Atanu Dey On India's Development

Lee Kuan Yew on India – Part 3

[Continued from Part 2.]

The recent performance of India’s private sector has underlined an important economics lesson, that competitive markets work where too often the command and control system founders. Within your arm’s reach is a device which is a miracle of modern technology—the cell phone. It took the government telecom monopoly 45 years—from 1951 to 1996—to install around 14 million land lines. Between 1996 and 2000, with the liberalization of the telecom sector, India’s installed capacity doubled to around 30 million lines. In the next five years, India’s telephone companies added another 90 million lines (of which 70 million were cell phone lines.)

Imagine if the government had continued to monopolize the sector and had continued the installation of capacity at the pre-1996 rate. It would have taken about 300 years—or till 2300—to reach today’s installed capacity. Astonishing things happen when the government gets out of the business of business, or at least allows the private sector to do its thing without trying to cripple it. Take another sector where the government allowed private firms to compete—the airlines. I recall those days where one was often reduced to begging a government employee at the airlines office for the privilege of being treated rudely by the airline staff on flights that more often than not delayed. Those were the days my friend, we thought would never end.

The license quota permit control regime was instituted with the express purpose of making sure that essential goods and services were affordable and available to the people and thus was the sole prerogative of the government. An admirable socialist goal of reaching the commanding heights of the economy. The outcome should not come as a surprise: shoddy goods and services, affordable and available to only those who had the clout and could bribe the officials. Bajaj scooters had a waiting time of 7 to 10 years! They were prized as dowry; want your homely daughter married soon, promise a scooter to sweeten the deal.

While the Indian economy has done better since the government has started relaxing its chokehold on it, there is much that is left undone. Until the bureaucrats and the politicians let go entirely, the Indian economy has a hard row to hoe. It is imperative that we ask and clearly understand what motivated the policy-makers to hobble the economy for so many decades. Without that frank enquiry, we may never fully understand which mistakes were made and therefore continue to stumble into the same traps.

By now, even the minimally awake observer may conclude that the private sector can do business better than the public sector can. For instance, India’s private sector uses capital very efficiently. Lee Kuan Yew points it out in his lecture (see part 1 here and part 2 here of my commentary):

A factor worth noting: India gets a much better economic return for the investment it makes in its economy because India’s private sector capital efficiency is high. If India opens up fully to FDIs, the results will be profitable for the investor and add considerable employment and added GDP growth for India. With jobs there will be a trickle down of wealth to millions of Indian workers, as there has been in East Asia.

Globally, there is a savings glut which is looking for investment opportunities. India would be the destination of this massive investment but the economy needs liberalization. If I am asked what I thought of the liberalization of the Indian economy, I would echo Gandhi (the home-grown one) and say, “I think it would be a good idea.”

The liberalization so far is too little but I sincerely hope it is not too late. LKY points to some stellar examples—they are miniscule in the context of the Indian economy but they are indicative of what is possible.

What India has achieved since 1991 should not be underrated. There have been many successes. The Delhi Metro is one. Bharat Forge, the largest Indian exporter of auto components and the leading global chassis component manufacturer, is another example in the manufacturing sector. There are others. The question is why there are not many more of them?

Why indeed. The Indian private sector can do much better but can’t. Why? Here is my conjecture on what LKY thinks is the reason: the mendacity, greed and ignorance of Indian politicians. LKY is a shrewd observer, of course. But even dim-witted people have realized that when it comes to greed Indian politicians are a class apart. Exposing that greed, mendacity and ignorance is fast becoming a thriving cottage industry as evidenced by Tehelka and Cobrapost.

Being a scholar and a gentleman, he really could not come right out and tell the politicians to their face that they are the problem. So he used a well-worn technique of deflecting the blow by saying that it is politics that is to blame. More over, he did not present it as his own conclusion but let other well-known Indians speak:

There is no dearth of excellent analyses by Indians about this problem. An entire library could be assembled on the subject. I consulted two books: The Future of India by Bimal Jalan, who was Governor of the Reserve Bank of India from 1997 to 2003, Chairman of the Economic Advisory Council to the Prime Minister and has represented India at the IMF and World Bank; one other book, Governance by Arun Shourie who has held several government portfolios and is a well-known writer. To sum up their arguments for the failings of the system in a single word: politics.

