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Underperforming even in good times

Topics: Economic Growth

Tags: east Asia

Posted On: 14 Jun 2013

Arvind SubramanianThe late Professor Raj Krishna's term Hindu growth rate was an aptly pejorative description of India's

economic performance in the post-independence period. But how has India performed in the good times, when the country's growth turned around? This column compares India's boom years with East Asia's.

The popular impression is that India has done exceedingly well in terms of the economys growth rates,second only to China in recent years. The reality however, is sobering.

The assessment that follows has four features. First, the benchmark is seven Asian countries - China,Indonesia, Korea, Malaysia, Singapore, Taiwan and Thailand. Second, the comparison is not inchronological time but in take-off time. That is, India's growth performance in the good years iscompared with the growth of the other countries during their respective high-growth episodes.

Third, the assessment is based on two metrics. The simple one compares growth rates of per capitaGross Domestic Product (GDP) (measured in purchasing power parity terms) between India and theother countries. Economic growth theory, however, offers perhaps a more appropriate convergence-adjusted - metric. Economic convergence simply means that poor countries should grow faster thanrich countries because poorer countries have cheap labour and low levels of capital, which together

offer greater investment and hence growth opportunities. So, if two countries A and B grow at the samerate, but A started off richer than B, then it is A's performance that is more impressive.

Finally, this assessment is undertaken for two periods of Indian performance. As emphasised by thework of Brad de Long (2003), Roberto Zagha and John Williamson (2002), and Dani Rodrik and myself(2005), India's growth turnaround occurred around 1980 and preceded the policy turnaround by about adecade. But India's growth trajectory steepened around 2002, yielding nearly 10 years of spectacularperformance. It is natural, then, to assess both the (33) good years after 1979 and the (10) go-go years

after 2002 with other Asian countries.

Figure 1. Growth per capita GDP in take-off time (selected Asian countries)

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The 33 good years after 1979Table 1a illustrates the comparison for the post-1979 period. Column 1 provides the take-off date for theother Asian countries. These dates are obtained from an influential paper by Hausmann, Pritchett andRodrik (2003). Column 2 displays the per capita GDP growth rate for all these countries over the 33years following their respective take-offs. Since Korea's take-off occurred in 1962, the growth reportedin this column is for the period 1962-1985, and so on for the other countries. Column 3 displays how

rich each country was relative to India at the point where its growth took-off. So, taking Korea as anexample, in 1962, the average level of its per capita GDP was 2.6 times that of India in 1979.

Table 1a. Indias underperformance relative to Asia in take-off time, post-1979

A few striking features stand out from Table Ia. In the post-1979 period, India grew slower than allseven Asian countries. Evidently, even Indian dynamism under-whelms its Asian counterpart (Table 1a,column 2; Figure 1). More strikingly, India grew slower than every country despite being poorer to startwith (Table 1a, column 4). Thus, on a convergence-adjusted basis, its performance was worse than thesimple numbers suggest. For example, Korea and Taiwan grew three percentage points faster thanIndia on average despite being 2.5-3 times as rich at the take-off point. In recent years, the Chinesegrowth story has attracted all the attention. But the Korean, Taiwanese, and even Singapore growthepisodes seem more impressive, because they posted comparable growth rates to China's despitebeing much richer.

What about magnitudes? On a simple comparison, India underperformed Asia by 1.8% a year, whichcumulates over 32 years to a whopping 185%. Translated into levels, India's per capita GDP today

should be $11,000 instead of $4,000. On a convergence-adjusted basis, India's underperformance waseven worse. We can compute what India's growth rate should have been had it behaved like the rest ofAsia in terms of catching up, taking account of the starting point. On this metric, India should havegrown by 7.2% per year rather than the 4.1% it actually posted. This under-performance of 275%implies that India's GDP should be closer to $15,000 rather than $4,000.

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The go-go years after 2002Table 1b provides answers. Of course, India's performance improved considerably. The average growthrate climbed from 4.1% post-1979 to 6.2% post-2002. But, as column 2 of Table 1b shows, India stillgrew slower during the period 2002-2012 than every other Asian country (except Thailand) did duringits first 10 years of rapid growth. On a convergence-adjusted basis, India grew slower than five out ofthe seven countries.

Table 1b. Indias underperformance relative to Asia in take-off time, post-2002

What about magnitudes? The simple comparison suggests that India underperformed by close to 1% ayear. On a convergence-adjusted basis, India underperformed by about 0.6% per year. These numbersare important in providing perspective to the recent Indian growth experience. Over the longer (post-1979) period, Indian growth was utterly unremarkable compared to Asian peers. But even the IndiaShining years seem less glossy. In real time, the impression was one of India outperforming allcountries except China. Properly measured, India did well but not as well as the Asian tigers duringtheir comparable growth spurts.

Is the Hindu growth rate dead?Why India has underperformed, and how this can be reversed, will continue to be the staple of debate.The numbers presented here would invite the irreverently brilliant Professor Raj Krishna to pronouncefrom somewhere high up: "The Hindu growth rate is dead. Long live the Hindu growth rate."

A version of this column has appeared in Business Standard.

Further ReadingDe Long, B (2003), 'India Since Independence: An Analytic Growth Narrative', in D. Rodrik (ed.) In Search of Prosperity: Analytic Narratives on Economic Growth, Princeton University Press, Princeton,New Jersey.

Hausmann, Ricardo, Prichett, Lant and Dani Rodrik (2005), Growth Accelerations, Journal of Economic Growth 10, 30329.

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Rodrik, Dani and Arvind Subramanian (2005), 'From Hindu growth to productivity surge: the mysteryof the Indian growth transition', IMF Staff Papers Vol. 52, No. 2. pp. 193-228.

Williamson, John and Roberto Zagha (2002), 'From Slow Growth to Slow Reform', Institute forInternational Economics. Washington, DC. July 2002.