The Mumbai consensus

By Chrystia Freeland
October 22, 2010

They call economics the dismal science, but Larry Summers, one of its pre-eminent public practitioners, is anything but dull. That penchant for intellectual controversy means he hasn’t always won popularity contests, but he is unfailingly stimulating, as he proved in a speech in India last week, when he hit on one of the biggest issues in the world economy today, and coined a snappy catch-phrase to describe it: the “Mumbai Consensus”.

The Mumbai Consensus, Summers said, is “people-centric.” He contrasted it both with the Washington Consensus, the U.S.-led, free-markets-and-democracy formula that seemed to have conquered the world after 1989, and with the Beijing Consensus, China’s state capitalist approach that today is winning fans in emerging markets and in some developed ones.

Summers thinks the real model to watch is India’s, the world’s largest democracy. Partly because of its political system, India’s economic rise has been powered as much by the voracity of its domestic consumers as it has by the country’s push into foreign markets. That’s a sharp contrast with China, where the focus has been on working for the rest of the world, while the Chinese people, who are poorer on average than those of Albania or Jamaica, nonetheless save more than half of their GDP.

What makes the idea of the Mumbai consensus, and of people-centric economic growth, so powerful is that the smartest and most politically potent critique of global capitalism right now is that it isn’t delivering for the middle class.

We are living in an age of unprecedented economic prosperity: since the 1970s the world economy has been growing at a faster pace than at any other time in human history, and billions of people have been lifted out of poverty as a result. Yet a perversity of this global boom is that it has benefited the super-elite most of all.

That is apparent most starkly in America, where 23.5 per cent of total income in 2007 went to the top 1 per cent, but it is also the case in countries with a more generous social safety net, like Canada and the UK. It is happening as well in communist China, where the gap between the rich and poor is as great as it is in the U.S., and in other emerging market powerhouses, including Russia, and, yes, India. (Income inequality has been falling in the fourth BRIC, Brazil, but that may partly be because it has historically been so high. Today it remains far greater than in the U.S.)

This unequal return on globalization is a pretty good key to understanding domestic political battles in most countries around the world. That’s true in authoritarian China, where, according to the state-run China Daily, the key concern of the Communist Party as it debated its twelfth five-year plan this week was “the widening wealth gap”. That is also true in the United States, where the rage of the Tea Party, with its proudly anti-elite heroines, is largely animated by anger that the American middle class is losing out.

Income inequality is high in India, too – Raghuram Rajan, the Indian born and educated University of Chicago economist pointed out in a 2008 speech in Mumbai that India was second only to Russia in its number of billionaires per trillion dollars of GDP. But Summers is right to assert that India’s rise out of developing world poverty has been “people-centric”:  both an engine and a consequence of India’s ascent has been a surge in consumption that extends deep into the income distribution.

For America and the rest of the developed world, there’s still a catch: people-centric growth is easier to achieve in countries where the people are cheap relative to the rest of the world. Consider IBM, which highlighted 29 per cent growth in the BRICs when it reported third quarter earnings this week. IBM’s engagement with the emerging markets is not just about exports: in 2003 IBM employed 9,000 people in India; today, 75,000. By contrast, since 2003 IBM has laid off 30,000 workers in the US, where it now has 105,000 staffers, just a third more than in India.

Summers, who has been worrying aloud about the hard-hit US middle class since well before the credit bubble burst, is painfully familiar with this problem. Identifying the Mumbai Consensus is a first step towards a solution, but alone it won’t be enough.


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“the rage of the Tea Party, with its proudly anti-elite heroines, is largely animated by anger that the American middle class is losing out”
The difference is, the Tea Party feels that it is losing out to the lower classes, not to the elites.

Posted by Temujin1 | Report as abusive

I think Summers is simply riding the wave, talking about how great India’s economy is simply because it is booming and new. He mentions how the world economy has grown faster than ever since the 1970′s, and how billions of people have been lifted out of poverty because of it. What economic model caused this? Hmmm…I believe the U.S. economic model caused it. Not India. If India does anything, they need to adapt themselves to the U.S. model. The few hoard their wealth in India, refusing to reinvest in their country simply because the believe they deserve it, based on the cast system, and because they want to live like kings. Unfortunately, in India many people associate wealth with greatness or divinity unlike in the U.S.. In the U.S., just because you have wealth doesn’t mean you deserve it or that you are a great person. In the U.S., actions speak louder than words or wallets.

Posted by Blackbird1996 | Report as abusive

@Blackbird … the world does not revolve around USA!

India has been around for more than 5000yrs before the USA even existed!! So please don’t get so US centric !

India is a unique democracy with its own strengths and weaknesses. While India is trying its best to achieve economic growth, please don’t resort to the fallacy of hasty generalizations with your half-baked knowledge about India, her economy and culture.

I am an Indian living in the US for quite some time and if think like you, i can trash talk about USA too!No country is perfect!

India is large,complex and ancient that it is a land of paradoxes. Everything you say about her, the opposite is also true!


Posted by Arihanth | Report as abusive

Freeland wrote: “Summers, who has been worrying aloud about the hard-hit US middle class since well before the credit bubble burst”


If Summers were truly worried about the middle class, he would have pushed for the elimination of H-1B and L-1 visas, which are responsible for hundreds of thousands of jobs transferred from Americans to Indians and other foreigners. By the way, the Times Square bomber originally arrived here from Pakistan on a H-1B visa.

If Summers were truly worried about the middle class, he would have been opposed to China’s entry into the WTO, as well as Russia’s entry in the near future. China has never respected the WTO rules regarding the opening of its markets, yet it used the WTO to gain entry into Western markets. Not to mention all of the intellectual property China has stolen and/or arm-twisted its way into. Russia will be a repeat of China.

If Summers were truly worried about the middle class, he would have pushed for the elimination of tax breaks for outsourcing. Funny how Obama started making noise about this only after Summers announced his farewell.

Posted by saucymugwump | Report as abusive

India is not a democracy like any other one in the world.

Most people in India is restricted by the caste system,
i.e., the myth of Slum Dog Millionare is an absolute myth.

Yes, you can vote, but if you below to the lowest caste, or maybe even culturally discriminated against and treated as if you are below the lowest caste, there is little mobility between the castes.

Plus, there are so many different dialects that national policies are very difficult to co-ordinate– lots of bureaucracy, something exposed by the Commonwealth Games.

There are different types of challenges, and unique sets of challenges, and potentials.

Posted by CommonSensLogic | Report as abusive

Interesting idea. However, I feel that the development in India is more ‘people-led’ rather than ‘people-centric’. ‘People-centric’ development is not as inclusive an idea as ‘people-led’. Indian State’s success lies in creating a conducive environment for this.

Posted by GaneshKulkarni | Report as abusive

India is not a democracy that one is used to in European countries. The USA is also not a democracy in the strict sense.
Perhaps, India would be well advised to call the form of Govt. not democratic but somethong different than democratic, a hindi name, perhaps from its 5000 years of history.
Apart from the civilian Govt. India has a military as well to rule its citizens.

The USA democracy has an elected President who is also the Commander In Chief of the military, and fully authorised in the constitution to start a war, even though the majority of the people do not approve of it. Perhaps they should also give a new name instead of a democracy to avoid confusion among non Americans. let us ask what Jimmy Carter thinks of this proposal?

Rex Minor

Posted by pakistan | Report as abusive