India is poor by choice – Atanu Dey

Atanu Dey“Ever since India’s political independence, the story has been the same. Important segments of the Indian economy have been managed by the Government, thus throttling private enterprise and economic growth. High prices, low quality and deep scarcity have characterised all that the Government controls. Socialist planning models have been imposed on the economy. I call it the PPP model – Perpetually Planned Poverty.” – Atanu Dey

Economic Freedom Index 2012India is poor by choice

The title of a series of talks I gave recently at a number of venues in India – including Wipro and Infosys in Bengaluru and at the Asian School of Business in Thiruvananthapuram – was “India: Past, Present & Possible Futures”. As usual, I learned a great deal from the discussions following my prepared presentation. I will visit those points in a future piece. In this series of posts, I highlight some of the main points that I made in the talks.

The first main point that I attempted to convey was that economic development is critically dependent on India attaining economic freedom. Which means of course that India is not economically free since India is clearly not a developed economy. Moreover, two of the most frequently used terms when talking about the Indian economy are “reforms” and “liberalisation” – both of which underline the facts that the Indian economy is dysfunctional (which is why it needs reforms) and that it is shackled (which is why it needs to be liberated).

Actually, all societies which lack economic freedom fail to prosper. This is a historically established fact and can be analytically supported from first principles. India cannot be an exception to what appears to be a universal law. Expecting India to be economically chained and still prosper materially is unreasonable and futile.

It is widely reported that India attained freedom from British colonial rule in 1947. What is not generally appreciated is that it was a restricted freedom of a specific kind. There are different kinds and degrees of freedom. There are three distinct kinds: political, economic and individual freedom.

In general, freedom has both instrumental and final values. Its instrumental value obtains from the fact that freedom is a means to some desirable end — such as economic growth. Freedom is also a final value since it is also an end itself. It is good to be free regardless of whether or not it leads to other outcomes.

It is possible to have some kinds of freedom and lack others. You can have economic and personal freedom without having political freedom, for instance. Moreover these freedoms can be ranked by individuals, depending on their specific circumstances and preferences. In my case, if I had to choose only one, I would choose economic freedom over political freedom.

Political freedom allows one to choose the form, the function and the style of the Government. Personally speaking again, I don’t really care who constitute the Government or what type of Government it is. I am happy with any form of Government as long as it delivers good governance. If the democratic form is unsuited for a country (given its particulars) and it leads to undesirable outcomes, I would be happy with a different type. I prefer the type of Government that works, and I am not stuck with some ideal type that does not work.

Economic freedom allows one to do as one wills in those activities that define our economic lives, namely, production, consumption and exchange of goods and services. As individuals, we attain our best level of material prosperity (a necessary but not sufficient condition for individual welfare) only when we are free from coercion in what we produce, consume and exchange. At an aggregate level, this translates into maximum social welfare and economic prosperity.

As a student of economic development and growth, the most important lesson I have learned is this — economic growth is neither impossible and nor is it inevitable. That scores of countries have been supremely economically successful demonstrates the possibility. That scores of other countries have tried and failed to climb out of desperate poverty – India being a case in point – shows that economic development is not inevitable.

Every time in public talks when I refer to India’s failure to develop, I invariably get push back from a few audience members. How dare, they say, I claim that India is poor or underdeveloped? It’s almost as if I had cast aspersions on their honour or dignity. It pains me to repeat the long list of unfortunate facts that prove that India is indeed a desperately poor country but I have to do this.

India is a poor country. It does not have to be so, but it is. Not just that, it is an impoverished country. India has been deliberately made poor. India’s poverty is a choice.

We are never entirely free of our past. We have to understand that India’s past has something to do with its present deplorable state. The future is determined by the present but we do have the freedom to choose from a set of possible futures. We have to envision that future and choose wisely.

India’s present, as summed up in the dismal figures – malnutrition, child mortality, poverty, farmer suicides, social unrest, etc – should make us weep for the pain that innocent people suffer needlessly. We have to do something to change this state of affairs. We have a choice and we have to choose.

