Growth in practice: East Asia, India and institutions

Between the 1960s and the 1990s a group of economies in East Asia grew faster and for longer than any large group had before. The World Bank’s The East Asian Miracle (1993) studied the high-performing Asian economies: Japan, Korea, Taiwan, Hong Kong and Singapore, followed by Indonesia, Malaysia and Thailand. They shared high saving and investment, fast growth in schooling, relatively low inequality, and industrialisation through exports of manufactures, not behind high tariffs. (GATE 2026 tests exactly that last fact.)

On World Bank data, Korea’s GDP grew about 9.7% a year between 1961 and 1990 and about 4.7% between 1991 and 2024. China grew about 10.2% a year between 1981 and 2010. Use the panel below to look at them beside India.

Was it a productivity miracle? Using the growth-accounting method of Lesson 3, Young (1995) found that growth in Hong Kong, Singapore, Korea and Taiwan came mostly from big increases in labour force participation, education and capital, and little from the residual. Krugman (1994) popularised the point: if growth is accumulation, then, with diminishing returns, it will slow, which is what the Solow model says, and the comparison with the Soviet Union’s earlier growth was uncomfortable. The rival reading stresses that these economies imported and adapted technology faster than others, so that capital accumulation and the learning of ideas went together (Lessons 10 and 11), and that measurement of the residual is fragile. Bosworth and Collins (2008) apply the same accounting to China and India.

World Bank data give real GDP growth for India from 1961. Dividing the years into three periods shows a clear staircase:

The first period is what was long called the Hindu rate of growth, about 3.5% a year. The break in the data comes around 1980, not 1991: Rodrik and Subramanian (2005) argue that the transition to faster growth began about 1980, following a shift in the government’s attitude towards private business, and that the 1991 liberalisation built on it. The facts of 1991 itself, and the list of Five-Year Plans, belong in the Indian economy pages; the question here is what the models make of the numbers.

Harrod–Domar reading. Divide the investment share by growth to get a crude incremental capital–output ratio: 19.6/3.6 = 5.5 in 1961–80, 25.7/5.6 = 4.6 in 1981–2000 and 34.5/6.3 = 5.5 in 2001–24. The ratio barely moves, so most of the rise in growth is the rise in investment, as g = s/v would suggest. Population growth is falling at the same time, which is the second route to a higher growth per head: the break-even rate n + δ falls (Lesson 6). Solow reading. A rising investment rate raises the steady state and growth during the transition, a level effect that shows as a spell of faster growth.

Structure. India’s agriculture share of value added fell from about 42% in 1960 to about 18% in 2023, industry rose from 21% to a peak above 30% around 2010 and then fell to about 26%, and services rose from 39% to about 48%. Kaldor’s laws (Lesson 12) stress manufacturing as the engine of growth; India’s services share has risen faster than its industrial share.

Choose a series and the countries. India is drawn thickest. Try investment against growth: China and Korea invested 35% to 45% of GDP at their fastest, and India crossed 35% only in 2004 and 2005. Try saving: Brazil’s stays near 15% to 20% while its growth has been slow.

Ask each model of the course the same question: what happens if a country raises its saving rate?

Every model above takes the saving rate, the schooling, the research effort as parameters. Institutions are the rules that determine whether those parameters are high: whether property is secure, contracts enforced, and government unable to confiscate the returns. Acemoglu, Johnson and Robinson (2001) used the death rates of European settlers in colonies as an instrument for institutions, and found that places where settlers could live safely, and set up institutions that protected property, are richer today. Why Nations Fail (Acemoglu and Robinson, 2012; asked in UGC NET 2023) generalises the claim: inclusive institutions, which give wide groups a stake in the system, lead to growth, and extractive ones, which serve a narrow elite, do not. The 2024 Nobel Memorial Prize was awarded to Acemoglu, Johnson and Robinson “for studies of how institutions are formed and affect prosperity”.

The rival emphasis is geography: Gallup, Sachs and Mellinger (1999) argue that climate, disease and distance from the coast affect income, through agricultural productivity, health and trade costs. Most economists now treat the two as complementary, and note that geography may work partly through institutions.

The practical lesson is the method of growth diagnostics (Hausmann, Rodrik and Velasco): do not apply a standard list of reforms, but find the binding constraint for a particular country, whether it is the cost of finance, the return to investment (infrastructure, human capital, property rights) or the risk of its being taxed away.

The Malthusian era. For most of history, income per head did not grow in the long run: gains from technology were eaten up by population growth. Galor and Weil (2000) built a model in which the economy moves from this Malthusian stagnation to modern growth, as the rate of technical progress rises, education becomes valuable, and the demographic transition replaces large families with investment in each child. It connects the population assumption of Lesson 6 with the ideas of Lesson 11, across centuries.

Secular stagnation. Hansen (1939) feared that slowing population growth would reduce the incentive to invest and leave economies short of demand. Summers (2014) revived the term for the rich countries after the financial crisis: a long period in which the real interest rate that would bring full employment is below zero. In the models of this module, slower population growth lowers the break-even investment rate, raises capital per head and lowers the return on it.

Climate and green growth. The models above treat output as free of environmental cost. William Nordhaus shared the 2018 Nobel Memorial Prize “for integrating climate change into long-run macroeconomic analysis” and Paul Romer for ideas; the question is whether ideas can decouple growth from emissions. That belongs to the environment topic and is mentioned here only because a growth model with a resource constraint is the standard framework.

Questions on East Asian industrialisation. Most questions on India’s growth, plans and reforms are in the Indian economy pages, because they depend on facts and dates of those topics rather than on the models. The poverty measures and poverty committees pages cover the distribution side.