India's Hyderabad Story: How poverty was dramatically reduced.

• Author: Rees, Matthew

The Indian city of Hyderabad has had a volatile trajectory over the past seventy-five years. In the aftermath of India becoming independent in 1947, the city's ruling prince--a Muslim named Osman Ali Khan--wished to remain independent of the Hindu-majority nation. He held out for a year, but Prime Minister Nehru eventually deployed the country's military to forcibly bring the city under central government rule.

During this period, Khan was said to be the richest person in the world, with a fortune equivalent to more than $60 billion today. He led a life of luxury: In 1934, he chartered an ocean liner to sail to Britain and brought 300 people with him. But he chose to lead a very modest existence once Hyderabad was absorbed into India.

Khan's decision to downplay his wealth was emblematic of his hometown's lot. In the decades after 1947, Hyderabad--which was incorporated into the state of Andhra Pradesh in 1956--was largely indistinguishable from many other large Indian cities. Poverty was widespread and private sector economic activity was virtually non-existent--byproducts of the central government subjecting business to voluminous regulations. The most sought-after jobs were in the public sector. For ambitious locals, the goal was to escape Hyderabad. "There wasn't much opportunity here," says Chebrolu Nagamalleswara, an investor who grew up in Hyderabad and has lived there for most of his adult life.

The situation couldn't be more different today. Hyderabad is a magnet for talent from across India and throughout the world. It has been transformed into a technology hub on par with its better-known rival, Bangalore. Plots of land that were once populated by nothing more than rocks are now home to modern office buildings that house hundreds of thousands of people--employed by many of the world's blue-chip companies. (A small sample includes Amazon, Dell, Ericsson, Facebook, General Electric, Google, IBM, Infosys, Microsoft, Oracle, PayPal, Tata, and Wipro.)

Hyderabad's economic gains--among the biggest experienced by any emerging market city in the world over the past two decades--did not happen spontaneously. They were largely made possible by a set of public policy changes that opened the economy to market forces, which enabled capitalist activity to flourish.

The episode showcases the way in which free markets unleash economic opportunity for people across the economic spectrum. But for the poor, the gains have been particularly meaningful. Millions of low-wage workers moved out of poverty as they seized the new opportunities and gained access to the world's goods and services.

SLOW AND STRUGGLING

"Hyderabad has been going through bad times," opined a New York Times reporter in January 1991. Hindu-Muslim riots had recently engulfed the city, leaving more than two hundred people dead. Per capita GDP in Andhra Pradesh was only about 75 percent of the national average, with agriculture accounting for 37 percent of the state's GDP and more than 70 percent of employment. From 1980-1981 to 1996-1997, growth rates for the state's economy and per capita income were less than India's growth rate for the same period.

By the mid-1990s, public spending on welfare programs and subsidies accounted for 27 percent of Andhra Pradesh's total expenditure--the highest share anywhere in India--with an impact that the World Bank politely characterized as "limited." The largesse led to budget deficits, as well as interest payments that consumed 16 percent of the state's revenue. The state's economy had been growing at a progressively slower rate, and the slowdown was projected to continue. That was going to handicap the already-struggling private sector, which in turn would have erected even bigger hurdles for the poor as they sought to improve their living standards.

Hyderabad had begun to see some benefit from the economic liberalization the central government in Delhi began to implement in 1991. While these changes expanded access to imports and opened up exports, they also sent a powerful message that the command-and-control approach to the economy that had dominated India since independence was no longer sacred.

END OF THE FREE RIDE

But changes at the state level were often slow and Andhra Pradesh consistently fell behind most other Indian states. A turning point came in September 1995. That marked the start of Chandrababu Naidu's tenure as chief minister (akin to the governor of a U.S. state)...