One Step Forward, Five Steps Back

Alternate history is a genre is underrated. I should say at the outset that I haven’t read as much as I would have liked to in this genre, but have thoroughly enjoyed what little I have read (or seen, in terms of movies).

Why begin with this? Because Niranjan raises, as he puts it, a tantalizing question:

The short period when Lal Bahadur Shastri was prime minister offered hope of change. Shastri wanted more investment in agriculture to control rising food inflation. He saw that physical controls were creating artificial shortages and black markets; he preferred financial controls. And the failures of the public sector convinced him that the private sector should have a bigger role in the economy. One of the tantalizing questions in Indian economic history is whether India would have embraced liberal economic reforms 25 years before 1991, if Shastri’s tenure had not been cut short by his premature death.

But if there is somebody reading this whose interests lie at the intersection of writing fiction and studying economics, boy do I have a project for your consideration. What if agriculture had become more productive and efficient back in 1965? What if we had moved away from the License Raj, rather than embracing it wholeheartedly? What if – the most ‘if only’ question of them all – 1991 had instead been 1965?

Please, somebody, write this book.

But alas, we went in a whole other direction. It all began promisingly enough, but things soon went awry:

Indira Gandhi began with a relatively liberal economic agenda, including devaluing the rupee as well as easing trade restrictions in response to balance of payments pressures. However, in response to the international geopolitical situation as well as domestic political calculations, she swung to the Left after 1969. The economy was choked with stringent licensing, credit rationing, import controls, as well as draconian laws such as the Monopolies and Restrictive Trade Practices Act and the Foreign Exchange Regulation Act. A series of exogenous shocks between 1965 and 1980 — wars, droughts and oil prices — further battered the economy.

I would strongly encourage young readers and folks new to economic theory to go over the presentation linked to in this blogpost. Why do I recommend this presentation? Because it is one thing for Niranjan to say that Indira Gandhi ‘swung to the Left after 1969’ because of domestic political calculations, and it is quite another to model why this was inevitable. Economics, remember, is the study of how to get the most out of life, and Indira Gandhi chose to get the most votes. This presentation explains why.

Economics is also the study of opportunity costs, and this presentation explains to us the cost of her choices. India fell behind when compared to some of her Asian peers in this period, and any student of Indian economics must almost heave a wistful sigh when studying this era of India’s economic history.

But the other reason I ask you to go over that presentation is because it helps you understand decisions made by all political leaders in all electoral democracies everywhere in the world. And as students of economics, it helps to understand how politicians respond to their incentives. This helps you become a better analyst of both economics and politics, and therefore of public policy.

The 1970s were a lost decade, with low growth and high inflation. However, there were two significant structural breakthroughs. First, the Green Revolution that began in the late 1960s helped India make a big dent in the food constraint. Second, the domestic savings constraint eased, perhaps helped by the spread of bank branches after nationalization. There were also the first signs of introspection on the nature of Indian economic policy in several official committee reports, though actual policy reforms were not yet on the horizon. The underrated budget speech by H M Patel in 1978, as finance minister of the short-lived Janata party government led by Morarji Desai, deserves more attention.

To me, what is most interesting in this paragraph is what Niranjan doesn’t say in it. In my personal opinion, this decade is worth studying not for its datasets or its metrics, but for the weakening of India’s institutions. The Solow Model is a great way to think about the growth trajectories of nations, and what students often miss out in the Solow Model are the underlying assumptions. Well defined property rights, a strong and independent judiciary, free and well-functioning markets, and a legislature that doesn’t indulge in over-reach are crucial for reasonably rapid long-term growth, and I would argue that all of these were missing either in parts or wholly for much of the 1970’s.

Niranjan hints at part of this in the paragraph that precedes the one I have extracted above, but there is much more going on in that unfortunate decade. If you wish to learn more about this decade and the impact that it has had on our growth trajectory, come to the economic data and its analysis last. Begin with biographies of the more important public personalities of those times, read about landmark judgments passed in and around that decade, and speak to journalists and political scientists who were around back then, or have studied that era well. Once you get a sense of the politics and the culture (political, social) of that decade, then start upon the economic analysis. That would be good advice in general, I suppose, but it is particularly applicable to the 1970’s. Oh, and watch the movies that were being made back then!

There is far too much going on in this decade for us to speak meaningfully about it in a single blogpost, and I hope to come back and write/speak about this topic later. But for the moment, I wish to leave you with my own sense of utter regret and wistfulness regarding the 1970’s. There was some progress, of course, but there was, in my opinion, much that was wrong, and too little that was right.

Growth always matters, but it really and truly mattered back then, and we failed to optimize for it.

Professors Koyama and Rubin Explain How the World Became Rich

To be honest, you really should read the entire book. But then again, it is freakishly expensive by Indian standards, and the interview we’re about to discuss serves as a very good introduction to thinking and reading more about this subject, so let’s get started.

If you play the animation in that chart (and make sure you have tick-marked the “Relative change” box), you should be struck by two questions. Well, I am, at any rate.

