Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries
In 1961, soon after arriving in Japan as the American ambassador, Edwin O. Reischauer held a public conversation with the Japanese economist Nakayama Ichiro.1 Their differences of perception illuminate many dilemmas of a developing nation like India today. The American diplomat, a particularly sanguine exponent of “Modernization Theory,” believed that rapid economic growth was well on its way to making Japan a Western-style developed nation and a model for other non-Communist Asian countries. The Japanese economist worried that economic growth that didn’t take account of the social and political changes accompanying it was unhealthy, and created more problems than it solved.
Like all modernizing countries with large rural populations, such as India and China, Japan was hobbled by an economy with two distinct sectors: one was defined by modern technology, a high ratio of capital to labor, and high worker productivity and wages; the other had all the opposite traits. Rapid, unbalanced economic growth aggravated the innate inequities of the “dual structure,” which in Nakayama’s vision had serious political consequences. Countries that develop without drawing large parts of the rural population into the modern sectors of the economy were prone to social unrest and authoritarian regimes. Nakayama knew this from bitter experience of the war that Japan, beset by severe internal crises in the 1930s, had subsequently waged against many Asian countries and the United States.2 Accordingly, he was keen to see postwar Japan develop an open, egalitarian, and pacifist democracy.
Largely due to the macroeconomic approach of Nakayama and his colleagues, which emphasized labor over capital productivity and technical training for people moving out of the agrarian economy, Japan achieved sustained growth for close to two decades.3 Helped considerably by American procurements during the Korean War and infusions afterward of aid, investment, and technological innovations, Japan then turned into a major exporter of goods and capital to East and Southeast Asia.4 Japan also became an example to the region with its land reforms, industrial policy, well-designed state intervention in markets, investments in education and health, which created a skilled and productive labor force, and economic nationalism—the features that when carefully adopted helped in the remarkable economic emergence of such countries as South Korea, Singapore, Taiwan, and Thailand.5
Most of these developing states in East and Southeast Asia, however, came late to electoral democracy. India’s own, much greater, challenges in the previous half-century are highlighted by the fact that this bewilderingly diverse and oppressively hierarchical society set out in the late 1940s to simultaneously build, without possessing much basis for either, an egalitarian democracy and a modern industrial economy.6 Decades of colonial rule had damaged India, saddling it by 1947 with an underproductive agricultural economy, a weak industrial base, and…
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