There you have it. The failing of the system are centered around politics. And who engage in politics? Therefore politicians. He said it to their face, however a bit more politely than I would have. He quotes Dr Singh’s interview in which Dr Singh pleads that his inability to govern arises from the coalition that he has clubbed together to do the job. But LKY does not let him off the hook.

Earlier this year, Prime Minister Manmohan Singh gave a wide-ranging interview to the McKinsey Quarterly. He rated his own government’s achievement as 6 out of 10, a performance he said was unsatisfactory. He acknowledged the need for better infrastructure, for more FDI, and also the need to move ahead in manufacturing. When asked whether the pace of implementation was fast enough, he replied:

” … economic policy and decision making do not function in a political vacuum. It takes a lot of time for us to take basic decisions. And furthermore, because we are a federal set-up, there are a lot of things that the central government does, but there are many things, like getting land, getting water, getting electricity – in all these matters the state government comes in, the local authority comes in ….. …. I do recognise that at times it gives our system the label that it is slow moving. In a world in which technology is changing at such a fast pace, where demand conditions change very fast, we need to look at a more innovative mechanism to cut down on this rigmarole of many tiers of decision-making processes.”

Prime Minister Singh added, “We are a coalition government and that limits our options in some ways.”

It is a sad sight: the Prime Minister of the country making excuses. Straight talk would be appreciated, instead of the mealy-mouthed equivocation emphasized above. Say, “our system is slow moving” instead of “at times it gives our system the label that it is slow moving.”

LKY responds to that excuse by rejecting it. He also rejects the notion that because India is a “democracy,” it is slow.

Politics is a fact of life in any country. And coalition politics is a fact of Indian political life.

It has been suggested that India’s slow growth is the consequence of its democratic system of government. Almost 40 years ago, Professor Jagdish Bhagwati wrote that India may face a “cruel choice between rapid expansion and democratic processes”.

But democracy should not be made an alibi for inertia. There are many examples of authoritarian governments whose economies have failed. There are as many examples of democratic governments who have achieved superior economic performance. The real issue is whether any country’s political system, irrespective of whether it is democratic or authoritarian, can forge a consensus on the policies needed for the economy to grow and create jobs for all, and can ensure that these basic policies are implemented consistently without large leakage. India’s elite in politics, the media, the academia and think tanks can re-define the issues and recast the political debate. They should, for instance, insist on the provision of a much higher standard of municipal services.

I agree with LKY. Fundamentally, what we finally achieve is what we are willing to settle for. This true at all levels of organization. As individuals, we pretty much end up where we have set our goals. Our achievements reflect to an unusually large extent what we set out to do. At the aggregate level, the society we end up having is determined by what type of society we desire. It is a cultural thing: the obtained level of corruption, poverty, filth etc is determined by how our culture accepts, tolerates, and takes as normal certain levels of corruption, poverty, filth, etc. It is the tolerance of corruption, poverty, filth that allow them to exist to the extent that they do.

So he says that politicians cannot hide behind the excuse that politics is what explains the poor performance.

By way of example, Chinese politics have always been plagued by factionalism. China also has great regional diversity. Like India, China also has powerful vested bureaucratic interests. But Deng Xiaoping forged a basic consensus among all political factions and the bureaucracy on the economic development and the necessary opening up to the outside world to succeed. A similar consensus can be achieved in India.

Next he goes on to point out that we have some great opportunities which must be taken to their logical conclusion instead of half-hearted implementation.

The passage of the Special Economic Zone (SEZ) Bill by the Lok Sabha (Lower House of the Indian Parliament) in May this year was an important move. SEZs can finesse some difficult internal issues blocking liberalisation. Singapore has some experience with SEZs in China. If India thinks it useful, we are willing to share our experiences with you, building upon what we have done in the Bangalore International Technology Park. I must conclude with a word of caution. SEZs, once embarked upon, must be made to succeed, which means total and sustained commitment from politicians and bureaucrats at national, state and local levels.

