From Developmentalism to Neoliberalism: A Comparative Analysis of Brazil and India 9811360278, 9789811360275

Table of contents :
Front Matter ....Pages i-xv
Introduction (Rahul A. Sirohi)....Pages 1-29
The Evolution of the Brazilian Economy: A Historical Analysis (Rahul A. Sirohi)....Pages 31-66
India’s Post-colonial Development: A Comparative Perspective (Rahul A. Sirohi)....Pages 67-111
Alternate Paths to Economic Development in the Neoliberal Era (Rahul A. Sirohi)....Pages 113-158
Neoliberalism and Social Development: Lessons from Brazil (Rahul A. Sirohi)....Pages 159-187
Neoliberalism and the “Growth Perspective” (Rahul A. Sirohi)....Pages 189-215
Conclusion (Rahul A. Sirohi)....Pages 217-231
Back Matter ....Pages 233-236

Citation preview

From Developmentalism to Neoliberalism A Comparative Analysis of Brazil and India Rahul A. Sirohi

From Developmentalism to Neoliberalism

Rahul A. Sirohi

From Developmentalism to Neoliberalism A Comparative Analysis of Brazil and India

Rahul A. Sirohi Indian Institute of Technology Tirupati Tirupati, Andhra Pradesh, India

ISBN 978-981-13-6027-5 ISBN 978-981-13-6028-2  (eBook) https://doi.org/10.1007/978-981-13-6028-2 Library of Congress Control Number: 2019930404 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2019 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover credit: Marina Lohrbach_shutterstock.com Cover design by eStudio Calamar This Palgrave Macmillan imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

For Sam, Ari and Sameera

Preface

My interest in working on the Brazilian and Indian economies began when I was a Ph.D. student at UIUC. There I had the good fortune of coming in contact with leading Brazilianists like Professor Werner Baer who had been actively working on the Brazilian economy. I had always been interested in Latin America but it was only once I got in touch with Werner that I started looking at a comparative political economy of the two countries as a serious research topic. I started working on my book soon after I graduated in 2014. By then I was well acquainted with the literature on these two economies and I came to realize that very few studies had actually done a comparative analysis of Brazil and India in the post-1980 period. That was when I seriously started considering writing a larger manuscript on the two economies. The main trigger for writing this book, however, came from political events in Brazil and India. 2014 witnessed the fourth consecutive electoral victory of the left-wing party, Worker’s Party (PT), in Brazil. The PT was formed during the wave of radical worker struggles in the 1970s, and during the subsequent decades, it became a vocal critique of neoliberal policies. Its base was in the trade union movement, but over the 1990s it also developed close links with social movements. In a complete contrast in India, 2014 witnessed the dramatic victory of the ultra-rightwing combine of the BJP-RSS which has had a long history of fomenting religious animosity and bigotry. Their economic program has been unabashedly pro-corporate. Although this was only the second time that the BJP-RSS were in a position to form a stable government at the vii

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center, the entire post-1980 period witnessed a considerable popularization of its ideologies. The contrast between the two countries therefore could not have been starker, and it was this contrast that got me thinking about writing a larger manuscript on the neoliberal experiences of Brazil and India. Over the last four years, I have received enormous help from various quarters. I am deeply indebted to my teachers, colleagues and students for the encouragement that they have provided me. Werner’s general approach to studying economics has influenced me immensely. He sadly passed away in 2016. Personally, I lost a very dear friend. Werner has left behind a rich legacy which includes several path-breaking books on the Brazilian economy. His academic work speaks for itself but I think his most significant contribution till date has been the scores of students that he has mentored and guided over the years. I was lucky to be one of them. My teaching stint in TISS Mumbai where there still exists a vibrant heterodox tradition in economics was very important. I came into contact with Prof. Mohan Rao and Prof. Ramakumar who gave me incredible support and encouragement to pursue my research ideas. My informal discussions with Aardra Surendran and Tarun Menon helped me formulate several ideas in this book. I would also like to acknowledge the support and warmth that I have received from my colleagues in IIT Tirupati. I would like to thank Sandeep Kaur from Springer for guiding me through the editorial process and for seeing this project through. Here I would also like to thank Brazilian Journal of Political Economy and Peoples Democracy for allowing me to use my published articles in this book. Finally, I would like to thank my family. I would not have been able to write this book without the love and emotional support of my wife. In her, I also found someone who I could always discuss my ideas with. Her comments on the early versions of my manuscripts were extremely helpful. I must here also thank my mother. As an expert on Latin America, she brought to my notice interesting political debates that were occurring in the region, many of which are often missed out on by non-Spanish speakers. This helped me frame many of my arguments in this book. Her emotional support through this journey has been equally crucial. I would also like to thank my father and my younger brother for their encouragement. My father, despite his serious illness, never forgot to

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enquire about the status of the book, and his constant prodding got me to put in effort at moments when I was slacking off. My thanks also go to my mother-in-law and father-in-law for helping out with the children at a crucial time when I was attempting to finish the manuscript. It goes without saying that the errors in this book are mine alone. Tirupati, India

Rahul A. Sirohi

Contents

1 Introduction 1 2 The Evolution of the Brazilian Economy: A Historical Analysis 31 3 India’s Post-colonial Development: A Comparative Perspective 67 4 Alternate Paths to Economic Development in the Neoliberal Era 113 5 Neoliberalism and Social Development: Lessons from Brazil 159 6 Neoliberalism and the “Growth Perspective” 189 7 Conclusion 217 Index 233

xi

List of Figures

Fig. 3.1 Fig. 3.2 Fig. 4.1 Fig. 4.2 Fig. 4.3

Trade-GDP ratio (%) 95 FDI-GDP ratio (%). Source World Bank (https://data.worldbank.org/) 96 Employment-population ratio (%). Source World Bank (https://data.worldbank.org/) 120 Real interest rate (%). Source World Bank (https://data.worldbank.org/) 131 A schematic diagram 139

xiii

List of Tables

Table 4.1 Table 4.2 Table 4.3

Macroeconomic indicators, India 118 Macroeconomic indicators, Brazil 119 Human development in a comparative perspective 123

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CHAPTER 1

Introduction

In the 1950s and 1960s, there was an optimistic belief that was widely shared amongst economists that global inequalities that existed at that time would not persist for too much longer and that the maladies of unemployment, poverty and hunger that afflicted scores of people around the world would be wiped out within no time (Kiely and Marfleet 1998). Perhaps the most striking example of this sort of thinking came from the self-professed liberal, John Maynard Keynes. In an interesting article written by him during the Great Depression, he noted that the “bad attack of pessimism” that had gripped the world during that time was actually misplaced (Keynes 1963, p. 358). Taking a longer view of development, he argued that capitalism had generated economic growth at such dizzying rates that it was just a matter of time before the “economic problem” affecting millions across the world would be solved (Keynes 1963, p. 364). The logic behind his assertions did not require more proof than the simple arithmetic of compound interest.1 Namely that if capital were to increase at steady rates then as the formula for compound interest would have it, societies would be able to produce sufficient quantities of goods in the near future to easily satisfy all the material necessities of their citizens. Keynes was writing in the context of a dilapidated Europe, but his belief in the inevitability of economic development was to be widely

1 For

a wonderful essay on Keynes’s argument, see Patnaik (2009).

© The Author(s) 2019 R. A. Sirohi, From Developmentalism to Neoliberalism, https://doi.org/10.1007/978-981-13-6028-2_1

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shared by those focussed on the developing world as well. The questions confronting classical development economists of that time, then, largely revolved around how best to organize resources and how best to devise policies to achieve results at the fastest possible pace. Underdevelopment was largely viewed as a problem that stemmed from low rates of savings and inadequate industrialization (Lewis 1954). Debates amongst economists therefore ranged from the choice between balanced and unbalanced patterns of development to the optimal policy responses to the inadequacy of capital in poorer nations (Hirschman 1968). There were of course concerns about the persistent nature of poverty, but these lowlevel traps were viewed as being a state of affairs that were amenable to change via state intervention and foreign aid. Whatever the differences amongst individual theorists, then, there was a certain optimism regarding the possibilities of modernization, as was best reflected in Rostow’s stages of growth thesis (Rostow 1990). The upside to this view was that poverty was not simply preordained by destiny but was a stage of development that countries could pull themselves out off, subject to appropriate policies. In actual practice however, the optimistic predictions did not turn out be as accurate as many thinkers might have imagined. It is of course true that to some extent that post-War period did initiate important changes in the poorer peripheries of the world. For example, industrialization did take root in many regions, with the most spectacular changes occurring in East Asia. Even in countries like Brazil and India, growth rates were robust and there was considerable industrial development. Yet the entire period between 1950 and 1980s also proved to be disappointing on many accounts. Except for small pockets of the world, by and large the much vaunted “catch up” process remained weak and global inequalities showed no signs of reducing. Between 1950 and 1973, developing region’s contribution to world GDP increased by a mere 1.5%. As a ratio of the per capita GDP of industrialized countries in the West, Africa’s ratio declined from 14.2 to 10.5, Asia’s relative position declined from 10.1 to 9.2 while Latin America’s GDP per head ratio declined from 39.8 to 33.7 (Nayyar 2013). This was indeed a case of “divergence, big time” (Pritchett 1997). Moving beyond income measures too there was little to celebrate. As far as the general standards of living were concerned, vast proportions of those residing in the developing world continued to face deep deprivations in matters of basic nutrition, education and health care. Politically, authoritarian regimes sprung up across the

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developing world and severe repression of political rights was the rule rather than exception. By the 1970s, intense debates raged on about the limitations of the post-War strategies of development adopted by peripheral economies. While there were several views, the ones forwarded by neoclassical theorists became very influential. Neoclassical critics argued that the excessive state intervention and policies of trade protectionism were the primary reasons for the muddle that the developing world was caught up in (Krueger 1998; Bhagwati 1993; Edwards 1995). Right since the 1950s, developing economies had adopted strategies of development in which the state was given a central coordinating role in the economy and in which economic protectionism was heavily employed to incentivize local industries. In theory, this strategy was supposed to quicken the pace of development, but in actual practice the restrictions that were placed on market forces, according to neoclassicals, resulted in serious misallocation of resources and economic losses. In addition, neoclassicals argued that the protectionist tools that these countries had adopted, far from encouraging competitive domestic industries, actually incentivized widespread rent-seeking and made domestic firms so dependent on the state that they ended up being in no shape to compete in international markets. As a result of this, developing countries had frequent balance of payment difficulties which meant that they simply could not maintain high rates of growth. Instead of the traditional statist recipe what developing countries needed to do, according to neoclassicals, was to unleash the power of markets. Accordingly, they argued for across the board economic reforms including greater global integration in finance and trade, privatization of state-owned enterprises, curtailment of fiscal deficits and adoption of strict monetary policies (Williamson 1993). By doing so, they argued that the developing world would finally be able to achieve the sort of modernization that it had always hoped for. These views gained a lot of currency within policy circles in the 1970s and 1980s, especially within institutions like the World Bank and the International Monetary Fund (IMF). This was also a period that coincided with the rise of conservative political forces in many parts of the world which were generally opposed to Keynesian demand management policies and were far more inclined towards monetarist proposals. Further, indigenous capitalist classes in developing countries who at one point keenly supported state regulation were, by the 1980s, aching to move beyond the confines that the state

4  R. A. SIROHI

had established and therefore had started to clamour for greater economic freedom. The combination of all these factors led to a worldwide shift towards neoliberalism starting from the 1980s. It is within this context that this book attempts to study the experiences of Brazil and India in recent years. Despite several differences, a comparison of the two regions provides an interesting case study of developing countries that have undergone neoliberal reforms. In both regions, neoliberalism was adopted in the 1980s as a response to the crisis of dirigisme and in both countries neoliberalism has involved, with differing intensities, greater involvement of markets. Despite such similarities the pace and pattern of liberalization, the two economies have varied substantially, with India following a slow and cautious approach to reforms and Brazil pursuing a faster and much more extensive integration with world markets. The result, in terms of economic growth, has been prolific for India which today has become one of the fastest growing economies in the world. Brazil’s story on the other hand has been one of slow growth and one of widespread de-industrialization. Partly because of the abysmal record of neoliberal reforms in Brazil, in the early years of the twenty-first century a leftist government with an anti-neoliberal platform was voted into power. In the subsequent phase, economic growth picked up but perhaps more importantly this growth brought with it improvements in the income distribution, reductions of poverty and improvements in basic human development indicators. Before moving ahead, it needs mentioning that there are at least three reasons why a comparative analysis of the sort this book seeks to undertake is a worthwhile project. First, over the last few decades both these economies have started to play an important role in the global economy. As of 2016, Brazil and India were the 9th and the 7th largest economies in the world respectively (measured in GDP). Both these economies have become hubs of international trade and foreign investors have ploughed billions of dollars of investments in the two economies. The emergence of the BRICS alliance has led to greater political and economic cooperation between these two economies and has added to their global significance. The sheer economic weight of these two economies is therefore reason enough for a closer and more careful analysis of what has been happening in the two regions. Secondly and equally importantly, a comparison of this sort is worthwhile because it provides insights and raises several questions that one may not have asked had such a comparative study not been undertaken

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in the first place. To take an example, in the case of India there is a raging debate about the nature of neoliberal reforms. There are those who point to the devastating and predatory nature of neoliberalism while there are others who have taken the opposite stance and have defended its achievements (Bhagwati and Panagariya 2013; Bhaduri 2008). Ultimately however, any such judgement about the nature of neoliberalism requires a counterfactual against which its experiences can be compared with and it is in this regard that a comparative exercise with Brazil is useful. To put it differently if we are willing to view India from a Brazilian perspective or for that matter if we are willing to view Brazil from an Indian lens, certain insights and perspectives may be gained that may not have been possible had such an exercise not been undertaken in the first place. It is of course true that structurally, Brazil with its high rates of urbanization is very different from a largely rural India. The per capita income levels of the two economies are also very different. Yet despite these differences, both nations share several striking commonalities as well which makes such an exercise meaningful. Both Brazil and India for instance share a common history of colonialism. Thus for most of the eighteenth and nineteenth centuries, they remained appendages to metropolitan economies as suppliers of primary commodities and by the middle of the twentieth century both these “late developers” responded to their peripheral positions in the world economy by adopting strikingly similar strategies of development. Wary of the primary commodity specialization that had been imposed on them by imperialist powers, policy makers in both regions adopted an inward-looking import substitution industrialization strategy of development (ISI). ISI sought to bring the state at the centre of all economic activities and use its vast coordinating institutions to promote industrialization. This was to be done within the protective walls so that infant industries would have the chance to develop without having to compete with foreign firms. The lateness of development and the history of colonialism also meant that industrialization was to be pursued in a context of common structural constraints. For instance, both Brazil and India inherited highly unequal societies when they embarked on their post-colonial modernization project and in both economies the incomplete transition to capitalism meant that capitalist classes were politically too weak to spearhead the sort of structural overhaul required for successful capitalist development.

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Despite such common historical and economic contexts, the two regions have nonetheless moved towards very distinct patterns of development in the neoliberal phase and this makes a comparison between the two an interesting way to study the dynamics of actually existing neoliberalism. It also reminds us that while it is true that liberalization has imposed similar pressures on developing economies to conform to fiscal discipline, to adopt similar monetary policies and so on, there is also a significant “diversity within the convergence” (Cerny et al. 2005, p. 2). Thus the third rationale for the comparison undertaken in this book is to caution against treating neoliberalizing economies as undifferentiated entities. Any analysis of actually existing neoliberalism requires a careful study of how local institutions, political and social dynamics combine with pressures of the world economy to create a wide spectrum of development outcomes (Brenner et al. 2010).

Alternative Patterns of Liberalization Neoliberalism as an economic and political phenomenon has been notoriously difficult to define because “although neoliberal experiences share important commonalities…neoliberalism is not a mode of production” and therefore does “not necessarily include a clearly defined set of invariant features” (Saad-Filho and Johnston 2005, p. 1). There are of course common trends and features that liberalizing economies across the globe share. These include an unprecedented scale of economic globalization, a phenomenal financialization of accumulation and increased commodification of labour. But underlying this unity, there are also striking differences in the growth performances, institutional transformations and structural changes that liberalizing economies have undergone. No two economies have liberalized in an identical manner. The liberalization in China and India for instance has steered clear from the big bang pattern adopted in many transitioning countries and in Latin America (Breslin 2011; Williamson and Zagha 2002; Kohli 2009). Liberalization in the former set of economies has been slow, selective and “homegrown”.2 The financial sector for instance has remained under state control and while foreign capital has become an important player, it has been guided and regulated through active state control. Asian economies more generally have had a more cautious approach to liberalization when compared 2 Chaudhry

et al. (2004).

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to economies in Latin America. Of course, Asian economies themselves exhibit considerable heterogeneity. China’s liberalization for instance has gone hand in hand with an expansion of the industrial sector while in India services have come to dominate. Moreover, whereas FDI inflows into China have been substantial, India has not been able to attract a significant amount of FDI since the 1990s. However one categorizes these economies, the fact remains that there seem to be a variety of neoliberal trajectories rather than one single homogenous kind of experience. The reasons for these divergences require serious analysis because traditionally globalization has been viewed as a homogenizing force pitted against institutions functioning within nationally bounded territories. This comes out most clearly in the statist political economy critics of neoliberalism, who visualize liberalization as an external imposition of policies and institutions on developing economies (Chang 2003, 2006, 2011; Wade 1998, 2003). Implicit in this perspective is a geographical assumption that the march of global markets is a process that necessarily comes at the expense of territorial differences. Now this picture of uniformity and convergence especially in matters of economic policy, generally speaking, is not an inaccurate account of the experiences of developing countries over the last few decades. But the relationship between domestic actors and institutions on the one hand and internationally determined pressures on the other hand, is far more fluid and contingent than critics propose. Because even though neoliberal globalization has an external logic associated with it, there is also a process of “internalization” of the logic of globalization that must necessarily occur for neoliberalism to become embedded in societies (Cerny et al. 2005). In other words, while globalization may create common pressures as far as economic policies are concerned, the manner in which these pressures are handled and managed are closely shaped by histories, institutions and structures existing in developing countries, which in turn themselves undergo a process of adaptation and change in response to their external environments. As Brenner et al. (2010, p. 331) put it: …the process of neoliberalization has been articulated unevenly across places, territories, and scales. The uneven development of neoliberalization results, on the one hand, from the continuous collision between contextually specific, constantly evolving neoliberalization projects and inherited politico-institutional arrangements, whether at global, national,

8  R. A. SIROHI or local scales. At the same time, through this collision, neoliberalization processes rework inherited forms of regulatory and spatial organization, including those of state institutions themselves, to produce new forms of geo-institutional differentiation. Consequently, at each juncture of its evolution, the ‘moving map’ of neoliberalization processes (Harvey 2005, p. 88) has been variegated, and has been continuously redifferentiated through a rapid succession of regulatory projects and counter-projects, neoliberalizing and otherwise.

In this spirit, there has been a concerted effort within social sciences to distinguish between the varied development trajectories of liberalizing countries during the last few decades. These studies classify developmental strategies adopted by various regions in terms of their distributional outcomes, macroeconomic goals, impact on labour markets, role of the state, effects on market structures, etc. The classic example of this line of analysis is the study by Rodrik and Subramanian (2004) who differentiate between two types of liberalization patterns which they term, pro-market and pro-business. In their categorization, pro-market liberalization entails a set of policies which encourage competition by reducing barriers to market entry. The pro-business approach on the other hand “…focuses on raising the profitability of the established industrial and commercial establishments. It tends to favor incumbents and producers” (Rodrik and Subramanian, p. 4). Politically, pro-business policies imply restricted labour rights and close alliances between state and capital (Kohli 2012). The strength of the Rodrik and Subramanian framework is that it opens up the possibility of studying the institutional environment within which liberalization unfolds. But the central problem with the neoclassical approach is that its classification is heavily dependent on a supply-side view of the economy and this leaves very little room for any demand-side analysis which is absolutely crucial to understand economic and social impact of liberalization. Following a more Keynesian tradition, there have been attempts to classify economies based on their “demand regimes” (Lavoie and Stockhammer 2013; Hein and Mundt 2013). This sort of classification seeks to disaggregate demand into various categories and seeks to study how each of these categories affect output and investment rates. Lavoie and Stockhammer (2013) for example differentiate between profit-led and wage-led regimes. In their scheme a regime is wage-led, if pro-labour policies increase growth, while a regime is profit-led if pro-capital policies increase growth. Pro-labour distributional policies are taken to

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include a set of measures that shift income distribution towards labour. On the other hand, pro-capital policies are those that tend to shift income in favour of capitalists. Lavoie and Stockhammer (2013) note that it is possible for a mismatch to arise between regimes and policies and that when this happens it can result in economic stagnation. For instance, “neoliberalism in practice” often involves implementing pro-capital policies within economies that are essentially wage-led thereby imparting a deflationary bias into liberalizing economies. In order to overcome the tendency towards economic stagnation, liberalizing economies rely on a wide array of methods to boost growth. In China for example, there has been an increased emphasis on exports whereas in economies like the USA, debt-led consumption booms have been resorted to for providing the necessary impetus to growth (Stockhammer and Onaran 2013; Hein and Mundt 2013). This classification based on demand regimes has the advantage that it incorporates distributional dynamics into the study of different regime types, but the problem is that it treats these regimes as predetermined. This exogeneity ignores the political and historical choices that go into sustaining various demand regimes. In this context, the literature on “welfare regimes” has played an important role in re-centring focus on labour markets and issues of human welfare in comparative studies while still paying adequate attention to political and institutional climate within which these systems function (Esping-Anderson 1985, 2013). This set of studies argues that economic comparisons between countries ought to take into account how different economies protect human welfare. Drawing on vast empirical evidence, these studies note that societies invest in human well-being to varying extents and do so through widely differing means. These choices in turn are determined by political and institutional endowments of respective economies. While much of the early work was confined to advanced capitalist economies, there have been attempts to extend this framework to developing countries as well (Wood and Gough 2006; Gough 2001; Barrientos 2009). This literature tends to stress on the resilience of national specificities and on the importance of path dependency, but economic changes at the global level are seen as playing an important role in influencing welfare outcomes as well. On a similar note, several studies have focussed on the varied experiences of East Asia and Latin America during the neoliberal era. In the case of East Asia, the phenomenal economic rise of South Korea, Japan

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and more recently China has attracted substantial attention from students of the Global South. Following a long duree perspective, Arrighi (2007), Trichur (2012) and Sugihara (2004) argue that the recent economic success of this region is a result of a distinctively “East Asian Path” of economic development whose roots can be traced back to the pre-modern era. This “East Asian Path”, unlike the traditional western/capitalist mode of development, consists of (a) a careful emphasis on developing human resources through investments in human capital and through promotion of labour-absorbing activities (especially via rural industrialization) (b) a preference for peaceful development, eschewing expansionist tendencies and (c) the existence of a non-partisan state that acts in the interest of the entire society rather any single class or faction. Now unlike East Asia, the Latin American trajectory in the 1980s and 1990s was one of painful economic convulsions. Having adopted through going liberal reforms, Latin American economies were faced with anaemic growth rates, declining standards of living and wide-scale de-industrialization. The failure of neoliberal reforms to elicit economic development became a harbinger of significant political change in the continent. Starting from Hugo Chávez’s electoral victory in 1998, popular frustration against neoliberal reforms led to a wave of leftist regimes being elected in countries like Bolivia, Brazil and Ecuador. These governments, to varying extents, sought to move away from the “Washington Consensus” style of development policies. The leftist governments laid emphasis on social policies, sought to revive the industrial sector through active industrial policies and attempted to introduce important changes in the institutional framework of their respective countries. The victory of the “pink-tide” governments did not however produce uniformly post-neoliberal development regimes; rather what was witnessed was the emergence of hybrid governance strategies where elements of economic liberalism came to exist uneasily with post-neoliberal structures and policies. The extent to which countries were able to break away from neoliberalism was fashioned by the nature of their political systems, the extent of external dependency, the mobilization patterns of social movements, the condition of the economy and the organizational strategies of oppositional movements. Various studies have attempted to document these varied “pink tide” typologies based on the nature and depth of social policies, the state-civil society interactions, the structure of political parties, the quality of democracy, the role of markets,

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etc. (Yates and Baker 2014; Castañeda 2006; Ciccariello-Maher 2013; Levitsky and Roberts 2011; Flores-Macías 2012). The review taken up here is not an exhaustive survey of the literature on neoliberal typologies but as is evident even in this short description, neoliberalism appears from these perspectives, to be a complex and regionally variegated process. While there is a risk that analysis of this sort could end up obfuscating larger structural commonalities, the emphasis on institutional, historical and cultural specificities of liberalizing economies is an important observation and this needs to be emphasized for a fuller understanding of neoliberalism.

Historical Origins of Brazilian and Indian Varieties of Liberalization The “Washington Consensus” was largely based on the idea that greater global integration constituted a necessary and sufficient condition for economic growth. The diverging experiences of Asian and Latin American economies have however defied this prediction. Several Asian economies have performed exceedingly well on the growth front, but they have done so primarily by carving out a relatively autonomous policy space with respect to forces of globalization. Thus the state has remained at the centre of economic activities, financial liberalization in countries like China and India has been restrained (from an international perspective) and while foreign investment has played a big role, it has complemented rather than substituted domestic business’s capabilities. Latin America on the other hand has remained far truer to the original “Washington Consensus” and its relationship with global markets has been marked by extensive trade and financial liberalization over the past three decades. But far from bringing about the sort of economic stability and growth that neoliberals had hoped for, Latin American economies have faced a debilitating streak of de-industrializations and most economies have barely managed to keep growth going as they have hopped from one crisis to another. There is therefore by now a considerably widespread view that “relative autonomy from global constraints”3 constitutes an important prerequisite for macroeconomic stability and growth in the neoliberal era (Kohli 2009; Amsden 2001; Pedersen 2008). The earliest ideas along this line of 3 Kohli

(2009, p. 387).

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thinking can be traced back to the writings of dependency theorists who were of the view that because the world economy was structured in such a way as to thwart all possibilities of industrialization in peripheral economies, “satellites experience their greatest economic development and especially their most classically capitalist industrial development if and when their ties to their metropolis are weakest” (Frank 1970, p. 10). This argument also appeared in fourth Congress of the Communist International’s “Thesis on Eastern Question” in 1922 which noted that the weakening of advanced capitalist economies due to the “imperialist war of 19141918 and the subsequent protracted crisis of capitalism” had “facilitated the development of native capitalism in the colonies and semicolonial countries”.4 More recently a similar line of reasoning has come to be espoused even by those who have otherwise been wary of the dependency approach. Amsden (2001) for example has argued that while most countries in the developing world adopted similar economic strategies in the immediate post-War period, only a select few “independents” were able to carve out an autonomous developmental space. For others, whom she labels “integrationists”, post-War industrialization was associated with a marked dependence on external sources of finance and technology. But what is more, she argues that in the neoliberal era the differences between the two sets of countries have become even more prominent. While the “independents” have been able to create knowledge-based assets through the selective promotion of domestic firms in the private and public sector, “integrationists” have largely adopted a strategy of “buying” rather than “making” knowledge-based assets. Here multinationals have tended to eclipse domestic firms and given that technology transfers from North to South have been minimal, this inability to develop domestic knowledge-based assets has hurt competitiveness and economic performance of the “integrationists”. It is possible to make a case that in a limited sense Brazil and India fit into these two patterns of liberalization identified by Alice Amsden and others. Looking at the two countries comparatively, the striking aspect of the latter’s neoliberal transition has been the gradualist pattern of insertion into global market. India has of course deepened its ties with international markets and its policy makers are in no way seeking 4 Available at: https://www.marxists.org/history/international/comintern/4th-congress/ eastern-question.htm. Also see Research Unit of Political Economy (2007).

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to build national autonomy the way early nationalists like Nehru had sought to do, but compared to Brazil the entire integration process has been far slower and selective. Thus even when the East Asian miracles came crashing down in 1997, the Indian economy owing to its relative insulation from capital flows remained unfazed and then again during the Global Financial Crisis of 2008, economic growth remained largely unaffected. This relative autonomy from global economic upheavals has allowed economic actors a phenomenal level of flexibility and manoeuvrability while implementing economic reforms. In contrast, Brazil’s case has been much more complex. To begin with Brazil was always far more tied to foreign investments and technology even during its import substitution phase. Further in the 1980s, the economy found itself faced with a grave debt crisis and in response to these external pressures it extensively liberalized the economy to regain economic stability. In terms of tariff reduction, privatization and capital account convertibility, Brazil’s integration was not just faster it was also far more extensive than that of many Asian countries. By the end of the 1990s, Brazil was therefore deeply integrated into international trade and finance networks. The most obvious indicator of these diverging patterns is the differential roles of foreign capital in the two economies.5 In 1980, FDI inflows as a percentage of total GDP stood at 0.8% in Brazil and 0.04% in India. By 2000, the ratios increased to 5.03 and 0.77% for Brazil and India, respectively. In 2015, the percentages were 4.14 and 2.08% for the two regions. In terms of FDI stock by 2016 Brazil’s stock of inward FDI was almost twice the number for India. We should also add here that not only has FDI been more prominent in Brazil’s economy, but to a large extent FDI has taken the form of M&A’s. This is in contrast to India where at least in the 1990s the share of M&A in total FDI has been generally smaller (Baer and Sirohi 2013). The net result of this pattern of integration has been a large denationalization of the Brazilian economy. Thus whereas in 1983 foreign companies accounted for 20.2% of total sales in industries this number increased to over a third by 2000 (Pedersen 2008). In the mid-1990s, the contribution of foreign firms to Brazilian exports was to just under a half of the total, but by 2000 the share rose to 60.4% (Pedersen 2008). In contrast in India between

5 See

UNCTAD and World Bank databases.

14  R. A. SIROHI

1991 and 1997 the role of the domestic private sector was not adversely affected when measured as a share of total corporate assets. In fact, “Despite the increased inflow of foreign investment, the share of foreign companies declined slightly” (Pedersen 2008, pp. 99–100). It needs to be stressed here that neither India nor Brazil have an exceptional history of innovation nor is there any crucial difference between the two when it comes to the core fiscal and monetary policies being pursued by their respective states today. What makes the proposed categorization even more fragile is that when the focus is shifted to the demand-side performance it appears as if Brazil has outperformed India at least in the recent decade and a half. Thus while distance from global markets has been seen as an important prerequisite for equitable growth according to Kohli (2009), India has not really fared too well on this dimension. In that sense, India and Brazil’s experiences do not really fall neatly into the categories that many scholars have in mind. The point being made here therefore is not that India’s trajectory is somehow more development-oriented than Brazil’s rather the point is that it is possible to make a case that Brazilian and Indian paths of development differ with respect to the pace and extent to which the respective economies have globalized. One potential answer as to why the Indian economy has been more restrained in its approach towards global integration lies in its distinctive historical experiences (Kohli 2004, 2009; Baer and Sirohi 2013). More precisely, in the run-up to the Second World War India witnessed a massive anti-colonial movement which saw large-scale mobilization of peasants and workers. Fearing adverse consequences of this, British capital vacated large swathes of the economy in the 1930s and 1940s (Chibber 2003; Mukherjee and Mukherjee 1988). The main gainers from this exodus were the emerging indigenous capitalist class. Thus during the initial decades of the twentieth century, local capital remained at loggerheads with foreign interests (Mukherjee and Mukherjee 1988). This is not to suggest that there was no close collaboration between Indian elites and the colonial regime, rather the point is that at least in a relative sense the colonial environment pitted Indian and foreign capital against each other to an extent that did not really occur in Brazil (Baer and Sirohi 2013).6 Apart from elite preferences, at a popular level the nationalist surge in

6 For

a more general discussion on this point, see Patnaik (1973).