  1. Why the hell did it take so long?
  2. What the hell happened about two hundred years ago?

And the interview is about precisely these questions, but before we get there, a slight digression.

My way of getting students interested in the topic of macroeconomics is by showing them Gapminder, and then asking them a seemingly simple question: why does the world look the way it does?. That is, why did the countries that are rich today (on a per capita basis) get that way?

Some students say it is because those countries have a smaller number of people, and I say that by logic China ought to be poorer than us. Some say it is because those countries were never colonialized, and I say that by that logic Singapore ought to be a very poor country, and so also South Korea. This goes on for a while, but I eventually get the discussion around to two central questions/conclusions.

First, is it likely that we will ever know for certain, and if so how? Or are we doomed to just faffing around for ever?

And second, if we do find out, can we apply some of those lessons in India’s case today? That is, if at all there is a recipe for growth, does it remain applicable across time and space?

And as Robert Lucas put it (in a different but very related context), it is very hard to stop thinking about these questions once you start thinking about them!

The book in question, How The World Became Rich, with its subtitle ‘The Historical Origins of Economic Growth’ aims to answer these very questions. And as anybody who has attempted to study a subject such as this know, this is A Very Hard Thing to do. Here is the description from the Amazon page:

Most humans are significantly richer than their ancestors. Humanity gained nearly all of its wealth in the last two centuries. How did this come to pass? How did the world become rich?
Mark Koyama and Jared Rubin dive into the many theories of why modern economic growth happened when and where it did. They discuss recently advanced theories rooted in geography, politics, culture, demography, and colonialism. Pieces of each of these theories help explain key events on the path to modern riches. Why did the Industrial Revolution begin in 18th-century Britain? Why did some European countries, the US, and Japan catch up in the 19th century? Why did it take until the late 20th and 21st centuries for other countries? Why have some still not caught up?
Koyama and Rubin show that the past can provide a guide for how countries can escape poverty. There are certain prerequisites that all successful economies seem to have. But there is also no panacea. A society’s past and its institutions and culture play a key role in shaping how it may – or may not – develop.

As the excerpt says, there are many, many theories about why some countries got a headstart on the others. And while we can’t ever be sure of what the exact mixture of theories is, and whether this mixture remains the same for all countries across all periods, we can be sure that any recipe must contain at least some of these ingredients. And that’s better than knowing nothing, eh?

But which ingredients? In the next section, my notes from having read the article

  1. The Fate of Rome, by Kyle Harper, is now added to the list.
  2. Life slowly got better across the centuries from the time of the Roman Empire until the Middle Ages, but many of these changes could be explained by major demographic changes (such as, say, the Black Death and the resultant decrease in the population.)
  3. Sustained economic progress necessarily needs sustained technological progress. And sustained technological progress needs to be high enough to be able to beat the inevitable downward pressure imposed by population growth. They also add property rights as an important component, but it is, in essence, enough technological progress to be able to beat the inevitable Malthusian Trap.
    “Ultimately (and this matters for the acceleration in growth we observe from the late 19th to the 20th centuries), it also helps if families limit the number of children they have. This does not necessarily contribute to innovation, but it does mean that innovation will more quickly translate into growth.”
    Of course, the next logical question to ask is why would families limit the number of children they have, and to me, the answer is that they will only do so if they are convinced that their children have a more than reasonable chance of surviving into adulthood. Health comes first, both for individuals, but also for economic growth.
  4. This is an article I will need to read carefully, on the debate between historians and economic historians. The topic? What role did slavery have to play in the economic development of Europe.
  5. Remember the ‘ingredients in the recipe’ analogy that I used in the previous section? Institutions (such as property rights, labor unions), the demographic transition and education are three things that Professors Koyama and Rubin completely agree upon.
  6. “I think one thing the history of technology has taught us is that as long as the incentives are there for innovators to innovate, we will continue to be surprised.”
    I think this to be a key sentence, and I wonder if we think hard and often enough about whether the world is incentivizing innovators enough.
  7. Capitalism without Capital is also added to the list. Sigh.

Lessons from the eradication of smallpox

Vox has a nice and short read out on the battle against smallpox, and lessons we might learn today from how and where the battle was waged, at what costs, and with what effects.

But for all that the world has lost in the last few years, the history of infectious disease has a grim message: It could have been even worse. That appalling death toll resulted even though the coronavirus kills only about 0.7 percent of the people it infects. Imagine instead that it killed 30 percent — and that it would take centuries, instead of months, to develop a vaccine against it. And imagine that instead of being deadliest in the elderly, it was deadliest for young children.
That’s smallpox.

