The Indian Economy Blog

December 19, 2005

Lee Kuan Yew on India – Part 2

Filed under: Basic Questions,Miscellaneous — Atanu Dey @ 9:49 pm

{The first part of this series is here.}

Reading Lee Kuan Yew’s lecture is edifying at various levels. As an observer, he is incomparable. But he did not merely observe; he hinted at solutions and did so without being rude. You know the Hindi saying, samajhdar ko eshara kafi hota hai (to the intelligent, a mere gesture suffices). Unfortunately, his talk to the Congress and other assorted disciples of Nehru must have been as useful as a bicycle to a fish. Nothing that LKY prescribed for India is surprising or counter-intuitive. Yet it is good to hear it from one who has not only talked the talk but actually walked the walk.

LKY transformed a third-world mosquito infested swamp into a rich developed city state within one generation. An autocrat to the core, he sequenced the changes and orchestrated the development of his city without apologizing for what he had to do. Singapore is one of the least corrupt economies of the world. He made Singaporeans clean up their act, both figuratively and literally. No other dictator has been able to achieve that sort of transformation. It is a random draw from which dictators are drawn. India drew a lousy hand and got saddled with dictators that were incompetent to the core. And staggering from one calamity to another, the country got rid of the dictators and with only a brief break, got a government that is headed by a foreign-born rather reluctantly naturalized citizen of India and supported by a bunch of treasonous communists.

There is sweet irony in LKY delivering the Nehru Memorial Lecture: a successful dictator lecturing the family members of a failed dictator who made a mess of the economy that was so full of promise. Just in case it is not entirely clear, Nehru was a dictator, never mind the fact that there may have been an election. The laws of the universe do not preclude the democratic election of dictators. Adolf Hitler was also elected, and he enjoyed the confidence of the majority just as much as Nehru enjoyed the confidence of the people of the newly minted republic of India. There was no opposition worth its name and Nehru did precisely what he willed.

Based on Nehru’s policy prescriptions, the Indian economy grew at a sorry 2 or 3 percent a year—the aptly named “Nehru rate of growth.” Per capita figures were even more dismal than that because the population grew rapidly. The Nehru dynasty continued to favor policies that kept India locked into the Nehru rate of growth until about 1991. Then economy grew at a more respectable rate but only compared to the Nehru rate of growth. In absolute terms, the “post-reform” growth rate was nothing to write home about. China had been growing for over a decade and at a much faster rate.

Compared to the dismal performance of the Nehruvian socialistic system, anything would look good. But that is not enough. LKY warns that today’s India should stop comparing itself to Nehru’s India. LKY put it thus:

India should benchmark itself not just against its own past, but against the best in Asia. And India can take heart from the achievements and performance of Non-Resident Indians (NRI) in free market economies such as the US, UK and even Singapore, where large numbers of NRIs have assumed high corporate positions in multi-national corporations. {Emphasis added.}

It is important to acknowledge precisely what makes NRIs tick whereas RIs don’t tick. It is a combination of nature (internal) and nurture (external) factors. The successful NRI in the US, for instance, are largely those who are innately intelligent, hardworking, ambitious, well-educated and driven to excel. They were born lucky, worked hard in school, and then ended up in a fine environment which allows and encourages people to do their best and move up. The external – environmental – factors that goes with a market economy is missing in India.

Considered as any large group of humans, Indians are no better or worse than others. There is genetic diversity and variation within the group. A specially selected subset could be constructed with arbitrarily extreme characteristics such as “very successful NRIs.” But the fact that the large group does poorly compared to other large groups is then entirely due to the environment. The environment can be changed but with great determination and foresight, as LKY did to Singapore.

One of the commonest objections I come across is, “Don’t compare Singapore to India. India is very large while Singapore is very small.” First of all, I am not comparing Singapore to India. I am comparing the culture and quality of the governance of Singapore to that of India. The values that are expressed by the leaders of a society are independent of the physical size of the society. Values and standards are thus not like physical goods. The value of not tolerating corruption applies with equal force whether the field is large or small. Just because India is a few hundred times larger than Singapore does not mean that the determination to not tolerate corruption has to be a few hundred times the determination required in Singapore’s case.

