India is widely regarded as the most celebrated case of a "failed" developmental state, seemingly the exception that belies the prediction of a triumphant Asian century. Its central political and economic institutions have been variously characterized as both "soft" and "strong"at once weak, predatory, and interventionist. Aseema Sinha presents an innovative model that questions conventional views of economic development by showing that the Indian state is a divided leviathan: its developmental failure is the combined product of central-local interactions and political choices by regional elites. To develop this disaggregated model, she examines three regional states with sharply divergent development trajectories: Gujarat, West Bengal, and Tamil Nadu. Drawing on recent work in comparative political economy, the theory of nested games, incentive theory, and an ethnographic analysis of business actors, this study directs analytical attention at the creation of micro-institutions at the subnational level, explores the role of provinces in shaping investment flows, and considers the role of federalism as a mediating institution shaping the vertical strategies of provinces. A comparative chapter applies the model to data from China, Brazil, Russia, and the former Soviet Union.
About the Author
Aseema Sinha is Assistant Professor of Political Science at the University of Wisconsin-Madison. In 2004-05, she will be a Fellow of the Woodrow Wilson International Center for Scholars.
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The Regional Roots of Developmental Politics in India
A Divided Leviathan
By Aseema Sinha
Indiana University PressCopyright © 2005 Aseema Sinha
All rights reserved.
The Puzzle of Developmental Failure and Success
If the republic is small, it is destroyed by foreign force; if it be large, it is ruined by an internal imperfection.
— Montesquieu, 1750
In October 1997, an official from the Industry Department of the Indian state of Tamil Nadu said to me, "In the pre-liberalization days, industrialists used to chase us, now we chase them; the government intervenes as much as before, if not more." How best to create institutions that will enhance developmental outcomes is a long-standing question once again at the forefront of debate in comparative political economy. Recent scholarship confirms that the issue of effective governance over markets is caught in a fundamental dilemma: a strong state necessary to curtail perverse individual incentives and ensure investment may also act in a self-interested way. Democracy seems to make this dilemma worse, creating particularistic pressures that divert crucial public goods away from their most productive uses. This pervasive problem prompts the main question of the book: What kind of state will provide developmental governance? Given the constant enlargement of the state's function in the twentieth century, the state's role in ensuring developmental success or failure deserves serious analytical attention. Nation-states around the world have varied greatly in the extent to which they have succeeded in transforming the developmental trajectory of their societies. Some states are more successful at facilitating industrialization, managing globalization, and ensuring the well-being of their citizens than others are. Thus, the corollary question becomes important: What accounts for persistent variation in achieving developmental failure or success?
To this debate on developmental failure and success, India, a large democratic country, provides an enduring puzzle in that its developmental record is characterized by a significant gap between its ambitions and its capacities. India seems to be the exception that belies the prediction of a triumphant Asian century. Amidst other relatively strong Asian states, we are confronted with contradictory images of the Indian state — at once strong, soft, and interventionist. Indeed, the nature of the Indian state is an issue of intense debate not only among students of Indian politics, but also among scholars of comparative political economy. The debate focuses on the role of the state in generating wealth and in ensuring that a minimum of developmental needs of its citizens are met. India is the most celebrated case of a failed developmental state in that its developmental failures are attributed to a strong state that intervened too much and with too little felicity. Recent success in achieving much higher growth rates is largely attributed to the ascendance of market forces attendant upon liberalization in the 1990s. Thus, the Indian model of development — during both its slow- and the recent high-growth periods — seems to confirm the conventional view that state failures are more crippling than market failures. However, self-sustaining regional variation in India despite the presence of a powerful central state urges a reevaluation of this conventional picture.