1 INTRODUCTION 

15

last decades of colonial rule also generated a strong disapproval of foreign involvement in the economy. As a result, whereas Indian nationalists viewed foreign trade and British capital as the primary reason for India’s underdevelopment, by contrast in Brazil “nationalism of the First Republic had a liberal content as it was rarely directed against foreign capital” (Topik 1980, p. 614). Thus having ousted the British in 1947, the legitimacy of the post-colonial regime came to heavily rely on their attitude towards foreign capital and as a result, very early on, Indian politicians developed an entire apparatus of conditionalities and rules to discourage foreign investment. In the 1980s, India’s transition to neoliberalism did in fact mark an important shift from its post-colonial strategy of delinked development, but precisely because of its historical context the liberalization process had far more rigid political and ideological obstacles to overcome (Kohli 1989). This meant that liberalization had to be done through piecemeal efforts rather than through some big bang rupture. In contrast to India, Brazil has had a very different experience. Independence came in 1822 but Brazil did not witness anything close to the anti-colonial, nationalist upsurge that occurred in India. On the economic front, both urban elites and rural elites depended on the economy’s foreign trade ties—the former in their role as importers of foreign manufactures and the latter in their role as primary commodity exporters (Kohli 2004). Taxes on foreign trade provided a large portion of the state’s revenue base and early industrialization in the region was aided by the influx of European migrants. It is of course undeniable that British imperialism severely constrained the state’s developmental capacities but because it was a formally sovereign nation, Brazilian actors also enjoyed a fair deal of flexibility to deal with foreign traders and investors. On the whole therefore even though Brazil emerged as a primary commodity producer par excellence and had a relatively weak industrial base, its historical experiences also created sufficient space for a collaboration between foreign and local capital (Baer and Sirohi 2013). As a result, much before embarking on import-substituting industrialization foreign capital had acquired a strong base in the Brazilian economy. Not surprisingly throughout the 1960s and 1970s despite adopting a strategy of protectionism, Brazilian capital and the Brazilian state remained closely tied to MNCs (Evans 1979). These historical traits meant that when the debt crisis of the 1980s hit Brazil, stabilization via external deregulation was readily adopted over other feasible, alternative strategies. Trade was

16  R. A. SIROHI

liberalized, domestic price levels were anchored to global levels and foreign finance was given a free hand in the economy. By the late 1990s, Brazil had thus extensively liberalized its trade and financial sectors. In sum therefore important path dependencies generated by the nineteenth- and early twentieth-century antecedents led to important differences between two economies with respect to external ties and these differences have continued to cast a shadow on their paths in the neoliberal era as well.

Growth, Uneven Development and Stability A characteristic feature of neoliberalism has been the substantial increase in economic inequality within liberalizing economies. There have been regional differences in trends but generally speaking inequality has risen in both the developing and the developed parts of the world (ILO 2011). What is even more concerning is that this rising inequality has gone hand in hand with a slowdown in the rate of growth of standards of living in the developing world (Weisbrot et al. 2006). India has not been an exception to this phenomenon. Although its economy has grown at a substantial pace over the last three decades, this growth has been associated with a worsening income distribution and a shift of national income away from wages, towards surplus earners. In fact, according to a recent estimate by Chancel and Piketty (2017, p. 35) “the top 1% income share is at its highest level (22%) since the [creation] of the Income Tax during the British Raj, in 1922”. To make things worse, on important dimensions like health, education and provision of basic social infrastructure, the record of the post-1980 Indian development has been very poor so that even after three decades of sustained growth, a large proportion of Indian children remain underweight and the recent Global Hunger Report has placed India below countries like North Korea on matters of food security. Brazil’s experience on the other hand has been far more complex. As noted above, Brazil began its liberalization process from very different “initial conditions” than that of India. Given the background of the debt crisis, from very early on stabilization rather than growth became a priority for the policy makers and thus economic policies remained deflationary throughout the 1980s and 1990s. During the initial years of liberalization, growth remained low, inequalities remained high, informality got worse even as de-industrialization took root in an economy that had built

1 INTRODUCTION 

17

up a formidable base over the post-War period. Under these conditions not only were the lowest classes disgruntled with liberalization policies but so were sections of the industrial capitalists and middle classes. By the late 1990s, this “losers’ alliance” that had lost out from structural reforms emerged to the political forefront (Morais and Saad-Filho 2003). The formation of this alliance was aided by the meteoric rise of a programmatic left-wing party, the Workers’ Party (Partido dos Trabalhadores or PT) which originated in the midst of the anti-dictatorship movement. In the 1980s and 1990s, the party was useful in uniting a splintered left and was particularly instrumental in creating horizontal coalitions amongst the lower classes that were crucial for launching its candidate to the presidential post in 2002. It is worth emphasizing here that the Brazilian civil society had become very active since the 1970s. With the end of authoritarian rule, scores of social movements had sprung up across Brazil demanding land reforms, expansion of health care, education and a whole lot more. It was the “double movement” organized from these quarters that provided PT with the political force to launch itself on the national stage in 2002. From then on the government initiated a series of redistributionary measures that succeeded in reducing inequality and in improving health and educational outcomes. In fact, according to estimates cited by Bruera (2012, p. 1)7 during this period Brazil witnessed “the highest reduction of poverty in its history” and “the purchasing power of the Brazilian population reached the highest levels since 1979”. Now, it is true that the Brazilian economy today is going through a new round of economic crisis and the impeachment of PT president, Dilma Rousseff, in 2016 has been a huge setback to leftist politics and to the economic experiments her party tried to initiate in the country. The reasons for the current situation obviously need to be studied and a preliminary analysis is taken up later on in this book, but for the moment if we were to just focus on the decade and a half of PT rule where significant progress was made in reducing inequality and poverty, then the comparative question that arises is why was India’s experience so different? From Brazil’s perspective, the persistence and stability of the unequal pattern of growth in India appear to be a puzzle because despite mounting evidence that neoliberal policies in India have failed to lift all boats, 7 Hernán F. Gómez Bruera’s book on the same subject is also available but I have only relied on the PhD Thesis.

18  R. A. SIROHI

no concerted political alternative has been able to emerge. The fact that in a vibrant political democracy where the poor regularly come out to vote in larger numbers than the rich, no viable opposition has arisen to counter these tendencies as was the case of Brazil suggests a closer analysis of the political dynamics that underlie India’s recent trajectory is necessary. In this regard, one striking feature of the neoliberal project in India is that it has been associated with the emergence of a politically conscious and cohesive bloc of propertied classes all of whom have gained from liberalization. Thus unlike Brazil where economic volatility and anaemic growth created cracks amongst the elite classes, in India because liberalization was undertaken in a sequential and gradualist manner, domestic propertied classes have had a greater opportunity to adapt to global pressures. Further, the high rates of growth that have been maintained over the 30 years of neoliberalism have also helped smooth out the kind of collective action problems within propertied classes that were considered at one point of time to be an endemic feature of Indian politics.8 In addition to these converging economic interests, the emergence of religious right-wing parties which have explicitly supported the neoliberal programme has also played a crucial role in bringing together these elite classes under a single umbrella. The politically exclusionary ideology of religious nationalism has provided a glue of sorts that has pulled together disparate sections of the upper class. What has made these political organizations even more effective in the pursuit of neoliberalism is that by using their brand of religious nationalism they have also fractured lower classes along religious lines thereby preventing any formidable subaltern opposition to neoliberalism. At a theoretical level, then, Brazil and India’s experiences tend to suggest that when growth is not neutral in a distributional sense, the stability of any such growth regime ultimately depends on two factors: (a) the intensity with which dominant classes can organize themselves into a cohesive collective in the political sphere and (b) the extent to which propertied classes can thwart threats from below.9 In theory, none of these eventualities can be guaranteed. Cohesion within the upper classes cannot be guaranteed despite the shared class instinct amongst 8 See

Bardhan (1999) for instance. Acemoglu et al. (2005) for a new institutional perspective. Other literature that looks at the institutional/political foundations of growth regimes includes Aglietta (2001), Lipietz (1987) and Esping-Anderson (1985). 9 See

1 INTRODUCTION 

19

propertied classes, because the centripetal forces of market competition isolate them into opposing factions and thus prevent them from forming long-lasting cooperation that is required for the continued dominance of their class (Poulantzas 1973, 2000). In developing countries, conflict resolution within propertied classes is often harder as they are vastly more fragmented along regional, ethnic and linguistic lines.10 This fragmentation that plays out at the economic level however can be overcome at the political level according to Poulantzas (1973, 2000). Here state institutions, dominant ideologies, mass political parties and more generally the larger institutional structure of the society can help build social cohesion on top. Apart from unifying dominant classes the existence of such institutions, very importantly, can help fragment lower classes and thwart possibility of their political mobilization. When these conditions fall into place, that is, when the political superstructure fits the underlying growth regime, it is possible that despite being highly unequal in their outcomes such growth regimes nonetheless stabilize and persist over long periods of time. When cracks do emerge between elites—such as during periods of economic or political crisis—avenues open up for subordinate classes to press for their demands, as was Brazil’s experience. During such periods of political contestation, existing economic and political structures undergo varying levels of transformation ranging from systemic ruptures to reformist changes. The nature and stability of these transformations, by definition, are contingent and uncertain because if popular rebellions generate forces of transformation, the inertia of existing structures “necessarily tend toward a weakening, an undermining, or a watering down of the explosive rebelliousness that served as their raison d’être” (Ciccariello-Maher 2013, p. 4). It is therefore important to note here that the success of any action from below depends on more than just elite fractiousness; it also depends on the organizational ability of subordinate classes to build horizontal alliances amongst various streams of working-class movement. The fragmentation of the working class, after all, is far more acute than that of the elites in capitalist societies. Here the prior existence of political parties which are capable of framing common demands and which are capable of forming broad alliances amongst workers, peasants and various types of social movements can play an 10 The classic analysis of collective action problems in the Indian context is Bardhan (1999).

20  R. A. SIROHI

important role. To this factor we may also add other variables that can affect the political contestation by subordinate classes such as the characteristics of the political system and the nature of insertion in the global economy. Electoral democracies for example provide larger associational possibilities than do authoritarian regimes if for no other reason than that they constrain the use of repression by ruling elites (Silva 2009). Within democratic regimes, institutionalized party systems produce a tendency towards programmatic moderation while non-institutionalized party systems—where parties are organizationally amorphous and lack pre-defined vote banks—provide greater degrees of freedom for making policy changes (Flores-Macías 2012). In this context, the extent of economic globalization can also play a role in constraining party programmes. Simply put, greater the dependency on external debt and external capital, the stronger is the disciplinary power that international investors can exert on policy programmes of newly elected left governments. The prime cause of this is the threat of capital flight. In highly dependent economies, the potential destabilization that such outflows can cause necessarily curtails the policy space available to left governments and makes them more cautious than they would have been in the absence of such a threat. This moderation is likely to be amplified in highly competitive party systems where government formation usually requires forging wide coalitions and where as a result there are greater pressures to avoid potentially de-stabilizing moves.

The Central Argument Contextualized One way to restate the argument laid out at the beginning of this chapter is to place it in a larger academic context. As is well known there is a considerable amount of comparative literature that has emerged on Brazil and India’s development experiences. The works of Evans (1995), Kohli (2004) and Pedersen (2008) are prime examples of such scholarship. The three studies attempt to show different ways in which economic performance of the two economies has been shaped by their respective states. Unlike the works of Peter Evans and Atul Kohli which are restricted to the import substitution era, the study undertaken by Pedersen (2008) is an ambitious comparative study of Brazil and India during the neoliberal era. Pedersen’s central suggestion is that the development state as it is traditionally defined has lost much of its potency in a globalized world and that the traditional link that has been made between the prowess of the development state and national economic

1 INTRODUCTION 

21

performance has thus undergone significant transformation. This is not to suggest that states do not have an important role any more, but rather Pedersen notes the need to develop new definitions and conceptualize new roles that development states must play in order to ensure economic success in a globalized world. Given the new challenges thrown up globalization, the efficiency of state intervention ought to be measured, in Pedersen’s view, in terms of its ability to protect domestic economies from the vagaries of global markets and by its ability to leverage global markets so as to foster domestic competitive capabilities. Politically, he argues that a successful development state in the contemporary era is one that seeks more of a collaborative rather than disciplinary relation with capital. The focus of analysis must accordingly shift from the desirable qualities of a successful development state to the capabilities and organizational capacities of private capital. In his opinion, India has been successful precisely because it has been able to foster a state–business relationship of the sort required for successful globalizers. More precisely unlike Brazil, in India businesses have been in a better shape to dictate the terms of liberalization and have been able to establish an “equitable” and “institutionalized” form of collaboration with the state. This in his opinion has resulted in a far superior performance of the Indian economy. The shift towards studying classes rather than abstract state qualities is an important aspect that Pedersen has touched upon. The rich evidence used in his analysis only adds to the relevance of the arguments he makes. Despite these achievements, there are two crucial problems with Pedersen’s arguments. At a theoretical level, it is worth noting that in the traditional statist literature the central role of the developmental state was that of an institution that aligned myopic interests of capitalists with larger long-term developmental goals for the national economy taken as a whole. Since privately rational decisions were unlikely to coincide with long-term developmental goals an extra-economic institution of some sort was said to be a necessary requirement for bridging the gap and it is in this regard that the necessity of a development state was said to arise in the first place (Evans et al. 1985; Chibber 2003; Chang 1997). Now for the state to play this role, it was argued that a certain measure of autonomy from, and a certain disciplinary power over capital was crucial (Amsden 1989; Chibber 2003). It is of course true that the state could not afford to be completely separated from capital and that it had to find ways of embedding itself in business networks, but excessive embeddedness statists argued ran the risk that the state may simply not be able to

22  R. A. SIROHI

perform its developmental role (Evans 1995). It is worth noting that much of this early state-centred analysis came up in opposition to the class-centred views espoused by Marxists. Pedersen’s claim from this perspective is underspecified because it is not entirely obvious how a more assertive capitalist class in itself can overcome the central problem of diverging private and public interest (Song 2011, 2013). If anything such an eventuality is likely to aggravate the divergence between social needs and private interests thereby hurting rather than advancing development outcomes. The underlying causal mechanisms between the qualities of the new development state and economic performance thus seem under-theorized in Pedersen’s account. Secondly and perhaps more importantly, Pedersen like many other statist political economists essentially provides a supply-side view of the two economies thus ignoring important indicators of labour market performance or matters concerning distributional dynamics. But if we accept that there is an intrinsic value to having a more equal distribution of opportunities, full employment, lower levels of poverty, greater levels of human development and full-fledged democratic rights, then our measures of successes and failures cannot be based solely on the rate of production of goods and services; our analysis and comparisons must also take into account the changes that have taken place in the quality of people’s lives (Drèze and Sen 2013). This stress on human development of course is not simply a normative one. There are important instrumental reasons for valuing human development as well. For example, several studies have indicated that countries that invest in the capabilities and capacities of their citizens grow faster than those that don’t. Higher levels of literacy and life expectancy are known to be correlated with higher rates of productivity, higher savings and lower levels of fertility all of which can enhance growth (Bloom and Canning 2000; Ram and Schultz 1979; Lam and Duryea 1999). From a long-run perspective, inequality has been found to be associated with poorer institutional quality, significantly lower provision of public goods and weak fiscal systems (Acemoglu et al. 2005; Engerman and Sokoloff 1997, 2002; Sokoloff and Zoltz 2007). In the context of ethnically diverse countries like India, inequality can aggravate ethnic fractionalization and weaken democratic norms (Chapter 6). From this perspective then, the focus on a broader set of development outcomes is not to dilute the importance of growth but rather to suggest that if growth has to be sustained for long periods of time, students of development cannot afford to delink it from

1 INTRODUCTION 

23

questions of political, social and indeed environmental sustainability. From this perspective, what matters more for developing countries than growth itself is the deeper processes through which that growth is generated (Bhaduri 2008; Patnaik 2008; Drèze and Sen 2013). For instance, it is possible to imagine a scenario where growth reaches dizzying rates, but the very process through which that growth is brought about has an immizerizing logic to it. In such cases growth, however high, will be unlikely to trickle down to the poorest since the growth process itself is contingent on predation and dispossession. This book shares with statist political economists their emphasis on institutions but it deviates from existing studies by taking into consideration a broader set of development outcomes. Doing so fundamentally changes the comparison and evaluation criteria of the two economies and it also allows the focus to shift from institutions towards the social environment within which institutions function in a more decisive manner than statist political economists have attempted to do. Such a perspective provides an opportunity to closely analyse the political and social, rather than just economic sustainability of accumulation trajectories. A closer look at demand-side processes also brings to the forefront issues of class conflict, hegemony and collective action many of which tend to get drowned out with the traditional focus on growth and productivity.

The Plan of the Book The book is organized in a chronological manner with the two chapters that follow, laying out the historical context within which Brazil and India initiated their neoliberal transitions. Chapter 2 delineates Brazil’s economic history from its colonial period to the era of import substitution (ISI). The reliance on foreign capital, the distinctive patterns of structural change and the political economy of development are emphasized. Chapter 3 provides a similar analysis of India’s history. The chapter shows how like Brazil, India too adopted an ISI strategy starting from the 1950s, but unlike Brazil the obstacles it faced and the policy choices it made in response to these obstacles were very different. The most important distinction here was with respect to the hard-line policy adopted by Indian policy makers towards foreign capital. The chapter highlights the limitations of Indian ISI and sets the context for Chapter 4 which provides the central comparative study of the two regions during the neoliberal era.

24  R. A. SIROHI

Chapter 4 looks at the patterns of growth and distribution in the two regions for the 1980–2014 period. The core claim of the chapter is that political and historical contingencies placed the two economies on two divergent paths. Between 1980 and 2014, India was able to achieve significant growth and macroeconomic stability but underlying this veneer was a dismal performance on the social front. Brazil’s growth record was less stellar but its achievements on the social and distributional dimension exhibited considerable improvements, especially in the early years of the twenty-first century. Chapters 5 and 6 study important political limits of the development paths of the two countries. Chapter 5 studies the recent political crisis in Brazil which began with the impeachment of President, Dilma Rousseff of the PT in mid-2016. For all ostensible purposes, the political crisis was sparked off by corruption charges levelled against high-ranking PT officials and by Rousseff’s attempt at bypassing the country’s fiscal prudence laws. Underlying these charges however lies a deep-seated incongruence between the larger institutional structure inherited by the leftist party and its attempt to install a wage-led pattern of accumulation within it. The chapter looks at some of these contradictions in an effort to understand the basis of Brazil’s ongoing political crisis. Chapter 6 highlights tensions that have arisen as a result of iniquitous development in India. In particular, the chapter studies the rise of religious nationalism and places this phenomenon in the larger context of India’s flirtation with an elitist development regime. It argues that the increasing economic inequalities and the seeming impotence of the state in the face of deepening deprivations faced by the poor have resulted in a sharp deterioration in the legitimacy and image of democratic institutions. The rise of political parties espousing religious nationalism is a response to this crisis and an attempt to find a non-economic “fix”, to use David Harvey’s language, for an unsustainable and dehumanizing regime of accumulation (Harvey 2003).

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26  R. A. SIROHI Chang, H. J. (2006). Globalization, Global Standards, and the Future of East Asia. Global Economic Review, 34(4), 363–378. Chang, H. J. (2011). Institutions and Economic Development: Theory, Policy and History. Journal of Institutional Economics, 7(4), 473–498. Chaudhry, P. K., Kelkar, V. L., & Yadav, V. (2004). The Evolution of ‘Homegrown Conditionality’ in India: IMF Relations. Journal of Development Studies, 40(6), 59–81. Chibber, V. (2003). Locked in Place: State-Building and Late Industrialization in India. Princeton: Princeton University Press. Ciccariello-Maher, G. (2013). Constituent Moments, Constitutional Processes: Social Movements and the New Latin American Left. Latin American Perspectives, 40(3), 126–145. Drèze, J., & Sen, A. (2013). An Uncertain Glory: India and Its Contradictions. Princeton: Princeton University Press. Edwards, S. (1995). Crisis and Reform in Latin America: From Despair to Hope, No GTZ-1556, Banco Mundial, Washington DC (EUA). Engerman, S. L., & Sokoloff, K. L. (1997). Factor Endowments, Institutions, and Differential Paths of Growth Among New World Economies: A View from Economic Historians of the United States. In S. Harber (Ed.), How Latin America Fell Behind. Stanford: Stanford University Press. Engerman, S. L., & Sokoloff, K. L. (2002). Factor Endowments, Inequality, and Paths of Development Among New World Economies. Working Paper 9259, National Bureau of Economic Research. Esping-Andersen, G. (1985). Power and Distributional Regimes. Politics & Society, 14(2), 223–256. Esping-Andersen, G. (2013). The Three Worlds of Welfare Capitalism. Hoboken: Wiley. Evans, P. B. (1979). Dependent Development: The Alliance of Multinational, State, and Local Capital in Brazil, Vol. 487. Princeton: Princeton University Press. Evans, P. B. (1995). Embedded Autonomy: States and Industrial Transformation. Princeton: Princeton University Press. Evans, P. B., Rueschemeyer, D. & Skocpol, T. (Eds.). (1985). Bringing the State Back In. New York: Cambridge University Press. Flores-Macías, G. A. (2012). After Neoliberalism? The Left and Economic Reforms in Latin America. New York: Oxford University Press. Frank, A. G. (1970). The Development of Underdevelopment. In Robert Rhodes (Ed.), Imperialism and Underdevelopment. New York: Monthly Review Press. Gough, I. (2001). Globalization and Regional Welfare Regimes: The East Asian Case. Global Social Policy, 1(2), 163–189.

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Harvey, D. (2003). The New Imperialism. New York, NY: Oxford University Press. Harvey, D. (2005). A Brief History of Neoliberalism. Oxford: Oxford University Press. Hein, E., & Mundt, M. (2013). Financialization, the Financial and Economic Crisis, and the Requirements and Potentials for Wage-Led Recovery. In M. Lavoie, & E. Stockhammer (Eds.), Wage-Led Growth: An Equitable Strategy for Economic Recovery. Basingstoke: Palgrave Macmillan. Hirschman, A. O. (1968). The Strategy of Economic Development. New Haven: Yale University Press. ILO. (2011). World of Work Report: Making Markets Work for Jobs. Geneva: International Labour Office (ILO). Keynes, J. M. (1963 [1930]). Economic Possibilities for Our Grandchildren. In Essays in Persuasion (pp. 358–373). New York: W. W. Norton. Kiely, R., & Marfleet, P. (Eds.). (1998). Globalisation and the Third World. London: Routledge. Kohli, A. (1989). Politics of Economic Liberalization in India. World Development, 17(3), 305–328. Kohli, A. (2004). State-Directed Development: Political Power and Industrialization in the Global Periphery. Cambridge: Cambridge University Press. Kohli, A. (2009). Nationalist Versus Dependent Capitalist Development: Alternate Pathways of Asia and Latin America in a Globalized World. Studies in Comparative International Development, 44(4), 386–410. Kohli, A. (2012). Poverty Amid Plenty in the New India. Cambridge: Cambridge University Press. Krueger, A. O. (1998). Why Trade Liberalisation Is Good for Growth. Economic Journal, 108, 1513–1522. Lam, D., & Duryea, S. (1999). Effects of Schooling on Fertility, Labor Supply, and Investments in Children, with Evidence from Brazil. Journal of Human Resources, 34, 160–192. Lavoie, M., & Stockhammer, E. (2013). Wage-Led Growth: Concept, Theories and Policies. In M. Lavoie, & E. Stockhammer (Eds.), Wage-Led Growth: An Equitable Strategy for Economic Recovery. Basingstoke and Geneva: Palgrave Macmillan and ILO. Levitsky, S., & Roberts, K. M. (2011). Introduction: Latin America’s ‘Left Turn’: A Framework for Analysis. In S. Levitsky, & K. M. Roberts (Eds.), The Resurgence of the Latin American Left. Baltimore: John Hopkins University Press. Lewis, W. A. (1954). Economic Development with Unlimited Supplies of Labour. The Manchester School, 22(2), 139–191.

28  R. A. SIROHI Lipietz, A. (1987). Mirages and Miracles: The Crisis of Global Fordism. London: Verso. Morais, L., & Saad-Filho, A. (2003). Snatching Defeat from the Jaws of Victory? Lula, the ‘Losers’ Alliance’, and the Prospects for Change in Brazil. Capital & Class, 27(3), 17–23. Mukherjee, A., & Mukherjee, M. (1988). Imperialism and Growth of Indian Capitalism in Twentieth Century. Economic and Political Weekly, 23(11), 531–546. Nayyar, D. (2013). The South in the World Economy: Past, Present and Future. UNDP Occasional Paper 2013/01. Patnaik, P. (1973). On the Political Economy of Underdevelopment. Economic and Political Weekly, 8(4/6), 197–212. Patnaik, P. (2008). The Accumulation Process in the Period of Globalisation. Economic and Political Weekly, 43(26/27), 108–113. Patnaik, P. (2009). The Paradox of Capitalism. People’s Democracy, 33(27). Available at: https://archives.peoplesdemocracy.in/2009/0705_ pd/07052009_10.html. Pedersen, J. (2008). Globalization, Development and the State: The Performance of India and Brazil Since 1990. Basingstoke: Palgrave Macmillan. Poulantzas, N. A. (1973). Political Power and Social Classes. London: New Left. Poulantzas, N. A. (2000). State, Power, Socialism. London: Verso. Pritchett, L. (1997). Divergence, Big Time. Journal of Economic Perspectives, 11(3), 3–17. Ram, R., & Schultz, T. W. (1979). Life Span, Health, Savings, and Productivity. Economic Development and Cultural Change, 27(3), 399–421. Research Unit of Political Economy. (2007). On the History of Imperialism. Monthly Review. Available at: https://monthlyreview.org/2007/12/01/ on-the-history-of-imperialism-theory/. Rodrik, D., & Subramanian, A. (2004). From “Hindu Growth” to Productivity Surge: The Mystery of the Indian Growth Transition. National Bureau of Economic Research, Working Paper No. 10376. Rostow, W. W. (1990). The Stages of Economic Growth: A Non-communist Manifesto. Cambridge: Cambridge University Press. Saad-Filho, A., & Johnston, D. (2005). Introduction. In A. Saad-Filho, & D. Johnston (Eds.), Neoliberalism: A Critical Reader. Chicago: University of Chicago Press. Silva, E. (2009). Challenging Neo-Liberalism in Latin America. Cambridge: Cambridge University Press. Sokoloff, K. L., & Zolt, E. M. (2007). Inequality and the Evolution of Institutions of Taxation: Evidence from the Economic History of the Americas. In Sebastian Edwards, Gerardo Esquivel, & Graciela Márquez

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(Eds.), The Decline of Latin American Economies: Growth, Institutions, and Crises. Chicago: University of Chicago Press. Song, H. Y. (2011). Theorising the Korean State Beyond Institutionalism: Class Content and Form of ‘National’ Development. New Political Economy, 16(3), 281–302. Song, H. Y. (2013). Marxist Critiques of the Developmental State and the Fetishism of National Development. Antipode, 45(5), 1254–1276. Stockhammer, E., & Onaran, O. (2013). Wage-Led Growth: Theory, Evidence, Policy. Review of Keynesian Economics, 1(1), 61–78. Sugihara, K. (2004). The East Asian Path of Economic Development: A Long-Term Perspective. In G. Arrighi, T. Hamashita, & M. Selden (Eds.), The Resurgence of East Asia: 500, 150 and 50 Year Perspectives. London: Routledge. Topik, S. (1980). State Interventionism in a Liberal Regime: Brazil, 1889–1930. The Hispanic American Historical Review, 60(4), 593–616. Trichur, G. K. (2012). East Asian Developmental Path and Land-Use Rights in China. Journal of World-Systems Research, 18(1), 69–89. Wade, R. (1998). The Asian Debt-and-Development Crisis of 1997: Causes and Consequences. World Development, 26(8), 1535–1553. Wade, R. (2003). What Strategies Are Viable for Developing Countries Today? The World Trade Organization and the Shrinking of ‘Development Space’. Review of International Political Economy, 10(4), 621–644. Weisbrot, M., Baker, D., & Rosnick, D. (2006). The Scorecard on Development: 25 Years of Diminished Progress. DESA Working Paper No. 31. Williamson, J. (1993). Democracy and the “Washington Consensus”. World Development, 21(8), 1329–1336. Williamson, J., & Zagha, R. (2002). From the Hindu Rate of Growth to the Hindu Rate of Reform. SCID Working Paper 144. Wood, G., & Gough, I. (2006). A Comparative Welfare Regime Approach to Global Social Policy. World Development, 34(10), 1696–1712. Yates, J. S., & Bakker, K. (2014). Debating the ‘Post-Neoliberal Turn’ in Latin America. Progress in Human Geography, 38(1), 62–90.

CHAPTER 2

The Evolution of the Brazilian Economy: A Historical Analysis

Any analysis of contemporary Brazil would be woefully inadequate without a careful study of its historical experiences. It is of course true that Brazil of the nineteenth century or for that matter the Brazil of the early twentieth century were very different societies from the Brazil that we see today. But underneath the dramatic changes that have been occurring in the region for the past century or so there are striking historical continuities as well. Modern Brazil may no longer be a European colony, but external dependence is something that it has not been able to escape; Brazil today may no longer be a slave-based plantation complex that it was in the nineteenth century but deep inequalities and economic injustices continue to pervade its society. Given that the past and the present share important similarities, any analysis of the Brazilian economy in the neoliberal era must be contextualized within its larger historical experiences. With this in mind, this chapter provides a broad overview of Brazilian history since its colonial days to the neoliberal transition of 1980.