LKY then quotes growth statistics which should make Indians hang their head in shame. China is a very large country. So comparing China and India cannot evoke the standard response that is given when Singapore is mentioned in any way with regard to India. Of course, the objection raised is then that India is a democracy while China is not. I have not yet figured out why being a democracy should be a valid explanation for a dysfunctional economic system.

The US, if I have my facts correct, is also a democracy, as are the Western European nations. Their populations do not subsist at the edge of starvation. Of course, all rebuttals to India’s dismal economy cleanly sidesteps the fundamental problem which is that India’s economic policies suck chrome off the bumper of a truck parked a hundred yards away. Open up any newspaper if you dare on any day of the week, and you will see the next asinine brain-dead scheme being proposed by the heirs of Nehru. Yesterday, for example, the government proposes to impose reservations and quotas for private sector jobs. No, not merit or competency—what will matter is if the applicant has the right caste, the appropriate religious affiliation, belongs to the correct vote bank.

Here is a stark demonstration that economic policies matter. LKY reports the differential growth rates of China and India. Were his audience, the honorable head of the Indian government and the Prime Minister Dr Manmohan Singh, paying attention?

Both India and China have both done much better than most of the world. In the decade from 1994 to 2004, India’s GDP grew two-fold from US$310 billion to US$661 billion. But during the same period, China’s GDP grew three-fold from US$542 billion to US$1,649 billion. In 1984, India’s GDP was about 30% smaller than China’s. A decade later, it was more than 40% smaller and by 2004 it was about 60% smaller. Such a wide disparity is unnecessary. India can and should narrow the gap by embarking on a new round of reforms.

Wide disparity unnecessary? Almost nothing that the various governments of India have done have been necessary. Futility has been writ large on each hare-brained scheme that the illiterate narrow-minded bigoted bunch of psychopaths have imposed on the economy.

I have been following the shenanigans of the government of India for a few decades. To quote Groucho Marx, “He talks like an idiot, and behaves like an idiot. But don’t let that fool you. He really is an idiot.” The Indian policymakers behave like idiots, and talk like idiots. Don’t let that fool you. They are actually a bunch of idiots.

Anyway, enough of this rant. Let us go back to LKY. He asks, “Can India keep pace with China’s growth?” and responds, “Yes, if India does more in those sectors where China has done better.

That statement, ladies and gentlemen, is worth drumming into the heads of India’s movers and shakers. Are you paying attention, Dr Singh?

Where did China do better? Manufacturing. That is where the foundation of a large economy lies. That is where it makes sense to distinguish between a small state like Singapore and a large ones such as India or China. A small economy of only a few million people can get by with only a services sector. But a large country with a billion people needs to have a correspondingly large manufacturing sector. When I say large, I do not mean that it should employ a large percentage of the people. I mean that the value of the production of the sector should be large. Why? Because manufacturing produces goods and it is the availability of goods that make people non-poor. Here’s LKY—

… But India cannot grow into a major economy on services alone . Since the industrial revolution, no country has become a major economy without becoming an industrial power.

Just as China is learning from India to improve its performance in the IT sector, so India must emulate China’s success in attracting FDIs and the jobs they create in manufacturing. It can do this by building infrastructure and educating and raising the skill levels of its workers.

Infrastructure and education. Actually, education is also part of the infrastructure—the supporting foundation upon which one can build an economy. Neglect of primary education rivals the neglect of other infrastructure such as roads, ports, power generation, railways, etc. Many decades have passed since India’s constitution was adopted in which primary education was given priority. Like pretty speeches, it is a non-starter. A very large percentage of Indians cannot read the constitution of India.

Yet—and this is the most baffling puzzle to me—I hear the claim that India is an information superpower endlessly touted by journalists, writers, and even the President of India. Cognitive dissonance on a social level or is it just plain stupidity?

LKY is right in his assessment that a country cannot leap-frog the agriculture and manufacturing stage and go directly to a services economy. He says:

Arvind Panagariya, a professor of Indian political economy at Columbia University, USA, puts the issue clearly. He noted that some have argued that India can focus on IT, grow rapidly in services, skip industrialization, and yet transform itself from a primarily rural and agricultural country into a modern economy. He dismissed such ideas as “hopelessly flawed” and “far-fetched”.

