Learning from the Indian Economic Legacy of Third World to First
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Rise of an economic power
Following independence, India was in chaos. Reeling from a bloody partition that killed between 500,000 and 2 million people, and uprooted an estimated 15 million more, it was synonymous with poverty.
Average life expectancy in the years after the British left was just 37 for men and 36 for women, and only 12% of Indians were literate. The country's GDP was $20 billion, according to scholars.
Fast forward three-quarters of a century and India's nearly $3 trillion economy is now the world's fifth largest and among its fastest growing. The World Bank has promoted India from low-income to middle-income status -- a bracket that denotes a gross national income per capita of between $1,036 and $12,535.
Literacy rates have increased to 74% for men and 65% for women and the average life expectancy is now 70 years. And the Indian diaspora has spread far and wide, studying at international universities and occupying senior roles in some of the world's biggest tech companies, including Google chief executive Sundar Pichai, Microsoft CEO Satya Nadella and Twitter boss Parag Agrawal.
Much of this transformation was prompted by the "pathbreaking reforms" of the 1990s, when then Prime Minister PV Narasimha Rao and his Finance Minister Manmohan Singh opened the country to foreign investment after an acute debt crisis and soaring inflation forced a rethink of socialist Nehru's model of protectionism and state intervention.
The reforms helped turbocharge investment from American, Japanese and Southeast Asian firms in major cities including Mumbai, the financial capital, Chennai and Hyderabad.
The result is that today, the southern city of Bengaluru -- dubbed "India's Silicon Valley" -- is one of the region's biggest tech hubs.
At the same time, India has seen a proliferation of billionaires -- it is now home to more than 100, up from just nine at the turn of the millennium. Among them are infrastructure tycoon Gautam Adani, whose net worth is more than $130 billion, according to Forbes, and Mukesh Ambani, founder of Reliance Industries, who's worth about $95 billion.
But critics say the rise of such ultra-wealth highlights how inequality remains even long after the end of colonialism -- with the country's richest 10% controlling 80% of the nation's wealth in 2017, according to Oxfam. On the streets, that translates into a harsh reality, where slums line pavements beneath high-rise buildings and children dressed in tattered clothes routinely beg for money.
But Rohan Venkat, a consultant with Indian think tank Centre for Policy Research, says India's broader economic gains as an independent nation shows how it has confounded the skeptics of 75 years ago.
"In a broad sense, the image of India (post independence) was that it was an exceedingly poor place," said Venkat.
"Certainly the image of India (to the West) was heavily overlaid by Orientalist tropes -- your snake charmers, little villages. Some of these were not entirely off the mark ... but a lot of it was simple stereotyping.
Since then, India's trajectory has been "exceptional," Venkat said.
"To witness the largest transfer (of power) from an elite ruling the state, to now becoming a complete universal franchise ... we are looking at an incredible political and democratic experiment that is unique."
Lessons India also learned from Singapore
This also reminds me of when I grabbed a copy of From Third World to First by the late Lee Kuan Yew. One of the many chapters talked about India. Chapter 25 is called "South Asia's Legends and Leaders". It would be an interesting read to see how Lee's legacy even affected India. Some can say Singapore opened to foreign direct investments (FDIs) because they have little to no natural resources. India is a country rich in natural resources but why was it left behind? The answer was Jawaharlal Nehru's protectionist regime.
Page 406-407 discuss the meeting of Lee with Indira Gandhi:
Indira Gandhi lost the election of 1977 but was resturned to power in 1980. When I met her at the Commonwealth Heads of Government Regional Meeting (CHOGRM) in Delhi in September 1980, she had lost some steam. India's basic policies had not got off the ground. Its alliance with the Soviet Union prevented any close collaboration with the United States and Europe. This, plus a system dominated by inefficient state enterprises, not many private sector entirpsies, and little foreign investment had made India's economy limp along. Its achievement was to feed its huge population growing faster than China's.