Colonialism and Commodity Cycles The South American region came under Portuguese colonial control in the early years of the sixteenth century. An expedition led by a Portuguese nobleman, Pedro Alvares Cabral, set out from Lisbon in 1500 towards India but ended up on the shores of north-eastern Brazil. The “discovery” of Brazil, at least initially, was not followed by a © The Author(s) 2019 R. A. Sirohi, From Developmentalism to Neoliberalism, https://doi.org/10.1007/978-981-13-6028-2_2

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concerted effort to colonize the region. Apart from scattered settlements in coastal regions, large parts of Brazil remained outside Portuguese control. Attempts by Portugal to exert greater control over its colony began after the 1530s but these were not driven by economic exigencies. With no immediate source of wealth to extract, Furtado (1971) reminds us that the immediate thrust for colonization was not economic but political. By 1504, the French had begun to assert their control on coastal regions and by the mid-sixteenth century, they had gained considerable ground in Rio de Janeiro (Skidmore 2010). Not too long after, the French started challenging the Portuguese in Northern Brazil as well. It was only by 1615 that they were ousted from the region. The Spanish and Dutch proved to be equally tough opponents. The Dutch threat emerged in the 1620s when the Dutch West India Company began acquiring territories in the sugar-growing regions of the North (Burns 1993; Klein and Luna 2010). They were defeated only by the mid-seventeenth century but just around this time the colonial administration was forced to turn its gaze southwards where it came into direct conflict with Spain in the Rio de Plata basin (Burns 1993). It was as a response to these growing encroachments that the Portuguese Crown began its “defensive colonialism” (Burns 1993, p. 49). Colonialists organized regular military expeditions (bandeiras) to explore and conquer interior regions in the West and the Crown fortified its positions in the North where the threats of foreign incursions were the greatest. As early as 1530, the Crown also issued land grants called “captaincies” to Portuguese colonizers. Originally Brazil was divided into fifteen “captaincies” and each grantee was given complete charge of political and economic affairs within their respective estates including the power to organize law and order, raise local armies, impose taxes and provide land grants or sesmarias for the purposes of agricultural production (Skidmore 2010). Economic motives of course would become important in later periods. Mired in a deep economic crisis of its own and having been edged out of Asia, establishing control over Brazil became exceedingly important from an economic perspective especially from the seventeenth century onwards. Over the three centuries of colonial rule exports of Brazilian raw materials like tobacco, sugar and wood would become essential for the survival of the Portuguese economy. The discovery of precious metals in the eighteenth century would help postpone Portugal’s decline by allowing the unindustrialized nation to balance its

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international debt using Brazilian gold. As an index of Brazil’s role in sustaining the Portuguese economy one can simply note that between 1797 and 1811, Brazil accounted for 34% of all Portuguese imports and 30% of its exports (Haber and Klein 1997). With the benefit of hindsight, it is evident that the decision to colonize Brazil was a very lucrative one. As far as the colony was concerned its incorporation into Europe’s orbit of influence entailed first and foremost, a prioritization of the production and export of raw materials and this had significant economic and political impacts. The extractive nature of colonization posed two immediate problems for the local economy (Moore 2000, 2009). First, the short-term focus on extractive activities forced the region into a pattern of producing monocultures for exports, making the economy vulnerable to the ebbs and flows of international markets. Second, without adequate diversification and planning, the production of raw materials faced the perennial problem of diminishing returns to investment. This problem stemmed from the fact that colonialists produced primary commodities without paying any heed to long-run ecological and social sustainability of the entire production process. Sugar, gold and a whole host of goods were extracted from the colony but colonialists were never interested in making countervailing investments into technology, human capital nor the preservation of soil fertility that could have sustained long-run productivity. In such an economic system, production necessarily entailed increasing costs over time. “In essence, the land was progressively mined, until its relative exhaustion fettered profitability, whereupon capital was forced to seek out fresh lands” (Moore 2000, pp. 413–414). The example of sugar which was the first major raw material exported by Brazil provides an interesting illustration of this pattern. Sugar was introduced into the region in 1520 but prior to this the Portuguese had initiated sugar production in the Mediterranean island of Madeira, which by the late fifteenth century had become the main centre of global sugar production (Moore 2009). Here the incipient planters quickly came to learn that sugar production was extremely resource intensive. “This first sugar revolution was”, as Moore (2009, p. 352) suggests, “an audacious act of biophysical transformation”. Due to economies of scale successful sugar production required abundant land and on a densely forested region like Madeira, acquiring such vast tracts of land was achieved by simply burning down its forests. Added to this, sugar production also

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required ready supplies of fuelwood for extracting sugar from the cane juice. The pressure on the island’s local ecology therefore was immense, and by the early sixteenth century “over half its accessible forests, had been cleared” (Moore 2009, p. 351). This massive deforestation not only increased the cost of fuel, but it also led to severe soil erosion which adversely impacted fertility and productivity. By the late fifteenth century, then, the inexorable drive to maximize production had “mined” the local ecology to such an extent that the island could no longer sustain the kind of output that it once had (Moore 2000). Between 1506 and 1530, sugar output fell by a massive 90% (Moore 2009). As Madeira’s productivity declined, Brazil came to acquire a more prominent role in the global sugar market. In this South American region, sugar plantations emerged along the coastal regions of Bahia and Pernambuco. Adequate levels of rainfall, good soil quality, vast forest covers which could be used for fuel and ready availability of ports made these north-eastern regions ideal for sugar cultivation. Being an export product, buoyant global demand was an essential prerequisite for sugar cultivation. This did not appear to be a problem as demand from European consumers was more than adequate during the sixteenth and early seventeenth centuries. On the supply side however, what was missing was a disciplined labour force capable of producing sugar at a large scale. The indigenous population was initially coerced into working for the sugar plantations, but arduous working conditions and devastating epidemics reduced their numbers and according to one estimate the population plummeted from 2,431,000 in 1500 to 800,000 in 1570 (Marcílio 1984). Having exhausted local reserves of labour, the colonialists came to rely heavily on the large-scale imports of African slaves for plantation work. By the early seventeenth century, most of the labour on the sugar plantations was provided by African slaves (Klein and Luna 2010). In the period between 1600 and 1680, the population of African slaves in the region increased tenfold from around 13,000–15,000 to 150,000 (Schwartz 1984). “By the eighteenth century slaves composed about half of the population in the north-eastern captaincies, but in sugar-growing regions they often constituted between 65 and 70 per cent of the inhabitants” (Schwartz 1984, p. 437). The decision to import African slaves as the prime source of labour was influenced by several considerations. To begin with, unlike the indigenous inhabitants, African slaves were viewed as being more resistant

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to diseases and were perceived as being better equipped with the sort of skills required to undertake agricultural work on sugar plantations (Burns 1993).1 To this we may also add the fact that Portugal already had become an established player in the Atlantic slave trade and therefore the imports of slaves could be accomplished without relying on intermediaries and without having to pay cumbersome taxes and duties (Blackburn 1998). North-eastern Brazil’s proximity to Europe as well as to the African coasts made it even more cost effective for the Portuguese to use their business networks to transport slaves to the sugar plantations in Brazil (Schwartz 1984; Klein and Luna 2010). Not surprisingly throughout the last quarter of the sixteenth century, all the way up to 1613 the price of slaves in Brazil was 50–66% lower than the prices in the Caribbean (Blackburn 1998). Of course, the resort to slavery was a much more complex issue because on paper it may have been possible to employ free labourers or indentured European workers instead of African slave labour. In practice however, this was always going to be difficult to implement because in land-abundant regions like Brazil the possibility of engaging in self-sufficient, subsistence farming would have left few incentives for workers to voluntarily opt to work in plantations where working conditions were exceedingly harsh.2 Further, Portugal lacked the population size to provide indentured labour a colony of Brazil’s size anyway. Under such circumstances, a coercive labour regime based on slavery provided the path of least resistance for organizing large-scale production on plantations. Finally, we may also note that sugar production was extremely labour intensive and therefore controlling labour costs was always a big concern for the plantation owners. Wage labour would have turned out to be extremely costly given the high demand that existed for labour (Blackburn 1998). Generally, the more technical and skilled work on sugar plantations was left to free labourers, but slaves 1 Schwartz (1985, p. 70) notes in this context that “In Brazil, the relative position of Indian and African slaves within the sugar labor force can be seen in its simplest and crudest form in the comparative prices of the two peoples. The average price of an African slave listed with occupation in 1572 was 25$, whereas Indians with the same skills averaged only 9$. The only skilled Indians whose prices equaled, or even approached, those of African slaves were those who were truly practicing skilled crafts - carpenters, sugar craters, and boat caulkers, for example, or those engaged in the specialized positions of a sugar mill. The vast majority of Indians listed with some occupation, but not an artisan skill, were priced far below the average value of unskilled Africans”. 2 Eric Williams (2014) has made this in the context of North America.

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were by far the most important labour input. It is estimated that anywhere between 60 and 200 slaves were employed on sugar plantations at any given time depending on the size and scale of production (Schwarz 1984). Regulation of labour costs was therefore essential for maintaining profitability. Slavery, then, seemed to be an attractive option for plantation owners. On a typical Brazilian plantation one day of the week was all that was necessary for the slaves to engage in subsistence activities. In effect, this meant that labour worth six days per week could be expropriated by the plantation owner as a direct slave rent (Taylor 1970). Needless to say, the quality of lives of the African slave population in Brazil was miserable. The conditions of work were such that on an average anywhere between 5 and 10% of the slave population perished each year in the Bahian sugar mills in the late seventeenth and eighteenth centuries (Schwartz 1984). Given the ready supply of slave labour coming in from Africa, there was no concerted effort to improve their living conditions. Food shortages were endemic in the North and since most slaves who were brought to work on Brazil’s plantations were working-age adult males, there were severe imbalances in the gender ratios of the working population and this precluded any natural increase in the slave population (Skidmore 2010; Schwartz 1984). It is therefore generally accepted that death rates far exceeded birth rates for the slave population and though no detailed data exists for initial decades, there are indications that life expectancies were very low. Under these conditions, the colony was permanently caught up in a “self-perpetuating cycle of importation and mortality” (Schwartz 1984, p. 439). Sugar production was organized around large sugar mills called engenhos. The capital requirements of setting up sugar production units were large and at least initially only the uppermost stratum of the colonial society had the wherewithal to establish such ventures. In terms of their socially status however, very few of these plantation owners or senhor the engenhos were from noble descent. They were “composed of commoners who saw in sugar the means to wealth and upward mobility” (Schwartz 1984, p. 443). Below the senhor were a class of cane farmers, lavradores de cana, who were often contracted by the former to grow cane for the sugar mills. The outsourcing of production to lavradores was an important mechanism to reduce costs of production (Blackburn 1998). The lavradores “were ‘proto-planters’, often of the same social background as planters but lacking the capital or credit needed to establish a mill” (Schwartz 1984, p. 446). Thus even though they belonged to the same

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racial and social group as the senhors, the relationship between the two was an unequal one. The contractual terms between the senhor and the lavrador varied from one region to another but it largely depended on whether the lavradors owned their own land or not. More specifically lavradors were divided into either tenants who leased lands from the plantation owners or direct cultivators who owned their own land and the latter were usually in a much better bargaining position vis-a-vis the senhors (Schwartz 1984; Blackburn 1998). “The lavrador received about a half of the sugar made from his cane if he owned his land, between a quarter and a third if it belonged to the senhor” (Blackburn 1998, p. 170). The division of labour on an engenho was thus complex. It is therefore worth emphasizing that despite the widespread use of slave labour, sugar production was not a primitive process. From cutting canes in the fields to the final stage of processing canes into sugar in the large engenhos, the entire process required substantial capital investments, technical expertise and a complex organization system to coordinate the entire process. Thus Moore (2000, p. 415) describes sugar production in the New World as being “profoundly industrial, involving a degree of labor process coordination and capital intensivity that was rare in the early modern world-system”. Although the use of technology was minimal, technological change was not altogether absent. Prior to the seventeenth century, sugar plantations typically employed mills with two vertical rollers, to crush cane. “The two-roller mill was heavy and cumbersome and, when driven by animal power, expensive as well. At least a hundred oxen divided into teams were needed to power this machine with all that this meant in pasture, feed, care, and replacement” (Schwartz 1985, p. 126). By the early decades of the seventeenth century, a more cost-effective milling method which used three rollers instead of two was introduced. The new milling technique “was easier to construct, pressed the cane better and thus did away with the need for secondary presses, did not demand such great amounts of animal power, and could mill cane at a faster rate” (Schwartz 1985, p. 127). The introduction of this new mill brought about a certain amount of modernization in Brazilian sugar mills and the resulting increases in productivity (or at least declining costs) played an important role in sustaining Brazil’s dominance of sugar production even in the face of unstable global prices in the initial decades of the seventeenth century. Schwartz (1985, p. 127) concludes that the “increase in construction of new engenhos noted after 1612 is most

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certainly due to this technological advance and to the lower costs of the three-roller mill compared to the previous system”. Ultimately of course it would be an exaggeration to equate the experiences of Brazil’s plantation-based economy with the sort of industrial capitalism that was taking root in European nations. For one, sugar production did not facilitate any broad-based structural changes in the Brazilian economy and neither did it lay foundations for industrialization. For Furtado (1971), the primary reason for this was that the wealth generated from sugar exports was largely appropriated by the commercial and planting elite who in turn spent most of their surpluses on imports from European countries and on slaves from the African coasts. Thus unlike North America where prevalence of small-scale agriculture gradually created a significant home market, in a slave-based economy like that of Brazil’s, there was little room to develop similar domestic demand that was so very essential for self-sustaining development. Additionally, Furtado (1971) noted that the sugar plantations, rarely if ever, developed backward and foreign linkages within the economy. There were occasions where demand from sugar plantations encouraged activities like cattle breeding, but by and large these linkages remained weak and temporary. This was aggravated by the fact that most payments were leaked abroad or were made in kind, which meant that investments failed to generate corresponding “flows of monetary income” with the result that the monetary economy remained restricted. Added to these factors, the incentives generated by the plantation regime were such that they led to an over-exploitation of resources thereby undermining long-term growth of productivity. As in Madeira, fuelwood became an important input in the sugar refining process, taking up as much as a fifth of the engenho’s costs of production in the eighteenth century. “In terms of land requirements, one and a half to two acres of forest were needed to process a single acre of sugar cane” in Bahia (Moore 2000, p. 422). During the initial decades, the wide availability of forests kept fuel costs under wraps but eventually massive deforestation that followed from the sugar plantation system made it harder to access fuelwood and increased costs of production (Miller 1994). Moreover, the resultant soil erosion decreased land productivity (Moore 2000). The cumulative effect of all this was the complete exhaustion of Brazil’s sugar frontiers. The sugar production reached its peak in the first half of the seventeenth century when it contributed to 90–95% of Brazil’s export earnings. But by 1700, its share in export revenues

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declined to 15% (Skidmore 2010). During the second half of the seventeenth century, global price of sugar declined rapidly and from here on out “the volume of average annual exports attained barely 50 per cent of the highest points reached about 1650” (Furtado 1971, p. 17). Though the crop remained an important export item even until the late nineteenth century, Brazil lost its international pre-eminence as a global sugar producer by the end of the seventeenth century. New centres of sugar production in the Caribbean came to gradually eclipse Brazil. The following centuries did not in any way reduce the economic importance of colonial Brazil in the world economy as the sugar cycle was followed by the gold cycle which was promulgated in the eighteenth century.3 In 1689, gold deposits were found in south-eastern Brazil, in Minas Gerais. This was followed by discoveries in Mato Grosso and Goías in the early eighteenth century. Not soon after these discoveries, Brazil emerged as a hub of mining activity and gold became a major export from the country. Production took off in 1706–1710, reaching a peak in 1726–1729 when the annual production was just a little under 16,000 kgs per year. According to estimates quoted by Baer (2014), 50% of the global gold supply came from Brazil during the eighteenth century. Domestically, the locus of economic activity shifted to the Centre and the South-East of Brazil. Cities like Ouro Preto and ports like Rio de Janeiro gained prominence. It was not long before the “Crown recognized this new geographic reality by shifting the capital of the colony from Salvador, in Bahia, to Rio de Janeiro in 1763” (Klein and Luna 2010, p. 56). While the colony remained vulnerable to the boom-bust cycles of previous decades, the gold cycle did stimulate cattle ranching and agriculture (Baer 2014). Sugar production emerged as an important activity in Sao Paulo and Rio de Janeiro which quickly “became the centers of production of both mascavo (brown sugar) and of aguardente (brandy made from sugar)” (Klein and Luna 2010, p. 69). In a slavebased economy, these linkages obviously remained weak and as with previous cycles, the era of gold exports came to an end in the last decades of the eighteenth century. The history of colonial Brazil has often depicted as a sequence of self-destructive commodity cycles. Typically, each cycle began with the discovery of a primary commodity whose production, while profitable in the initial stages of production, also initiated a series of regressive 3 The

description of the gold cycle that follows draws on Klein and Luna (2010).

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processes that eventually hindered long-term productivity growth. Thus, in every century high-profit booms eventually gave way to busts and a renewed search for new “commodity frontiers” (Moore 2000). It is this inexorable tendency of capitalist development that one of the foremost students of capitalism, Karl Marx, had underscored in his writings a few centuries ago. Marx was of the view that capitalist development while seemingly well-coordinated and smooth was nonetheless based on an essential contradiction. It was a social system that was capable of generating explosive productivity on a scale that mankind had never seen before, but it was also a system that “only develops the techniques and the degree of combination of the social process of production by simultaneously undermining the original sources of all wealth-the soil and the workers” (cited in Moore 2000, p. 424). Brazil’s colonial experience is a testament to Marx’s observations.

The Brazilian Economy in the Nineteenth Century: The Coffee Cycle With the waning of the gold cycle towards the end of the eighteenth century, Brazil’s history was once again on familiar turf. As in previous centuries, the economy turned to its agriculture and a new source of economic stimulus emerged: coffee. By the end of the nineteenth century, Brazil became the pre-eminent exporter of coffee, accounting for well over half of the world’s supply (Flynn 1979). The rise of coffee went hand in hand with other important political and social changes which had far-reaching effects on the Brazilian society. The nineteenth-century commodity cycle was unlike any Brazil had encountered previously. Several noteworthy developments made this phase unique in Brazilian history. Perhaps the most important change was political in nature. In 1822, Brazil attained formal independence from Portuguese rule thereby breaking the mercantilist monopoly that had strangled its external trade for three centuries. From a comparative perspective, the entire episode of independence was actually anticlimactic. Unlike the rest of Latin America, in Brazil the break between colony and metropolis was relatively bloodless and smooth.4 Having been pushed out of Lisbon by Napoleon’s army, the Portuguese monarchy 4 See

Skidmore (2010) for a brief description.

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had already shifted to Brazil in the early years of the nineteenth century. The exiled Portuguese court lifted the ban that had been placed on manufacturing in Brazil and if this was not unprecedented enough, in 1815 Brazil was officially given the same political status as Portugal. The Portuguese King Dom Joao VI eventually returned to Lisbon but his son Dom Pedro I stayed back in the Brazilian capital, Rio. As cries for regaining control over Brazil grew louder from Portugal, Emperor Dom Pedro I declared independence of Brazil from Portugal in 1822. There are those who have argued that formal independence in itself meant very little for Brazilian economic development and that if anything independence deepened Brazil’s dependency on Britain, substantially weakening prospects of economic modernization (Burns 1993). There is an element of truth in such interpretations. On the social front, the hierarchical nature of the Brazilian society did not witness any major change after 1822. If anything, the power of agricultural oligarchy only increased. Even though representative institutions were beginning to take root, racialism and politically illiberal attitudes of the powerful elite classes meant that most of the population remained disenfranchised. As in previous centuries, slavery continued to be the basis of commodity production. In the period 1830–1850, an average of 35,000 African slaves entered Brazil each year (Skidmore 2010) and it was not until 1888 that the abhorrent practice was eliminated. The extensive use of slaves together with an explicit attempt by the state to subsidize European immigration ended up exerting a downward pressure on wages (Furtado 1971; Leff 1997). On the external front, economic dependency on Britain became a characteristic feature of the period. Well before independence was declared, the Portuguese monarchs had given the British preferential access to Brazilian markets through a variety of tariff arrangements. This pattern continued even after independence as well. The treaty of 1827 placed a tariff ceiling on British goods entering Brazilian markets. The British of course were not required to provide any such preferential treatment for Brazilian goods. The treaty which was to be in effect till 1844 has been described by some as one of the key reasons for Brazil’s relatively late industrialization (Bethell and De Carvalho 1985). While British influence on foreign trade did eventually decline towards the second half of the nineteenth century, Brazil’s financial dependency on London only turned deeper (Cains and Hopkins 2016). Large expenditures made by the state on railways, ports and warehouses

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were often financed through loans raised in Britain. Additionally, “the financing, shipping and insuring of Brazil’s overseas trade remained overwhelmingly in British hands down to 1914, irrespective of its destination” (Cain and Hopkins 2016, p. 282). This in turn meant that British financial interests came to influence key economic decisions of the government. If one is to look at the impact of independence on economic growth, the record of nineteenth-century Brazil is far from impressive. In the period from 1850 to 1913, income grew at an average rate of 2.4% but per capita income growth was negligible (Skidmore 2010). Viewing the numbers from a more disaggregated level, it becomes obvious that the poor performance of the north-east lies at the heart of the low aggregate growth rates. According to estimates quoted by Davis (2002), between 1872 and 1900 per capita output in the states of Ceara, Rio Grande do Norte, and Bahia fell by 275, 100, and 3% respectively while for Sao Paulo per capita output increased by over 500%. For Baer (2014), these regional patterns of development were closely linked to Brazil’s changing relationship with the world economy. The gold cycle of the eighteenth century had already weakened the relative position of north-eastern Brazil whose dominant product was sugar. By the nineteenth century, with the emergence of coffee as the primary driver of growth, the fate of the north-east was effectively sealed. In 1821–1823, the share of sugar and cotton—two important products of the north-east—in total exports hovered around 50% and then declined to around 29% in 1871–1873. By 1912–1914, the figure was just a little under 3% (Leff 1972). The principal commodity that displaced these crops was coffee which was primarily cultivated in and around the south-eastern regions of Rio de Janeiro and Sao Paulo. As a result, the economic role of the north-east declined and whatever incipient industrial growth that did occur during this period was concentrated in the coffee producing regions. Had adequate state support been forthcoming it may have been possible to encourage alternative activities to counter the loss of export markets in the north-eastern belt. This would have required expanding domestic industries, providing large-scale financial support and perhaps even encouraging alternative commodity exports. But the Brazilian state, however sovereign, did not have the developmentalist capacity required for this project with the result that the north-east lagged behind the richer parts of the country. The political efforts to decentralize power in the late nineteenth century only served to weaken the north-east even more. The demands

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for regional decentralization can be traced back to the early decades of the nineteenth century, when the monarchy took over the reins of the newly independent country. Formally, the constitution of 1824 promulgated by the King outlined a centralized system of governance in which the Monarch was to have extensive “moderating power” (Flynn 1979; Skidmore 2010). Subordinated to the monarchy were two other important political institutions. The first was the Senate which was to be made up of members selected by the monarch based on recommendations made by the states. The other was the Chamber of Deputies which consisted of elected representatives from each state. The right to vote was restricted according to income and gender which basically meant that the vast majority of Brazilians remained outside the political system. Within this system, there were several instances where the monarchy used its constitutionally given powers to pit itself against the regional power blocs—including on the issue of the abolition of slavery. Legally, the Emperor “could dissolve the lower house, then call new elections. He also had the power to approve or veto any measure passed by the Chamber or the Senate” (Skidmore 2010, p. 48). But having said this, the powers of the Monarch were not unlimited. Flynn (1979) suggests that despite all the external appearances, under the guise of a centralized monarchy the Brazilian political system remained highly fragmented and decentralized. True political power wrested in the hands of regional notables and political stability could only be maintained as long as each political actor including the Monarch respected the rights and privileges of these local oligarchs. According to him, formal constitutional forms notwithstanding, the Monarch’s role in this environment was simply to act as an intermediator between regional groupings, to “defuse party politics and resolve that struggle for political supremacy” (Flynn 1979, p. 16). By 1889, federal power was further weakened as the monarchy was brought down and replaced by a political system which placed even more power in the hands of regional blocs. According to the new constitution of 1891, states were given the power to raise their own foreign loans and create their own armies. The most important dimension of the republican constitution however was that the taxes on exports were placed under the purview of states rather than the federal government (Love 2013). Since taxes on foreign trade constituted a major share of the public revenues, this decentralization of fiscal power re-enforced the tendency towards regional inequality. Those states that exported highly

44  R. A. SIROHI

demanded products like coffee witnessed a significant increase in their revenues after 1891. These states, as a result were also more successful at attracting foreign loans (Fritscher and Musacchio 2010). Was political independence completely insignificant, then? While it is true that the nineteenth-century Brazilian economy was constrained by British imperialism and that the post-independence period was marked by significant continuities rather than ruptures, it is important not to downplay the significance of the political break from Portugal. While Brazil remained an agricultural exporter par excellence, political sovereignty was consequential because it allowed local elites to protect their interests vis-a-vis foreign capital in a way that may not have been possible in many colonies like India. In contrast to what was happening in India where the massive profits generated through its exports were simply being repatriated back to metropolitan regions in the form of political tributes, in the case of Brazil foreign trade came to be associated with modest levels of capital accumulation especially in the south-eastern regions. In these areas the “major export crop, coffee, was in the hands of local rather than foreign capital” (Evans 1979, p. 61). This “not only provided some degree of local autonomy, but more important, the possibility of local capital accumulation” (Evans 1979, p. 61). Not surprisingly regions most closely connected with the coffee boom also became the base for early Brazilian industrial growth and very often it was the coffee planters themselves who pioneered early infrastructural and industrial projects (Baer and Sirohi 2015; Hewlett 1975). A semblance of local autonomy also meant that the Brazilian planter elite had direct access to the state apparatus and could influence state policy in the economic arena. Local oligarchs had several mechanisms through which they could influence government officials. Like in other parts of the periphery, the use of kinship ties was often used to get preferential treatment (Flynn 1979; Topik 1991). In the absence of strong national-level political parties, agricultural interests organized themselves into “commercial associations” which provided a forum for local agrarian elites to influence the government. It was not long before these associations became a point of convergence for a wide variety of Brazilian elites and according to Ridings (1977) because of the immense influence wielded on the government, these organizations came to be recognized as “quasi-official” bodies in important sectors like the railways. In response to the varied demands of elites, the Brazilian state could and did intervene in the domestic economy to favour local

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constituencies. In the case of railway infrastructure—a key demand of coffee producers—the state played an important role in mobilizing investments by providing subsidies in the form of guaranteed returns on investments to attract foreign capital (Topik 1979). As a result, the total trackage increased from around 14 km in 1854 to approximately 26,000 km in 1914 (Leff 1997). While the railway network remained confined to the coffee producing regions in the South-East and failed to integrate the entire economy—say in the way the Indian railways did—they were nonetheless very important for making Brazil’s exports competitive.5 Because of this with the advent of the railways, ports and coffee producing interiors became well connected and transport costs— which accounted for a large share of total costs—declined considerably. The development of railway networks also helped incipient industries gain easier access to inputs which helped reduce their costs of production (Evans 1979). It is worth noting here that state intervention at least initially was not driven by developmentalist motives, but by sheer pragmatism. The Brazilian economy was underdeveloped and lacked a strong domestic bourgeoisie. Meeting the rising infrastructural needs of the economy therefore could not be left to private domestic actors alone (Topik 1979). Further, the state itself was neither capable of nor interested in taking on such projects on its own (Baer and Sirohi 2015).6 The state therefore increasingly sought to woo foreign investment to make up for the weaknesses of domestic capital. But what began as a pragmatic response to the demands of development, over time turned into a more decisive form of state intervention (Topik 1979, p. 329). Apart from incentivizing the entry of foreign capital the state “stipulated the route, the nature of the equipment, the capitalization, and the freight and passenger rates” (Topik 1979, p. 336). Eventually as the guaranteed returns promised by the state became burdensome, railway lines were nationalized and by the 1930s over half the Brazilian railroads were owned by the state (Topik 1979). 5 Davis (2002, p. 380) notes “Unlike Victorian India with its impressive railroads and inter-regional grain trade, Brazil until the early 20th century remained an ‘archipelago’ of distinctive economies separated by dauntingly high internal costs of transportation”. See Baer and Sirohi (2015) for further details. 6 Here the contrast with India is interesting where the state directly took over railroad construction between 1870 and 1880. 3500 km of railroads were built up by the state and at relatively cheap costs (Headrick 1988).

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A second important area of state intervention was on the external trade front. It has been noted above that the preferential tariff policies of early nineteenth century were particularly harmful to the Brazilian economy. The Brazilian state was not however completely powerless. It, for example, continued successfully to resist pressures on it by Britain to abolish slavery (Haber and Klein 1997). In 1844, the imperial government refused to renew the preferential tariff agreement that it had signed with the British in 1827 and over the next few decades, tariffs on imports were increased on a regular basis. The result was that by the end of the century the average tariff rate was 25% and in some cases like the textile industry, they were probably four times as high (Kohli 2004). Partially this change in the stance was because of the state’s weak fiscal capacity which made it increasingly reliant on duties levied on exports and imports. It must be remembered that unlike nineteenth-century India, where the dominant source of revenue was land tax, in Brazil state expenditure was funded to a large extent, through taxes on foreign trade. Well over two-thirds of the state’s revenues between 1830 and 1885 came from taxes levied on foreign trade (Leff 1997).7 Haber (2006) however notes that while the tariff rates had become uniformly higher in the late nineteenth century, there was also an element of selectivity in the sense that certain sectors received more protection than others. More specifically “beginning in the late 1880s, the government began to push up the tariff on finished cotton cloth” but when it came to raw materials and machinery the rates of protection were slashed (Haber 2006, p. 550). It was this “cascading tariff structure that allowed for effective protection” as opposed to just having uniformly high tariffs (Haber 2006, p. 550). Ultimately therefore, whether by design or by accident the hike in tariffs had a protectionist impact on incipient local industries (Leff 1969; Haber 2006). Perhaps the most important form of state intervention came during the early decades of the twentieth century, in the form of the valorization scheme. By the late nineteenth century, Brazil’s coffee cycle was showing signs of weakening as global prices began to stagnate. To make things worse on the supply side, there was an overproduction of coffee output. In fact, between 1880 and 1901 the coffee output more than quadrupled according to estimates cited by Furtado (1971). Given the 7 According to Banerjee and Iyer (2005), 60% of state revenues were derived from land taxes in India in 1841.

