India vs Latin America

On Monday we started our ten-day course on microfinance: Total Immersion Program in Finance and Development (TIP/FD). The first speaker was Jessica Wollock and she spoke about development and finance in India, giving a brief overview of economic policies in the country since Independence.

She mentioned that there exist many similarities in economic and industrial policy with Latin America before the 90's; for example, a very large public sector with a desire for central planning, as well as close collaboration with the private sector in policy making. By the mid-80's they had unsustainable government spending and debt that led to a balance of payments crisis, which in turn forced them to slim down the public sector and start opening the economy.

Here is where the two stories differ. Whereas Latin America followed very radical free-market reforms in capital and goods markets, India has followed a more gradual process. This can explain to some extent why India has been growing so rapidly while Latin America has stagnated. By following unorthodox policies they have been able to deal with the constraints that impede growth and also with distributional conflict (Rodrik's argument). This was certainly not the case in LA.

So when I asked the speaker about why if the stories were so similar we saw such different outcomes, her response surprised me. She answered from the viewpoint that LA is better off than India, which is something I didn't expect, since in my mind growth rates can be seen as a parameter of success of an economy and India is growing and we are not.

But she is right. Per capita gdp is higher, on average, in LA (surely in Mexico); access to basic services and infrastructure is also higher and poverty incidence is lower. Her argument was that even if policies were similar, LA had a better starting point, so even if growth rates have been lower, levels of gdp are higher.

This is not to pat ourselves in the back and be satisfied; LA should also be growing. The relevant comparison is then not against growth rates or levels of indicators, but against policies that promote and sustain growth. That is where we are falling behind and where we have a lot to learn from India.