Archive for the ‘Economy’ Category
Angus Maddison is a world-renowned economic historian who is famous for his work on estimating the past GDPs of modern economies by different measures. I won’t go much details into his original work, but the pieces he wrote about Indian subcontinent are worth-reading. In this post, I will try to delve into his assessment of British rule in India (read the Mughal one also). Just to remind you, I am an Indian and Angus Maddison is a British national – so a difference in narratives (bias?) could be present in my write-up.
The Elitist British
The biggest change the British made in the social structure was to replace the warlord aristocracy by an efficient bureaucracy and army. In the first generation, British tried to Westernize India – introduced English education, tried out a few Social efforts and tried to modernize infrastructure. But soon they changed their course. Having failed to Westernize India, the British established themselves as a separate ruling caste. They did not inter-marry, their kids grew up in separate schools and they socialized with separate clubs where “native” population was absent. Maddison compares –
“The British ruled India in much the same way as the Roman consuls had ruled in Africa 2,000 years earlier, and were very conscious of the Roman paradigm.“
One of the positive sides of the whole thing was that the British never tried to settle down in India and remained low in number. This resulted in low taxation but Maddison described that it benefited the middle class and land-lords but not the bottom-of-the-pyramid peasants.
“There were only 31,000 British in India in 1805 … In 1911, there were 164,000 British … In 1931, there were 168,000. … The British had inherited the Moghul tax system which provided a land revenue equal to 15 per cent of national income, but by the end of the colonial period land tax was only 1 per cent of national income and the total tax burden was only 6 per cent. … Most of the benefits of the lower fiscal burden were felt by landlords, and were not passed on to the mass of the population. In urban areas new classes emerged under British rule, i.e. industrial capitalists and a new bourgeoisie of bureaucrats, lawyers, doctors, teachers and journalists whose social position was due to education and training rather than heredity. In the princely states, the remnants of the Moghul aristocracy continued their extravagances – large palaces, harems, hordes of retainers, miniature armies, ceremonial elephants, tiger hunts, and stables full of Rolls Royces.”
The System of Exploitation
The main aim of British exploitation was to remit money to Britain. Again, as per Maddison, there were two phases of it. The British East India company had nothing but a short-term-profit-maker attitude while the British Kingdom had a long-term-rent-seeking approach. For example, Robert Clive, the East India Company General took quarter of a million pounds for himself as well as a jagir worth £27,000 a year. (worth mention comment from Maddison – British did not pillage on the scale of Nadir Shah, who probably took as much from India in one year as the East India Company did in the twenty years following the battle of Plassey.)
Comparatively, later on, the remittances became more smooth and systematic –
“the Viceroy received £25,000 a year, and governors £10,000. The starting salary in the engineering service was £420 a year or about sixty times the average income of the Indian labour force … Under the rule of the East India Company, official transfers to the UK rose gradually until they reached about £3.5 million in 18566, the year before the mutiny. In addition, there were private remittances … By the 1930s these home charges (i.e. remittances) were in the range of £40 to £50 million a year … (also) About a third of the private profit remittances should therefore be treated as the profits of colonialism. “
Moreover, the Govt of India, which always ran fiscal surplus over the British Kingdom, ran into debts due to spurious reasons. Further, during the World Wars, Govt of India “gifted” (joke!!?) millions of pounds from its reserves to the British Govt. Maddison describes –
“In spite of its constant favourable balance of trade, India acquired substantial debts. By 1939 foreign assets in India amounted to $2.8 billion, of which about $1.5 billion was government bonded debt … (during World Wars) there were two ‘voluntary’ war gifts to the UK amounting to £150 million ($730 million). India also contributed one-and-a-quarter million troops, which were financed from the Indian budget.”