IT is less than 2% of India’s GDP. While services have grown rapidly, the bulk of the growth is from service sectors where wages and productivity are low. Business services, which include software and IT-enabled services, account for only 0.3% of GDP. Only manufacturing can mop up India’s vast pool of unemployed, narrow the urban-rural divide and reduce poverty.

Professor Panagariya concluded:

“The right strategy for India is to walk on two legs: traditional labour intensive industry and modern IT. Both legs need strengthening through further reforms ….”

LKY comes back to the mantra—education and production of stuff. In the manufacturing sector, he notes that reform in labor laws is critical.

India’s relatively young population can be an asset if they are universally well educated. UN forecasts that India’s population will outstrip China’s by 2030. Job creation through faster GDP growth is therefore an urgent necessity. Growth in IT and other services will not create enough jobs. IT-related jobs make up only one quarter of one percent of India’s labour force.

To create jobs the main thrust of reforms must be in manufacturing. That requires a change in labour laws to allow employers to retrench workers when business demand is down , streamlining the judicial processes, reducing the fiscal deficit, loosening up the bureaucracy, and most of all improving infrastructure. Let me focus on the last two as I believe they are crucial and inter-connected.

Industrialisation cannot take off without adequate infrastructure: better roads, and a reliable supply of power and clean water, better ports and airports. By one estimate, economic losses from congestion and poor roads alone are as high as US$4 to 6 billion a year. Another estimate is that the cost of most infrastructure services in India is about 50% to 100% higher than in China. The average cost of electricity for manufacturing in India is about double that in China; railway transport costs in India are three times those in China. China has spent over eight times as much as India on its infrastructure. Three years ago, China’s total capital spending on electricity, construction, transportation, telecommunications and real estate was US$260 billion or more than 20 percent of its GDP as compared to US$31 billion or 8 percent of India’s GDP.

Why do I think that India’s policy makers are incompetent? Because it should be clear to the meanest intelligence that industrialization depends on infrastructure and that that should be a priority. Which part of this simple statement don’t they understand. And if they do, why are they preventing the building of infrastructure? No money to finance the infrastructure? LKY says let the private sector do it.

If there are budgetary constraints , the answer is to privatise these infrastructure projects. There are well established construction companies, Japanese, Korean and others, that have done many such infrastructure projects on franchise terms.

One area where India has done well is its telecommunications infrastructure. This has been a critical factor for India’s IT success. India needs to aggressively privatise infrastructure development and open it to foreign investment. Then FDI flows will increase. And the bureaucracy must not impose onerous conditions that will hamper this privatisation.

Good luck Mr Lee Kuan Yew. Bureaucracy not impose onerous burdens? That is their raison d’etre.

The Political and Economic Risk Consultancy (PERC) based in Hong Kong, recently surveyed expatriate businessmen on bureaucracy and red tape in Asia. India was rated worst out of the 12 countries covered. PERC’s conclusion was that:

“The Government would like to liberalise many sectors, and there are plenty of announcements of new initiatives to do so. But when push comes to shove, bureaucratic inertia has been extremely difficult to overcome.”

Asking bureaucrats to stop throwing spanners into the works is like trying to teach a pig to sing: it cannot be done and it annoys the pig.

The World Bank has also done its own study. It found that in India it can take a decade to close a business through insolvency proceedings. It also found, among other things, that official fees amount to almost 13 percent of a property transaction in India as against just over 3 percent in China.

My secretaries asked Singapore businessmen with investments in India what, apart from infrastructure, they found as major constraints. To a man, they replied it was the bureaucracy.

I am sure that there must have been senior bureaucrats in the audience. Did they feel uncomfortable? Or are they too thick-skinned to understand how much damage they inflict on the nation.

Last year I was at a policy makers’ roundtable in Chennai. The topic under consideration was how ICT can enable development. Lots of hot air was generated by impassioned speeches on how the Internet and the PC would enable rural India to leap-frog development. When it was my turn to speak, I started off with, “First we kill all the bureaucrats.” The bureaucrats at the round table were not amused. Perhaps it was because they did not recognize that it was Shakespeare localized for Indian conditions (“First we kill all the lawyers.”) I continued that bureaucracy ruthlessly strangles with hands of gold the Indian economy and no amount of ICT will change India’s fortunes unless the bureaucracy is fixed first.

