Free DP Download 12 November 2020 - COUNTING THE TRUE COST OF COLONIALISM: The East India Company's Rule and the Drain of Wealth (1757-1858)

Thursday, November 12, 2020

MEASURING COLONIAL EXTRACTION: The East India Company's Rule and the Drain of Wealth (1757-1858)
Pilar Nogues-Marco  
CEPR DP No. 15431 November 2020

A new CEPR paper by Pilar Nogues-Marco revisits the relationship between capitalism and colonialism by examining the case of British India under East India Company (EIC) rule (1757-1858). The study uses the East India Company budgets to measure the extent of the wealth that was drained through three direct channels: oppressive land taxes, unproductive expenditures on the imperial army and civil administration, and the unrequited export of commodities from India to Britain. Among the findings: 

  • The land tax levied by the EIC was excessive and paid by poor peasants, which caused huge inequality, extreme poverty, and agricultural stagnation.
  • Land revenue (the most important source of territorial revenue) was an extractive tax, amounting to around half of gross production.
  • The EIC charged extractive land taxes in a society whose GDP per capita fell close to bare-bones subsistence in the early nineteenth century. Because land taxes primarily affected agricultural laborers, they lived below subsistence levels.
  • Taxation based mainly on land revenues intensified poverty and probably made agriculture less productive.
  • Military expenditures, civil charges, and interest on debt consumed the vast majority of the fiscal budget. As a consequence, productive expenses were tiny. Especially important is the case of irrigation systems. 
  • Contrary to Mughal practice, the EIC neither invested in nor repaired irrigation systems, which reduced agricultural productivity and intensified famines during the recurrent episodes of drought.
  • The unrequited export of goods from India to Britain was used as a mechanism whereby trade could become a form of exploitation - probably the least understood and most controversial channel of the drain of wealth.  
  • Commercial debt was discharged with the fiscal surpluses, which could have been used instead to fund productive expenditures for Indian development. Additionally, the EIC accumulated debt that was transferred by the British government from the EIC liability to Public Indian debt - the amount of unrequited exports charged to Indian public debt represented 13% of Indian GDP.

The study supports the Marxist interpretation that there was a drain of wealth, and its effect on the underdevelopment of former European colonies deserves further research.

FIGURE 1: UNREQUITED EXPORTS FROM INDIA TO BRITAIN, 1798-1858 (selected years, quinquennial frequency), million pounds sterling


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