Where Maddison differs
Maddison differs quite a bit on the topic of Industry. He countered arguments of R.C. Dutt, R Palme Dutt and Nehru on de-industrialization (i.e. the decline of the old handicraft industry without the compensating advance of modern industry) of India with his set of facts. He accepted the facts that the Mughals did have a large industrial base and with British rule and policies it died. But added an important quote –
“Oversimplified explanations, which exaggerate the role of British commercial policy and ignore the role of changes in demand and technology, have been very common and have had some adverse impact on post-independence economic policy”
Maddison argued that the Mogul Indian industry were to produce luxury goods for aristocrats. But after British rule begun, the higher echelons of Indian society were flipped upside down. The British officers and native “copycat” Zaminders had little attraction on the traditional Indian handicrafts. Instead they developed taste of British merchandise. Furthermore, with social changes in Europe, there were a decline in demand of handicrafts overall (not only Indian but also other European ones as well). Along with that, cheap and better quality textile from Britain occupied Indian market. Maddison agreed that the above incidents probably threw a lot of Indians out of job but he adds that the per-capita textile consumption doubled due to cheap British imports. He explains –
“the displacement effect on hand-loom weavers would have been smaller than at first appears. The hand-loom weavers who produced a third of output in 1940 would have been producing two-thirds if there had been no increase in per capita consumption.”
But he, in the end, agreed that India was the net loser on textile industry due to long term colonial effects –
“In time, India built up her own textile manufacturing industry which displaced British imports. India could probably have copied Lancashire’s technology more quickly if she had been allowed to impose a protective tariff in the way that was done in the USA and France in the first few decades of the nineteenth century, but the British imposed a policy of free trade. British imports entered India duty free, and when a small tariff was required for revenue purposes Lancashire pressure led to the imposition of a corresponding excise duty on Indian products to prevent them gaining a competitive advantage. … If India had been politically independent, her tax structure would probably have been different. In the 1880s, Indian customs revenues were only 2.2 per cent of the trade turnover, i.e. the lowest ratio in any country. In Brazil, by contrast, import duties at that period were 21 per cent of trade turnover.”
So the fundamental issue was on the “free-trade” without preparedness but not the British policies.
In fact Maddison threw light into a few different aspects of Indian industries. Britain used India as their Asian export Hub and that resulted in Indian industrial gain.
“By the time of independence, large-scale factory industry in India employed less than 3 million people as compared with 12 1/4 million in small-scale industry and handicrafts, and a labour force of 160 million.56 This may appear meagre, but India’s per capita industrial output at independence was higher than elsewhere in Asia outside Japan, and more than half of India’s exports were manufactures.”
So, even though Indian industry was small, it was better off most of its Asian counterparts. However, the industry relied on mostly British skilled workers to fill in the upper ranks and that (along with protective policies) led to a demise of Indian industries post-Independence.
Overall, as per Maddison, British urban economy was better off the Moghul one. It was more productive, modern and focused on entrepreneurship. On the other hand, the condition of villages worsened because of “extractive” Zaminders, population increase and reduced per-capita land availability. The book overall is a fascinating read and I will probably write up another post to follow up on my evaluations and criticisms of Angus Maddison.
The primary resource – Class Structure and Economic Growth: India & Pakistan since the Moghuls (1971) by Angus Maddison.
I read a couple of chapters of Angus Maddison who described Indian economy and its pitfalls quite vividly. Angus Maddison is a world-renowned economic historian who is famous for his work on estimating the past GDPs of modern economies by different measures. I won’t go much details into his original work, but the pieces he wrote about Indian subcontinent are worth-reading.
In short, both Mughal and British empire were significantly “elitist” and “extractive“, i.e. from power to money – everything was in the hands of a few. Contrary to the widespread belief in India, the common mass lived a little above the sustainability level and were hit by periodic natural calamity and crop-failures. The system or the economy in general was built to grind the common people into de-facto slavery. In this blog-post, I will focus on the Mughal rule (read the British one also).
The Elitist Mughals
To start with the Mughal system, Maddison notes –
“India had a ruling class whose extravagant life-style surpassed that of the European aristocracy.It had an industrial sector producing luxury goods which Europe could not match, but this was achieved by subjecting the population to a high degree of exploitation. Living standards of ordinary people were lower than those of European peasants and their life expectation was shorter.”
To expose the elitism in Indian society, he notes that the major export items those India had at that time were “salt-peter (for gunpowder), indigo, sugar, opium and ginger” but the import items were nothing but silver, gold and other precious stones. This highlights that on the national level, India exported items produced by ordinary populace where they imported items for elites only. Maddison went on the compare the European standard of living with the Indian ones –
“In spite of India’s reputation as a cloth producer, Abul Fazl, the sixteenth-century chronicler of Akbar, makes reference to the lack of clothing in Bengal, ‘men and women for the most part go naked wearing only a cloth about the loins’. Their loincloths were often of jute rather than cotton. In Orissa ‘the women cover only the lower part of the body and may make themselves coverings of the leaves of trees’. They also lacked the domestic linen and blankets, which European peasants of that period would have owned.”