When they succeed, they will have a powerful effect on the whole economy, give a boost of confidence and spark off a healthy competitive dynamic between different states and regions. Successful SEZs also will erode opposition to reforms because their benefits become self-evident, as has happened in China.

He concludes this part of his talk with a wonderful example of the mendacity of the communists. West Bengal, once upon a time the most valuable jewel in the Crown, is a basket case, now more known around the world as the “Gutter” (thanks to the tireless working of the “Saint of the Gutters” who enriched her own organization by show-casing the poverty of Bengal). How did this remarkably sorry transformation take place, you may ask. The secret sauce: communists.

A few months ago, in August, the communist Chief Minister of West Bengal was in Singapore to drum up investments for his state offering market incentives to attract investors. He said: “The lesson from the collapse of the Soviet Union and from China is that [India] must reform, perform or perish.” That very same month, members of his own party in Lok Sabha in New Delhi forced a retreat on India’s privatisation programme. This is India’s party politics.

Pondering the imponderables is next on LKY’s mind. He lets Prof Pranab Bardhan speak about the important distinctions which lie at the base of the differential performance of China and India.

There are some imponderables. American commentators believe that China’s political system is too rigid, that it does not have the flexibility of pluralistic politics and democracy with freedom of speech, the media, assembly and respect for human rights. So China will encounter severe problems and setbacks. Professor Pranab Bardhan of University of California, Berkeley, has explained the problem this way:

“China’s authoritarian system of government will likely be a major economic liability in the long run, regardless of its immediate implications for short-run policy decisions.

“But inequalities (particularly rural-urban) have been increasing in China, and those left behind are getting restive.

”With massive layoffs in the rust-belt provinces, arbitrary local levies on farmers, pervasive official corruption, and toxic industrial dumping, many in the countryside are highly agitated.

“China is far behind India in the ability to politically manage conflicts, and this may prove to be China’s Achilles’ Heel.

”Over the last fifty years, India’s extremely heterogeneous society has been riddled with various kinds of conflicts, but the system has by and large managed these conflicts and kept them within moderate bounds. For many centuries, the homogenizing tradition of Chinese high culture, language, and bureaucracy has not given much scope to pluralism and diversity, and a centralizing, authoritarian Communist Party has carried on with this tradition”.

Prof Bardhan’s assessment is that India’s ability to politically manage conflict better than China could be a reason to believe that India holds at least one good card in its hand.

LKY diplomatically states that he believes that China will learn how to manage conflict in time and that it is not realistic to imagine an unchanging Chinese political system. As he says in the conditional below, India will draw ahead in the longer term only if the Chinese make the mistake of not transforming their political structure.

If they are right, India will draw ahead in the longer term.

Such analyses assume that the Chinese political system will remain static. If China’s political structures do not adjust to accommodate the changes in its society resulting from high rates of growth, India will have an advantage because of its more flexible political system in the longer term.

But Bardhan also cautions: “India’s reform has been halting and hesitant. India’s heterogeneous society has been riddled with conflicts, but the system has by and large managed these. There are many severe pitfalls and roadblocks which India and China have to overcome.”

Both India and China are huge countries with vast populations and long histories. They have to evolve standards of governance that is consonant with their cultures and the spirit of their civilisations.

The implicit assumption of that last statement is that Indian and Chinese cultures are different. To me, cultural distinctions explain the varying performance of different groups of people. In some sense, it is a dismal conclusion because it means that to succeed, ultimately one must change a dysfunctional culture, and success is not going to be easy.

At stake is the future of one billion Indians. India must make up for much time lost. There is in fact already a strong political consensus between India’s two major parties that India needs to liberalise its economy and engage with the dynamic economies of the world. The BJP led coalition government of former PM Atal Behari Vajpayee continued and indeed extended the economic liberalisation policies of Manmohan Singh when he was Finance Minister in PM Narashima Rao’s government. India now has a strong, able and experienced team with Manmohan Singh as PM. The time has come for India’s next tryst with destiny.

The first tryst with destiny did not work out as planned, if you pardon the pun. Too much planning can lead to failure of plans. Indian leaders and policymakers have a seemingly hypocritical attitude towards the people. The people are assumed sophisticated enough to figure out who should rule the nation, but they are not smart enough to make simple day to day market decisions; for the latter, they have to have a patronizing government official in charge.

