Arundhati Roy and Capitalism in India
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| via Wikimedia Commons |
Two decades of booming economic growth have covered India’s wealthy in gold coin. Ambani is India’s richest man. He is worth $20 billion. His empire takes in everything from petrochemicals to grocery stores. Family-owned conglomerates, like Ambani’s Reliance and the Tata Group, dominate the landscape of corporate India. The 100 richest people in India own assets equal to a quarter of its annual GDP.
But Arundhati Roy, a Booker Prize-winning writer and social activist, eloquently surveys “the poltergeists of dead rivers, dry wells, bald mountains and denuded forests; the ghosts of 250,000 debt ridden farmers who have killed themselves, and the 800 million who have been impoverished and dispossessed” and argues that India’s economic reforms have failed.
Many people who belong to India’s urban elite dismiss Roy’s periodic broadsides as the nutty ravings of a left-wing do-gooder. This reaction has much in common with the urge to look away when a hungry urchin taps her fingers on the polished glass of your BMW. Being driven around Delhi’s roundabouts in a pleasant, single-malt induced haze can make it all too easy to ignore the horrific inequities that define India’s economic and political life. After reading Roy’s article, one is left with an overwhelming feeling that something has gone terribly wrong.
Roy does less well in identifying what has gone wrong and what should be done about it. Her article is titled “Capitalism: A Ghost Story” and she chooses her targets freely: India’s super-rich and its politicians; the Ford, Rockefeller, and Gates Foundations; Big Dams; the Indian Army, the Jaipur Literary Festival; Milton Friedman and the University of Chicago; NGOs; Nelson Mandela; microfinance; Anna Hazare; RAND Corporation; the Brookings Institution; and, of course, the World Bank and the IMF. In short, “capitalism.”
Though her piece is fairly long, Roy doesn’t take the time to define what she means by “capitalism,” preferring to use the word as a nebulous term of abuse. To state the obvious, prices and output in a capitalist economic system are set in a market of buyers and sellers, rather than by the state. Under a simple set of assumptions (such as perfect competition and well-behaved preferences), market determined prices are efficient. No participant can be made better off without making someone else worse off.
The unrealistic assumptions that underpin this important result have the advantage of being mathematically explicit. They can be relaxed for theoretical embellishment when they are violated in the world. Knowingly or unknowingly, Roy points to several instances when these assumptions are violated so the market fails to deliver the optimal allocation of resources.
Pollution is a classic example of market failure. The acid rain that yellows the Taj Mahal is the partial product of buyers and sellers facing lower prices than would be the case if the social cost of pollution was fully internalized by market participants. The result, too much pollution, is inefficient. Other externalities result in too little production of certain classes of goods. Investments in health, education, and basic research can be valuable to society. But individuals and solitary firms may lack the incentive to make these investments because the benefits are shared by all.
Monopoly is another type of market failure. Market power often results in high prices and too little output, harming consumers to the benefit of the monopolist. It is also the cornerstone of many of the world’s great fortunes. Prominent examples include John D. Rockefeller’s Standard Oil, Bill Gates’ Microsoft and Carlos Slim’s Telmex. Some sectors of India’s economy, such as cell phone services, are arenas of ferocious competition. Others are comprised of a few clubby players rolling loaded dice, taking super-normal profits at the expense of consumers.
Some causes of market failure are more subtle, or lodged in the deep recesses of human psychology. Behavioral economists have systematically documented the thousand ways in which we make decisions that veer dramatically from the assumptions of the classical model. People lack self-control and have time-inconsistent preferences, and may not fully understand the awful power of compound interest. An impoverished farmer is just as vulnerable to making irrational decisions as anyone, and may save too little and take on too much debt.
Simply because a market is efficient does not mean that it is equitable. The basic model is silent on the question of why some people are able to afford some products while others are not, and whether this distribution of capabilities is fair. A competitive labor market may pay wages equal to workers’ marginal product, but we need to understand how workers came to acquire different levels of education and skills.
Thus, there are many good reasons to justify governments intervening in markets, and most people disagree about two linked questions. First, is market failure relatively limited or relatively widespread? And second, to what extent can governments produce better outcomes?
Roy writes somewhat longingly about the failure of communist parties in India to build durable links with the lower caste and tribal communities. And she often sounds as though she rejects capitalism and the idea of market efficiency outright. If one remains a communist after the collapse of the Soviet Union and the unprecedented success of China’s opening, no arguments are likely to sway you toward the alternative position.
But it is worth having a debate if she is in the broad middle that disagrees about those two questions. India, like many other countries in the developing world, was brought to its knees by the import substitution industrialization policies it followed after independence. By the 1970s, GDP growth per worker averaged 0.7 per cent and total factor productivity growth was actually negative.
India began liberalizing its economy in the 1980s and then more rapidly after a violent currency crisis in 1991.The structural policy changes it made are well known. The “pro-business” reforms of the 1980s relaxed restrictions on imports, created tax incentives for exporters, and ended price controls on key intermediate inputs. The 1990s “pro-market” reforms abolished industrial licensing, reduced the scope of state controlled industries, and liberalized the financial system and key services such as telecommunications.
GDP per worker grew at 3.9 in the 1980s and 3.3 percent in the 1990s. At one point, Roy writes that the growth rate has “plummeted to 6.9 per cent”, a level that License Raj India could only dream of. The reforms have succeeded in increasing the size of the economic pie, just as they have in the “Chicago Boys” free-market laboratory of now first-world Chile. “Capitalism” has been the world economy’s engine of growth for two centuries, and it remains so today.