So the common people perished where the wealthy had it all. While average Indians didn’t have cloth to wear on, the Indian muslin were famous in Europe and was noted for aristocracy.
The health condition of common people was equally bad. Indian population almost stagnated for about 2000 years –
“Kingsley Davis has suggested that mortality rates in India were high enough to offset the very high fertility rates, so that there was little increase in population in the 2,000 years preceding European rule.”
The System of Exploitation
There lies the hierarchy and Maddison got it correct. The Indian system worked through the caste hierarchy and the agro-income from the lowest strata of the society used to bubble up as taxes to the upper elites.
“The revenue of the Moghul state was derived largely from land tax which was about a third or more of gross crop production, i.e. a quarter or more of total agricultural output including fruits, vegetables and livestock products which were not so heavily taxed … Total revenue of the Moghul state and autonomous prince-lings and chiefs was probably about 15-18 per cent of national income. By European standards of the same period this was a very large tax burden”
Not only the taxes were high, the tax money were used mostly in “consumption expenditure of the ruling class”. Maddison further notes that the Jagir system in India was not hereditary and the Jagirs were posted from place to place. So, he “had an incentive to squeeze village society close to subsistence”. The village society was very docile and governed by the rules of caste. That was the primary reason why India was smoothly ruled by outsiders for years as Indians were more concerned about their “karma” as per their “caste” and not to sidestep it for a larger or revolutionary role in the society. One notable absence, as per him, was that Indians rarely tried to take up sea-trade as part of their profession since “religious beliefs inhibited foreign travel and commercial development by Hindus”. Furthermore, caste stagnated the society to new ideas and technology unless they are imposed from the rulers –
“In spite of extensive contact with foreigners, India did not copy foreign technology either in shipping or navigation, or in artillery and military organization, and this is one of the reasons it was conquered by Europeans. “
On the other hand the revenues from this exploitation channels were put in to the “hoarding precious metals and jewels“ and “construction of palaces and tombs”. The total land-irrigation work undertaken was as little as 5% of the total fertile-land.
On the brighter side though, Maddison mentioned that religious institutes in India did not consume as much money as it did in Europe.
In summary, in spite of a few glitches (I would discuss those later), Maddison probably got to the closest to the reality. There are very few Indian scholarly articles that could now-a-days confirm that Indians on an average were richer than the Europeans or the Arabs at the same time. The perils of elitist economy would be felt sooner than anyone expected – during Industrial revolution. The major Indian produce – things such as muslin – were dependent on aristocrats to buy. In a world where mass-production was much more important than elite products – Indians were bound to lose the trade war. Moreover, the producer lived in perils and he had little incentive to innovate or take his production scheme to the next level. All things necessary to produce a failed state were gathering mass under the lavish Mughal aristocracy. The myth of rich Mughal India is thus just another myth.
The primary resource – Class Structure and Economic Growth: India & Pakistan since the Moghuls (1971) by Angus Maddison.
In United States, inequality of income or inequality in general is a hot topic of discussion. I tried to prepare a list of good and relevant points around the inequality arguments.
8) All in one
In my earlier post I argued that colonialism has probably no long lasting economic effect on either of the colonizer or the colony. I got a couple of more points to display it. The first is that of Caribbean Island states. They got their independence in different times in the history but that has no effect on their economy. The first one to get independence was Haiti (1804) but they lag behind the all of other neighboring islands by much. The top-of-the-list Bahamas got their independence in 1973 and the second-in-list Puerto Rico is still a US Colony.
The second set of data is of Turkey and Balkans. Turkey had a lot of area (in Europe) under their occupation for a long time in the history. However, in the long term, there is nothing to suggest that Turkey has economically a better performer than the rest. Rather it is more evident that the other East European colonies are doing far better than Turkey. In fact, until recently (till 1980s), Turkish people were far worse of the entire East Europe they ruled for centuries.
