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The Rise of India: Overcoming Caste Society and Permit-License-QuotaRaj, Implementing Some Economic FreedomErich Weedeaa Institute of Political Science and Sociology, University of Bonn, Germany

Online publication date: 20 August 2010

To cite this Article Weede, Erich(2010) 'The Rise of India: Overcoming Caste Society and Permit-License-Quota Raj,Implementing Some Economic Freedom', Asian Journal of Political Science, 18: 2, 129 153

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The Rise of India: Overcoming CasteSociety and Permit-License-Quota Raj,Implementing Some EconomicFreedom

Erich Weede

Two or three centuries ago most of mankind was still very poor. When the West outgrew

mass poverty, India was a British colony and suffered from stagnation. When East Asian

economies exploited the advantages of backwardness and benefited from export-led

growth, India remained inward-looking and poor. The Hindu rate of growth preserved

mass poverty. Since the reforms of the early 1990s India has exploited the advantages of

backwardness and some global markets. In this article, the roots of Indias failure to grow

rapidly before the end of the twentieth century are analyzed. Stagnation is blamed on

restrictions of economic freedom, whereas growth is explained by the expansion of

economic freedom. Before the mid-twentieth century, the caste system and the legacy of

sultanism curtailed economic freedom and contributed to economic stagnation. There-

after, democratic socialism distorted incentives and generated permit-license-quota raj

or a rent-seeking society. When some obstacles to growth were dismantled, vigorous

growth followed. Although expanding economic freedom remains limited. Indias growth

potential is not yet fully exploited. Indian infrastructure and human capital formation

remain inadequate, regulations intrusive, and the budget in deficit. The rule of law looks

better on paper than from the ground. Compared to China Indian public policy still has

a lot of room for improvements. Maoists or Naxalites threaten political stability andeconomic freedom. Geopolitics may explain Indias late, slow and incomplete reforms. The

rise of Asia, in particular of China and India, generates geopolitical challenges of its own.

Conceivably, the global expansion of economic freedom permits not only the rise of Asia,

but the peaceful management of the coming power transition between Asia and the West.

Keywords: Capitalism; Caste; Economic Freedom; Geopolitics; Growth; India; Regulation

Erich Weede, PhD, was a Professor of Sociology at the University of Bonn, Germany. He is a member of the

Mont Pelerin Society. Correspondence to: Erich Weede, Institute of Political Science and Sociology, University ofBonn, Germany. Email: [email protected]

ISSN 0218-5377 (print)/ISSN 1750-7812 (online) # 2010 Asian Journal of Political Science

DOI: 10.1080/02185377.2010.492977

Asian Journal of Political Science

Vol. 18, No. 2, August 2010, pp. 129153


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Introduction

The purpose of this article is the explanation of Indian economic performance in the

long run. The tools of this effort are propositions tested elsewhere, some of them

tested in my own work, most of them tested in econometric studies done by others.

Although my explanatory effort is not fit for testing a theory, it illustrates the

relevance of theorizing about economic freedom.

Some centuries ago most of mankind was still desperately poor. There was not

much per-capita-income disparity between countries. Only 400 years ago, the real

wages of farm labourers in India might have been higher than those in Britain

(Goldstone, 2008: 82). During the nineteenth and twentieth centuries, a peninsula

and subcontinent attached to Asia, namely Europe and its North American and

Australasian daughter societies, overcame mass poverty (Collins, 1986; Jones, 1981;

Landes, 1998; Maddison, 2001; North, 1990; Weber, 1923/1981; Weede, 1996; 2000;

2009). After modern economic growth began, the global population increased seven-fold, global production more than 60-fold, and manufacturing industry at least

75-fold (Goklany, 2007: 19, 41).

After the rise of the West, Japan joined it by making economic development its top

priority. After World War II Singapore, Hong Kong, Taiwan and South Korea followed

the same path. But most of mainland Asia, including India, remained mired in

stagnation and poverty until the 1980s. Certainly until then, and possibly until the end

of the second millennium, the gap between developed and less developed countries

widened and the global distribution of income became less and less equal. China and

India together account for almost 40 per cent of mankind. Once they joined thecapitalist market economies, capitalism became truly global. Mainland Asia is catching

up. According to Maddison (2007: 378, 381), in 1950 the Asian share of world

population was 54.7 per cent, but the Asian share of world gross domestic product

(GDP) was only 18.6 per cent. By 2003 the Asian share of global population had

increased to 59.4 per cent, but the Asian share of world GDP had more than doubled

and increased to 40.5 per cent. In 2003 the West still commanded 43 per cent of world

GDP, but contained only 12 per cent of global population (Maddison, 2007: 71).

Global growth is good for the poor (Dollar and Kraay, 2002). Even global income

distributions between households and persons finally mighthave become more equalagain (Collier and Dollar, 2002; Sala-i-Martin, 2007; Wolf, 2004: chapter 9; World

Bank, 2005). Since all of the empirical studies have to build on less than perfect data

and some questionable assumptions, one may accept the scepticism of Anand and

Segal (2008) that we do not really know how the global distribution of income is

changing. If one wants to arrive at some admittedly uncertain and preliminary

conclusion, however, then one may start with Anand and Segals (2008: 6364)

compilation of studies. Among those analyses which cover the last three decades of

the twentieth century, six of them report a decrease, but only three report an increase,

in inequality. Thus, there is more, albeit inconclusive evidence in favour of an

equalizing trend than of a change for the worse.

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Developing countries benefit from the diffusion of technology from rich to poor

countries in terms of life expectancy. Life expectancy in many poor countries is

higher today than it was at the same stage of economic development in Western

societies (Goklany, 2007: 39). According to Bhalla (2002: 187), the global middle class

is no longer Western and white. Most members of the global middle class were Asiansalready by the turn of the millennium.1

The rise of Asia might also be illustrated in a different way. According to the recent

data published by the World Bank (2009: 378379), the rank order of gross national

incomes in purchase power parity terms is: first, the United States; second, China;

third, Japan; fourth, India; fifth, Germany; sixth, Britain; seventh, Russia; eighth,

France. Three among the top five are Asian economies. The rise of China and,

somewhat more slowly, of India will not only make global poverty rates fall, but also

affect the global balance of power.2 According to Maddisons (2007: 343) estimates,

China might control about 23 per cent, the USA 17 per cent, and India 10 per cent ofgross world product in 2030.

As this sketch of global economic history illustrates, India missed the boat of

economic development in the eighteenth and nineteenth centuries, when the West

surged ahead. Although the ultimate cause of economic development seems to be

institutional and determined by politics, India is a civilization where political

institutions and their frequently negative impact on economic freedom and property

rights, on incentives and opportunities to exploit knowledge do not suffice to explain

its falling behind the West. In India*by contrast with China and the West (Weede,

2009)*religion and the caste system also had some harmful effects. Since its

independence, however, in the middle of the twentieth century, politics reasserted

itself and led to permit-license-quota raj which retarded catch-up growth in India

until the 1990s. Only in the last decades has India expanded economic freedom

a bit and permitted creeping capitalism to make inroads in its persistent poverty.