OK, maybe I was a bit too blunt. LKY is polite and says it like it is:

They believe it is a mindset problem. The average Indian civil servant still sees himself primarily as a regulator and not as a facilitator. The average Indian bureaucrat has not yet accepted that it is not a sin to make profits and become rich . The average Indian bureaucrat has little trust in India’s business community. They view Indian businessmen as money grabbing opportunists who do not have the welfare of the country at heart; and all the more so if they are foreign businessmen. Deng Xiaoping said at the start of China’s open door policy, it was glorious to be rich. The sequel is reported in Forbes Asia, November 14 2005, where it listed over 300 China’s richest, 40 of them with thumbnail CVs in a centre -fold. All are new entrepreneurs creating jobs and spreading wealth. Now, after private enterprise and the free market have generated wealth in the coastal provinces, China’s leaders have concentrated on spreading growth to the inland provinces by building infrastructure and offering generous economic incentives for investments.

One Singapore businessman told me this story. He entertained a former senior Indian civil servant to lunch in Singapore. Some months later when he was in India, the former civil servant reciprocated by hosting a dinner at which several other guests were present. His host made this surprising comment that he was amazed to see that in Singapore, a business could be successful without being dishonest.

India must find some way to reward bureaucrats who facilitate, not hinder investments and enterprise whether Indian or foreign.

India needs reform in various areas. The most critical area is the bureaucracy. Why India got saddled with a dysfunctional bureaucracy is easy to understand: the British were in India to exploit and extract wealth and created the bureaucracy with that objective. When the British left, the bureaucratic infrastructure was not jettisoned because it was the perfect tool for the “command control license permit quota” Raj which began with Nehru and still impedes India’s progress.

I think I will take a break and get back to the rest of LKY’s speech tomorrow. Au revoir until the next time and the case is sol-ved.

13 Comments »

  1. You come across from this post as an anti-Nehru person without any logic in your arguments. You are just using this to drive your political agenda rather than delivering any insight into the issue. I wouldn’t be surprised if you also think BJP as a pro reform party. I have already replied to people like you in Ravi Kiran’s post

    http://indianeconomy.org/2005/12/06/why-we-reformed-what-we-did/

    There are many such self described libertarians in the blogosphere. Fortunately, you guys make a small number in Indian voters and India is saved.

    Comment by Krish — December 19, 2005 @ 11:52 pm

  2. “Fortunately, you guys make a small number in Indian voters and India is saved. ”

    The sweet irony.

    Actually I will be quite surprised if there is any BJP supporter at all on this blog.

    Regards

    Comment by Gaurav — December 20, 2005 @ 12:24 am

  3. Atanu, I hope that you really don’t take the policy-makers of India to be idiots. There are some really smart people out there. The time-horizon of their interests clashes directly with ours. We are looking at long-term and they are looking to survive this 5-year cycle or please the political boss. For every activity that passes from government hands into the market sector, I can hear the sound of loss of bureaucratic/ political power and jobs. Singapore and Chine dealt with the opposition through political suppression. That would be difficult in India. The question is how to reform in the face of the pressures that these smart people face. I remember a top bureaucrat telling about an education reform, “I love this, but there would be political opposition to it. Create a following among the people and that will make my task easier to make this pass.” Most government programs may sound as “idiotic” but they make eminent sense for those who pass them!

    Comment by Naveen — December 20, 2005 @ 1:59 am

  4. >>> Just in case it is not entirely clear, Nehru was a dictator, never mind the fact that there may have been an election.

    Atanu– why don’t you live in China and blog there? Just don’t use words like “democracy”! Your words are entirely clear, I’m not sure your thinking is.

    Comment by Manish Khettry — December 20, 2005 @ 3:23 am

  5. I disagree with the statement that beaurocrats think making a profit is a sin. THey have no qualms about making a profit through bribery. The best and most brilliants minds go into business, not politics. Civil servants (and I don’t want to make a sweeping generalization about all of them, I’m sur emost are clean and honest) tend to lean on jealousy toward businessmen because of this fact, and therefore demand a cut in the profits.

