A History of Wealth and Poverty: Why a Few Nations are Rich and Many Poor, by John P. Powelson.




Though each has its individualities, India and Africa possess many common features accounting for the failure of the power-diffusion process. In both areas before the nineteenth century land was plentiful and migrations common. India and Africa each traded vigorously over long distances in early history, the Africans within their continent and the Indians across continents. Despite the existence of private trading and production, nevertheless in both India and Africa the state — through tribal chieftains and rulers — dominated production and the ownership of assets and enjoyment of income. (It still does.) Endemic warfare ravaged both continents for long periods. (It still does.) Each experienced a colonialism that deprived the subject peoples of opportunity and land and also endowed indigenous rulers with powers they never had held before.

When colonialism ended, the land was returned but the power imbalance remained. Finally, although each had its local governing organizations — tribe and village — historical references to vertical alliances or to economic negotiations between villagers and overlords are not so numerous in India and Africa as in northwestern Europe and Japan. We may speculate that the land abundance and alternative income through thriving trade in earlier centuries, along with the power imbalance under colonialism, constrained communication between rulers and underclass, and that this communication failure blinded both sides to the positive-sum cooperation and complex institutions that might have led to durable economic development.

A Trading and Entrepreneurial Society

Even more so than Africa's, India's history is rich with trade and entrepreneurship. Unlike Africa, India's precolonial past also includes literacy, high-level science, written law, and banking.

In the second millennium BCE India already traded internationally. It became an entrepot, where goods were exchanged between Western and oriental shippers. Guilds were registered with town authorities, and a money economy evolved, spawning financiers and bankers. But there are also evidences of concentration of power. The uniformity of weights and measures, common script and seals, "all indicate some measure of political and economic control and point to the great cities of Mohenjo-dara and Harappa [2500-1700 BCE] as their centres." [1]

Even in the era of political disunity (184 BCE to 320 CE) trade extended as far as Rome and China, [2] and "revenue from trade contributed substantially to the economies of the participating [Indian] kingdoms." [3]

In the fourth through eighth centuries CE monasteries in southern India were centers of learning. Mathematicians had calculated both pi and the length of the solar year. High-quality gold coins were circulated. Legal texts were written and formal judicial procedures practiced. [4] India was a jewel in Britain's trading sphere from the seventeenth century right up until its independence. "Growing demand for cotton revolutionized the Indian export trade after 1835." [5]

India had a head start on Africa because of its location at the center of the East-West trade routes. Early on, Indian legal and monetary systems were more advanced than African and at least on par with European. But they still did not become fully modern. Being largely elite-managed, they did not reflect the interests of the groups they presumably served, so they were not institutionally capable of negotiating the many positive-sum moves that were physically possible. Ultimately, they were supplanted by British systems that also did not serve the interests of non-elite Indians.

Village Organizations


Although village organizations existed abundantly in India, [6] peasants did not negotiate vertically to the same extent as did their counterparts in northwestern Europe and Japan. In an earlier writing, I have documented the existence and nature of village organizations, [7] which I summarize here.

Before the British, Indian land was held on three or more levels: (1) the sovereign or conqueror, whose objective was to receive taxes and maintain security; (2) the intermediate official, called zamindar, jagirdar, or other name, whose purpose was to collect taxes, keep his share, and pass the rest on to the sovereign; and (3) the village, which often held land in common, whose purpose was to allocate plots among villagers, feed itself, and pay taxes. Often layer (2) was actually many layers and many privileges, in a complex pattern of rights and obligations based on seemingly infinitesimal, changing distinctions among land uses. The pattern was so complex that the British did not truly understand it in all the years of their overlordship. More detail on the enormous variation in agrarian relations is found in Kumar. [8]

Wade writes of the Indian village as a corporate group. "Indian villagers are emotionally dependant on and derive their identity from groups — and in that sense are not individualistic." He also describes "a complex web of patron-client ties within the village and stretching upwards to higher levels of politics and administration." [9]

The most convincing explanation of the failure of village organizations to negotiate vertically and of the difference between India and Europe is pathetically expressed in a passage by an Indian author:

None of the major struggles in Indian history had for its object the exercise of rights within the village, but the exercise of rights over the village. They were conflicts between overlords of various grades for the right or power to get a payment from the peasant, not to seize his land. European history, on the contrary, reveals a conflict between the peasant and the manorial lords because the latter not only demanded a share of the produce, but desired to retain a particular method of cultivation — by forced labor — or to introduce new methods of cultivation (enclosures, large-scale farming). The Indian conflict was between lords who were concerned not at all with the method of farming, but to draw an income from the peasantry. . . . The issue was always between different claimants of the sword, the village and the peasantry remaining throughout the passive subject of conflict, the booty over which the rival powers fought each other. [10]

Other authors reinforce this sentiment. I quote from my previous work: [11]

Metcalf writes that after the Gupta fell, village organizations took form, with distinctions among cultivating castes. Tribes slowly migrated across the fertile Gangetic plain, "observers of the great struggle that raged over their heads between imperial dynasties and local powerholders." . . [12]

In the south, where rival empires existed precariously, village organizations became highly developed, but not at all in the European-Japanese mold. . . . The agrarian organization before the eleventh century is little known. By that time, however, well-organized villages were emerging, which Stein [13] calls "nuclear areas of corporate institutions." Two types predominated: the brahmadeya (each one a group of villages controlled by a Brahman organization) and the periyanadu, an extended locality controlled by organizations of commoners (Sat-Sudras).

