The Indian Economy Blog

October 30, 2005

What Holds Back Reform in India – Ideas, Interest Groups or Ineptitude?

Filed under: Growth,Politics,Regulatory reforms — Amitabh @ 8:23 am

I would like to initiate a discussion on this matter. I do not believe that in general the free play of market forces is either necessary (look at China) or sufficient (the US was a more free market economy than it is today when it slipped into the Great Depression) to deliver rapid economic growth. I do believe, however, that something close to the free market ideal is the only sustainable way for India to grow.

Clearly, other things being equal, all politicians would like to promote policies that promote faster economic growth since nothing delivers votes like improved standards of living. It would be worth asking why politicians do not promote such policies in their own self-interest.

Are they held back by antiquated ideas? This can be countered by vigorous public debate such as the discussion on the blog.

Is it interest groups – organized labor, employee unions at electricity boards – that wield political power disproportionate to their numbers and scuttle reform? Mancur Olson has rigorously analyzed the dynamics of collective action to explain why this happens. Mere public debate will not undermine these groups, and certainly not debate that bypasses the vernacular press.

Or is it the inability of the state to tax the winners and subsidize the losers in reform in order to ‘sell’ liberalization? Notice that with the exception of Naidu, no Indian politician has articulately championed reform as key item on the political agenda; liberalization in India has been an elitist project, argued in English by its champions and opponents.

14 Comments »

  1. For more on this, check out http://indianeconomy.org/2005/09/12/taking-economic-liberalism-to-the-masses/

    Comment by Prashant Kothari — October 30, 2005 @ 11:53 am

  2. One mad idea: maybe politics is not a competitive market. It is at most an oligopoly today. The link between performance (good governance) and prize (winning the elections) is fuzzy. There are entry barriers for the intellectuals to enter politics. So as a politician, I know there is not enough pressure to perform.

    Rajan and Zingales have a very interesting explanation of special interest groups weilding disproportionate power in their book Saving Capitalism from the Capitalists. So yes, I agree that this is part of the problem.

    Comment by Renuka Sane — October 30, 2005 @ 12:32 pm

  3. IMO, it’s all the reasons Amitabh cites — antiquated ideas, special interest groups and ineptitude – and more.

    Conventional wisdom likes to finger crooked politicans for most (all) of India’s ills. And to be sure, there’s no dearth of those in India. However, I think crooked politicans are only a proximate cause. The bigger question is, why does India have so many crooked politicans? Why do good people not enter politics? Or if they, how come they don’t get to the top?

    To me, the ultimate cause lies within the instiutional set up of our polity.

    Comment by Prashant Kothari — October 30, 2005 @ 2:07 pm

  4. Renuka: There is probably no worse duopoly than the two-party politics in the US. Also a far greater proportion of incumbents get elected to congress in the US than in India. I do not think inadequate competition is a problem.

    I think the problem is that political coalitions tend to persist even when the economic/social interests can diverge – note how long the Democrats dominated southern politics even though ideologically, the South and Democrats had been drifting apart since the New Deal. So Lalu Yadav can coninue to garner Yadav-Muslim votes even though he has not performed.

    Comment by Amitabh — November 1, 2005 @ 11:31 am

  5. Liberalization will always be an elitist idea – and its implementation too will depend on the elite whether it is totalitarian China or democratic India as was the case with PVN. The idea that the vernacular press if enlisted will make a difference overstates the ability of the masses to influence the agenda even in a democracy. Blogs in the US are again a case of of attempting to influence the elite – the political class.

    Btw – the implication that the free market had even a secondary role in the great depression is a non-sequitur – there were many causes for the depression but a free market was surely not one of them.

    Comment by anonymous — November 1, 2005 @ 1:51 pm

  6. I do not argue that the operation of free markets caused the depression – merely that the existence of free markets did not prevent a massive unerutilzation of resources.

    Comment by amitabh — November 1, 2005 @ 11:15 pm

  7. Forget free markets or better politicians. There is a proven and a much easier solution.

    If you are asked to choose between blue widgets and red widgets – would you ever ask for green widgets instead? Most people won’t demand for options that aren’t visible. Thats the problem with masses of India right now. They don’t have options that are visible clearly.