This book modifies the conventional view of India and of strong states by showing that the Indian state is a divided leviathan; its regional states' actions have surprising and powerful consequences. In this view, neither India's developmental failure nor its recent successes can be attributed to only the central state; rather, they are the combined product of central-local interactions and political choices by regional elites. This book, then, is an attempt to convince those schooled in the belief that the central state is responsible for India's "Hindu rate of growth" or stalled, "half-hearted reforms" of a different reality: that regional elites, in varying ways, have inserted and continue to insert their agendas into the central framework. Limiting analytical attention to the top-down centralized state blinds us to the crucial regional responses to that state; these responses, I show, prove to be directly consequential for investment flows and institutional changes in many countries. What is commonly understood as a strong central state's failure to perform stems, in part, from the regional states' variable responses to implement their developmental programs; it does not follow uniformly from the framework imposed by the central regime.
These arguments resonate with a larger critique of prevailing theories. Usually, economic policy is treated as "output" of a coherent state. The core argument of this book challenges assumptions regarding the appropriate roles of states rooted in both neoliberal and institutionalist accounts: the emphasis of neoliberal assumptions on a self-regulating market system is misplaced, yet arguments related to strong versus weak states are equally misleading. Market-friendly views must redirect attention to the indispensable role of the state in building markets. Statist claims must attend to variations within state institutions and coordination across geographic areas. This book argues that regional politics and national policy are inextricably interrelated. These conclusions arise from an analytical framework in which the federal and regional governments interact to determine and implement economic policy. I argue that the national framework that governs industrial change in India was, and continues to be, a combined product of central rules of the game, subnational strategic choices, and regional institutional variation. Regional politics, a product of subnationalist movements and electoral compulsions, emerges as a salient factor explaining both central-regional and horizontal interactions. These regional incentives and the institutions they produced were not solely a response to regional material conditions such as initial economic differences, ecology, technology, demography, or market access. Nor were they unique to each subnational setting; rather, they were found in different configurations across regions within India. The operation of a similar regional logic means that regional differences cannot be dismissed as idiosyncratic regional peculiarities or as inevitable, and thus they can be understood within a general theoretical framework. The argument that regional political incentives and subnational institutional variation shape outcomes must not disregard the effects of factors operating at a higher level of analysis. Rather, I insist that regional responses are shaped, in part, by central rules of the game and the possibility of central transfers as well as by regional electoral competition. This reinforces the need to evolve a disaggregated and multilevel framework to understand economic policy, development, and globalization. Such a framework must attend to local (subnational) responses toward both dirigiste states and globalization. This chapter explicates the problem of India's developmental failure. I introduce the theoretical concepts animating the study and present the argument of the book.
The Puzzle of India's Developmental State
India epitomizes an unfulfilled yet potentially realizable economic future. Despite the country's democratic achievements enviable in the rest of the developing world, Indians feel cheated economically. Born in the similar historical context as East Asia, with not only a steel-frame meritocratic state but also a well-diversified resource base, with the world's fourth-largest pool of skilled manpower, with domestic stability and a high savings rate, India was expected to perform well. And yet, India grew slowly, at the proverbial Hindu rate of growth (a dismal 3.5 percent a year from 1960 to 1990), and failed to fulfill the basic developmental needs of its citizens. In 2003 India was ranked 161st, with a per capita income of $480 (current market prices) (World Bank 2004, 252). Forty percent of the world's poorest people, earning less than one dollar a day, live in South Asia (World Bank 2001). While one-third of India's population live below the poverty line, the adult literacy rate in 2001 was 67 percent in India (69 percent for men, 46 percent for women), far behind the 84 percent literacy rate in China (93 percent for men, 79 percent for women). Yet, the paradox of India remains: it is a regional power with the nuclear capability to destroy lives, but its state capacity to affect the developmental well-being of its citizens remains attenuated.