My notes after having read the article:

  1. Smallpox is estimated to have killed between 300 million to 500 million people in the 20th century alone
  2. We still do not have an effective treatment against smallpox
  3. There are two different viruses that cause smallpox: variola major and variola minor
  4. We no longer need to explain R0 to anybody, thanks to covid, but this point is staggering: it had an infectiousness of between 5 to 7, and a mortality rate of 30%.
  5. “In China, as early as the 15th century, healthy people deliberately breathed smallpox scabs through their noses and contracted a milder version of the disease. Between 0.5 percent and 2 percent died from such self-inoculation, but this represented a significant improvement on the 30 percent mortality rate of the disease itself.”
    What a horrible lottery to play. Would you play this lottery? This, by the way, is one of the many reasons why learning statistics and probability is worth your time.
  6. Learn more about Edward Jenner.
  7. We have better ways of shipping vaccines across the world these days, but what a story this is!
    “Spain especially struggled to reach its colonies in Central and South America, so in 1803, health officials in the country devised a radical new method for distributing the vaccine abroad: orphan boys.
    The plan involved putting two dozen Spanish orphans on a ship. Right before they left for the colonies, a doctor would give two of them cowpox. After nine or 10 days at sea, the sores on their arms would be nice and ripe. A team of doctors onboard would lance the sores, and scratch the fluid into the arms of two more boys. Nine or 10 days later, once those boys developed sores, a third pair would receive fluid, and so on. (The boys were infected in pairs as backup, just in case one’s sore broke too soon.) Overall, with good management and a bit of luck, the ship would arrive in the Americas when the last pair of orphans still had sores to lance. The doctors could then hop off the ship and start vaccinating people.”
  8. Institutions matter:
    “It was not until the 1950s that a truly global eradication effort began to appear within reach, thanks to new postwar international institutions. The World Health Organization (WHO), founded in 1948, led the charge and provided a framework for countries that were not always on friendly terms to collaborate on global health efforts.”
  9. Culture matters:
    “Efforts by the British Empire to conduct a smallpox vaccination program in India made less progress, due in large part to mistrust by the locals of the colonial government.”
  10. Science matters:
    ” “There was no shortage of people telling [the people involved in the eradication effort] that their effort was futile and they were hurting their career chances,” former CDC director William Foege wrote in his 2011 book House on Fire about the smallpox eradication effort.
    But other advances had brought it within reach. Needle technology had improved, with new bifurcated needles making it possible to use less vaccine. Overseas travel improved, which made it easier to ship vaccines and get public health workers where they were most needed, and provided impetus for worldwide eradication as it made it more likely that a smallpox outbreak anywhere in the world could spread.”

As always, read the whole article. I’ll quote here the concluding paragraph from the piece, and I’d urge you to reflect on it:

The devastation of Covid-19 has hopefully made us aware of the work public health experts and epidemiologists do, the crucial role of worldwide coordination and disease surveillance programs (which are still underfunded), and the horrors that diseases can wreak when we can’t control them.
We have to do better. The history of the fight against smallpox proves that we’re capable of it.

Why do institutions matter?

Remember the Sachin masterclass example from the previous post?

Well, now imagine that he gives this masterclass to me, and to you. Also assume that I am a middle aged man, slightly portly, and not very good at sports (this would, in fact, be a very good assumption on your part). Furthermore, assume that you are young, lithe, and take to any sport naturally (for your sake, I’m hoping this is a very good assumption on my part!)

Who do you think will learn better in that masterclass? Portly, ungainly me, or lithe, athletic you?

Similarly, a spanking new airport in Mumbai, and a spanking new airport in Bangui (the capital city of the Central Africa Republic) won’t have the same impact on both cities. I’ve never been to Bangui, and I certainly mean no disrespect, but it would be a safe bet to assume that law and order, level of corruption, ease of transactions are all better in Mumbai than they are in Bangui. Not perfect, not by a long shot, but better.

Institutions, in this context, is the framework in which economics happens. Markets don’t – cannot – exist in a vacuum. They must be protected by courts, who help in mediating disputes. They must be protected by the police, who help in guaranteeing property rights. There must be a state that creates laws for citizens to abide by. When these things function the way they ideally should, markets thrive, capital is rapidly created, and the economy grows fast.

When these things are broken – when corruption, theft and lawlessness are the norm, markets crumble, capital flees and the economy turns moribund.

The key point is, it isn’t enough for Sachin to give you a masterclass. You must have the body conditioning to learn.

Similarly, it isn’t enough for you to have a low stock of capital – your country must also have the right mix of institutions.

But as with most things in life, that is easier said than done. In some ways, it is the classic chicken and egg problem. A country will have quality institutions only once it gets rich, and we’ve just argued that you can’t get rich without having quality institutions. But that is part of what makes thinking about development so tough.

It is fair to say that both institutions and the accumulation of capital proceed hand in hand – when one grows, so does the other, and vice versa.

Are India’s courts, police force, and laws better today than in the 1950’s? Yes. Have we a higher stock of capital today than in the 1950’s? Yes. Does one cause the other, or is it a self-reinforcing process? Probably the latter – but this much is certain: one can’t happen without the other.

So, to sum up our story so far: growth is important, and growth can’t happen without capital. Accumulating capital is hard, but the good news is that if you have hardly any to begin with, you can grow it quite fast. The bad news, institutions really matter.

Next up: depreciation.