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DADABHAI NAOROJI (1825–1917)
Pointing out the elephant in the room
From the 16th to the 19th centuries the world became more unequal. In 1500 the average person living in England was roughly as rich as the average person living in India or China. By 1900 she was eight times richer. Many Western European countries had seen blistering economic growth; much of the rest of the world stagnated or, in the case of China, actually became poorer.
What determined the “wealth of nations” was of great interest to the political economists such as Adam Smith. Yet few thought much about the economics of colonialism–especially the question of whether the growing wealth of western Europe came at the expense of other countries. Even Karl Marx, who searched high and low for problems with western capitalism, did not consider the impact of colonialism all that much. But at exactly the same time that Marx was writing, the world saw the first stirrings of what could be called “imperial economics”, looking at the impact of empires both of the colonisers and the colonised. The principal exponent of this branch of economics was Dadabhai Naoroji.
Today Naoroji is practically unknown. In his time, however, he was a celebrity. Born in Mumbai, he was part of a newish class of Indians who benefited from an English-style schooling system. He attended the Elphinstone Institute School, an institution that had been set up to educate certain “natives”. The subject he enjoyed most at school was English. In the words of his biographer, R. P. Masani, this helped make him “an orator and an author always comprehensible to the simplest minds”. In 1855 he accepted an offer to join Cama & Company, a trading firm that was perhaps the first Indian firm to be established in London.
Cama paid well, and Naoroji was a stylish fellow. Masani reports that he “went about in Liverpool and London dressed in a costume of his own invention–a long broadcloth coat, buttoned up chest high, a white silk handkerchief round the shirt collar passed through a plain gold ring, black trousers to match and a light black velvet cap, from which flowed a blue silk tassel”. But Naoroji did not much like the world of business. Masani points out that “in the course of its [Cama’s] business were opium, wine, and spirits. Dadabhai could not persuade himself to pocket the earnings of dealings in articles which led to the degradation and ruin of thousands of human beings.” So by 1856 he had become a professor of Gujarati at University College London, a position which he held until 1866.
Most famously, he was Britain’s first Asian MP.1 He had stood unsuccessfully for the Liberal Party in the election of 1886 in Holborn, a staunchly Conservative seat. Upon his defeat the prime minister, Lord Salisbury, remarked that “[h]owever great the progress of mankind has been, and however far we have advanced in overcoming prejudices, I doubt if we have yet got to the point of view where an English constituency would elect a Blackman.” Queen Victoria was reportedly distraught that the prime minister had insulted one of her Indian “subjects”.
Naoroji was determined to prove Salisbury wrong. At the election of 1892, supported by people including Keir Hardie and Florence Nightingale, he stood in Finsbury. He may have ditched his usual attire in an attempt to look “less Indian”. According to one observer at the time, “so English is his look–[it] might be Brown or Jones, did it not happen to be Dadabhai Naoroji”. He won–though by only five votes, giving him the nickname “Dadabhai Narrow-majority”. “Those who have the pleasure of knowing him,” wrote the Guardian upon his election victory, “never fail to be impressed by his keen political mind, as well as by an ease and charm of manner which would secure distinction anywhere.” In 2009 a street in the Finsbury district was named after Naoroji.
The highest stage of capitalism
Naoroji is included in this book for his economic work. He wondered why India remained poor while Britain galloped ahead. During Naoroji’s lifetime India’s GDP per capita grew by a paltry 0.3% a year, about one-quarter as fast as the equivalent figure for Britain. (There was only a tiny increase in per-person income in the first half of the 20th century.) Naoroji eschewed easy explanations for why India was performing so poorly. In his survey of the history of Indian thought, for instance, Christopher Bayly argues that Naoroji “dismissed both the climatic and also the Malthusian interpretations of famine and scarcity”.2
Naoroji placed more weight on what came to be known as “drain theory”. This is the notion that Britain sucked wealth away from India. Naoroji first outlined his thoughts on drain theory in 1867, in a lecture he gave to the East India Association, in London, just weeks before the publication of Marx’s Capital (though both were living in London, there is little indication that they knew each other at that time).3
Naoroji was not the first economist to argue that colonialism weakened the Indian economy. Raja Rammohan Roy, who had died in 1833, was perhaps the first to voice a complaint against the “tribute” which was paid from India to England. In 1841 the pro-Indian editor of the Bombay Gazette invited readers to come forward with their grievances against British rule. As J. V. Naik shows, several letters appeared under pen names. The letters may have come from individuals such as Bhaskar Pandurang Tarkhadkar and Bhau Mahajan, both of whom had, like Naoroji, studied at Elphinstone. The letters complained that British rulers were impoverishing their country. Naoroji was later to acknowledge that he was the not the first to think about the economic impact of British rule: “More than 20 years ago,” he declared in 1867, “a small band of Hindu students and thoughtful gentlemen used to meet secretly to discuss the effects of British rule upon India.” It was not only Indians who fretted about the economic impact of Britain’s dominance over India. In 1783 Edmund Burke worried about England drawing wealth from of India “without any return or payment whatsoever”.
