NCPA - National Center for Policy Analysis

Economies Grow When Government Gets Out of the Way

April 27, 2004

Countries that wish to grow economically must reduce regulations that constrain businesses, according to economist Dani Rodrik (Harvard University).

In a paper from the National Bureau of Economic Research, Rodrik and researcher Arvind Subramanian of the International Monetary Fund use India as an example:

  • From the 1950s to 1970s, real annual growth in gross domestic product hovered between 2 percent and 4 percent each decade.
  • In the 1980s and 1990s, real GDP grew at an annual average of 5.8 percent.
  • Factory productivity grew from an annual rate of 2 percent in the 1970s to 6.3 percent in the 1980s.

Why the sudden growth after the 1970s? According to Rodrik and Subrmanian, India's leadership (under the direction of Prime Minister Rajiv Gandhi) adopted a more pro-business stance. His government gradually eliminated production quotas for manufacturers and allowed the importation of capital goods. Freed from bureaucratic regulation, businesses were able to expand and invest in new capital.

Source: James Mehring, "India: Growth Goes Way Back," BusinessWeek, April 26, 2004, Dani Rodrik and Arvin Subrmanian; based upon, "From 'Hindu Growth' to Productivity Surge: The Mystery of the Indian Growth Transition," NBER Working Paper w10376, March 2004, National Bureau of Economic Research.

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