How the caste system, pervasive bureaucratic interference with the economy,3 and

liberalizing reforms affected economic freedom4 and growth will be analyzed in the

next section.

Caste Society and Stagnation

The majority of Indians, whether under Mughal or British or democratic rule, have

always been Hindus. Webers (1921/1978) treatment of Hinduism is the best part of

his sociology of religion. Much of Hindu religion*for example, whether one prefers

Shiva or Vishnu among the gods*is quite irrelevant for the economic order and

growth. But the ideas of caste duties, retribution, and reincarnation are important.

A simplified account suffices for the purposes of this article. For Hindus, there is

a natural rank order of human beings. One is born into an estate, or more exactly,

a caste. Castes differ in ritual purity with Brahmins, or priests, being the cleanest

group, whereas the untouchables or dalits, being definitely unclean. In Webers

analysis, the spirit of Hinduism and the caste system promoted a flight from this

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world rather than attempts to improve it. Most Hindus, especially lower caste

Hindus, aspire to have a rebirth in a higher caste. The way to achieve it was to fulfil

ones caste duties. Doing somebody elses duties, especially the duties of a cleaner

task, would be worse than useless. It would not be rewarded by a better reincarnation

next time, but punished by a worse one. Thus, the caste system restricted economicfreedom. It came close to preventing individual mobility, thereby making a rational

or wealth-maximizing division of labour impossible.

Moreover, the caste system deterred innovation because of some magical beliefs,

according to which innovation might not only be incompatible with ones

caste duties or dharma, and thus, damage ones prospects of upward mobility on

the way to the next life, but according to which forgetting ones caste obligations

also harms other members of the caste too. So, the conformity pressure within

castes made technical innovation or change in working practice quite difficult in

traditional India.In Hinduism, rule and military service were the right and duty of a specific caste,

the Kshatriyas or Rajputs.5 Where the mass of the people is excluded from military

service, there is little reason for rulers to grant rights, including property rights to

them (Andreski, 1968). Not only Hinduism and the caste system contributed to the

disarmament of most of the Indian population, but the heterodox teachings of Jains

and Buddhists had a similar impact. They taught ahimsa, or radical pacifism. The

assertion of rights by military means could only damage the prospects of non-

members of the warrior caste in the next incarnation. Since the inhabitants of many

Indian cities in the first millennium adhered to Jainism or Buddhism, and later to

Hinduism, self-defending and self-ruling cities could not be established in traditionalIndia. Religious doctrine made military service inconceivable for too many Indians.

Because of the fine gradations of cleanliness among Indians, they could not even eat

together, much less fight together in order to assert their rights against ruling

authorities.

To sum up, Hinduism had two negative effects on the establishment of economic

freedom, capitalism and growth.

First, it diverted the upper castes to transcendent concerns and most of the middle

and lower castes to a ritualistic instead of a rational division of labour which could be

guided by the principles of comparative advantage and mobility or job hoppinginstead of descent and ascription. Whether one belonged to a clean or unclean caste,

economic freedom was severely restricted.

Second, the caste system made self-rule in cities, by merchants and artisans as in

medieval Europe, rather than arbitrary rule less likely and thereby undermined the

establishment of the institutional prerequisites of capitalism.

An analysis of Indian history has to consider that huge parts of India have been

ruled by Muslims for most of the second millennium. In Webers (1922/1964) terms,

Muslim rule in India qualifies as sultanism. Sultanism is the most extreme subtype of

patrimonialism which is defined by the dependence of the staff on the ruler who

controls the means of administration as well as the livelihood of his staff. In sultanism

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rulers were assisted by foreigners and slaves who enjoyed no support in society. They

absolutely depended on the ruler and his grace. The more dependent on his grace the

staff of the ruler is, the more reliable an instrument of arbitrary rule it becomes. That

is why sultanism provides the weakest protection of property rights for subjects. In

addition to the caste system, centuries of sultanism also restricted economic freedomin India.

Economic backwardness in India and elsewhere is sometimes explained by colonial

exploitation. There is no doubt that exploitation happened, but exploitation does not

usually lead to development in exploiting countries. Iberian rule over Latin America

illustrates this point. It helped neither Spain nor Portugal to develop. Moreover,

ruling classes other than Western colonialists have exploited their subjects, too.

Maddison (2007: 123) provides a quantitative estimate of the exploitation of India by

the Mughals and their British successors: The income which the Mughal elite, native

princes and zamindars [officials] managed to squeeze from the rural population wasproportionately quite large. It amounted to about 15 per cent of national income . . .

But, by the end of British rule, the successors of the old elite got only 3 per cent.

Of course, the caste system has never been immutable. Current developments may

be summarized under the headlines of westernization and sanskritization. According

to Srinivas (1959: 159), westernization affects the upper and more privileged castes,

whereas sanskritization is an attempt by lower caste groups to achieve collective

mobility and respectability by purifying their lifestyles. Since westernization implies

the acquisition of marketable skills, it promotes economic development and growth.

The Brahmin might study information technology or engineering instead of religious

texts, such as the Vedas. If the low-ranking shudra or dalit (untouchable), however,gives up dirty work, this does not guarantee that he finds better-paid work. So,

sanskritization may imply deepening poverty rather than overcoming it (Sharma,

1974). Whereas sanskritization dates back to British colonial rule, within independent

India castes have become special interest groups which demand and frequently get

special privileges, such as access to universities or government jobs*not because of

merit but in order to remedy past sufferings by affirmative action. That is why it now

even happens that castes demand to be reclassified downward in order to qualify for

privileges (Nilekani, 2009: 285).

The reassertion of Hindu identity is more frequently analyzed by writers interestedin political rather than economic development (Nussbaum, 2007; Devare, 2009).

Although one has to deplore the destruction of mosques or the killing of thousands

of Muslims by Hindu extremists, one simultaneously should note that leading Hindu

revivalists, such as Savakar,6 are not pious traditionalists reaffirming caste rules, piety

or service to the gods, but ardent nationalists interested in catch-up growth and

making India a great power. By contrast, the secularist Brahmin Nehru expressed his

contempt for capitalism and entrepreneurship in traditional caste terms by reference

to bania civilization (Nilekani, 2009: 76).

According to Greenfeld (2001: 218) the view of the economy as a battlefield in the

struggle for national supremacy provides much of the motivation for economic



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growth. As in Japan more than hundred years ago, nationalism in contemporary

China seems currently to be succeeding at legitimating entrepreneurship, private

property rights, and capitalism and thereby overcoming the traditional contempt and

lack of respect from which merchants suffered in the Confucian societies of East Asia.

A similar development in India might be economically useful*

in spite of the obviouspolitical dangers connected with nationalism. Increasing the status of banias

(entrepreneurs,7 merchants, traders) at the expense of Brahmins, politicians and

bureaucrats might be exactly what India needs for the sake of development and

growth.

Permit-License-Quota Raj

From the 1950s to 1980 per capita incomes in India and China were fairly similar to

each other. Per capita incomes in both countries grew more slowly than globally

(Maddison, 1998: 4041). Both of them pursued leap-forward strategies which

focused on heavy industries in spite of capital scarcity and labour abundance.

