The Indian Economy Blog

March 13, 2006

The Driving Force Of Our Prosperity

Filed under: Miscellaneous,Regulatory reforms — Amit Varma @ 2:13 pm

In a superb post titled “The New Yorker and the Beatles,” Don Boudreaux writes:

[C]reative human insights are the driving force of our prosperity. By allowing xenophobia and protectionist rent-seekers to restrict the number of people who contribute their ideas to the market process, we inevitably reduce — and perhaps even reverse — the rate of economic growth. Our prosperity will be lower and lower than it would otherwise be.

And this lower rate of economic growth and the correspondingly lower standard of living might well never be revealed by the data.

Quite. And just as this should fuel our outrage over how protectionist rhetoric has become more voluble in recent times in the West, it should also made it look hard at our own policies. Any company that wants to do business in India, no matter where it’s from, should be allowed to, as long as it doesn’t violate the laws of the land. No exceptions.


  1. Not so — think South African companies during the Apartheid era.

    Comment by AC — March 13, 2006 @ 10:34 pm

  2. Agree with AC. How about we replace that “Any company” by “Most companies” ? General statements about free trade make me uneasy- and it’s not just apartheid. The entry rules are often a great tactical weapon as well, for other (economic or not) goals. Suppose India were in Dubai’s position. Wouldn’t it be nice to have the option of saying “we are evaluating where Air India should buy its 100 new jets from…” just when the Senior Senator from the Great State of Washington, also the home of Boeing, is getting on his bully pulpit.

    Comment by RS — March 14, 2006 @ 1:46 am

  3. Hmm, good points. Well, AC, I did say “no exceptions”, but apartheid was obviously a special case and all that, an exceptional exception as it were. The exceptions I had in mind were the litany that protectionists rake up these days, here and abroad.

    RS, I understand what you’re saying, but my support for free trade is based on the benefit it brings to consumers. Trade barriers might be a (questionable, in my opinion) tactical weapon for governments, but my first priority would be the consumers, the people.

    Comment by Amit Varma — March 14, 2006 @ 3:06 am

  4. Uh, where do you think no regulation and no protection lead to? Though I have reservations against import tariffs, not this kind of silly thoughts.

    Comment by Harsha — March 14, 2006 @ 9:14 am

  5. I agree with RS. I believe it’s called selective protectionism/regulation, depending on which side of the fence you are. Fact is that every country uses this kind of tact.

    Free trade may not bring any benefit to the consumers in the long run. But if the local manufacturers/agriculturists are not adequately equipped with the right technical & financial tools (subsidies, free power, tax laws, land laws etc), free trade can practically wipe them out.

    just a thought !

    Comment by Manpreet — March 14, 2006 @ 10:13 am

  6. Harsha, your question, “Where do you think no regulation and no protection lead to?,” is best answered by the recent case of Dubai nearly winning the contract to manage American ports. They may still win it.

    Yes, we all know Dubai has no connection with Al-Qaeda. Yes, we all know that it is not even a major oil producing country with powers to choke the American economy at will. But here is the significant difference. The Dubai company that would (have) run the ports is a government controlled entity, not a private enterprise. Does America want to hand over its oceanic borders to a foreign government?

    The flip side of this coin was the totally privatized and horribly lax security at American airports prior to 9/11. I used to travel out of Chicago’s O’Hare airport all the time back in those days, and I always got a kick out of the young Indian girls “manning” the X-ray machines and digging into handbags.They were freshly recruited from India by Indian contractors in Chicago that had the contract to manage security at O’Hare. They were totally inept. Do we really want to entrust our airport security to young girls, Indian or American, with minimal training?

    Reverting to the question of regulation and protectionism, the raging debate in America for at least three decades has been over the benefits of low-priced imports vs. loss of jobs. So outsourcing is not all that new. When textile went offshore in the Sixties and manufacturing in the Seventies, a person no less savvy than Lee Iacocca pronounced the death of the American economy unless the government imposed tariffs on most imported manufactured goods. Where does the American economy stand after America was first colonized by the Japanese – colonized because the Japanese imported a raw material called steel and exported finished goods called cars? Well, where is the highly regulated and government-managed Japanese economy today? Where is the American economy?

    The question of protectionism, and how selective it should be without canceling out the benefits of globalization and free enterprise, is probably the most difficult question governments have to answer today.

    Comment by Sarat Dayal — March 14, 2006 @ 6:32 pm

  7. Harsha, the rule of law is all the regulation that’s required. As for your question about where no protection will lead to, the answer: prosperity.

    Manpreet, in which industry in India where foreign players have been allowed have a) the consumers not gotten a better deal and b) deserving local players gone out of business?

    If I may take one example: In telecom, consumers have benefitted vastly, and we now get a connection in a couple of days when it took years in the 1980s. The existing player, MTNL, has lifted its game in response to competition.

    Also, though there are no foreign players involved there, a look at the airlines industry demonstrates the value of competition. I just finished a Mumbai-Delhi return trip that cost me less than than a one-way trip would have a couple of years ago, because of competition and innovation. IA (or Indian, as they are now called!) is having to adapt to this, and if it can’t, it deserves to go out of business.

    Sarat, you ask, “Where is the American economy?”

    It’s in America.

    Comment by Amit Varma — March 15, 2006 @ 12:22 am

  8. Deregulation in India in any sector has seen a tremendous flowering of benefits for the customers – Banking, Telecommunication, Insurance, Automobiles, etc primarily because since Independence, regulation has been used to convert a noble-minded thing like regulation into a corrupt license Raj that a few can manipulate so that they are the only people woth licenses to manufacture or sell anything – sort of like the Factories of the Soviet Union with no incentive to improve anything – Remember the clunker cars whose design remained the same for 50 years?.

    While theoretically, regulation needs to take care of the common man, in India given the state of democracy and corruption, deregulation seems to be the only mechanism that seems to pave the way to progress. However, deregulation of entire industries with limited controls on who can invest how much in what industry will help locals flourish at the expense of multinationals coming in and using them as pure profit centers. This has been the road India has been taking and seems like a good one!

    So more and more deregulation of all sectors while some controls on ownership composition is perfectly O.K, in my opinion!!

    Comment by Nari Kannan — March 19, 2006 @ 3:57 pm

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  11. So finally it is competition and innovation. Or shall, we say it is competition through innovation. Not foreign investment nor cheap labour. PK Chaubey

    Comment by P K CHAUBEY — August 17, 2009 @ 6:11 pm

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