Industrialization patterns reveal a similar story of a gap in potential. India was the first country in Asia to have a modern textile industry as of 1851, preceding Japan by twenty years and China by forty years. In fact, the first cotton mill (1851), the first jute mill (1854), and the first railway track (1850) were established in India and Japan around the same time, in Japan after the Meiji restoration in 1867 and in India in the mid-nineteenth century. Asia's first stock exchange was the Bombay Stock Exchange, established in 1875, three years before the setting up of Tokyo's stock exchange (in 1878). In the twentieth century, developments in Japan and India diverged significantly. A comparison with China, a country of comparable size, becomes even more revealing. China's industrial development in the 1940s was slower than India's at independence and was debilitated by poorer transport facilities and undeveloped technology (Maddison 1995, 299). By 1995, China was one of the most industrialized countries in terms of output; its industrial value-added was forty-three times as high in real terms in 1995 as in 1952. In terms of output, China is now one of the most industrialized countries. Forty-one percent of its GDP arises from industry, compared with 22 percent in Britain and the United States and about a quarter in India (Maddison 1998, 79). Material well-being in India lags behind many comparable nations. In 1955, India's GDP per capita in 1988 prices averaged $672, while South Korea's per capita GDP was $879. In 1991, India's per capita GDP in 1988 prices was $1,251, while South Korea's was $7,251 (Krueger 1998, 190-91), almost six times India's per capita GDP. By 1996, Korea entered the OECD club as an industrialized country, while India remained a poor underdeveloped country.
This cross-national contrast has led scholars to characterize India as a failed developmental state, a state that aspired to, and had some important preconditions for, rapid growth but failed to realize its developmental potential (Evans 1995; Herring 1999; Bardhan 1984; Isher Ahluwalia 1985; Arrow 1998; Krueger 1974; Wade 1985). A World Bank study on India reiterates the internationally accepted consensus that India has fared poorly in growth and poverty reduction in comparison to Southeast Asia (World Bank 1997a, 5).
While India's economic potential shows more promising results in the 1990s, what is remarkable is that a surprising consensus unites the observers of India's dramatic developmental failure as well as recent successes. The developmental failure from the 1960s to the 1980s is attributed largely to the effects of a regulatory state that intervened too much and was not flexible enough to respond to changing international conditions. Similarly, the recent economic upturn is attributed to the liberalization program, which checkmated the role of the central state. The central state is perceived to be the key lever of indifferent progress from the 1960s to the 1980s, and liberalization is seen to provide a drastic antidote to the central state.
The state in India seems to be a powerful explanatory tool for all analyses. One high-level official in New Delhi is reported to have told a friend, "If you want me to move the file faster, I am not sure I can help you; but if you want me to stop a file I can do it immediately." Both liberal and radical scholars, as well as the international policy community, business leaders, and journalists, attribute the failures of India's developmental trajectory to its central state and constraining policy framework, embodied in what has come to be called the "license-quota-permit-raj [rule]" (hereafter license-raj). Krueger's analysis of the "rent-seeking state" originated in the Indian experience. India became the model of failure that helped to usher in the anti-state, pro-market Zeitgeist of the 1980s. The Economist characterized India as a caged tiger — its potential caged by the central state. The Indian example served, in both the popular imagination and the scholarly community, to urge caution about the role of states in economic life, overturning a powerful postwar faith in state intervention. The Indian model of development seemed to confirm that state failure was more crippling than market failures. Kenneth Arrow, the father of general equilibrium analysis, noted, "Institutions seem to have played distinctive coordinating roles in different developing countries. Conservative and bureaucratic direction has guided the path of India, the coordinated building of the market that of Korea. In both cases, institutions have played their roles, though clearly with differing results" (1998, 45).
