responsibility of family, not the state. Rural workers got few welfare benefits, because the plan was to push them off the farms and into factories.

It was only after the Asian financial crisis in 1997 that Taiwan and South Korea started to shift in earnest from a “developmental” to an “inclusive” welfare model. Taiwan rolled out unemployment insurance, and South Korea extended it to rural labourers, after the crisis had passed. By then, these countries already had average incomes approaching $15,000, or nearly eight times higher than India today. In other words, they began spending on welfare for the poor and jobless only after they could readily afford it.

Today East Asia still has limited welfare systems and small government, with state spending typically around 20% of GDP – a pittance for relatively rich countries. Though India is much poorer, its government spends a similar share of GDP – and spends more heavily on social welfare. India spends around 7.5% of GDP on social assistance, or at least three times more than what South Korea was spending at a similar income level.

Compared to East Asia, particularly in its early years, India’s spendthrift government also has to borrow more, which keeps interest rates relatively high and puts the squeeze on corporate borrowers, adding to the burdens already created by heavy taxes. Taxes for large corporations are still close to 30% in India, compared to the 20% level that was common in many East Asian economies.

The East Asian model also included labour laws designed to protect corporations more than workers. The aim was not to guarantee safety or limit hours, but to give management control. In response to strikes in the 1960s, South Korean dictator Park Chung Hee imposed increasingly strict rules on unions, enforced by the police and soldiers.

In India it is companies who worry about labour law crackdowns. India tried to copy China’s free trade zones but failed to attract many investors, because its laws favour workers over capital. India has tried to encourage large manufacturers, but most prefer to stay small, because if they get big they face stricter labour rules and higher taxes.

The Modi government speaks of pushing labour and other reforms to attract investment, but it also promotes a full buffet of welfare programmes, and its latest budget reflects a commitment to continued welfarism more than new investment. Any country at India’s low per capita income level can’t afford both expansive social spending and enough investment to achieve East Asia style 8% growth.

For that, it would need more than incremental reform. It would need to roll back government, reduce taxes, cut welfare spending and reallocate funds for new roads, bridges and other infrastructure, which in turn would boost private investment. To say any of this out loud is to recognise that it’s not politically possible or even in many ways desirable. As always, India will follow its own model and, most likely, fall short of becoming the next Asian economic miracle.

(The writer is the author most recently of ‘Democracy on The Road’)