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Matthews Asia Snapshot

Roots of Economic Karma

Week of November 09, 2012

I’m a strong believer that bad governance (yes, bad) is a natural part of the process of socio-political empowerment, and one that is actually necessary at times in order for some democracies, such as India, to achieve faster economic growth. Typically, during times of great socio-political transformation economic governance takes a backseat as newly empowered segments of society view redistribution of power and patronage as the first order of business. Their attention turns to good economic governance only after they feel fully assimilated. Allow me to explain.

The Hindi heartland states in north India—sometimes known by the acronym BIMARU (which is translated as “sick” in Hindi) for the states of Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh—have long lagged states in India’s southern and western regions in economic development.

The BIMARU states together account for nearly 40% of India’s population. Exactly where they are headed will impact the trajectory of India’s growth in the coming decades. So it is important to understand this dichotomy and its future.

Since India’s independence from British rule in 1947, the BIMARU states have been predominantly run by those in upper castes while the vast majority of the population in these states belonged to middle and lower castes. Assimilation of the lower castes into the polity and the economy was minimal in these states until the late 1980s. Meanwhile, India’s southern and western states began accommodating lower and middle castes much earlier and have done a much better job of being inclusive. This has enabled a wider spread of education, health care and nutrition. The opening up of the Indian economy therefore led to faster economic growth in these southern and western states.

Even after the caste assimilation process in Bihar and Uttar Pradesh finally got underway in the late 1980s, there was still rampant corruption and frequent scandals. Successive administrations headed by lower/middle caste politicians focused on asserting their newfound power and dispensing patronage were backed by voters who kept electing them back to power, perhaps in celebration of their newfound political voice. Economic policymaking and the maintenance of law and order took a backseat. Kidnapping became a cottage industry, and during that period it was hard to convince anyone that things would ever change. But eventually people grew tired of the status quo and things took a turn for the better in mid-2000s when Bihar elected a capable and progressive politician. Bihar’s GDP growth took off promptly after the election. Uttar Pradesh followed suit earlier this year in electing a young and seemingly progressive politician. With any luck, a similar spurt in growth may ensue.

To be sure, large parts of India still struggle with bad governance. But the grindingly slow but necessary process of socio-political empowerment that is underway should serve India’s long-term growth prospects well.

Vivek Tanneeru
Research Analyst
Matthews International Capital Management, LLC

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