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Roots of Economic Karma
Matthews Asia
By Vivek Tanneeru
November 9, 2012

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I’m a strong believer that bad governance (yes, bad) is a natural part of the process of socio-political empowerment, and one that is actually necessary at times in order for some democracies, such as India, to achieve faster economic growth. Typically, during times of great socio-political transformation economic governance takes a backseat as newly empowered segments of society view redistribution of power and patronage as the first order of business. Their attention turns to good economic governance only after they feel fully assimilated. Allow me to explain.

The Hindi heartland states in north India—sometimes known by the acronym BIMARU (which is translated as “sick” in Hindi) for the states of Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh—have long lagged states in India’s southern and western regions in economic development.

The BIMARU states together account for nearly 40% of India’s population. Exactly where they are headed will impact the trajectory of India’s growth in the coming decades. So it is important to understand this dichotomy and its future.

Since India’s independence from British rule in 1947, the BIMARU states have been predominantly run by those in upper castes while the vast majority of the population in these states belonged to middle and lower castes. Assimilation of the lower castes into the polity and the economy was minimal in these states until the late 1980s. Meanwhile, India’s southern and western states began accommodating lower and middle castes much earlier and have done a much better job of being inclusive. This has enabled a wider spread of education, health care and nutrition. The opening up of the Indian economy therefore led to faster economic growth in these southern and western states.

Even after the caste assimilation process in Bihar and Uttar Pradesh finally got underway in the late 1980s, there was still rampant corruption and frequent scandals. Successive administrations headed by lower/middle caste politicians focused on asserting their newfound power and dispensing patronage were backed by voters who kept electing them back to power, perhaps in celebration of their newfound political voice. Economic policymaking and the maintenance of law and order took a backseat. Kidnapping became a cottage industry, and during that period it was hard to convince anyone that things would ever change. But eventually people grew tired of the status quo and things took a turn for the better in mid-2000s when Bihar elected a capable and progressive politician. Bihar’s GDP growth took off promptly after the election. Uttar Pradesh followed suit earlier this year in electing a young and seemingly progressive politician. With any luck, a similar spurt in growth may ensue.

To be sure, large parts of India still struggle with bad governance. But the grindingly slow but necessary process of socio-political empowerment that is underway should serve India’s long-term growth prospects well.


You should consider the investment objectives, risks, charges and expenses of the Matthews Asia Funds carefully before making an investment decision. This and other information about the Funds is contained in the prospectus, which may also be obtained by calling 800.789.ASIA (2742). Please read the prospectus carefully before you invest or send money as it explains the risks associated with investing in international and emerging markets. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Fixed income investments are subject to additional risks, including, but not limited to, interest rate, credit and inflation risks. In addition, single-country and sector funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific industry, sector or geographic location. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies.

The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information.

Matthews Asia Funds are distributed in the United States by Foreside Funds Distributors LLC. Matthews Asia Funds are distributed in Latin America by HMC Partners.

© 2012 Matthews International Capital Management, LLC. Matthews Asia® is a registered trademark of Matthews International Capital Management, LLC.

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San Francisco, CA 94111


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