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important role of coffee in the Brazilian economy and given the political clout of planters, the state was inclined to intervene and regulate coffee supply. Initially undertaken by the governments in Minas Gerais, Rio De Janeiro, and Sao Paulo, in 1906 the valorization programme was eventually given federal support. Under the scheme, the state bought excess coffee from planters and held them as inventories, the costs of which were covered by foreign loans guaranteed by the federal government. The payments on foreign debt were to be recovered through a set of taxes levied on coffee exports (Baer 2014; Skidmore 2010; Furtado 1971; Kohli 2004). Between 1904 and 1908, 8 million bags of coffee were purchased by the government in Sao Paulo alone. Then again in 1917 around 3 million bags were bought up by the state government. By 1921, when the federal government had taken over the responsibility of maintaining coffee buffer stocks, close to 4.5 million bags of coffee were purchased (Krasner 2013). The valorization scheme did not address the central deficiencies of a primary commodity centric growth pattern, but what it did was to postpone the boom-bust patterns that Brazil had witnessed throughout its colonial period. Moreover, one unintended consequence of boosting coffee prices in this manner was that it protected domestic effective demand and prevented the economy from sliding into stagnation at a time where world markets were becoming increasingly volatile (Furtado 1971). Thus, at the dawn of the twentieth century Brazil remained inextricably tied to the international sector but several important institutional changes outlined above and the vast amounts of wealth created through coffee trade created conditions for the emergence of incipient industries. Between 1850 and 1889, almost 600 factories were established (Burns 1993). By the early twentieth century, Brazil had already developed a considerable base in light industries like textiles, beer brewing, clothing, shoes, etc. The most important industrial subsector during this period was cotton textiles. By 1905, Brazil “had the largest cotton textile industry in Latin America” (Haber 2006, p. 544) and by 1927 “the domestic industry was supplying almost 90 percent of the internal market for cotton textile” (Leff 1969, p. 474). In terms of growth rates, the success of this sector becomes even more evident. After growing at an annual rate of 9.4% between 1866 and 1885, the figures touched 13.1% in the period 1885–1905 before settling at 6.1% in the subsequent decade (Leff 1969). It is also worth noting that domestic industries taken as a whole were able to provide 85% of manufacturing supply in 1938 (Leff 1969).

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These numbers should be put in perspective because of the low base on which they are calculated. Moreover, it should be clear that this early phase of industrial growth ought not to be confused with the industrialization that North American or Continental European nations were undergoing. Understood as a process of structural change, industrialization in Brazil only began from the 1930s onwards (Baer 2014).

The Rise of Import-Substituting Industrialization The first major impetus for industrialization occurred in the 1930s when a series of external shocks and internal political upheavals created a developmentalist consensus amongst policy makers. Externally, drastic declines in international coffee prices due to the Great Depression forced the state to experiment with protectionist policies. In order to conserve foreign exchange, strict restrictions were imposed on imports. Additionally, since coffee was the motor of Brazilian development, the government acted swiftly to protect this sector by buying up large amounts of coffee, placing price floors on coffee and by providing debt relief to coffee planters. Celso Furtado (1971), as we have seen above, argued that these policies, although meant to protect the economy from the adverse fallouts of the external shock, unintentionally also helped increase domestic incomes (see Baer 2014 also). The resulting impetus for import substitution meant that between 1930 and 1939 the industrial output grew from an index of 95.2 to 224.6. The most rapid growth within the manufacturing sector occurred in metal products, paper products and textiles subsectors (Baer 2014). Along with the unintentional consequences of external shocks, changes in the political sphere were equally important. The initial decades of the twentieth century witnessed rising opposition to the “Old Republic” regime. Whereas in the previous century, the monarchy had provided some stability to the political system, no such moderating power existed after 1889. With financial powers devolved to state-level governments, it was essentially the coffee producers from the South, especially from Sao Paulo, that came to dominate the political scene. There was therefore a growing stratum of the elite especially in the north-east and in the Southern region of Rio Grande do Sul that found the lack of representation within the regime to be stifling (Flynn 1979). Further, at a time where regional militias were often larger than the federal army, significant sections within the army (tenentes) felt increasingly

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threatened by the provincialism of the “Old Republic” (Skidmore 2010). The tenentes openly expressed their disillusionment with the established political system and organized violent rebellions against the establishment (Flynn 1979). Though they lacked a coherent political programme, they were deeply concerned with the decadence, cronyism and corruption in the “Old Republic”. Such nationalist sentiments were of course a part of a larger ideological wave that had engulfed the developing world. These views found support not only amongst the young army lieutenants but also amongst intellectuals and who criticized the political establishment for its provincialism and lack of national outlook (Burns 1968). Finally, sections of the new industrial bourgeoisie that had emerged during the late nineteenth century too were eager for having a greater say in matters of economic policy. These oppositional groups coalesced together under the leadership of the nationalist politician, Getúlio Vargas, who led a successful military coup in 1930. Given the heterogeneous make-up of the alliance that supported Vargas, Kohli (2004) notes, that it would be too simplistic to describe the 1930 coup as some sort of defeat of the agricultural oligarchy as some have tended to do. Paulistas were by and large opposed to Vargas’s regime but given the importance of coffee to the Brazilian economy the government was careful not to rock the boat. Thus Love (2013, p. 109) points out that “half the Bank of Brazil’s outstanding loans in 1937 to the federal government were for matters related to coffee defense. In addition, São Paulo by that year had garnered half of the bank’s loans to the state governments and two-fifths of the bank’s loans to private concerns”. Vargas was an adept politician and above all, a pragmatist. He preferred class conciliation to revolutionary change and therefore never really entertained any proposal for radical reform of the rural economy’s class structure which would have hurt agrarian elites. His political base within the military insulated him from pressures of landowners and other feudal elements within the society8 allowing him to undertake several modernizing initiatives but his was not a programme of radical modernization. The 1930 upheaval for the most “was mainly an intraelite political affair, with a strong military component; peasants and workers played a minimal role” (Kohli 2004, p. 153).

8 Bergsman

(1970).

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What was indeed true is that under Getúlio Vargas the state became more centralized and resources under federal control increased substantially. This marked a major reversal from the previous decades. The army was strengthened while administrative reforms aimed at modernizing the bureaucracy were implemented (Kohli 2004). Over time as his grip on the government increased, Vargas sought to modernize the economy by promoting industrialization, by expanding credit institutions, setting protective tariffs and bringing about greater coordination between the state and industrialists. From the 1950s onwards, industrialization became an explicit aim of the Brazilian state under Vargas’s second regime and even though he died in 1954, subsequent governments remained heavily invested in the modernization programme that he had helped initiate. In the post-War era, Brazilian industrial policy involved a mix of exchange rate policies, tariffs, non-tariff barriers, subsidies and loose credit policies. Exchange rates were generally maintained at overvalued levels in order to ensure a steady stream of cheap imports—of raw materials, fossil fuels, machinery and capital goods—required for domestic industries (Baer 2014). Though this meant that exports were effectively discouraged, overvaluation was seen as being essential for maintaining lower inflation rates (Bergsman 1970). Moreover, given that the chances of succeeding in export markets in the 1950s were slim, policy makers had few reasons to change their exchange rate policies.9 Brazilian policy makers also institutionalized a long-standing demand of economic nationalists for erecting protective tariffs. The economic justification for protection was based on an extension of the infant industry argument. Since Brazilian industries were simply too weak to compete with foreign producers, it was believed that high tariff walls across the economy would have to be erected to protect the “infant economy” from competitive pressures, at least in the short run (Baer 2014). Over the long run, it was expected that the web of protectionist measures would be sequentially dismantled once local industries matured enough to compete on the international level. In the immediate post-War period, policies like the “law of similars” taxed foreign goods that could potentially compete

9 The overvaluation continued until 1968, after which the government adopted a “crawling peg” aimed at devaluing the currency. Not surprisingly this shift coincided with the state’s export promotion drive.

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with “similar” goods produced locally, the definition of “similarity” being very laxly defined (Bergsman 1970). Like in other parts of the developing world, the state also made use of various kinds of subsidies to guide the allocation of resources within the private sector. The national development bank of Brazil, BNDE, which was established by Vargas in 1950 emerged as an important source of low interest credit during this period. According to estimates of Bergsman (1970) for the period 1952–1964, BNDEs credit operations provided an implicit subsidy of almost 3% of manufacturing investment. In terms of structure of credit flows, in 1960 “38 per cent of disbursements went to electric energy, 40 per cent to basic industry, 19.8 per cent to railroads and 1 per cent to agriculture” (Doctor 2015, p. 5). Later on in the decade as the focus shifted towards “deepening” of industrialization, industries “received almost 83 per cent, while infrastructure only about 14.7 per cent” (Doctor 2015, p. 5). In the post1964 period as the state increased emphasis on exports, export subsidies became particularly important in the industrial policy toolkit. Starting from 14.8% of exports in 1969, these subsidies peaked at 50.4% in 1977 (Rodrik 1993). The most impressive of these government initiatives was the BEFEIX programme which required firms to meet predetermined export targets, in return for which firms were to be provided with a wide variety of exemptions and subsidies. Firms in transport and textiles were the main beneficiaries of the programme and according to Rodrik (1993) this programme was a major success in getting multinational firms to develop exports capabilities in Brazil. The exact mix of policies that the state followed changed over time, but what was undeniable was that state policies were successful in promoting industrialization. The extent of industrialization achieved by the 1960s itself was far beyond what anyone would have expected at the beginning of the twentieth century. In 1930, agriculture accounted for around 30% of total GDP and manufacturing accounted for a little over 16%. But by 1960, manufacturing accounted for approximately 32% while agriculture’s share had dropped to 17.8% (Saad-Filho 2010). Within the industrial sector, there was a clear indication towards deepening import substitution as reflected in a slow but steady shift from consumer goods towards intermediate and capital goods. While consumer goods contributed to 80% of manufacturing value added in 1919, by 1959 the share had reduced to 46.6%. During the same period, the shares of intermediate and capital goods increased from 16.5 to 37.3%

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and 1.5 to 11.1%, respectively (Saad-Filho 2010). The extent of import substitution can also be judged by the structure of imports: whereas in 1949 intermediate and capital goods imports accounted for approximately 25.9 and 59% of total supply, by 1960 the numbers changed to 11.9 and 23.4%, respectively. In the same period, consumer durables declined from 10 to 4.5% (Baer 2014). When the military regime came to power in 1964, industrialization became very import intensive. During this period, import ratios started to increase and for “every 1 percent of economic growth in Brazil during this period required some 2 percent increase in imports” (Kohli 2004, p. 206). Measured in terms of the import-GDP ratios, imports accounted for less than 7% in the 1960s but increased to 11.3% in 1974 and by 1980 the ratio stood at 9% (Abreu 2008). Luckily availability of cheap external finance allowed the economy to fund its import binge. Thus, between 1966 and 1980 the average annual growth rate of value added in industries was 9.7%. If we break this entire period into two sub-periods, we can see that during 1966–1973 growth rates reached 11.4% per annum which subsequently declined to 7.9% in 1974–1980.10 The striking aspect of this era was the expansion of exports which grew at an average of 38% per annum in the 1970s (Rodrik 1993). As a result, in 1960 the share of manufactures in total exports hovered at 3% but by the 1980s the number had touched 44.8% (Abreu 2008). Viewing the entire period between 1950 and 1980, it is evident that industrialization was successful on many fronts. At an aggregate level, the share of industry in total GDP increased considerably while the contribution of agriculture declined. Services remained predominant in terms of their contribution to employment and GDP. In 1980 agriculture, manufacturing and services contribution to GDP was 10.1, 40.9, and 48.9%, respectively (Saad-Filho 2010). The growth of manufacturing output in the 1950–1980 period was 7.6% while GDP grew at 6.8% in the same period (Ffrench-Davis et al. 1994). These high growth rates were backed by modest saving rates which hovered around 20% in the first two decades of ISI before increasing to 24% in the 1970s (Ffrench-Davis et al. 1994). Perhaps most importantly the structural changes within the industrial sector were marked by a clear shift towards more sophisticated

10 Calculated

from World bank: data.worldbank.org.

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sectors. Abreu (2008, p. 286) notes that in 1939 “the textile sector combined with food processing accounted for 53.7 percent of the aggregate value of industrial production” while the contribution of more technologically sophisticated sectors like “chemicals, metallurgical products, electrical, mechanical and transport equipment-was 16.8 percent of the total”. At the end of the ISI period in 1980, the relative importance of the two sectors “had been radically reversed with the textile and food processing sectors accounting for 20 percent of the total industrial sector and the five modern sectors for 52.9 percent” (Abreu 2008, p. 286).

Dependent Development: The Demise of Import-Substituting Industrialization It is important to understand that import-substituting industrialization did not in any way imply an end to Brazilian dependence on the world economy. Even before the military regime began its export promotion drive, Brazil’s industrialization was heavily dependent on foreign finance. Brazil was fortunate because unlike many Latin American countries where foreign investments were driven towards extractive sectors, in the case of Brazil foreign investment had been funnelled into manufacturing in the early decades of the twentieth century (Evans 1979). Thus, by 1976 when industrialization was in full swing, 81% of foreign investment was in the manufacturing sector whereas mining and agriculture accounted for a mere 3% (Baer 2014). What was also striking about Brazil was the sheer dominance of foreign investors. According to one estimate, half of Brazil’s manufacturing sector was under foreign control in 1970. Within industries, in subsectors like transport equipment and electrical machinery the foreign share was over 80% (Franko 2007). Baer (2014) notes that between 1970 and 1973, externally financed investment accounted for 5.3% of total GDP and by 1974–1978 this figure rose to 7.9%. By 1980, Brazil could boast of a FDI stock of over 17 billion USD. As one can expect, there was a clear division of labour between local and foreign capital. Whereas the latter dominated technology-intensive subsectors with high entry barriers, it was only in relatively technologically light industries like leather processing, paper products, wood products, etc. that local capital had a firm position (Evans 1979). Given the prominent role played by international players Saad-Filho (2010, p. 9) is correct in stating that:

54  R. A. SIROHI the conventional argument that ISI ‘closes’ the economy is misplaced… Brazil was always open to-and increasingly dependent upon-foreign capital and loans for balance of payments support, provision of technology, and supply of finance for industrial development, leading to the accumulation of external debt, growing remittances of interests and profits, denationalisation of industry, and increasing dependence on foreign technology.

The dependent character of Brazilian industrialization had negative as well positive sides to it. On the one hand, the reliance on foreign capital in the face of limited domestic resources provided the state with funds without which it is hard to imagine Brazil industrializing to the extent that it did. Since industrialization was eminently complex, especially at the later stages of import substitution, access to foreign technology became crucial for “deepening” industrialization. Although technology transfer was not free, the easy access to frontier technologies may have allowed the economy to forego the costs of “re-inventing the wheel”. In addition to the supply-side benefits, maintaining external linkages was important for expanding the demand for Brazilian industries. After the military coup in 1964, the army initiated a drive towards exports and the results as we have noted earlier were impressive. By expanding the demand base for Brazilian industries, export markets became pivotal for sustaining a high tempo of growth. Having stated the benefits, several scholars did recognize very early on, the numerous problems that came with Brazil’s dependent development. The chinks in Brazil’s strategy were revealed in 1982 when the economy found itself in the midst of a debilitating debt crisis that ended up severely weakening the industrial base it had so arduously built over the years. The crisis was so devastating that its effects lingered on in the subsequent decade as well and throughout the 1990s industrial growth remained anaemic. To understand how the debt crisis occurred and how it was related to Brazil’s external dependence, a few points regarding Brazil’s post-1964 policy may be stated. During the authoritarian period, industrial growth relied heavily on imports. Though there were several attempts at promoting exports, the resources raised through this channel proved to be insufficient to cover external deficits. In such a situation, external borrowing seemed like the path of least resistance (Kohli 2004). In a fortuitous turn, international markets in the 1960s and 1970s were flushed with Eurodollars and interest rates were low enough for countries like Brazil to take on external debt without having to worry about costs of repayment.

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This strategy was based on the conviction that “future savings of foreign exchange resulting from the investment programs- due to import substitution and to the development of new export capacity- would ultimately bring about a situation in which Brazil could produce trade surpluses large enough to service and repay its international debt” (Baer 2014, p. 79). Accordingly, between 1967 and 1973, the annual growth rate of net foreign debt stood at a staggering 12.2% and in the subsequent quinquennium it grew at an average of 38.7% per year (Baer 2014). Initially, just as the military technocrats had predicted, this strategy worked perfectly and the economy grew steadily. But subsequent events would prove this approach to be disastrous. The high import intensity of industrialization had already caused external accounts to deteriorate. Added to this, the two oil crises during the 1970s substantially increased Brazil’s external indebtedness. From this point onwards, the fortunes of the entire economy came to be based on the availability of foreign capital. Unfortunately, starting from the late 1970s a series of external shocks suddenly reduced capital inflows. In 1979, capital worth 1.3 billion USD flowed out of the country. In 1980, the figure reached 2 billion USD and after a brief respite in 1981, 1.8 billion worth of capital exited the economy in 1982 (Franko 2007). With the wave of bankruptcies beginning with that of Mexico in 1982, the supply of foreign capital to Brazil simply dried up. What followed was the familiar story of default and crisis that many Latin American economies were forced to undergo. Faced with substantial amounts of debt to repay but without adequate capital inflows to roll it over, the Brazilian economy entered a period of violent crisis where inflation reached four-digit levels, unemployment soared and GDP growth completely collapsed. With these turn of events, Brazilian import-substituting industrialization came to a grinding halt. In doing so, the debt crisis also exposed deep-rooted problems within Brazil’s industrialization strategy. To get a better understanding of why and how Brazil witnessed such a drastic reversal, certain institutional aspects of the Brazilian industrialization project need closer analysis. As we have noted above, for most of the nineteenth century Brazil was restricted to be an exporter of raw materials. Industries did grow, but tied to the world economy in a highly disadvantaged position, Brazil never acquired the sort of industrial prowess that its European and North American counterparts could boast of. From this perspective, the experiments with industrialization that began in the early decades of the twentieth century were, for some observers,

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nothing short of an “industrial revolution” (Bresser-Pereira 2015). Given its historical legacy of colonization and dependence, there is an element of truth in this view. The possibility of building steel production units or the idea of building factories that could produce sophisticated goods for exports to countries at the centre would have been an unthinkable prospect in the nineteenth century. But by the 1980s, Brazil’s industrial base was formidable and in a world where several peripheral economies had failed to develop even the most basic technological capabilities, Brazil had acquired impressive capabilities. Yet it is worth emphasizing that underneath these modernizing tendencies, the exclusionary roots of accumulation that the nation had inherited from its past remained largely untouched by its “industrial revolution”. The state that emerged in the 1930s and 1940s may have had a modern appearance but underneath this façade it remained wedded to the preservation of a highly hierarchical social system. In rural regions, the aversion to land reforms effectively excluded a vast majority of the population from benefitting from economic growth. Within urban regions, the state incorporated formal workers into its developmental scheme but resolutely worked to restrict its most radical demands. During the Vargas period, the process of taming labour was accomplished by establishing corporatist industrial relations in which labour unions were made subordinate to the state. The Ministry of Labour was given extensive powers to regulate union elections, to recognize and de-recognize unions and in order to curtail shop-floor activity most employment-related grievances were to be handled by labour courts that were subordinate to the state rather than via direct worker–employer bargaining (Seidman 1994; Skidmore 2010). The labour code initiated during Vargas’s rule was to form the basis of industrial relations throughout the period but under the military regime, labour repression would take a more brutal and authoritarian form. We have already noted that the military government initiated a series of policies to encourage exports. The push towards exports however meant that international competitiveness began to take precedence over all other concerns including enlarging internal demand (Seidman 1994). In this context, the authoritarian regime’s entire strategy of boosting competitiveness came to depend on extensive wage repression. One of the earliest theorists to recognize this link between wage repression and export promotion was the Brazilian Marxist Ruy Marini. Drawing on dependency theories, Marini (1972) noted that whereas in advanced capitalist

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economies industrial output was directed towards domestic markets, in an export-oriented, dependent economy like Brazil output produced by workers was not destined to be consumed by them but was intended to be consumed by residents of advanced economies. This meant that for all practical purposes the worker in a dependent economy “counts only as a producer, as a creator of consumer goods, but never counts as a consumer”. Since worker’s consumption demand had little or no relevance to the realization of surplus value, he argued, that there existed a tendency towards super-exploitation of the workforce in the peripheries of the world economy. This tendency was aggravated by the unequal exchange between dependent and core economies which incentivized capitalists in peripheries to use wage repression as a means of offsetting the external profit squeeze imposed on them (Almeida Filho 2013; Valencia 2015). The added advantage of squeezing workers in this manner was that the consequent shift of income towards upper classes stimulated demand for consumer durables which were precisely the sort of goods that dependent countries produced for exports in any case. In Marini’s (1972) words: Unlike what happens in industrial countries, where an important part - in the North American case almost all of production - is made in the domestic market, in a dependent country the main part of what is produced for the market is shifted to the sphere of the world market. This has a decisive consequence for the situation of the producer, of the worker… The possibility of lowering the salary of the worker is not limited by the necessity to realize the product, once it is destined to be sold outside; the consumption of the worker is irrelevant for the realization of the product. Consequently, the character of the cycle of capital in an economy of this type does not put any obstacle to the exploitation of the worker and, on the contrary, leads it towards super-exploitation.

There was, of course, nothing inevitable about this policy choice of deliberate income deflation. In the East Asian case for example, labour demands were repressed by authoritarian regimes but export-led industrialization went hand in hand with improvements in the distribution of income, modest wage increases and high rates of investments in human capital (Amsden 1990; Page 1994; World Bank 1993). Theoretically therefore, had the Brazilian state been able to discipline private capital into becoming more innovative and efficient as the East Asian states had managed to do, the downward pressure on wages may have been weaker

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and competitiveness may have been achieved through a “high road” to industrialization. But in the case of Brazil, this institutional route was simply not possible because from the very inception the Brazilian state was a product of a “conservative pact”11 with the country’s elites and this pact presupposed a highly unequal relationship between its constituents: the state was required to protect private capital and subsidize its operations, but the state itself was never to be given sufficient power to subordinate local capitalist classes to developmentalist discipline (Chibber 2005). This aversion to state regulation was evident very early on when any and all attempts at introducing planned development were met with failure (Fiori 1992). The SALTE plan for example was supposed to be implemented during a four-year period from 1950 to 1954, but due to a lack of funding it was bundled up after a year of its operation (Baer 2014). In the post-1964 era, the state opened its coffers to private capital through cheap credit and export subsidies of all sorts. State-owned firms invested heavily in basic infrastructure and provided cheap inputs to private firms. As Frieden (1987, p. 105) notes, “major parastatal investment programs were important sources of orders for the country’s private industry. State enterprises in electric energy, petroleum and petrochemicals, and steel accounted for over half of the domestic demand for heavy capital goods”. The growing role of the state was reflective of the weaknesses of the private sector and not surprisingly initially capitalists were more than willing to support the policies of the military regime. However, when state support started to become more coercive and when state-elites began attempting to introduce a semblance of cohesiveness and discipline, there was severe disapproval from capitalists. By the 1970s, the business elite according to Skidmore (1988, p. 181) became increasingly “irritated at the maze of incentives and controls” that the state had established. The slowdown following the first oil shock witnessed the business mobilization against military rule. “With monotonous repetition, business groups demanded an end to ‘statization’, calling on the state to reduce direct involvement and to provide more support to private capital” (Seidman 1994, p. 107). What local capitalists feared the most was that the increasingly aggressive state intervention in the economy may snowball into a more intrusive form of state capitalism. There was apprehension that the “rapidly growing state sector might combine,

11 Fiori

(1992).

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de facto, with the foreign-owned sector to crowd out Brazilian business” (Skidmore 1988, p. 181). Whatever the merits of this suggestion, it was clear that the business class was intent on frustrating any attempt by the state to impose performance conditionalities on it. The inability to discipline capitalists meant that, by default, wage repression—and hence unequal income distribution—came to be the central plank upon which the state machinery would try and maintain international competitiveness. In the absence of institutional mechanisms to promote innovation, the high growth rates achieved by the military regime became increasingly contingent on keeping wages low. And thus, for most of the post1964 period real wages stagnated or at least remained below productivity growth (Fishlow 1973). During 1960–1970 alone the share of income accruing to the poorest 80% of the population decreased from 45.5 to 36.8% while the top 5% of the population increased its share from 27.3 to 36.3% (Evans 1979). These contradictions had several implications for Brazil’s ambitious project. For one, the stagnation of wages and the associated increases in inequality created major demand-side obstacles to industrialization. It is well established that import substitution by its very definition presupposes the existence of a large home market for industrial goods. Even in export-oriented economies, the importance of internal demand for industrial development has been noted earlier (Murphy et al. 1989). Income concentration therefore has a depressing effect on industrial growth. Additionally, a skewed income distribution is also likely to distort the industrial composition in favour of import-intensive products.12 This is because preferences of upper classes for consumer durables and other “luxury goods” tend to be import intensive and thus a unit increase in the share of surplus of total national income has a positive impact on quantity of imports. In dependent economies, this “demand twist” may be aggravated because of the operation of international demonstration effects which imposes upon dependent economies 12 Taylor and Bacha (1976) provide a formal mathematical model of what he calls the “Belindia” phenomenon where income inequalities interact with consumption preferences of the rich, causing the industrial composition to shift towards luxury goods and consumer durables. Prebisch (1978), Baran (1957) and a whole host of dependency theorists have argued that in an unequal society where purchasing power is concentrated in the upper echelons of the society, the “demonstration effect” of foreign consumption patterns is likely to be much higher. This in turn is likely to increase expenditures on goods imported from abroad and reduce demand for domestic good.

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characteristics of “affluent” societies at a relatively early stage of development (Bacha 1980). Thus, between 1960–1962 and 1972, capital goods imports as a percentage of total imports increased from 29 to 42.2% while intermediate good imports increased from 31 to 42.7% (Baer 2014). On the whole during this period imports grew at a much faster pace than exports and this was visible in its deteriorating trade balances in the 1970s. Footing the bill for this massive import binge pushed the state towards greater integration with international capital markets. External debts soared and fed industrial growth for a decade and a half, but by the 1980s it was clear that this was unsustainable and with the debt crisis the curtains were brought down on Brazil’s post-War experiment. In this way, the inbuilt tendency towards inequality turned out to be increasingly prejudicial for the long-run sustainability of Brazilian industrialization.

Fundamental Causes of Dependent Capitalism Now, in addition to the complex political economy issues raised above Brazil’s openness to foreign borrowing has a deeper, and in a sense, a more fundamental explanation. After all countries like India which faced similar patterns of inequality and faced constant external disequilibria in the post-War period never actually integrated themselves so deeply into international capital markets in the ISI period as Brazil did. Moreover, even in the post-1980 phase whereas many Asian economies have been reluctant to undertake economy-wide liberalization, Brazil has been far more open to the “Washington Consensus” and has kept its economy far more open to foreign finance and trade. According to Kohli (2009), what explains Brazil’s, and more generally, Latin America’s affinity towards a “dependent” style of capitalism is the distinct historical experience of the region in the pre-ISI phase. More specifically, unlike India where the shift towards a post-colonial regime marked was marked by massive mobilizations of workers and peasants which led to important political and structural breaks with many features of its colonial past, Brazil never really witnessed a significant nationalist movement against foreign rule. Therefore, unlike India where pressures from below pushed the elites towards greater economic nationalism and forced them to establish sovereign institutions, no such pressure existed in Brazil. Thus Bethell and De Carvalho (1985, p. 682) state that “Brazil in 1822 had no economic unity. Nor was there

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in Brazil any strong sense of national identity”. Similarly, Kohli (2004, pp. 128–129) notes how the nineteenth-century elites “often identified more with their counterparts in Europe and the United States than with the people they governed”. They “championed laissez faire, reflecting an early lack of confidence and an absence of national assertiveness…” (Kohli 2004, p. 134). On the economic front, agrarian and urban notables maintained close ties with foreign markets throughout the nineteenth century and with the help of the state, local capitalists developed a symbiotic relationship with foreign investors. The actions of the sovereign Brazilian state may have had a positive developmental impact as we noted earlier but it paradoxically also furthered elite affinity to foreign capital and external markets. Thus, while political independence from Portugal was of great consequence for Brazil’s growth and development, yet there is also a sense in which the new-found sovereignty naturalized rather than exorcised external dependence. This pattern of dependent development continued into the early decades of the twentieth century and even before the industrialization drive of the 1950s had begun foreign capital had come to acquire an important position in the Brazilian economy. This “first mover advantage” meant that foreign interests were already deeply intertwined with domestic ones prior to the adoption of ISI.13 Thus, despite the rise of developmentalist fervour in the ISI phase, nationalism in twentieth-century Brazil “continued to be relatively shallow” and “the Brazilian political elite-their occasional nationalist flourishes notwithstanding-remained much more open to foreign investors in their pursuit of state-led development” than their Asian counterparts (Kohli 2004, p. 180).

Conclusion The analysis thus far does little justice to the intricacies and complexities of Brazilian economic history, but it does indicate the striking historical continuities between the nation’s past and present. Nowhere is this clearer than in the pattern of Brazil’s external dependence. Brazil’s colonial history was marked by devastating external exploitation, but even after obtaining independence in the nineteenth century the economy remained wedded to an export-oriented economy. It was not until 13 See Amsden (2001) for the importance of timing of foreign investment entries into late developers.

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the 1950s that a conscious attempt was made to develop local productive capacities. The ISI era witnessed some phenomenal changes in Brazil’s economic structure. A country that could barely produce any manufactured products for its population at one time, had, by the 1980s, developed an industrial base capable of exporting the most sophisticated kinds of goods to European and North American markets. As a consequence of ISI, the economic role of agriculture declined, urbanization occurred at a rapid pace, Brazilian firms acquired a strong presence in global markets and with all these changes the very nature of Brazilian society underwent significant transformations. Despite these shifts, however, history could not be completely shaken off. The striking changes in the post-1950 era notwithstanding, Brazil remained saddled by its past in many ways. Like earlier, large sections of the population remained excluded from matters of governance, and authoritarianism rather than political inclusion remained the norm. Perhaps more importantly, the clout of elite classes prevented the state from undertaking radical institutional changes in the economy that were required for auto-centric development and this translated into an extreme reliance on external sources of finance, technology and demand. As long as international ties added to Brazil’s productive capacities, external dependence seemed to pose no real threat to its economy. Brazil grew at extraordinary rates and even came to be touted as a “miracle” economy by international institutions. However, by the end of the 1970s external dependence increasingly took the form of debt and Brazil’s entire developmental engine came to be associated with high levels of external borrowing. This process allowed the economy to grow at a commendable pace but it also exposed it to the vagaries of international markets which finally broke Brazil’s industrial miracle in the 1980s.

References Abreu, M. D. P. (2008). The Brazilian Economy, 1930–1980. In L. Bethell (Ed.), The Cambridge History of Latin America: Brazil Since 1930, Vol. 9. Cambridge: Cambridge University Press. Almeida Filho, N. (2013). Overexploitation of the Workforce and Concentration of Wealth: Key Issues for Development Policy in Brazilian Peripheral Capitalism. World Review of Political Economy, 4(1), 4–24. Amsden, A. H. (1990). South Korea’s Record Wage Rates: Labor in Late Industrialization. Industrial Relations: A Journal of Economy and Society, 29(1), 77–93.

