Industrial policy learnings from a Soviet model versus Japanese

Source– The post is based on the article “Industrial policy learnings from a Soviet model versus Japanese” published in The Indian Express on 10th March 2023.

Syllabus: GS3- Changes in Industrial Policy and their Effects on Industrial Growth.

Relevance– Different models for industrial growth

News– The governments of most of the economically advanced countries are now pivoting towards more interventionist policy. They are promoting investments in preferred sectors through a combination of domestic subsidies as well as import tariffs.

What are arguments in support of policy interventions by the government in the economy?

First, the desire to build some element of strategic autonomy in a more geopolitically fragile world.

Second, the need to help in rapid transition to a green economy before climate change does more damage.

Third, the attempt to reduce dependence on a single supplier or a single source of export demand.

What were the debates related to the development model to be followed by India after independence?

Early Indian nationalists of all hues agreed that the state should play an active role in driving economic development after independence. Though there were differences in the details.

In 1950, the two most important models to follow were those of Japan and the Soviet Union.

India ultimately adopted the Soviet model. It was based on Mahalanobis’ strategy.

Why do some economists argue that India should have adopted the development path chosen by Japan after the Meiji Restoration in 1868?

Japan at the time of the Meiji Restoration had crucial features that made it the best economic model for India.

Japan had focused on higher farm productivity, the rapid expansion of primary education, and an early focus on export markets to accelerate industrial expansion. By the 1920s, Japan was in the ranks of the world’s industrialized countries.

India’s First Five-Year Plan also mentioned the Japanese experience as a way forward. Even Jawaharlal Nehru saw the benefits of the Japanese strategy,

The Mumbai economists C.N. Vakil and P.R. Brahmananda were critical of Nehru-Mahalanobis strategy. They argued that India should focus its development strategy on the production of wage goods rather than heavy industry, like what the Japanese did.

How was the Japanese development strategy different from the one that the Soviet Union followed in three ways?

Japan built industrial capacity with private rather than public investment. The sectoral focus was on light rather than heavy industry. Rapid productivity growth on small farms owned by families released female workers for industrial work.

Since all industrial progress in Japan has been achieved in comparatively recent years, it offersIndia the most direct and valuable lessons in reconstruction.

What are arguments against the wage goods model?

While the wage goods model outperforms the Mahalanobis model in the short run.the growth rates converge over a longer period of 40 years.

This is under the unrealistic assumption of a very highinitial savings rate. With more realistic savings at the beginning, the Mahalanobis model actually outperforms the wage goods model.