The brahmadeya consisted of groups of settlements that Brahmans assembled and managed, taking themselves a share of output. The periyanadu, covering a wider territory, was governed by corporate groups of farmers or merchants or both.

Although some historians argue that Indian "feudalism" is enough like its European and Japanese counterparts to merit that term, others point to the crucial difference of contract. [14] Peasants and overlords in Japan and northwestern Europe forged a binding relationship, with obligations on both sides, enforceable in courts of law. Indian peasants and lords had no such relationship. [15] When the cultural distance between lords and peasants was so great, when peasants had no legal rights to land but instead had been told for hundreds of years that they were less than the dirt beneath their feet, they would not be so bold as to think of vertical alliances or negotiating. A British assessment of tenancy in Bengal in the eighteenth century reports that "the zamindars, in general, did not enter into agreements with the ryots [peasants]; they collected what they could, and the impositions were 'numerous and unascertainable'." [16]

I have found a few references to "contract" for land use, but usually they were between persons of high rank, not between high-status and low-status people. Or they may have been passed down by authorities or arbitrated by outsiders instead of by peasants through their own committees. For example, miras were group-controlled resources found in irrigated villages in southern India in the nineteenth century. Shareholders, primarily Brahman or high-caste peasants, would "take disputes outside their community for arbitration, and intercommunity squabbles naturally required an authority outside of but respected by many distinct shareholding assemblies. Officers of the state undoubtedly served this role." [17] Finally, the caste system precluded negotiation between high- and low-level people. A Brahman did not talk to an untouchable.

Hence the organizations to carry on economic transactions were — as in Africa — mainly managed by rulers, including the Mughal emperor, the rajas, the Brahmans, the zamindars, the British East India Company, the British government, and later the Government of India.

Three Possible Reasons for Lack of Contracts

Three reasons may explain why Indian villagers did not enjoy binding contracts with their superiors: abundance of land, international trade, and persistent warfare.

Abundance of Land

A religious divine of Delhi (c. 1454) . . . cites the example of a peasant who needs to have seed, a pair of oxen, and tools or implements. Possession of land is not included among the essential implements. Clearly, our divine was living in a period of land abundance. [18]

Historical sources on India are replete with references to migration and land abundance. Ludden writes that migration "accelerated and expanded after 1300" and describes how "land was abundant and labor scarce . . . anyone with family labor could find land to cultivate for at least a meager subsistence." [19]

In eighteenth-century Bengal, "the pattas [deeds of lease] granted to the paikashi ryots generally contained a limitation in point of time; where they regarded the terms as unfavourable they migrated to some other place." [20] In Khandesh, villages would be periodically deserted and later revived with new cultivators. [21]

Villagers all over India sometimes negotiated with their overlords in good times. They were "not mere passive observers." But "when the situation worsened, they 'voted with their feet' and left for better conditions." [22] Thus land availability set a limit on bargaining, which was not normally forced by lack of alternative.

A British government report of 1820 refers to waste land being granted to speculators, with the hope that it would "not only draw back the Natives of Candiesh who have retired to Guzerat and other Countries, but even attract new settlers, from places where the population is overabundant." [23]

Contrary evidence is found in some places. In sixteenth-century Delhi, land was "almost fully under cultivation." [24] Kerala has long been densely populated. Kumar quotes the Arab explorer Ibn Battuta as remarking that in fourteenth-century Malabar "there is not a foot of ground but what is cultivated." Yet Kumar also writes of South India: "When population grew, or when the rains failed, men would migrate to other areas seeking permanent or seasonal employment." [25]

From these scattered references, one may conclude that land was sufficiently abundant in much of India that — unlike in northwestern Europe and Japan — lords and peasants were often (but not always) physically mobile and could escape each other. They did not need a binding, one-on-one relationship.

International Trade

Adapted to India, the Goodell thesis would appear as follows: During the first millennium CE, the lords of India could earn their wealth by trade. While they had to rely on tenants for their food, nevertheless they did not need to make contracts with any specific tenants. They could either expel an obstreperous group or make conditions so miserable that the group would leave. Landlords would tide themselves over with gold from trade until new peasants were co-opted.

In view of India's intensive participation in international trade during the early centuries CE, the Goodell thesis appears plausible, but more research would be required to find specific instances of it. In any event, the proposition that lords and tenants did not normally form vertical alliances does not rely on the Goodell thesis, so there is no need to prove it or disprove it for India.

Persistent Warfare and Violence

India's major wars include the Arab invasions of the eighth century; the Ghaznavid conquest of the late twelfth century, which began the main Muslim period; the overthrow of the Ghaznavids by the Ghurids; the ensuing wars of the Delhi Sultanate (thirteenth to sixteenth centuries) with its factional intrigues, battles against the Mongols, and the subduing of Hindu kingdoms; the power struggles of the Khaljis (1290-1320), Tughlug (1320-1416) and Sayiid (1414-51) dynasties; Timur's invasion of 1398; the Mughal initial conquest of the sixteenth century and its continued warring to subdue Hindu kingdoms; in the south, the power seizures and rivalries under the Bahmani kingdom (1347-1527) and its rivalry with the Vijayanagar Empire (1336-1646); Marathan rebellions against Mughal encroachment in the south and their own expansion in the eighteenth century; and finally the European colonial wars, fought among British, French, Dutch, and Portuguese, but involving the Indians.

