Wednesday, August 28, 2002

India and the Global Growth Sweepstakes

In the two decades of the last century India’s growth performance was among the best in the world, making it worthy of being called a “Star performer.” During these two decades (1980 to 1999) per capita GDP growth averaged over 3.8% per annum with GDP growth averaging about 5.8% per annum. GDP growth has however fallen sharply during the last five years, going as low as 4% in 2000-1. Yet many commentators keep saying that India is (currently) one of the fastest growing economies in the World. Is there any factual basis to this assertion or is it merely an example of informational inertia? We use the latest available data on global growth rates for the period 1996 to 2000 to show the large gap between these statements and the data. Our analysis also reveals a paradox: India’s per capita growth rate was marginally higher during this period relative to the two-decade average but our global ranking has deteriorated dramatically.
If we leave out the tiny and small economies, India was during the two decades of the eighties and nineties, one of the fastest growing economies in the world [(Star Performers of the 20th (21st) Century: Asian Tigers, Dragons or Elephants, by Arvind Virmani, Occasional Paper, Chintan, September 1999) http://finance.nic.in/avirmani]. Others in this group of star performers included China, S. Korea, Singapore, Thailand, Ireland, Luxemburg, Hong Kong, Malaysia, Vietnam and Chile. With the possible exception of Ireland and Luxemburg all these countries including India were affected to some extent by global crises such as the “Asian crisis,’ the Russian meltdown & the Brazilian crisis. It would be interesting to know how these “Star performers” did during the global crisis years at the end of the century.
What happened to India and the other star performers during the five-year period 1996 to 2000. India’s per capita growth ranking dropped dramatically from 11th place during two decades, to 27th place during the last five years. Only Ireland, China and Vietnam retain their place among the star performers during these five years. S. Korea is no longer a star performer but is ranked one position above India. It is recognised by most observers of Asian economies to have carried out the widest/deepest reforms among the crises affected countries. For instance it replaced its highly restrictive policy towards FDI and foreign equity flows by a new one, which whole heartedly welcomed both. As a result it moved rapidly up in FDI & equity rankings from a position behind India to one above India with a few years. All the other E & S.E. Asian countries see an even more dramatic fall in their growth ranking than India. Thus Singapore, Chile, Malaysia, Hong Kong and Thailand fall to 29th 38th, 59th, 81st and 110th position.
Malaysia’s per capita growth decline during 1996-2000 (relative to its 2-decade average) was 1.5% compared to a decline of 1.2% for Singapore and 2% for S. Korea. These two Asian crisis countries (& Hong Kong) were shown in Virmani (1999) as free from a euphoria-panic cycle in contrast to Malaysia, Thailand and Indonesia, which suffered from this phenomenon. The latter countries were growing (due to euphoria) above their long term potential and so a period of slower growth was inevitable, though better policies such as a flexible exchange rate would have mitigated the “panic.” The major difference between the three was that Malaysia was able to act quickly and decisively to meet the crisis while the policy response in Thailand and Indonesia was slow and indecisive because of the prevailing political situation. Though Hong Kong was free of “euphoria” before the crisis it was not expected (in the 1999 paper) to do well because its currency board regime and absorption into China reduced policy flexibility, and this is borne out by its 2.5% point growth decline.
What are the reasons for the fall in India’s ranking? Surprisingly the worsening of India’s rank is not due to a worsening of its performance. On the contrary its per capita GDP growth during this period is marginally higher than the average for the two decades. This is so despite the bursting of the Asian bubble and the post-Pokharan sanctions imposed on India. This is consistent with 1999 paper, which identified India and Ireland as the only two countries among the high growth economies whose growth rate could increase in future. The reason for the fall in ranking is that twenty-two countries have strongly improved their performance. Eleven of these are East European (including former USSR), four are from Africa, three are from Latin America and two each are from Western Europe and Asia. Among the larger countries that have improved their performance are Poland, Finland, Hungary and Tunisia. The dramatic liberalisation and opening of the Eastern European economies and their integration with Western Europe has clearly led to faster growth of these economies. Perhaps there is a lesson for those still haunted by nightmares of the East India Company.
In contrast to India, China’s (official) per capita growth rate was lower by 2.5% points during the five-year period under consideration. The 1999 paper had shown that China’s growth rate was decelerating. Its rank, however, declined marginally from 1st to 2nd because its official growth rate for the two decades was very high. Independent economists believe it to be overestimated by about 2%. If China’s growth rate is exaggerated by only 1% point China will, however, still be among the top ten during 1996-2000.
In conclusion we see that India’s growth performance seems to have moved from the “Hindu rate of growth” (about 3.8%) during the seventies to what we may now call the “Bharatiya rate of growth (5.8%)” during the eighties and nineties. While our growth rate is stuck at this level, dozens of other countries have improved their performance during 1996 to 2000 through faster reforms. Our per capita growth ranking has therefore plummeted. It is little consolation that the performance of other high growth economies (HGEs) such as Singapore, Chile, Malaysia and Thailand has deteriorated and their ranking dropped more sharply than ours.

1 comment:

Bijoy said...

Nice post, its a really cool blog that you have here, keep up the good work, will be back.

Warm Regards

Biby Cletus - Blog