This unenviable invoking of India as an example of state failure continues despite a significant turnaround in its growth prospects. In the 1990s, India grew at the average rate of 6.0 percent per annum. While economic reforms have ushered in a more promising scenario, their success is interpreted through the old lenses. The perception of failure continues to haunt assessments of India's developmental state. In a recent international conference, T. N. Srinivasan, an eminent economist, lamented the persistence of a "wooden bureaucracy" even after the onset of reforms in India. More recently, Sumit Ganguly and T. N. Srinivasan argue that India's continued slow performance after 1991 can be traced to the vested interests created by the license-raj. The Economist continues to blame slow reforms on lip service paid to economic reform by India's central government (Economist 1995; 2001). Similarly, Krueger writes of "stalled reforms" in India (2000). For others, sweeping changes are valued positively so long as they imply a drastic antidote to the erstwhile central state. India Unbound, a recent socio-autobiography written by an Indian industrialist, evokes the historical existence of a "bound India" and echoes Bhagwati's assumption that India must be freed of its statist chains. Jagdish Bhagwati, Amartya Sen, Isher Ahluwalia, and Pranab Bardhan, scholars usually found on opposing sides of the intellectual spectrum, converge in their analysis of effects of the central state, variously described as the "third actor" or "the iron fist of controls" in suffocating the economy. While they do disagree with regard to the sources of this power of the central state, they do not quibble over the fact that the central state was responsible for constraining the private sector and ensuring nonproductive use of resources.
This regulatory power over the private sector embodied in the licens e-raj was designed to, among other goals, ensure some level of regional uniformity and central direction; it thus went hand in hand with the power of the central state over regional units. From 1949 onward, industrialization came to be part of the central planning endeavor and subjected provincial responsibility to central rationality. The formation of the Planning Commission in 1950, the enactment of the Industrial Development and Regulation act in 1951, and the declaration of the Industrial Policy resolution in 1956 saw the passing of control into the central government's hands. As the First Five-Year Plan put it, "It is obvious that without complete coordination of policies and timely concerted action, there is danger of waste and misdirection of efforts which may have consequences extending far beyond the responsibility of any single authority, and this, it must be recognized, places special responsibility on the Center" (Planning Commission 1953, 11; emphasis added). Thus, India's developmental pattern was designed to be state-led and centralized. Centralization from 1947 onward seemed to confirm the conventional understanding that the central state was responsible for India's developmental failure.
Yet an intriguing puzzle, until now considered marginal to the debate over India's developmental trajectory, confounds and throws doubt on this picture. Despite uniform central policy interventions, regional states reveal very different developmental trajectories. This raises a key question: If dirigisme is the problem, as conventional scholarly opinion concludes, what explains the different subnational developmental pathways within India? Clearly, a similar central constraint cannot explain this variation. Did successful regional states mitigate the constraining effects of the central state in their regions? And if so, how?
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Table of Contents
List of Tables, Figures, and Maps
A Note on Terminology
List of Abbreviations
Part One. Introduction and Theoretical Framework
1. The Puzzle of Developmental Failure and Success
The Puzzle of India's Developmental State
Unpacking Developmental States: A Multilevel Framework
Applying the Framework to India
Globalization in India (1991-2004)
Infranational Comparisons and Comparative Politics
Plan of the Book
2. A Theory of Polycentric Hierarchy
India and Comparative Politics
A Theory of a Multilevel Hierarchy: Territory, Divided Government, and Nested Games
Business Responses and Investor Behavior in a Dirigiste but Multilevel State
Design of Study: Selection of Cases
Part Two. National-Level Analysis
3. Disaggregating the Central State
Regional Variation in Large-Scale Investment
A Competing Political Explanation: Central Discrimination
An Alternative Institutionalist Explanation: The Central State Designed to Fail
Political Economy of the Divided State
Liberalization and the Central State in India
Part Three. Subnational Variation Mapped
4. Regional Strategies toward the Dirigiste State
Bureaucratic Developmentalism in Gujarat
West Bengal: The Strategy of Partisan Confrontation
Mixed Vertical Strategy in Tamil Nadu: Anti-Center Mobilization (1967-77) and Opportunistic Alliance Formation (1980s)
The Phase of Anti-Center Strategy
Alliance Formation and Opportunistic Bargaining with the Center
Vertical Interactions in Pre-1991 India
Vertical Interactions in Post-1991 India
5. The Subnational State as a Developmental Actor
Why Are Regional Institutions Important, and How Do They Matter?
Developmental Strategies in Indian Regional States
Institutional Capacities in India's Regions
Sticky Institutions in West Bengal, Gujarat, and Tam