Drawing the Wrong Lessons

Some leaders from poor nations gloat about the global credit crisis and point fingers of blame at liberal, open-market policies. “In India, the debate between capitalist globalization and self-reliance required a huge paradigm shift,” writes Shashi Tharoor for the International Herald Tribune, noting that while the West associates capitalism with freedom, nations like India associate it with colonialism and slavery. Seeking self-reliance and economic independence, India relied protectionist measures, which in turn resulted in “subsidizing unproductivity, regulating stagnation and trying to distribute poverty,” Tharoor notes. Capitalism comes in many forms, and Tharoor points out that citizens can best pursue prosperity, assisted by a government that ensures “a level playing field, fair regulation and social justice.” A balanced form of capitalism, Tharoor explains, encourages entrepreneurs to innovate and make products rather than wait in state lines, hire workers rather than pay bribes, understand consumers rather than woo politicians. During the past 15 years, India embraced globalization and competition, lifting more people out of poverty than the 45 years prior when the country embraced economic nationalism with its state controls. Capitalism is compatible with government, and the two working together can ensure a free and entrepreneurial spirit. – YaleGlobal

Drawing the Wrong Lessons

Shashi Tharoor
Tuesday, October 14, 2008

NEW DELHI: The recent convulsions in the international financial markets have provoked an unseemly amount of gloating on the part of many in the developing world.

That Fidel Castro and Mohammed Ahmadinejad should pronounce themselves vindicated by the crisis in global capitalism is hardly surprising, since capitalism has over the years been so strongly identified with America that both see the problem through the lens of their own anti-Americanism.

A worrying number of people in India, though, are saying similar things. "See, we were right in opposing all this liberalization," one told me, stressing that India's previously over-regulated system had saved it from a similar fate much earlier. Another approvingly quoted right-wing rants in the U.S. about the dawning of a "Socialist Republic of America" and added, "We should nationalize the banks again - after all, even the Americans and Brits are doing it!"

They are wrong, but there's a real danger that India's political classes could find themselves persuaded by this lapse into historical amnesia.

In India, the debate between capitalist globalization and self-reliance required a huge paradigm shift. Whereas, in the West, most people axiomatically associate capitalism with freedom, India's nationalists associated capitalism with slavery - because the British East India Company had come to trade and stayed on to rule. So from 1947, our nationalist leaders were suspicious of every foreigner with a briefcase, seeing him as the thin edge of a neo-imperial wedge.

Instead of integrating India into the global capitalist system, as only a few developing countries like Singapore so effectively were to do, India's leaders were convinced that the political independence they had fought for could only be guaranteed through economic independence.

Self-reliance became the slogan, the protectionist barriers went up, and India spent 45 years with bureaucrats rather than businessmen on the "commanding heights" of our economy, wasting the first four and a half decades after independence in subsidizing unproductivity, regulating stagnation and trying to distribute poverty.

This only goes to prove that one of the lessons you learn from history is that history sometimes teaches the wrong lessons. It would be tragic if recent events led Indians to learn the wrong lessons again.

The reactionaries today seem quickly to forget that it took a humiliating financial crisis in 1991 (one in which India had to physically ship its gold reserves to London as collateral for an IMF loan) to prompt New Delhi to change course. A measure of the extent to which the course had changed came for me a few months ago in Calcutta when I heard the Communist chief minister of West Bengal, Buddhadev Bhattacharya, say: "Some people say globalization is bad for the poor and must be resisted. I tell them that is not possible. And" - the emphasis is mine - "even if it were possible, it would not be desirable."

For decades, the theory of development economics had suffered from two intertwined historical circumstances - the experience of the Great Depression in the 1930s, when only robust government intervention saved a number of economies, and the fight for freedom from colonial rule, which involved the overthrow of both foreign rulers and foreign capitalists (though few nationalists could tell the difference).

The development gurus firmly believed in the wisdom of top-down rule and government planning by all-knowing, all-seeing economists, of whom India suffered from a superabundance. Our rulers, in turn, mistrusted what ordinary people could achieve for themselves when they were freed to pursue their own prosperity within a framework of government-supported structures that ensured a level playing field, fair regulation and social justice (the model that came to be adopted in the Western democracies, though increasingly dismantled in Republican-governed America). Instead they created a license-permit-quota raj that denied Indian businesses the opportunity to prosper and grow.

The result was what was derisively called the "Hindu rate of growth," at which India chugged along at 3 percent while much of the rest of Asia shot ahead. Resources that the state could have spent on infrastructure development, education, health and agricultural reform went instead to massively inefficient public-sector projects that employed many and produced little.

It is sadly impossible to quantify the economic losses inflicted on India over four decades of entrepreneurs frittering away their energies in queuing for licenses rather than manufacturing products, paying bribes instead of hiring workers, wooing politicians instead of understanding consumers, and "getting things done" through bureaucrats rather than doing things for themselves.

The disastrous inefficiencies of the system were masked by subsidies from the national exchequer, and a combination of vested interests - socialist ideologues, political opportunists, bureaucratic managers, self-protective trade unions and captive markets - shielded it fiercely from economic reality, as millions of Indians languished in poverty.

In the last 15 years, India has pulled more people out of poverty than in the previous 45 - averaging some 10 million people a year in the last decade. The country has visibly prospered, and despite population growth, per capita income has grown faster and higher in each of these years than ever before.

The current financial crisis, far from prompting a retreat, is an opportunity to safeguard those gains and to build on them. For more than four decades India suffered from the economics of nationalism, which equated political independence with economic self-sufficiency and so relegated us to chronic poverty and mediocrity.

Let us not condemn Indians again to repeating the mistakes of that unlamented past.

Shashi Tharoor, chairman of Dubai-based Afras Ventures and former undersecretary general of the United Nations, is the author, most recently, of “The Elephant, the Tiger and Cellphone: Reflections on India in the 21st century.”

Copyright © 2008 The International Herald Tribune