Unit 1 Prosperity, inequality, and planetary limits

1.11 Application: Did the British colonization of India reduce Indian living standards?

The technological revolution and trade reversed the fortunes of the British and Indian textile industries.

British colonization of India began in 1600, and over the next 200 years Britain became the dominant European colonial power there, taking full control by the mid-nineteenth century.

A prelude to the Industrial Revolution in Britain was a period of booming sales of novel types of clothing made in India using traditional technology. ‘All of a sudden, we saw all our women, rich and poor, clothed in [India-made] calico,’ wrote Daniel Defoe, author of Robinson Crusoe, in 1727. He went on: ‘China, India, and other Eastern Countries … have, it is true, the most extended manufacture, and the greatest variety in the world, and their manufactures push themselves upon the world, by the mere stress of their cheapness.’

A century and a half later, the flow of trade had been reversed. Over half of the textiles purchased in India were made in Britain’s steam-powered mills and the subcontinent’s once world-dominant textile industry was in permanent decline. India had been one of the largest producers of manufactured goods in the world, but under British colonial rule would remain a farm-based economy. Following the decline of its textile industry, its main exports were agricultural products, until late in the twentieth century, when India became a major exporter of software and computer services.

Angus Deaton, a Nobel Laureate who specializes in the analysis of poverty, observed that, when 300 years of British rule of India ended in 1947, ‘It is possible that the deprivation in childhood of Indians … was as severe as that of any large group in history’. In the closing years of British rule, a child born in India could expect to live for 27 years. After fifty years of independence, life expectancy at birth had risen to 63 years.

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Figure 1.17 Stagnation and decline in the economies of India and China during periods of foreign intervention.
Note: Average incomes had been declining in India prior to British interventions there. Average incomes have grown very rapidly in both countries since 1975, as can be seen in Figure 1.1. Figure 1.1 also shows that in Britain, average income in 1975 was 11 times what it had been in 1600. Average income in Japan, a country that resisted foreign interventions, increased 17 times over the period shown in Figure 1.17. The growth of both the Indian and Chinese economies accelerated after 1975.

Stephen Broadberry. 2021. ‘Accounting for the great divergence: recent findings from historical national accounting’.; Total Economy Database.; S. Broadberry, H. Guan, and D. Li. 2018. ‘China, Europe and the Great Divergence: A Study in Historical National Accounting’ Journal of Economic History 78: pp. 955–1000.; S. Broadberry, J. Custodis, and B. Gupta, B. 2015. ‘India and the Great Divergence: An Anglo-Indian Comparison of GDP per Capita, 1600–1871’ Explorations in Economic History 55: pp. 58–75.

Figure 1.17 (an enlargement of part of Figure 1.1) shows that per capita output declined in colonial India. The take-off of the Indian economy began soon after independence in 1947. The pattern of economic decline followed by economic growth is similar in China, which experienced growing dominance by other nations until the middle of the last century (but did not become a colony).

The Indian data raises the question: ‘Did the British colonization of India reduce Indian living standards?’

To answer this question fully, we would need to know what would have happened if India had remained independent rather than becoming a British colony. In the previous section, we addressed a similar type of question by using West Germany as a ‘control’ or ‘counterfactual’, to indicate what would have happened in East Germany had it not been a planned economy. Can we find an appropriate counterfactual for Indian history without British rule?

Japan might be a suitable comparator: it had been as poor as India in 1600 (Figure 1.1) but successfully resisted domination by any foreign power. From the late nineteenth century onwards, Japan became a successful capitalist economy that was adept at borrowing the new technologies developed in Britain and other economies that were already part of the continuous technological revolution. We cannot tell whether something similar would have happened in India had it remained independent.

Recent research documents two of the actions taken by the British colonial rulers that appear to have reduced Indian living standards.

Railways for military use, not economic development: In India the railways were designed primarily for military purposes, particularly after the revolt of Indian soldiers in the British colonial army in 1857. By contrast, the growing prosperity of farming regions in the US, Canada, and other economies was supported by the development of public infrastructure, particularly railways and ports, to expand the markets for farm products and the development of industries processing them.