Far more disruptive are the many succession disputes, violent overthrows of petty states, and the almost continuous, often low-level, warfare. Eleven historical citations on such violence are found in Appendix 10.1. This endemic violence produced unstable and fluid ruling groups, just as was the case in Africa. In northwestern Europe and Japan, by contrast, the durability and cohesiveness of high-level competing groups had made vertical alliances possible.

As in Africa, there were periods of peace in India. But — again as in Africa — these were neither long enough nor pervasive enough to alter the underlying properties. As in Africa, this violence did not stop entrepreneurship, capital formation, or trade. But it did put a cap on the institutions of durable economic development, which can reach the necessary complexity only when their participants come to trust each other through continuous peaceful relations.

Endemic violence was temporarily suppressed by the British occupation. After independence in 1947, it erupted again over the whole subcontinent: between Hindus and Muslims as Pakistan was created; three succeeding wars between India and Pakistan; the communal riots in various states in 1978; fighting between Muslims and Hindus in 1982; [26] bombings by militant Sikhs in 1982; [27] massacres in Assam in 1983,28 which broke out again in 1989; [29] Hindu-Sikh warfare in 1984, including the Hindu assault on the Sikhs' Golden Temple with 41 victims of torture; [30] clashes with Ghurkas demanding a state of their own; [31] the assassination of Prime Minister Indira Gandhi in 1984; [32] battling between Bengali immigrants and Chakra tribespeople in Bangladesh in 1987; [33] "hundreds reported killed each year" in Bihar; [34] new assassinations in 1985 with violence in the Punjab in 1986; [35] warfare of Tamils of India and Sri Lanka versus Buddhist Sinhalese throughout the 1980s; [36] the assassination of M.M. Farooq, senior Islamic leader in Kashmir in 1990; [37] Hindu-Muslim riots in 1990 over a Hindu plan to erect a temple on the site of a mosque in Ayodha, and the destruction of that temple; [38] the assassination of Prime Minister Rajiv Gandhi in 1991, [39] and fighting on the Kashmir border. [40] Also:

Indian paramilitary forces and local police officers fought here today with thousands of students and other demonstrators demanding an end to a new policy reserving more jobs to some lower-caste Indians. [41]

[A] recalcitrant voter or two may be gunned down as an example to others. . . . This newfangled system of voting can be settled best by violence; violence alone proves a point dramatically and irrefutably. [42]

Caution must be exercised in assessing Indian warfare, however. We do not know how to measure violence. All wars are different, and endemic violence is always to a degree. Nor is the threshold between violence and nonviolence known at which vertical alliances, leverage, and trust become possible. Europe and Japan also had their share of warfare. Violence erupts also in the industrialized world: rioting and burning in Washington, D.C. in 1967 and in Los Angeles in 1992, for example. The bombs dropped on Nagasaki and Hiroshima in 1945 and the United Nations/Iraqi War of 1991, with an economy destroyed, an estimated 100,000 killed and many more uprooted, and a country driven to poverty, starvation, and ethnic hatreds, shows that the United States still is ready to employ violence. Vicious and terrible though these events were, however, U.S. economic growth was not interrupted. Rather, a different kind of violence — continuous, on the inter-personal level, all-pervading, and therefore endemic — inhibits the institutions of economic growth in Africa and India.

The wars in northwestern Europe and Japan ceased to be endemic during the centuries of rapid economic development. Even without exact measurement, the far greater intensity and frequency of inter-personal violence in Africa and India today puts it in a different class from the violence of the more developed countries.


As in Africa, European colonial governments — this time primarily the British — unwittingly elevated Indian elites to powers they had never held before. This they did by mandating organizations and relationships copied from their home country, but whose checks and balances had not evolved in India. As in the case of Africa, powerful Indians, appointed to positions in these organizations, behaved with the aggressiveness of their time-honored institutions, not limited by the constraints of English institutions.

In the seventeenth century, when sovereign boundaries were looser than they are today, the British East India Company dotted the coast with trading points, or "factories." Recognizing that rulers dominated economic enterprise, it bought and sold through the Mughal emperor or territorial rulers. This policy worked for a century, but contradictions gradually emerged.

First, the British East India Company became involved in local wars. The Mughal emperor was trying to assume paramountcy over many autonomous rulers, to make them lose hereditary rights and depend on him. [43] The company reinforced his power by doing business with him.

Second, the company fought other Europeans for trade jurisdiction. These wars overlapped rivalries among Indian rulers, who would ally with one or another European power. Not being clear whether it was a private business or a representative of the crown, the company increasingly resembled a feudal lord.

But an obsolete feudal lordship in Britain differed from its living counterpart in India. In the latter, mutual obligations did not exist or were not clearly defined. When the company became zamindar under the Mughal Empire by buying rights over cities in 1698, it began to assign lands and collect rents on behalf of the Mughal emperor. Uninhibited by legal restrictions, British officials grabbed powers they could never have acquired at home. Parliament found this to be "corruption."

Third, dismayed at this corruption, in 1784 the British Parliament assumed the political but not the business functions of the company. After a bloody rebellion in 1857, the British Government took these over as well.