Both of these also shows that colonialism has limited effect on a economy of a country in the long term. Of course there are some effects in the short-term, such as draining resources or dependency, but in the long economic history drainage of resources has similar effects to that of a war. A war has seldom made a country poorer – especially if we take recent examples of Germany or Japan.
Colonialism, or as of that the whole thing called imperialism has a different root. If I can see through the eyes of Adam Smith, the famous economist and father of modern Economics –
“No nation ever voluntarily gave up the dominion of any province, how troublesome soever it might be to govern it, and how small soever the revenue which it afforded might be in proportion to the expense which it occasioned. Such sacrifices, though they might frequently be agreeable to the interest, are always mortifying to the pride of every nation, and what is perhaps of still greater consequence, they are always contrary to the private interest of the governing part of it….””
Well, all that imperialism boils down to the pride of nation. The notion of a colony is a positive pride for the mother country and negative shame for the colony itself. It may be beneficial to the mother country in the economic sense. It may not be as well.
In the wake of recession in Europe and downgrades by several rating agencies, Indian politicians and media are back to the drawing board to figure out what caused the debacle of last couple of years. Initially, it looked like a recession bypassing us and we are recession-proof. Later, the thought was that the effect would be temporary and probably caused by an international bubbles. Now, its more and more evident that recession has actually exposed Indian under-performance. A lot of the issues currently plaguing India is home-grown and the solutions can be achieved internally. But the media didn’t listen. Neither did the political leadership. So, with a new gun, they are targeting the trade deficit with China to be one of the main culprits. I can see politically things have started moving, both in terms of talks and actions.
Before I delve deeper into the issue, let me present the facts. The first point to note – Trade deficit between the neighbours widened to $40 billion last year. At $17.9 billion, India’s exports to China in 2011-12 were less than a third of the $57.55 billion worth of goods it imported from the country (source). The worrisome factor is – this has a trend. The trade gap is growing, even if we look at the post-recession trend alone. Overall, India is not in a good shape in terms of trade. The deficit is creating pressure on exchange rates and reserves. So, we get a culprit and it turns out to be our favorite – China.
Is it that easy? Probably not. Jyoti Rahman once explained how trade deficit with India might not be that bad for Bangladesh. In this case also, if I look deeper, I see the traces of hints from his writing. What caused this massive trade deficit and what keeps it growing – are the two prime questions I would try to answer at first. If one looks at this chart provided courtesy Wall Street Journal, you can easily identify the three major import items from China. They are (ranked) – Telecom equipment (e.g. ), Equipment for major projects (e.g. Power plant, Mining), Computer related accessories/parts (e.g. Computers, Hard Disks etc.). All these things are known as “Capital Goods”. In fact, overall Capital goods imports are estimated to have crossed $40 billion at present. They were $6.5 billion in 2003-04 (source). So, the growth in import from China is mainly coming from Capital Goods and not from toys (as people often complain).
Now that we have an answer that Capital Goods import from China is the major cause of Trade imbalance with China, we now question, is that a bad thing? To me, the answer is mixed but overall I am leaning towards the answer “No”. Let me explain why I am in favor of Capital Goods import from China.
Capital Goods import is considered to be a good sign for the economy in general. As explained in details in this article, a developing nation imports machinery (or other capital goods) and uses its cheap labor to make items worth of export. As the time proceeds, the country is able to produce more and more export-goods and eventually produce those capital goods close at home. This has happened in China too, as it is described in the figure below. In 1980s, it imported machinery from Japan and Germany to set up its factories where it produces garments/textile and consumer goods to be later exported to North America and Europe. After a while, Japanese and German companies invested in China to produce those machinery to compete rising labor cost close to home and China has eventually become a net exporter of Capital goods. At the same time, Japan and Germany moved to higher value added manufacturing industry (e.g. innovation, design) and China took their former place. Most of these capital goods tagged as “Made in China” are also designed in Japan/Taiwan/Germany.
