How India lost the cotton war to the British

First the paper.

During the early modern period, India was the world's main producer of cotton textiles, with a substantial export trade. Indian textiles were exported to Britain on a large scale from the seventeenth century.² By the early nineteenth century, however, Britain had become the world's most important cotton textile producer, dominating world export markets, and even exporting to India.³ This dramatic change in international competitive advantage, which must surely rank as one of the most important developments of the industrial revolution period, is often described entirely in terms of developments within Britain, without any reference to India, and with little or no reference to factor prices.⁴ This paper attempts to redress the balance.

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As early as the seventeenth century, an unskilled labourer earned four to five times as much in Britain as in India.¹⁰ In the middle of the nineteenth century, an unskilled labourer earned less than twice as much in America as in Britain.¹¹ Similarly, the British unskilled silver wage during the second half of the eighteenth century was also less than twice as high as in much of western Europe.¹² The Anglo-Indian factor price comparison is of particular importance in cotton textiles, where India was Britain's major competitor. ………However, there appears also to be a second reason, arising from a reluctance to characterize Britain as a high-wage economy during the industrial revolution, a period where the focus has been on the slow growth rather than the high level of British wages…….The story of Anglo-Indian competition in cotton textiles begins with the growth of cloth imports into Britain via the East India Company from the seventeenth century. The new cloths, patterns, and designs became increasingly fashionable and thus threatened the livelihood of domestic producers of fine woollens and linens, which were the closest substitutes for printed cottons from India.¹⁷ The pressure from these groups led to protective legislation that remained in force between 1701 and 1774, and opened up new opportunities for British manufacturers via a strategy of import substitution.¹⁸ However, high silver wages in Britain meant that cotton textiles produced domestically using labour-intensive production methods could not compete with Indian goods in third markets. This stimulated a two-stage process of technological change.

First, high wages led to the adoption of a more capital-intensive technology in Britain. Second, this choice of technology resulted in a faster rate of productivity growth in Britain, because of the greater incentive to devote resources to improving technology where capital intensity is higher. This is consistent with the positive relationship between capital intensity, resources devoted to research and development, and the rate of technological progress, highlighted in Schumpeterian models of economic growth.¹⁹ This effect can be explained partly by the greater learning potential on capital-intensive technology.²⁰ In Britain, however, the effect was amplified by the existence of an effective patent system.²¹

There was thus a stronger incentive to devote resources to innovation in the machine-intensive industry of Britain, compared with the labour-intensive industry of India. As productivity increased in the machine-intensive British cotton textile industry and stagnated in India, a shift in competitive advantage occurred. However, the shift was delayed in international markets during the late eighteenth and early nineteenth centuries by a temporary rise in raw cotton prices in Britain, as the increase in production put pressure on factor markets. The shift of competitiveness in the Indian market was delayed further by transport costs, which prevented the British from breaking into the Indian market on a large scale until after 1830

And this is again a rather salutary lesson about how one has to keep running after productivity, invest in people, equipment and technology improvements. Also interesting, and something not quite discussed, is how the import protection works. As it did in the 18th century UK.

India does the stupid thing, it has import protection, but doesn't do anything to invest. So the opportunity costs increases all the time and we become poorer and poorer. At this moment, China is eating India’s lunch…guess the old adage, people who do not learn from history are condemned to repeat it.