Fourth, the British tried to remodel Indians after themselves. An influx of British agencies — banks, law courts, and the like — was easy. But the landholding system became its nemesis. [44]

Out of the bewildering array of land and tax rights, the British tried to establish private ownership. They selected the zamindars and certain other claimants as the most likely to imitate the "innovating landlords" of seventeenth-century England. In a series of "settlements," they made these the private owners. But "innovating landlords" did not materialize. Instead, the new landowners had a more powerful weapon over their tenants than ever before. Previously, there might have been some custom or obligation that would mitigate excessive taxation or dispossession or cruel treatment, or the tenants might have held some incipient leverage, if for example some other overlord, an enemy of their immediate rent collector, would protect them. But naming the zamindar as the landowner protected by the British government removed whatever minimal leverage the peasants possessed. The new owners demanded maximum rent with minimum outlay. Perhaps in time they would have perceived that improved agricultural output through investment and cooperation with tenants would have yielded just that. But in a world in which possession had never been secure and the stability of workers never assured, immediate payoffs were preferred.

A further explanation may lie in a cultural difference touched upon by Neale, who writes that the British, in acting as if the Indians responded culturally as they themselves would have, failed to grasp different values that Indians placed on money and power: "more Englishmen were willing to trade in more power for money while more Indians were willing to trade in more money, or goods, for power. . . . To the Englishman, the route to power lay in public administration or in parliamentary politics. [To the Indian, on the other hand, it lay in control over people.] Since villages were often split by faction fights, the political Indian needed to increase the unity of and the numbers in his faction. The ideal position for an Indian interested in power was to be a leader of the dominant faction of the dominant caste in a village." [45] But tenants selected on the basis of who would bring the most power might not be the same as those who would produce the greatest output. These observations reinforce the hypothesis that a shift in relative values — from power to material wealth — correlates with durable economic development.


Religious and political hierarchies define social distinctions and allocate privileges in premodern societies. The caste system has always performed this function in India. With Brahmans as the highest caste for millennia, one may presume that the law was made by Brahmans for Brahmans. Even before the first millennium CE, rules were being compiled in the sacred writings, which were intended to cover every aspect of life, including the economic.

Hindu law traditionally originates in the Vedas, at uncertain dates about 1500-1200 BCE. But these writings were sacred hymns, not laws, and they did not apply to non-Hindu Indians, such as Christians, Jews, and Muslims. Rather than judicial precedent, the sacred writings were guides to behavior, which kings and judges would take into account in their legal decisions. Subsequent scholars — virtually all Brahman — elaborated and interpreted them, in a series of writings collectively known as Dharmasastras, which might differ according to region. The "duty of the King to give justice lies within the whole concept of a dharmic ideal." [46]

In addition to this top-down law, early village law, the kula, was probably negotiated by "cultivators, barbers, traders, artisans, herdsmen, and so forth. . . . [L]ater literature shows that these lower classes also had their group organizations or guilds for regulating their own affairs. . . . [T]hese inferior classes had guild usages which were binding on them irrespective of any reference to the sacred law." [47] Indeed, many commercial disputes were resolved in villages without being brought to the king or Brahmans. Principles of this law were studied by scholars and written down in manuals.

Like that of Europe and Africa, Indian law has multiple origins. First are the Vedas and the Dharmasastras, which are specifically Hindu. [48] Second is Muslim law, the shari'a, based on the Koran. Third are many ad hoc arrangements by local kings, such as trading rules in ports visited by European ships. Fourth is the kula, or village law. Finally, European laws — mostly British — were added to the mix.

Before the British occupation, no known attempt was made to reconcile the disparate laws into a single system, as had occurred in northwestern Europe. Hindu and Muslim laws could hardly be integrated, for they sprang from different divinities, and the Koran was presumably immutable. Only the third and fourth types — ad hoc arrangements and kula — were drawn up by agreements among participating parties, and these might be swept aside by the next conqueror.

Thus elitist and religious law overwhelmed lawmaking on lower levels, in contrast to the cases of northwestern Europe and Japan, which tended toward agreed or negotiated justice. "Many disputes [in India] could not be brought by the aggrieved parties, but were promoted suo motu as the outcome of the king's officers' enquiries, including espionage." [49] However, contrasts based on this quotation must be made with caution, for early European and Japanese courts also would not consider family disputes, whose judgment belonged to the head of the family. Nevertheless, the path from "unequal contract" to "impartial law," however imperfectly completed in the West and Japan, was not undertaken at all in India until modern times.

Sen-Gupta [50] attributes the following law to Visna, a god of the Vedic period: "If the seller fails to deliver the goods to the buyer who has paid the price, the seller is liable to repay the price with interest and to pay a fine of 100 panas." He attributes the following law to Yajnavalkya, a semi-legendary sage of approximately the same period: "The time allowed (to the vendee) for the examination of seeds, iron, beasts of burden, jewels, females, and milch beasts, is ten days, one day, five days, seven days, one month, three days, and a fortnight respectively." [51] Other similar laws are also attributed to gods. If one supposes that these laws were written by Brahman scholars rather than by gods or ancient sages, however, they spring from elitist morality rather than the haggling of the marketplace.

A further inconvenience must have been the obvious inconsistency — even flagrant hypocrisy — between high moral qualities enunciated in the writings and the persistent, permeating violence and inhumanity practiced over centuries. Virtues such as "truth, abstention from injuring, freedom from anger, humanity, self-control, uprightness, abstention from theft, [and] ritual purity" [52] are the ideal of many religions. That qualities so distant from observed behavior should be considered standards of judicial procedure diminishes the credibility of the law itself.

A still further inconvenience of Indian law was the abrupt change with each conqueror. The Muslim period had an advantage for trade, in that for the first time all of northern India was subject to the same laws, [53] but also a disadvantage, in that the sudden abandonment of traditional laws must have led to some confusion.

