Friday, December 13, 2013

Book Review: 'An Uncertain Glory' by Jean Drèze and Amartya Sen , 'Transforming India' by Sumantra Bose, The Wall Street Journal, December 13, 2013

Indian reformers did not sell their liberal reforms to the people, who concluded the free market helps the rich alone.

Two and a half years ago India was the envy of the world. It had survived the global financial crisis, and its economy was growing at a rate of 9% a year, creating masses of jobs and lifting millions out of poverty. This happy situation was the reward of free-market reforms that began in 1991. As government reduced the regulatory shackles on business, dozens of innovative firms emerged that competed brutally at home and began to succeed on the global stage. India's governments after 1991 kept reforming, if slowly. Even slow reforms added up to make India the world's second fastest-growing economy.
But the present government, led by the Congress party, changed course, guided in part by the ideas of the eminent economist and Nobel laureate Amartya Sen. The starting point for achieving prosperity, Mr. Sen argues in "An Uncertain Glory: India and Its Contradictions"—written with Jean Drèze—is an immediate attack on illiteracy and ill health. Such an approach, he says, will produce a healthier and more literate workforce and lead to higher economic growth. Higher growth, in turn, will bring larger revenues for the state, allowing further attacks on illiteracy and ill health.
Under the influence of Mr. Sen's ideas,Sonia Gandhi, the leader of the Congress party, and her National Advisory Council—which includes Mr. Drèze—have concluded that India's free-market reforms weren't helping the poor. Asserting a trade-off between growth and equality, the council advised changing the government's focus to spending on welfare. Instead of building roads, for example, it preferred to give away cheap food and energy and waive loans to farmers. Its flagship program was a guarantee of 100 days employment to everyone in rural areas. Approvals to industry for new projects came to a virtual halt, mostly on environmental grounds. As a result, investors lost confidence, and inflation shot up. India's economic growth has now plummeted to a rate below 5%.

Part of what led to this change of course in India was that reformers didn't sell the country's liberal reforms to the people themselves, as Margaret Thatcher did in the U.K. in the 1980s, for example. Hence the broad population got the impression that the free market helps the rich alone and not the common man. India ended up reforming in a furtive or incomplete way because no political party had bothered to explain the difference between being "pro-market" and "pro-business." To be pro-market is to believe in competition, which helps keep prices low, raises the quality of products, and leads to a "rules-based capitalism" and economic growth, a state of affairs that helps everyone, not just the rich. (This lesson and others were brilliantly explained by Jagdish Bhagwati and Arvind Panagariya in "Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries," published earlier this year.) To be merely pro-business, by contrast, means leaving the control of economic decisions with politicians and officials, an arrangement that easily leads to "crony capitalism."
In the midst of India's worst economic crisis since 1991, the country's current left-of-center government has just enacted a food-security law, with enthusiastic support from Messrs. Sen and Drèze: It will distribute grains to two-thirds of India at roughly 10% of the market price. This policy has shocked many people because official surveys show that only 2% of Indians claim to be hungry. In any case, past experience shows that less than half the food from such programs reaches the intended beneficiaries; the rest is lost in inefficiency and corruption. A month ago Ms. Gandhi told Parliament that if there was no money for her food-security law, it would just have to be found. And if the public-distribution system was broken, she added, it would have to be fixed. How she did not say. The opposition protested that such policies were a blatant bribe to win votes before elections, but it didn't try to stop them for fear of appearing hostile to the poor.
The obstacles to India's long-term prosperity remain political, but Sumantra Bose's "Transforming India: Challenges to the World's Largest Democracy," though offering a well-researched chronicle of India's recent political history, doesn't provide answers either. The book tells the story of democracy's evolution in India from the 1950s and makes the excellent point that, over the past two decades, India has changed from a country dominated by a single nationwide party into a robust multiparty, federal union. The regionalization of the nation's political landscape has decentralized power, given communities a distinct voice and deepened India's democracy. The running of India, as Mr. Bose notes, is now in the hands of the states and the regional parties.
With power shifting to the states, strong and decisive regional leaders have emerged in recent years. Many have delivered good governance and attracted investments and jobs. The rise of the regions is spreading the economic boom to distant corners of the land as new consumer subcultures thrive. But it hasn't resulted in local, homegrown voices in support of liberal reforms at the regional level. Instead, crony capitalism has become even more embedded in India's economy.
In the end, India's story is one of private success and public failure. Prosperity is indeed spreading, but it is happening amid appalling governance. Indians despair over the delivery of the simplest public services. Where the state is desperately needed—in providing law and order, education, health and drinking water—it performs poorly. Where it is not needed, it is hyperactive, tying people in miles of red tape.
While they recognize India's many problems, neither Messrs. Sen and Drèze nor Mr. Bose provides a satisfactory solution. It seems elementary that in such a situation either you must enhance state capacity or limit your ambition; thus it is difficult to understand why Messrs. Sen and Drèze in particular insist that only the state directly deliver food and employment through its bureaucratic machinery; they are even skeptical of cash transfers to the poor that would, at least, not damage labor and food markets. Instead of "make work" schemes, why not create sustainable opportunities for employment creation by eliminating regulation and other impediments?
More than even economic reforms India needs reforms for the institutions of the state—the bureaucracy, the judiciary, the police. It needs to become a strong liberal state with the ability to take quick, decisive action, uphold the rule of law and punish the corrupt, and of course make itself accountable to the people. India's hope may well lie with its aspiring young, those who have just entered the middle class or who are about to reach it. They are about a third of the country now and will be half in a decade. They are puzzled as to why their tolerant nation offers astonishing religious and political freedom but fails to provide economic freedom.
In a country where two out of five people are self-employed, it takes, on average, 42 days to start a business; the entrepreneur is a victim of red tape and corrupt inspectors. No wonder India ranks 119 on the global "freedom index" (from the Heritage Foundation) and 134 on the World Bank's global measure of "ease of doing business." Two decades after the 1991 reforms, India has still not become a manufacturing powerhouse like China, and its economy is driven by services. How can India hope to provide jobs for the millions of young people on its farms? Sadly, the vast majority of Indians still work in the informal economy, not in legally established companies.
The secular, political space at the right-of-center is empty, and none of the existing Indian parties is likely fill it. The answer may well be a new liberal party that trusts markets rather than officials for economic outcomes and focuses on reforming the institutions of governance. Such a party may not win votes quickly, but it would create a demand for reforms. It would also show voters that open markets and rules-based government are the only civilized ways to lift living standards and achieve shared prosperity.
—Mr. Das's most recent book is "India Grows at Night: A Liberal Case for a Strong State."

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