Comparative advantage was neglected (Lin et al., 2003: chapter 2). It could not be

exploited until the focus on heavy industry and import-substitution was mitigated

or given up. Like China, India was afflicted with socialism and an emphasis on

planning.8 Of course, a comparative advantage defying development strategy would

have been impossible in a free and competitive market economy. A large involvement

of government makes big and persistent mistakes possible. Whereas China suffered

from the repressive and radical variety of socialism, India tried the democratic

variety. Both countries, even democratic India, more or less disengaged from theglobal economy. In the late 1940s when India became independent, its share in

global exports was 2.4 per cent. In the early 1990s, it was only 0.4 per cent (Bhagwati,

1993: 58).

The poor performance of the worlds most populous countries was not inevitable.

In principle, both of them should have enjoyed the advantages of backwardness and

should have benefited from conditional convergence (Barro and Sala-i-Martin, 1995;

Helpman, 2004; Levine and Renelt, 1992; Levine and Zervos, 1993; Olson, 1996).

Although not all backward economies do converge, although not all of them exploit

the potential advantages of backwardness, in principle the followers of the globaldevelopment process enjoy some advantages over the pioneers. If they choose to do

so, they can benefit from the greater degree of economic freedom and development of

the more advanced countries (Weede, 2006). They may borrow technologies.9 They

easily find opportunities for productive investment and are less likely to run into the

problem of decreasing returns. They can reallocate labour from less productive

employment in agriculture to more productive employment in industry and, later, in

services.

Whether or not a backward economy develops and catches up depends on other

factors. Without investment or human capital formation economic growth is

unlikely. Insufficient amounts of investment cannot explain why neither India nor

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China succeeded in realizing the advantages of backwardness in the 1950s to

1970s.10 Instead the productivity of investment left much to be desired (Bhagwati,

1993: 40ff.). Human capital formation is another candidate to explain this. Here,

China and India differ. Already in 1950, the Chinese had benefited from a little bit

more schooling than the Indians (Maddison, 1998: 63). Now China scores muchbetter in adult literacy than India, namely, 93 against 66 per cent (World Bank,

2009: 378). What holds Indian education back is teacher absenteeism (Panagariya,

2008: 365, chapter 20).11 The difference in human capital formation between Asias

giants may help us to understand why China outperformed India. In the early

twenty-first century the Chinese advantage persists. According to the World Bank

(2005) and The Economist (2005a: 10), at the beginning of the twenty-first century

Chinese workers have been 50 per cent more productive than Indians, but cost

only 25 per cent more.

Compared to the global economy India and China did poorly in the 1950s to

1970s. Advantages of backwardness were not realized in spite of sufficient investment

and, at least in China, sufficient human capital formation. This poor economic

performance was to be expected on the basis of an institutional explanation of the

ultimate sources of growth, where economic freedom, property rights, incentives and

opportunities to exploit knowledge matter most, as I have argued elsewhere (Weede,

1996; 2000; 2009).12 Although India became and remained a democracy after its

independence, although it never nationalized all the means of production, it

nevertheless was inspired by the Soviet model for decades (Lal, 1998: 129). As

pointed out by Maddison (2007: 130) Ghandian pressures in favor of self-sufficiency

had a similar impact.Slow growth and persistent poverty were the results of this inspiration. Bureau-

cratic controls and interventions weakened incentives, severely restricted entrepre-

neurial decisions on hiring and firing and distorted prices. Import substitution and

protectionism contributed to weak competition. Favoured enterprises, cartels, and

even monopolies enjoyed an easy and profitable life at the expense of consumers. The

political economy of India was characterized by license-permit raj (FICCI, 1999:

165). Moreover, marginal income tax rates in India had been above 90 per cent some

decades ago. At the beginning of the twenty-first century, they are down to about

30 per cent (Panagariya, 2008: 336

342).One of the reasons why India did rather poorly for the first decades after

independence is the fragmented character of its markets. Already Adam Smith (1976/

1976) taught in the late eighteenth century that productivity depends on the division

of labour, and that the division of labour depends on the size of the market.

An Indian entrepreneur (Nilekani, 2009: 242243) deplores the limited size of Indian

markets in the following terms:

India has been routinely described as a land deeply fragmented, with divisionswithin divisions, and I think this description especially suits our markets, which aresplintered all over the place*fragmented at the state level thanks to policydifferences, and locally because of regulation, weak infrastructure and information



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networks that cover only half the country. In fact, while India has managed tosustain a political unity that has defied all expectations, economic unity has beenfar more difficult for us to achieve.

Although the improvement of infrastructure*from ports to rail or roads*

necessarily takes time, the avoidable contribution of politicians and administrators

to fragmented markets should not be forgotten. States impose taxes at state borders.

Worse still, sometimes they force growers to sell their produce to local monopolists.

Uttar Pradesh cane sugar-growers are an example for this type of misguided policy

(Nilekani, 2009: 246). Whereas state borders are obstacles to trade for some, they

constitute an opportunity to milk the public purse for others. Nilekani (2009: 250)

points to a 50 per cent subsidy for pesticides in Uttar Pradesh which makes some

trucks cross the state border multiple times with the same cargo in order to collect

the subsidy each time. Of course, this abuse becomes easier where the border patrols

are corrupt and take their cut. Different markets may be more or less affected byfragmentation. According to Nilekani (2009: 251), agriculture suffers most from

constricted markets, manufacturing somewhat less, and services least. This rank order

mirrors different sectoral growth rates.

By contrast to the private sector the public sector expanded. Its share in gross

domestic product increased from 8 to 26 per cent between 1960 and 1991 (Yergin and

Stanislaw, 1998: 216). Even in the late 1980s, the Indian public sector took about

70 per cent of all workers employed by big enterprises (Bhagwati, 1993: 64). It

accounted for about 6 per cent of the economically active population and twice as

many people as private employers of more than ten workers (The Economist, 1997:13). So, except for the impoverished informal sector and agriculture, public

enterprises were dominant in India. Like elsewhere, public enterprises in India

tended to be less efficient than private enterprises (Majumdar, 1998). Firing workers

became close to impossible before the enterprise went bankrupt (Bhagwati, 1993: 65,

86; Joshi and Little, 1998: 211ff.).

Strong job protection in the formal sector, however, came at a price. Employment

in the formal sector was reduced by about 30 per cent because of labour market

regulations which made Indian enterprises install machines instead of hiring

workers

13

(Nilekani, 2009: 308

312). Although Indian socialism benefited a minorityof workers, the poorest strata of society were denied all access to formal employment.

Certainly, Indian socialism neither expanded economic freedom, nor optimized

incentives. Democratic socialism in India provided as little hope for the poor or their

children as socialism in China did before Deng Xiaopings reforms.

Although there has been a lively debate about the degree, kind and success of state

intervention in East Asian economies, nobody doubts the strong interference of the

Indian state with the economy. Even a strong supporter of state intervention, Kohli

(2004: 14), however, admits that Indian intervention lacked effectiveness: Fragmen-

ted-multiclass states were neither more nor less interventionist than cohesive

capitalist states, but they were less effective. . .

tax-collecting capabilities were limited,

136 E. Weede


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public spending priorities included numerous goals other than growth promotion,

attempts to direct credit easily evolved into cronyism . . ..