Pages 409-410 discuss the meeting of Lee with the late Narasimha Rao who died in 2004. This was a turning point in Indian history when they decided parliamentary wasn't enough. They needed to open the country more to FDI:
In 1992, Narasimha Rao’s minority Congress government was forced to change India’s economic policies radically to comply with an IMF rescue package. Rao got on well with my prime minister, Goh Chok Tong, when they met at the Non-Aligned conference in Jakarta in 1992, and persuaded him to visit India with a delegation of Singapore businesspeople. His finance minister, Manmohan Singh, and his commerce minister, P. Chidambaram, visited Singapore to brief me on their changes in policy and attract investments from Singaporeans. Both ministers were clear on how to improve India’s economic growth and knew what had to be done. The problem was how to get it done with an opposition that was xenophobic on free enterprise, free markets, foreign trade, and investments.
Rao visited Singapore in September 1994 and discussed India’s opening up with me. The most difficult obstacle, I said, was the mindset of Indian civil servants toward foreigners-that they were out to exploit India and should be hindered. If he wanted foreign investments to flow into India freely, as in China, they must change their mindsets and accept that it was their duty to facilitate, not regulate, the activities of investors. He invited me to visit India for a brainstorming session with his colleagues and his top civil servants. In January 1996, I visited Delhi and spoke to his civil servants at the India International Centre, and also to businesspeople from their three chambers of commerce, on the obstacles that blocked India’s path to higher economic growth. In a separate one-on-one meeting with Rao, he acknowledged that age-old fears of Indians that economic reforms would lead to unequal distribution of wealth had made it difficult for him to proceed with further changes. He had injected large amounts of money to benefit the people but had been accused by his opposition of selling and mortgaging the country. He highlighted two social issues: India’s slow rate of public housing because funds were lacking and its high birth rate. He wanted my prime minister to help him in his housing program. I had to dampen his high expectations that because of our successful housing program we could solve India’s housing problems. Singapore could provide India with planning but they had to raise the resources to implement the plans themselves.
When I met Rao in the 1980s, he was foreign minister in Indira Gandhi’s government. He was of the generation of independence fighters, in his late seventies and on the verge of retirement. When Rajiv Gandhi was assassinated in 1991 in the middle of an election campaign, the Congress Party agreed on Rao as leader. A sympathy vote gave his party the largest number of seats, although short of a majority. Rao became prime minister and for the first two of five years carried out radical economic reforms; but he was not an energetic young man chasing his own ideas. The impetus to the Indian economy came from Manmohan Singh, his finance minister, who ironically had started his career as a central planner. Rao did not have the conviction to persuade the people of India to support these reforms over the heads of an obstructive opposition. With slow economic but high population growth, India is not about to be a wealthy nation for some time. It has to solve its economic and social problems before it can play a major role in Southeast Asia. It is in Asean’s interest to have India grow stronger and help maintain peace and stability on the Indian Ocean side of Southeast Asia.
Although the growth was slow, Lee did acknowledge back then with the systemic problem. India had a parliament but it missed having a better economic system. Lee later talked about how Delhi was soon an environmental mess. However, these were all but temporary setbacks since Lee's principles were slowly integrated into India's economic system. India had to discard the old school of thought.
The great Singaporean-Indian thought leader, Kishore Mahbubani, had definitely proved a lot of his fellow Indians wrong. Mahbubani was a man who knew what he was talking about. Singapore is a model that any country can follow economically. What Mahbubani stressed out was how Singapore was to be different. Mahbubani called it a third-world mentality. That's what Lee also cited that such a mentality that FDIs are bad is the mentality of third-world development economists. Here are some more insights from Lee himself in his book From Third World to First:
Pages 57-58After several years of disheartening trial and error, we concluded that Singapore's best hope lay with the American multinational corporations (MNCs). When the Taiwanese and Hong Kong entrepreneurs came in the 1960s, they brought low technology such as textile and toy manufacturing, labor-intensive but not large-scale. American MNCs brought higher technology in large-scale operations, creating many jobs. They had weight and confidence. They believed that their government was going to stay in Southeast Asia and their businesses were safe from confiscation or war loss.I gradually crystallized my thoughts and settled on a two-pronged strategy to overcome our disadvantages. The first was to leapfrog the region, as the Israelis had done. This idea sprang from a discussion I had with a UNDP expert who visited Singapore in 1962. In 1964, while on a tour of Africa, I met him again in Malawi. He described to me how the Israelis, faced with a more hostile environment than ours, had found a way around their difficulties by leaping over their Arab neighbors who boycotted them, to trade with Europe and America. Since our neighbors were out to reduce their ties with us, we had to link up with the developed world-America, Europe, and Japan-and attract their manufacturers to produce in Singapore and export their products to the developed countries.The accepted wisdom of development economists at the time was that MNCs were exploiters of cheap land, labor, and raw materials. This "dependency school" of economists argued that MNCs continued the colonial pattern of exploitation that left the developing countries selling raw materials to and buying consumer goods from the advanced countries. MNCs controlled technology and consumer preferences and formed alliances with their host governments to exploit the people and keep them down. Third World leaders believed this theory of neocolonialist exploitation, but Keng Swee and I were not impressed. We had a real-life problem to solve and could not afford to be conscribed by any theory or dogma. Anyway, Singapore had no natural resources for MNCs to exploit. All it had were hard-working people, good basic infrastructure, and a government that was determined to be honest and competent. Our duty was to create a livelihood for 2 million Singaporeans. If MNCs could give our workers employment and teach them technical and engineering skills and management know-how, we should bring in the MNCs.
