The weak legitimacy of Indian capitalism and is it more East Asian or Latin American?

Two articles from the same newspaper and both are related. The first one is by Niranjan who asks whether India is like East Asia or Latin America? The second one is worried over legitimacy of Indian capitalism where corruption is at the centre.

First Niranjan:

Does India resemble East Asia or Latin America? These two regions have had completely different economic trajectories since 1950—of stability versus volatility. Latin America has had volatile economic growth, a low savings rate, bouts of uncontrolled inflation, periodic balance of payments crises, overvalued currencies, and growing inequality. 

East Asia has had a dramatically different experience—rapid economic growth, a high savings rate, reasonable levels of inflation, stable balance of payments, competitive currencies, and relatively low levels of inequality. Needless to say, this is a simplified comparison. For example, it is not that there has been no turbulence in East Asia. The entire region was in turmoil thanks to the 1997 financial crisis.

But it is significant that the affected countries quickly bounced back. Compare that with the lost decade that came in the wake of the Latin American debt crisis in the early 1980s. The hysteresis was acute.

Why have these two regions diverged? 

Economists have offered two sets of explanations. The mainstream view is that East Asia got its policy mix right. The developing states in the region made economic growth their primary strategic goal, pushed labour-intensive manufacturing for exports, tried to follow prudent macroeconomic policies, and invested heavily in education and healthcare.

The radical view, from the group of dependency theorists, is that the nation states of East Asia had more autonomy from the neo-imperial influence of the US. Latin America was not that lucky, being in the backyard of the US. 

So, to repeat the question, does India resemble East Asia or Latin America? Is it a paragon of sensible policy or is it prone to macroeconomic adventures? The latest Economic Survey written by the economists in the finance ministry has said that India now resembles East Asia in terms of high savings rate, growing integration with the global economy and macroeconomic stability.

Raghuram Rajan used to talk about the risks of India going the Latin American way—not just in terms of periodic macroeconomic instability but also the power of oligarchies over policy. It is not an easy puzzle to solve within the confines of a newspaper column. India currently has similarities with East Asia as well as with Latin America.

However, I would like to focus on one issue that perhaps holds the key to whether India goes down the East Asian or Latin American path in the future. And that is job creation. There is a common misconception, thanks partly to a faulty sample survey conducted by the government in 2009, that India has had jobless growth. Yet, there is no doubt that the Indian economy has failed to create high-quality jobs for new entrants into the labour market.

East Asia pursued a growth strategy that helped millions move from farm to factory over three decades of stunning economic advancement. The ability to create jobs was one key reason why the countries in that region could grow rapidly without generating high inequality. India has had a tougher time because of its failure on the job creation front. 

The inability to do what East Asia did so well over three decades in effect means that a democratic government will need to use fiscal resources to buy social peace in an unequal land. In other words, it will need to spend far more than should be considered prudent. And these fiscal pressures could lead to a swing from the East Asian to the Latin American model—a danger that is always lurking below the surface.

Hmm..

Well non-creation of quality jobs is an outcome and not a cause.  Why did India falter on the job creation front if at all we did? We know India has a huge population and creating an economy which provides jobs should have been the top goal. Are we victims of neo-imperial influence of the US and have made policies largely aping them (though Federal Reserve has lower unemployment as one of its goals)?

Or is it something else?

The second piece hits at Indian capitalism more directly:

It is no secret that India is one of the most corrupt countries in the world. Each individual policy proposal to curb corruption is welcome. But what binds everything together is the broader need to shift from crony capitalism to a competitive market economy on the one hand, and from a government system rooted in political patronage to one based on rules rather than discretion on the other. These are issues worth pondering over as India completes 70 years as a free country later this month.

Does it resemble more of Latin America or more of East Asia? The 1997 crisis exposed the crony capitalism of East Asian Tigers in a big way. We keep hearing Latin American crony stories off and on.

Actually, India’s case is neither Latin American nor East Asian. It is distinctly Indian with bits and pieces from everywhere. It is never easy to classify Indian model as one type as shades of other type are as strong…

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3 Responses to “The weak legitimacy of Indian capitalism and is it more East Asian or Latin American?”

  1. The weak legitimacy of Indian capitalism and is it more East Asian or Latin American? - Daily Economic Buzz Says:

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  2. The weak legitimacy of Indian capitalism and is it more East Asian or Latin American? - Daily Economic Buzz Says:

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