He states the standard view explaining the rapid growth of the two countries:

What explains this strikingly rapid growth? The answer that continues to dominate public discussion in the United States runs along the following lines: decades of socialist controls and regulations stifled enterprise in India and China and led them to a dead end. A mix of market reforms and global integration finally unleashed their entrepreneurial energies. As these giants shook off their “socialist slumber,” they entered the “flattened” playing field of global capitalism. The result has been high economic growth in both countries and correspondingly large declines in poverty.

Then he proceeds to demonstrate why that explanation is incomplete at best and provides a more nuanced and comprehensive explanation which touches on matters that are often neglected in the narrative explaining the growth miracles. For instance:

Start with the claim that global integration and associated market reforms resulted in high growth, which in turn produced dramatic declines in extreme poverty. Applied to China, the timing simply does not fit. China has indeed made large strides in foreign trade and investment since the 1990s, but well before then, say between 1978 and 1993, the country had already achieved an average annual growth rate of about nine percent—even higher than the impressive seven percent growth rate in East Asia between 1960 and 1980.

It is a very well-reasoned article and must be read in full. Let me close with the concluding paragraph of the piece.

Chinese and Indian economic performance has been far better in the last quarter-century than in the previous two hundred years—and this is one of the striking events in the recent history of the international economy. Other countries must adjust to this reality, and learn to treat the partial restoration of the earlier global importance of these two countries as an opportunity for trade, investment, and exchange of ideas, not as a threat. (We also need to work in tandem with them on the environment.) But we must remember that the story of their rise is more complicated and nuanced than standard accounts make out. That more complex story includes the positive legacy of China and India’s earlier statist periods, which offers general lessons for the process of development much too often ignored.

Will those guys–the communist leaders–suffer? No way in hell. They will continue to live comfortable lives knowing that their policies have added to their vote banks. That is the irony of all. The commies create the conditions for their continued victory in the elections by improverishing the country.

May the commies all rot in hell for eternity.

Related Post: The Privatization of Public Sector Units.

In a state like Delhi, for instance, can any private power distributor without an established work force be able to carry out electrification?

The answer to that is of course no. No distributor, private or public, can carry out electrification without an established workforce. But if that question was intended to demonstrate that only the government can have an established workforce, that is patently false. One doesn’t quite know where to begin in trying to point out how ridiculous that contention is. It is empirically false, not just theoretically false.

The same argument was forwarded when the question of allowing the private sector into providing telecommunications. For over 100 years, telecommunications was the sole preserve of the government and one assumes that by then the government had succeeded in establishing a workforce. What did we the consumers get from that established workforce? We got to wait for years to have the privilege of having a telephone which occasionally worked and for that privilege we paid through our noses.

I will not abuse anyone’s intelligence by pointing out what exactly was wrong with the government’s involvement in the telecommunications sector. What I find most stunningly and stupifyingly astounding is why the communists don’t see what is as plain as the nose on one’s face. Do they see the government actually delivering anything more efficiently than the private sector when it comes to most private goods and services?

Every sector that the government gets it grubby fingers into, instantly turns into a pile of horse-doodoo. Air India used to be one of the most efficient well-regarded private airlines run by the Tatas. Foreign airlines used to look up to it for guidance and expertise. One airline, which later on went to become Singapore Airlines, was one such. Then the government took Air India over. Now it can only be described as a third-rate national carrier of a third-rate economy. How on earth did they (the government) manage to do that?

Like I had said before, there has to be a reason for why the government apparently has the anti-Midas touch — whatever it touches, it turns to crap. There can be many reasons but there has to be one underlying first cause which can parsimoniously explain the failures of the Indian government. I guess I will take a cue from television news channels and say, “Stay tuned. Details at 11.”

[Followup article "The Cupidity of the Indian Government."]

I am against privatisation of the state electricity boards. I simply do not understand the merits of the decision of setting up state regulatory commissioners even as private distributors increase costs repeatedly. In a state like Delhi, for instance, can any private power distributor without an established work force be able to carry out electrification?

I am not sure what it is about Delhi that makes it so unique in the whole universe with regards to the generation and distribution of electric power. From what Mr Bardhan says one can only conjecture that there is something astonishingly unique about Delhi that it is not subject to the usual laws of the known universe. In the rest of the universe, the generation and distribution of electrical power can be, and has been, handled quite competently by the private sector. Perhaps it is the bit about “private distributors increase costs repeatedly”.

That is certainly most unique. In the rest of the universe, firms try to reduce costs so as to increase profits. Going by Mr Bardhan’s assertion, it must be something in the air in Delhi that makes power distributors increase costs instead of reducing them. Be that as it may, the fundamental point is that there is no reason on earth to believe that the government has been or even can be better at providing power than the private sector. Any undertaking by the Indian government is plagued by bureaucratic corruption, political interference, nepotism, and plain old fashioned idiocy. Which explains why most of the public sector units are national resource sinks, not centers of excellence and profits. Do we really want to give more responsibilities to someone who has repeatedly demonstrated in the most stark terms that he is totally incompetent?

