India, Pakistan, and Growth – Part I

March 22, 2014
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There are a number of examples in history where two countries that share the same fate and trajectory for a while suddenly start to diverge in their economic fortunes. A persistent difference in the growth rates of the two countries – i.e. a difference in long-run growth – translates into a huge difference in GDP per capita within a generation or two.

Berkeley’s Brad Delong provides a number of such historical comparisons: North vs South Korea, China vs Taiwan (until the 80s), Cambodia vs Thailand, Georgia vs Turkey, Cuba vs Mexico, and so on. Each pair of countries had similar “initial conditions” and yet something clicked in one country but not the other. The result was that within a few decades, the successful high-growth country was on average eight times richer than its twin counter-part!

This is how important long-run growth is. A country that fails to trigger what is necessary for long-run growth traps itself in the cycle of poverty.

India and Pakistan are a natural pair for long-run comparison. The two countries share a common colonial history and started off with a largely similar nature of economic activity. How does the long run trajectory of these two countries compare?

We use real exports per capita as our metric of comparison because exports are much better measured than other components of GDP in India and Pakistan. Exports also provide a reflection of a country’s global interconnectedness.  The graph below plots real exports per capita for India and Pakistan starting in 1980. We index the two lines to 100 in 1992 for ease of comparison.

 

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Up until 1992, both India and Pakistan were on a similar trajectory with low growth in their exports per capita. However, the trajectories diverge strongly in 1992 with India’s export growth taking off while Pakistan continued to trudge along at mediocre pace. One can see the power of compounding when growth rates persistently differ. Within a span of just two decades, Indian exports per capita have grown to be almost six times those of Pakistan.

What explains the persistent divergence between India and Pakistan since 1992? A natural candidate would be India’s economic liberalization that kicked off in 1992. However, an oft-overlooked fact is that Pakistan initiated economic liberalization earlier and with greater gusto than India. So something else must be at work.

Relatedly, the divergence between India and Pakistan has more to do with Pakistan’s failure to keep up with its peers as opposed to the growth being unique to India. A case in point is Pakistan’s comparison with Bangladesh, a country that was part of Pakistan until 1971. It turns out that growth in Bangladesh also diverged from Pakistan starting 1992.

So what could be behind Pakistan’s dismal long-run export performance? We will turn to this question in a later post.

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2 Responses to India, Pakistan, and Growth – Part I

  1. Larry Signor on March 22, 2014 at 9:37 pmi

    I believe you will find most of the difference captured by FDI. See: http://www.indexmundi.com/facts/india/foreign-direct-investment
    and:
    http://www.indexmundi.com/facts/pakistan/foreign-direct-investment

    The causes of differential FDI are the interesting question. Security, transparency, currency debasement, religious and political tolerance/intolerance, tax and pricing policies? A cornucopia of possibilities.

    • Hugo André on March 24, 2014 at 4:34 pmi

      What on earth are you talking about? Taking a quick look at the charts you link to (the indian one in particular) there seems to be almost no connection between export growth and FDI.

      (from your chart) Indian FDI was low before 2006 when it suddenly exploded. It then remained stable until 2008 when it began to decline and it kept on declining heavily until 2011.
      None of this is visible in per capita exports chart above. If anything, FDI is surprisingly badly correlated with export growth in India.

      @Mian and Sofi
      Please continue writing this kind of post because it is a very interesting subject!