Page 66
Our job was to plan the broad economic objectives and the target periods within which to achieve them. We reviewed these plans regularly and adjusted them as new realities changed the outlook. Infrastructure and the training and education of workers to meet the needs of employers had to be planned years in advance. We did not have a group of readymade entrepreneurs such as Hong Kong gained in the Chinese industrialists and bankers who came fleeing from Shanghai, Canton, and other cities when the communists took over. Had we waited for our traders to learn to be industrialists we would have starved. It is absurd for critics to suggest in the 1990s that had we grown our own entrepreneurs, we would have been less at the mercy of the rootless MNCs. Even with the experienced talent Hong Kong received in Chinese refugees, its manufacturing technology level is not in the same class as that of the MNCs in Singapore.
Pages 68-69
If I have to choose one word to explain why Singapore succeeded, it is confidence. This was what made foreign investors site their factories and refineries here. Within days of the oil crisis in October 1973, I decided to give a clear signal to the oil companies that we did not claim any special privilege over the stocks of oil they held in their Singapore refineries. If we blocked export from those stocks, we would have enough oil for our own consumption for two years, but we would have shown ourselves to be completely undependable. I met the CEOs or managing directors of all the oil refineries-Shell, Mobil, Esso, Singapore Petroleum, and British Petroleum on 10 November 1973. I assured them publicly that Singapore would share in any cuts they imposed on the rest of their customers, on the principle of equal misery. Their customers were in countries as far apart as Alaska, Australia, Japan, and New Zealand, besides those in the region.
This decision increased international confidence in the Singapore government, that it knew its long-term interest depended on being a reliable place for oil and other business. As a result, the oil industry confidently expanded into petrochemicals in the late 1970s. By the 1990s, with a total refining capacity of 1.2 million barrels per day, Singapore had become the world's third largest oil-refining center after Houston and Rotterdam, the third largest oil trading center after New York and London, and the largest fuel oil bunker market in volume terms. Singapore is also a major petrochemical producer.
To overcome the natural doubts of investors from advanced countries over the quality of our workers, I had asked the Japanese, Germans, French, and Dutch to set up centers in Singapore with their own instructors to train technicians. Some centers were government-financed, others were jointly formed with such corporations as Philips, Rollei, and Tata. After 4 to 6 months of training, these workers, who were trained in a factory-like environment, became familiar with the work systems and cultures of the different nations and were desirable employees. These training institutes became useful points of reference for investors from these countries to check how our workers compared with theirs. They validated the standards of Singapore workers.
What Mahbubani taught was how Singapore progressed. That's why I really wrote an article comparing Mahbubani with Hilario Davide Jr. (read here). Both old men were United Nations (UN) diplomats. Both men have records as public policymakers. Yet, Mahbubani knew about economics better. Davide Jr. said it's best to retain 60-40 in the FDI law. Yet, Mahbubani said otherwise. Mahbubani was involved with economics in the UN economics council. I guess Davide Jr. was probably too convinced that the 1987 Constitution of the Philippines is "the best in the world". Not for Mahbubani--he knew that Singapore's constitution needed reform every now and then to achieve where it went.
The same thing happened in India. India could've said, "But India isn't Singapore." Instead, India knew it had to tap its potential. Though, it wasn't as fast but think of how India is also a country that went from third world to first.