    Case in point: Which girl took up tennis in India 2 years ago? But now, because they’ve seen Sania Mirza, hundreds of girls are taking up tennis as a sport.

    Show them the options. Make masses believe that they can achieve anything. And success will come at an unstoppable pace.

    The question is: how to make people believe in themselves and build a burning desire in peoples hearts? One way is to turn to history. India has such a marverlous history – teach it. Don’t teach world wars and stuff. They do nothing in building up the Indian psych. Instead, teach about Chanakya and Mauryas and Aryabhatta. Teach about the Golden age. The first civilizations. The Aryans. *Teach about how India Prospered* before teaching how India won independence.

    Case in point: In 1450′s England was a dump. No person of ambition stayed there. Poor population. No desire. But suddenly in 1450-60s something changed. The peoples hearts changed. And from 1485 onwards, there was no stopping England to becoming a world power. A small worthless island became the first world power. But how? If we trace back, we find that in 1450s, people staying in that small island heard a story. And started believing in themselves. The story they heard was of King Arthur and his Noble Knights. The story about the heroism of an English Knight! Henry VII heard that story and that fueled his ambtion to expand the borders.

    But did you know that King Arthur was a fable, a myth created by Thomas Malory while he was in prison? England became worlds first empire because a myth created by a prisoner fueled the hearts of its people.

    India on the other hand already has a successful history. No myth making necessary. History is the best tool to create burning desires. Unfortunately, bad history is taught to kids these days. In schools as well as by parents.

    Change the history and we will change our futures.

    Comment by Ankesh Kothari — November 3, 2005 @ 5:37 am

  8. As an aside, why is the time on this site not Indian standard time?

    Comment by Ankesh Kothari — November 3, 2005 @ 5:41 am

  9. All anlaysts who analyse India and get paralysed, limit their critique to Politics, Infrastructure and Trade Policies.

    There is however a need to understand that every country has a character which is based on its cultural heritage , religious beliefs, military attitudes and the traits of exploring the world.

    India has been and will be a country that has practiced Hinduism for 10000 years or more. Deeply ingrained in which one of us is the concept of Prarabdha and karma. We believe in the fact that what we are born with and where we are born into is a gift from past life and has to be experienced. We do not believe that action alone is the way for creating a life that wish to live . Instead when things go wrong we offer paryaers in the temple. When we win an election even the most erudite scholar like ma Mohan Singh will offer paryers in Amritsar Tirupati and Ajmer.

    It is difficult to raise a mass of humanity from this belief and transform them into believing that what we actually attain in this life is the result of actions we take. The politicians aided and abetted by the Heads of religious organisations exploit this ideology and that is why change is slow and incremental. Never exponential.

    We are not a warring society and therefore do not seek a contest with others to settle scores .Our legislative processes amply demonstrate the ease with which people linger a case asking extensions on frivilous reasons. Our masses will not rise in revolt against a tyrant . That is essentially our character.

    We are not a nation of sea farers who went out seeking better futures when opportunity was limited in the country, except in the case of people who lived in Rajasthan who did travel to other parts of India and the world to seek better fortunes. We have gone out of the country as migrant labour to build plantations, rail roads, airports and now information technology systems. We do not have the spirit of adventure that the Chinese Pirates had or the Scottish seamen had.

    Therefore it is wrong to expect that a Chinese or a European or a Japanese model of change will occur in India. We will struggle to sustain above 6 % growth. We will have a very polarised society in which 800 Million people will live at levels from moderately well to obscenely rich. We will close our eyes to the 400 million who are poor or the 48% children who are malnourished because our national character of 10000 years or more has instituted the concept of Prarabdha – destiny – past lives or whatever term you wish to use.

    India will grow – with visible poverty to which we will turn a blind eye. The 800 million people will all look forward to enjoying their wealth in some country with better infrastructure and natural or man made amenities. The rest of the world better plan for issuance of millions of travel visa( we can assist them in establishing electronic systems to do this seamlessly) and creating Dosa Idly, Butter chicken ,samosa Poori Bhaji serving restaurants. Else we will even export our own cooks to take advantage of the economic opportunity.

    You or I or Man Mohan Singh can not take away the heritage of Upanishads – infact we have realised there is money to be made in even the export of the message of Upanishad and Yoga.