Talking of responsibilities, it is important to recognize that there are things that only the government can do and these things have to be done. Any government which fails in those things cannot be trusted to do things that it has no business doing. Take for instance, primary education. It cannot be done by the private sector. The public sector has to finance primary education, if not actually be in the business. So also the government has to provide an efficient legal system, public safety and security, and other such public goods. If a government is unable to even provide those basic public goods, how in the name of god almighty does one propose that the government get into areas that it has no particular advantage in and has no business in?

I believe that ultimately the universe is comprehensible. That implies that whatever happens, however bizarre on the face of it, can be explained. Now our task is to explain how seemingly rational people can hold totally absurd notions in their heads and influence policy which could doom hundreds of millions to a miserable fate.

That question I will take up tomorrow. For now, let’s have a moment of silence to remember that asinine policies have condemned many hundred millions of Indians to a miserable existence for decades. Sad part is that there is more to come given the unholy alliance that is directing the ship of state.

{Contined in “The Government’s Anti-Midas Touch“}

Even Lord Keynes would not have approved of disinvestment! Even he believed that there are some areas the government should not step out of. … Disinvestment means privatizing profits and nationalizing losses…. Profit making public sector units should not be privatized for two main reasons. First, because they are major contributors for taxes, and, second, they pay huge dividends. … Selling profit-making PSUs, like Oil and Natural Gas Corporation, is akin to selling jewels to buy groceries. … I am against privatization of the state electricity boards. I simply do not understand the merits of the decision of setting up state regulatory commissioners even as private distributors increase costs repeatedly. In a state like Delhi, for instance, can any private power distributor without an established work force be able to carry out electrification? …

For the record, I have to make a disclosure first. Mr. Bardhan is a respected elder to me. So when I differ with him vehemently, I do so with the utmost respect and regard for him. With due respect, I think what he says is nonsense and nonsense of the most pernicious kind. The entire piece in the Business Standard is a study in how wrong-headed thinking carried on over an entire life-time can warp the judgment of a well-meaning and idealistic person. I don’t doubt for a moment his total commitment to the lot of workers. I am confident of his sincerity for the well-being of labor. But good intentions are far from sufficient in making things better. Let me save you from drowning, said the monkey to the fish, as he put it up on a tree.

Now to some specifics. The appeal to authority that Mr Bardhan makes in invoking Keynes is disingenuous at best. Agreed that the government should not step out of some areas. But which areas should that be? Should the government be in primary education or should it be in power generation and distribution, or should it be in neither or should it be in both? Should the government be running airports and airlines, or should it be enforcing law and order?

To answer questions such as those, we need to first ask: what would happen if the government were not to be in a specific area. Would the private sector step in? Or will it get neglected leading to social welfare losses? It is very simple to demonstrate that primary education will not be optimally provided by the private sector because it has public good characteristics and there are major positive externalities which cannot be adequately captured by any private provider. Primary education, therefore, is a prime candidate for government financing, irrespective of whether the actual provisioning and delivery of primary education is by the private sector or the public sector.

On the other hand, the government should not be in the running of airports and airlines simply because in a competitive marketplace the private sector will provide an optimal solution. The point to note especially is the competitive marketplace bit. Airports and airlines are not natural monopolies. Monopolistic control of airports and airlines leads to the kind of outcome we are so familiar with in India (thankfully, the government monopoly of domestic airlines has ended) with shoddy airline service, massive supply constraints, the worst airports in the entire civilized world.

Now about the bit about PSUs paying dividends (out of profits, presumably) and contributing taxes. So do many private sector firms. So that is no argument against privatization. He forgets that while making profits is important (whether it be a private or a public sector firm), it is also important to ask whether the firm making a profit faces competition or not. If you grant me the monopoly to provide, say, telecommunications services in India, I would make a humongous profit, pay lavish dividends, and contribute to taxes. Of course, I would also screw over the country by curbing supply (monopolies control supply to maximize profits), charge an arm and a leg for shoddy telephone service, and generally I would talk very loudly of how wonderful an employer I am since my employees don’t have to face the threat of me going out of business and laying them off. So the employees would also lord it over the people who need telecommunications services by threatening to cut off their telephone services unless consumers grease their palms every so often. See, my being a monopolist meets all the conditions that Mr Bardhan requires for the public sector to be in a specific business.

What I describe above is exactly what the government did in the telecommunications sector — it was a public sector monopoly and as expected the country suffered immensely as a consequence. Now there is a degree of relief (but not entirely) since the market is somewhat competitive (more about this some other time.) I am not against PSUs. The more the merrier. But here are the two conditions that they should meet:

1. They not be monopolies.
2. That they have a hard budget constraint.

The first condition means that other firms should be allowed, if not actively encouraged, to be in the business. So for instance, the public sector firms BSNL and MTNL can be in the same sector as other private firms providing telecomm services. It is only when the public sector firm is the only game in town when the sector goes to hell in a handbasket.

The second condition is required to prevent the public sector unit from being a drain on the public purse. Suppose that BSNL is a player in a competitive market but bleeds crores of rupees every month absent a hard budget constraint. That would be against the rules of the game (that is, it would not be subject to the same conditions that its competitors face in that they exit the market if they cannot efficiently run their business) and it would impoverish the public as well.

