I have read Peter Temin’s excellent paper Economic History and Economic Development. It was wonderfully insightful because it traced the British industrial revolution to the Black Death of the 14th to 16th centuries in Europe.

Then I read the first two chapters of the new economics curriculum developed at the Institute for New Economic Thinking. Chapter 2, in particular, gave me further excellent reference material. The chapters have been updated on January and the number of chapters has gone up to 16 from eight. I then listened to the hour-long lecture by professor Robert C. Allen, in four parts. According to him, North America and western continental Europe caught up with the British industrial revolution by adopting the following:

• Internal free market (elimination of internal tariffs)—national single market (for India goods and services tax helps—no wonder so many are resisting—foreign hand too in the resistance?)

• Stable domestic banking system

• High external tariff

• Universal education

• Infrastructure.

They did not catch up practising free trade and open capital markets. What a surprise!

Up to 1750, India and China contributed more than half the world’s manufacturing. These two nations contributed around 70%-80% of the global population up to the 19th century. Naturally, their manufacturing was labour-intensive.

The West leapfrogged in the 19th century with capital and technology simply because real wages became too high in the UK and substituting labour with capital made a lot of sense. Necessity became the mother of invention. Full credit to them. One must note here that other countries which did not have such high real wages (and cheap energy) as the UK were slow to get on to the industrialization bandwagon.

Then they used colonies to import raw material for their capital-intensive production. For example, India supplied raw cotton and imported Manchester cotton fabric and clothing. Britain maintained fragmented internal market in India to collect revenues. It brought down India’s external barriers to allow free import of British-made goods. Nor did it invest in India’s education or banking. It invested in railways to collect our raw material for shipment to Britain at Indian seaports.

A good question to ask is why today’s developing countries did not emulate these points after they became independent. They tried with half a heart, in most cases. Most likely because many of their policy and business elites would have found a way to profit from their association with Western growth as exporters of raw materials exploiting cheap local labour. Naturally, if not reasonably, elites favoured keeping economic growth and its fruits away from wider diffusion to maintain status, power and influence. For instance, in India, well-meaning but eventually counterproductive emphasis on higher education and the use of English in official communication after Independence ensured that the bulk of the population stayed at the periphery of economic activity or outside of it. Therefore, halfhearted attempts led to half-baked output in many ways.

Further, the capital intensity of production needed to serve large domestic markets became so high that high external tariffs unfortunately ended up creating fragmented and inefficient domestic industries of insufficient scale. Exceptions were to be found mainly in East Asia—Japan, Korea, Taiwan and now China.

Having grown with capital-intensive technology, cheap capital and trade protection, Western nations advocated free trade to push their production into developing countries. However, free trade was not extended to free movement of labour where developing nations had an advantage, given their population sizes. It exposed the moral hollowness and inconsistency of the arguments advanced by the West against offshoring or outsourcing.

What does the future hold? Cheap energy played a big role in driving Western prosperity. Britain could burn coal copiously and industrialize without worrying about CO2 emissions. The recent collapse in fossil fuels, if sustained for a decade, will help developing countries to catch up. Of course, climate change concern is a big hurdle. The West will use it as a lever to discourage the use of cheap energy sources in developing world. They have placed the developing world in a bind.

India’s population requires abundant cheap energy and capital to produce on scale to satisfy demand. However, short of a plague or war that creates a massive labour shortage, resistance of labour to technology and scale would remain in India and in other developing countries where labour is cheap relative to capital.

Therefore, the chances are high that countries such as India (and even China), given climate change risks and their huge sizes, may never indeed catch up with the West on a per capita basis. These two countries are short on water too. North America and Europe were not constrained in this manner in comparative stages of development.

That is why it does not appear smart to wager on the outcome that India and China recapture their share of global economic and manufacturing output of the 18th century or early 19th century by the end of 2100.

V. Anantha Nageswaran is co-founder of Aavishkaar Venture Fund and Takshashila Institution.

Comments are welcome at baretalk@livemint.com. To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk

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