There are enormous differences in the degree of industrialization — that is, share of industry in national income or employment — of different countries. Industry has come to mean mechanized production — so much so that even post-modern industries like information technology or telephony are included in services. Mechanized production did not exist before the application of inanimate power; and inanimate power came into existence with the invention of the steam engine. The steam engine was not invented overnight; there were versions of it constructed by various inventors over almost two centuries. None of them came into common use: their ratio of energy input to output was too low, or they were risky and unreliable. James Watt is remembered not so much because of his steam engine, but because he first added a condenser to it and thus reduced heat loss, and used it to generate rotary motion, which could be used to drive machinery; the textile industry could then move away from fast-flowing streams that drove it earlier, and cotton spinning became much cheaper. That is how it began in the late 18th century; the steam engine was applied to various other industries over the next century.
This process began in England, and thence spread first to Europe and the United States; it spread much later to Asia and Africa. That is how we came after World War II to the distinction between developed and developing — that is, aspiring to develop — countries. Industrialization began on the rim of the North Atlantic and spread out from there; it is still doing so. How fast did it spread? Where is it spreading? Where would it go? These are questions of importance to us in India. A recent NBER working paper by Bénétrix, O’Rourke and Williamson (BOW) points at some of the answers.
To understand the process, one must start with some countries where industry originated. Britain is obvious. But it did not remain leader; it was first overtaken by Germany, and then both were overtaken by the US. By the second half of the last century, Britain hardly belonged to the leaders; Japan made the grade better. So BOW take two variants — one consisting of the three original leaders, and one in which Japan replaces Britain after 1939. The latter is more reasonable.
BOW begin in 1873. Till 1913, the leaders grew at a sedate pace — 3 per cent till 1889, and 3.4 per cent from then till 1913. Then came the interwar slowdown; in 1920-38 their growth fell to 1.9 per cent. The War was followed by a golden age; the leaders grew at 5.2 per cent in 1950-1972. Then came another slowdown after the oil crisis; in 1973-89, leaders’ growth fell to 1 per cent. Then it perked up to 2.1 per cent in 1990-2007. Let us call these periods early prewar (1873-89), late prewar (1889-1913), interwar (1920-38), postwar (1950-73), post-oil-crisis (1973-89) and recent (1990-2007). Thus the last century has seen alternating periods of lower and higher growth amongst the leaders, but growth in the most recent period is not much higher than in the depressed IW.
Britain and Germany are included in leaders. BOW divide the remaining European countries into Scandinavia, the core (Belgium, Netherlands, France and Switzerland) and the periphery. By and large, the leaders are slow growers; other countries have grown faster than them. The exceptions are Asia in EPW, Middle East in EPW and LPW. The rest of the world is divided into the (European) periphery, sub-Saharan Africa, Latin America and the Caribbean, Asia and Newly Settled Countries — Australia, New Zealand and Canada.
According to BOW, rapid industrial growth began as far back as 1870 in the European periphery and Latin America. It spread to Asia after 1890 and to Africa (north and south of the Sahara) after World War I. This could be explained in terms of cultural affinity; the most European parts of the world began to catch up with the leaders earliest.
The Post-War Period saw the highest growth amongst leaders, and the most rapid catch-up; in other words, it was the period of highest growth everywhere in the past 140 years. For Europe, that was the period of reconstruction. But for the rest of the world also, something went right in 1950-72 in a way it did not before or after. The warring countries organized themselves for a fight-to-the-finish war. After the war, they applied what they had learnt to growth, and it worked.
The question is, why did it stop working after 1973? The immediate answer is the oil crisis. But it was not just a matter of higher oil prices. The enormous transfers to oil-producing countries landed them in a financial crisis: they had suddenly to find avenues of investment for their enormous surpluses. Latin American countries borrowed a good deal from those surpluses; they were the only group that did well in 1973-89. But many of them eventually went bankrupt. And oil-consuming countries faced immediate payments crises. This disruption of trade and payments flows slowed down growth after 1973. It has recovered after 1990, but not reached the levels of the PostWar Period.
The Post-War Period was also distinctive for other reasons. For one thing, it saw the fastest convergence of industrial output across countries. For another, productivity levels converged across countries: in other words, productivity went up in countries with low output per head. Finally, the cross-country variability of growth rates also came down. Although growth came down after 1973, variability has not changed much. In other words, growth in different countries has moved together more closely since World War II than it did before.
BOW list the top ten growers in every region. India has never been a particularly fast grower. In 1870-1889, it was fourth after Japan, Indonesia and Thailand, the only countries for which there were data. It was sixth in 1889-1913 and 1920-1938, and tenth in 1950-1972. After 1972, it was not even in the top ten. This is extraordinary, for we have a narrative in this country, that India’s growth was held up by Nehruvian socialism till 1991, and that the great reforms unleashed a surge of growth afterwards. It may be so, but other Asian countries saw an even greater surge.
This is not the last word, for I find some of BOW’s results surprising. I can understand China, Korea and Malaysia growing faster than India after 1990; but BOW put even Afghanistan, Laos and Burma amongst the top ten. That does not automatically mean that their figures or calculations are unreliable. But it is not enough to gather together masses of statistics and put them into the mill. Data crunching has to be accompanied by their interrogation and analysis. The convergence they look for is not only with leaders. It would occur amongst all countries; their growth would slow down as their level rises.
At this stage, I would end with the conclusion that India’s post- reform performance is not stellar by international standards, and that we need to ask ourselves whether we need another set of reforms. Maybe the reforms covered too little; maybe the ingenious politicians and bureaucrats have found ways to defeat the reforms.