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Dutt1992 indian

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Dutt1992 indian

  1. 1. American Economic Association The Origins of Uneven Development: The Indian Subcontinent Author(s): Amitava Krishna Dutt Source: The American Economic Review, Vol. 82, No. 2, Papers and Proceedings of the Hundred and Fourth Annual Meeting of the American Economic Association (May, 1992), pp. 146-150 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/2117391 Accessed: 26/10/2010 16:50 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=aea. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic Review. http://www.jstor.org
  2. 2. THEORIGINSOFUNEVENDEVELOPMENT:THERISEOF THE WESTANDTHELAGOF THERESTt The Originsof Uneven Development:The IndianSubcontinent By AMITAVA KRISHNA DUTT* In the 17th century, the Indian subconti- nent (henceforth: India) was not signifi- cantly less developed than Britain. But be- tween 1757, when Britain began colonizing India, and 1947, when India gained inde- pendence (and British growth had already slowed down), the ratio between British and Indian per capita income increased at least tenfold (Angus Maddison, 1971), and sev- eral countries initially less developed than India grew rapidly while India stagnated. The obvious question is: what caused this "uneven development"? The answer to this question is important for understanding both the roots of India's present economic backwardness and the current division of the world into rich and poor nations. No clear answer to the question has emerged, in part because of the paucity of data, but also because of the heat and smoke generated by the debates on the impact of colonialism, which show no sign of abating (see Neil Charlesworth, 1982). India's re- lative stagnation is explained in the "nation- alist" view by colonialism, and in the "imperialist" view by the socioeconomic structure established during the ancient Hindu period. This paper briefly discusses some issues relevant for a reexamination of the origins of uneven development in the Indian case, confining attention to the Indian side and using some recent developments in the the- ory of North-South trade. 1. Theory To explain the origins of uneven develop- ment, it is useful to turn to a class of North-South models which assume an ini- tially identical structure for two regions and examine how differences between them come about. A model of this type (see Dutt [1986],which drawson Paul Krugman[1981]) considers two regions that differ only in their amounts of capital accumulated, each producing two goods, an agricultural good with only labor and a fixed labor:output ratio and an industrial good with labor and capital (which is the produced industrial good) with fixed coefficients at a point in time. Labor is perfectly mobile within each country and is available in fixed supply in each region. Both labor and capital are fully employed, and a fixed fraction of profits in the industrial sector is saved and invested in the industrial sector, there being no interna- tional capital flows. Consumption expendi- ture is allocated in value terms between the two goods in a fixed ratio. The productivity of labor in industry in each region depends positively on its stock of capital, with a constant elasticity, and capital productivity is assumed to be constant. The model implies that if the two regions do not trade with each other, they will end up at a stationary state with identical stocks of capital. If they engage in free trade, the region that has even a slightly higher stock of capital and exports industrial goods will tDiscussant: Lance Davis, California Institute of Technology. *Department of Economics, University of Notre Dame, Notre Dame, IN 46556. I am grateful to Ned Lorenz for discussions and to Maria Rizo Lopez for research assistance. 146
  3. 3. VOL. 82 NO. 2 THE ORIGINS OF UNEVEN DEVELOPMENT 147 cumulatively increase its capital. The other region, even if it accumulates capital ini- tially, will eventually undergo deindustrial- ization. This model belongs to a general class of models that stress the importance of increasing returns and learning in manufac- turing and demonstrate how small changes in history can have large effects. 11.History The model just described is obviously too simple to provide definitive answers to the question of the origins of uneven develop- ment. India and Britain were parts of a world economy, which violates the two- region assumption of the model, and the structures of the two economies when they came into contact in the 18th century were not identical, as assumed in the model. However, since Britain was India's major trading partner in the 19th century (K. N. Chaudhuri, 1982) and since the perfect-sym- metry assumption is not required for the validity of the result on the implications of the specialization, it is possible to explore the consequences of taking the two regions of the model to represent India and the rest of the world dominated by Britain. India's pattern of trade changed drasti- cally after a few decades of colonial rule (see Tapan Raychaudhuri, 1968; Chaudhuri, 1982). When the British began their colo- nization, India was an exporter of industrial goods and an importer of primaryand inter- mediate goods. Before 1800, India was the major supplier of cotton and silk textiles (fine clothes as well as everyday wear for the masses) in international markets, includ- ing Europe; Indian textiles were consider- ably cheaper than British woolens because of India's lower wages and technical advan- tages. In addition to these, which consti- tuted the overwhelming bulk of Indian ex- ports, India exported raw silk, sugar, and