    We must learn to work within the culture of a race.

    Comment by RD — November 5, 2005 @ 8:57 pm

  10. Wow RD!!! you dont sound too optimistic. In the 70′s several Indian economists used the term “Hindu Rate of Growth” to explain why India could not achieve a rate of growth above 3.5%. Apparently, the problem was not the socialist policies of the then government, it was a cultural thing why India could not achieve a higher growth rate. If today the “Hindu” rate of growth is 6%, I say PROGRESS.

    Comment by Vivek G — November 5, 2005 @ 9:31 pm

  11. I don’t have a grand answer to the question posed by Amitabh but want to highlight something that may be relevant. Anywhere that Indians have gone outside of India they have been successful. It does not matter whether they were Bihari indentured laborers going to Fiji or Trinidad or sawmill workers from Panjab going to western Canada, or Tamil students coming to study in America. In every case, they have shown an amazing ability to move up and succeed in fields as diverse as commerce, agriculture, professions and arts. The late Minoo Masani once asked Indira Gandhi in Parliament why Indians seemed to thrive everywhere in this world except under her rule.

    The problem is not Congress (though they have a large share of the blame). The problems have to do with India’s legacy of being an incredibly hierarchical society with more minute shades of discrimination and social exclusion than any other country. If you consider how Indian society was organized at the daily level 100 years ago and today you would be amazed at how much has changed (for the better). Unfortunately, there is a long way to go to attain a decent level of respect and social (not income) equality.

    India is undergoing a quiet, largely peaceful but thorough social revolution. This is the bed-rock of politics, upon which Mancur Olsen’s theory of interest groups, plus some aspects of the country’s cultural legacy, and just bad political leadership are also doing their damage.

    Nevertheless, the miracle is two fold: (1) the idea of one person one vote is actually seeping into all aspects of life and turning everything upside down, and (2) the economy grows at a decent rate despite all these problems. I am not arguing for complacency but just asking you to consider the larger context.

    Comment by Blue Sky — November 7, 2005 @ 9:03 pm

  12. What holds back reform in India?

    Amitabh Arora wants to know.Is it interest groups – organized labor, employee unions at electricity boards – that wield political power disproportionate to their numbers and scuttle reform? Mancur Olson has rigorously analyzed the dynamics of collectiv…

    Trackback by PSD Blog - The World Bank Group - Private Sector Development — November 16, 2005 @ 7:00 pm

  13. IMF: India faces “the gale winds of divergence, big time”

    Can India reform? Well, it is starting to. Over at the Indian Economy Blog, meanwhile, Amitabh Arora asks What Holds Back Reform in India – Ideas, Interest Groups or Ineptitude? (Hat tip: PSD Blog) But for another perspective on this debate, a new pa…

    Trackback by New Economist — November 22, 2005 @ 1:42 pm

  14. The comments by RD make me so angry.

    ” Our masses will not rise in revolt against a tyrant . That is essentially our character.”

    “We must learn to work within the culture of a race”

    This is the worst form of racism – the kind that a people direct towards themselves. Instead of examining the issue in a rational manner, seeking refuge in emotional reasoning. “We” do not share a character RD, the only character you can speak of, with any authority, is your own.

    I agree with Kothari in that people need to see possibilities. The desire to achieve is human. During my undergrad years between 1996 and 2000, there was a huge shift in the belief system of the student body. When I entered, the proclaimed ideal was to come to the US for higher studies and find a job. By the time I was graduating, we had an incubator for start-ups on campus, and some of the brightest were opting to stay and work hard for their dream of starting something of their own. I think the alumni played a huge role in this change – several alumni, venture capitalists and entrepreneurs themselves (mainly US-based), chose to mentor the students and put money into their start-ups. Many of those start-ups died, which is just how that works. But the mindset has changed forever.

    India’s history is complex – People like RD can read twisted interpretations onto our history. It is best to look ahead and live in the present. To not just inspire but provide real possibilities.

    As for the question posed – what holds back reform in india ? – i think the main reason is that no political party really believes in it or even understands it. And noone has done a good job of explaining economic reform and its promise to the masses. That has been covered elsewhere on this blog.

    Comment by sakshi — December 20, 2005 @ 1:38 am

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