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Amsden, A. H. (2001). The Rise of “the Rest”: Challenges to the West from LateIndustrializing Economies. New York, NY: Oxford University Press. Bacha, E. L. (1980). Selected Issues in Post-1964 Brazilian Economic Growth. In L. Taylor, E. L. Bacha, E. A. Cardoso, & F. J. Lysy (Eds.), Models of Growth and Distribution for Brazil: Models of Growth and Distribution for Brazil (pp. 17–48). New York: Oxford University Press. Baer, W. (2014). The Brazilian Economy: Growth and Development. 7th edition. Boulder: Lynne Rienner. Baer, W., & Sirohi, R. (2015). Transportation Infrastructure and Economic Development: A Comparative Analysis of Brazil and India. Global & Local Economic Review, 19(2), 37–59. Banerjee, A., & Iyer, L. (2005). History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India. American Economic Review, 95(4), 1190–1213. Baran, Paul A. (1957). The Political Economy of Growth. New York: Monthly Review Press. Bergsman, J. (1970). Brazil, Industrialization and Trade Policies. London: Oxford University Press. Bethell, L., & De Carvalho, J. (1985). Brazil from Independence to the Middle of the Nineteenth Century. In L. Bethell (Ed.), The Cambridge History of Latin America: From Independence to c.1870, Vol. 3 (pp. 677–746). Cambridge: Cambridge University Press. Blackburn, R. (1998). The Making of New World Slavery: From the Baroque to the Modern, 1492–1800. London: Verso. Bresser-Pereira, L. C. (2015). State-Society Cycles and Political Pacts in a National-Dependent Society: Brazil. Latin American Research Review, 50(2), 3–22. Burns, Bradford E. (1968). Nationalism in Brazil: A Historical Survey. New York: Frederick A Praeger Publishers. Burns, Bradford E. (1993). A History of Brazil. 3rd edition. New York: Columbia University Press. Cain, P. J., & Hopkins, A. G. (2016). British Imperialism: 1688–2015. London: Routledge. Chibber, V. (2005). Reviving the Developmental State? The Myth of the ‘National Bourgeoisie’. Socialist Register, 41, 44–165. Davis, M. (2002). Late Victorian Holocausts: El Niño Famines and the Making of the Third World. London: Verso. Doctor, M. (2015). Assessing the Changing Roles of the Brazilian Development Bank. Bulletin of Latin American Research, 34(2), 197–213. Evans, P. B. (1979). Dependent Development: The Alliance of Multinational, State, and Local Capital in Brazil. Princeton, NJ: Princeton University Press. Ffrench-Davis, Ricardo, Muñoz, Oscar, & Palma, Juan G. (1994). The Latin American Economies, 1950–1990. In L. Bethell (Ed.), The Cambridge

64  R. A. SIROHI History of Latin America: 1930 to the Present, Vol. 6(1). Cambridge: Cambridge University Press. Fiori, J. L. (1992). The Political Economy of the Developmentalist State in Brazil. Cepal Review, 47, 173–186. Fishlow, A. (1973). Brazil’s Economic Miracle. The World Today, 29(11), 474–481. Flynn, P. (1979). Brazil, a Political Analysis. Boulder, CO: Westview Press. Franko, Patrice M. (2007). The Puzzle of Latin American Economic Development. New York: Rowman & Littlefield. Frieden, J. (1987). The Brazilian Borrowing Experience: From Miracle to Debacle and Back. Latin American Research Review, 22(1), 95–131. Fritscher, A. C. M., & Musacchio, A. (2010). Endowments, Fiscal Federalism and the Cost of Capital for States: Evidence from Brazil, 1891–1930. Financial History Review, 17(1), 13–50. Furtado, C. (1971). The Economic Growth of Brazil: A Survey from Colonial to Modern Times. Berkeley: University of California Press. Haber, S. (2006). The Political Economy of Industrialization. In V. BulmerThomas, J. Coatsworth, & R. Cortes-Conde (Eds.), The Cambridge Economic History of Latin America: The Long Twentieth Century, Vol. 2 (pp. 537–584). Cambridge: Cambridge University Press. Haber, S., & Klein, H. S. (1997). The Economic Consequences of Brazilian Independence. In S. Haber (Ed.), How Latin America Fell Behind: Essays on the Economic Histories of Brazil and Mexico 1800–1914 (pp. 243–266). Stanford: Stanford University Press. Headrick, D. R. (1988). Tentacles of Progress: Technology Transfer in the Age of Imperialism, 1850–1940. New York: Oxford University Press. Hewlett, S. A. (1975). The Dynamics of Economic Imperialism: The Role of Foreign Direct Investment in Brazil. Latin American Perspectives, 2(1), 136–148. Klein, H. S., & Luna, F. V. (2010). Slavery in Brazil. Cambridge: Cambridge University Press. Kohli, A. (2004). State-Directed Development: Political Power and Industrialization in the Global Periphery. Cambridge: Cambridge University Press. Kohli, A. (2009). Nationalist v Dependent Capitalist Development: Alternate Pathways of Asia and Latin America in a Globalised World. Studies in Comparative International Development, 44(4), 386–410. Krasner, S. D. (2013). Manipulating International Commodity Markets: Brazilian Coffee Policy 1906 to 1962. In J. I. Dominguez (Ed.), Latin America’s International Relations and Their Domestic Consequences: War and Peace, Dependency and Autonomy, Integration and Disintegration. New York: Routledge. Leff, N. H. (1969). Long-Term Brazilian Economic Development. The Journal of Economic History, 29(3), 473–493.

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Leff, N. H. (1972). Economic Development and Regional Inequality: Origins of the Brazilian Case. Quarterly Journal of Economics, 86(2), 243–262. Leff, N. H. (1997). Economic Development in Brazil, 1822–1913. In S. Haber (Ed.), How Latin America Fell Behind: Essays on the Economic Histories of Brazil and Mexico 1800–1914. Stanford: Stanford University Press. Love, J. (2013). The Brazilian Federal State in the Old Republic (1889–1930). In M. Centeno & A. Ferraro (Eds.), State and Nation Making in Latin America and Spain: Republics of the Possible (pp. 100–115). Cambridge: Cambridge University Press. Marcílio, M. (1984). The Population of Colonial Brazil. In L. Bethell (Ed.), The Cambridge History of Latin America (pp. 37–64). Cambridge: Cambridge University Press. Marini, R. M. (1972). La acumulación capitalista dependiente y la superexplotación del trabajo. Available at: http://www.marini-escritos.unam.mx/043_acumulacion_superexplotacion.html. Miller, S. W. (1994). Fuelwood in Colonial Brazil: The Economic and Social Consequences of Fuel Depletion for the Bahian Recôncavo, 1549–1820. Forest & Conservation History, 38, 181–192. Moore, J. W. (2000). Sugar and the Expansion of the Early Modern WorldEconomy: Commodity Frontiers, Ecological Transformation, and Industrialization. Review (Fernand Braudel Center), 23(3), 409–433. Moore, J. W. (2009). Madeira, Sugar, and the Conquest of Nature in the “First” Sixteenth Century: Part I: From “Island of Timber” to Sugar Revolution, 1420–1506. Review (Fernand Braudel Center), 32(4), 345–390. Murphy, K. M., Shleifer, A., & Vishny, R. W. (1989). Industrialization and the Big Push. Journal of Political Economy, 97(5), 1003–1026. Page, J. (1994). The East Asian Miracle: Four Lessons for Development Policy. NBER Macroeconomics Annual, 9, 219–269. Prebisch, R. (1978). Socio-Economic Structure and Crisis of Peripheral Capitalism. Cepal Review, Second Half of 1978. Ridings, E. W. (1977). Interest Groups and Development: The Case of Brazil in the Nineteenth Century. Journal of Latin American Studies, 9(2), 225–250. Rodrik, D. (1993). Taking Trade Policy Seriously: Export Subsidization as a Case Study in Policy Effectiveness (No. w4567). National Bureau of Economic Research. Saad-Filho, A. (2010). Neoliberalism, Democracy and Development Policy in Brazil. Development and Society, 39(1), 1–28. Schwartz, S. B. (1984). Colonial Brazil, c. 1580–c. 1750: Plantations and peripheries. In L. Bethell (Ed.), The Cambridge History of Latin America (pp. 421–500). Cambridge: Cambridge University Press. Schwartz, S. B. (1985). Sugar Plantations in the Formation of Brazilian society: Bahia, 1550–1835. Cambridge: Cambridge University Press.

66  R. A. SIROHI Seidman, G. W. (1994) Manufacturing Militance: Workers’ Movements in Brazil and South Africa, 1970–1985. Berkeley: University of California Press. Skidmore, T. E. (1988). The Politics of Military Rule in Brazil, 1964–1985. New York: Oxford University Press. Skidmore, T. E. (2010). Brazil: Five Centuries of Change. Oxford: Oxford University Press. Taylor, K. S. (1970). The Economics of Sugar and Slavery in Northeastern Brazil. Agricultural History, 44(3), 267–280. Taylor, L., & Bacha, E. L. (1976). The Unequalizing Spiral: A First Growth Model for Belindia. Quarterly Journal of Economics, 90, 197–218. Topik, S. (1979). The Evolution of the Economic Role of the Brazilian State, 1889–1930. Journal of Latin American Studies, 11(2), 325–342. Topik, S. (1991). The Old Republic. In M. L. Conniff & F. D. McCann (Eds.), Modern Brazil: Elites and Masses in Historical Perspective. Lincoln: University of Nebraska Press. Valencia, A. S. (2015). The Future of Work: Super-Exploitation and Social Precariousness in the 21st century. Leiden and Boston: Brill. Williams, E. (2014). Capitalism and Slavery. Chapel Hill: University of North Carolina Press Books. World Bank. (1993). The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford University Press.

CHAPTER 3

India’s Post-colonial Development: A Comparative Perspective

Indian industrialization began in earnest in the 1950s after India got its independence from Britain. Like Brazil, India followed a strategy of import substituting industrialization for the first three decades of the post-War period and just like Brazil, India developed a formidable economic base in this period. Under a protectionist cover and with the help of an activist state, domestic technological capabilities improved and there was significant structural change away from sectors producing “traditional” goods towards those sectors involved in the production of sophisticated goods. In comparative terms, industrial growth in India paled in comparison with Brazil. The average growth of Indian industries was 4% for the 1966–1980 period. Brazilian industrial growth on the other hand averaged 9.7% in the same period. Thus, by the 1980s whereas the manufacturing subsector contributed to over 20% of GDP in Brazil, in India its share was 14.3%. The reasons for these differences are complex. Partly the modest growth rates of Indian industries stem from its highly disadvantaged “initial conditions”, but they are also related to the policies adopted by the state. The plan of this chapter is to dwell on some of these issues and bring out the central features of Indian industrialization from a comparative perspective. The following sections seek to understand the evolution of the Indian economy from its colonial days to the post-independence period of state-led industrialization. After surveying the economic conditions in the colonial period, the chapter will look at the patterns of post-War policy making. Several detailed studies of © The Author(s) 2019 R. A. Sirohi, From Developmentalism to Neoliberalism, https://doi.org/10.1007/978-981-13-6028-2_3

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India’s economy during this period already exist. The plan therefore is not so much to report the findings of previous literature but to eke out, through a comparative analysis, those aspects of Indian industrialization that generally do not receive as much attention. Further, like Chapter 2 did for Brazil, this chapter is also meant to contextualize India’s transition to neoliberalism which will be dealt with in Chapter 4.

The Colonial Experience The Pre-colonial Indian Economy The traditional historiography of pre-colonial India has tended to downplay the dynamism and commercial development of the Indian economy in the sixteenth and seventeenth century. Recent studies have however dispelled older Eurocentric assumptions about the subcontinent and there now exist several detailed studies of the commercial and industrial vibrancy of the Indian economy in pre-colonial days (Parthasarathi 2004, 2011; Frank 1998; Palat 2015). This revisionist strand of analysis has suggested that prior to the era of British dominance, India experienced considerable peace and stability under Mughal rule. The population grew substantially between 1500 and 1700 and with it, urbanization also increased at a rapid pace (Frank 1998). The doubling of population during this period maybe compared with the relative stagnation over the next century (corresponding roughly to the establishment of British colonialism of India) according to one estimate cited by Frank (1998). Thus, on the eve of colonization the Indian economy produced almost a quarter of the world’s GDP which was larger than the share of all Western Europe put together (Nayyar 2013). At the heart of the prosperity of pre-colonial India were the dense trade ties that connected it to the Middle East, Southeast Asia and East Africa. With the appearance of European traders in the 1600s, new markets in West Africa, Europe and America were also opened up to Indian merchants. Important Indian exports included pepper, indigo, raw silk and saltpetre, but it was cotton textiles that were the most significant components of Indian Ocean trade. Available evidence for textiles suggests that the international demand for Indian-made goods was substantial throughout the seventeenth and eighteenth century and according to one estimate, almost 4.2 millions square meters of cloth was imported by the English East India company in 1664 alone (Richards 1995).

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Further, in the early decades of the eighteenth century well over half of British textile exports to West Africa consisted of re-exports of Indian textiles. This figure fell in the subsequent period but even by 1750 Indian share of this trade remained above 30% (Parthasarathi 2011). French slave trade was similarly dependent on the re-exports of Indian textiles, and the Dutch East India Company “had a stock of half a million to a million pieces of Indian cloth in its warehouse in Castle Batavia” in the early eighteenth century (Parthasarathi 2011, p. 26). A counterpart to this Europe-India trade was the massive flows of bullion into the subcontinent. “Since there was little demand in Asia for European goods, Europeans could purchase Asian commodities only through the export of bullion” (Palat 2015, p. 20). Between 1660 and 1760, “Dutch and English companies together shipped an average of over 34 tons of silver and nearly half a ton of gold every year” (Richards 1995, p. 198). The volume of Indian exports in the period 1600–1800 was large enough to have attracted 20% of the world’s supply of silver (Parthasarathi 2011). According to Parthasarathi’s (2011, 2004) research, what made Indian cotton cloth so highly demanded in the rest of the world was its quality, aesthetic appeal and low price. The finer cloth found large markets amongst upper classes in Europe and eventually coarser grades came to be worn extensively by lower classes as well. While cheaper alternatives to Indian cottons did exist, amongst cotton textiles Indian products were amongst the cheapest in world markets. This competitive edge in cotton textiles emerged not so much from some technology-based comparative advantage but from the social arrangements underlying the production process (Parthasarathi 2004). In weaving centres of South India, for example abundant employment opportunities and significant geographical mobility meant that in effect there was considerable competition amongst merchants and amongst local kingdoms to attract weavers. Merchants provided farmers with cash advances to produce cloth, but the contractual terms were usually very flexible and more often than not, favourable to the weavers. Similarly, because of their economic importance local kingdoms opened their coffers and provided incentives of various kinds to weavers to attract them into their kingdoms. These included generous cash advances and loans for building houses. Perhaps more importantly, states were also willing to make substantial investments in irrigation, manuring and in the clearing of good quality land. These investments, Parthasarathi (2004, p. 44) explains “was a way to attract and fix laborers in the conditions of scarcity and intense

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competition for laborers which existed in the late pre-colonial period”. The mobility that weavers enjoyed therefore ended up creating in-built incentives for investment in agriculture. As a result of this social arrangement, then, agricultural productivity was extremely high in South India and food grain prices were low even when viewed from an international perspective. The resulting low costs of subsistence were crucial because they translated into lower nominal wages providing an edge to Indian exports internationally. British Colonial Rule in India It was within this sort of a dynamic and highly commercial economy that the British started gaining a foothold in the latter half of the eighteenth century. The East India Company had successfully established a commercial foothold in various parts of India in the seventeenth century itself, but the turning point came when the Company acquired Diwani rights in the Bengal Presidency in 1765. This marked the beginning of India’s “incorporation” into the British imperial orbit (Wallerstein 1986). Having acquired the rights to collect land revenues in one of the most prosperous areas of India, the English East India Company found itself in an enviable position of being both a ruler as well as a profit maximizing trader. With the grant of Diwani rights, the Company no longer needed to import bullion in exchange for Indian goods because domestically raised taxes could now be used to purchase Indian goods which could then be re-exported to the rest of the world. As an ­eighteenth-century British official noted, “the company are merchants as well as sovereigns of the country. In the former capacity they engross its trade, whilst in the latter they appropriate the revenues. The remittances to Europe of revenues are made in the commodities of the country, which are purchased by them” (Sir John Shore cited in Ganguli 1965, p. 89). This peculiar pattern of colonization meant that between 1750 and 1797 imports from India into Britain increased from 1.5 million pounds to 5.8 million pounds even as British exports to India stagnated reflecting the political dominance of the East India Company (Habib 1975). The gap between the two was not paid for by bullion flows or debt commitments but simply eaten away by the East India Company which now had access to a growing revenue base within the subcontinent. Using the balance of payments data between India and Britain, Irfan Habib calculates that, “the total gain of Britain at the expense of

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India to well over £ 2 million in 1789–1790 and over £ 4.70 million about 1801” (Habib 1975, p. 28). This intricate link between India’s domestic fiscal system and its external accounts remained a defining feature of British colonialism all the way until its independence (Patnaik 2006, 2013). This mechanism of tribute appropriation relied on the colonial state’s ability to extract local revenues from the subcontinent. Since land taxes were the most important source of public revenue until the late nineteenth century, early British efforts were directed towards maximizing control over land. Starting from 1793 in the Bengal Presidency and in parts of South India, a decentralized land revenue collection system called the zamindari system was established (Banerjee and Iyer 2005; Bagchi 2010). Here a stratum of intermediaries or zamindars was given the rights to collect land revenues in return for a share of the revenues collected by them. Under the zamindari system, the revenues were fixed in perpetuity. By doing so, the hope was that these rent collectors would eventually turn into capitalists who would use their control over land rent to pump investments back into agriculture thereby enhancing productivity and in turn, enhance the state’s future land revenues. In practice, things did not turn out as planned. Early on, the revenue demands of the state were so exacting that several zamindars failed to meet their revenue targets and lost their zamindari titles. As a result, starting from 1799 the state had to arm zamindars with legal powers to enable them to extract rents more effectively from cultivators (Bose 1993). In the short run, the “rent offensive” proved to be effective and between 1765 and 1810 the total land revenue generated for the colonial state increased from 3 million pounds to 22 million (Bose and Jalal 2004). The problem with this strategy however was that in the long run, the zamindars had no incentive to transform themselves into a class of productive capitalists. Instead, the legal changes ensured that the zamindars could simply continue being rent collectors, living off the surpluses siphoned off from cultivators without having to plough back any investment into land. Added to the legal changes, from the 1860s onwards as prices of food grains increased substantially and as a result the share of rents accruing to zamindars increased without them having to make the slightest of investments in agricultural improvement (Habib 1975). The zamindari system was established at a time where British administrative machinery was still in the making, and colonial domination of India was not as yet complete. However, over time as British hold over

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India increased, the state found the zamindari system to be too inflexible and the permanent settlement came to be viewed as a fetter for British revenue needs. From a British perspective, not only were revenue shares of the state fixed in zamindari regions but a portion of it was eaten up by intermediaries thereby dealing a double blow to the state’s coffers. Driven by the need for exacting larger revenues alternative, non-settled revenue systems were established in various parts of British India (Bagchi 2010). In Madras and Bombay Presidencies, the raiyatwari system was instituted wherein cultivators directly paid taxes to the state rather than to some intermediary. In North-Western India, a system of tax collection, where the villages rather than the individuals were made responsible for tax payment, was instituted. This came to be known as the Mahalwari system. Unlike the zamindari system where revenues were fixed, in these non-settled mechanisms, revenues could be changed at regular intervals, usually every 30 years. It has been suggested that in the non-settled areas, especially those under the raiyatwari system, there were in-built incentives for agricultural improvement. Whereas in zamindari regions revenue collection was left to a class of intermediaries and thus the state had little interest in investing in agricultural infrastructure, in raiyatwari regions incentives for productive investments were higher because the state was a direct beneficiary of any productivity enhancements. Thus “almost all canals constructed by the British” Banerjee and Iyer (2005, p. 1199) note, “were in non-landlord areas”. Having said this, looking at it from an institutional perspective it would be a mistake to make too much of the differences between the zamindari and non-zamindari regions. The land tenure systems established in colonial India, regardless of the existence or non-existence of intermediaries shared a common feature in that they tended to impinge on security of tenure (Bagchi 2010). More specifically, colonial land tenure made it so that property rights of peasants were made contingent on the payment of land revenue and failure to do so often resulted in evictions and forfeiture of land holdings. Further, not only was the land revenue itself often pitched at extremely high levels leaving few resources in the hands of direct cultivators but more significantly unlike pre-colonial times where land revenues varied as a share of output according to seasons, the colonial state fixed land revenues in terms of “estimated average produce of land” (Bagchi 2010, p. 199). This “fixity in the face of variability of the net produce of the land had the effect of increasing the degree of riskiness faced by

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peasants” (Bagchi 2010, p. 202). The attendant risks introduced into agriculture by the land tenure system led to recurring crisis in the countryside. From 1890 onwards, agricultural productivity grew slowly and in fact for the period between 1911 and 1947, per capita food grain availability declined at an annual average of 1% (George Blyn’s estimate quoted in Tomlinson 2013). While large landowners and moneylenders improved their positions, smaller cultivators suffered immensely and there was a surge in the number of landless workers in the nineteenth century (Habib 1975). The most dramatic symbol of the agricultural crisis was the series of famines that ripped across rural India in the late nineteenth century. During famines that occurred during 1876–1902, anywhere between 12 and 29 million people are said to have perished (Parthasarathi 2011). In the Bengal famine of 1943 alone, between 1.5 and 3 million famine-related deaths were recorded (Sen 1981). While British officials were quick to distance the recurring famines from the land revenue policies adopted by the state, for Indian nationalists the regressive land tenure system was at the heart of the problem. Outside of agriculture, the situation was not too much better. As we have noted earlier, in the initial phases of East India Company’s rule the state sought to capture Indian textiles for the purposes of re-exporting them to the rest of the world. But by the early decades of the nineteenth century as the industrial revolution in Britain took off, imperialism took on more familiar hues. Rather than exports of textiles, exports of raw materials like cotton, jute and indigo that were required for British industrialization were prioritized. Moreover, maintaining a captive market for British industries in India came to acquire a central role in colonial policy making. The latter goal was accomplished mainly through a discriminatory tariff system in which British goods could enter Indian markets with relative ease, while high tariffs were imposed on Indian textile exports to Britain. “From 1813, locally made cloth in Bengal paid an internal transit duty of 15%” even as “British cloth was exempted from these internal tolls and paid a nominal import tax of 2.5%” (Parthasarathi 2011, p. 252). All this then meant that by the 1830s, India not only lost its hold on international textile markets but increasingly its own economy came to be dominated by British manufactured goods. From 0.8 million yards in 1815, imports of British cotton goods into India raced to 100 million yards by 1839 (Habib 1975). In the subsequent period, between 1839 and 1860 the share of Indian cotton cloth consumption supplied

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by British increased from 9.4 to 27% according to Habib’s (1975) calculations. Thus, whereas India’s share in world GDP stood at 24.5% in 1700, by 1870 its share of world output drastically declined to 12.2% and by 1913 the figure was a mere 7.5% (Nayyar 2013). Early debates on the causes of economic decline were extremely acrimonious. While British officials and economists tended to justify India’s industrial decline in culturalist terms (Vera Anstey cited in Parthasarathi 2011), in the eyes of nationalists like Dadabhai Naoroji the root cause of economic upheavals in India lay in the subordination of the Indian economy to British interests. What colonial officials with their training in classical political economy had failed to understand, according to Naoroji, was that the free trade depicted in the works of classical political economists where everyone gains from trade, was very different from the exchange relation between a colony and the metropolis because the latter was a relation between unequal partners, “…something like a race between a starving, exhausting invalid, and a strong man with a horse to ride on” (Naoroji 1901, p. 62). This meant that what was widely perceived as a mechanism of development—foreign trade—in the hands of colonialists, had become a tool to “drain” the economy of its resources. According to Naoroji, it was this plunder of Indian resources via foreign trade that was impoverishing India and not some missing cultural prerequisite. Similar views were voiced by the renowned social reformer M. G. Ranade as well, who pointed to the colonial state’s complete disinterest in encouraging local industries. Whereas in Europe, respective states were busy setting up banks, promoting local producers and investing in local capabilities, in India there was blatant disregard towards the developmental needs of Indians and according to him this was what was stifling industrial development. As a result of the state’s negligence, rather than experiencing industrialization and urbanization as many European nations had, in India vast swathes of urban labourers were being forced shift to agriculture to find employment in the rural sector: Every class of artizans, the Spinners, Weavers and the Dyers, the Oilsman, the Paper-makers, the Silk and Sugar and Metal workers, etc., who are unable to bear up against Western competition, resort to the land, leave the Towns and go into the Country, and are lost in the mass of helpless people who are unable to bear up against scarcity and famine. (Ranade 2012, 340)

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This process of “ruralization” that Ranade complained of has come to be called colonial de-industrialization in Indian historiography. That these claims were more than just quibbles made by nationalists seeking to delegitimize colonial rule has been well established by several contemporary studies. According to one influential analysis on Gangetic Bihar, the share of the population in the secondary sector is said to have fallen from 18.6% to a little over 8% during the nineteenth century (Bagchi 1976). The study notes that this is likely to have been a more generalized phenomenon across British India. Based on a survey of available evidence, Irfan Habib suggests that while the magnitudes of de-industrialization may have varied across regions, “of the process itself there can be no doubt” (Habib 1975, p. 39). Even amongst those who have expressed scepticism about the “nationalist” view, the decline of employment in the secondary sector has been noted.1 Critics of the de-industrialization hypothesis, like Morris (1963), suggest that the inflow of British goods into India could not have displaced Indian manufactures because the increase in domestic demand was more than sufficient to absorb the supply of all the goods. As a result, far from impoverishing the economy the colonial period was associated with industrial growth and internal modernization of the industrial sector. Morris’s analysis is however problematic on several counts. While it may be true that certain regions and certain subsectors did exhibit dynamism especially in the twentieth century at a macro level, the picture is far less rosy. Through the nineteenth century, per capita growth was almost stagnant from an international perspective, the global share of India’s manufacturing output declined significantly and the development of modern industries even at the time of independence was minimal (Nayyar 2013). Secondly, the causal mechanisms that Morris (1963) relies on in his critique, namely increases in demand, are themselves suspect. Looking at the evidence, it is overly optimistic to suggest that Indian demand could have been buoyant enough to absorb both domestic as well as foreign manufactures. Prior to British rule, consumption demand from the local bureaucracy and Mughal elites provided a significant market for domestic manufactures. But with the advent of the British, this class of local rulers was all but wiped out. “The new rulers wore European clothes 1 See

the critique of Trithankar Roy by Banerjee et al. (2015).

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and shoes, drank imported beer, wines and spirits, and used European weapons” (Maddison 2010, p. 55). Even the new class of urban and educated Indians that assisted the British adopted European patterns of consumption with the effect that “about three-quarters of the domestic demand for luxury handicrafts was destroyed” (Maddison 2010, p. 55). Added to this, as we have seen the entire colonial establishment was heavily dependent on extracting land taxes which ended up squeezing purchasing power of poor peasants. By “linking the revenue to be paid to the estimated average produce of the land with only minor adjustments for variations in harvests, and pitching the tax demands sufficiently high” scores of peasants lost land titles (Bagchi 2010, p. 199). Thus Habib (1975, p. 44) cites a study on South India according to which “the proportion of agricultural labourers to the total agricultural population increased from 15 or 17 per cent to 27 or 29 per cent during the course of the nineteenth century”. Had there been adequate government expenditure on agriculture or access to institutional credit, the taxation may not have had a substantial impact, but in India the colonial administration barely involved itself in productive works as most expenditure was diverted towards the military (Bagchi 2010). Thus even towards the end of colonial rule, the picture is not one of demand-led industrialization but a sordid story of declining per capita food availability and malnourishment. Under these conditions, it is hardly possible to argue that demand could have been high enough to sustain industrialization. A bigger problem with the orthodox critique of the de-­industrialization hypothesis is the use of neoclassical tools and assumptions that are completely inappropriate to study a colonial situation. The assumption of perfect competition for instance, that Morris (1963), Roy (2000) and a whole host of other critics seem to be making, is not something that can be easily justified for studying a colonial set-up. In a perfectly competitive world, markets function without any hindrance and agents are free to negotiate with each other, to enter into contracts and to take decisions that maximize their gains from trade. Under these special assumptions, it can be shown, as Ricardo and many others have done, that exchange between agents is beneficial for all parties involved. But a colonial economy, as Naoroji and many other Indian nationalists argued, was different from this neoclassical ideal. India being a colony of Britain had no freedom to choose it’s economic and trade policies. Domestically, peasants had no option but to pay exorbitant rents to the state and its appointed intermediaries.

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In the light of the structured realities of colonies, Bagchi (2002) suggests that India’s de-industrialization, and more generally its economic decline, ought to be viewed in the context of a racist colonial state that used its coercive powers to favour British interests over Indian ones. This colonial monopoly was exercised in shipping, finance, jute manufacturing and in the construction of railways where Indian investors were virtually obstructed from investing in their own rail system. In other arenas as well, the state’s discriminatory approach weighed heavily. For instance, the most lucrative jobs in the bureaucracy, the banking system and in the railways were given to the British. The Indian Civil Services were opened to Indians only in the twentieth century because prior to that the recruitment exams for bureaucrats were conducted in Britain. Finally, as far as tariffs were concerned, Indian exports to Britain received a heavier tax than British imports into India. It may be noted that Brazil had to undergo a similar fate in the early decades of the nineteenth century but by 1844, the Brazilian state put the preferential trade agreement to an end. Thus Maddison (2010, p. 56) notes: If India had been politically independent, her tax structure would probably have been different. In the 1880s, Indian customs revenues were only 2.2 per cent of the trade turnover, i.e. the lowest ratio in any country. In Brazil, by contrast, import duties at that period were 21 per cent of trade turnover. If India had enjoyed protection there is no doubt that its textile industry would have started earlier and grown faster.

The limitations of the Smithian framework adopted by critics of the de-industrialization hypothesis become even more evident in the short shod that they give to the “drain” of resources from the Indian economy (Banerjee et al. 2015). As we have noted earlier, under East India Company’s rule the diversion of local revenues for purchasing commodities for re-exports was pervasive. It was widely recognized by Company officials that these exports from India remained unrequited and thus constituted a colonial tribute of sorts (Ganguli 1965). Habib (1975) has estimated that in the period 1783–1784 to 1792–1793 close to 9% of British India’s national income was transferred to the metropolis by the Company. What is often not recognized is that the “drain” was not restricted to the initial phase of “plunder” alone. In later periods as well, there was a veritable transfer of resources from India to UK. By the second half of the nineteenth century, the mechanisms of tribute extraction

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became far more opaque and given the political ramifications, British officials became far less inclined to accept the existence of the “drain”, but the “drain” did not in anyways disappear. Using India’s export surplus as a rough estimate, India’s tributes to Britain accounted for as much as 2.8% of British India’s GDP in 1875, 3.7% in 1895 and 2.2% in 1909 (Habib 2016). According to Maddison’s (2010) estimates, the “drain” from India amounted to 25% of aggregate savings or around 1.5% of its income, in the period 1921–1938. The lack of accurate data is obviously a major problem, and thus these numbers have to be cautiously interpreted. But the point is that these transfers which were crucial for precipitating India’s de-industrialization were made possible precisely because Britain could use its political supremacy to exert monopoly power on matters of trade. A Smithian framework of perfect competition is thus wholly inappropriate for studying the colonial system of tributes based on coercion and exertion of monopoly power. It was precisely because of this, that many nationalists linked India’s deindustrialization with it’s subordinate position in the world economy.

