Opinion | The Theory X and Theory Y of India’s economic reforms5 min read . Updated: 01 Apr 2019, 10:31 PM IST
India’s next government should be judged not by its pro-market moves but by how effectively it relieves citizens of poverty
Many economists complain that the present government did not capitalize on its handsome electoral mandate to make enough economic reforms. With elections around the corner, they wonder whether the next government will reform the economy faster. The most important question is, what sort of reforms are required?
Since the 1980s, the direction of economic reforms has been a one-way street—push back governments and expand the operation of markets. Ronald Reagan said, “Government is not the solution, it is the problem." Margaret Thatcher fought off labour unions to give capital more power. Both Thatcher and Reagan were inspired by the free market economics of Milton Friedman, who also propounded the idea that “the business of business must be only business".
Collectively these ideas are the Theory X of economic reforms—more market, less government; more private, less public. In Theory X, the market, where everything can be bought and sold for a price, is a solution to all problems. Climate change, for example, can be resolved by putting a price on carbon, and water depletion by pricing water.
India was also caught up in the global wave of pro-market and pro-private economic reforms sweeping out of the Washington Consensus. On this, 1991 was a landmark year in India’s economic history when the government threw out industrial licensing and dropped international trade barriers. Theory Xers complain that those reforms have not yet been completed. The present government has not divested its stake in public sector enterprises and has not reformed labour laws.
India and the world must find solutions to problems of environmental sustainability and increasing inequalities. But pushing harder on Theory X will not solve these problems. Indeed, there is mounting evidence that Theory X has aggravated these problems. Consider some examples.
Healthcare: The US has the most expensive healthcare system in the world, and yet, does not produce the good outcomes that healthcare systems in other countries do—the UK, Japan, and even “socialist" Cuba. There is a huge ideological bias in the US against the government increasing its role in the provision of healthcare like in other countries. India’s healthcare indicators, too, are among the poorest in the world. Indian citizens also rely on private providers for their healthcare needs because the government has failed to create a good system.
Housing and urban development: Indian citizens need affordable housing when they move to cities to find jobs. India’s housing market has been skewed too far towards attracting investors in real estate who build “bankable" properties rather than homes for poor people to live in.
Internet platforms: these have become the most glaring examples of Theory X having gone too far. Private enterprises must be stopped from converting citizens’ personal data into marketable commodities and from corrupting public discourse while increasing their own profits. It is no longer a question of whether governments should regulate privately owned platforms, but how.
Theory X is founded on an idea propagated by “marginalists". According to these economists, whose ideas have become mainstream, value is determined by market prices. In Theory X, care given by a professional caregiver has a price and is therefore valuable to the economy, whereas unpaid care given by parents to their own children, or by children to their aged parents, is not valuable.
Markets expand when services and environmental resources such as water are sold at a price. Whenever something is priced, those who have money can buy it. If the resource is scarce, its price is driven higher by those who can pay more, and is no longer affordable for people with lower incomes. This is how the privatization of public services invariably becomes inequitable if the government cannot curb the profit motive.
In Theory X, the public should get out of the way to make more room for private. In Theory X, people are valued in society by how much money they earn. Theory X thus devalues the roles of women and caregivers in families.
Theory Y takes a different approach to the economy. The foundation of Theory Y is that the best things in life do not have a monetary price and such intrinsically valuable things should not be forced into the market just to increase its size and to boost gross domestic product (GDP).
“Minimum government; maximum governance" is an attractive slogan. Theory X focuses on the first part—minimizing government. Theory Y focuses on the latter, on improving governance to create a more just society that provides more equitable access to good quality public services.
The next government of India must be judged by how well it implements the Theory Y of reforms. Here are some markers.
One, the growth of GDP does not matter as much as the pace of inclusion in the economy by the creation of more opportunities for people to earn good incomes with decent social security.
Two, whether or not Air India is privatized is not as important as whether small enterprises will have access to capital at low cost and whether the terms of trade are fair for small enterprises and small farmers so that they can earn decent profits.
Three, making more room for the private sector to deliver public services is not as good an idea as improving the capacity of the public sector to provide better quality education, healthcare and urban services.
And four, India’s problem is not “unemployment". People have jobs of sorts, but their precarious employment—in flexible arrangements with their employers, or in tiny self-owned enterprises—does not provide them sufficient incomes, decent working conditions and social security. Reform of labour laws to make it even easier for people to be fired cannot be the right gauge of whether the government is “reformist". Rather, reforms must provide workers in all sectors with better and fairer working conditions.
In summary, the best gauge of the quality of reforms must be whether they improve the lives of citizens, especially those at the bottom of the pyramid, rather than the profits of large corporations.
Arun Maira was a member of the erstwhile Planning Commission.