If I were the one making pretty speeches for the next tryst with destiny, I would recommend a few things such as trusting the people a bit more, and trusting the bureaucrats and politicians a bit less.

In the next and final bit I will summarize what I learnt from LKY’s speech.

  • Venkat Ramanan

    Atanu!
    I am waiting for the concluding part!! This is what I would perfectly term a word-by-word analysis of a speech!
    Great job Sir!

  • http://parvativetri.blogspot.com Parvati

    1. I think that instead of the constant comparison between the private and the public sectors, and the writing off of the public sector organisations, what needs to be done is that the existing amazing mammoth institutions of the Public Sector can use all the man, machine, technology and mind therein, but INCORPORATE INSIDE THEMSELVES, by making a paradigm shift in their existing Existence Policy from a welfare organisation to a solid profit oriented one, without laying off people that are already there, but not recruiting more and more, so that costs need not excalate by way of just mere salaries.

    2.I don’t agree with either the American commentators or LKY that the inability to be flexible would in any way mar China’s capacity to handle conflicts. And I don’t think that India has managed to handle conflicts any better. Invariably all conflicts howsoever severe are replaced by worse ones and all put in a cold deep storage.

    To me, problems in China that result from its high growth rate, like “massive layoffs in the rust-belt provinces, arbitrary local levies on farmers, pervasive official corruption, and toxic industrial dumping”,are purely material ones and even a rigid political system with no freedom of speech can easily handle them.

    Culture and Politics have actually no bearing on the economics of a nation, essentially at least. That’s why one keeps on repeating the fact that Politics should keep away from Business. Politics is totally unnecessary to business, and since politicians and politics are so all powerful, whether in a democracy or a dictatorship, our secret and cunning strategy must be, as should our blatant and transparent one be to cajole politicians and politics, to make, of their own volition, policies that keep them away from our economy and businesses.

  • http://chennaikaran.blogspot.com plus ultra

    As extenuating circumstances we must bear in mind the historical baggage that Nehru was saddled with – 40 years of Gandhian philosophy of self-denial and frugal living had its impact on the national psyche. He could not have carried out the experiment on a nation of this size, that Mr Lee could do with impunity in his tiny state. He would have met with resistance if he had shifted gears in 1947 and taken the country on a different course. The flaw was not so much in that Nehru took the socialistic path in the ‘50s, but that we did not abandon it in the 60s or even the 70s, long after Nehru left the scene..

    Also, on your other point regarding privatization. The success of private telecom and airline players may prove the point that “competition” helps, by providing the customer a wider choice, reduced cost and increased efficiency. But you haven’t made out a case yet that the success was due to “privatization”. With evolution and march of technology certain positive developments were inevitable, with or without privatization. Consider these counter- examples :

    1) Not Hindustan Motors with its Ambassadors , not Premier Auto with their Padminis, but it was the public sector Maruti Udyog which brought in new levels of cost efficiency and quality into car manufacture.

    2) Ashok Leyland and Telco, both private sector companies, had a free run in the last 4-5 decades and divided the market for bus/lorries between them. Except for a few cosmetic changes, these companies did precious little to innovate or come out with better designs. The bus owner/traveler has seen practically no improvement in comfort, fuel efficiency or aesthetics. In contrast, Indian Railways though functioning as a Govt monopoly has made genuine efforts at enhancing passenger comfort.

    3) For decades, Bajaj Auto, an icon of the private sector, thrived on the shortage in the market and refused to ramp up production. Though they kept the ex-factory cost low, they let a black market for scooters flourish.

    4) The inefficiency in the power sector is well-documented , yet you can find a BHEL-supplied plant at Vijayawada commissioned in good time and operating at excellent plant load factors, without any incentive or the fear of competition

    5) There are several companies in Singapore, Malaysia and Italy, for example, which are Govt owned and which have been performing very well.

    My point is that Govt. can do equally well if it brings in an element of competition ( either among its own institutions or with private players) and if it gives these companies a long rope..

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