Elsewhere, Kohli (2004: 219, 258) deplores the softness of the Indian state and

tries to shift the blame for Indias poor economic performance until the 1990s from

state planning to limited state capacity: The Achilles heel of Indian political economyis not so much its statist model of development as the mismatch between that statist

model and the limited capacity of the state to guide social and economic change.

Thereby, Kohli comes close to an endorsement of Olsons (1987) earlier and more

general insight. Whatever ones view of state guidance of economies is, the required

effective bureaucracies are certainly not the comparative advantage of most

developing societies, India emphatically included. In this context, one also has to

remember Lin et al. (2003) insight, according to which only the state, but no private

capitalist, can pursue a comparative advantage-denying development strategy for

long, as India has done and, given its overregulated labour market, still does to asignificant degree.

Although permit-license-quota raj was rationalized by egalitarian concerns and

socialist ideals, the poor did not benefit. According to Nilekani (2009: 19), it

perversely promoted privatization for the privileged classes: The low standards of

our state-run schools and our weak infrastructure have especially hurt the poor in

terms of access: those of us who can afford alternatives merely opt out, turning to

private schools, private electricity, and gated communities*or we emigrate, leaving

behind rickety, nonfunctioning systems for the less fortunate to endure.

Social security in India illustrates the concern for the poor*as practised, rather

than merely rhetorical*

perfectly. For the masses in the informal sector, social

security simply does not exist. In old age they have to depend on support by their

children. But the implied debt on civil service pensions amounts to 55 per cent of

Indias GDP, in spite of covering only 24 million (out of more than a billion) people

(Nilekani, 2009: 394).

Expanding Economic Freedom, or Towards Creeping Capitalism

Whereas China reformed its economy ahead of the bankruptcy of the Soviet model,

India took its time. As Panagariya (2008: 96) and Lal (2008: 15) point out, there is alink between earlier Chinese and later Indian reforms. It was much easier for Indians

to deny the policy relevance of the still earlier South Korean or Taiwanese economic

miracles than of the Chinese miracle. One reason for this tardiness might be that

independent Indias economy grew much better under Nehru than in the colonial

period before it (Cohen, 2001: 95; Panagariya, 2008: chapter 2). As in China

economic growth rates and productivity picked up in India during the 1980s. Since

1980, GDP per capita has more than doubled (Bosworth and Collins, 2006: 1).

There is a debate why this has happened. Growth in the 1980s has been explained

by growing aggregate demand driven by soaring government deficits and a build-up

of external debt which led to the crisis of the early 1990s and thereafter to liberalizing



11/26

reforms (Ahluwalia, 2002; Lal, 2008). Or, it has been explained by the suspension of

the governments hostility to the private sector in the 1980s (Rodrik and

Subramanian, 2004: 3), by a pro-business orientation of the government resulting

in fewer restrictions on capacity expansion for established industries, fewer price

controls, and lower corporate taxes. These reforms were not yet pro-market or infavour of competition. They favoured incumbents rather than entrants to the market

or consumers. Or, one may reject the distinction between pro-business and pro-

market policies as artificial and insist on the economic freedom and market

promoting character of the reforms, even though it was liberalization by stealth

(Panagariya, 2008: chapter 4).

Despite a rather strong growth record in the 1980s, these reforms did not suffice to

prevent the crisis in 1991. Neither public finances nor the current account were

sustainable. Public sector deficits rose. Foreign currency was in short supply and

became ever more so. After the dissolution of the Soviet Union, the main source offoreign aid had disappeared. The reforms consisted of the following measures. Most

of the industrial licensing system was abolished. Reluctantly, foreign investment was

welcomed. The Indian currency was devalued. The dream of autarchy was given up.

Tariffs were cut dramatically. Whereas the average rate was 125 per cent in 19901991,

it became 71 per cent three years later. The peak rate fell from 355 per cent to

85 per cent in the same period (Joshi and Little, 1998: 70). Until 20052006 it has

fallen to 12.5 per cent (Nilekani, 2009: 71).

Although the Indian economy did not switch as vigorously from inward to

outward orientation and export promotion as China did, there was a lot of

movement in the right direction. Since growth rates improved in the early 1990s,especially in manufacturing, since the current account deficit fell and foreign

exchange reserves strongly recovered while the primary deficit of the central

government fell, too, the liberalizing reforms paid off (Joshi and Little, 1998: 17,

35). Given the poor record of Indian administrations in large-scale policy

implementation, liberalization made sense because it implies some economizing on

limited state capability (Pritchett, 2009: 33).

But the Indian development pattern does not offer sufficient job opportunities to

its labour force which is dominated by low-skilled workers (Bosworth et al., 2006:

34). Most of Indias labour force is not even employed in the formal economy or theso-called organized sector. Out of a labour force of about 470 million people, 21

million work for the government or public enterprises and merely 14 million for

organized private enterprises. In the private part of the formal economy labour

productivity is about nine times as high as it is outside the organized sector. Whereas

manufacturing employed more than hundred million Chinese workers, it employed

seven million Indians only at the beginning of the twenty-first century (Luce, 2006:

4849).

Whereas Chinas economic development started with agricultural reforms, then

moved to low-cost manufacturing before climbing the value-added chain, India

grows from the other end with a strong emphasis on capital and human capital

138 E. Weede


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intensive products and services (Luce, 2006: 38). The Economist (2007a: 70) claimed

that the main difference in the growth performance of China and India is not the

strength of Indias service sector, but the weakness of its manufacturing. According to

Panagariya (2008: 288), the key barrier to the emergence of large-scale, unskilled-

labour-intensive firms is the complex set of labour laws they face in India. Neithermuch higher pay in the formal part of the economy, nor perfect job security helps

those who cannot find a formal job in rigid labour markets.

In contrast to China, India had never abolished private property in land and

private farming.14 Nevertheless, agriculture suffered from serious distortions.

According to Joshi and Little (1998: 89), the prices of all major agricultural products

have been largely determined by the central governments total control of foreign

trade in them. The prices of cereals*rice, wheat, and coarse grains*and cotton have

been held below world prices in most years by controlling exports. Although this

specific problem has been mitigated or even overcome, subsidies for food, fertilizer,electricity, or water are more likely to assist well-to-do farmers than the poor.

According to Panagariyas (2008: 361) estimate, only in between 4 and 18 per cent of

the food subsidies reach the poor. Since subsidies, like labour market rigidities,

distort market signals and reduce growth rates, one should concur with Panagariyas

(2008: 77) conclusion that a focus on equity instead of economic freedom has had

harmful effects on poverty alleviation in India.

Compared to China, India seemsto possess some advantages. Because of the British

heritage, India seems much closer to the rule of law than China.15 But Indias laws

might not be adequate for a poor country. According to an entrepreneur, the impactof laws is questionable: The consequence of too many rules has obviously been that

eeveryone has agreed to ignore them (Nilekani, 2009: 207).