On the other hand, if one looks at growth rates of Chinese items exported to the rest of the world, one can easily verify that Telecom equipment, Electrical machinery and Office machines are three fastest growing export (that testifies the theory) sectors as of 2004. (source) So, it’s a natural thing in the growth cycle of a developing country and it’s better to get it sooner than later. But isn’t that hurting the competitiveness of Indian companies who build Capital goods also? That’s absolutely true but probably not a big deal. Imagine the early 1990s, when Indians started importing computer and related accessories from rest of the Asia. If Indian Govt decided to curb those and promoted domestic computer manufacturing industries, would we have seen such exponential growth in services export? Probably not. One advantage that India had was that they had no domestic manufacturer of Computers and no jobs were threatened because of cheap Computer import (Leftist brigade might still argue otherwise). There is no dispute that the third highest item in the list of imports from China (Computer and accessories) actually adds value to Indian services industry. The imports related to power plants and telecom are targeted towards another domestic problem – infrastructure.
However, Indian political delegates are talking to China in order to get more market access and remove restrictions. While this is not a bad ploy but the success of such ploy will definitely be limited. India should also push for greater market access in the developed world (such as EU-India FTA), where most of Indian exports should end up. After all, India will continue to have a huge labor advantage against the First world, but probably not against China. If India can fix their perennial infrastructure problem and obtain better access to developed world market, investments will start flowing. More investments are used for more capital goods import and more export of consumer goods and increase in jobs – just as the classical development paradigm suggests. So, the trade deficit with China is not as bad thing as the press suggests and we should probably rethink our perceptions about our constraints.
Additional Reads –
1. This old paper from Jong-Wha Lee argues why Capital goods import is good for long-run growth.
2. This paper from Veeramani relates Capital goods import with labor-productivity.
3. This paper suggests – “access to cheaper capital good imports not only had a positive effect on labor productivity growth for the entire sample period, but has become increasingly important in recent years.”
4. This paper concludes – “we find that for the period from 1980 to 1997, after controlling for trade liberalization, other reforms, and fundamentals, stock market liberalization are associated with a significant increase in imports of capital goods. Both our evidence and the literature’s further suggest that this can be attributed to the consequences of financial integration which allow access to funds and lower the cost of capital in an economy.”
WSJ published an article in the similar tune.
“India’s cabinet last month approved a 21% tariff on imports of power generation equipment into India. … But this is a profoundly short-sighted approach to the trade issue, which ignores what should be the far bigger concern of Indian policy makers—not the trade deficit with China, but the country’s overall infrastructure deficit. India’s chronic shortfall of electricity (witness last month’s blackouts), roads, airports and the like is a major constraint on growth. Imports from China are part of a solution to this problem, not a problem in their own right.
The vast majority of imports from China consist of capital goods such as electrical machinery, nuclear reactors, boilers, ships, boats and items for civil engineering projects. Consumer goods such as toys, footwear and the like account for less than 2% of imports from China. These capital goods tend to come at a lower cost (thanks to the so-called China price), and are made cheaper still by extremely advantageous financing offered by Chinese banks.”
Now Swaminathan Aiyar has come to my support.
“Why have falling import barriers now produced prosperity? Because this encourages specialisation in areas where India is competitive, and discourages wasteful investment in uncompetitive areas.”
I have been reading for a while about post-colonial world and how colonies were able to turn things around. The blog post from Jyoti Rahman made me think twice. Was it all correct?
Being Indian, the version I read and heard a hundred times from my childhood, was that Indian subcontinent along with a lot of other former European colonies were hammered quite heavily by colonialist masters. The sole reason of our current state of poverty seems to be related to our history, which has a couple of hundred years of colonial rule in its timeline. During this period, our raw resources were taken away and were used in factories across Europe to produce items for consumption of rest of the world. On the other hand, our local small industries were bulldozed with high restrictions and they soon mired into oblivion – leaving us a nation full of poor people. Little or no investment in Agriculture and food-distribution caused several famines during colonial rule. No effort for public education system left a bunch of illiterate people. To add on top of that, ever since we became independent, we are doing better and better, with more food, some industries and now the services industries to cheer about. There are multiple examples around us to justify this pattern. (Read an article by Amartya Sen on this topic)
To question this understanding, the first graphics I would refer to, is simply of growth of some of the countries post-independence. If I have to assume that it was raw materials from colonies that caused the growth in masters, then there should be an economic effect of increased availability of those resources in colonies post independence. And a scarcity of the same should be causing growth to limp in the masters.