saltpeter, which do not fit the description of primary agricultural products; even indigo involved some amount of processing. India's main imports were foodstuffs such as coffee, tea, sugar, and spices; luxury items such as wine and horses; and a considerable amount of precious metals (given India's chronic merchandise export surplus). Except for an insignificant amount of luxury goods and, occasionally, cannon, no manufactured metal products were imported before the 19th century. After the first few decades of the 19th century, India became primarilyan exporter of agricultural products, including raw cotton and jute, tea and coffee, opium, indigo, oil-seeds, and foodgrains, and an im- porter of manufactures such as cotton yarns and cloth, metals, and machinery. The case of textiles is most striking: Bengal handi- craft manufactures, so dominant in the 1770's that an European observer wrote that the incomparable quality of the product guaranteed that their demand would never falter due to competition, were almost com- pletely eliminated from international mar- kets by the first three decades of the 19th century. Between 1814 and 1835, exports of cotton goods from India to England fell from 1,266,608 pieces to 306,086, while im- ports rose from 818,208 yards to 51,777,277; a similar fate befell Indian exports to other markets (Romesh C. Dutt, 1903). By the turn of the century imported piece goods supplied about 60 percent of Indian cloth consumption, a proportion which was prob- ably higher earlier in the century (Maddi- son, 1971). An examination of some features of for- eign rule provides some plausible explana- tions for this shift in India's pattern of specialization, which has been carefully doc- umented by nationalist historians (Dutt, 1901, 1903; B. D. Basu, 1935; see also Bipan Chandra, 1966). First, Indian handicraft in- dustries were adversely affected by the de- cline of Indian royal courts, which had been important buyers of quality products and promoters of factories that made to their order. Second, the same industries were dis- located as a result of the exploitation by the English East India Company after it gained important trading privileges in Bengal, as its traders imposed arbitrary prices and other conditions and subjected the artisans to flogging, imprisonment, and worse (cutting off the thumbs of winders of raw silk has been documented). Third, while internal
  4. 4. 148 AEA PAPERSAND PROCEEDINGS AMAY1992 tariffs and transit duties restricted trade in Indian goods, British goods were granted exemptions. Fourth, while import duties were imposed in Britain on imports of In- dian manufactures (in 1812, calicoes were taxed at about 72 percent, and import taxes on other goods ranged from 100 percent to 600 percent), British goods were allowed into India duty-free or at low duties of 2.5 percent. These features, by worsening the compet- itive position of Indian handicrafts even slightly, could have led to the cumulative process of uneven development and struc- tural change analyzed by the model, and as indeed hinted by early nationalist writers like Mahadev Ranade and G. V. Joshi (see Chandra, 1966). Another relevant consequence of British rule is the so-called "drain" of wealth from India to Britain, initially as a result of direct plunder and looting, and later through the payment from Indian revenues of adminis- trative charges incurred in India and else- where in the empire, interest payment on debt, and remittance on retained profits. Various inconsistencies of the early presen- tation of this theory by Dadabhai Naoroji have been pointed out, and it has been argued that, if one takes into account the fact that India received a great deal in re- turn for the outflow of capital (railway con- struction, far instance), the drain becomes a negligible proportion of Indian income (see Charlesworth, 1982). My model, however, implies that a relatively small drain of capi- tal during the early stages of interaction between the two regions can explain the shift in the pattern of specialization, and if the model is expanded to allow for unre- quited capital flows through time, this drain exacerbates the tendency toward uneven development due to deindustrialization (a connection that was noted by Naoroji and others). It is relevant to note here, first, that the extent of the drain during the early period of foreign rule is less controversial than that of the later period and, second, that the development of railways had the effect of reducing the effective protection of Indian industries after uneven development was already under way, therefore exacerbat- ing it. III. Further Comments I conclude with three comments address- ing some possible objections to my analysis. First, the analysis may appear to be contra- dicted by claims made by "imperialist"writ- ers and their modern counterparts that British rule had some favorable effects on the rate of Indian economic growth through the establishment of law and order, the development of railways, and the spread of commercialization in agriculture. Moreover, theory and empirical evidence is marshaled to argue that India experienced no absolute decline in industrial employment. However, the present interpretation of the model is quite consistent with temporary increases in per capita output and modest increases in the industrial labor force (if it is extended to allow for population growth). My model predicts that, other things constant, there would eventually be a stagnation in per capita income growth and a decline in the share of the population dependent on in- dustry (that this may have been slight can be explained by the relative self-sufficiency, due to inadequate