The transport infrastructure that served Indian agriculture was used to export agricultural products, not transport them to local manufacturers for processing. For example, hides and skins were exported rather than being locally manufactured into shoes. The result appears to have been a lost opportunity for the growth of the farm-based economy and industries using its output.

Entrenching local elites: In many parts of the subcontinent, British colonial rulers relied on local elites—particularly large landowners—to collect taxes for them (taking a cut for themselves, of course). The result was the entrenchment of the power and property rights of powerful landlords who were more interested in collecting taxes than in modernizing the economy. Their influence over those renting land from them or working for them for wages was already substantial before British rule, but it was greatly strengthened by the Permanent Settlement of 1793. In this agreement, the East India Company (the de facto colonial rulers) conferred governmental powers on the landlords by giving them the right to collect taxes and making them de facto state officials.

The fact that British taxation and land tenure policy varied across the colony provides a natural experiment to test the importance of these British institutions for subsequent economic growth. Economists Abhijit Banerjee and Lakshmi Iyer compared the post-independence economic performance and social indicators of districts of modern-day India in which landlords had been empowered by the colonial land tenure and taxation systems with other districts where the landlords had been bypassed in favour of the village community or direct taxation of the individual farmer. They found that the landlord-controlled districts had significantly lower rates of agricultural productivity growth, reflecting lower rates of investment and less use of fertilisers and other modern inputs. The landlord-controlled districts also lagged significantly in educational and health improvements.

Colonial rule of India coincided with the divergence of fortunes of Britain and India. The eclipse of India’s early lead in textile manufacturing and its failure to transition away from a stagnating agricultural economy dominated by rural elites is part of the legacy of colonial rule there.

Economist and historian Bishnupriya Gupta explores the stagnation and decline of Indian living standards prior to Independence in 1947.

In this video, Professor Bishnupriya Gupta explains the long period of economic stagnation and even decline during the British rule in India and considers why economic prosperity accelerated following Indian independence in 1947.

Though China was never a colony of a European nation, from the early nineteenth century Britain, Portugal, and other nations controlled a number of key ports, such as Hong Kong and Macau, and prevented the Chinese government from acting independently in important economic matters. These foreign interventions ended only in the mid-twentieth century, when a successful revolution ended foreign interventions and placed China under Communist Party rule. During this period of foreign intervention, per capita income in China declined.

The rise of Britain and then the rest of Europe—as both economic and military powers—fundamentally altered the geography of worldwide production, that is, where most global goods and services (output) were being produced. If we measure the size of an economy by the total amount of goods and services (output) it produces, we see dramatic shifts since Tavernier visited India in the seventeenth century:

• In 1600, India, China, and the rest of Asia produced three-fifths of the world’s output, three times as much as western Europe.
• In 1750, China produced a third of the world’s manufacturing output and India’s textile and other manufacturing output was greater than in the whole of Europe.
• And only in 1850 did London displace Beijing as the world’s most populous city.

Figure 1.18 summarizes the changing geography of world output, showing the percentage of global output produced in three different regions.

• Before 1800, Asia’s large share of world output reflects the fact that most people in the world lived in Asia (the amount produced per person did not differ much by region).
• Beginning around 1800, there was a sharp rise in the contribution of the West to world output at the expense of Asia’s contribution because the European population grew rapidly, as did output per person.
• In the last few decades, with the rapid growth of East and South Asia (especially India and China, but also other countries including Vietnam and South Korea), Asia is once again contributing a larger share of world output than the West.

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https://www.core-econ.org/microeconomics/01-prosperity-inequality-11-british-colonization-india.html#figure-1-18

Figure 1.18 Shares of world output produced in Asia, the West, and the Rest. The West refers to western Europe, the US, Canada, Australia, and New Zealand. The Rest includes Latin America, Japan, Africa, and eastern Europe (the latter including Russia and other countries ruled by the Communist Party in the second half of the twentieth century).

Angus Maddison. 2007. Contours of the world economy 1–2030 AD: Essays in macro-economic history. OUP Oxford.; IMF World Economic Outlook. 2022.

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For a visual reminder of these long-run changes, note that the time paths of the shares of world output of the West and Asia resemble a pair of pliers.