Moreover, the application of the law in India leaves much to be desired. Cohen

(2001: 115) observed: In some states, it is difficult to separate the politicians from the

criminals; in others, the police are under the sway of high and middle castes and are

used to hunt down and kill lower-caste or tribal leaders in what are euphemistically

called police encounters. Even in big cities property conflicts may still be settled by

gangs of bullies rather than by courts of law (Kakar, 1996). Land titles seem to be

a mess. According to Nilekani (2009: 358), 90 per cent of all land titles are disputed,

and 30 per cent of all pending court cases concern land disputes. In 2006, 27 million

legal cases waited for a judgment, murder cases included. About US$75 billion was

tied up in these legal disputes (Luce, 2006: 9495).

Problems of law enforcement reduce the impact of this presumed Indian

advantage. Since Indian states are on the way to become more assertive, enterprising,

and powerful, it is conceivable that they become engaged in a race to the top where

they compete with each other in providing a good business environment. Federalism,

Indian style may provide some hope for the future. So far, however, India benefits

little from its putative advantage in the rule of law, but it still suffers from

overregulation or the legacy of license-permit raj (FICCI, 1999: 165).



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According to The Economist (2005a: 14), Indian bureaucracy continues to slow

things down . . . it takes 89 days to receive all the permits needed to start a business in

India, compared with 41 in China. Insolvency procedures take ten years, compared

with 2.4 in China. Or, take other examples from the information technology (IT)

business. One of the co-founders of Infosys had to hang around in the lobby outsidea bureaucrats office for 18 days in order to change the port of arrival for some

hardware import from Madras to Bangalore (Nilekani, 2009: 70). In another instance,

Infosys had to apply for the permission to import some hard disk drive. When they

finally got the license, capacity had doubled and the price was cut. But the import

license had to be changed (Nilekani, 2009: 98).

Tardiness of administration may undermine the advantages of the rule of law. In

spite of such handicaps Indian IT businesses led the country towards globalization.

According to Infosys co-founder Nilekani (2009: 123): Information technology

services served as the Trojan horse through which globalization entered the Indianeconomy and gained acceptance. Unconstrained by Indias capital and infrastructure

bottlenecks, the knockout growth of the sector in the years since the reforms showed

how well world markets could work to Indias advantage. The important

characteristics of globalization and openness are the expansion of economic freedom

and the weeding out of apathy and inefficiency.

The rule of law is related to an even broader issue: good governance. Most social

scientists seem to believe that better governance leads to better economic

performance. Econometric evidence from developing Asia does not provide much

support for this idea (Quibria, 2006). There are at least two different explanations for

this irritating finding. Either the proposition is false or the measurement ofgovernance is biased and afflicted with measurement error. This author is inclined

towards the second explanation.16 After all, standard operationalizations of govern-

ance are derived from Western examples and implicitly tend to assume that Western

ways are the most efficient or best ways to govern. Possibly, this is an exaggerated

assumption.

Good governance is incompatible with high levels of corruption. In India

corruption is endemic at all levels of government (Quah, 2008). It seems to have

become worse over time. The legacy of permit-license-quota raj provides ample

opportunities because civil servants administer or control a lot of activities, includinglucrative ones. Low salaries must generate some appetite for speed money or other

kinds of illegal income. Moreover, the risk of detection and punishment is low

because the police itself is understaffed and corrupt and the judicial process is

characterized by delays. Neither the per capita expenditure nor the staff levels of the

corruption fighting agency indicate sufficient political will for fighting corruption.

Whatever ones general view about the effectiveness of state intervention in the

economy and planning is, corruption certainly undermines it (Olson, 1987).

Another widely acknowledged Indian advantage is the fact that most educated

Indians, and all natural scientists, engineers, and economists, speak English fluently*

very much in contrast to the modest foreign language skills of most Chinese. So, India

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should be in a position to acquire technology from the West much faster than China.

Although the Indian elite enjoys an advantage in speaking English, education policies

frequently worked against its preservation. The entrepreneur and co-founder of

Infosys Nilekani (2009: 87) deplores that English was quite decisively marginalized

everywhere. On average. . .

less than 10 per cent of state schools in India were English-medium schools, and many of the states passed policies that allowed the teaching of

English only from the sixth standard. Since the promotion of provincial languages or

Hindi hurt the lower castes and the poor worst, a dalit activist complained: We have

an English language economy, but our education policy has denied people access to it.

It is not an intelligent law, its a political one (Nilekani, 2009: 88). Since even the poor

have recognized the value of English for getting a well-paid job, private English

medium schools are mushrooming in Indias slums and countryside.

Whereas India lags China in primary education, it is still ahead in tertiary

education. But one should not exaggerate the achievements of Indian universities. Onthe one hand, Indias pool of highly qualified graduates was still about twice as large

as Chinas until recently (The Economist, 2006a: 28). On the other hand, one study

estimates that 75 per cent of all Indian graduates are unemployable in their field of

study (Nilekani, 2009: 326).

India should raise its investment rate. Since household savings have strongly

increased, the savings rate could support more investment (Bosworth et al., 2006:

figure 2a). Actually, India seems to be well on the way towards raising investment. By

contrast to China, there is little financial repression in India. But in infrastructure

development India might lag a full decade behind China (Lal, 2008: 28

29). Chinaspends about three times as much for it as India (Nilekani, 2009: 234). Since the

Indian public sector already is deeply in deficit, this will be difficult. Some time ago,

already 44 per cent of recurrent expenses in India serviced the public debt (The

Economist, 2005a: 14). So, the legacy of past profligacy undermines Indias capability

to improve its infrastructure. Whereas public debt was about a quarter of Chinese

GDP, it amounted to 80 per cent of Indian GDP in 2005 (The Economist, 2007b: 66).

Whereas Chinas government might have been in surplus in 2007, Indias total

government deficits was close to 7 per cent of GDP (The Economist, 2008a: 72). In

2008 the Indian deficit approached 10 per cent of GDP, in 2009 it is likely to be about

12 per cent (The Economist, 2008b: 52; 2009e: 50). Estimates of Indian public debt go

as high as 85 per cent of GDP, that is, much higher than those for China, Russia, or

Brazil to whom India is frequently compared (The Economist, 2009e: 51).

Although Indian public spending is frequently rationalized by the need to serve the

poor, they benefit little. Subsidies on fuel or fertilizer are most useful for those who

own vehicles or farm large plots of land. In Luces (2006: 89) evaluation, two-thirds of

the nominally pro-poor subsidies in India benefit better-off groups. Moreover, until

the first decade of the twenty-first century Indias government depended to a

significant degree on customs duties, on barriers to trade and globalization.17 The

state still makes money by restricting economic freedom.



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Whereas China has been one of the four most important trade partners of the US

for a long time, India had to be satisfied with the 25th rank at the turn of the

millennium (Cohen, 2001: 288; Sivasubramonian, 2002: 116). When China already

was the third most important exporter of the world, behind Germany and the US, but

ahead of Japan, India did not yet equal in importance even the Republic of China onTaiwan (The Economist, 2005c: 101). Of course, trade in manufactured goods is

Chinas comparative advantage. India might have a comparative advantage in

services, in particular in software exports.18 Moreover, the 2.5 million strong and

affluent Indian-American community (Dhume, 2008: 27) of doctors, engineers,

businessmen, and software experts may link India at least as closely to the United

States as Sino-American trade does for China. Conceivably, Indian expatriates might

contribute to Indias future globalization as much as Chinese expatriates have already

done for China by direct foreign investment in the past.

