India has long believed in the goal of economic self-sufficiency. Its constitution describes India as a socialist country, and Prime Minister Jawaharlal Nehru, in office from independence in 1947 until his death in 1964, saw economic independence as connected with political independence. “He held that depending on imports for railways, airplanes and guns amounted to being slaves of foreign countries,” wrote economics professor Arvind Panagariya in the Times of India last year.
Nehru and, after him, his party, the Indian National Congress, ran the country for the first 30 years after independence. They made Soviet-style five-year plans and implemented the “License Raj” of government involvement in every aspect of commerce. They did so in pursuit of the goal of economic self-sufficiency.
India’s economic advantage should be in supply of labor, given its massive population. But the License Raj undermined India’s foremost economic strength. Panagariya wrote that, “under this system, India became uncompetitive against foreign products even in labour-intensive manufactures.” To correct for that, the government restricted imports to allow domestic manufacturers security in the domestic market. Then, “inefficiency from a lack of competition was thus piled on top of the inefficiency of scale,” Panagariya wrote. To correct for that, the government implemented price controls.
In 1991, under the government of Prime Minister P. V. Narasimha Rao, India began a series of economic reforms to undo the License Raj. It was only then and in the early 2000s that India’s GDP per capita began to soar.
But the legacy of the post-independence self-sufficiency mindset still lives on in Indian economic policy. One of the ideas seems straightforward: India has a huge domestic market because it has so many people. Focusing on the domestic market should generate growth.
A recent piece in The Print by Rahul Ahluwalia argues against that idea. “We must realise that a country’s market size is not being targeted by any one business or economic activity, but by all businesses and all economic activities,” he writes. “The simplest way to see this is to move the population into the denominator and think of the market on a per capita basis.”
Ahluwalia points out that India still fails to excel in labor-intensive manufacturing because of the remnants of the post-independence control economy. (One is reminded of Milton Friedman’s line about how if the government were put in charge of the Sahara Desert, there would be a sand shortage.) Much of India’s growth was in the IT services industry, which was “successful because our socialist legacy of laws and institutions did not anticipate it,” he writes.
Comparing India to other Asian countries is also illuminating. Ahluwalia points out that Japan, Taiwan, South Korea, and even China were able to grow for sustained periods of time, in many cases escaping widespread poverty, by focusing on foreign markets. If economic self-sufficiency was the path to prosperity, we’d expect India to be wealthier than all those countries today.
The example of India should serve as a reminder to America’s own trade restrictionists that self-sufficiency is not a smart economic goal. Of course, India’s case as a developing economy is different from America’s as a developed one. The U.S. domestic market is much larger than India’s on a per capita basis, but our economic output is much larger as well, and the same basic logic of Ahluwalia’s case holds for any country. We’d be foolish to limit our massive economic output to domestic customers only.
Our all-domestic baby-formula market is a clear example of the weakness of self-sufficiency. Sole-source government contracts through WIC eliminate competition. Secular price increases result. Calls for government assistance to consumers follow. It’s the same pattern as in India: One government “fix” leads to a pile-on of government intervention that ends up making everyone worse off. Now we’re in a situation where one factory closes down and there are widespread shortages.
The allure of focusing on the domestic market trapped India in decades of economic stagnation. The U.S. is far wealthier than India, but we shouldn’t be buying into the same logic behind the domestic-market myth in pursuit of the same wrongheaded economic goal.