Locally, the Extent of British Rule in India Still Holds Back Economic Opportunity

Areas under direct rule lost the components of human capital

While formal British colonial rule in India officially ended in 1947, UCLA Anderson’s Shohini Kundu and Washington University at St. Louis’ Nishant Vats suggest the economic exploitation by the British is not merely a fact of history, but a still-active driver of inequality.

In a working paper, the researchers leverage a real-world A/B testing environment of sorts. During British rule in India — the East India Company  began land grabs in 1757; formal colonialism under the British Crown ran from 1858-1947 — some regions were subject to direct British control, while others had a more indirect relationship, with princes retaining administrative control of their region, albeit with a constant threat of annexation.

Kundu and Vats analyze current day private-sector investment and human capital (skills, experience, access to skilled networks) levels relative to whether a region was historically under direct or indirect rule during the reign of the EIC and then the official British Raj. 

The researchers make a case that the full-on direct rule exploitation that ended nearly a century ago continues to hold back the economies in these regions. 

A key observation in this paper is how British takeover in direct-rule states effectively robbed many low-caste districts of their economic engine. No longer able to reap the benefits of their agricultural labor — cotton was a particularly valuable commodity the lower caste were more adept at growing and converting into textiles — the locals lost valuable human capital to share and pass down. Smaller coexisting interdependent local economic ecosystems were overrun by the EIC and then by formal British rule.

And it is that legacy that seems to endure. Today there is less private investment in areas that historically were under direct rule, and projects that do exist are smaller in scope. 

Kundu and Vats make a case that the loss of human capital during British colonialism still haunts these areas. Private investment gravitates to areas brimming with capability (see: venture capital’s infatuation with Silicon Valley); the districts in India under direct control lost agency in cotton textile production, which was for many their only available skill. The researchers note that the ability to segue into new industries or obtain new skills is limited for the lower-caste of Indian society — both historically and in today’s society as well.

History as a Current Day Economic Variable

The researchers utilized a database of project-level private investment in India from 1996 through 2018. They mapped the investment activity in 427 present day districts to the historical boundaries of 17 historical states that existed during formal British rule. 

The authors calculate the level of investment concentration in a given area and find that in direct-rule states, investment concentration today (suggesting less competition) is 20 percentage points higher than in states that were historically under indirect rule. They estimate that the impact of direct-rule investment concentration accounts for 13% of the geographic variation in private investment in India today. 

In a further refinement of their research, Kundu and Vats studied pairs of contiguous districts in which one was under direct rule and the other fell under indirect rule. This approach helps to control for other potential drivers of investment such as climate and local policies/customs.In this analysis, a bordering district that was under direct rule is estimated to receive 8% to 10% less today in private investment funding, and projects announced in directly ruled districts are about 11% smaller than those in indirectly ruled districts. 

The authors propose that the destruction of well-established economic organizations influences investment in the present. They argue that the destruction of economic organizations can erode patterns of human capital accumulation and affect the geographic concentration of investment over time. 

To explore their theory that a loss of human capital decades ago is a current day drag for regions that were under direct rule, Kundu and Vats use the invention of the Whitney cotton gin as a key pivot point.  

This technological advance took hold in America around 1800. The type of cotton grown in India was not compatible to processing by the cotton gin, causing the British textile industry to shift more of its attention to cheaper and more abundant American-produced cotton. Therefore, the British had weaker incentives to dismantle the Indian cotton textile sector after the invention of the cotton gin that made the U.S. the key supplier of raw cotton.

They sorted districts that were under direct British control before 1800 and those after 1800, when the British shifted more of their cotton demand focus to America.The authors find that the majority of investment differences between direct- and indirect-rule districts are driven by districts that fell under direct British rule before the invention of the cotton gin at the turn of the 19th century, when British incentives to dismantle the existing cotton industry were stronger.

Using a government survey, the authors show that lower-caste modern-day households in regions that were annexed prior to the invention of the cotton gin (when British interest in Indian cotton production was at its peak) are 69% more likely to lack a formal education and be literate, and 32% less likely to have completed secondary school compared with lower-caste households in areas annexed after 1800.  Moreover, current day households living in regions that were annexed early amid intense British exploitation prior to 1800 were 18.5% more likely than households in later annexed regions to lack interest in acquiring an education. 

This research suggests that history casts a very long shadow in driving economic opportunity.