This document summarizes an academic paper about the origins of uneven economic development between India and Britain from the 17th century to Indian independence in 1947. It presents a theoretical model showing how small initial differences in capital accumulation between two regions can lead to increasing specialization through trade, with one region industrializing while the other declines. It argues this helps explain India's relative economic stagnation under British colonial rule from 1757-1947, as British policies disrupted India's manufacturing industries and shifted its trade to primary goods exports and imports of British manufactures. While various factors contributed, these policies may have exacerbated India's deindustrialization according to the theoretical framework presented. The document considers some counterarguments but maintains British rule likely reduced India's

1. American Economic Association
The Origins of Uneven Development: The Indian Subcontinent
Author(s): Amitava Krishna Dutt
Source: The American Economic Review, Vol. 82, No. 2, Papers and Proceedings of the
Hundred and Fourth Annual Meeting of the American Economic Association (May, 1992), pp.
146-150
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2117391
Accessed: 26/10/2010 16:50
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2. THEORIGINSOFUNEVENDEVELOPMENT:THERISEOF THE
WESTANDTHELAGOF THERESTt
The Originsof Uneven Development:The IndianSubcontinent
By AMITAVA KRISHNA DUTT*
In the 17th century, the Indian subconti-
nent (henceforth: India) was not signifi-
cantly less developed than Britain. But be-
tween 1757, when Britain began colonizing
India, and 1947, when India gained inde-
pendence (and British growth had already
slowed down), the ratio between British and
Indian per capita income increased at least
tenfold (Angus Maddison, 1971), and sev-
eral countries initially less developed than
India grew rapidly while India stagnated.
The obvious question is: what caused this
"uneven development"? The answer to this
question is important for understanding
both the roots of India's present economic
backwardness and the current division of
the world into rich and poor nations.
No clear answer to the question has
emerged, in part because of the paucity of
data, but also because of the heat and smoke
generated by the debates on the impact of
colonialism, which show no sign of abating
(see Neil Charlesworth, 1982). India's re-
lative stagnation is explained in the "nation-
alist" view by colonialism, and in the
"imperialist" view by the socioeconomic
structure established during the ancient
Hindu period.
This paper briefly discusses some issues
relevant for a reexamination of the origins
of uneven development in the Indian case,
confining attention to the Indian side and
using some recent developments in the the-
ory of North-South trade.
1. Theory
To explain the origins of uneven develop-
ment, it is useful to turn to a class of
North-South models which assume an ini-
tially identical structure for two regions and
examine how differences between them
come about. A model of this type (see Dutt
[1986],which drawson Paul Krugman[1981])
considers two regions that differ only in
their amounts of capital accumulated, each
producing two goods, an agricultural good
with only labor and a fixed labor:output
ratio and an industrial good with labor and
capital (which is the produced industrial
good) with fixed coefficients at a point in
time. Labor is perfectly mobile within each
country and is available in fixed supply in
each region. Both labor and capital are fully
employed, and a fixed fraction of profits in
the industrial sector is saved and invested in
the industrial sector, there being no interna-
tional capital flows. Consumption expendi-
ture is allocated in value terms between the
two goods in a fixed ratio. The productivity
of labor in industry in each region depends
positively on its stock of capital, with a
constant elasticity, and capital productivity
is assumed to be constant.
The model implies that if the two regions
do not trade with each other, they will end
up at a stationary state with identical stocks
of capital. If they engage in free trade, the
region that has even a slightly higher stock
of capital and exports industrial goods will
tDiscussant: Lance Davis, California Institute of
Technology.
*Department of Economics, University of Notre
Dame, Notre Dame, IN 46556. I am grateful to Ned
Lorenz for discussions and to Maria Rizo Lopez for
research assistance.
146

3. VOL. 82 NO. 2 THE ORIGINS OF UNEVEN DEVELOPMENT 147
cumulatively increase its capital. The other
region, even if it accumulates capital ini-
tially, will eventually undergo deindustrial-
ization. This model belongs to a general
class of models that stress the importance of
increasing returns and learning in manufac-
turing and demonstrate how small changes
in history can have large effects.
11.History
The model just described is obviously too
simple to provide definitive answers to the
question of the origins of uneven develop-
ment. India and Britain were parts of a
world economy, which violates the two-
region assumption of the model, and the
structures of the two economies when they
came into contact in the 18th century were
not identical, as assumed in the model.
However, since Britain was India's major
trading partner in the 19th century (K. N.
