Why doesn’t India have a liberal, free-market political party?
The lack of such a party is a paradox, since India has seen the benefits of an open economy since 1991. So there should ideally be politicians out there who are keen to embrace the twin goals of an open economy and an open society—and reap electoral dividends. Yet, the political rhetoric we keep hearing is uncomfortably statist.
Over the past few weeks, several commentators and letter writers have discussed this issue in this newspaper. S.V. Raju, for example, has been fighting a long battle in the courts because the current law stipulates that every political party in India needs to swear allegiance to socialism. This he refuses to do—and hence cannot get the Swatantra Party, the lone voice against Nehruvian socialism in the 1960s, registered in our democratic republic.
But I think the issue is far deeper than such absurd legal requirements. It is rooted in social attitudes towards capitalism: The fault lies not in our politicians but in ourselves. The problem is endemic in many other parts of the poor world. This is perhaps why hardly any developing country has an overtly pro-capitalism party, and also why economic reforms have often been introduced by stealth rather than through open debate in most of these countries, including India. (Some even argue, perversely I feel, that the military dictatorships in Latin America in the 1960s and the 1970s were essential because the democratic debate there was too left-wing for its own good.)
Getting to the root of these problems is essential if India has to build a new variant of the Swatantra Party— one that openly supports markets and globalization. A new academic paper, Why Doesn’t Capitalism Flow to Poor Countries, by Rafael Di Tella of Harvard Business School and Robert MacCulloch of Princeton University, offers an interesting explanation for the lack of pro-capitalist parties in countries such as ours. The two researchers say that the most important issue is corruption. It reduces the “moral legitimacy of business”. Citizens come to believe that success depends on luck or corruption, rather than on hard work and enterprise. Hence, there is always likely to be support for high taxes and regulation, even though these will harm long-term economic growth. “Existence of corrupt entrepreneurs hurts good entrepreneurs by reducing the general appeal of capitalism,” say Di Tella and MacCulloch.
The role of luck in success is another issue altogether. Even F.A. Hayek, the most outstanding defender of capitalism in the 20th century, suggested that luck could play a part in economic success. But let’s stick with the corruption theme, especially since Indians in general know how damaging it is. We are one of the most corrupt societies in the world. The old system of industrial and trade licensing created an inefficient class of rentiers, who earned extraordinary profits because licensing kept competition at bay.
The economic reforms of 1991 and beyond did dismantle large parts of the old system. Yet, the government and its agencies still have too large a say in economic life. Those who have access to them, either individually or through the powerful business lobbies that work out of New Delhi, get a head start over ordinary entrepreneurs. What India has today is not liberal capitalism, but a corporatist variety. The stories that filter out about SEZs, privatization, shadowy reforms, subsidies to certain industries—all go to convince ordinary citizens that the system is corrupt and rigged to benefit a few business houses.
Nobel economist Douglas North and his colleagues have recently put forth an impressive conceptual framework for interpreting recorded human history. Human societies originally emerge as what North calls “limited access orders”. These societies use the political system to limit economic participation and impose social order. The lack of open competition leads to excess profits (or what economists call rents). These rents are used to limit violence and maintain political stability.
Later, there was the emergence of a few “open access orders”, where order is maintained through open competition rather than rent-seeking behaviour. Economic and political participation in these societies is relatively unhindered. North and his colleagues say that very few countries have successfully made the transition from closed access to open access societies.
India has perhaps begun the transition, but has a long way to go. We still are too much of a closed access society, dominated by rent-seeking and corruption. The twin analyses—by North and by Di Tella and MacCulloch—suggest that the legitimacy of capitalism is unlikely to be accepted by the general electorate unless corruption and rent-seeking are severely restricted. That is the real challenge for those who dream of re-establishing a new free-market party in India.
And that is also why Manmohan Singh’s recent comments on crony capitalism need to be taken very seriously.
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