Why Did Industrial Policy Fail in India?
Review: Vivek Chibber's Locked in Place: State-Building and Late Industrialization in India
Locked in Place: State-Building and Late Industrialization in India, by Vivek Chibber. 2003
I was disappointed by Vivek Chibber’s Locked in Place, which promised to explain why industrial policy foundered in India in the post-independence decades—surely a million-dollar question in economic development.
To understand why India’s 1950s-1960s development push failed, Chibber uses South Korea as a counterfactual. Both countries had comparable institutions and income levels at independence, and on the surface, both tried to follow the same model of state-led growth, where the government set ambitious plans, subsidized strategic industries, and coordinated investment between private and public actors. Of course, the economic outcomes couldn’t have been more different. Why did India’s development state fail, while South Korea’s succeeded?
Chibber’s answer boils down to a single missing component: export orientation.
While India pursued a policy of import substitution, South Korea instead pushed for export-led growth. Faced with the tough competition of global markets, Korean firms were willing to acquiesce to state discipline in exchange for support. Meanwhile, in India, local capitalists were happy to dominate the uncompetitive domestic market, benefitting from government largesse without a corresponding impetus to innovate. And so Korean industry raced to the frontier as it fought tooth-and-nail to win foreign markets, while Indian firms stagnated behind protective walls.
None of this should come to any surprise to economists, who have been conditioned—too much, in my view—to suspect all industrial policy as crony capitalism. (Readers of Joe Studwell’s How Asia Works will also recognize this idea as “export discipline”.) But, judging from how Chibber structures his book, it’s far from obvious to economic sociologists, which leads to pages and pages of pretty tedious description of how Indian capitalists clawed away the already-limited powers of the Planning Commission.
But Chibber’s diagnosis raises a natural follow-up question: why did Korea pursue export-led growth, while India opted for import substitution?
Chibber points to the arrival of Japanese firms in the 1960s-70s, who wanted to offload their light manufacturing to a place with lower costs so they could upgrade to making higher-value goods. Crucially, their arrival coincided with Park Chung-hee’s military coup, and the formative early days of the industrial policy regime—which, for a brief shining moment, aligned the incentives of state planners and capitalists. This rare window of opportunity made an export-led growth strategy possible.
This answer may very well be right. But it feels far from satisfying: strangely, a book that was advertised as about Indian policy failure becomes more about a deus ex machina that saved Korea from the dead end of import substitution. Chibber puts an unusual amount on emphasis on the timing; the stars had to align exactly, with the Japanese arriving precisely when the system of industrial policy was being put into place, or Korea’s policy regime would have been “locked in place” like India’s. This strikes me as putting too much analytical weight on what even Chibber admits was a stroke of good luck.
I’m not an expert on Indian development, but I do know a little about Korea, and I have to think there must be more fundamental reasons that can also account for the Korea-India divergence. As candidates, I might point to Korea’s central position in the Cold War, which drew in lavish amounts of American aid, and the role of a more powerful, existential threat (North Korea) in “disciplining” state-led development policy. I would also point to other policies, like land reform, which pushed people to cities and spurred planners to find ways to create factory jobs. Finally, I wouldn’t underrate the importance of scale in shaping India’s choice to import-substitute: ex ante, setting up your industry to sell to 450 million people seems like a much safer bet than trying to hawk your wares on the cutthroat global market.
Perhaps I’ve been too harsh. This book did a lot of things well—most of all, reminding me that I should read more Indian history. I learned a great deal about the Indian National Congress in the heady post-independence days, and the factional politics between left and right. I liked the chapter on how the INC defanged its labor movement, and inadvertently deprived itself an important countervailing force to capital. From what I can tell, Chibber’s book has helped revive historiography around India’s crucial post-independence period. But, in my view, the 20th century South Asia-East Asia economic divergence deserves another critical examination.