Chaudhuri, 1982) and since the perfect-sym-
metry assumption is not required for the
validity of the result on the implications of
the specialization, it is possible to explore
the consequences of taking the two regions
of the model to represent India and the rest
of the world dominated by Britain.
India's pattern of trade changed drasti-
cally after a few decades of colonial rule
(see Tapan Raychaudhuri, 1968; Chaudhuri,
1982). When the British began their colo-
nization, India was an exporter of industrial
goods and an importer of primaryand inter-
mediate goods. Before 1800, India was the
major supplier of cotton and silk textiles
(fine clothes as well as everyday wear for
the masses) in international markets, includ-
ing Europe; Indian textiles were consider-
ably cheaper than British woolens because
of India's lower wages and technical advan-
tages. In addition to these, which consti-
tuted the overwhelming bulk of Indian ex-
ports, India exported raw silk, sugar, and
saltpeter, which do not fit the description of
primary agricultural products; even indigo
involved some amount of processing. India's
main imports were foodstuffs such as coffee,
tea, sugar, and spices; luxury items such as
wine and horses; and a considerable amount
of precious metals (given India's chronic
merchandise export surplus). Except for an
insignificant amount of luxury goods and,
occasionally, cannon, no manufactured
metal products were imported before the
19th century. After the first few decades of
the 19th century, India became primarilyan
exporter of agricultural products, including
raw cotton and jute, tea and coffee, opium,
indigo, oil-seeds, and foodgrains, and an im-
porter of manufactures such as cotton yarns
and cloth, metals, and machinery. The case
of textiles is most striking: Bengal handi-
craft manufactures, so dominant in the
1770's that an European observer wrote that
the incomparable quality of the product
guaranteed that their demand would never
falter due to competition, were almost com-
pletely eliminated from international mar-
kets by the first three decades of the 19th
century. Between 1814 and 1835, exports of
cotton goods from India to England fell
from 1,266,608 pieces to 306,086, while im-
ports rose from 818,208 yards to 51,777,277;
a similar fate befell Indian exports to other
markets (Romesh C. Dutt, 1903). By the
turn of the century imported piece goods
supplied about 60 percent of Indian cloth
consumption, a proportion which was prob-
ably higher earlier in the century (Maddi-
son, 1971).
An examination of some features of for-
eign rule provides some plausible explana-
tions for this shift in India's pattern of
specialization, which has been carefully doc-
umented by nationalist historians (Dutt,
1901, 1903; B. D. Basu, 1935; see also Bipan
Chandra, 1966). First, Indian handicraft in-
dustries were adversely affected by the de-
cline of Indian royal courts, which had been
important buyers of quality products and
promoters of factories that made to their
order. Second, the same industries were dis-
located as a result of the exploitation by the
English East India Company after it gained
important trading privileges in Bengal, as its
traders imposed arbitrary prices and other
conditions and subjected the artisans to
flogging, imprisonment, and worse (cutting
off the thumbs of winders of raw silk has
been documented). Third, while internal

4. 148 AEA PAPERSAND PROCEEDINGS AMAY1992
tariffs and transit duties restricted trade in
Indian goods, British goods were granted
exemptions. Fourth, while import duties
were imposed in Britain on imports of In-
dian manufactures (in 1812, calicoes were
taxed at about 72 percent, and import taxes
on other goods ranged from 100 percent to
600 percent), British goods were allowed
into India duty-free or at low duties of 2.5
percent.
These features, by worsening the compet-
itive position of Indian handicrafts even
slightly, could have led to the cumulative
process of uneven development and struc-
tural change analyzed by the model, and as
indeed hinted by early nationalist writers
like Mahadev Ranade and G. V. Joshi (see
Chandra, 1966).
Another relevant consequence of British
rule is the so-called "drain" of wealth from
India to Britain, initially as a result of direct
plunder and looting, and later through the
payment from Indian revenues of adminis-
trative charges incurred in India and else-
where in the empire, interest payment on
debt, and remittance on retained profits.
Various inconsistencies of the early presen-
tation of this theory by Dadabhai Naoroji
have been pointed out, and it has been
argued that, if one takes into account the
fact that India received a great deal in re-
turn for the outflow of capital (railway con-
struction, far instance), the drain becomes a
negligible proportion of Indian income (see
Charlesworth, 1982). My model, however,
implies that a relatively small drain of capi-
tal during the early stages of interaction
between the two regions can explain the
shift in the pattern of specialization, and if
the model is expanded to allow for unre-
quited capital flows through time, this drain
exacerbates the tendency toward uneven
development due to deindustrialization (a
connection that was noted by Naoroji and
others). It is relevant to note here, first, that
the extent of the drain during the early
period of foreign rule is less controversial
than that of the later period and, second,
that the development of railways had the
effect of reducing the effective protection of
Indian industries after uneven development
was already under way, therefore exacerbat-
ing it.
