A visitor from the 17th century on a trip to the year 2009 would be rather surprised to learn that the United States of America is in distress. He would, of course, be no stranger to troubled times; but in his time, troubles came in the form of famines, diseases, strife and taxes. This blight called “recession” that has struck the United States would seem strange to him. Factories that were at full steam two years ago are now idle, though their productive capacity is undiminished. Healthy men and women who were working in those factories now sit at home. Goods lie in warehouses even while vehicles to transport them in and roads to carry them on remain intact. Further inquiry would reveal that the cause of the United States’ trouble is a breakdown in the system by which it coordinates demand and supply, present and future consumption, and risk and reward. Though the visitor would not be prepared for the scale and sophistication of the system that has now suffered a setback, he would be no stranger to the idea of markets. Markets and traders have existed for as long as humankind has, and so have attacks against them.
Defending free trade and free markets has never been an easy task at the best of times. Defending financial markets is an even tougher proposition. If our visitor is from Europe, he would know of pogroms against Jewish moneylenders, conducted by princes unable to repay the money they recklessly borrowed. Trading and money-lending have always been little-understood professions; the role they play in society has always been questioned. At Pragati, our stated mission is to further the Indian national interest, which, we continue to believe, is served best through economic freedom. It is natural that at times like these, when “greed” and “unregulated markets” roll off the tongues of detractors like a well-practised refrain, our continued belief requires some explanation.
An important part of the explanation is to reflect on the fact that if our 17th century visitor is offered a choice between suffering the disasters he has experienced and the one that he is witnessing, he will unhesitatingly choose the latter. India, along with all of humanity, faces a similar choice. Its former finance minister, P Chidambaram, has boasted that India has escaped the malaise that has struck the world because it has “regulated” its markets better. He has neglected to mention that this narrow escape has come at a cost. The cost is that India suffers the continuing disasters of poverty, malnutrition and backwardness. Percy Mistry, noted proponent of open financial markets, has asked why India is willing to forgo 30 percent of GDP growth in order to stave off a financial shock once in a decade that will cost it 3 percent. This is a valid question that must be asked more often, and the 30 percent of GDP that India loses should be quantified in terms of human costs.
The cost is paid by the farmer who is forced by law to sell his produce to the Agricultural Produce Marketing Commission, controlled by thuggish local politicians. It is extracted by government officials who stalk the borders of every city and every state, holding up trucks carrying the farmer’s produce for hours and days. The cost that they extract, in bribes, time and waste, is paid by the farmer who could have got more and by the consumer who could have paid less. The inability to conduct trade and transport over long distances within India means that industries are concentrated in a few small cities, which in turn means that the farmer, if he does decide to migrate, has to travel far more than he should have to.
The government expropriates Indian citizens’ savings and “invests” them in wasteful schemes. And to ensure that this continues, it prevents a decent bond market from developing. This hamstrings the economy and prevents companies from making investments. Government-owned banks make politically-directed loans, which cuts off credit for productive small businesses. The government mandates that certain products can only be produced by “small-scale” industries, and this provides an incentive to those industries to stay small artificially. They hold back from making investments that will give them advantage of scale, and keep workers off the rolls to avoid hitting the upper limit. The cost paid by the factory worker who works in the unorganised sector must surely count in the 30 percent of the GDP that India loses every decade.
Sadly, as the Kannada proverb goes, no one weeps for the one who dies every day. The pride that the supporters of the status quo experience, based on the claim that India has escaped this contagion, is rather unfounded. In any case, India’s daily deaths have not immunised it from periodic disasters. India’s “strict” regulations did not prevent it from reaching the verge of bankruptcy in 1991. Regulations before 1991 did not free India from having to devalue its currency twice to prevent balance of payments crises, and regulations since then have not stopped it from having periodic booms and crashes in the stock markets. In fact, this statement can be generalised. No country has found the magic wand that, once waved, will bring into existence just the right balance between economic growth and stability. It is easy to devise a regulation that would have, in retrospect, prevented the last crisis. But no one has found a political, economic, administrative and legal system that is good at identifying and implementing these regulations ahead of time. When these constraints are considered, it is not clear that the free market prescription does all that badly.
Indeed, there are many lessons to be learnt from the current global economic crisis. Unfortunately, there are an equally large number of incorrect lessons that should not be learnt, and it is not an easy task to distinguish between the two kinds.
We must be wary of claims that the crisis could have been prevented. Booms and busts are endemic to capitalism — indeed to all economies. We may find, once the dust has settled, that some mistakes may indeed have worsened the magnitude of the crisis, but it is highly unlikely that anything could have prevented a recession.
Of the various claims regarding the cause of the recession, one is particularly relevant to India — that the United States got its comeuppance because it was “living beyond its means”. This claim is, by all accounts, true. But it is also true that one can live beyond one’s means only if others let him. The others in question are countries like China, Japan and India that worship at the altar of export-driven growth. The dogma that exports are better than imports leads to baffling policy choices. This in turn leads to consumers of poorer countries subsidising housing booms in rich countries. The shocking decline suffered by Japan in the last quarter of 2008 is a result of decades of such policy fallacies. India’s record in this regard is not as terrible as Japan’s or China’s, but it is still a lesson that needs to be learnt.
Likewise, there will be a lot to learn on how to get out of this jam, and here too, there are many incorrect lessons to avoid. By all accounts, the bailouts seem like good examples of the latter. The importance of transparency, however, is an example of the right kind of lesson. Financial markets are frozen currently, because banks and other institutions have no way to quantify the value of the assets on their books. Economist Hernando de Soto has pointed out that what is a temporary condition in the advanced economies is a chronic condition in the property markets in countries like India. Slum-dwellers are unable to monetise the value of their landor possessions, because property rights are ill-defined and unrecorded.
The most important lesson that India can learn, however, is that it is important to be prosperous enough to be able to weather crises. We, at Pragati, believe that the road to prosperity lies through economic freedom—free trade, free markets, rule of law, low and non-distortionary taxes, enforcement of contracts, light but consistent regulations, sanctity of property rights. You may have heard this song before. We shall sing it till it is really heard. And then again.