How do developing countries catch up?

'Convergence' is a term that students of economics are familiar with. For several reasons, developing countries are poised to catch up with higher income countries over time, although this could be a long time. How to expedite this is an important policy issue. The conventional wisdom is that you allow markets to function freely and do the trick- produce high growth. Remove the dead hand of the state and- hey presto!- growth materialises. Most "reformers" would ascribe the high growth in India since the 1990s to precisely such a thing having happened.

Alas for them, the reality is rather different. Economist Deepak Nayyar has an article in the Hindu in which he points out that rapid growth flowed from meaningful state intervention rather than state retreat. (He has a book coming out on this theme):

Thus, industrialisation was not so much about getting-prices-right as it was about getting-state-intervention-right. Indeed, it is plausible to suggest that, for a time it might even have been about getting-prices-wrong. It may be argued that state intervention in the form of industrial policy should recognise and exploit potential comparative advantage, but it is just as plausible to argue that instead of climbing the ladder step by step it could be rewarding to jump some steps in defiance of what comparative advantage might be at the time. In either case, state intervention is critical.

Apart from an extensive role for governments, the use of borrowed technologies, an intense process of learning, the creation of managerial capabilities in individuals and technological capabilities in firms, and the nurturing of entrepreneurs and firms in different types of enterprises were important factors underlying the catch-up in industrialisation. The creation of initial conditions was followed by a period of learning to industrialise so that outcomes in industrialisation surfaced with a time lag. This accounts for the acceleration in growth of manufacturing output that became visible in the early 1970s.

Clearly, it was not the magic of markets that produced the sudden spurt in industrialisation. It came from the foundations that were laid in the preceding quarter century. In this context, it is important to note that much the same can be said about the now industrialised countries, where industrial protection and state intervention were just as important at earlier stages of their development when they were latecomers to industrialisation.

So, the acceleration since the 1990s didn't come out of thin air, it wasn't conjured up by markets or private sector firms. The foundations had been laid in terms of an industrial base, technological capability, investment in higher education, a growing middle class, etc. Liberalisation helped get the best out of this investment in capability that had been state-driven. It might have happened a little earlier; the License Raj excesses were clearly unwarranted. But this is different from saying that the private sector produced a magical transformation, starting in the 90s.