But the graph above shows absolutely the opposite. In last 50 years, colonies might have got little improvement of per-capita growth, but the gap between colonies and their former masters has expanded at a rapid pace. This makes me comment that rather than we demanding our independence, the masters should have voluntarily freed our nations.
But then comes the next question, why is this disparity, even after the decolonization? There are two answers – one in the side of the masters, the other was from the colonies. After world-wars, the European nations were better of without colonies because they avoided one of the core reasons of their disputes – ownership of colonies. Post-world-war, Germany developed rapidly and this time they didn’t have a problem with other European countries, as they didn’t vie for colonies. There are no intra-state war (not even a proxy one) among Western European colonialists after the colonialism ended. Rather the cold-war kept them united.
The second reason would probably be attributed to a successful shift of their economy to tertiary one, which these countries already doing good at. With higher level of average education and skills in Science, they were bound to lead the world in services and innovation driven economies.
On the other hand, most of the colonies inherited better institutions than their previous native rulers have built (Indian institutions were far better in 1947 than what was left by Mughals in 1757). However, for most of these countries, strong nationalist sentiments drove them to success in the form of independence. These sentiments, coupled with fear from recent-past experiences, made these countries extremely business-unfriendly. They became inward looking, anti-foreign-investment and invested most of the resources into less-productive sectors such as Agriculture and small-scale industries. However, standard of living were improved in these countries in the form of health, education and social indices went up and towards the end of the graph, those start to yield some good results for them.
Now going back to where I started, were these colonies better off being never fallen into the grips of masters? I see point for and against it clearly. The points in favor of this view are discussed in the beginning. The points against it are also becoming clear. For example, between 1750 and 1947, the growth in the World economics were mostly fueled by manufacturing. There were new innovations all along the Europe and an active patent system to protect interest of investment on innovation. Indian rulers before the British did never thought of value of innovation, nor did they encourage it with more business. The culmination of pre-Raj Indian empires were said to be Akbar’s rule that created space for peaceful existence, but not even an iota of industrialization and literacy drive that one would expect in contemporary Europe. If you look at Akbar’s EU contemporaries, you’ll find Elizabeth of England and she appears to be much more farsighted than Akbar. Long later in 1857, Indians started their first war of independence with an objective of getting their old Mughal-Maratha rulers back but not for democracy, literacy, separation of church and state or modernization of infrastructure and institutions. India didn’t yet have enough decision-makers to think in those terms.
In summary, I feel we got what we deserved. Even if there were no such thing named colonization (which again was inevitable) or we were never colonized, we were having roughly the same standard of living that we have today. Whether we named our country as India, or were we have 20 different countries instead of three – are different questions and I can not address them. Guided by democracy with no political setup or autocracy with an extension of Mughal-Maratha-like empires would not have taken us far beyond where we are today.
Bangla Version with a lot of discussion.
I read hundreds of articles about US presence in Iraq and most of them argues with oil as a primary driver of US Economy. Moreover, they also highlight the importance of Persian Gulf as a primary source of US oil and energy resources. These notion is extremely popular in Indian subcontinent and Middle-East, where people love to discuss sans any facts. However, digging deeper in facts quickly dismisses that big a role of oil in modern day United States.
If we briefly look at oil import trends of United States, we can definitely observe a downward trend in oil import for last six years. In year 2010, US imported almost same amount of oil as they did in 2001. From the peaks of 2005, its down by about 12%. US oil imports are actually going down. (source)
Let’s go over the other myths –
1. US imports most of its oil from Persian Gulf and US imports more from OPEC countries.
Clearly wrong. US imports around 15% of oil from Persian Gulf and about 40% from OPEC.
2. US imports a lot of oil from Saudi because of the kingdom’s closeness with USA.
US is steadily increasing imports from Canada over Saudi and in 2010, US imported 2.5 times of that it imported from Saudi. The tar-sands oil in Canada made them the owner of second largest oil reserve after Saudi and United States is making full use of it.
This is the detailed break up of US oil sources –
The last but not the least – it’s always assumed that US will remain the largest net oil importer of the World. However, Shale Gas is turning that tide. A very optimistic article (and another one)on Shale Gas discovery and its impacts terms this as “energy revolution”. The days might not be far ahead, when US might not import from outside of the continent at all.
A good read – Swami Aiyar’s blog