transportation, of many village communities), and available evidence seems to corroborate these tendencies. Second, it must be conceded that the kinds of events described above may not have been responsible for the reversal in India's pattern of specialization, even in terms of the model. It has been claimed, instead, that technological change in British industry was responsible for the shift and that this was independent of British rule in India. To buttress this argument, it is also suggested that the reduction in import du- ties in Britain on Indian goods in the 1820's and 1830's did not revive Indian cotton-good exports to Britain. However, against this it can be argued that, had India been politi- cally autonomous, she could have provided tariffs and other forms of support to her industries. Moreover, even in 1813, witness after witness in the Select Committee of the House of Lords testified that free Indian
  5. 5. VOL. 82 NO. 2 THE ORIGINS OF UNEVEN DEVELOPMENT 149 textile imports (of both finer and coarser varieties) would damage British industry (Basu, 1935), and Horace H. Wilson (1845 pp. 538-9), based on this testimony, calcu- lated that cotton and silk goods manufac- tured in India could be sold for a profit in Britain at a price 50-60 percent lower than those manufactured in Britain. It may be speculated that the subsequent sharp fall (almost 60 percent between 1819-1821 and 1829-1831 for cotton piece goods) in British costs was due to learning which resjilted from the expansion of British exports to colonies such as India, and only after this occurred could tariffs be reduced without jeopardizing British industry. Finally, it may be argued that the model takes an overly mechanical view of technical change and industrial growth: that it fails to distinguish between the handicraft industry of India and factory industryof Britain (with only the latter having a potential for scale economies and technical change) and that it fails to take into account the potential for industrial growth in an economy that is ini- tially an exporter of primary products. Against the former claim it must be argued that conventional wisdom seems to over- stress the distinction between factory and craft production and the technological ad- vantages of the former (see Charles Sabel and Jonathan Zeitlin, 1985): in Europe and the United States, craft production had all the technological dynamismof mass produc- tion. The role of small-scale handicrafts in the industrialization process in Meiji Japan is also well known. There is also evidence that the Indian cotton industry was flexible in expanding its production and adjusting its product to European tastes and in adopting foreign methods (the shipbuilding industry also showed a capacity for imitative innova- tion); and the fact that it remained highly labor-intensive and did not mechanize can be explained in terms of low wages, expand- ing markets, and the absence of competition (Raychaudhuri, 1982). This is not to argue that Indian craft industry was as sophisti- cated as the western cases of flexible spe- cialization or that India was on the brink of an industrial revolution before the British invasion. What is being argued, however, is that, especially by hitting hardest the finer end of the textile industry, deindustrializa- tion considerably reduced the chances that the Indian economy could experience indus- trial development based on its handicraft industry (perhaps by drawing skilled labor and entrepreneurship from it, or through technical change in the craft shops them- selves). On the latter point, it must be con- ceded that the model overstresses the knife-edgedness of the uneven development process, ignoring various channels by which latecomers can industrialize. However, as is well documented (see Dutt, 1901, 1903; Basu, 1935), India's foreign government, by obstructing Indian industrialization, or at least failing to support it systematically (as admitted even by modern critics of early nationalist views), arguably blocked these channels. REFERENCES Basu,B. D., Ruin of Indian Tradeand Indus- tries, 3rd Ed., Calcutta: R. Chatterjee, 1935. Chandra,Bipan,TheRise and Growthof Eco- nomic Nationalism in India, New Delhi: People's Publishing House, 1966. Charlesworth,Neil, British Rule and the In- dian Economy, 1800-1914, London: Macmillan, 1982. Chaudhuri,K. N., "Foreign Trade and the Balance of Payments (1757-1947)," in D. Kumar, ed., The Cambridge Economic History of India, Vol. 2, Cambridge:Cam- bridge University Press, 1982, pp. 804-77. Dutt,AmitavaK., "Vertical Trading and Un- even Development," Journal of Develop- ment Economics, March 1986, 20, 339-59. Dutt, Romesh C., The Economic History of India, Vols. I and II, London: Routledge & Kegan Paul, 1901, 1903. Krugman,Paul, "Trade, Accumulation, and Uneven Development," Journal of Devel- opmentEconomics, April 1981, 8, 149-61. Maddison,Angus, Class Structure and Eco- nomic Growth, New York: Norton, 1971. Raychaudhuri,Tapan, "A Re-interpretation
  6. 6. 150 AEA PAPERSAND PROCEEDINGS MAY1992 of Nineteenth Century Indian Economic History?" Indian Economic and Social HistoryReview, March 1968, 5, 77-100. ,"Non-Agricultural Production- Moghul India," in T. Raychaudhuri and I. Habib, eds., The CambridgeEconomic Historyof India, Vol. 1, Cambridge:Cam- bridge University Press, 1982,pp. 261-307. Sabel, Charles and Zeitlin, Jonathan, "Histori- cal Alternatives to Mass Production: Poli- tics, Markets and Technology in Nine- teenth-Century Industrialization," Past and Present, August 1985, 108, 133-76. Wilson, HoraceH., History of British India. From 1805 to 1835, Vol. I, London: James Madden, 1845.

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