Poverty and prosperity
Naoroji’s work builds on these contributions. His studies of the Indian economy culminated in Poverty and Un-British Rule in India, a book published in 1901. What did he argue? It is not possible to find in his work a formal, rigorous exposition of drain theory. The theory instead has many strands. The simplest is what we know today as “brain drain” (Naoroji referred to it as “moral drain”). There was a lot of migration of skilled people from India to England, including, of course, Naoroji himself. Naoroji argued that by depriving India of its best and brightest, Britain held it back.
But Naoroji did not place great emphasis on “moral drain”. He was much more interested in the drain from India’s “balance of payments”–a term for the movement of money between the domestic economy and the international economy–to explain why the Indian economy was doing badly. Naoroji linked his arguments here to the works of John Stuart Mill.
In a passage of Principles of Political Economy, published in 1848, Mill explains the way in which exports and imports work. It sounds essentially like a re-statement of Hume. Imagine that Britain imports more than it exports. The result will be a net loss of currency from that country. In response to this “drain” (Mill’s word) of currency, prices in the British economy fall. That makes Britain’s exports cheaper. But as other countries accumulate more currency, their prices will rise. As a result, Britain will be able to afford fewer imports–and its exports will be more competitively priced. Exports and imports will come back into balance. The drain of money will stop.
Mill then considers the question of what economists today call “unrequited transfers”–payments of money, from one country to another, for which nothing is sent back in return. Examples include remittances, foreign aid and taxes. Using the logic from before, Mill argues that “a country which makes regular payments to foreign countries, besides losing what it pays, loses also something more, by the less advantageous terms on which it is forced to exchange its productions for foreign commodities” (emphasis added). In other words, as a result of paying unrequited transfers, the price level in that country will fall. It will therefore find itself exporting more and/or importing less. The standard of living in that country will, correspondingly, be lower.
Naoroji was inspired by this idea. He wondered if it applied to India. Every year India shipped huge amounts of money to Britain, with nothing in return. The catchall name for these “unrequited transfers” was “Home Charges”. Britons working in India, for instance, sent money back home to support their families and for the education of their children. Money was also sent to Britain to repay public debt held in India. As Angus Maddison, an economist, points out, India also paid for the salaries of colonial administrators. Many of these were extremely high: “the Viceroy received £25,000 a year, and governors £10,000. The starting salary in the engineering service was £420 a year or about sixty times the average income of the Indian labour force.” Meghnad Desai, another economist, reckons that during Naoroji’s time, roughly half of the financial transfers from India to Britain could be considered “unrequited”.
Why was that bad for India? According to the Millian–Humean logic, it implied that Indians had to consume fewer imports, resulting in a lower standard of living. Such transfers were also an inherent problem, because they were funded by heavy taxes on ordinary Indians: Naoroji calculated that 75% of India’s tax revenue was collected from poor people. The best estimate, upon which Naoroji and his disciples settled, was that each year roughly a quarter of all tax revenue raised in India was remitted back to England. A country so poor could ill afford to have to divert so much tax revenue away from domestic needs.
Again borrowing from Mill, Naoroji argued that the “drain” reduced the stock of capital in India available for investment. If Indian companies did not have enough money to invest then the country could not become more productive. It was therefore destined to remain poor–which was, indeed, precisely what happened.