Both the capriciousness of conquest and the distance between ideal and practice would imply that laws were interpreted in ways to preserve hierarchy and privilege rather than in the "equal justice" to which European visitors were aspiring in their own lands. The British dilemma was that laws they might impose would not be enforced, while Indian laws did not protect trade and production to the degree they wanted. Their modus vivendi was, as in Africa, to allow indigenous legal principles to continue for local disputes but gradually to introduce British laws of ownership and contract through statute and judicial precedent.

As in Africa, however, three adverse elements crept in. First, British courts did administer local law, Hindu for Hindus and the shari'a for Muslims. Not only were they unfamiliar with these laws, but they assumed them to be static. In writing them down, they both stopped their natural evolution and adjusted them to their own custom. [54] Second, laws imposed by outside authority are not accompanied by the checks and balances established when the same laws evolve through negotiation and parliamentary debate. The gap between lawgivers and subjects was vast. [55] Third, without these checks, Indian judges and civil servants gained authority they had never known before. That authority did not emerge full blown until after independence, however, for until then it was suppressed by the racial arrogance of British officials.

Paying little attention to the needs of the multitude, during the nineteenth century the British prepared codifications based on English law in many branches: "criminal law, civil and criminal procedure, evidence, contract, and succession." [56] Morris and Read call this a "remarkable achievement," but Mensah-Brown finds that all the British attempts to reform Indian law failed. [57] Only after independence was a Hindu legal code written by the new government, in 1955-56.

Is the Indian legal system today able efficiently to resolve disputes arising out of economic matters? If scholars have addressed this question, I have not found their works. Perhaps the Union Carbide case will offer some clue.

In December, 1984, a gas leak at this company's plant at Bhopal resulted in 2,000 deaths, with many more thousands seriously injured.58 This accident prompted discussion as to whether damage suits should be tried in the United States, since India's courts might not be capable of handling them. Few if any damage claims were filed, for to do so is not the custom in India:

Even without Bhopal litigation, the country's chaotic district and high courts labor with a backlog of a million cases, many of which will drag on unresolved into the 1990s. The notion that India could handle the Bhopal suits "is ludicrous," says Salman Khurshid, a Delhi lawyer who has studied and taught in England. [59]


In many respects, the Indian financial system of the thirteenth century resembled those of Europe. Although coins were minted primarily by monarchs (as in Europe and Japan), private credit was extensive. Guilds and other merchant associations possessed links beyond Indian borders. Some specialized in money exchange and lending. Merchants used commenda-style arrangements similar to those of the Italian city states. [60]

Indian traders had known money at least since Roman times. Gold coins were minted by the Kushan (from about 78 CE) and Gupta (320-540 CE) monarchs. By the eleventh century, money circulated in all parts of the subcontinent. Coinage by the Sultanate of Delhi, begun in 1193, helped develop an international credit network.

The currency of the Mughal Empire (1526-1761) became one of the most highly reputed in the world, with uniform, standardized issues and coinage open to everyone who brought bullion to an authorized mint. Seigniorage fees were small, so the exchange value of coins approximated the market value of the metal. Prices fluctuated among gold, silver, and other metals. [61] Nonmetal and base-metal currencies were used for small trade, including copper, cowries, badam (an inedible bitter almond from Persia), lead, iron, tin, and seeds. [62] European trading companies also issued coins, often authorized by territorial rulers in southern India, where Mughal control was looser. [63] Presumably Indian rulers made these accommodations — for which contemporary African rulers saw no need — because India was in the center of the trade routes, and coins and credit arrangements were needed for trade. Metal had to come from abroad for these coins.

Why India did not grow into one of the world's greatest financial centers, rivaling Britain and Holland, is unexplained. The European powers did nothing to prevent it. Indeed, a source of coinage in India might have been to their advantage. A major reason for this lack of development may have been the failure to diffuse power in India, with the result that the monetary system was heavily adapted to the collection of taxes rather than to the needs of trade.

Probably the main need of coins for Mughal and territorial rulers was to buy the goods of war; taxation was the way to obtain the coins; and, because of India's location and exposure to European technology, demanding coins rather than produce was a more apt means of taxing. [64] Perlin elaborates on the relationship of money to taxes in the Mughal period. First, "big urban bankers had become closely involved with the activities of tax-collectors in many parts of India." [65] Second, even when taxes were paid in kind, other charges on a peasant's income required coin: "contracts between absentee and residential right-holders, the huge range in size of different accumulations of rights, and the complexity of organization of the larger households, would have allowed considerable flexibility in choice as to the medium of collection." [66] Thus the relationship between coins and taxes is not simple. Rather, coins played their part in a complex set of economic transactions, in which surplus extraction from the peasantry was the dominant motif.

Contemporary Europeans, on the other hand, had long since passed the day when surplus extraction from the peasants was their primary reason for minting coins. By the seventeenth century, world power and trade were so intermixed that it is impossible to distinguish European motives. Whichever the case, by Gresham's era sound coinage was valued by enough of the many interest groups — traders of many countries, manufacturers, farmers large and small, the Queen of England and the King of France — that they converged on stable money (though they did not always achieve it) for reasons far beyond taxes. It was different in Japan, where Tokugawa rules were trying to suppress international trade. But it was also different in India, and this difference may have been a reason why India did not remain what it once was, the dominant trading power of the world.