III. Further Comments
I conclude with three comments address-
ing some possible objections to my analysis.
First, the analysis may appear to be contra-
dicted by claims made by "imperialist"writ-
ers and their modern counterparts that
British rule had some favorable effects on
the rate of Indian economic growth through
the establishment of law and order, the
development of railways, and the spread of
commercialization in agriculture. Moreover,
theory and empirical evidence is marshaled
to argue that India experienced no absolute
decline in industrial employment. However,
the present interpretation of the model is
quite consistent with temporary increases in
per capita output and modest increases in
the industrial labor force (if it is extended
to allow for population growth). My model
predicts that, other things constant, there
would eventually be a stagnation in per
capita income growth and a decline in the
share of the population dependent on in-
dustry (that this may have been slight can
be explained by the relative self-sufficiency,
due to inadequate transportation, of many
village communities), and available evidence
seems to corroborate these tendencies.
Second, it must be conceded that the
kinds of events described above may not
have been responsible for the reversal in
India's pattern of specialization, even in
terms of the model. It has been claimed,
instead, that technological change in British
industry was responsible for the shift and
that this was independent of British rule in
India. To buttress this argument, it is also
suggested that the reduction in import du-
ties in Britain on Indian goods in the 1820's
and 1830's did not revive Indian cotton-good
exports to Britain. However, against this it
can be argued that, had India been politi-
cally autonomous, she could have provided
tariffs and other forms of support to her
industries. Moreover, even in 1813, witness
after witness in the Select Committee of the
House of Lords testified that free Indian

5. VOL. 82 NO. 2 THE ORIGINS OF UNEVEN DEVELOPMENT 149
textile imports (of both finer and coarser
varieties) would damage British industry
(Basu, 1935), and Horace H. Wilson (1845
pp. 538-9), based on this testimony, calcu-
lated that cotton and silk goods manufac-
tured in India could be sold for a profit in
Britain at a price 50-60 percent lower than
those manufactured in Britain. It may be
speculated that the subsequent sharp fall
(almost 60 percent between 1819-1821 and
1829-1831 for cotton piece goods) in British
costs was due to learning which resjilted
from the expansion of British exports to
colonies such as India, and only after this
occurred could tariffs be reduced without
jeopardizing British industry.
Finally, it may be argued that the model
takes an overly mechanical view of technical
change and industrial growth: that it fails to
distinguish between the handicraft industry
of India and factory industryof Britain (with
only the latter having a potential for scale
economies and technical change) and that it
fails to take into account the potential for
industrial growth in an economy that is ini-
tially an exporter of primary products.
Against the former claim it must be argued
that conventional wisdom seems to over-
stress the distinction between factory and
craft production and the technological ad-
vantages of the former (see Charles Sabel
and Jonathan Zeitlin, 1985): in Europe and
the United States, craft production had all
the technological dynamismof mass produc-
tion. The role of small-scale handicrafts in
the industrialization process in Meiji Japan
is also well known. There is also evidence
that the Indian cotton industry was flexible
in expanding its production and adjusting its
product to European tastes and in adopting
foreign methods (the shipbuilding industry
also showed a capacity for imitative innova-
tion); and the fact that it remained highly
labor-intensive and did not mechanize can
be explained in terms of low wages, expand-
ing markets, and the absence of competition
(Raychaudhuri, 1982). This is not to argue
that Indian craft industry was as sophisti-
cated as the western cases of flexible spe-
cialization or that India was on the brink of
an industrial revolution before the British
invasion. What is being argued, however, is
that, especially by hitting hardest the finer
end of the textile industry, deindustrializa-
tion considerably reduced the chances that
the Indian economy could experience indus-
trial development based on its handicraft
industry (perhaps by drawing skilled labor
and entrepreneurship from it, or through
technical change in the craft shops them-
selves). On the latter point, it must be con-
ceded that the model overstresses the
knife-edgedness of the uneven development
process, ignoring various channels by which
latecomers can industrialize. However, as is
well documented (see Dutt, 1901, 1903;
Basu, 1935), India's foreign government, by
obstructing Indian industrialization, or at
least failing to support it systematically (as
admitted even by modern critics of early
nationalist views), arguably blocked these
channels.
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