Fatehpur-Sikri built by Akbar the Great
Source: NY Times
Commentators have often compared the recent Great Recession of the United States and Europe to the Great Depression of the 1930s. In both cases, asset prices tumbled, financial systems turned insolvent and demand plummeted. One difference is that in the recent case, we mounted a swifter rescue effort than we did in the 1930s; for instance, Ben S. Bernanke, as chairman of the Federal Reserve in the recent crisis, drew upon his academic research in supporting bailouts and reflating the economy.
This comparison is intriguing, but we may be neglecting other, less obvious and yet more unsettling historical parallels for today’s global economy. For all the talk of the Great Depression, we might look at a different exemplar for modern times, 18th- and 19th-century economic history India. That country’s economic retrogression during that era may help us understand the quandary that some parts of the world face today.
In 1750, India accounted for one-quarter of the world’s manufacturing output, but by 1900 that was down to 2 percent. The West became more productive as a result of the Industrial Revolution, and India lost much of its leading export sector, textiles. While the data is fragmentary, the best estimates show that India’s living standards declined through the middle of the 19th century and that its economy retrogressed, even as it borrowed some technological improvements from the West. India just didn’t do enough to move toward production on a larger scale or with better machines,
Parsee cotton merchants of Bombay, circa 1800. India’s living standards fell through the middle of the 19th century as it didn’t do enough to move toward production on a larger scale or with better machines. CreditUniversal History Archive/UIG, via Getty Images
This story of India’s loss to foreign competition is documented in “Deindustrialization in 18th and 19th Century India,” a paper by David Clingingsmith, an economics professor at Case Western Reserve University, and Jeffrey G. Williamson, an emeritus professor of economics at Harvard.
Economists are accustomed to emphasizing the benefits of international trade, and these arguments are largely correct. But in India, internal regulations and underdevelopment, combined with British colonial depredations, prevented Indian resources from being redeployed productively. The lesson is that a sufficiently large international trade shock can lead to decades of economic decline in a major economy, especially if that economy isn’t geared to mounting a flexible response.
Today, we’re not used to the idea of declining living standards, because growth throughout the 20th century was the global norm for economies that were not at war. International trade grew rapidly after World War II, but at least in the early postwar years most of that trade was among countries with roughly comparable technologies and real wages. And that trade spurred growth rather than damaging laggard economies.
In the last 20 years, the economic surge of Asia, especially China, has brought a large trade readjustment to the world, one with few parallels with the possible exception of the rise of the Western economies several centuries ago. China’s per capita income, less than $300 in 1984, is now in the range of $10,000. The country is now the world’s second-largest economy, and becoming the largest by one measure.
