Economic comparisons are often made between India and China. More often than not those comparisons have as their end point a more or less favourable assessment of China’s virtues. It is therefore surprising for me to read this week that IMF economist Raghuram Rajan has recently been in the forefront of criticism of the “perverse economic incentives” underlying the recent proliferation of tax-advantaged special economic zones. This was particularly surprising to me in the light of the widespread and advantageous use which has been made of the special economic development zones idea in China.
Of course Raghuram Rajan is not alone in his criticism here as finance minister P.Chidambaram has also criticised the scheme, as has the BoI. Criticism in the press has also been quite widespread.
No, what’s puzzling me is not that people find this particular package perverse, but rather why it costs so much in India to get things right, and why there is evidently so little consensus about such measures in India (undoubtedly China’s great virtue at this stage this one). In fact Rajan is a little off target here when he says:
“If you create perverse economic incentives and then rely on bureaucrats to stand in the way of businesses exploiting them, the outcome will be little more investment?.?.?.? and a lot less revenue, but much richer bureaucrats,”
He is off target I think since I’m pretty sure in China there have been plenty of rather perverse economic incentives, and there have obviously been no shortage of bureaucrats who could have stood in the way of one thing or another. The main issue seems to be that normally they didn’t (even though they might well have enriched themselves in the process of not standing in the way), so the issue is why does India have such a deep and pervasive problem in this regard, that is the question.
After all, China itself has only last month announced the designation of eight special zones to make cars and car components for export (in the process naturally sending a warning shot off across the bows of the entire global car sector). And these zones are to receive preferential loans and export-tax rebates, and who gets what and how will of course be decided by the proverbial bunch of bureaucrats.
Yet hardly a murmur of criticism has emerged from any quarter. And the zones themselves are needed. If human capital and technology manipulation skills are to be aquired in the presence of increasing returns dynamics undoubtedly the use of some kind of incentive or other is entirely justifiable in the context of a developing economy. The question at the end of the day isn’t who it is who does the gatekeeping, it is how it is done. Of course if Rajan is right and the measures themselves are perverse in the first place then that naturally only makes a bad problem worse. Which would lead me to another puzzle. Given that there are the Chinese, Japanese, South Korean etc models to learn from, then why the hell does it cost so much to put a non-perverse package together: the gatekeeping starts here, and as Atanu never tires of reminding us, normally the ‘gatekeepers’ at this level are not the government functionaries but the politicians themselves.