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Business News/ Opinion / Online Views/  A credible capitalism
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A credible capitalism

Raghuram Rajan did well to raise some fundamental questions in his speech to students of IIM, Bangalore

A file photo of Indian government’s chief economic adviser Raghuram Rajan. Photo: Priyanka Parashar/Mint (Priyanka Parashar/Mint)Premium
A file photo of Indian government’s chief economic adviser Raghuram Rajan. Photo: Priyanka Parashar/Mint
(Priyanka Parashar/Mint)

A looming crisis is usually a cue for investors to focus exclusively on the immediate risks but it is also an opportunity for scholars to ask some fundamental questions.

So, Raghuram Rajan, chief economic adviser to the Indian government, did well to raise some of these fundamental questions in a speech he gave on Monday to students of the Indian Institute of Management, Bangalore. A lot of what he said resonates in a country where economic reforms have had too little political support despite their success in raising average incomes. Rajan explained that the median voter will prefer punitive taxes and tough regulation in case he believes that the rich have done well because of corruption rather than enterprise.

Every economic system rests on the bedrock of legitimacy. Economists such as Douglass North, Daron Acemoglu and James Robinson have shown in their research that open-access or inclusive systems tend to be more effective in the long run, primarily because they offer opportunity for a wider spectrum of citizens. Also, liberal economic systems tend to have greater public support when they are seen to be fair.

India has had a problem on this front. The corruption scandals of the recent past are intractably linked to natural resources such as telecom spectrum, gas fields, coal mines and real estate that are often controlled by oligopolies.

These have given Indian capitalism a bad name, despite the stellar role played by firms in competitive or knowledge-intensive industries such as information technology, automobiles, drug discovery and consumer goods.

Sadly, business lobbies have myopically refused to engage the public on these issues.

Many other countries have had to overcome such problems on the road to liberal capitalism. The US is a good example. It had its era of robber baron capitalism at the turn of the previous century. The predatory wealth of that era invited a public backlash, first as anti-modern populism followed by what came to be known as progressivism, an ideology that inspired Woodrow Wilson and Theodore Roosevelt, both US presidents, and eventually led to the breakup of monopolies and political reform.

In a sense, the churn that India is going through right now is akin to what happened in the US a century ago. The central task is changing the rules of the game, through public auction of natural resources, an effective competition regulator, rule-based economic policy, greater access to information, and eventually political change.

Of course, these reforms are quite different from what we have had since 1991, and in a sense more difficult to implement. But the alternative is a 1970s-style trap.

What is at the root of India’s present morass: corrupt politics or unbridled capitalism? Tell us at views@livemint.com

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Published: 02 Apr 2013, 12:39 PM IST
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