India’s economic policy will not make it rich

The developing world has fallen back in love with economic planning. As protectionism sweeps the West, poor countries are no longer afraid of industrial policy—or bold ambition. India’s government declares that manufacturing will propel the country to high-income status by 2047. Indonesia wants to get there by 2050, with growth driven by green commodities. Vietnam is aiming for annual GDP growth of 7% until 2030. At the same time, South Africa wants to have more than doubled its income per person by 2021. Surely economies everywhere are about to accelerate.
Not so, according to a new report by the World Bank. At current growth rates, it will take India three-quarters of a century to reach a quarter of America’s income per person. That is one calculation in the “World Development Report”, released on August 1st, in which the bank’s researchers run the numbers for 108 middle-income economies, accounting for 40% of the world’s GDP and 75% of its population. Indermit Gill, the bank’s chief economist, Somik Lall, one of his advisers, and co-authors argue that the fad for industrial policy, especially as practised in India and Indonesia, is unlikely to deliver the riches of which politicians are now dreaming.
The report starts by laying out the challenge. Since 1990 just 34 countries have attained high-income status. Thirteen were in the Eastern bloc and benefited from joining the EU; another handful in the Gulf and Latin America owe their wealth to commodity booms. Income per person in the median middle-income country has remained below a tenth of America’s since the 1970s. If India is to sustain growth of 6-8% a year, it would repeat a feat only South Korea has managed.
Such growth, the bank’s economists reckon, is fanciful. They argue governments would be better off seeking to maintain slower growth for longer. Mr Gill and co-authors suggest three aims: becoming more attractive to capital, making better use of existing technology and developing new tech. This is hardly groundbreaking. But what is new is the suggestion of a timeline, against which they mark the progress of middle-income countries.
Brazil, for instance, is thought to have been on the right track until it became a lower-middle-income country in the 1970s. At that point, it should have focused on importing foreign technology and introducing state-owned conglomerates to international markets. Instead, it taxed international intellectual property. Local patents became more common, but the quality of innovation declined. Bulgaria, meanwhile, managed to integrate existing technology into domestic production, but its own research and development remains weak.
The authors criticise countries that hope to skip stages by developing homegrown technology, rather than rolling out stuff used elsewhere. Such an approach risks wasting scarce resources. Researchers will be tied up with bad products, state bureaucracy will be overwhelmed and funds will be channelled to unproductive firms. The report points out that South Korea’s industrial policy subsidised the adoption of foreign tech, rather than incentivising the production of knowledge at the frontier of human thought. Any country that tries the latter path, the authors warn, will struggle to reach the frontier.
Mr Modi’s “Make in India” strategy hopes to attract foreign firms to manufacture everything from phones to electric vehicles. That is better than plans in other developing countries. Malaysia offers subsidies to fledgling firms willing to try their hand at cloud computing. Indonesia shaves off some of the cost of an electric vehicle, but only if enough of its components are domestically designed. But there is a risk that India goes the same way. Other prongs of the country’s industrial policy seek to advance domestic technology, including in chips and defence. Since 2020 the state has banned the import of 509 common defence components as part of a bid to pump up local arms exporters. The country has nevertheless dropped out of the top 25 defence exporters.
India’s management practices also come under fire. Although the World Bank usually sticks to conventional macroeconomics, the report’s authors employ a somewhat Schumpeterian framework, holding out the possibility that incumbent firms can be efficient, but only if they are surrounded by new entrants to keep them on their toes. India’s state prevents this at both ends of the spectrum. Small Reservation Laws ensure a portion of handouts go to firms too small to be efficient. Meanwhile, cronyism and poor competition policy foster unproductive giants. A firm in America that reaches its 40th birthday will typically have increased in size seven-fold. In India, it will only have doubled in size.
Not all of the World Bank’s prescriptions stand up to scrutiny. Improving education is a worthwhile aim, if ferociously hard. Keeping populism at bay, also on the list, is another nice but tricky proposal. The report’s fondness for South Korean industrial policy goes overboard. Yet it is surely right that much of the country’s prosperity came from stonking private investment and openness to foreign tech. Mr Modi has been unable to get investment roaring in the sectors in which he wants India to produce its own breakthroughs. The risk is that, in making a premature push, the country will in time find it harder to develop industries that rival America’s. Luckily, all is not lost. By the World Bank’s calculations, policymakers have at least three-quarters of a century to get things right.
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