{Continued in “Wrong-headed policies condemn millions to misery“}

The article by Kelkar and Shah essentially tells us that the Indian economy is not doing badly and that we would not be remiss if we indulge in a little bit of self-congratulatory back-slapping. They indicate with pride the progress we have made. For instance:

In a recent month, we added two million mobile phones, an event that made the global telecom industry sit up. Prices have crashed. In a truly ironic reversal of roles, land lines are now a luxury, mobile phones are cheap and ubiquitous.

The turnaround time at our ports has come down by half. And we are finally getting the first high-quality highways in our history. We used to build 11 km of highway per year; we are now on the verge of building 11 km of highway per day.

Services exports: Ten years ago, we started exporting software. This sounded like an elitist thing, where a handful of top universities would produce computer engineers for the software export industry. That industry was enormously broadened owing to an explosion in private and public production of IT skills.

But then IT exports have metamorphosed into the much wider field of services exports, where all kinds of services (and not just software) are being exported. Its components include call centres, financial back offices, database creation.

A whole range of labour-intensive activities can now be traded on international markets, thanks to improvements in telecom. India is the country best equipped to harness this.

All very fine and good and it gives a body a very warm and fuzzy feeling. Until one stops to ask a different question. Nobody seems very eager to even ask that question. It is an important question that if not answered, can have some serious consequences.

Kelkar and Ajay write

FOR many decades, we in India watched with envy while countries of east Asia embraced globalisation, cut customs duties and obtained export-led growth by harnessing the dramatic rise in world trade in goods in the 1970s and 1980s.

The question we need to ask is this: Why did the policy makers and leaders of this blessed nation strap itself into a suffocating straitjacket and stifled the economy so as to condemn hundreds of millions to a degrading inhuman existence below an abyssmal poverty line and reduce the nation into a basket case?

“Well, we are great. We need to congratulate ourselves for the wonder that we are.”

“What wonder is that?”

“We are doing really well. Our children have stopped crying all day long. Now they only cry a few hours a day.”

“Did they really cry all day long?”

“Yes, they wailed all day long. We used to look with envy at our neighbors’ children because they did not cry at all. But our children used to cry a lot. So now that they cry less, we are catching up with our neighbors and we are starting to feel good.”

“That’s really good. But what was it that made them cry? Why did they cry?”

“Well, we used to beat them mercilessly all day long. Now that we don’t beat them continually, they cry less. And that is why I think we are great. Our children have stopped crying all day long and we are really making progress.”

“I see. You must have noticed that your neighbors did not beat their kids and that the kids did not cry?”

“Yes, we knew that. But we have made progress. You have to admit that we are the best because our children have stopped wailing all day long. We are great.”

“Wait a minute. You used to beat them all day long. And now you only beat them occassionally. So you are congratulating yourself for stopping doing something that you should not have been doing in the first place. Are you a brainless cretin or are you just a sadomasocistic idiot?”

Whenever we hear the word ‘liberalization‘, we need to ask what was the reason for chaining the economy in the first place. What was it that caused the economy be be bound and gagged and strangled and choked and stifled? Unless we understand that cause, we will not completely be able to deal with the effects.

Like the cretin in the above dialog, the government has stopped continually beating up on the economy but has not yet stopped entirely. It still does it. You may say, it is better than before. Sure it is, but why not stop entirely? Here is a joke that illustrates my argument.

A motorist does what we call a “California Stop”, that is, he comes to a stop sign and slowly rolls through without actually coming to a stop. A cop catches the guy and is about to write a ticket when the guy explains that he should be let go because even though he did not stop, he did slow down and isn’t slowing down just as good as stopping? At that the cop (and this is just a joke) starts rapidly slapping the motorist. The motorist shouts in alarm, “Stop, stop!” The cop asks, “Do you want me to stop or should I just slow down?”

The good news is that we don’t have to be particularly smart or heroic to improve our economy; we just have to stop doing the stupid things we have been doing, and do so immediately. The telecommunications sector provides an illustrative case in point.

The telecommunications sector was declared off-limits to the private sector and kept as a public sector monopoly. The laws governing phones was framed in 1885 — that’s not a typo, it really is nearly 120 years ago. The objective of the government then was to deny the citizens access to a tool that would empower them. It was meant to be the sole preserve of the government (British) so that they could administer the country. When the British left, the objective of controlling the population did not change. Hence we had until very recently a pathetic telephone system. The waiting time for receiving a telephone line even in cities was of the order of 10 years, leave alone telephones in rural India.

So while our chests may swell up with pride that we are adding a million cellular phones each month, the question is what took us so long and what was the reason for the colossal idiocy of not allowing the telecommunications sector freedom. Why, indeed, even now is the sector not being allowed to reach its potential? Why are the private providers being forced to squeeze money out of their customers to feed the government machinery?

Reform is great. But the need to reform implies that something was rotten in the first place. What need to inquire into the cause of that rot and having figured it out, we need to remove that cause from its very roots. If we don’t do that, we will continue to be also-rans in a race that is so fast and furious that like Alice, we have to keep running as fast as we can just to be at the same place.