Can India survive globalization just because she is big?

Nirvikar Singh and T. N. Srinivasan, Project Syndicate

For many years after independence in 1947, India remained a large and poor country. Successive governments embraced policies that made the state the engine of growth and development, while severely restricting economic interactions with the rest of the world.

India's population is now much larger, and it is still poor -- but not as poor as it might have been. More than a decade ago, it embarked on a new course that has led to faster growth and lower poverty. External trade was liberalized, and many government controls on domestic investment were removed. Perhaps more significantly, the mindset of many intellectuals and policymakers changed in favor of a more market-oriented approach, including greater integration with the world economy.

This represents a crucial breakthrough for India's development. As the Nobel laureate James Heckman points out in his recent analysis of the poor performance of the German economy after reunification, new opportunities in technology and trade have raised the cost of preserving the status quo. "The winners in world trade in the next generation," Heckman argues, "will be those countries that can respond flexibly with educated work forces."

But how does a country of India's size and diversity go about achieving the flexibility that integration into the world economy requires? Abdul Kalam, India's president since 2002, has stressed the need to build global competitiveness from the ground up -- within each of the country's federal states. By emphasizing the federal nature of India's polity, he is directly addressing an issue that has moved front and center in debates over economic reform in an era of globalization.

The fear is that some regions of a country might race ahead, while others languish in poverty. It is a fear that prevails not only in India, but in China, South Africa, Mexico, and Brazil. For example, in India, the cities of Bangalore and Mumbai might become enclaves comparable in attitude and achievement to the world's rich industrialized countries, capable of leading their respective states, Karnataka and Maharashtra, toward prosperity. But states such as Bihar and Uttar Pradesh could well remain stagnant, falling ever deeper into relative deprivation.

Studies in the 1990's seemed to bear out this gloomy scenario: inequality of per capita output between India's states was increasing as they moved further apart in their performance. If this trend persists, the existence and stability of India as a federal democracy will inevitably be called into question, because the laggard states have large populations and account for a majority of parliamentary constituencies.

Such a denouement, although worrisome, is not inevitable. True, the economic reforms of the 1990's gave state governments more freedom to set their own policies, and their choices varied dramatically. Moreover, one of the main consequences of economic openness and globalization at the subnational level has been fierce competition between state governments for foreign direct investment, which has been regionally concentrated.

But growing inter-state inequality may not be fatal to India's survival, for several reasons:

The output data are not conclusive in showing any long-run divergence (although clearly capital flows -- domestic as well as foreign -- matter for growth);

Internal labor mobility may well have some countervailing effects, which is not seen in data on output, but would be seen in figures on state incomes, if these were available;

Indian states differed in their responses to reform, mostly because of disparities in their economic and social infrastructure -- particularly education and health -- at the time reforms were initiated. But these differences can be reduced over time by appropriate policy. Poor states that spend public money more wisely improved people's lives quite quickly: Madhya Pradesh and Rajasthan illustrate the value of better governance;

Other measures of development, such as the Indian Human Development Index (which includes literacy, infant mortality, access to safe water and durably constructed housing, as well as formal education, poverty ratios, and per capita expenditure), do not show increased inequality;

Exclusive focus on the states ignores problems that are concentrated at lower levels: available evidence, albeit limited, suggests that decentralizing policy-making power that is currently exercised at the state level could lead to further improvement in overall economic performance.

India's central government retains an important role to play in reaching out to the poor. Transfers of government money to subnational governments express the entitlement of all citizens to a basic set of public services.

But to fulfill this promise, India's central government must liberalize more. It must privatize state-owned enterprises that suck up public resources; clean up and privatize the financial sector, which remains so government-controlled that it makes fiscal discipline at the subnational level close to impossible; and streamline the system of intergovernmental transfers so that means and ends are clearer.

This is not an exhaustive list of reforms, but they would go a long way toward allowing the central government and the states, working together, to confront successfully the grave potential peril that globalization holds in store for India. President Kalam was right to appeal for policies that "develop competitive strengths for the states so that they can excel at the national level and the global level." Now India must deliver.

Nirvikar Singh is Professor of economics at the University of California, Santa Cruz. T. N. Srinivasan is Professor of economics at Yale University and research fellow at the Center for Research on Economic Development and Policy Reform, Stanford University.