    Comment by AK — December 20, 2005 @ 4:53 am

  6. Krish, you figured out all by yourself that I am a severe critic of Nehru! I see that I can’t get anything past you.

    Well, I don’t have a political agenda. My agenda is rather simple–to point out what is blatantly obvious. One can hardly call pointing out what is blatantly obvious as insightful. Yet, some Indians either refuse to acknowledge or are unable to figure out that the revered leaders of India have all been, to a first approximation, either incompetent or malicious, or both.

    Why? Because India is so dismally and heartbreakingly poor. Did a comet strike India and destroy the promise of our prosperity? Did god decree that India have hundreds of millions of abjectly poor people? Are Indians as a collective incapable of creating a prosperous society? No to all those and many more questions that finally reduce the options to this: that policy chosen by India’s leaders were such that it impoverished India. Who chose the policy? Nehru set the agenda. Surely even you are capable of noting that. I never met the man. But I look on his works and despair. He was either incompetent or malicious or both. Charitably I just think he was totally incompetent.

    I can argue that it was not Nehru’s fault; rather it was the fault of the Indian people. Well, in that case why then make a deity of Nehru and his entire family for 17 generations when he did not have what it takes to transform India?

    I would leave Nehru out of the picture only if they stop labeling every institution, every park, every charitable trust, every road, port, university, stadium, whateveryoucanimagine with either Nehru’s name or his progeny. The more Indians idolize Nehru, the more I will point out that his policies were asinine and Indians suffer because of him. The louder they talk about how great Nehru is, how wonderful and committed a democrat his daughter Indira was, how absolutely amazingly great his grandchildren were, how astoundingly marvelous goddess his Italian-born grand-daughter-in-law is, the quicker I will point out how astoundingly stupid the man was.

    If only they just said he was an ordinary man not particularly bright, a product of his times, lacked a real understanding of what was required, was a very poor executive, would have made a great speech-writer but should have left the business of policy making to smarter people — I would not have to get on his case. But the more they idolize him, the more it becomes necessary to deflate the man’s image.

    Here is the bottom line: either he was in control from 1947 onwards or he wasn’t. If he was, he perpetrated the disaster; if he wasn’t then it is wrong to sing the glory of his and his entire brood. The most damning thing that one can do about Nehru, his legacy and his extended family is to look at the numbers that sum up India and then weep.

    Comment by Atanu Dey — December 20, 2005 @ 8:36 am

  7. Atanu,

    My question is clear. If everything we face today is nehru’s fault, then what scientific data you have to prove that we would have been better off with capitalism? You can take the result of capitalism from another country and try to argue it in the case of India. Taking into account the exact scenario in India after independence, you need to show with scientific data that we could have done better with capitalistic agenda. As long as it is not done, it is just a political rant and it doesn’t mean anything. You can get thousands from BJP and RSS to give the same rant. Also, you talk as if Nehru and his family ruled India through backdoor dictatorship. They were elected. It is the people who elected them on the basis of what they offered. If the result is disaster, then ridicule the people who elected Nehru family. What is the point in ridiculing them for India’s ills. If they had ruled the country through dictatorship, then blaming Nehru makes sense. In this case, it is just a political rant without any meaning. Indians should have thrown them out if they thought whatever they did is ruining India. Your rant doesn’t make sense in a democracy. Also without a clear cut argument to prove how capitalism would have performed for India, criticizing them for evils doesn’t make any sense.

    Comment by Krish — December 20, 2005 @ 10:35 am

  8. Well Mr. Krish,

    First of all “scientific” is a very dirty word. It was first made famous by Mr. Marx. Only his theories, which eventually went on to kill 100 million on planet earth, was “scientific”. The rest were all unscientific bullshitting.

    India was systematically made destitute by the practice of Socialism that killed all enterprise and creative skills of its people from 1947 to 1991. It is only in the past 15 years that we have taken some small steps towards restoration. Complete restoration, I think is stalled till 2009, by the very “scientific” communist gentlemen in power today.