Certainly, there is little reason to doubt that more trade openness and globalizationshould help India. As Panagariya (2005: 14) has pointed out, before liberalizing its

economy Indias per capita growth rate in the 1960s and 1970s was only 1.1 per cent.

After modest liberalization in the 1980s and deeper liberalization in the 1990s, the

record for these two decades improved to 3.8 per cent. It was 5.7 per cent in 2007

2008 (World Bank, 2009: 378). Since 2000, Indian gross domestic product grew

7.9 per cent per year (World Bank, 2009: 384).

Although poor infrastructure, poor productivity, and bigger barriers to trade

explain why India cannot repeat Chinas success in attracting foreign direct

investment in order to compensate for the weakness of its domestic investment,India is remarkably successful in attracting foreign institutional investment (Nilekani,

2009: 126). India seems to need foreign capital rather than foreign entrepreneurship.

In spite of this mushrooming of entrepreneurship, economic freedom has not yet

found a comfortable home in India. For 2007, Gwartney and Lawson (2009: 10, 109)

rank the country 86 out of 141, that is, below the median.19 Regulation and

deteriorating property rights are the components which do most to depress Indias

freedom rating. But attitudinal obstacles against capitalism, free markets and

globalization have been vanishing in India. According to a Pew Survey (The

Economist, 2009a: 26), in no major country did faith in free markets exceed the

Indian level or increase as much between 2002 and 2007. Whether politicians shall

translate this permissive opinion climate into pro-growth policies or continue

servicing rent-seekers remains to be seen.20

In contrast to the West and most small poor countries, Indias and Chinas

economies are rebounding even before a recovery in the West (The Economist,

2009d: 60). Moreover, India benefits from the fact that trade in services is more

resilient in the current crisis than trade in goods (The Economist, 2009f: 64). While

India looked hopeless in the first three decades after its independence, now it seems

to be rising. Moreover, the country benefits from a pervasive spirit of optimism.

Previously, Indians worried about the difficulty of feeding their people. Currently

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they are proud of being a young nation in an aging world. The young population

becomes an asset, a reservoir of skilled labour (Nilekani, 2009: 49).

Interstate Rivalry and Domestic Instability

So far, Indian advantages remain largely unexploited. Why did China reform its

economy so much earlier and more forcefully than India did? Although an autocratic

government may enjoy some advantages in this respect over a democracy, I tend to

credit geopolitical factors with more influence than domestic politics. Here, I follow

the guidance of Jones (1981; 1988: 177) who explained the European miracle by

interstate rivalry: Competition for subjects and power among states and kings and

nobles seems in the end to be the answer. It abridged the worst behaviour*not

much, and only on average, but more than in other great societies of the world.

Focusing on nationalism rather than on geopolitical considerations, Greenfeld (2001:

218) makes a related point where she argues that nationalism and the view of the

economy as a battlefield in the struggle for national supremacy provides much of the

motivation for economic growth. As in Japan more than hundred years ago,

nationalism in China might succeed in legitimating entrepreneurship, private

property rights, and capitalism and thereby overcome the traditional contempt and

lack of respect from which merchants suffered in the Confucian societies of East Asia.

Rivalry between the Peoples Republic of China on the Mainland and the Republic of

China on Taiwan, growing hostility between the Chinese and their fellow Commu-

nists in the Soviet Union in the 1960s to 1980s, as well as the historical rivalry

between China and Japan, and the geographical closeness of US troop deployments toChina forced the PRC leadership to consider the consequences of falling further and

further behind the West, Japan, and Taiwan.

The more privileged geopolitical location of India compared with China

contributes to the explanation of the lateness and of the half-hearted character of

Indian economic reforms. Although Indians had learned in the early 1960s*after

suffering defeats in battles during the Himalaya War*that China might become a

threat to their national security, the effect of this lesson was mitigated by the fact that

both superpowers of the 1960s, the United States and the Soviet Union, favoured

India over China. The dominant national security preoccupation of India remainedPakistan. Competing with Pakistan, or even fighting a successful war against it, as

India had learned in the early 1970s when it dismembered Pakistan*or, if one prefers

to put it that way: when it liberated Bangladesh*did not require a transformation of

the Indian economy.

China began its economic reforms at a time when it enjoyed little friendship abroad,

but was surrounded by hostile neighbours, even the Soviet Union and Vietnam

included among them. Foreign threats were the midwife of the European evolution

towards economic freedom and capitalism centuries ago (Jones, 1981; 1988; Weede,

1996; 2000; 2009). In the late 1970s, foreign threats were the midwife of Chinas

expansion of economic freedom (from an extremely low base) and creeping capitalism,



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too. Conceivably, the already visible rise of China helped to persuade Indians of the

usefulness and necessity of reforming and liberalizing their economy in the early 1990s.

India has been affected by turmoil and insurgencies (Mitra, 2006). In the late

1940s, India incorporated the principality of Hyderabad and most of Kashmir. Since

the mid-1950s there have been insurgencies in the north-east by Nagas, Mizos, andAssamese. Scattered through time and place there have been Communist uprisings

and terrorist incidents. In the 1980s, there was a major ethnic-religious uprising in

Punjab. Since the 1990s there is renewed fighting in Kashmir. None of the domestic

uprisings ever came close to success. But a Maoist or Naxalite insurgency continues

in many states of the union. If they should ever capture political power, economic

freedom would be tightly restricted and growth would deteriorate or stop. During the

first six months of 2009, it claimed about 450 lives (The Economist, 2009d: 65).

In 2002, there was a mass murder of Muslims in Gujarat which some observers

even call genocide (Nussbaum, 2007). Although it is not widely known in the West,Indian Islam has not gone untouched by the jihadist trends in neighbouring Pakistan

and Bangladesh. Indeed in recent years more civilians have been killed in India as a

result of Islamic terror than in any other country aside from war-torn Afghanistan

and Iraq (Dhume, 2008: 29). The multiple terrorist attacks at ten different locations

in Mumbai, the financial capital of India, in late November 2008 resulting in nearly

two hundred deaths are only the most recent and worst terrorist incidents in India

(Prasannarajan, 2009: 34). Being poor and a fractionalized society, by ethnicity as well

as by religion, or caste, India is predisposed to suffer from insurgencies and civil wars.

Its readiness to give a voice to minorities, even to empower them, fits a democracy

well, but such a humane approach to diversity may exact a price. According to arecent cross-national study of civil war (Jacobsen and de Soysa, 2009: 137), state

policies that dis-empower people under conditions of high fractionalization actually

reduce the chance of civil war. India seems to be too democratic to stabilize itself by

recourse to repressive means.