Where data come in
Naoroji’s critique was, and is, powerful. Intuitively it seems plausible. It also had clear political implications. His theory provided nationalists with solid intellectual backing. British colonialism was objectionable both on ethical and economic grounds. India needed to be an independent country. At that point the drain would vanish because India would no longer need to pay “tribute” to Britain. Economic growth would result as the drain now retained would be used to boost investment.4 Naoroji also wanted India to raise barriers to trade, thus helping to protect industries that were getting going.5
Naoroji himself became more of a strident nationalist over time. “Self-government”, he was eventually to declare, “is the only and chief remedy. In self-government lies our hope, strength and greatness.” Bayly speculates that Naoroji “seems to have been the first major public man to use the term ‘Swaraj’ (self-rule) for dominion status in India”. Mahatma Gandhi even hung a portrait of Naoroji in his room when he lived in South Africa. He referred to Naoroji as both “the author of nationalism” and “the Father of the Nation”.
But does drain theory stack up? One issue is what precisely Naoroji considers to be part of the “drain”. He has a poor understanding of so-called “invisible” imports, such as insurance. Since no physical commodity is bought, Naoroji believes that money spent on such imports is simply wasted–that it composes part of the “unrequited transfers”. But that is not a fair assumption. Invisible imports can boost the economic health of a country just as much as ones that you can drop on your foot.
There is also the question about the benefits accruing to India from being able to acquire cheap credit, since the British gave the country implicit financial backing. As M. G. Ranade pointed out in 1890, “[a] portion of the [‘drain’] represents interest on moneys advanced to or invested in our country, and so far from complaining, we have reason to be thankful that we have a creditor who supplies our needs at such a low rate of interest.” Others pointed out that Britain was investing in her colony. For John Maynard Keynes, who believed quite solidly in the economic benefits of British rule over India, the inflow of long-term capital into India was in fact evidence of what could be called a “reverse drain”6 of wealth from England.7 The upshot is that Naoroji probably overestimates the size of the drain from India to Britain.8 Desai puts it at about 2% of GDP a year.
What about the counterfactual: what would Indian capitalists have done with that 2% of GDP had it not “drained away”? Naoroji does not consider that question (and, to be fair, it is difficult to do so without fairly complex statistical treatment). Angus Maddison asserts that “[i]f these funds had been invested in India they could have made a significant contribution to raising income levels.”
Perhaps. Desai counters that at the time many Indians preferred to hoard their savings in the form of gold or silver, rather than investing it.
But assume that they would indeed have invested the money, if only it had not drained away. According to Desai, 2% of GDP would not have made a massive difference. “[I]f the 2%… drained had been invested entirely into productive investment,” he calculates, “it would have added between 0.12 to… at most 0.15 to the growth rate”–a small amount.
Naoroji’s drain theory, then, has its problems. So what is the best explanation for why India grew so slowly–if at all–during the 19th century? Answering that question has provoked an enormous amount of academic scholarship; there is not nearly enough space to do that work justice. But some argue that, contrary to what Naoroji had claimed, the impact on the Indian economy of poor British administration was the main factor. Britain’s political realignment of India created economic turmoil, even as British exports began to out-compete India’s on world markets.9
A tantalising combination
It is difficult to assess Naoroji’s influence on the development of economic thought. Most histories of economic thought give Naoroji at best a passing mention. In his gigantic History of Economic Analysis Schumpeter does not mention him once.
But Naoroji seems to hang over Marx. True, in Capital, published in 1867, Marx barely touches on the economics of colonialism. He does not mention Naoroji. Yet towards the end of his life, Marx appears to have cottoned on to some of Naoroji’s ideas. It is possible that a mutual friend, H. M. Hyndman of the Social Democratic Federation, introduced them to each other at a dinner party.
Whatever happened, Naoroji’s ideas seemed to have seeped into Marx’s consciousness. By 1881 Marx was arguing that “[w]hat the English take from [India] annually in the form of rent, dividends for railways useless to the Hindus; pensions for military and civil service men… is a bleeding process, with a vengeance!” Marx had no time to incorporate these ideas into his work: two years later he was dead. Had Marx lived for longer, would Dadabhai Naoroji be a better-known economist today?