    The “scientific” data that you require is already there. Just compare the post-1991 and pre-1991 economic growth rate of India.

    Comment by Pankaj — December 20, 2005 @ 12:59 pm

  9. Atanu,

    This is the present status of some of the initiatives of the present government.

    Labour reforms; stalled

    Disinvesment; stalled

    The upgradation of Mumbai and Delhi airports; stalled.

    The establishment of foreign universities to elevate higher education standards in India; stalled.

    Manmohan Singh and his team, which includes the very distinguished Montek Singh Ahluwalia, are all hapless guys. I think they would share your concerns but they are completely pulverized from both ends.

    At one end, are the eternal nay sayers, the communists, because there entire survival and success depends on continued Indian poverty and deprivation. At the other end, is the signora with her cabal of fourth grade, spineless and servile human beings. In such a scenario, Singh is doing the best he can, which is not much.

    Regards.

    Comment by Pankaj — December 20, 2005 @ 2:08 pm

  10. Krish, Nehru and Congress had the power and responsibility of making India a propsperous country, whatever the way of government or economic mantra be, in which it he/it failed and LKY succeeded. That is the crux of the matter. We can argue about which/what/how/who of policies and people, the core issue is the current system those two have landed India into which is becoming very difficult to come out of barring a dictator. And please dont give your rant over people electing these goverments. Otherwise will be real waste of time debate about politics/elections/gullibility/amercians electing bush etc.

    Comment by Arun Puri — December 20, 2005 @ 3:05 pm

  11. My two cents:

    There are two reasons why China has been growing at a much faster clip in the period that you mention –

    a. Economic liberalisation in China began around 1979. We started the process only in 1991. The benefits cannot be felt in a year or two. The process has to be sustained. In India, thanks to democracy, the liberalisation process was stopped mid-way in 1994 when the Congress began to realise they may not be coming back to power in the 1996 elections. There was a hiatus in the reforms process which lasted at least 5 years.
    Had this not happened, the trickle-down benefits that policymakers pray for could have taken effect. Also, because of the very nature of the economy – it is more complex and mature with a sound legal and banking system in place – policymakers needed to take a cautious approach to reforms to protect the domestic industry.

    b. The other reason the growth looks disparate is because India’s growth has happened in the services industry, and not in manufacturing. Manufacturing by its very nature gives you scale, something that the services sector doesn’t. What I mean by scale is that a Reliance Industries can grow from Rs 42k cr to Rs 75k cr in 2 years with a decent growth, but even at a 50% or thereabouts growth rate a TCS will grow Rs 1.5k cr to Rs 9k cr in 5 years.

    For multinational corporations who are being forced to invest in emerging economies (vis-a-vis Europe or the US where growth rates are much lower), it is increasingly becoming a situation where it’s no longer a decision between China or India … it is now China AND India!

    Comment by Bonatellis — December 21, 2005 @ 1:27 pm

  12. [...] s 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 [...]

    Pingback by The Indian Economy Blog » Blog Archive » Lee Kuan Yew on India - Part 3 — December 22, 2005 @ 4:43 pm

  13. I would think Krish is really stuck behind the theory that anybody who blames nehru is delusional. If that’s the case, why did LKW point out the fallacies of nehru’s policies in his speech? Come up with a incisive rebuttal and then we’ll believe you. Just snapping at Atanu because he is stating the facts makes you look like you have no idea what you are talking about.

    Comment by Sanjay — January 21, 2006 @ 2:17 am

  14. Reasons why India will never catch up with China:
    1. No comparable infrastructure investments in roads, railways, ports, and airports
    2. No manufacturing industry in India
    3. The cast system
    4. Overseas Indians should start investing huge amounts in India like their Chinese counterpart did in China
    5. We should stop looking at China as the country to “beat” but instead focus our energies on developing our own country
    6. Start attracting larger sums of FDI
    7. We don’t have a Hong Kong, Macao, Taiwan to be another source of huge amounts of capital
    8. Start promoting Indian culture overseas–how many people want to learn hindie over Mandarin?
    9. I could go on and on and on…………………….

    Comment by Hindupersad — September 6, 2006 @ 2:57 am

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