Like China, India suffered from a recent history of violence and war (Small and

Singer, 1982; Gleditsch et al., 2002). India has fought four wars against Pakistan, one

against China, and it captured the former Portuguese colony of Goa by force. In

addition, it unsuccessfully intervened in the Sri Lanka Civil War in the late 1980s.

Although Indias most persistent foreign conflict, the protracted hostility with Pakistan,has not been solved, India had established its supremacy by dismembering Pakistan and

making Bangladesh into an independent state in 1971. Therefore, one may argue that

the worst foreign challenges to India are historical rather than current concerns.

About 30 years after the Chinese precedent, India became a nuclear weapon power

in the late 1990s. The Himalayan border issue which led to the 1962 war has not

yet been solved. In the west, China controls Aksai Chin, but India still claims it. In

the east, India controls Arunchal Pradesh but China still claims it. Although both

sides seem to have little interest in reviving the border conflict, a settlement is not in

sight either. By contrast, China has settled almost all other land border conflicts,

frequently by making substantial concessions to weaker neighbouring states (Fravel,

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2005; 20072008). Moreover, China has been a persistent supporter of Pakistan, even

delivering nuclear and missile technology (Cohen, 2001: 259).

It is likely that the future big three in the global economy will be the United States,

China, and India (Kugler, 2006).21 All of them already are nuclear weapon powers.

Sooner or later, international politics is likely to become dominated by relations withinthis triangle of powers. Following Collins (1986) geopolitical theory, one should expect

that the most centrally located power is likely to be isolated. Since the United States

alone is not located in Eurasia, it enjoys the most peripheral location. It can choose

whether it wants to favour China or India. Since China is stronger than India and likely

to remain so for decades to come,22 geopolitical realism makes one predict that the

United States favours India over China. In Mearsheimers (2001: 4) words: China and

the United States are destined to be adversaries as Chinas power grows.

The American preference for India over China has been well expressed (and

promoted) by a former American ambassador to India who has advocatedsubordinating nuclear non-proliferation concerns to cooperation between America

and India as well as reinforcing Indian military power. Blackwill (2005: 10) wrote: In

my view, the United States should try to integrate India into the evolving global non-

proliferation regime as a friendly nuclear weapons state. And he asked the rhetorical

question: Why should the United States want to check Indias missile capability in

ways that could lead to Chinas permanent nuclear dominance over democratic India?

During the second half of the twentieth century, the United States usually enjoyed

more cordial relations with Pakistan than with India. Following the ascent of India

American perceptions of both countries changed. Tellis (2008: 23) advocatesclassifying India as the larger and more strategically important country and

Pakistan as a troubled country teetering repeatedly on the brink of failure. Tellis

(2008: 36) prescription for Pakistan in its historic rivalry with India comes close to

pre-emptive surrender: Pakistan would have to make its peace with India on what are

essentially the only sustainable terms over the long run, namely, those that reflect the

differential in relative power. If global US interests would best be served not simply

by respecting the natural evolution of the balance of power in South Asia but rather

by accelerating it through a committed buildup of Indias national capabilities (Tellis,

2008: 31), then one should consider the repercussions of such a policy not only

on Pakistan, but on China as well.23 At best, the Chinese must regard such

considerations and subsequent policies as containment by stealth.

One may raises the question whether it is wise for the United States and India to

contain China, to encircle it. According to Lind (2007: 14), an anti-Chinese alliance

of the US, Japan, and India would be to launch a cold war of choice. How many

more cold wars between nuclear-armed powers can mankind survive? Fortunately,

Indians do not seem to be inclined to join the Americans in an effort to contain

China. Moreover, China has become Indias most important trade partner (The

Economist, 2009b: 54). In the past, the expansion of economic freedom, economic

interdependence and trade ties significantly reduced the risk of war between nations



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(Gartzke, 2005; 2007; 2009; McDonald, 2007; Russett and Oneal, 2001; Weede, 2005a,

2010).24

Admittedly, there is also something like the democratic peace. The risk of war

between democracies is extremely small. But one should conceptualize the

democratic peace as a component of the capitalist peace, because democraciesprosper best in wealthy countries,25 because capitalism or economic freedom and

thereby globalization contribute to prosperity (Weede, 2005a; 2006). Moreover, the

democratic peace is simply not applicable throughout Asia, because it merely pacifies

relations between democracies. It neither pacifies Sino-Western, nor Sino-Indian

relations. By contrast, economic freedom, and the capitalist peace built on it,

promises a much better foundation for Asian security.

Conclusion: Economic Freedom, Growth and Peace

Historically, growth has depended on the establishment and expansion of economic

freedom. Economic freedom implies limited government and respect for private

property rights. As Austrian economists (Hayek, 1945; 1960; Mises, 1920) have

argued, private property rights and economic freedom are essential in order to

achieve an efficient allocation of resources and to exploit widely dispersed knowledge.

By contrast, centralized political decision-making permits a comparative advantage

denying development strategy (Lin et al., 2003). In traditional India, the Hindu caste

system restricted economic freedom by linking legitimate work to a status which was

inherited from ones parents. Muslim rule brought sultanism and arbitrary

government which was incompatible with safe property rights for producers andmerchants. Whereas the fragmentation of political power in Europe forced competing

kings and princes in Europe to concede property rights and economic freedom to

subjects, political fragmentation in southern India did not exert such a beneficial

impact because many political units were much less persistent than European ones.

Economic freedom and private property explain why the West could ever overtake

Asia,26 why small Britain could ever conquer and rule much bigger India. The

determinant of limited government, economic freedom and safe private property

rights in the West is interstate competition or European disunity.

Once the West had become developed and much richer than Asia, potentialadvantages of backwardness were established. Poor countries could borrow

technologies and institutions from richer ones, thereby benefiting from the earlier

and greater degree of economic freedom elsewhere. Of course, limited government,

economic freedom and secure private property rights at home remained useful. The

socialist inclinations of the long dominant Congress Party lead to permit-license-

quota raj and the corresponding Hindu rate of growth until the early 1990s. Since

then economic freedom within India and Indian participation in international trade

has expanded. Growth has picked up. India could delay the liberalization and

opening up of its economy longer than China because it was not threatened by major

powers, like the United States or the Soviet Union. Only when neighbouring China

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began its miraculous rise, Indians began to recognize the benefits of expanding

economic freedom.

As hiring and firing regulations in labour markets demonstrate (Gwartney and

Lawson, 2009: 109), India still has a long way to go. Indias growth potential remains

insufficiently exploited. Since rising powers tend to challenge the political status quo,it is good luck that the two demographic giants rising Asia seem to prosper under

global capitalism. Therefore, the strong economic ties between the United States,

China and India hold some promise for the future and survival of mankind.

Economic freedom is simultaneously compatible with the rise of Asia and its peaceful

management.

Notes

[1] Of course, such statements depend on definitions. In Bhallas view, a daily income between

10 and 40 US-dollars makes one a member of the global middle class.

[2] Although the rise and decline of nations has historically been associated with threats to

peace, I am optimistic about our chances of accommodating the rise of China and India

(Weede, 2005a).

[3] Of course, bureaucratic guidance looked attractive to Indians, because of the British heritage.