Not only was gold coinage advanced in India by the seventeenth century, but so also was the private credit market:

Country moneylending involved both professionals and potentially anyone retaining an annual surplus: managers of rights, administrators in their private capacity, soldiers, wealthy right-holders and the better-off peasantry. . . . Borrowers also included a considerable range of different occupations and statuses, . . [67]

Such a rich mixture of groups and institutions was already integrated into a total system, through which international flows of specie must have related directly to the money supply for all activities of the country, each one to be supplied according to its needs and the rate of interest. This in turn probably led to multiple expansions of bank money, common also to the more-developed countries. The ultimate development is a central bank, the Reserve Bank of India, created in 1935. Although India missed its opportunity to become a world financial center, nevertheless its monetary system is today modern and efficient.

Yet some disturbing factors — to be elaborated in the next section — can be traced to Mughal times. Efficient as the credit system was, the records show that in the Mughal era it was biased toward supplying resources to leading families. [68] It was built mainly upon the demands of both the central government and dispersed foci of local power and upon the need to fulfill a vast network of obligations, rather than as a source of credit for economic entrepreneurship. It could be as efficient and modern as any in the world, but it would serve the imbalance of power. The same is so today.

In sum, the money system in India had all the inherent possibilities of becoming a modern rival to that of northwestern Europe. That it did not do so reflects the fact that money follows culture, not the other way around. Like its legal and fiscal systems, India's monetary system is built on the skewness of power, the failure of vertical negotiation and leverage, the unforgiving land-tenure system, and the continued dominance of authorities over underclasses. The system revolves around perpetuating these imbalances rather than maximizing domestic production and international trade.

India Today

India's real gross domestic product increased, on average, by 4.39 percent per year for twenty years, 1970-90. With population growth averaging 2.16 percent per year during the same period, the per capita increase in gross domestic product was about 2.23 percent per year, a respectable rate by world standards. Increases in agricultural output, thanks in part to the green revolution, have been spectacular; periodic famines appear to be past. Unlike many Third World countries, India has not incurred excessive foreign debt. Finally, the monetary authorities have controlled inflation to a modest average of 6 to 9 percent per year since independence. [69] "[India] is increasingly emerging as a major industrial and military power. . . an increasingly modern, powerful and self-sufficient industrial nation that manufactures everything from video recorders to fighter aircraft." [70]

By the major economic indicators, India is on its way toward becoming a more developed nation. Yet it scarcely complies with the power-diffusion process. Have we therefore uncovered a flaw in that process?

Not necessarily. Had we been analyzing Russia under Peter the Great, Turkey during the Tanzimat of the nineteenth century, or China in the early 1950s according to the precepts of mainstream economics, we might have concluded that any of those areas had "taken off" into sustained economic growth. Yet all of them faltered.

There are today a few signs that India may be at the threshold of acquiring the early elements of a power-diffusion process. First, land is running short. While the afflictions of population explosion are well known, it carries one bright spot. Indians can no longer migrate away from their human relations; there is no more place to go. Second, interest groups are forming, to put peaceful pressure upon "superiors" for a change in institutions. [71] There are signs of vertical negotiation, not just horizontal. Third, there is some awareness of the need for a free market in goods and services.

But the positive signs are — so far — overwhelmed by a sea of negatives. First, although privatization of industry is rife in the 1990s, nevertheless the central government is hanging on to its control over the economy. "Businesses must obtain permission to enter markets or leave them, to build new factories or close old ones, to import or export." [72] "[N]ot only must a minister be propitiated before he will issue a license, allot a house, or award a pension, but so must every clerk through whose hand the relevant file passes. . . ." [73] Second, violence is as strong as ever. In many areas it remains a legitimate means of resolving conflicts. Third, most proponents of free markets in goods and services, whether Indians or the international community, are content that these should be imposed centrally and do not understand why central authorities do not always perceive the advantages. They do not yet grasp that free markets will become durable only if, as institutions, they are formed in free markets for institutions.

India's economic problems, much analyzed elsewhere, [74] are only summarized here. First and foremost, poverty — both rural and urban — is grinding and intense. [75] Second, business enterprise is high-cost and inefficient. Private producers are protected from international competition, and government enterprise incurs heavy subsidized losses. [76] Privatization can hardly be expected to yield efficiency under these circumstances. Third, price and production controls favor the wealthy few, while limiting or closing opportunities for the many poor. Fourth, the spectacular agricultural progress is largely limited to water-abundant lands of wealthier farmers. In other farms, agriculture has been stagnant for a century or more. The vast majority of India's rural population lives in the less-favored areas; many are landless sharecroppers. Fifth, government employment is excessive and largely nonproductive. Some predict that without major policy changes, India's vaunted economic progress will be short-lived.

On the assumption that the Government of India is motivated to promote the "general national welfare," economic advisors are proposing some or all of the following steps: (1) Continue to sell ("privatize") unprofitable government enterprises or make them otherwise accountable so that they operate at a profit. Close those where this is impossible. (2) Eliminate price controls. (3) Reduce unnecessary bureaucracy, to bring government accounts into balance. (4) Both the rate of inflation and the foreign deficit should be diminished by appropriate interest and exchange-rate policies. Although price rises and balance of payments are not chronic problems, they have been worsening of late. (5) A major land reform is essential to agricultural improvement.

