That is half the story. In the nineteenth century, imports from Britain killed off Indian industry, especially the textile industry. But then, towards the end of the nineteenth century, something interesting started happening. Indian industrialists started setting up industries in India. An entire textile industry came into being. And, this is the most interesting part – the industrialists started off their lives as traders, more specifically as importers. See here for a detailed description of how that happened. Actually, go ahead and read the whole book. The traders found that cheap imports had created a market which made it feasible for them to set up here.
Now I am sure the British did not “encourage” this process. I am also sure that they did not like it. Free trade, throughout its history has grown inspite of government hindrance (and government help). But I want to ask about a counterfactual. Suppose that the British hadn’t conquered us. Suppose that, by some magic, we had got a liberal democratic government by the end of the eighteenth century (the period when, in the real world, the British were taking us over)
What policies should it have followed if it were committed to India’s development? Yes, British imports destroyed India’s traditional industry, but British manufacture destroyed Britain’s traditional industry too. The British developed the steam engine and its industrial base before us. This fact is not a result of imperialism. So tell me, should the hypothetical liberal democratic government of India have allowed free import of textiles from Britain or not? If it had allowed, we are talking of exactly the same policies that the British followed. If it had followed protectionism and tried to “encourage” Indian industry, well we know how well Nehru’s policies worked. We also know for a fact that India’s car industry did not manage to come out with a decent car for fifty years when it was protected, but has come out with the Indica within years of being faced with competition.
Don’t come back to me saying that things would have been different if Nehru had done things in a slightly different way. (Such as for example, if we had remained an autarky, but gone in for inernal liberalization.) I have no way of disproving your pet theory, (because, as you will point out, your particular combination of policies has never been tried, hence irrefutable by experiment) but I just want to point out that no one can predict precisely how markets will respond to government intervention. The only thing I can say with any real confidence is that Markets treat government intervention as damage and route around it.
I will go by historical evidence.
Industrial revolution started in England. It was not the result of imperialism. But England did not have a liberal democracy in today’s sense. Yet it had rule of law.
The next wave of industrialisation took place in France and Germany with the United States following closely. Later on Japan industrialised successfully.
France and Germany took protectionist policies to nurture domestic industry. They copied British technology, improved on them and devised their own. This was done with state-support with the state sponsoring the purchase of machines etc. Later on France and Britain embarked on colonising Asian and African countries in search of resources to feed their manufacturing industries.
Japan also industrialised by state-driven policies. State-driven policies were not restricted to the economy but also social engineering. Protectionist measures were used.
The US initially redistributed land among its settlers. A low-density population and abundance of cheap land meant a need for “machines”. This was the spark for industrialisation. There were some protectionist measures. But the US had the most open of all economies.
Post-war phase shows rapid industrialisation by S. Korea, Taiwan and later on China. Again, this was state-directed export-driven growth with heavy protectionist policies.
So if India had a liberal democratic government(which would have involved some competition among rulers and war) it most probably would have taken a protectionist policy and industrialised itself by copying the achievements of the Industrial revolution. The huge rich domestic market would have sustained the growth(Indian economy was big in comparison to other countries of the world.) Later on India would have had to go out in the world to find resources and markets to fuel its further growth.
Protectionism doesn’t pay in the long-term and countries have to open up to trade and investment. All of the above countries I mentioned moved from protectionism(of various degrees) to freer trade and opened their markets.
I would suggest the book “Wealth and Poverty of Nations” by David Landes. It is not a perfect book. I do not agree with the implication that the Industrial Revolution was possible only in Europe. But it is a good book for some facts of economic history of the world.
I will end my discussion here.
When I said state-driven policy I mean a government-led one where private players are capitalised, protected and to some extent directed by the state.
Sorry I missed a part of what I intended to post. It is the reason why the above examples are important.
I only mentioned successes. An example of failure to industrialize very well is Spain. Imperial Spain looted enormous wealth from South America. It had no dearth of capital. But instead of using the wealth for development and industrialization, Spain spent away the money in wars and luxury. Wars are costly and in case of Spain needed enormous imports. On top of it money was spend on importing luxury goods. As someone stated Spain spent away its gold to import baubles(may be it was in the above-mentioned book) This problem was compounded by political strife and religious intolerance. Spain became poor and its power waned. It never recovered until recently when a mixture of massive EU aid and market reforms brought it up to first world status.
There are more examples like Argentina, Brazil etc that did not pay attention to industrialization and social justice.
To think about it, may be our Kings and Princes would used India’s enormous wealth to pay for their vulgar displays and expensive tastes.
Who knows what would have happened?
Anyway this is my last post 🙂