The Nationalist Movement and the Origins of the Post-War Development Strategy Outside of China, India witnessed one of the largest anti-imperialist mobilizations in the colonial peripheries. The dawn of the twentieth century witnessed popular grass root movements spring up across India. Peasant rebellions and tribal uprisings occurred with great frequency and while industrial labour was still numerically small, its militant labour strikes caught the attention of the fieriest of Russian revolutionaries (Lenin 1908). One of the earliest and most symbolic anti-colonial mobilizations was the Swadeshi movement in Bengal. The movement initially began as a protest against the government’s plans to partition Bengal in 1905, but it soon adopted a more aggressive stance by calling for a deliberate boycott of foreign goods. The boycott, which was to become a leitmotif of future mobilizations was a conscious assertion of national identity, but it was also reflective of the extent to which nationalist criticisms of colonial rule had found widespread audience amongst the general population. Echoing the concerns of Naoroji, Dutt and Ranade participants of the boycott viewed it as an attempt to provide protection for local manufacturing, something that the government had failed to do for over a century. As one Swadeshi activist put it, “If

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protection by legislative enactment is impossible, may we not, by fiat of the national will, afford industries such protection as may lie in our power?” (Surendranath Banerjee cited in Goswami 1998, p. 628). Despite its emotive power, the Swadeshi movement was short lived and by 1908 it had all but dissipated. The movement was followed by a series of regional mobilizations in various parts of India, but it was only after the First World War that mobilizations began to take acquire a pan regional character. The call given by the Indian National Congress (INC) in 1920 for non-cooperation with colonial authorities for example received considerable popular support across the country. Students and lawyers rallied around calls to boycott government courts and educational institutions. A strike was organized by tea workers in Assam and in UP, peasant unions joined the fray. Railway workers in many Northern areas and textile workers in Bombay came out in large number to support the Non-Cooperation Movement (Chandra et al. 1989). This was followed by fervent anti-colonial activities and by the 1930s a mass nationalist movement had already emerged. Apart from the sheer scale of the mobilizations after the First World War, what was significant was that this new phase witnessed clear political programmes being developed by its participants. In 1930, the Communist Party of India released its “Platform of Action” where it outlined the need to end class and caste exploitation as a prerequisite for developing a successful anti-colonial movement (Ranadive 1984). In 1931, during the Karachi session, the Indian National Congress adopted a resolution in which it called for measures to be taken to reduce debt burden on farmers and demanded improvements in working conditions of urban labourers. The Karachi Resolution also called for the establishment of a political system with universal adult franchise (Chandra et al. 1989). A few years later, the foremost leader of the Dalit movement, Ambedkar, famously declared the need for the “annihilation of caste” as a basic prerequisite for building a democratic nation (Ambedkar 2015). In this context of rapid change, the position taken by indigenous capitalists and rural oligarchs towards the growing anti-colonial sentiment became increasingly contradictory and ambiguous. It is of course true that many business leaders were closely associated with anti-colonial initiatives organized by Gandhi who was viewed as a moderating influence within the nationalist movement. Big business houses from Bengal, Gujarat and Bombay are known to have funded the INC at various points of time (Frankel 2005). Yet the political stance of

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favouring moderate voices within the nationalist camp stemmed from economic realities in which Indian capital found itself in, rather than from some innate political preference. The colonial apparatus, as we have seen above, was a fetter for local capitalist development (Bagchi 2002). The colonial state did all it could to prop up British capitalists over Indian ones. However, with the rise of the nationalist movement, for the first time the balance of power began to tilt away from foreign firms. The state was forced to increase tariff rates on industries in the interwar years, and it changed its purchase policy to favour domestic firms. Fearing adverse consequences of the nationalist upsurge British capital also started to exit the economy in the interwar period and thus sectors that had been under British control for decades were all of a sudden open to Indian firms. The Indian business classes were now eager to jettison British capital from its traditional strongholds (Mukherjee and Mukherjee 1988). The tug of war between local and foreign capital during this last phase of colonial rule meant that the preferences of emerging capitalists were not opposed to a policy regime that discriminated against foreign capital and in that sense the economic interests of Indian businesses did converge with the general anti-British thrust of the emerging nationalist struggle. Having said this, it is worth stressing that business support to the nationalist movement was also driven by an underlying fear that outright opposition to the nationalist movement may unintentionally radicalize Indian masses (Chibber 2003). This fear grew from the rising political significance of labour unions and peasant organizations in the freedom struggle, many of which were led by communists. One consequence of this was that capitalist support to the nationalist movement was strictly conditional on the proviso that demands of the INC be restricted to “political” issues related to British colonialism. “These were bourgeois nationalists, eager for freedom from the British but not freedom for the masses to fashion their own destiny” (Prashad 2015, p. 87). The problem however was that as mass mobilization picked up after the 1920s, the artificial separation of “political” and “social” demands became more and more tenuous.2 Lower caste movements, peasant uprisings and later, 2 See Frankel (2005). The most illuminating critique of the separation between social and political reform is due to Ambedkar in his magnum opus, The Annihilation of Caste (Ambedkar 2015 [1936]).

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the communist insurgencies in Andhra Pradesh and Bengal brought to the fore deep-rooted aspirations amongst the poorest for greater equality. The success of the anti-colonial struggle therefore became increasingly contingent on the ability of nationalists to frame and articulate a vision of India based on an end to foreign rule, the recognition of equality of all Indians and an end to poverty and hunger. But by articulating such demands, nationalists would also risk alienating business support to the anti-colonial project. The short-term resolution to this paradox was found in the Indian National Congress and its representative par excellence, Gandhi. Established in 1885, the INC was more of a movement than a political party. Its main objective was to provide a platform for nationalist activities and disseminate nationalist ideologies. It “included in the ranks of its leadership persons with diverse political thinking, widely disparate levels of political militancy and varying economic approaches” (Chandra et al. 1989, p. 79). The INC had a powerful contingent of conservative representatives and over time most of its decision-making bodies came under the control of dominant rural castes, urban middle classes and business elites (Frankel 2005). Yet as the freedom movement gathered pace, the core cadre of the INC came to be comprised of the poorest and most marginalized sectors. The INC also retained space for socialist tendencies within its ambit. For example, in 1934 members with radical socialist views formed a platform, the Congress Socialist Party (CSP), within the INC with the explicit objective of furthering socialist goals. By 1936, the CSP formally extended its membership to include the members of the banned Communist Party of India. The other major element in the nationalist struggle was the emergence of Gandhi as the unchallenged leader of the INC. He was one of the first nationalists to attempt to “unite the National Movement with economic struggles” (Habib 2013, p. 28). Under his stewardship, the INC which until the 1920s had remained largely restricted to urban areas was able to extend its reach into rural India as well. Thus while over half its members were from urban regions in 1920, just three years later this figure had fallen to around one-third (Frankel 2005). Gandhi’s success stemmed from the uncanny manner in which he was able to bring together various ideological factions within the nationalist movement under a single anti-imperialist umbrella. His ability to translate nationalist ideas into idioms and symbols that were familiar to Indian masses won him a mass following and endeared him to the

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more conservative elements within the movement. Gandhi’s critique of colonialism for instance drew on religious texts and Hindu philosophy. Moreover, unlike many of his liberal compatriots Gandhi was deeply suspicious of the western pattern of modernization which he associated with imperialism and exploitation. He therefore urged his countrymen to draw on their own histories rather than of the West to imagine an alternative future for India. Having said this, underlying the language of traditionalism Gandhi was actually an eminently modern thinker and was thus able to find common grounds with radical leaders within the INC like Nehru and Bose as well. Gandhi recognized the need to eradicate exploitation, untouchability and gender inequality. Even his “religiosity was based on an extension of humanitarian values” (Habib 2013, p. 27). He may have been averse to revolutionary political methods, but his language was actually very similar to that of Marx’s (Frankel 2005). Gandhi spoke of “surplus value” and of how workers under capitalism were dispossessed of goods that they produced by their employers. He critiqued private property and spoke of the need to build a just and egalitarian order. Of course, unlike Marx, Gandhi preferred class conciliation over revolutionary methods to achieve this socialist ideal. He hoped that by advocating non-violence on the part of the lower classes and by inculcating values of trusteeship amongst the elites he could preserve unity in the anti-imperialist camp while at the same time lay the basis for a gradual end to social grievances. It is worth noting that the nationalist movement in the 1930s and 1940s went well beyond the confines defined by the INC. Partly because of the sheer diversity of the Indian society and partly because of INC’s reluctance to address deeper social issues, several radical streams developed strictly outside the fold of the INC. These included organized labour movements in cities like Calcutta and Bombay, tribal revolts in Central and Southern India and anti-caste movements like the SelfRespect Movement of Tamil Nadu. In addition, the victory of the Bolshevik revolution and the solidarity that the Russian communists extended to anti-colonial struggles led to the popularization of socialist ideals. Several communists began to penetrate peasant organizations and trade unions in the 1920s. In Bombay, the communist-led Girni Kamgar Union alone had 64,000 members by 1929 (Ranadive 1984). The growth of the communist movement alarmed the government and following the “Meerut Conspiracy” case several communist leaders were incarcerated. The Communist Party of India itself was banned between

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1934 and 1943 (Sarkar 2014). But despite heavy repression, communist ideals gained considerable traction amongst Indians. Luminaries of the anti-caste movement like Periyar and Ambedkar on the one hand and communists like Ranadive and M. N. Roy on the other hand increasingly spoke of the need to radicalize economic and political demands. They demanded an “annihilation” of the caste system, redistribution of land and a general end to exploitation of all kinds as a basic prerequisite for waging a successful anti-imperialist struggle. In their own ways, each of these currents was suspicious of Gandhi’s tactics and were wary of his views on social issues. The mighty Dalit leader, Dr. B. R. Ambedkar is an interesting example of this line of thinking. For Ambedkar, Gandhi’s dislike of industrialization and his views on the exploitative impact of modern machinery were “primitive” and “hopelessly fallacious” (Ambedkar 1991, p. 283). Whereas Gandhi idealized village life, for Ambedkar rural India with its patriarchy and casteism was “a sink of localism, a den of ignorance, narrow-mindedness and communalism” (Ambedkar 2010, p. 317). Gandhi’s views on economic modernity, according to Ambedkar, had seeped into his views on the Indian society as well and this is what irked Ambedkar the most. More specifically, while Gandhi wanted an end to the practice untouchability he viewed the caste system in a favourable light. In contrast, Ambedkar was of the view that maintaining any facet of the caste system would be disastrous for Dalits and thus nothing short of a complete annihilation of abhorrent social gradations would suffice (Ambedkar 1991, 2015). Not only was the caste system prejudicial to the principle of economic efficiency, but it was also an obstacle to building national unity. On the issue of caste, Ambedkar and Gandhi remained at loggerheads till the very end. Tempting as it may be to delineate the differences between Gandhi and the radicals, but to do so without underlining commonalities would be a travesty because in many ways the commonalities far overpowered the differences. More specifically, the nationalism of Ambedkar and Gandhi was a nationalism that was centred around issues of poverty and inequality. This sort of developmental nationalism entailed a thorough critique not only “of the colonial present…but also of many institutions and values maintained or consolidated under colonialism but having roots deep in the pre-colonial past” (Sarkar 2008, p. 433). Freedom from this perspective entailed, both, an emancipation from colonial rule as well as freedom from social and economic hierarchies that pervaded

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the Indian society. There were of course differences in the extents to which participants were willing to go to challenge existing social mores, but there was a general recognition that the two freedoms were inseparable from each other. As the mercurial revolutionary, M. N. Roy declared in a speech that he delivered in 1943: Having spent a whole life time in the fight for freedom, it is very difficult for a man like me to get reconciled to the idea that freedom will be nothing more than the freedom for the Indian upper classes to replace the British Imperialists as rulers and exploiters of our country. That is not the freedom for which any decent man will be prepared to sacrifice a whole life. (Roy 1944, p. 22)

This shared vision for future India meant that various streams of the nationalist movement were able to find common ground despite innumerable differences between them. The commonalities that linked the radicals and Gandhi becomes far more obvious when they are compared to the exclusionary forms of nationalism that were being espoused by various religious right-wing groups in the 1930s and 1940s. Whether Hindu or Muslim in orientation, what was common to the cultural nationalist movements that started to spring up in the early decades of the twentieth century, was that their vision of India had little to do with challenging social and economic hierarchies. The nation according to them was an “already established glorious entity, with a resplendent history and culture, free of blemishes other than those imposed by external invasion or domination” (Sarkar 2008, p. 433). This then implied that demands for social and economic reforms were to “be frowned upon as divisive” (Sarkar 2008, p. 433). Perhaps the most important strand of cultural nationalism was of the Hindu nationalist variety as espoused by V. D. Savarkar and M. S. Golwalkar. Hindu nationalism as preached by them had its roots in the late nineteenth century but it was in 1925, with the formation of the Rashtriya Swayamsevak Sangh (RSS) that this phenomenon became institutionalized into the Indian political scene. The ideologues of this cultural brand of nationalism sought to define India and Indianness in terms of religious affiliations. Thus, for V. D. Savarkar India was “merely an English synonym for the Hindu nation” (cited in Mukherjee 2005, p. 232). By this definition, then, there was no scope for Hindus and Muslims to live side by side in one nation; they were

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by the very definition of cultural nationalism, “two nations” (cited in Mukherjee 2005, p. 233). The narrow focus on religion as the defining feature of citizenship also meant that issues of caste discrimination, landlordism or the grinding poverty of the masses found little space in Savarkar’s writings. For him, the core problems affecting India stemmed from the enfeeblement of Hindus on account of the power wielded by religious minorities. This particularistic view also meant that “neither in Golwalkar’s nor in Savarkar’s writings…is there any discussion about British imperialism or the struggle against it” (Mukherjee 2005, p. 243). In fact, both the RSS and the Hindu Mahasabha remained largely absent in anti-colonial mobilizations. Perhaps this is one of the reasons why religious nationalism never attained the sort of hegemonic status that the inclusive, anti-imperialist ideologies of Gandhi and his counterparts were able to attain. Thus when India attained independence in 1947, the constitution of the new nation state proclaimed itself to be a democratic one in which the state itself would not be identified with any particular religion or community. The dominance of egalitarian ideologies had an important salubrious effect on a country that was otherwise fragmented along ethnic and economic gradations.

Planning, Industrialization and Structural Change From the early 1940s itself it had become clear to all involved that whatever the outcome of the War, economic development in post-War India would be based on state-led planning. Drawing on the experiences of western nations and based on the dramatic changes in USSR, there was a broad consensus that industrialization would be given a priority in the post-War period. “It is obvious to me” Nehru declared in a speech to the Indian parliament in 1952 “that we have to industrialize India, and as rapidly as possible” (Nehru 1956, p. 5). The importance given to industrialization was twofold. It stemmed from the belief that India’s poverty was rooted in the low productivity of its economy; and therefore, the hope was that by focussing on heavy industries and expanding the productive base of the country it would be possible to employ the scores of unskilled labourers stuck in agriculture and pull them out of poverty (Roy 1944; Banerjee et al. 1944, Nehru 1956; Thakurdas et al. 1944). But a second rationale for adopting industrialization was that it was seen as being crucial for protecting India’s

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sovereignty (Panagariya 2008). The nationalist movement’s ideological critique of colonialism rested on the firm belief that India’s external economic dependence was at the root of its poverty and underdevelopment. Many within the nationalist camp therefore came to believe that political emancipation from colonial rule, while extremely important, in itself, was insufficient to guarantee India’s progress as long as India remained tied to the world economy in a subordinate position (Khilnani 2012). The need to build a self-reliant economy was therefore deemed to be extremely crucial to break the Indian economy away from external constraints imposed by western economic imperialism, and this is where industrialization acquired immense importance for early nationalist policy makers. By producing domestically those goods that the economy traditionally imported, it was hoped that India could reduce its reliance on external economies, and by doing so, guarantee the independence that it had so assiduously fought for. In Nehru’s words: One thing is clear to me: that if we do not develop heavy industry here, then we either eliminate all modern things such as railways, airplanes and guns, as these things cannot be manufactured in small-scale industry, or else import them. But to import them from abroad is to be the slaves of foreign countries. Whenever these countries wished they could stop sending these things, bringing our work to a halt; we would thus remain slaves. (quoted in Panagariya 2008, p. 25)

In addition to the prioritization of industries, there was also a widely shared view that initiating industrialization in a peripheral setting necessarily required some sort of planning. For the drafters of the Bombay Plan, planning was essential for bringing about better coordination within the economy without which there could be no industrialization. Planning and markets were seen as being complementary to each other. This instrumental view of planning, it needs to be stressed, was not accepted by everyone. For M. N. Roy (1944) and the writers of the People’s Plan (Banerjee et al. 1944), planning was justified on more profound grounds. Roy (1944) was of the opinion that left to the whims of markets, peripheral economies would never be able to attain their goal of industrialization because of the simple fact that the internal market for industrial goods was too small. This was not to say that demand did not exist at all. There was indeed a substantial “human demand” for basic goods and services, but the point was, that this was not the sort

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of demand that a private capitalist would be willing to produce for. The paradox of capitalism in the peripheries therefore was that while a “country must be industrialized in order to cure the evils of poverty” yet “the country cannot be industrialized, unless the people are less poor” (Roy 1944, p. 32). In order to break this vicious circle, it was imperative for production to be guided by the needs of “human demand”, of which there was no dearth in India. Since the private sector was incapable of doing this, the responsibility had to be taken up by the state. It was in this profound sense that planned industrialization was justified by many on the left not as a prop for markets but as a mechanism that would aid India’s transition towards a more egalitarian future. It is worth noting that the strategy of heavy industrialization was not without its critics. One prominent voice that stood out against the general consensus for large-scale industrialization was that of Gandhi’s. Gandhi as we have noted, despised the western pattern of industrialization for all the violence that it had inflicted on the world. He warned Indians never to “take to industrialisation after the manner of the west”. “The economic imperialism of a single tiny island kingdom [UK] is today keeping the world in chains. If an entire nation of 300 million took to similar economic exploitation, it would strip the world bare like locusts” (cited in Guha 2007). Thus, even as the clamour for heavy industrialization grew in the 1940s, Gandhi and his associates remained adamant on their views. Their response to the new Nehruvian orthodoxy came in the form of the Gandhian Plan which was written by S. N. Agarwal (1944) and which laid out the essentials of an alternative strategy of economic development. Like other participants in the debate, Agarwal accepted the need for state intervention and planning but felt that the post-colonial development strategy ought to emphasize decentralized, village-based industries rather than large-scale industries. The problem with pursuing large-scale industrialization was that it was based on a “ceaseless pursuit of material wealth” (Agarwal 1944, p. 18). This logic of accumulation for its own sake had no place for promoting human values, for protecting political freedoms nor for cultural enrichment of people. To the contrary, industrialization of the sort that many Indians were demanding was only likely to deepen inequalities, produce violence and devalue human beings. This, Agarwal noted, could not possibly be the basis of constructing an alternative path to India’s development. As opposed to this, the Gandhian argued that if the focus were

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on reviving village communities and on developing rural areas where a bulk of the Indian population resided it would be possible to chart out a more sustainable mode of development. For, “if we have almost selfsufficient Village Communities in which everyone works for his or her living on a co-operative basis there will be almost no room for exploitation” (Agarwal 1944, p. 26). Towards this end, the Plan advocated reviving small-scale industries within villages and called for greater focus to be paid to agricultural improvement. It called on the state to support smallscale production by providing tax incentives and cheap credit. While the Plan remained averse to a policy of prioritizing heavy industries, it recognized the need for developing basic industries, public utilities and infrastructure. Given the inherent social dangers of leaving large-scale production in private hands, the Plan suggested that the state be made responsible for the development of these key industries. As history played itself out, Gandhi’s alternative plan never came to fruition and the economic modernizers within the nationalist camp came to win the day. On attaining independence India, led by Nehru, adopted a strategy of development based on heavy industrialization. The basic strategy relied on pumping investment into heavy industries rather than into consumer goods production, as many others at that time were doing. The strategy was based on the assumption that the primary economic constraint for underdeveloped economies like India was on the supply side and thus the hope was that by focussing on the production of capital goods, over time it would be possible to employ greater amounts of labour in productive sectors thereby pushing up the economy’s productive frontiers (Chakravarty 1989). Agriculture accordingly was to play a passive role, primarily as a prop to support the production of capital goods. This is not to say that planners failed to recognize the importance of agriculture-industry linkages. Rather, what they seemed to have assumed is that agricultural productivity could be increased at a rapid enough pace simply by instituting basic organizational changes in the rural sector which would require few investible resources (Frankel 2005). Finally, partly because of Gandhi’s influence and partly because heavy industries could not really be expected to provide employment for the millions of underemployed workers languishing in rural areas in the short run, early planners sought to encourage small-scale industries. By “walking on two legs”, it was hoped that the economy would simultaneously build up a capital good sector while creating adequate employment in labour-intensive industries (Chakravarty 1989). Towards this end,

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planners reserved certain sectors of the economy solely for small-scale industries. Given that the private sector was not willing to invest in large and risky projects, the Industrial Policy Resolution of 1948–1956 carved up the economy into distinct areas of operation for the public and private sectors. The state was given sole charge of developing heavy industries, infrastructure and sectors associated with national defence. Outside its sphere of immediate influence, the state was given wide-ranging powers to regulate production, pricing and allocation decisions. By doing so, policy makers hoped that scarce resources could be funnelled into areas that were considered to hold national importance (Panagariya 2008). In this regard, the Industrial Development and Regulation Act of 1951 established a licensing system which required private capital to obtain prior clearance from the state “for establishing a new industrial unit, increasing production capacity, and changing the location of an existing unit” (McCartney 2009, p. 101). Small-scale industries, it is worth noting, were exempt from licensing requirements (Subrahmanya 1998). On the monetary front, the state strengthened regulation of the banking sector thereby extending its power to matters of resource mobilization as well. The nationalization of the Imperial Bank in 1955 led to the creation of the State Bank of India. Similarly, in 1956 insurance companies were nationalized and merged into the Life Insurance Corporation of India (Joshi and Little 1994). Just as the industrial licencing regime did for private capital, “The Banking Companies Act of 1949 empowered the Reserve Bank of India (RBI) to control the opening of new banks and bank branches, inspect the accounts of a banking company and prevent the winding up of a licensed bank” (McCartney 2009, p. 95). Apart from establishing several credit institutions, as a matter of explicit policy the state also introduced highly regulated system of interest rates to aid credit flow into sectors it deemed important. In order to insulate domestic firms from foreign competition, high tariff rates were imposed. Further import controls were operationalized via a system of licensing. Like the “law of similars” in Brazil, the general thrust of the licensing mechanism was to regulate the quantities and types of imports coming into the economy. The licensing system was backed by a “canalization” of imports whereby select state-owned enterprises were made responsible for the distribution and purchase of foreign goods (Joshi and Little 1994). Given that, a large chunk of foreign firms already vacated the economy during the interwar years and given

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that many of those firms that remained were involved in exports of raw materials which as an activity died down in the post-colonial period, foreign firms barely constituted a threat (Amsden 2001). Thus, the government followed a relatively benign policy towards foreign firms during the early years, even providing tax incentives to foreign investors. This policy stance was to become more stringent later on after Nehru’s death as will be discussed in the subsequent section. From a comparative perspective, one striking aspect that stands out about Indian post-War industrialization is its pattern of structural change. In particular, despite steady rates of industrial growth, agriculture consistently provided the bulk of employment to the Indian labour force. In 1960, 71.9% of the workforce was employed in the primary sector and by 1980 the figure was 72.4%. The share of industries remained more or less constant at around 11% in the two periods. This is in contrast to Brazil’s case where the service sector emerged as the dominant employer by 1980, when it accounted for approximately 39% of the labour force. Agriculture employed 38%, and industries employed over 20% in the same year.3 To put this in perspective, it is widely recognized that structural change in late developers has not mimicked the transition that advanced capitalist economies experienced. More precisely, while the contribution of industries to total GDP increased in a number of countries in the post-War period, the occupational structure did not follow suite (Bagchi 1972; Tokman 1982). Barring a few economies, industries were never able to employ a significant share of the workforce. Thus the employment structure in many post-colonial economies was skewed towards non-industrial sectors even in those regions that experienced substantial industrial growth. The predominance of agriculture in India goes back to its experiences during colonization.4 As we have seen earlier, India had a significant pre-colonial manufacturing base. This stands in contrast to Brazil which at the time of colonization was sparsely populated and had little going on in terms of manufacturing activity. We saw in the previous section that after being colonized by Britain economic conditions in India changed 3 Baer and Sirohi (2016). These figures are taken from GGDC Data Base, see Timmer et al. (2014). 4 This is a summary of an argument that has been developed in detail in Baer and Sirohi (2016).

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rapidly. The colonial economy was obligated to make annual payments to the metropolis as political tribute and this continued right up to the end of colonial rule. The drain of income became particularly burdensome towards the end of the nineteenth century as Britain began to lose its economic dominance on the world economy and had begun to rely on its colonies to prop itself up. The export surpluses that India ran up against newly industrializing countries of that time were also mopped up by Britain under the guise of various administrative charges. It was during this time that India also became a large outlet for British manufactured goods. Under these conditions, the Indian economy witnessed a substantial erosion of its proto-industrial base. Evidence suggests that from the nineteenth century onwards, a concerted process of de-urbanization was underway as workers in urban areas were forced to migrate to rural regions in search of employment. What this meant was that at the time of independence, the Indian economy emerged with a large pool of labour in its rural hinterlands. The share of urban population in India in 1950 was therefore half of Brazil’s urban share (McGranahan 2012). This historical inheritance of de-industrialization weighed heavily on the occupational structure of post-colonial India. The prioritization of heavy industries from 1950s onwards only added to the employment constraint within the secondary sector. In terms of growth performance, the post-War development may be divided into two broad phases. The initial period between 1951 and 1965 witnessed spectacular changes. Gross domestic savings as a percentage of GDP increased from 9.5% in 1951 to 14.6% in 1965. The state was particularly successful in mobilizing resources and channelling it into industries. Gross savings in the public sector therefore increased from around 2% of GDP in 1951 to a peak of 15.3% in 1966 (Bardhan 1999). The initial success of planning GDP grew at an annual average of 4.1% which represented a significant break from the colonial period. Agricultural growth was low, but industries grew substantially at an average of 6.7% per annum (Panagariya 2008). Within industries, lighter subsectors like cotton textiles grew marginally, while the most important contributions came from heavy industries. Between 1955 and 1960 the output of machinery more than doubled, while the output of iron and steel increased from an index of 122 to 238 (1950 = 100) (McCartney 2009). The Nehruvian era of planning started to run into its limits by the mid-1960s. The subsequent decades witnessed a significant slowdown in

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the pace of accumulation and industrial diversification. Industrial growth fell to 4% per year, and heavy industries in particular were badly hit. The growth of metal products for example was down to 2.5% per year from an average of 12.5% in the previous phase (Panagariya 2008; McCartney 2009). Similarly, the output of capital goods and chemicals declined significantly (McCartney 2009). Outside of industries, the performance of agriculture and services was no better. Agricultural growth fell from 2.9% in the previous phase to 2.1% and service sector growth declined marginally from 4.7 to 4.3% (Panagariya 2008). As the economy slid into recession, political strains that had remained dormant until then exploded. At the regional level, several political parties began to challenge the hegemony of the Congress. The left had by this time grown tremendously and had acquired strong bases in Kerala and West Bengal. Strike activity increased in urban regions, and peasant insurgencies spread like wild fire in states of West Bengal, Orissa and Andhra Pradesh. Secessionist movements emerged in Punjab, Assam and later in Kashmir. Starting from the late 1970s, there was also a sharp increase in religious conflicts and Hindu nationalist organizations began to move into mainstream politics (Desai 2012). The stage was set for a neoliberal transition.