Land reform exemplifies the technical possibility of a positive-sum move on which the parties refuse to agree. Because the "overriding constraint is the unfavorable ratio of land to population in the rural areas" and "extreme inequalities in the distribution of ownership," [77] and because sharecropping does not supply incentive to do labor-intensive agriculture, Frankel concludes that land reform is a prerequisite to increased peasant incomes. Large owners (50 acres or more) farm small, scattered plots on which they are "rarely able to realize the maximum return [because the size is] less than the optimum area for the efficient cultivation of the high-yielding varieties." Although Frankel maintains that an increase in output is physically possible with known technology, she explains convincingly that achieving it is impossible under existing tenurial arrangements. But changing the tenurial arrangements is also impossible, she says. The central government cannot command it. This decision is reserved constitutionally to the states, whose governments are controlled by the landowners. Nor can it arise from below, for the beneficiaries are too weak to demand it effectively. Though pessimistic for the immediate future, she ends with the vague hope that a democratic land reform will sometime occur. [78]

Frankel does not follow up her cogent observation, however, that a positive-sum solution — increased agricultural output — is physically possible with known technology. So, if all parties would gain through some distribution of the increment between landowners and peasants, why cannot they agree to do it and to divide the gains? One of Frankel's explanations is that "some landowners simply have no interest in land development or in maximizing output from their holdings. Under existing tenurial arrangements, they have reliable income effortlessly by collecting rent and interest on loans." [79] Still, it seems unreasonable that landowners would not wish to increase their rents through increased productivity. The marginal utility of income surely has not reached zero for them.

Several possible explanations come to mind, for the failure of greater landlord-peasant cooperation to increase output for mutual advantage. Owners might fear that any seemingly positive-sum move would enable peasants to seize their lands violently. Or they might believe that consolidating fragmented holdings would reduce their political prowess, which depends on an extensive presence. Or they might not want to recognize lower-caste peasants as legitimate bargaining agents. Or they might feel that any change is a risk they do not want to take. Reassuring them on these matters might require communication with the lower castes and some trust, both of which are lacking. Whichever of these may be the case, the owners appear unwilling to trade power for goods.

These are speculations, all of which imply that lack of trust in vertical relationships is still a barrier. The power-diffusion process would be initiated only when the landowners are forced to negotiate with peasants because some circumstance requires them to do so for their very survival.


India's economic achievements, compared with, say, those of Africa, are explained primarily by geography — its location in the center of East-West trade routes — but this happy circumstance has not been enough to realize the promise of the highly advanced industrial and financial society that might have been predicted in the thirteenth century.

Probably because of another geographic circumstance — the abundance of land until the present century — Indian groups have rarely been forced to communicate and negotiate vertically with each other. Numerous invasions and chronic warfare are another explanation. International trade (according to the Goodell thesis) may be still another. With the ability to escape each other, Indian elites and commoners have followed the age-old pattern, that power will not be yielded in favor of vertical cooperation, and free markets will not be agreed upon as second-best for everyone, until there is no other path for survival.

Some Indian elites join foreign governments, international agencies, and academicians in believing that decentralized power and freedom of enterprise can be imposed by government mandate. For example, two newspaper sources proclaimed:

India's Rajiv Gandhi Moves to Reform Government, Industry. He Lowers Barriers to Trade, Shuffles Senior Officials, Tackles Vast Bureaucracy. [80]

Prime Minister Gandhi, promising voters a decentralization of power, wants to make elected village councils compulsory all over India, and has introduced a constitutional amendment to bring about "panchayat raj," or "power to the panchayats." The slogan is plastered on walls everywhere he goes. [81]

"What the lord gives, the lord may take away." Gandhi's promises were no guarantee that he or his ministers or successors would not subsequently retract what he had granted. He never had the chance to implement his long-term plans anyway; he was assassinated in 1991.

Foreign and international agencies may well be repeating the mistakes of the British when they support "centralized decentralization," morally or financially. In so doing, they help elites gain power they had never held before, and they make the peasants more beholden to the rulers, just as the British did, and for the same reason: so they will mold their country into a world of foreign choosing.

The current semblance of liberalized economy and economic advancement will not survive unless the interest groups now forming can exert enough power to hold the rulers accountable for their use of resources. In this, the emergence of democracy may be a great boon. That a government can be voted out of office and will not come back by coup d'état, as it might in some countries of Latin America or Africa, provides these groups with a powerful bargaining tool.

So far, however, they have not used it well. Unless they do, India will share a fate similar to other historic instances of command development, which were also abetted by foreign powers. Only with the advance of new, pluralized forces, already weakly evident, will the poorer segments of India escape their centuries of grinding poverty.


