The Indian Economy Blog

December 3, 2006

Markets Work…IF You Let Them, That Is…

Filed under: Business,Growth,Human Capital,Labour market — Prashant @ 12:56 pm

Reader and IEB friend, Joydeep Mukherji sent us this article from the Business Standard, noting that

There is so much garbage about alleged “jobless growth” in India that this is a nice antidote. It shows how the booming textile sector in Punjab is running out of workers. The firms are raising wages, improving conditions, seeking to entice local women to seek work outside the home, and sending recruiters to remote parts of Orissa to seek new workers. All of this is because of capitalism. Demand is growing and the usual flow of poor workers from Bihar is now going elsewhere. Poor Biharis have a choice, so they are not all coming to Punjab. This is good news.

Indeed. Would that we saw more of the above, and less of this. For more on labor reforms, here’s a couple of posts worth reading — Naveen and then Nitin and Ravikiran’s points of view.


  1. The key to generating employment lies in less government intervention, not more. (This was in your old post on the Employment Guarantee Bill).

    That strikes me as too sweeping — isn’t it possible that the key to generating employment lies in efficient government intervention?

    Comment by shreeharsh — December 4, 2006 @ 6:07 am

  2. Shreeharsh

    Can you provide examples of efficient government intervention in India?

    My guess is that I\’ll probably have a hundred examples of inefficient government intervention for every \”efficient\” intervention

    Comment by Prashant — December 4, 2006 @ 6:46 am

  3. Point taken, I can’t (perhaps in the first twenty years after Independence, maybe?).

    I was actually trying to make a more abstract philosophical point, which was that laissez faire calls for lesser government are actually calls for better, more efficient practices — it just so happens that empirically those efficient practices boil down to less government interference (except maybe in a regulatory capacity, and even there, not in our license-permit style).

    But yes, I totally agree with you here. Employment generation in India will happen once we dismantle our labor laws, not by massive government schemes, guaranteed to go nowhere.

    Comment by shreeharsh — December 4, 2006 @ 7:24 am

  4. Not all problems can be solved all the time without the Government intervening. Inefficient solutions are not always “ineffective solutions”. I agree with Sriharsh that periods such as the early decade of India’s independence did call for a greater government intervention in infrastructure sectors, where the greater good was more important that ROI. And greater good at all time cannot always be achieved “all the time” with free market forces.

    Comment by Girish Mallapragada — December 4, 2006 @ 9:30 pm

  5. “That strikes me as too sweeping…”


    Even if there were examples of efficient government intervention, why do you want it? Why can’t normal people organize their lives without government intervention, efficient or otherwise? What is that greater good that you seek? And who decides what that good is?

    I have yet to see a benign government, anywhere on the planet, that does good things to all people – there are winners and losers (more of them, in fact) even when government intervenes. Yet praise continues for it. People doing good things to themselves, like those Biharis and Punjabies, is just not enough, I guess.

    Comment by Chandra — December 5, 2006 @ 11:52 am

  6. Hi Naveen, didn’t get your reply on the rodrik articles. Sorry to be a pain :(

    Comment by Ananth — December 5, 2006 @ 8:05 pm

  7. Chandra,

    I am not saying I want a benign government. All I am saying is that institutions do matter and often times without the intervention of institutions (government is just one of them), the exclusive solution arrived at by the free market forces is not always “effective”.

    To answer your question as to why normal people cannot just organize without government intervention – government is a macro-level governance institution and although we would like to think that the economic agenda of a society is independent of its social structure (which to me seems like the more classical economic view), in reality it is not. Neglecting the notion that all economic activity is embedded in a much broader social context is a great mistake that has been and being committed by a great many view points.

    A free-market solution does not take into account such embeddedness, efficient it may be, but it is not always effective.

    Comment by Girish Mallapragada — December 6, 2006 @ 2:57 am

  8. Girish,

    You are right to say that economic activity reflects broader society. But please don’t equate broader society with government bureaucracy and lawmakers, especially in India. Broader society can find its own economic dynamism and equilibrium in due course when government stops meddling in people’s lives with its infinite wisdom.

    In fact, we are just starting to recover from the government’s economic wisdom for the past 50 years while we are being subjected to another bout of government’s wisdom – this time social – all in the name of greater good. Count another 50 years, or more, to recover from the current social wisdom dumped on the broader society.

    Comment by Chandra — December 6, 2006 @ 10:33 pm

  9. Chandra,

    I was making a case for more for institutions and not the “Indian” government per se. I hope I clarified myself. Government is just one cog in the wheel, but surely it is the most important one.

    To make a sweeping statement that all that is evil with the current economic status of India is because of government intervention over the 50 years is definitely not qualified, and must be taken with a pinch of salt. We did not take the other road (that off less government intervention), and I reserve my opinion on what could have happened without the socialist agenda of the fifties.

    In my opinion, we are just about doing OK now and I would say that we would have been not way too better off if we had gone for an all-out private model with little government intervention in the early decade after independence. There is no way anyone could prove or show it would have been better. Simply, our economy needed to mature (supporting structures had to be erected for free market forces to operate) before it could become what it is right now.

    Comment by Girish Mallapragada — December 7, 2006 @ 7:02 am

  10. A very nice article on New York times on a relevant note.

    and a blog post on the Freakonomics blog here

    Comment by Girish Mallapragada — December 7, 2006 @ 8:26 am

  11. “I would say that we would have been not way too better off if we had gone for an all-out private model with little government intervention in the early decade after independence.”

    Even if you ignore Japan – Singapore, Korea, Taiwan, whole host of middle income south east Asian countries, and lastly China prove otherwise, I think.

    Comment by Chandra — December 9, 2006 @ 12:02 am

  12. You make a point that really substantiates my earlier argument that one cannot abstract away the “broader” social setting while arguing in favor or against the economic model. Invoking country differences in economic success only strengthens the economic sociology argument rather than the classical economic argument.
    The countries that you cite as examples of success are homogeneous in their social settings, compared to India.

    Comment by Girish Mallapragada — December 9, 2006 @ 2:40 am

  13. “Invoking country differences in economic success only strengthens the economic sociology argument rather than the classical economic argument.”

    I think you are missing the point. My argument is our government with its socialistic policy did not allow for an economy that could have evolved in India – based on it’s own social environment! The Malaysians, the Thai, and the Singaporeans are hardly homogenous. And Indians are not as heterogeneous as you think. Now please don’t tell me that the planned soviet-style socialist interventionist economy is the original Indian way – socially speaking.

    Comment by Chandra — December 9, 2006 @ 8:39 am

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