Economy | Open sesame4 min read . Updated: 11 Aug 2011, 08:03 PM IST
Economy | Open sesame
Economy | Open sesame
A dozen years after the end of World War II and near the high noon of European social democracy, British prime minister Harold Macmillan famously announced, “Let us be frank about it: most of our people have never had it so good."
Curiously, despite a wonderful opportunity to infuse some cheer into the dark national mood, our political leaders expressed no such optimism this July, exactly 20 years after the unlikely combination of Narasimha Rao and Manmohan Singh finally liberated the Indian economy from overwhelming government control. A rotting edifice based on institutionalized scarcity, price controls, shoddy products, protectionism and endemic underperformance was swiftly demolished in 100 days of inspired action.
It takes utter cussedness to deny the obvious achievements of greater economic freedom. Forget the bragging rights that come with being one of the most dynamic economies in the world or the hope of membership at the global high table as an emerging superpower. Ordinary lives have been changed beyond recognition thanks to the opportunities provided by economic reforms.
Average real incomes have quadrupled since 1991, providing ordinary Indians a rare opportunity to improve their lot. Ownership of consumer goods has spread. Most homes have access to electricity. School attendance rates have soared, a sign of new aspirations. India accounted for 25% of the world’s out-of-school population in 2001; that is now down to less than 10%. Indians are eating better, with consumption of fresh produce such as vegetables, eggs and fruit becoming more common. Higher consumption of meat and fish could also indicate that caste rules are weakening in many parts of the country.
To be sure, it has not been all smooth sailing. The 250 million people stagnating at the bottom fifth of the income pyramid continue to live in abject poverty. Inequality is rising, though there is too little public discussion about the reasons. Are millions being left behind because of social factors such as caste, or the fact that they do not have the capital and skills to participate in the more dynamic parts of the economy, or because they are trapped in regions that do not have adequate links to markets? Each reason demands a different response from policymakers. However, a complicated problem has been reduced to eloquent but vacuous sermons.
Politics can be transformed as voters get the freedom to finally look beyond the daily struggle for survival and think about the future. “India is witness finally to what I have called the Revolution of Perceived Possibilities," economist Jagdish Bhagwati told parliamentarians in December, when he delivered the third Hiren Mukherjee lecture. “Aroused economic aspirations for betterment have led to political demands for the politicians to deliver yet more. This suggests, as my Columbia University colleague Arvind Panagariya and I have hypothesized, that voters will look to vote for the politicians who can deliver growth, so that we would expect growth before the vote to be correlated with vote now."
Building on the gains of the past two decades and addressing the failures will require political imagination from various groups over the next decade.
The Left needs to realize that the poor can move into higher-paying jobs in modern sectors and the government can fund an effective welfare state only if the Indian economy continues to grow at close to double-digit rates, which will require a further dose of economic reforms that the Left instinctively distrusts. One possible model is Brazil under Luiz Inácio Lula, a man of the Left and perhaps the most successful political leader in the past 10 years, with a winning combination of free-market economics and a well-funded welfare state that has reduced poverty and inequality.
The Right has its own sets of challenges. It hopes that India will be able to strut more confidently on the global stage but refuses to accept the multilateral compromises that go with being a global player, even on key issues such as extinguishing the Pakistani military-jihadi complex. The cultural conservatives will have to live with the fact that greater global trade and investment is needed for prosperity but that such linkages will naturally undercut many social arrangements. The conservative philosopher Michael Oakeshott pointed out many years ago that change is always a threat to identity.
The biggest challenge before the business class is to ensure that the current concerns about the rise of crony capitalism do not eventually lead to a full-blown legitimacy crisis for Indian capitalism. Engaging with the rest of society is essential. The angry response by influential businessmen, after some of their peers were arrested on corruption charges, reveals a shocking degree of myopia, almost on a par with the opposition of the Bombay Club to the 1991 reforms. Economic researchers have shown that liberal capitalism has little resonance in many countries because the vast majority believes that fortunes have been made through favours rather than hard work and innovation.
The middle class faces its own set of paradoxes. It has done well since 1991 but has withdrawn into a shell as far as public participation goes. The very people who have gained from greater economic freedom have little faith in the institutions of political freedom, rarely even bothering to vote during elections and at other times either banking on charlatans or on single-issue movements that have no respect for the inherent trade-offs in politics and policy. In contrast, the poor, who have little economic freedom, are the backbone of our system of political freedom. More generally, the middle class has moved into the sanitized world of gated communities, private schools, private hospitals and air-conditioned cars.
How each of these contradictions is resolved could play a big role in deciding which way India goes in the next 10 years—a million exasperated mutinies, a sclerotic oligarchic capitalism where competition and new ideas are shut out, a violent nationalism that is mistaken for patriotism, or a genuinely open economy and open society.