  1. EBMa 1974:9:339.
  2. Wolpert 1977:70, 74, 78.
  3. EBMa 1974:9:345.
  4. Wolpert 1977:92; Lewis 1988:185.
  5. Ludden 1985:139.
  6. Ludden 1985:35.
  7. Powelson 1988:chapter 16.
  8. Kumar 1982, chapter II.
  9. Wade 1988:4,5. For support, he cites Hofstede 1980 and Kakar 1981.
  10. Shelvankar 1940:102, cited by Desai 1954:3.
  11. Powelson 1988:194.
  12. Metcalf 1979:3.
  13. Stein 1969:180.
  14. EBMa 1974:9:363.
  15. Powelson 1988:195.
  16. Banerjee 1980:262.
  17. Ludden 1985:89. The descriptions of mirasidars are on preceding pages.
  18. Habib 1982:48.
  19. Ludden 1985:42, 81.
  20. Banerjee 1980:261.
  21. Gordon 1979:74.
  22. Gordon 1979:78.
  23. Gordon 1979:75.
  24. Habib 1982:48.
  25. Kumar 1982:207, 29.
  26. Banks 1990:284-5.
  27. "Sikhs Raise the Ante at a Perilous Cost to India," New York Times, 11/7/82.
  28. Hazarika, Sanjoy, "The Benaglis in Assam: How a Tragedy Evolved," New York Times, 2/24/83; "Ethnic Slaughter in Assam Abating, but Not the Fears of the Survivors," 3/28/83; and "Peace Fragile in Assam Year After Massacres," 2/26/84.
  29. Hazarika, Sanjoy, "Scores Killed in Ethnic Violence in Northeast India," New York Times, 8/13/89.
  30. Articles by William K. Stevens in New York Times, 3/27/84. 4/3/84, 4/8/84, and 5/23/84. Also Hazarika, Sanjoy, "41 Torture Victims Found at Sikh Shrine," New York Times, 8/7/88.
  31. Weisman, Steven R., "Indian Tea Region Yields Bitter Harvest of Unrest," New York Times, 10/3/86.
  32. Charlton, Linda, "Assassination in India: A Leader of Will and Force," New York Times, 11/1/84.
  33. Weisman, Steven B., "Murderous Feuds Threaten Unity of South Asian States," New York Times, 4/26/87.
  34. Weisman, Steven R., "India's Corner of Misery: Bihar's Poor and Lawless," New York Times, 4/27/87.
  35. Weisman, Steven R., "In Punjab, the Young are Particularly Restless," New York Times, 6/29/86.
  36. Weisman, Steven R., "Sri Lanka: A Nation Disintegrates," New York Times Magazine, 12/13/87.
  37. Banks 1990:289.
  38. Encyclopedia Britannica Book of the Year 1991:430.
  39. Spaeth, Anthony, and Greenberger, Robert S., "Assassination of Gandhi Ends Political Dynasty That Shaped India," Wall Street Journal, 5/22/91.
  40. Hazarika, Sanjoy, "Kashmir Dispute is Souring India-Pakistan Relations," New York Times, 1/31/90.
  41. Hazarika, Sanjoy, "2 Die as Upper Castes Fight Allotment of Jobs in India," New York Times, 9/26/90.
  42. Desai, Anita, "India: The Seed of Destruction," The New York Review, 6/27/91.
  43. Hasan 1969:19.
  44. Powelson 1988: chapter 17.
  45. Neale 1969:8-10.
  46. Derrett 1973:10.
  47. Sen-Gupta 1953:8-9.
  48. "Although Hindu law had its origins in India, it is not the law of India any more than Islamic law is the national law of Muslim states. It is the law of a community which in southeast Asia observes Hinduism or a philosophy of life known as Brahmanism" (Mensah-Brown 1976:53).
  49. Derrett 1973:13.
  50. Sen-Gupta 1953:272-73.
  51. The fact of six commodities but seven time spans is an apparent error in the author's rendition.
  52. Derrett 1973:22-23.
  53. Lewis 1988:183.
  54. Derrett 1973:22-23.
  55. Derrett 1973:25.
  56. Morris and Read 1972:110.
  57. Mensah-Brown 1976:55.
  58. Banks 1989:275.
  59. Stewart, James R., "Why Suits for Damages Such as Bhopal Claims are Very Rare in India," Wall Street Journal, 1/23/85.
  60. Lewis 1988:186.
  61. Prakash 1987:173.
  62. Perlin 1987:240.
  63. Prakash 1987:188.
  64. Prakash 1987:204.
  65. Perlin 1987:278.
  66. Perlin 1987:279.
  67. Perlin 1987:280-1.
  68. Perlin 1987:282-3.
  69. Data in this paragraph are calculated from International Monetary Fund, International Financial Statistics Yearbook 1989:412-3 1992:406; March 1992:282-4; and May 1993:280-1.
  70. House, Karen Elliott, and Kann, Peter R., "India, though plagued by poverty, emerges as major world power, Wall Street Journal 8/8/84.
  71. See, for example, "Organized Interest Groups," in Divekar 1978, chapter 5. The formation of interest groups is also reported in New York Times, 8/14/81, 1/17/82, 1/20/82, 6/15/82, 10/29/84, 7/26/88, and 6/28/89.
  72. Passell, Peter, "India's Slow-Growth Path," in New York Times, 3/18/87.
  73. Desai, Anita, "India: The Seed of Destruction," The New York Review, 6/27/91.
  74. For example, World Bank 1990a and 1990b; also Lucas and Papanek 1988. For newspaper articles on industrial progress and entrepreneurship, see New York Times, 8/2/81, 2/24/83, and 8/6/83.
  75. For newspaper articles on population and poverty, see New York Times, 2/19/82. 8/8/84, and 4/27/87.
  76. For newspaper articles on overcentralization and inefficiency, see New York Times, 7/28/81, 1/14/82, 1/17/82, 2/20/82, 7/16/82, 8/15/82, 9/16/84, and Wall Street Journal, 4/11/88.
  77. Frankel 1979:154.
  78. A democratic land reform did occur in the state of Kerala. Although the state government was labeled "communist," the reform did not follow communist precepts. Land was confiscated from large owners and divided in private property among the middle classes. Many remained landless. This reform is described in Powelson and Stock 1990: chapter 10.
  79. Frankel 1979:158.
  80. Sterba, James P., "India's Rajiv Gandhi Moves Fast to Reform Government, Industry," in Wall Street Journal, 2/14/85.
  81. Croisette, Barbara, "Village Councils Reborn (Gandhi Gets There Late)," New York Times, 6/28/89.

Copyright © 1994 by the University of Michigan. First published in the USA by the University of Michigan Press, 1994.

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