Trade Openness and Foreign Investment: The Post-colonial Experience As noted earlier, economic self-reliance was seen as a crucial goal of post-colonial development planning. Towards this end, the government encouraged development of heavy industries to substitute foreign imports and on the external front it raised considerable barriers to the entry of foreign goods by erecting tariff walls and establishing import controls. With the backdrop of the nationalist movement, the political legitimacy of the post-colonial regime was intricately linked to the state’s adoption of an anti-foreign capital stance and therefore political elites were inclined to minimize reliance on foreign capital. Thus unlike Brazil where MNCs were invited in large number to set up industrial units within the country, India’s policy stance towards MNCs was far more cautious. These policy choices however were driven as much by economic considerations as by political ones. More specifically, the economic realities in the 1950s and 1960s were such that even if policy makers wanted

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to exploit export markets, the wave of protectionism across the world would have made an extroverted policy stance unviable. Similarly, with respect to foreign investment Nehru’s approach was extremely pragmatic. In fact, during the early days of the Nehruvian regime the state made no effort to nationalize foreign firms. If anything, policies were enacted to incentivize foreign investments to enter the economy (Kumar 1995; Panagariya 2008). Partly this was because foreign capital had already lost its domineering position in the economy and thus posed no threat to local industries. But this accommodativeness was also driven by a sense of pragmatism—in a country with weak technological capabilities, foreign investments were viewed as immediate venues of obtaining advanced technology. In addition to foreign investment, Nehru used adept foreign policies to mobilize external savings in the form of foreign aid. Well before taking over the reins of independent India, Nehru had developed a keen interest in international affairs. In the late 1920s, he had developed close relations with anti-colonial activists during his stint as an executive council member of the League Against Imperialism (Louro 2015). Deeply influenced by these early internationalist expeditions, as the first Prime Minister of India, Nehru spearheaded a policy of non-alignment which stressed on the need for ex-colonial societies to maintain an independent political and economic programme. In 1947, representatives from 28 Asian countries met at the Asian Relations Conference organized in New Delhi to discuss economic and social issues confronting Asian nations (Guha 2008). Later, in the Bandung Conference in 1955 Nehru outlined his vision of non-alignment in a gathering of delegates from 29 Asian and African countries. There, he railed against ex-colonial countries that had joined military pacts with Western powers warning them of the dire consequences this would have on their future sovereignty. While advocating a cautious policy of equidistance towards world powers, Nehru along with leaders like Sukarno of Indonesia, Nasser of Egypt called for closer cooperation between members of the peripheries (Prashad 2008). The foreign policy of non-alignment from world powers placed India at the head of world affairs, and this growing legitimacy was instrumental in leveraging advanced countries to provide foreign aid to the economy. It is of course true that the amount of foreign aid remained modest but measured in terms of technological transfers their importance ought not to be diminished. Many of the early steel plants

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in India for instance were set up with the assistance of USSR, USA and West Germany (McCartney 2009). By the 1960s after Nehru’s death, there was a perceptible shift as government policies towards foreign investors became far more stringent. Partially, this growing hostility was due to the fact that “[c]onstraints on local supply of capital and entrepreneurship had begun to ease somewhat” by the late 1960s and thus foreign investments were no longer as sought after (Kumar 1995, p. 3229). In 1969, the government nationalized the banking system and embarked on a large banking expansion programme which further helped improve financial intermediation. To add to all this, political pressures following a failed liberalization attempt in the mid-1960s also contributed to the government’s stance towards MNCs (Panagariya 2008). In the 1960s, India faced large food shortages. In return for food aid from USA, India agreed to liberalize its economy. The rupee was devalued in 1966, and controls on the external sector were relaxed. The move however backfired as growth fell and inflation rates surged. Moreover, the actual foreign aid ended up being far below promised commitments, adding further salt to the wounds. The domestic backlash against the government’s move was so severe that Congress faced electoral losses across state level elections held in 1967. After the liberalization debacle, the government was forced to backtrack and a series of legal changes were instituted to actively discourage foreign investments. In 1968, the Foreign Investment Board was established to screen foreign collaborations and in 1970, the government introduced a patent law “which abolished ‘product’ patents in foods, chemicals, and drugs and reduced the life of process patents from 16 to 7 year” (Kumar 1995, p. 3230). Perhaps the most significant of the changes was the 1973 the Foreign Exchange Regulations Act which sought to limit foreign equity holding in Indian companies to 40%. Thus at a time where East Asian and Latin American countries were embarking on more extroverted strategies of industrialization, India seemed to be turning more and more inwards. One way of measuring India’s stance towards international markets is to look at trade figures. As a result of Nehru’s emphasis on heavy industries, there was a decline in the importance of imports over the planning period. As a percentage of total supply, imports of non-electrical machinery fell from 65.8% in 1959 to 56.3% in 1965 and the figure reached 31.4% in 1978. Similar trends occurred in the case of electrical

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machinery, transport equipment, metal products (Bardhan 1999). Measured in terms of the share of trade in total GDP, external openness declined from 11.4% in 1960 to 8.61% in 1965 and further to 7.74 in 1970 before increasing to 15.55% in 1980. To put these numbers in perspective for Brazil, the corresponding figures were 14.1, 13.29, 14.4, and 20.3% for the four years, respectively. Figure 3.1 shows the evolution of trade ratios for the two countries. As far as MNCs were concerned, there was decline in the importance of foreign collaborations especially after 1965. According to one estimate, there were “on average, 568 foreign companies operating in India from 1957–58 to 1972–73” (Majumdar 2007, p. 99), but “by 1981 the number of foreign companies operating in India had fallen to 300” (Majumdar 2007, p. 100). Thus FDI as a percentage of GDP was −0.01% in 1975 and 0.04% in 1980. Even by 1990, the FDI-GDP percentage remained modest at 0.07%. In comparison, in Brazil the figures were 1.05% in 1975 and 0.81% in 1980. After the Brazilian debt crisis, there were significant declines in FDI inflows into Brazil but despite this, in 1990 FDI still stood at almost 0.2%

25

20

Trade-GDP (%)

15 Brazil 10

India

5

0 1960

1962

1964

1966

1968

1970

Year

Fig. 3.1  Trade-GDP ratio (%)

1972

1974

1976

1978

1980

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FDI - GDP (%)

ϭ Ϭ͘ϴ Brazil

Ϭ͘ϲ

India

Ϭ͘ϰ Ϭ͘Ϯ Ϭ ͲϬ͘Ϯ

ϭϵϳϱ

ϭϵϳϳ

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ϭϵϴϭ

ϭϵϴϯ

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ϭϵϴϳ

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Year

Fig. 3.2  FDI-GDP ratio (%). Source World Bank (https://data.worldbank. org/)

of GDP. Figure 3.2 shows the trends. One way of making sense of these numbers is to note that in the period 1957–2001, the average yearly growth rate of the number of foreign firms in India was almost 1.9% compared to a growth rate of over 7.2 and 7.7% for public and domestic private firms, respectively. Focussing only on the period between 1957 and 1990, the growth of foreign firms registered a decline: an average of −0.1% in 1957–1972 and −0.45% in 1973– 1990 (Majumdar 2007).

The Exhaustion of Planned Industrialization The nature and causes of the demise of Nehruvian planning have been debated extensively, but there is little agreement on why despite seemingly favourable institutional conditions, India never achieved the kind of success that say its East Asian neighbours were able to achieve. Both, in terms of industrial growth and in terms of human development India’s performance during the planning period remained modest when compared to other developing economies. For neoclassicals, the central explanation for the breakdown of the post-colonial ISI regime was the excessive reliance on the state as opposed to markets in matters of pricing and allocation decisions (Bhagwati 1993; Panagariya 2008; Bhagwati and Srinivasan 1975). The overbearingness of the state, so the story goes, bogged down private incentives, misallocated resources and hurt economic competitiveness.

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Moreover, whereas East Asian economies launched themselves onto an export-oriented strategy of growth from the 1960s, India remained shackled with an isolationist trade policy pushed by a set of doctrinaire state elites. The problem with this line of argument, as a number of scholars have pointed out, is that it fails to explain how despite a large state presence, the Indian economy performed relatively well—at least in terms of growth—in the first decade and a half of planning (McCartney 2009; Nayyar 1978). Moreover, from an international perspective, the neoclassical argument appears even more out of date in the light of the fact that the successful industrialization strategies of countries like South Korea and Taiwan relied heavily on their respective states (Evans 1995; Amsden 2001; Kohli 2004). The question confronting students of Indian planning, from this perspective, is therefore not whether the Indian state was too interventionist or not but rather why the quality of state involvement in the economy failed to sustain growth and development in the same way that states in other successful industrializers were able to (Chibber 2003). To understand the limits of Indian state intervention, it is worth noting that the post-colonial state was a product of two essentially contradictory historical forces. There was, on the one hand, the dramatic social energy released by the anti-imperialist movement. Along with the Gandhian style of civil disobedience, there were scores of anti-caste movements, communist insurgencies and peasant revolts that spread across India after the First World War. That these mass mobilizations of lower classes did not snowball into a full-fledged attack on property rights was primarily because moderate elements within the INC were successful in striking a “bargain” between the propertied classes and the toiling poor; a bargain which promised “that India’s freedom from British rule would produce a dynamic toward the fullest democracy and equality, even within the constraints of a structure that set the industrial magnate against the industrial worker, the zamindar against the peasant, the patriarch against the daughter-in-law” (Prashad 2008, pp. 93–94). The institutions, organizations and dominant ideologies informing post-colonial India were deeply influenced by this “bargain”. Now it is true that many demands emanating from the freedom struggle remained unfulfilled in the post-colonial period, but at the same time the dominance of such egalitarian ideologies in a country torn apart on casteist, religious and economic lines had a salutary effect on the policy making.

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The first and perhaps most important result of the nationalist legacy was the nature of the Indian post-colonial state. Between 1946 and 1949, nationalists of differing ideological hues and colours collected under a single Constituent Assembly to establish a legal framework for independent India. It is worth underlining that in the background of the partition, voices for establishing a Hindu state within the and outside of the Constituent Assembly were very loud. The constitution adopted by the lawmakers however distanced itself from these particularistic tendencies. The Fundamental Rights in the constitution enshrined “freedom of religion…plus those special provision relating to the protection of script and culture, rights of minorities to maintain their own educational institutions, and so on, that appear in the Cultural and Educational Rights of the Constitution” (Austin 1999, p. 83). In addition, the Directive Principles of State Policy empowered the state to provide affirmative action programmes for lower castes in recognition of the centuries of exploitation and discrimination that they had been subjected to. Wideranging debates occurred on extending such rights to religious minorities and women, but eventually “reservations” were limited to lower castes only (Guha 2008). Positive discrimination enshrined in the constitution was not legally enforceable, but its inclusion in the constitution was nonetheless a major historical watershed in a society built upon the denial of opportunities to lower castes. In addition to these positive rights, the Constituent Assembly also outlawed the practices of untouchability and the use of forced labour. Finally, and perhaps most important of all the Constituent Assembly debates was the one related to the adoption of universal adult franchise. The lack of representativeness in matters of governance had always been a major bone of contention between nationalists and the colonial authorities. Instituting a representative government had emerged as an important demand by the 1930s itself (Austin 1999). Over time as the nationalist movement became more radicalized, democracy also came to be viewed as a means of achieving greater economic equality. Given that, an outright assault on the country’s property structure was not on the agenda, democratic institutions were viewed as crucial instruments that would help bring about a non-violent transformation of social and economic hierarchies (Nehru 1956). In practice, Indian democracy in the post-colonial period was not a picture-perfect system. The use of preventive detention laws, the brutality with which the police and army were used against civilians and the

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general neglect of economic needs of the poor, all seriously undermined the political system (Anderson 2012). Yet, in hindsight the proclamation of political equality in itself was a phenomenal achievement. For a land that was ravaged by poverty and where the most abhorrent kind of hierarchies was prevalent, democracy gave a crucial voice to socially and economically oppressed. As one observer put it, “A Dalit may be denied access to the village well or an upper caste house or even a barber’s shop”, but universal adult franchise meant that come election time his/her vote was “not less worthy than a Brahmin’s or landlord’s” (Alam 2015, p. 22). Though the caste-based discrimination was far from eliminated during the planning period, its social basis was increasingly challenged within the context of a political system with regular elections. With time, it was this section of marginalized and excluded people that began to outnumber voters from privileged sections of the society. The promulgation of universal adult franchise in India with all its imperfections on the ground certainly provided a sense of dignity to those who had been denied the most basic human rights for centuries. The gains, it is worth noting, were not merely of an abstract sort. Reservations in public sector firms, in the bureaucracy and in government-run educational institutions provided real economic opportunities to lower castes (Desai and Kulkarni 2008). While the record on income and asset redistribution has been poor, according to estimates based on tax returns by Banerjee and Piketty (2005), the share of income going to the top 1% declined over the planning period. It is of course true that if the rural sector were to be counted, the overall trends of inequality may have probably been far less rosy but even here it is worth noting that some important institutional changes were made. For example, the stranglehold of non-institutional creditors on the rural peasantry had been a source of popular revolts during the colonial period and this is one area where the post-colonial state actively intervened by channelling massive resources into “priority sectors”. “Between 1969 and 1990, bank branches were opened in roughly 30,000 rural locations with no prior formal credit and savings institutions (unbanked locations)” (Burgess and Pande 2005, p. 780). “Priority sector” lending increased to 36% of total commercial bank credit in 1981 from a low base of 14% in 1969. Concomitantly, the share of “exploitative” credit declined to a quarter of rural credit in 1991 from a high of around three-quarters in 1951–1961 (Shah et al. 2007). Similarly, while land inequalities did not decrease substantially they did not show significant increases either. The owned area

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of the poorest 60% of rural households was 10.8% in 1961 and in 1971 before declining slightly to 10.5% in 1981. Similarly, the share of owned area of the richest 10% hovered between 51 and 51.5% between 1961 and 1981 (Banerjee 2015). The momentum of the nationalist movement and the adoption of democratic politics also provided early policy makers with a certain level of insulation from elite classes. The struggle against the British had imparted a radical political consciousness to the poor and both the moderate nationalists as well as the economic elites recognized this and were willing to make basic compromises—including accepting stateled planning—in order to thwart political threats to existing property rights. The Bombay Plan (Thakurdas et al. 1944) for instance, which provided the blueprint of the bourgeoisie’s economic demands, stressed the importance of equity and of the need for improving the standards of living of the masses. It even called for heavy state intervention in the economy to meet these goals. This cumulative, historical conjuncture meant that during the initial phase of planning under Nehru, the state was able to carve out a space, however limited, for autonomous action. The Planning Commission for instance was given wide-ranging powers to formulate plans and advise ministries on how to go about allocating their resources. Its role was considerably watered down due to business opposition and thus it did not take on the kind of global coordinating role that say the planning body took on in South Korea’s case,5 but with the Prime Minister as its chairman the Planning Commission commanded immense informal powers in matters of economic policy. “Nehru established close links between the Planning Commission and central government, investing the members of the commission with prestige similar to that enjoyed by Cabinet ministers” (Frankel 2005, p. 113). Added to this, during its heydays the Planning Commission was manned by competent experts who “were firmly committed, or at least sympathetic, to the blend of socialist goals and Gandhian methods” (Frankel 2005, p. 115). More generally, those manning the bureaucracy, according to Patnaik (2007, p. 12), had deeply imbibed the “Nehruvian ideology” and “were generally sceptical about, and even to a degree hostile to, the capitalist class and were committed to State capitalism which they also saw as a means of self- advancement in the new situation of

5 See

Chibber (2003).

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de-colonization”. This basic institutional framework that was established in these initial years meant that by the mid-1950s the state was in a position to make far-reaching changes in the industrial sector. In the Second Five Year Plan, planners managed to allocate large amounts of resources to public sector firms despite rising resistance from capitalists (Frankel 2005). The state was also successful in raising revenues through taxes (mainly indirect), foreign aid and by tapping into household savings through the banking system. On the expenditure front, “rising share of total state expenditure was accounted for by investment. The percentage more than doubled from 25.56 per cent in 1950/51 to a peak of 54.64 per cent in 1958/59, then stabilised at a level around 47/48 per cent until 1964/65” (McCartney 2009, p. 97). The rupture with history notwithstanding, the post-colonial state was also shaped by a counteracting historical inertia that severely limited its capacity to enact developmentalist reforms. More specifically, independence may have reshaped the distribution of de jure political power, but it did nothing to dislodge the economic power wielded by rural and urban elites.6 The entire post-colonial project of modernization was undertaken without affecting any major alteration in the property distribution that India had inherited from its colonial past. The hope of early nationalists was that the state would be able to bring about a non-violent, gradual transformation of property rights over time. However, as time would reveal these hopes did not really materialize. Limited land reforms that the government enacted did end landlordism, but the main beneficiaries of this were locally dominant intermediate castes who had already begun to acquire substantial economic clout in rural areas during the final decades of colonial rule and not the poorest of the poor. Large sections of the rural population were thus untouched by government initiatives. One implication of this was that unlike advanced European nations or even its East Asian neighbours where industrialization was preceded by a re-organization of the rural hinterlands, in India industrialization occurred without breaking the back of rural elites. Thus while the entire industrialization strategy required that agricultural productivity be increased (with minimal investments) and that the resulting surpluses be directed towards industries, in reality the de facto political power of the rural elites prevented the state from enforcing such reforms. Initially,

6 I

draw here on the discussion in Acemoglu et al. (2005).

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this opposition played out within the ranks of the Congress but from the 1970s propertied classes belonging to the intermediate castes began to organize themselves into independent regional political organizations demanding greater subsidies from the state and essentially putting breaks on further economic reforms. The fact that rural elites had acquired a veto position in the Indian economy was to some extent influenced by the legacy of the moderate economic programme of Gandhi and other nationalists. But having said this, even the capitalist class which had explicit economic reasons to support rural re-organization was averse to drastic changes in the rural property distribution because it was fearful that “thorough-going attack on landlord property might well rebound into an attack on bourgeois property itself” (Patnaik 1973, p. 202). In such a situation had the Nehruvian state been willing to ally itself with lower classes, it may have been able to leverage their support to push through developmental reforms as say the French state had done in order to implement its strategy of indicative planning (Chibber 2003). But by the 1960s, as the memory of the nationalist movement faded away conservative elements within the Congress leadership were successful in defanging the labour movement. Unions were increasingly made subordinate to the state, and independent peasant mobilizations were discouraged. This, then, weakened the only possible political counterweight to elite power that was available thereby laying the basis for eroding the relative autonomy enjoyed by the Nehruvian state. Torn between an increasingly aggressive capitalist class and parasitical rural classes, the state by the 1960s, found it increasingly difficult to mobilize and allocate the kind of resources that were required for industrialization. With direct taxation of agricultural surpluses or direct taxes on urban elites off the table, the state had to resort to indirect taxation which grew from 6.9% of GDP in 1960–1965 to 11.7% in the last half of the 1970s (Joshi and Little 1994). Indirect taxes were of very limited use in this context given their regressive effects on demand and in a country which was highly sensitive to inflation deficit financing too had its strict limits (Patnaik 1979). Had India resorted to external borrowing as Brazil had, it may have relieved its supply bottleneck for some time, however given the historical aversion to foreign capital, its economy remained highly insulated from capital markets. Thus at a time when Brazil was on a borrowing spree, as a percentage of GDP, India’s external debt declined from 15.1% in 1970 to 13.4% by the mid-1970s and then to 12.6% by 1979 (Joshi and Little 1994).

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The fiscal crunch was made worse by proliferation of subsidies on the expenditure side (Bardhan 1999). With the economy in shambles, not only were rural elites beginning to demand greater protection from the state, the urban middle class and industrialists were clamouring for larger shares of the national pie as well. As Bardhan (1999, p. 61) put it: “When diverse elements of the loose and uneasy coalition of the dominant proprietary classes pull in different directions and when none of them is individually strong enough to dominate the process of resource allocation, one predictable outcome is the proliferation of subsidies and grants to placate all of them”. McCartney (2009) interestingly argues that the growing fractiousness amongst elites was directly related to the declining power of the Congress after the mid-1960s. During the early years of the nation state, McCartney (2009) notes that the Congress was particularly successful in quelling class conflicts through an intricate network of patron–client relationships. The unchallenged political power of that the Congress had acquired during the first phase of planning enabled it to control and disburse “patronage resources” in such a way so as to diffuse opposition to Nehru’s economic policies at minimal costs. In turn, various demand groups were willing to accept Congress diktats “even if they were not gaining short term benefits” because to exit and oppose the Congress would be to “forgo any future prospect of benefits” (McCartney 2009, p. 107). However, by the 1960s Congress’s ability to play this role of a conflict manager was severely weakened. On the political front, its dominance became increasingly threatened by the emergence of regional parties many of which represented the interests of dominant rural castes. Perhaps more importantly, its failure to enact social and economic reforms alienated vast sections of the rural and urban poor, further damaging its political status. As Congress’s hold on political power weakened, so did its ability to control “patronage resources”. “With Congress no longer the ‘only game in town’ it made little sense for groups losing out in the short term to remain within the Congress system in hope of future rewards” (McCartney 2009, p. 140). The splintering of political power prevented Congress from managing conflicts the way it had in the previous decade and all of a sudden the system of political bargaining that had been established in the previous decades gave way to an unstable equilibrium that could only be sustained by increasing subsidies. A sum of all these changes meant that state revenues which should have been targeted at productive expenditures were in reality diverted as

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subsidies and doles to pacify “dominant proprietary classes” (Bardhan 1999). In addition to the fiscal constraints, on the demand side we may also note that the aversion to asset redistribution and the consequent income concentration diminished the home market for locally produced goods. The strategy of planned industrialization from the very beginning never took seriously the possibility of a demand constraint arising from income concentration. But in the 1970s, a number of students of the Indian economy pointed out a link between industrial stagnation and distributional dynamics (Nayyar 1978; Sau 1974). The problem as many saw it was that in a closed economy such as that of India, import substitution could not rely solely on pumping up investments—an assumption that early planners had made. Protection provided by the state and the investments that it injected into the economy did indeed provide a strong stimulus to industrial growth early on. But with the end of the first phase of import substitution, industrialization required that the capacities built up by the state in the first round of ISI be “absorbed by final consumer demand” (Nayyar 1978, p. 1273). For this, it was necessary to have a large domestic demand for industrial goods. But given the unequal nature of income distribution in the Indian countryside, the expansion of demand for final goods was heavily constrained, and thus the scope for industrialization, severely limited. The short shrift given to the distributional question was no doubt a result of the power wielded by elites, but it also was reflective of a deeprooted bias amongst early policy makers regarding the importance of human development and more generally, the role of labour in the production process. Despite several differences, most debates on Indian planning took for granted that the central problem that needed solving was that of low productivity. Problems of inequality, or for that matter mass illiteracy and of low life expectancies, most participants agreed, could be put on the backburner while the economy focussed on producing goods on larger and larger scales. Labour in this scheme of things was to only play the role of a pliant input in the production process, and nothing more. Its welfare and its share in the national pie was to be determined not by its own collective action but by the charity of state trustees.7 From the very beginning then the state approached labour

7 See

Selwyn (2016a, b) for a general critique of “elite development theory”.

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and peasant movements with great distrust and rather than ride on the coat-tails of popular power to force rural oligarchs to cede to politically contentious structural changes, early state builders sought to weaken and repress rebellions of subordinate classes as was evident very early on in the way the Indian army crushed the Telangana armed struggle. What all this meant was that despite its stated commitment to socialism, neither was there any attempt to politically empower labour beyond what the liberal democratic framework would allow nor was there any attempt to materially improve the quality of lives of labouring classes beyond what was needed for increasing production. The First and Second Five Year Plan for all their rhetorical focus on poverty alleviation barely had any room for investments in human capital. In fact, the First Five Year Plan “argued against regular schooling at the elementary level, favouring instead a so called ‘basic education’ system, built on the hugely romantic and rather eccentric idea that children should learn through the self-financing handicrafts” (Drèze and Sen 2013, p. 24). Measured as a percentage of government budget, the expenditure on education declined over the first two plans (Anderson 2012). The result of the consistent neglect of human capital was that by 1980, the average years of schooling in 1980 was 2.3 years in India compared to 5.3 in China, 3 years in Brazil and 8.13 in South Korea.8 To put things in perspective, Chakravarty (1989) notes that Indian planning models never conceptualized growth as being linked to redistribution in favour of the capitalist class and therefore Indian planners strictly speaking did not really have a “trickle down” type of mechanism in mind while formulating their plan of industrialization. There was also, as Khilnani (2012, p. 77) notes, a recognition amongst early planners that “economic growth was not an end in itself” and that “It had to be reconciled with independence and democracy”. What is however indeed true is that the entire strategy of development was based on a certain crass kind of elitism where the aspirations and needs of labour were visualized as being secondary to or at least derivative of the productive needs of the economy. Thus the Nehruvian regime deviated from “classical capitalism”9 in important ways, but at a fundamental level the logic that

8 Barro-Lee 9 Raj

data set. (1973).

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drove it was a capital-centric one; a logic that prioritized capital accumulation over people.

Conclusion The Indian post-colonial development episode was an attempt to modernize the economy while still retaining the social base it inherited from the colonial period. The extent to which the post-colonial regime was able to break away from its historically generated path dependencies governed its success in the economic sphere. Industries grew at a modest pace, and new technical capabilities were added to the economy’s arsenal during the thirty years of state-led development. But the inertia generated by its social and economic structure haunted its progress at each step and ultimately limited its success. The implosion of ISI and the shift towards neoliberalism produced two important changes in India’s political economy that will be discussed in the next chapter in detail. First, has to do with the nature of state-elite relationship. As we have noted in this chapter, the Nehruvian state was an institution that was torn between the egalitarian legacy of the anti-colonial movement on the one hand and the pressures of propertied elites on the other. While it was always a capitalist state, during the planning period there was a certain relative distance that the state had been able to create between itself and the propertied classes. This vestige—which had already started to weaken after the mid-1960s—has slowly but surely been set aside during the neoliberal period and with it the ambivalence that the state exhibited vis-a-vis economic elites has been replaced by a blatantly pro-capitalist stance. Second, one important feature of the planning period was a lack of cohesion within the “dominant proprietary classes” which Bardhan (1999) cites as a crucial factor behind the demise of Indian planning. In the next chapter, we shall argue that while the fundamental elements of this conflict have not in any way disappeared, the neoliberal shift has nonetheless brought about a much greater level of intra-elite cooperation. The calibrated pattern of external liberalization has allowed the wealthier classes to take advantage of foreign finance, it has provided them access to advanced technologies and has allowed them high levels of geographical mobility. The structural shift towards services (IT, finance, real estate) has enabled accumulation and concentration of unprecedented levels of wealth. Ideologically, this neoliberal

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shift has gone hand in hand with the rise of the religious right which has provided a common uniting ideology to the rich. A combination of these ideological and economic factors has resulted in the emergence of a neoliberal social bloc with significant implications for India’s political economy.

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Prashad, V. (2015). No Free Left: The Futures of Indian Communism. New Delhi: Leftword. Raj, K. N. (1973). The Politics and Economics of “Intermediate Regimes”. Economic and Political Weekly, 8(27), 1189–1198. Ranade, M. G. (2012 [1893]). Indian Political Economy. In B. Chandra (Ed.) Ranade’s Economic Writings. New Delhi: Gyan Publishing House. Ranadive, B. T. (1984). The Role Played by Communists in the Freedom Struggle of India. Social Scientist, 12(9), 3–32. Richards, J. F. (1995). The Mughal Empire: New Cambridge Economic History of India, Vol. 1.5. Cambridge: Cambridge University Press. Roy, M. N. (1944). Planning a New India. Calcutta: Renaissance Publishers. Roy, T. (2000). De-industrialisation: Alternative View. Economic and Political Weekly, 35(17), 1442–1447. Sarkar, S. (2008). Nationalism and Poverty: Discourses of Development and Culture in 20th Century India. Third World Quarterly, 29(3), 429–445. Sarkar, S. (2014). Modern India 1885–1947. New Delhi: Macmillan. Sau, R. (1974). Some Aspects of Inter-Sectoral Resource Flow. Economic and Political Weekly, 9(32/34), 1277–1284. Selwyn, B. (2016a). Elite Development Theory: A Labour-Centred Critique. Third World Quarterly, 37(5), 781–799. Selwyn, B. (2016b). Theory and Practice of Labour-Centred development. Third World Quarterly, 37(6), 1035–1052. Sen, A. (1981). Ingredients of Famine Analysis: Availability and Entitlements. The Quarterly Journal of Economics, 96(3), 433–464. Shah, Mihir, Rao, Rangu, & Vijay Shankar, P. S. (2007). Rural Credit in 20th Century India: Overview of History and Perspectives. Economic and Political Weekly, 42(15), 1351–1364. Subrahmanya, B. (1998). Shifts in India’s Small Industry Policy. Small Enterprise Development, 9(1), 35–45. Thakurdas, P., Tata, J. R. D., Birla, G., Dalal, A., Ram, S., Lalbhai, K., Shroff, A., & Matthai, J. (1944). A Brief Memorandum Outlining a Plan of Economic Development for India. Timmer, M. P., de Vries, G. J., & de Vries, K. (2014). Patterns of Structural Change in Developing Countries. GGDC Research Memorandum 149. Tokman, V. E. (1982). Unequal Development and the Absorption of Labour: 1950–1980. CPAL Review, 17. Tomlinson, B. R. (2013). The Economy of Modern India: From 1860 to the Twenty-First Century. Cambridge: Cambridge University Press. Wallerstein, I. (1986). Incorporation of Indian Subcontinent into Capitalist World-Economy. Economic and Political Weekly, PE28–PE39.

CHAPTER 4

Alternate Paths to Economic Development in the Neoliberal Era

This chapter analyses the evolution of Brazil and India in the period between 1980 and 2014. At the surface, there have been striking similarities between the development strategies of Brazil and India during this period. Both have embraced neoliberal policies since the 1980s, but far from limiting their government much of their economic success is attributable to active state intervention. On the external front, though trade barriers have been torn down, policy makers in both countries have not shied away from employing selective protection and regulation for strategic purposes (Ban and Blyth 2013; McCartney 2010). But underlying these similarities, there are far-reaching contrasts. Brazil’s development policy under the administration of the Worker’s Party (PT) was successful in making growth inclusive. Though growth rates have been moderate, the economy was able to generate employment, high wages, and was successful in reducing poverty and inequality. In contrast, India’s development model has been exclusively oriented towards maximizing growth. The strategy has delivered unprecedented growth rates—making India one of the fastest growing economies in the world—but this impressive performance has come at a large human cost, as poverty and deprivation have remained abysmally high and have probably even worsened over the neoliberal period. The rest of the chapter is arranged as follows: Sections “Neo-Liberal Reforms in India” and “Brazil’s Neoliberal Experience” describe the This is a modified version of my paper that appeared in the Brazilian Journal of Political Economy, Vol. 37, No. 2, April–June 2017. © The Author(s) 2019 R. A. Sirohi, From Developmentalism to Neoliberalism, https://doi.org/10.1007/978-981-13-6028-2_4

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experiences of the two economies under neoliberalism. Section “Political Economy of Growth Regimes: A Comparative Analysis of Brazil and India” builds on the previous sections and provides some insights into why the two regions followed very distinct development paths. The final section provides a brief conclusion of the main arguments.

