Excerpt: Why Growth Matters

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Two central follies stood behind the policy features that undermined growth:

First, the heavy hand of the government in economic activity was so pervasive that the problem with India (and many other developing countries) prior to the reforms of the early 1990s was that Adam Smith's Invisible Hand was nowhere to be seen. After those reforms aimed at reducing burdensome and counterproductive government intervention were implemented, economist Joseph Stiglitz and financier George Soros talked about how they constituted a practice of "market fundamentalism." In truth, in India, the reforms represented a move to the pragmatic center from a situation in which markets were sactificed, with grave consequences in efficiency and growth, to what can only be described as "anti-market-fundamentalism."

Second, the counterproductive policy framework was also inward-looking on trade and hostile to direct foreign investment, which meant that India turned away from integration into the world economy, foregoing opportunities for important gains. The proponents of autarky in trade were of the view that, as the Chilean sociologist Oswaldo Sunkel put it, "integration into the international economy would lead to disintegration of the national economy." This "malign-impact" view of opening to trade turned out to be generally wrong.