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10 Apr

How to get rich without getting lucky (Countries' Edition): Part 3

If you’ve read the last two editions of this three-part series, you now have a good grasp of the playbook that nations can use to get rich. It boils down to using agriculture as a stepping stone to industry and staying the course till your country has ‘specific knowledge’ when it comes to advanced technology (read: machinery and physically transportable goods).

Unfortunately, doing this can come at considerable financial discomfort to the citizens and the entrepreneurial class of a country. Aggressive industrialization can only occur when all financial resources are directed toward the singular objective of technological upgrading.

When a nation is one-track-minded on industrializing, there is considerable ‘collateral damage’. Consumer interests are completely ignored as citizens will need to put up with low (or negative) real interest rates on their deposits. Entrepreneurs will not be able to make merry as the state will not allow them to channel profits towards any activity that does not improve the technological capacity of their firms.

This can often take several decades to fully pan out. How does one stay the course?

Simple: by practicing delayed gratification at a societal level. This cannot be done by appealing to the conscience of the people or by extolling the virtues of hard work and labor. This can only be done by architecting a financial policy that eliminates the prospect of short-term profits for the upside of higher returns in the (far) future.

In other words, capital allocation ought to be done at the level of the state.

Governments make the best VCs.

It is not uncommon for the educated lot in India to denigrate the economic models of North-East Asia (Japan, Korea et al.) and keep lauding the developmental models of the West. Little do they know that both of them are largely the same.

Nineteenth-century Europe and America, having been at the forefront of industrializing had policy environments that protected industries and encouraged entrepreneurs to experiment with and develop new technologies. The state-led industrial policy came first, financial policy only served to enable it.

This is what happened in the Tiger economies of Asia, albeit at a rapid rate. All of them imposed strict capital controls on their countries and used state-led central banks to collect and point all financial resources toward supporting their aggressive industrialization drives.

South Korea’s Park Chung Hee was notorious for bullying the Korean business elite into establishing manufacturing firms despite them not wanting to. Modern-day conglomerates like Samsung and Hyundai were born from his fervent desire to force businesses to invest heavily in improving their technological capacity.

Japan’s Ministry of International Trade and Industry (MITI) was able to meticulously plan sectoral development (across electronics, automobiles, etc.) because they knew that the state’s coffers were open to them, and by extension, Japanese industrialists who were willing to play by the government’s rules.

Developing countries cannot afford to have entrepreneurs who are asset traders. Entrepreneurs who contribute little to national development are anathema to developmental success and policies must be put in place to ensure that short-term profiteering is all but impossible.

Rejecting the Washington Consensus

A blind belief in free-market policies and their purported merits has proven to be the undoing of several countries in South East Asia. This set of beliefs, popularly known as the Washington Consensus was continuously prescribed to Asian countries by bodies such as The World Bank and the IMF.

At the core of the consensus lay a belief that was taken to be the gospel: that capital is a sentient entity that must be liberated from the clutches of the government. It was believed that upon liberation, it would autonomously identify the right investments that would usher in economic prosperity. It was a clarion call for financial deregulation, with little to no consideration for whether it would be appropriate for the kind of developmental stage that most Asian countries were in.

There emerged a clear pattern amongst the Asian states. Those that blindly followed the IMF (Thailand and Indonesia for example) suffered the developmental equivalent of shooting themselves in the foot. Those that pretended to pay heed but continued to go about their dirigiste policies (Japan, South Korea, and China) began to pull ahead.

Sometimes, Materialism is the only way.

The lesson here is this: for countries to get rich, the most optimal route is to acquire technological capacity and produce goods that modern capitalist economies over the world are willing to pay for. How countries can go about it is ultimately up to them, but policies that do not micromanage capital flows, and entrepreneurial ambition have not been able to demonstrate any lasting success.

At the end of the day, we do need to reckon with ground realities, especially in a country like India. Widespread land reform is unlikely to happen, and it is a pipe dream to expect the government to suddenly go back to constraining capital flows and subsiding industries on a large enough scale.

What we could do, however, is channel the profits from the services/software sector toward building industrial capacity, something along the lines of what Elon Musk did. As Joe Studwell put it:

“The biggest lesson of all has long been clear to anyone who has considered history: that economic development is a complex and dynamic process of stages that requires constant and unending adjustment. There are no one-stop solutions to economic progress.”

India is a unique country, with no precedents,  geographically or culturally. A vast mosaic of cultures with widely differing talents is a beautiful thing. It remains to be seen how the coming decades unfurl as India starts to experience the full might of its demographic dividend.

I will leave you with a striking remark from Joe Studwell that exposes the truth underlying the argument of having a ‘demographic dividend’:

“In the end, the size of your working-age population is still less important to your developmental progress than what you do with that population.”

What do you think is the route to becoming a rich country? Write to me, I’d love to know.

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