Envisioning future scenarios for India and China

Suppose we go back to 1870 and think of four interesting and promising countries.

Britain was the incumbent, the pioneer of the industrial revolution, home of Newton and Darwin, with a head start on building institutions, with sound economic policy and deep integration with a global empire.

Germany, the rising power of Europe, rapidly catching up with the frontier (and ahead of Britain in some fields). More centralisation of power, which perhaps gave an edge in certain things.

The US, a vast country blessed with a great constitution, inhabited by a cast of characters made up of the mavericks, misfits, nutcases and adventurers of Europe.

Argentina, a vast country with boundless prospects, sound policies after 1852, and tightly integrated into the London capital market.

Today we think `Argentina?’. But in the middle of the 19th century, there were many people who thought that Argentina had better prospects than the US. From 1850 to 1930, Argentina did astonishingly well. In particular, from 1880 to 1905, GDP growth averaged 8 per cent over 25 years, which was unheard of in those years.

With the benefit of hindsight, we know what happened. We know that Argentina collapsed into illiberal populism (first into socialism/fascism (1930) and then into Peronism (1946)), that Germany collapsed into militarism, and that the US and the UK managed to build liberal democracies.

So with this framing, let’s ask about how India and China will go.

Will India make it to good institutions, like the UK or the US? Or will India collapse into illiberal populism, much like Argentina did?
All too often, the Indian elite tends to take good outcomes in the deep future for granted, but I am not so sure and it is worth  worrying about the foundations of liberal democracy and a market economy. Given the weak foundations of liberal ideas in India, political freedom is not something to take for granted. Given the weak foundations of market economics in India, economic freedom is not something to take for granted. Argentina’s binge of welfare programs and populism is uncomfortably close to the instincts of most Indian politicians.

Will China make it into good institutions, like the UK or the US? Or will China descend into chauvinism and militarism, much like
Germany did?

The story of Argentina and Germany, from 1870 to 1914, reminds us that what works in a country for a few decades is often not enough to carry the country through to a happy ending. Germany did very well from 1870 to 1914 (44 years). Argentina did very well from 1850 to 1930 (80 years) of which 50 years were really high growth. To many people, sustained success (a la India) has generated complacence: we have started trusting in our governance DNA, thinking that it has delivered results. This hinders the process of identifying incipient problems, criticising the status quo, and changing course.

But the fact that a economic/political recipe worked well for a few decades does not mean that this recipe will continue to deliver. For a country to work out in the long run, it has to constantly renew the foundations of liberal democracy and the market economy, and
repeatedly reinvent itself.

In the late 19th century, growth rates were low in absolute terms, other than outlandish episodes like Argentina (1880-1905). Germany was the star performer of Europe over 1870-1914, with GDP growth of 2.9 per cent. The UK did just 1.9 per cent in this period. At 2.9 per cent growth, GDP doubles each 24 years. In other words, the economy and the political system need to be reinvented in each generation.

At 7 per cent growth, in India, we are getting a doubling of GDP every decade. This requires a reinvention of the economy and the
political system every decade. We have a stark contrast where we have grossly failed on modifying laws, government agencies, policy
frameworks and world views at a rapid pace.

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