Inequality and exploitation in India

Posted in development, economic history, economics, history, institutions, South Asia by jrahman on May 21, 2012

Without the raj, none would have calculated deficit and surplus … even in those days no-Indians did calculate those. Even if money would have stayed in India, it would have been used in something else than development. The modern way of development was never in Indian genes before raj kicked in …

That’s Diganta’s comment in the post on the Raj.  This goes really to the heart of the debate about the economic history of British India.  While nationalist writers point to the possibility of an indigenous industrial revolution sans imperialism, others counter that there was nothing in pre-British India that suggests the likelihood of such possibility.  Here is one recent example of this debate.

Work by Branko Milanovic, a World Bank economist and expert on inequality, and colleagues can help shed some light on the matter.  His innovations in the study of inequality are the inequality possibility frontier and the inequality  extraction ratio.  The first concept is a measure of maximum possible inequality in a society — essentially, an economy that is on the inequality possibility frontier is where most people (say ‘the 99%’) are on subsistence, while the rest of the income accrues to the elite (say ‘the 1%’).  The inequality extraction ratio compares the actual inequality in an economy with the maximum possible given its income level.

This paper explains the concept — the algebra is quite easy for economics, and for the non-initiated, there is a lot of intuitive explanation.  An economy that is very close to the frontier, and thus has a ratio near 1, is where there isn’t any surplus left in the hands of the non-elite.  And not only Milanovic and colleagues theorise about these concepts, they have also calculated them for a number of societies in history, with two entries for India — in 1750 and 1947, bracketing the Raj.

This chart from the above-linked paper is summarises their finding that is relevant for us.














The chart shows that before the onset of the British rule, in 1750, India had roughly similar per capita income as China in the late 19th century or the Byzantine empire around 1000.  But India’s inequality extraction ratio was actually slightly above 1 — that is, the elite extracted all the surplus and then some, and most Indians lived below subsistence.  Fast forward two centuries, and when the British left, per capita income rose by a little bit, and the inequality extraction ratio fell just below 1 — that is, the average Indian continued to be very poor, and most Indians now were living just above subsistence, with the elite extracting almost all the income produced in the economy.  Of course, the elites in 1750 and 1947 were not identical.  But it seems that as far as the aam aadmi is concerned, Mughals and the British made little difference.

Of course, there is always a margin of error in these kind of studies.  So don’t get too hung up on the exact numbers.  Rather, think about what the chart — if correct — might mean for Diganta’s comment, and the broader academic debate.  Had Clive not won in Plassey, would India have industrialised?  None of the other economies close to the frontier in the chart (except one — see below) went on to industrialise, so why would India be different?  I think the intuition should be fairly straightforward — in highly unequal societies, the elite has little incentive to spur innovation or enterprise, and hence there is no modern economic development.  So perhaps Diganta (and the Indo-sceptics or Raj-apologists) have a point. 

But that’s not quite the end of the story.

Firstly, two centuries later, when the British left, India was still a highly exploited place.  And yet, India has been developing for over six decades now, at pretty strong pace for at least the latest two decades.  So it’s not ‘exploited now’ need not mean ‘exploited forever’.

Question then is, why did post-British India develop when none of the other economies could?  I guess the ‘pro-Raj’ argument would be that the British had left India with a set of instutions — democracy, rule of law, English language, cricket — that made the difference.  But then again, one could argue that modern India’s founders — Pundit Nehru and co — deserve the credit for these institutions.  And yet others argue that India is developing despites these institutions, not because of them. 

So, it seems to me that the interesting question not about how similar India was before and after the Raj, but howdifferent it was despite the apparent similarities. 

Another line of question would be about whether it makes sense to talk about India as a homogenous entity as of 1750.  By that year, the Mughal Empire was effectively fragmented, with de facto successor states in Bengal, Hyderabad and what is now Uttar Pradesh.  Further, the Marathas controlled large swaths of territory in central India, and Tipu Sultan or the Sikhs were emerging as powers in the regions.  Without the British, perhaps India would have fragmented into a dozen different countries, each with their own path to development. 

Needless to say, there is a lot more to read and write about this topic.  Stay tuned.

5 Responses

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  1. Diganta said, on May 22, 2012 at 5:32 am

    Thanks for taking my views in consideration, most Indians won’t even listen to my inputs on this.

    India would not have seen any Industrial revolution unless there were inputs from British – this argument is further strengthened by activities post 1947. India continued to ignore industry for 40 long years before actually going near bankrupt in 1991. Most of the policy-makers till that time were busy scripting policies focused on reducing inequality rather than creating efficient industry. Even after reforms, the manufacturing sector didn’t flourish that much due to legacy of post-independence-poor-policies.

    Between 1750 and 1947, the growth in the World economics were mostly fueled by manufacturing. There were new innovations all along the Europe and active patent system to protect interest of investment on innovation.
    In India neither any sort of innovation were taking place nor even anyone thought about those. The culmination of pre-Raj Indian empires were said to be Akbar’s rule that created space for peaceful existence, but not even an iota of industrialization and literacy drive that one would expect in contemporary Europe. If you look at Akbar’s EU contemporaries, you’ll find Elizabeth of England and she appears to be much more farsighted than Akbar.

    In post-1991 growth has nothing to do with industry per say, its’ more towards services where the growth has taken place. And again, one of the main instruments in this growth engine were legacy of British – English.

    I would read Sen’s argument before I comment further.

  2. jrahman said, on May 23, 2012 at 12:33 pm

    The literature on this is extensive. But most of it is ideologically charged. Also, it’s interesting that in the ‘West vs the Rest’ debates, people usually analyse why China or the Muslim Middle East failed to industrialise, but India is seldom mentioned.

    I should also note that I am using the terms ‘development’, ‘modernisation’ and ‘industrialisation’ interchangeably. But this is actually quite slopphy. They mean different things in the literature. But then again, I am writing a layman’s blog, not an academic paper.

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  4. Diganta said, on June 5, 2012 at 12:17 am

    So I added my view on top of the existing literature. I tried to read a few of existing ones but most of them are biased. If you get to find an unbiased (at least seems to you) analysis, please let me know.

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