Neoliberal Reforms in India As we noted in Chapter 3, by the 1970s—less than two decades after embarking on an ambitious project of economic development—the Indian economy was in the midst of a crisis. Industrial growth declined and economic stagnation reached such proportions that according to an estimate by Isher Ahluwalia productivity in the industrial sector actually decelerated at a rate of −0.6% per annum in the period 1959–1979 (quoted in Goldar 1986). Faced with severe economic constraints Indian policy makers opted for a radical shift in the economic sphere. The new economic model adopted in the 1980s—and deepened after neoliberal reforms in 1991—sought to deregulate the domestic private sector and increase—albeit limitedly—economic integration with the world economy. Internally, licensing requirements in major industries like cement, telecommunications and automobiles were eased. Planningera monopoly regulations were weakened, and corporate taxes were slashed (Maiorano 2014). On the external front, the rupee was devalued, import controls were dismantled, and many sectors of the economy were opened up to foreign investments. Whereas prior to liberalization the Foreign Exchange Regulation Act limited foreign investment at 40%, by 1991 “approval for FDI was moved towards an automatic route; a 51 per cent stake was allowed in 34 priority industries (mainly intermediate and capital goods)” (McCartney 2010, p. 37). All these changes undoubtedly marked a major shift in India’s political economy but it also deserves to be noted that the most crucial aspect of these changes was the gradual and sequential nature of reforms (Ahluwalia 2002; Williamson and Zagha 2002). Radical changes in labour laws, across the board privatization or big bang financial liberalization, were avoided in favour of a more cautious approach. For instance, internal liberalization notwithstanding, average tariff protection for industries actually increased during the 1980s and it was only in the 1990s that there was an across the board reduction in protection (Rodrik and Subramanian 2004). As far as the capital account was concerned the role of foreign

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investments did increase substantially but in absolute terms, foreign capital remained a marginal player in the 1980s and 1990s. FDI inflows as a percentage of GDP hovered around 0.04% in the 1980s and increased to around 0.5% in the 1990s. These numbers should be seen in context of Brazil where the numbers were approximately 0.6 and 2% for the two periods, respectively. Further, far from retreating from the financial sphere, throughout the 1990s the state closely regulated foreign investments and consciously controlled the economy’s external debt (McCartney 2010). Despite easing rules for foreign investors close to 75% of total banking assets remained under state control even as late as 2005 (Panagariya 2008). Interestingly, therefore, according to estimates of external openness by Wacziarg and Welch (2008), India could be categorized as having a closed economy even by the early 2000s while Brazil according to the same study had transitioned towards an open economy by 1991. The manoeuvrability and flexibility enjoyed by Indian policy makers were aided by the fact that in the run-up to the reform process the economy was largely free of the kind of crippling crisis that many Latin American nations faced. There were of course two periods of crisis in the early 1980s and in 1991, but the extent of the problem paled in comparison with what Latin American economies went through and from a comparative perspective the Indian economy weathered them with considerable ease. The implications of these features are important and will be taken up in greater detail later on in this chapter. Thus, it ought to be noted that liberalization did not in any way diminish the role of the state. Deregulation is therefore really a misnomer for describing India’s new development path. Rather what occurred was a significant shift in the nature of state intervention (Kohli 2006a, b; Patnaik 2007). To understand this shift, we may restate certain features of the Nehruvian development regime that were discussed in the last chapter. As we saw previously, the post-colonial state was a product of two contradictory features. On the one hand, the political clout of rural oligarchs and industrial magnates ensured that state activism remained within strict limits when it came to issues like land reforms or large-scale income redistribution. On the other hand, whatever the failings of the post-colonial state it was at least ideologically also wedded to the idea of social and economic justice. What gave the state this egalitarian ideological bent was its specific historical legacy—It was the product of a democratic anti-colonial struggle; a struggle which had united Indians by promising freedom not just from imperial rule but freedom from

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servitude of all kinds (Sarkar 2001, 2008; Guha 2008; Patnaik 2013). Therefore, even though the post-colonial state may have been elitist in its actual functioning, its historical legacy had also imparted an egalitarian streak to its ideologies. This historical specificity also meant that “… the motivation, the ideological inclinations, and the class background of the State personnel ensured that the State had a degree of autonomy both vis a vis imperialism and also vis a vis the domestic capitalists” (Patnaik 2007, p. 12). The development path adopted in the late 1980s represented a break precisely from this sort of a state. Not only was there a dissolution of the anti-imperialist ethos but as Kohli argues, the success of the new regime of accumulation was contingent on an all-out “repression” of labour and a close alliance between the state and propertied classes. In a break from its past, key institutions of the state began to be manned by officials “whose motivation is no different from that of the big bourgeoisie and financial interests” (Patnaik 2007, p. 13). Kohli (2006a, b, 2012) therefore refers to the Indian liberalization project as a “pro-business” one. In practice, this shift produced important alterations in the structure of the state. The role of the Planning Commission declined whereas the importance of the Ministry of Finance increased, reflecting the changing priorities of the state—from pursuance of developmentally oriented goals to those aimed at promoting confidence of domestic and international corporates (Sengupta 2015; Patnaik 2015). This internalization of the pro-business logic also meant that for the state, the maintenance of profitability and efficiency started to take precedence over its traditional concerns. For instance, in the pre-liberalization period poverty was viewed as a phenomenon that had structural causes and therefore one that needed an overhaul of the property rights structure. However, after the 1980s the emphasis on altering property rights waned and poverty gradually came to be viewed as an individualized phenomenon which required a fiscally responsible, targeted form of social policy (Corbridge and Harriss 2011; Maiorano 2014). Similarly, whereas the effectiveness of the banking sector had traditionally been evaluated on its ability to funnel money into “priority sectors”, starting from the 1990s influential commissions on banking reforms sought to reduce this type of lending and sought to change the evaluation criteria of the banking system by giving greater weight to banking profitability (Shah et al. 2007; Shajahan 1998).

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At a procedural level too, the state came to imbibe this pro-business logic of liberalization in profound ways. Government bodies were gradually re-organized on “business lines” (Joseph 2007) and politicians increasingly sought to rebrand themselves as CEOs who were not afraid to bend rules to “get things done” for the sake of boosting growth. Democratic checks and balances came to be viewed as messy distractions to the larger goal of improving the “ease of doing business”. Rather than deliberation and debate, major economic reforms were pushed ahead through “stealth”, i.e. via non-transparent negotiations, strategical sequencing of reforms and careful rebranding of policies, all aimed at obfuscating the nature and extent of changes that the state sought to usher in (Jenkins 1999). What all this amounted to was a blatant de-politicization of decision-making. The most striking example of this was the industrial-policy reform package implemented in 1991. The proposed policy, which had important consequences for Indian citizens, was enacted by the Congress-led government not through a process of democratic consultation as one would expect in a democracy, but by a unilateral executive order. “Anticipating nationalist opposition to global opening, the government used legal technicalities—they included the policy changes in a ‘statement’ rather than in a ‘resolution’—to avoid any discussion and a vote in the parliament” (Kohli 2006b, p. 1363). In fact, the 1990s witnessed an average of 22.1 ordinances being passed each year compared to, 6.1, 9.1, 12.7 and 8.1 ordinances passed in the 1950s, 1960s, 1970s and 1980s on an average, respectively (Kapur and Mehta 2006). As an economic project, two tendencies of this “pro-business” liberalization may be noted.1 First, as Table 4.1 indicates, the economy has experienced substantial economic stability. Apart from a brief crisis in the early 1980s and in the early 1990s, growth has been stable and consistently high. In fact, India along with China remained largely unperturbed by the string of currency crises that hit East Asia and later Brazil, Turkey and Russia in the late 1990s. Even during the Global Financial Crisis of 2008, the Indian economy was relatively unfazed as policy makers used “aggressive counter cyclical fiscal and monetary policies” to prop up the economy (Weisbrot 2015, 1 I fall back heavily on the theoretical analysis of Lavoie and Stockhammer (2012) on wage-led and profit-led growth regimes throughout this chapter, though the terminology is not identical.

118  R. A. SIROHI Table 4.1  Macroeconomic indicators, India 1980–1990 GDP growth (annual %) Agriculture, value added (annual % growth) Industry, value added (annual % growth) Services, etc. value added (annual % growth) Total debt service (% of GNI) Total debt service (% of exports of goods, services and primary income) External debt stock (% GNI) Gross savings (% of GDP)

1990–2000

2000–2012

5.7 4.4 6.1 6.2 1.6 25.9

5.6 2.9 5.8 7.2 2.9 28.6

7.0 3.0 7.4 8.5 2.4 13.5

17.7 21.1

27 24.1

19.1 31.8

Source World Bank (https://data.worldbank.org/)

p. 113). The same table also shows that after 2000, growth rates have skyrocketed. While agricultural growth has been low, industries and services have performed very well, growing at an average rate of 7.4 and 8.5%, respectively. To put these growth figures in historical perspective, we may note that per capita GDP grew at an average rate of 4.3% in the period 1980–2015 compared to 1.15% in the period 1961–1979.2 Even more striking is the fact that growth has been associated with a healthy increase in savings rates which averaged 32% of GDP in 2000–2012, compared to 24% in 1990–2000. The financial sustainability of India’s growth episode has recently been put to the test after a phenomenal accumulation of non-performing assets in the banking system but it is important to note that the economy’s investments have been financed largely from internal resources and therefore growth has not increased the economy’s external debt burden (McCartney 2010). A comparison of Tables 4.1 and 4.2 reveals that external debt stock figures for India remain well below those of Brazil. Finally, we may also note that unlike Brazil, where the prioritization given to inflation control led the state towards a regime of uncompetitive exchange rates and extremely high rates of interest, in India the state has followed a different route. The government has maintained comparatively lower real interest rates and according to an estimate cited by Weisbrot (2015), exchange rates in the post-2000 period were undervalued by a factor of 60%. 2 World

Development Indicators, World Bank.

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119

Table 4.2  Macroeconomic indicators, Brazil 1980–1990 GDP growth (annual %) Agriculture, value added (annual % growth) Industry, value added (annual % growth) Services, etc. value added (annual % growth) Total debt service (% of GNI) Total debt service (% of exports of goods, services and primary income) External debt stock (% GNI) Gross savings (% of GDP)

1990–2000

2000–2012

2.4 3.3 1.3 3.5a 5.4 49.6

2.1 2.6 0.7 2.8b 4.5 49.8

3.6 3.6 3.6 3.3 6.1 42.8

38.9 19.8

29.1 15.5

27 16.3

aData

from 1980 to 1989 from 1992 to 2000 Source World Bank (https://data.worldbank.org/) bData

Second, the new economic model has been successful in promoting high levels of growth but its actual impact on employment has been limited. There seems to be a broad agreement amongst students of the Indian economy that economic growth has been “jobless” (Bhaduri 2008). Joblessness is reflected in the declining employment elasticity which has fallen precipitously from 0.44 in 1999–2005 to 0.01 in 2004–2010 (Mehrotra et al. 2012). Figure 4.1 shows how employment population rates fare in the two countries. The figure indicates Brazil’s superior performance on this front especially in the 2000s despite the fact that it experienced far lower rates of growth. Though there are several reasons for these abysmal employment figures, one important factor is India’s unique pattern of structural change which has favoured high-tech services and skill-intensive manufacturing subsectors (Ghani 2010; Kochhar et al. 2006; Chandrasekhar 2010; Baer and Sirohi 2016). What makes India’s experience strange is that traditionally structural change has entailed a shift of labour and other resources from agriculture to industry in the early stages of development, but in the case of India the service sector has become predominant at a relatively early stage. One fallout of this has been that the skill and capital-intensive nature of structural change, while growth inducing, has been unsuccessful in absorbing the large pool of unskilled labour that exists in the countryside. Thus, while the share of services accounted for 53% of GDP in 2010, its share in total employment was a mere 26%. Agriculture on the other hand employed 55% of the labour force, but

120  R. A. SIROHI 64 62

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60 58 56 54 Brazil

52

India

50 48 46 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

zĞĂƌ

Fig. 4.1  Employment-population ratio (%). Source World Bank (https://data. worldbank.org/)

accounted for only 16% of GDP in the same year.3 The growing discrepancy between the most productive sectors and those sectors that employ a significant chunk of the labour force has resulted in the dismal rate of job creation in the country. Thus, not surprisingly despite high rates of GDP growth, total employment growth declined to 0.83% per annum in 2004–2009 as compared to 2.66% per annum in 1999–2004 (Chandrasekhar and Ghosh 2011). The flip side to the phenomenal growth of the service sector has been slow growth in agriculture and this has only compounded the problems in the Indian labour market. Since the 1990s a massive agrarian crisis has engulfed the rural countryside which in large part has been driven by the state’s withdrawal from the rural economy. This shift has to be considered in the context of a sector that has traditionally relied heavily on state protection. In 1985–1990, public expenditure on rural development and infrastructure stood at 11.1% of national income, but by 2000 it had fallen to 5.8% (U. Patnaik 2005). This period has also witnessed a general reduction of “priority sector” credit flows to rural regions. “Nearly 5,000 rural bank branches were closed between 1991 and 2007” and 3 Baer and Sirohi (2016) develop this argument in detail. See Ghani (2010) for a different conclusion.

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the share of rural credit fell from 14.7% of total credit in 1991 to 8% in 2007 (Banerjee 2012, p. 183).4 On paper, there have been attempts to expand credit facilities to rural areas, especially since 2005, but what many suggest is that the benefits of this expansion have been cornered by larger farmers and MNCs many of whom are not actually involved in agricultural operations but in more urban operations like food processing (Banerjee 2015). The effect of the shift from a developmentally oriented credit system of the kind that existed prior to the neoliberal reforms to a commercially driven one is that a large section of the peasantry has been forced to turn to non-institutional sources of credit that often charge very high interest rates (Banerjee 2012, 2015). Given that the rural sector has always depended on state investments, this withdrawal of the state has led to a low agricultural growth (Table 4.1). Thus, compared to the pre-liberalization era, growth of food grain production has fallen between 1990 and 2007, so much so that it has been growing at a rate which is slower than the population growth rate (Swaminathan and Bhavani 2013). What this has resulted in therefore is a major crisis of social reproduction of small farmers in the countryside. With increasing input costs and unavailability of cheap credit, agricultural activities have become unprofitable for small peasants and this in turn has meant that scores of peasants (between 1991 and 2004, the figure stands at a little over 18 million) have, in a sense, been expelled from agriculture and have been forced to find employment in non-farm activities (Banerjee 2012). The crisis in Indian agriculture in other words has increased the supply of wage labour far beyond what other sectors in the economy are capable of absorbing.5

4 Dalit’s and other vulnerable communities have been adversely affected by this. Whereas in 1991, 9.5% of commercial bank credit was directed to these vulnerable groups, by 2006 the figure stood at 6.5% (Chavan 2007). 5 It is worth noting here that this process of expulsion has been worsened by the spate of forcible land acquisition led by state governments across the country for setting up various development projects (Adnan 2015; Levien 2011; Walker 2009). The government since the early 2000s has indulged in a land grabbing spree to set up Special Economic Zones for attracting national and international corporates. Walker (2009) cites an estimate according to which in 2001–2006 alone half a million hectares of forestland were grabbed up by the state for such projects. Most often peasants receive poor compensation for the land that the government takes from them and without adequate employment alternatives many of these dispossessed peasants are forced into the unregulated informal sector.

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In sum therefore underlying the dizzying growth miracle of the neoliberal decades, there lies a story of growing precariousness and deepening insecurity for scores of Indians. Not surprisingly the cumulative result of the Indian pattern of development has been a relatively poor performance on the social front.6 In terms of labour market indicators, one may note that starting from the 1980s there has been a steady decline in the share of wages in total national income (Chandrasekhar 2010; ILO 2010). Real wage growth which had touched 4.11% in 1982–1992, slumped sharply to −0.63% in 1999–2004 (Ahn 2010). But this squeeze on the purchasing power of poorer households has forced many into more precarious occupations as informality has increased. Various indicators of human development strengthen the perception that India’s growth experience has been exclusionary. UNICEF estimates that three out of ten stunted children in the world come from India7 and IFPRI’s food hunger index places India along with countries facing “serious” rates of hunger (IFPRI 2014). In rural areas, the distress has reached epidemic proportions as indicated by a spate of farmer suicides. Crushed by debt and poverty over 180,000 farmers have committed suicide during 1997–2007 alone (Sainath 2009). As far as actual poverty trends are concerned, there is considerable controversy regarding estimates. There is a broad agreement that official poverty lines in India are too low (U. Patnaik 2007, 2010; Ray 2007; ADB 2011). For example, using a poverty line of 1.35 USD per day, an estimated 740 million and individuals were below poverty line in 2004–2005, which is much higher than the official estimate of 300 million (ADB 2011). As far as changes in poverty are concerned, opinions are divided. Favourable estimates suggest that poverty, however high, has nonetheless declined over the post-liberalization era (Ravallion 2011; ADB 2011). In contrast, calorie-based estimates suggest that poverty has actually increased drastically (U. Patnaik 2007, 2010; Ray 2007). Utsa Patnaik’s analysis indicates that poverty increased from 74.5% in 1993–1994 to 87% in 2004–2005 in rural regions and from 57 to 64.5% in urban regions in the same period. The period between 2004 and 2009 shows similar trends (U. Patnaik 2013). Table 4.3 shows a comparison between Brazilian and Indian achievements on a range of human development indicators like access to 6 See

Drèze and Sen (2013) and Kohli (2012) for a brief discussion.

7 http://unicef.in/Story/1124/Nutrition.

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Table 4.3  Human development in a comparative perspective Brazil (2013) Infant mortality (per 1000 live births) Mean years of schooling Prevalence of underweight children 2009–2013 (%) Improved sanitation (% of pop with access) Public expenditure on health (% GDP) Public expenditure on education (% of GDP) Military expenditure (% of GDP)

15 7.2 2.1 82 3.8 6 1.3

India (2013) 40 5.6 30.7 39 1.3 3.8 2.5

Source World Bank, UNDP, IFPRI

sanitation, child malnutrition rates, infant mortality, etc. For several of the indicators cited in the table, Brazil far outperforms India. Of course, this partly stems from the fact that India has a much lower per capita income, but it is also evident that the Indian state’s spending priorities are also to blame for the bleak situation. To take an example, in 2013 public expenditure on health was 1.3% of the GDP while the military expenditure stood at almost double that value, or 2.5% of GDP. According to an estimate cited by Khera (2014), a whopping 9% of GDP goes to the middle and upper classes in the form of government subsidies and another 3% as tax revenues foregone on account of corporate tax cuts. Lack of resources as a cause for India’s shoddy social development seems even less likely as a determining factor because the tax-GDP ratio which was 11% in 2013 remains woefully low when viewed in a cross-national perspective. It therefore hardly makes sense to point fingers at a lack of resources to explain adverse human development indicators. A more likely explanation is that the current flirtations with pro-capital policies have straight jacketed the state from taking up even the most basic social welfare policies.8 Finally, turning to the dynamics of inequality, the neoliberal phase has witnessed significant polarization of income and wealth. Banerjee and Piketty (2005) study tax return data from 1922 to 2000 and find that income shares for the top 0.01, 0.1 and 1% exhibit a U-shaped evolution in the 78-year period. The shares declined during the planning phase but then increased after the 1980s. Based on household data on expenditure, 8 Interestingly, Sridharan (2014) has noted that a large proportion of middle class Indian voters have expressed a clear aversion to pro-poor welfare intervention by the government.

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Sarkar and Mehta (2010) find that the Gini index declined from 0.319 in 1983 to 0.298 in 1993–1994 but from then on it increased so that by 2004–2005 the figure had reached 0.376. Inequalities within urban areas seemed to have increased at a faster pace than in rural areas according to their estimates. Jayadev et al. (2007) analyse wealth distribution using household-level data and find that the Gini index of per capita wealth and net worth increased between 1991 and 2002. The distribution of land, according to estimates cited by Banerjee (2015), became more unequal in the 1990s. The share of owned area of the top 10% of rural households increased from 51.0 in 1991 to 55.2 in 2002. Most of this came at the cost of the bottom 60% of rural households. By 2011, almost half the rural households had thus become landless. It is important to stress that the description thus far has been a caricature of a very complex and non-linear process. In fact, in 2004 a coalition-government consisting of political parties with a heavy pro-labour tilt came to power and initiated several key policies. One of the most celebrated interventions of this period was the Mahatma Gandhi National Rural Employment Guarantee Scheme or the NREGS, the world’s largest employment guarantee scheme. The programme was celebrated for its extensive scale and reach. Policy makers and politicians were applauded by foreign and domestic observers. For some, interventions like these even signalled the end of India’s flirtation with pro-capital policies (Maiorano 2014). However, with the benefit of hindsight, one can safely say that this short phase ended up only as a minor inflection point in an otherwise continuous consolidation of the pro-capital project. Take the example of the MNREGS itself. After initial bluster and excitement, successive governments have made concerted efforts towards weakening the program. Employment generated by the NREGS has fallen by 50% in the period 2009 and 2015 and budgetary allocations have been slashed by 30% over the same period (Drèze 2015). Any lingering doubts about India’s trajectory have been put to rest with the 2014 electoral victory of a government that has adopted a brazenly anti-labour stance. The government has threatened to dismantle the entire NREGS program itself. The deprivations faced by the Indian working class are therefore not innocent side effects of the pro-business developmental regime; rather, inequality and poverty seem to have become crucial drivers of the Indian growth miracle. Bhaduri (2008) calls this “predatory growth”: a process of accumulation that has become contingent on transfer resources from the poorest to the richest through economic and extra-economic means.

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These trends portend a dismal future for the most vulnerable sections of the Indian society. From this perspective, there is an immediate need to reconceptualize social priorities and question the hegemony of elitist economic policies. Here, the progress made by other societies can provide important lessons. The following section highlights how Brazil has been able to combine economic growth with the goals of social and economic justice. This inclusive growth has lifted millions out of hunger and has led to impressive improvements in human welfare.

Brazil’s Neoliberal Experience Brazilian neoliberalism has to be analysed in the context of the military dictatorship which lasted from 1964 to 1985. As we saw in Chapter 2, when the authoritarian regime acquired power in the middle of the 1960s, Brazil was in the midst of a political and economic crisis. The response of the army was swift and clinical. Democratic rights were suspended and any viable political opposition was defanged. On the economic front, the new regime embarked on a novel pattern of industrialization based on export promotion and greater integration with foreign capital (Baer 2014). A distinctive feature of this new strategy was that it emphasized industries catering exclusively to the upper and middle classes (consumer durables). Functionally, this meant that the traditional emphasis on expanding home markets was effectively replaced by a strategy that concentrated on a narrower market made up of middle- and upper-class consumers (Bresser-Pereira 1984). The new policy stance was to be supported by a concomitant exploitation and repression of labour (Seidman 1994). By the 1980s, Brazilian economy had developed a considerable industrial base and was capable of producing sophisticated goods. The contribution of agriculture to total GDP declined consistently while the share of manufacturing increased from 32.2% in 1960 to 40.9% in 1980 (Saad-Filho 2010). Equally significant was the dramatic increase in the contribution of manufacturing to total exports between 1960 and 1980 (Abreu 2008). But underlying all these achievements there were glaring flaws. Apart from the outright political and economic repression of labour, the military regime’s economic policies were economically unsustainable. This was evident in the growing indebtedness that Brazilian industrialization came to be associated with. An industrialization model that was averse to expanding home markets inevitably came to rely on

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debt and “By 1979 debt service amounted to over 63 percent of the country’s exports” (Baer 2014, p. 80). Given these inherent flaws, the Brazilian model of development ran up against its limits. Massive bouts of inflation, reaching four-digit numbers by the end of 1980, crippled the economy. As gross capital formation and savings declined, so did the growth rates of GDP (see Table 4.2). On the political front, the anti-labour policies of the authoritarian regime had created severe disenchantment amongst poorer sections of the Brazilian society and starting from 1978 a series of strikes rocked the Brazilian political landscape. This period also witnessed the rise of left parties like the PT and a proliferation of social movements like the Landless Workers Movement (MST). These tumultuous political conditions together with the adverse economic fallouts of the crisis led to far-reaching economic and political changes: in the political sphere, the 1980s marked an end of the military dictatorship and a transition towards democracy. In the economic sphere import substitution, industrialization was abandoned and free-market policies were officially adopted in the 1990s. It may be noted that the primary goal of post-authoritarian governments was to bring inflation under control. The process of stabilization was however a long drawn out affair. Early “heterodox” attempts to control inflation drew inspiration from structuralist theories of inflation. Structuralists viewed inflationary episodes as consisting of two types of processes: those that initiated price increases (balance of payment shocks, supply bottlenecks, institutional blockages in agriculture, etc.) and those that propagated these price increases over time and across sectors (class conflict, extent of indexation, etc.) (Bresser-Pereira 1987). For structuralists, it was the latter feature that explained why Brazil’s inflation had reached such high levels and why it had persisted at these levels despite the deployment of a barrage of monetary and fiscal tools (Vernengo 2006). By underscoring the importance of historical “inertia” generated by past prices, the structuralist view sought to dispel the orthodox monetarist idea that linked inflation to exogenous increases in money supply. Instead they argued that distributive conflicts between social classes and the substantial indexation of prices that had occurred since the 1960s had created a situation where smallest of price shocks had the ability to spiral into an uncontrolled inflationary episode. Thus, inertia rather than money supply was the root cause of the problem. Monetary policies were of course important, but under Brazilian circumstances money

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supply could “merely sanction inertial inflation” (Bresser-Pereira 1987, p. 1040). From the structuralist perspective, if the monetarist remedies for inflation were problematic the orthodox Keynesian approach was no better because inflationary episodes in Latin America were occurring despite the existence of substantial idle capacity, something that was at odds with orthodox Keynesian theory. From a structuralist perspective, then, curtailing prices required neither monetary nor strictly fiscal policies. Instead administered price freezes, that once and for all killed the underlying inflationary inertia was what was required. As one of the early architects of the heterodox stabilization plans put it: Given the dominantly inertial nature of Brazilian inflation, there was no other alternative to a heterodox shock. An orthodox shock, inspired by monetarist or Keynesian economics, is based on a cut in state spending and an increase in taxes, on a drastic reduction in the money supply, on an increase in the interest rate and on a recession which would have indirectly led to a reduction in wages and in profit margins. This kind of shock would not have been viable because inflation was inertial rather than due to demand pull. It was necessary to break the inflationary inertia, that is, the ability of economic agents to formally or informally index their prices, thus automatically passing their increases in costs on to prices. To do this, indirect measures which aim to reduce this inertial increase of prices via the market are inefficient, as they present an extremely high cost-benefit ratio. Actually, there are only two correct ways for combating inertial inflation, both of which are of an administrative nature. One can either follow a policy of gradually controlling prices, wages, and the exchange rate in accordance with a declining future rate of inflation, or, if the level of inflation is already very high, introduce the only alternative, a heterodox shock. (Bresser-Pereira 1987, p. 1037)

The “Cruzado” plan of 1986 was the first attempt at initiating a “heterodox shock” of the type described above. It involved a general freeze on wages, rents, mortgages and prices of various final goods which were announced by President Sarney on 28 February 1986. The wage-freeze adjusted wages to the average levels of the preceding 6 months and a premium of 8% (Baer 2014; Bresser-Pereira 1987). Moreover, the older currency, the Cruzeiro, was replaced by the “Cruzado” and all contracts were to be expressed in terms of the new currency. Initially, the plan was met with spectacular success as prices came down within one month and this had positive spill-over effects on the economy as growth

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rates increased. The success of the program even allowed Sarney to be re-elected as the country’s president. But as it turned out, the gains were short lived as high rates of inflation re-appeared by 1987 when annual inflation rates reached four-digit figures once again. The Cruzado plan was followed by a series of other “heterodox” attempts in the late 1980s and early 1990s but each of them met with a similar fate. Scholars have pointed out two fundamental reasons for the failure of “heterodox” plans. First, many argued that chronic inflation in Brazil resulted not simply from inertial expectations but it also stemmed from a whole host of structural obstacles which weren’t adequately dealt with by stabilization plans of the 1980s (Baer and Beckerman 1989; Roxborough 1992). For instance, on paper the Cruzado plan was to be backed by a revamp of the country’s tax system. Had this actually happened the “wealth effect” and the consequent demand surge that followed the early rounds of price declines may have been avoided and perhaps the inflation spiral may not have resumed. Instead, the improved purchasing power of Brazilian consumers led to a demand surge and capacity utilization rates reached peak levels. Mounting uncertainties meant that private investment was not forthcoming and in the absence of tax revenues public investments too remained low. Thus, it was not long before sharp shortages appeared in the economy fuelling further inflation and bringing the curtains down on the Cruzado plan. Secondly, the social philosophy underlying heterodox stabilization plans assumed that it was possible to construct “some sort of social pact that placates the distributive conflict” (Vernengo 2006, p. 485). Such an assumption was unrealistic in the 1980s Brazilian context as there were no truly corporatist institutions that could have subdued conflict in the first place (Roxborough 1992). The state for instance was viewed with considerable hostility by labour unions because despite the widespread belief that the price freezes worked in favour of the working class, SaadFilho and Mollo (2002, p. 118) suggest that the stabilization plans created “a tendency towards real wage decline”. If labour was hesitant to get on board the state’s attempt to create a social pact, the story with Brazilian capital was not too different. Not long after the price freeze was announced as a part of the Cruzado plan there were attempts by private entrepreneurs to cheat the system by engaging in black market operations. In many cases, prices on products were raised beyond permissible levels by repackaging them as “new products” or by charging “side payments” for obtaining scarce goods (Baer 2014). Thus, despite

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some initial success in bringing down inflation, the core distributive conflicts remained intact and thus high levels of inflation continued to dog the Brazilian economy. After a number of unsuccessful anti-inflationary programs, the first glimpse of success came in the mid-1990s when under the stewardship of finance minister, F. H. Cardoso, the Real Plan was implemented. Highly orthodox in its approach, Cardoso’s plan sought to link domestic prices to an exchange rate anchor (Saad-Filho and Mollo 2002; Amann and Baer 2003). The idea was that if exchange rates could be kept at overvalued rates, this nominal anchor could keep domestic prices in check. To do so the Real Plan began by instituting a virtual monetary system in which commodity prices were to be linked to a reference value (­ unidade real de valor) which was to be pegged to the US dollar (Amann and Baer 2003; Saad-Filho and Mollo 2002). Once some amount of stability was attained in wages and prices, the unidade real de valor was converted into, the Real, and this new currency was “was allowed to fluctuate freely against the US currency” (Amann and Baer 2003, p. 1034). The results of the plan were immediately evident. From an annual average of over 1600%, the CPI declined to 22% by 1995 and to a further 1.7% by 1998 (Amann and Baer 2003). The plan’s effectiveness was aided by the capital inflows in the early half of 1994 which led to an appreciation of the Real thereby further dampening prices. At a more fundamental level, the success of the plan stemmed from the fact that it was successful in indirectly constructing “social consent” amongst contending classes in a way that heterodox strategies of the 1980s failed to do (Saad-Filho and Mollo 2002). More precisely, rather than relying on a purely administrative fix, the Real Plan bought social consent via overvalued exchange rates. With overvalued rates, general price levels declined and cheap imports from abroad flooded Brazilian markets. Thus, not just the rich but even the poorest households found their purchasing power increase even as inflation was kept under wraps. In this respect, Bresser-Pereira (2009) notes: An appreciated exchange rate is more attractive in the short run than a competitive rate because it implies higher real wages and higher profits. The rich, who measure their wealth in dollars, see it grow every time the foreign exchange increases in value. The wages of the middle class, with its relatively high component of imported consumption, rises whenever the local currency gains value. Even the poorest benefit from real wage

130  R. A. SIROHI increases with non-competitive exchange rates, as a share of the products in their consumption basket becomes cheaper.

Interestingly, therefore, the stabilization plan not only rid the economy of high rates of inflation but the resulting stability was responsible for moderate improvements in the income distribution at least in the early phases of the program. Further, between 1990 and 1996 the proportion of the population below the poverty line reduced even though the rate of decline was modest (Saad-Filho and Mollo 2002). These gains however were short lived and soon the costs of the Real Plan started to become more evident as growth rates declined and unemployment increased. The problem with the strategy espoused by Cardoso was that it created severe current account imbalances, and therefore for such a plan to work, a full-on trade and financial liberalization package became an indispensable part of stabilization program (Baer 2014). Theoretically, the idea was that trade liberalization would expose local firms to foreign competition and would therefore impede their ability to increase prices, while financial liberalization would ensure that any current account deficit arising from overvalued exchange rates could be easily financed through external capital. The Real Plan thus involved a wholesale integration of the Brazilian economy into international markets (Saad-Filho 2010). Though highly effective for controlling prices, the plan resulted in extremely high interest rates which had a deflationary effect on the economy. Figure 4.2 shows just how high Brazilian interest rates have been when compared to India. On the whole, therefore, the results of these stabilization policies were mixed. On the negative side, Table 4.2 indicates that the deflationary policy stance curtailed investment rates and dampened GDP growth. The overvalued exchange rates widened current account deficits which reached 4.8% of Brazilian GDP in 1998. The industrial sector, in particular, grew slowly and the contribution of the manufacturing sector to total employment declined by a third (Wylde 2012). As far as the labour markets were concerned, there was a trend towards greater labour market flexibility. Informality increased and employment growth remained low even while wage shares declined (Serrano and Summa 2011; Baltar et  al. 2010). “Unemployment increased from 4.2 percent of the labor force in 1990 to 8.4 percent in early 1999, while the central bank’s index of the wage mass increased

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