As Huntington (1968) and Kohli (2004) point out, the British built a much more effective

administrative service in India than they did in some of their African colonies, like Nigeria.

Unfortunately, however, affirmative action for the benefit of backward tribe, low-caste and

untouchable (or dalit) Indians must have undermined the quality and effectiveness of the

bureaucracy. In 1990, 49 per cent of central government positions were set aside for these

groups (van Praagh, 2003: 201).

[4] According to Gwartney and Lawson (2009: 3), the key ingredients of economic freedom are

personal choice, voluntary exchange coordinated by markets, freedom to enter and compete

in markets, protection of persons and their property from aggression by others. Since 1980,

economic freedom data is available for a large and increasing number of countries.

Operationally, economic freedom assesses size of government (preferably small), security of

property rights, sound money, freedom to trade internationally, and regulation (preferably

limited).

[5] My description of the caste system is admittedly extremely superficial. I do not elaborate the

distinction between varna, i.e., the classical four castes, and jati. There might be about two or

three thousand of the latter. Caste duties refer to jati. Whether a jati is a part of one or

another varna may be contested, if a jati becomes richer or more powerful, or if it tries to

become cleaner. The latter process is called sanskritization. Details like these and sources are

provided in Chapter 6 of my book on Asia (Weede, 2000).

[6] Savakar himself even has been an atheist (Devare, 2009). Whereas atheism is obviously

incompatible with being a Jew, Christian, or Muslim, being an atheist, however, is

compatible with being a Hindu. Most Hindus are neither monotheists nor atheists, but

polytheists.

[7] Of course, not all entrepreneurs have a bania caste background. Since many Brahmins have

earned degrees in the natural sciences or engineering, many high-tech entrepreneurs are

Brahmins.

[8] The choice of planning and import substitution by many poor countries, including China

and India, has two important roots. One was the spirit of the time (1950s and 1960s) and the

tendency of development economists to exaggerate market failure and to overlook state



21/26

failure. The second is the desire to achieve national security by heavy industrialization,

autarchy, and, at least in the Chinese case, building a strong army.

[9] Actually, one might even refer to a double advantage of backwardness. The first of these

advantages refers to the well-known potential for much higher growth rates in poor or less

developed than in rich countries. The second one of these advantages refers to the fact that

the same real income today buys much lower infant mortalities, better nutrition or cleanerwater, and higher life expectancies than it did for the West at an earlier stage of economic

development (Goklany, 2007: chapters 2 and 3, 409).

[10] Although this is an article on Indian economic development rather than a comparison

between Chinese and Indian economic performance, some comparisons between India and

China are useful in order to highlight what was possible in the global context of the time.

Here, China provides a much better yardstick than, say, Russia or South Korea. By contrast

to resource-rich and sparsely populated Russia, India is comparatively resource-poor and

densely populated. By contrast with South Korea, India (like China) is a demographic giant.

South Korean economic achievements merely suggested that the global economy was open

enough for small countries to benefit from an export-oriented growth strategy. China

demonstrated that a huge and populous nation can repeat the success story.[11] Unfortunately, teachers are a politically influential group in India. Because of poor

public schooling, an increasing number of students get a private education. Whether private

schools are officially recognized or not, their students usually outperform state-educated

students. But some poor families may have to pay one quarter of their income in school fees

(Nilekani, 2009: 183, 188, 194). Absenteeism is even worse in Indian public health services

than in Indian schools (Panagariya, 2008: chapter 19). It has been estimated that more than

85 per cent of all patients choose private health care, including even a large proportion of

very poor people (Nilekani, 2009: 375).

[12] My work builds on Weber (1923/1981) and Jones (1981; 1988), on Smith (1776/1976), Mises

(1920), and Hayek (1945, 1960).

[13] An earlier attempt by the World Bank (1995: 90) to assess this effect estimated at least 18 percent. Workers in big enterprises earned a multiple of agricultural wages, in steel production

eight times as much (World Bank, 1995: 76, 83).

[14] Legal titles to land are poorly documented in India. Records are incomplete and fragile

(Panagariya, 2008: 323).

[15] As Kohli (2004) points out, the British built a much more effective administrative service in

India than they did in some of their African colonies, like Nigeria. Unfortunately, however,

affirmative action for the benefit of backward tribe, low-caste and untouchable (or, dalit)

Indians must have undermined the quality and effectiveness of the bureaucracy. In 1990, 49

per cent of central government positions were set aside for these groups (van Praagh, 2003:

201). According to Peerenboom (2007: 166), violations of physical integrity rights in India

appear to be more severe than in China

quite in contrast to what one might expectconcerning the different human rights performance of democracies and autocracies.

[16] Seldadyo et al. (2007) report a positive relationship between good governance and growth

after reducing the impact of measurement error by confirmatory factor analysis.

[17] The Economist (2005a: 15) once estimated that tariffs accounted for about one sixth of the

tax revenue.

[18] Information technology (IT) and IT-enabled services employed less than a million people in

2004 and accounted for about 4 per cent of the Indian GDP. By 2007, these numbers might

grow to 4 million people and 7 per cent of GDP. The value of IT-related exports might triple

in three years (The Economist, 2005b: 69).

[19] According to Gwartney and Lawson (2008: 18), however, what seems most important is not

so much moving from an intermediate degree of freedom to very much more, but to avoid

extreme restrictions of freedom.

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[20] Possibly, one should question these survey results. Survey responses frequently depend on

framing the questions. Nilekani (2009: 272280) complains that reforms or privatization are

still less popular than inclusive growth or swadeshi which is close to autarchy.

[21] This expectation depends on pessimism about Europe. Elsewhere (Weede, 2005b) I have

explained why Europe should be discounted as a major power.

[22] Since China is greying significantly faster and much earlier than India, India has anopportunity to outperform China after the 2020s.

[23] Not only Americans, but also neutral observers (Mohan, 2008) perceive the link between US

support for India and balancing the rise of China. Whether the similarities between the

worlds greatest democracies facilitate their cooperation, remains to be seen.

[24] Trade depends not only on political barriers, but also on distance and transportation costs,

on the size and complementarity of economies. Therefore, measures of trade and measures of

the avoidance of protectionism need not have the same impact on peace. See McDonald and

Sweeney (2007).

[25] Of course, India is a well-known exception to this generalization. On the general proposition

linking prosperity or the level of economic development and democracy, see Burkhart and

Lewis-Beck (1994), Lipset (1994), and Przeworski et al. (2000). For criticism of this untilrecently widely accepted link, see Acemoglu et al. (2008). In Acemoglus view, (capitalist)

institutions made prosperity as well as democracy possible. For a warning against premature

democratization, see Heller (2009).

[26] The link between the expansion of economic freedom and growth has been supported by

econometric studies (de Haan and Sturm, 2009; Doucouliagos and Ulubasoglu, 2008;

Gwartneyet al., 2006; Liu, 2007; Weede, 2006). What remains disputed is whether economic

freedom as such or its improvement exerts the stronger impact on growth, whether the

relationship between economic freedom and growth is linear or merely monotonic

(Gwartney and Lawson, 2008: 18). Establishing some economic freedom seems to be more

important than approaching perfection.

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