Robert Lucas, Jr., Economics Nobel laureate put it thus, “I do not see how one can look at figures like these without seeing them representing possibilities. Is there some action a Government of India could take that would lead the Indian economy to grow…? If so, what exactly? If not, what is it about the “nature of India” that makes it so? The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about anything else.” – Niti Central,  8 October 2012

M.K. Gandhi & J. NehruIndia’s colonial rule continued past 1947

In my first piece “India is Poor by Choice,” the main point was that Indian’s economic development depends critically on India attaining economic freedom. In this piece I argue that India’s lack of economic freedom arises from its colonial past.

The reality of India’s devastating poverty is hard for anyone who cares about India to accept with equanimity. Whenever I mention India’s crushing poverty to a large group of people, there are always at least a few people who deny that reality. It could be that they are genuinely ignorant of the facts. Educated urbanised Indians who live and work in relative comfort (by underdeveloped economy standards) rarely get to rub shoulders with the poor majority and have little understanding of what it means to be so poor as to not be able to even afford food for their children.

Laying out a few simple (but horrifying) facts about India’s poverty is not a pleasant experience but I usually do it to lay the foundation for what is to follow. Doing this at least gets a few of the uninformed to recognise the reality. Citing facts and figures is fine for those who genuinely do not know but are open to be informed. But there is another group which simply denies that India is poor. They feel it in their guts, as it were, that India is actually quite rich and that the problem lies elsewhere.

I suspect that this is some kind of psychological defense mechanism — deny the existence of the problem so that one can get on with life as if everything is fine. It absolves one of any responsibility and feelings of guilt. I have seen this expressed as, “You know, the poor are actually quite happy. Have you seen how contented they appear to be?” I am sure that I sympathise with all the unhappy rich people but I feel that material poverty is not all that good for happiness.

Another common reaction I get relates to India’s past glory. Well, they say, India is poor today but in the past India used to be rich. I may even be given some statistics such as India accounted for a quarter of the world’s GDP around the mid-18th century (or some such number). I generally avoid getting into an argument and step around the matter by saying that even if it were so, we still have to worry about why India is not what it used to be.

I need to address this point here — India did have a large share of the world’s GDP a couple of hundred years ago. But that does not mean that India was rich — neither in absolute terms nor in relative terms. All countries used to be poor by today’s standards. The gap in per capita incomes of the rich and poor countries was not as wide as it is today, and it continues to diverge. India’s per capita income was not significantly lower than England’s in the 18th century CE. In the past, India’s GDP made up a significant share of the world’s GDP because India had a large population.

Then around the mid-18th century, something happened that started a great divergence in the fortunes of countries around the world. It is known as the ‘Industrial Revolution’. The industrial revolution changed the nature of the game and under the new rules, some nations prospered and others did not. India started falling behind countries which industrialised.

Among the many changes that the industrial revolution brought about, one significant change was that land became less significant than it used to be as a factor in the production of economic wealth and human capital became a more significant factor. India continues to suffer from a lack of human capital and the reason for that can be traced to India’s colonial past.

Colonial powers colonise for fun and profit. If there was nothing material to be gained, it would be pointless to subjugate far away people. The Europeans who colonised great sections of the globe were not motivated by some irrational whim. They established colonies to exploit and extract as much as they could. And as long as the benefits exceeded the costs, they did it and when it was no longer profitable, they left.

The British were arguably the world’s most successful colonial people. And it can be argued that they got the most out of India – which is why India was the jewel in the British crown. The British built the hard and soft infrastructure necessary for successful colonial rule. The rules and regulations they put in place flowed from their extractive and exploitative policies — which in essence meant the total control of the people. Not just political control but more importantly, economic control.

The British Raj was about control. They created all the institutions needed to govern — actually ‘control’ – a large country like India. The British Government were the rulers and Indians were told what they were allowed to do and what they were disallowed. The rulers went around with red flashing lights on top of their cars (or whatever was the equivalent for the time) and Indians had to step aside to let them pass.

The British left in 1947. The extraction and exploitation was not yielding as much as it used to. They left and gave control of the nation to whoever was the most eager to take over — which happened to be MK Gandhi and his protégé Jawaharlal Nehru. Nehru and his friends did not see much need to change anything that the British had instituted. The whole setup suited Nehru just fine. The British had built the institutions for their benefit — and Nehru, as he himself admitted, was an Englishman at heart and boasted that he was “the last Englishman to rule India”.

This transfer of control of India from the British to Nehru and company has far-reaching consequences. It was the start of what I call British Raj 2.0 — a new version of an earlier system where the core remains the same while superficial user interface changes are made. British Raj 2.0 continues the hoary tradition of impoverishing India like its predecessor did through economic control of the population. Like before, Indians are denied economic freedom and are subject to what we call the “license-permit-quota-control raj.” – Niti Central, 15 October 2012

We must fight for India’s economic freedom

Richard Alpert, the American spiritual teacher better known as Ram Dass, said that if you think you are free, there’s no escape possible. The illusion of freedom is as good as any prison made of bricks and steel. Indeed, the illusion is worse because at least the bars in an actual prison are a visible reminder that cannot be ignored.

India became politically free from British colonial rule in 1947. Economic freedom, however, was a different matter. The British had instituted the economic system that had suited them, and the inheritor of the British Raj – the Indian National Congress led by Jawaharlal Nehru – found no reason to change the state of affairs.

Indians had been aware that they did not have political freedom and to some extent were moved to struggle against it. I doubt that they had any understanding of the fact that they lacked economic freedom also. Why this was so is easy to understand.

The leaders of the “freedom movement” wanted India to be politically free so that they could be the bosses instead of the English. They had an incentive to awaken the people about their (the people’s) lack of political freedom because the people would help them gain political power which they (the leaders) lacked under the British rule. However it was not in the interests of these leaders to make the people aware of their economic servitude because the leaders wanted economic control of the people for the same reason as the British did.

India’s lack of economic freedom, however damaging to the people of India, was good for the rulers then, and it is still good for the new rulers of India. What worked under British Raj then, works equally well under British Raj 2.0. Unfortunately for the people of India – more so for the poor people of India – this lack of economic freedom leads directly to poverty.

There is significant empirical evidence that economic freedom is correlated with economic prosperity. The “Economic Freedom of the World: 2012,” a report published by the Fraser Institute, a Canadian public policy think-tank, in collaboration with other institutions around the world, lists India in the 111th position in a ranking of 141 countries around the world.

The Frasier Institute’s definition of economic freedom is this: “Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. An index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions.”

The top five countries in economic freedom are Hong Kong, Singapore, New Zealand and Australia – all rich economies. The lowest ranked are Myanmar, Zimbabwe, Republic of Congo and Angola – countries that are not known for economic prosperity. India shares its 111th position with Iran and Pakistan. Countries ranked lower than India include Guyana, Syria and Nigeria.

The Cato Institute, referring to the report, notes, “Nations in the top quartile of economic freedom had an average per-capita GDP of $37,691 in 2010, compared to $5,188 for bottom quartile nations in 2010 current international dollars. In the top quartile, the average income of the poorest 10% was $11,382, compared to $1,209 in the bottom in 2010 current international dollars. Interestingly, the average income of the poorest 10% in the most economically free nations is more than twice the overall average income in the least free nations. Life expectancy is 79.5 years in the top quartile compared to 61.6 years in the bottom quartile, and political and civil liberties are considerably higher in economically free nations than in unfree nations.”

India’s per capita income of around $1,200 (nominal) places it squarely in the bottom 10 percent of the bottom quartile of the economic freedom ranking. Indians would have been ashamed and alarmed about the lack of economic freedom and its resulting poverty but for the fact that we are generally ignorant about the lack of freedom and it is not in the interests of the Government to inform the people.

India is caught in a poverty trap that involves the Government. The Government restricts economic freedom and justifies that on the specious grounds that it is necessary for helping the poor. The Government takes greater control of the economy. This leads to greater poverty, which is then used as an excuse for increased Government control. There appears to be no escape from the vicious cycle of Government control, lack of economic freedom and poverty.

Ever since India’s political independence, the story has been the same. Important segments of the Indian economy have been managed by the Government, thus throttling private enterprise and economic growth. High prices, low quality and deep scarcity have characterised all that the Government controls. Socialist planning models have been imposed on the economy. I call it the PPP model – Perpetually Planned Poverty.

There is a way out but it will not be easy. People have to understand that they lack economic freedom and why economic freedom matters critically for their well-being. The current system is collapsing around them and the most visible sign of that collapse is the unprecedented and unbelievable corruption of Sonia Gandhi’s UPA Government. – Niti Central, 19 October 2012

» Dr. Antanu Dey is on the faculty of the Indian School of Business, Hyderabad, for Economics and Public Policy.