Nor is it the case that only the rich have done well. India’s middle class has grown. While the absolute number of people living under $2 a day has risen, the number as a fraction of the population has declined. After adjusting for inflation, government revenue has risen four-fold since 1990-1991, and there is more money to spend on roads, power plants, hospitals, schools, and employment schemes. Roy argues that most Indians have been left worse off in the reform era. This is a hard position to sustain, if only because four decades of state-led development made such a slight dent in the economic challenges facing the country.
It is true, however, that compared to other developing countries, each increment of growth in India’s economy produces a tiny decrease in poverty and a parallel increase in inequality. Arundhati Roy correctly points out the close links that bind India’s rent-seeking businessmen and its venal, captured politicians are a major cause of growing inequality, as is the case in other parts of the world. In continual search for copper and iron and coal, this nexus of the country’s rulers and its industrialists has gorged on the rights of voiceless millions, especially in the rural hinterland. Perhaps even more disheartening to champions of democracy, many spectacularly corrupt politicians have emerged from the ranks of the most downtrodden castes and classes to prove Lord Acton right.
India’s failure to reduce poverty is down to more than just corruption. Above all, it has botched the key tasks of educating its people and providing them with basic healthcare. Life expectancy at birth is only 64.4 years, compared to 73.5 for China. The mortality rate per thousand infants born in India stands at an appalling sixty-six; it is to seventeen in China. Generously defining literacy, only about seventy-three percent of adults can read and write in India; for China the equivalent figures are well north of ninety-percent. All this has meant that many have been left without a ticket as the locomotive of India’s economy has gathered steam and hurtled into the distance.
India has also long spent much more on tertiary education relative to primary education than most other poor nations. Prior to reform, the peninsular states were more successful in educating their people than the states in north. This combination meant that liberalization and decentralization concentrated growth geographically in the southern states and sectorally in skill-intensive services. Hundreds of millions of poor farmers in the Hindi heartland have been left facing a drought of manufacturing jobs. The defining trait of the global middle class is that most of its members have regular work in a factory, so it is no surprise that India’s middle class is stunted. Even in the agricultural sector, China, with its more equal distribution of land, has been vastly more successful in lifting farmers’ incomes than India.
Roy skewers “capitalism” and many other individuals and organizations, but her astringent piece says almost nothing about how she would mold a better future for the country’s destitute millions. She is certainly successful in communicating and inciting righteous indignation, but her parting call to “take back the night” really doesn’t take us very far.
Unlike Roy, I believe that “capitalism” is at the very core of the answer to India’s vast problems. Capitalism comes in many varieties, and countries cannot be placed on a simple continuum defined by whether they have more or less of it. But every single developed country has grown rich by freeing prices and trade. Economic growth in these countries has occurred as they have taken farmers out of agriculture and into factories and services. Why would India, or any other developing country for that matter, be any different?
Reliance Industries is famous for using the levers of political power to increase its own profits. It isn’t, by any means, a paragon of the fair corporate fighter. Still, it has created billions in shareholder wealth and tens of thousands of steady jobs. The same could be said of many of India’s industrial houses. The truth is that growing, efficient firms are the only means by which India’s boundless surplus of labor can ever be put to work.
Accordingly, India’s archaic labor laws and regulatory constraints on the scale of private enterprises should be abolished. These reforms will generate gales of opposition from politically powerful labor unions, but they are crucial for nurturing new industrial enterprises at scale. This does not mean that the government should abdicate its task of robustly regulating firms in other ways. It should punish firms that damage the environment, create poor working conditions, harm consumers, or unlawfully exploit the voiceless or illiterate.
The government must also encourage exports and foreign investment in key sectors such as infrastructure and airlines, especially when the economic growth is slowing. But policy should be nuanced. The social disruption caused by liberalizing retail could be significant, and the benefits comparatively small, so it may be the wrong time to welcome foreign players into this space. At the same time, a spendthrift state would be wise to resist tempting but harebrained ideas like retroactive taxes on corporate profits, lest these policies create a hostile environment for foreign capital.
A vibrant private sector will be a crucial boost to growth and poverty reduction, but the gains cannot be shared widely without an active government role. There is a tradeoff between growth and inequality, and income redistribution is a difficult thing to do well.
India itself has a long history of creating ambitious social programs that dash upon the rocks of the government’s corruption and incompetence. Despite having one of the largest grain stockpiles in the world and spending thirteen billion dollars per year on its Public Distribution System, an estimated 250 million Indians don’t get enough food to eat. Only about fifty percent of the grain taken by states from central warehouses actually reaches its intended target. The National Rural Employment Guarantee Scheme, with an annual outlay of nine billion dollars, will no doubt inspire graft and waste on a similarly epic scale.
The Indian government’s inefficiency is unlikely to change quickly. Given that constant, the most effective way of reducing poverty is to do two things: complete the six decade long process of land reform and simply give cash to poor families. Mexico and Brazil have had success with transferring cash to households that send their children to school or meet other conditions. Even an unconditional cash transfer program would be a vast improvement over the lazy bureaucrats and corrupt middlemen who feast on government bounty. The scope for corruption and misuse would be greatly reduced. Families could also decide for themselves where best their money should go.
Some object to outright cash transfers on the grounds that they will only lead men to buy more tobacco and alcohol. But the same could be said of a more wasteful scheme to provide work and wages to the underemployed. And those who object to handouts on purely philosophical grounds would do well to stop patronizing the poor and consider carefully the abject deprivation that chars their lives. Given the difficulty of identifying the poor, Abhijit Banerjee suggests giving everyone over the age of twelve a small unconditional cash grant. This precludes the need for India’s digital ID scheme (even if the program’s effects are unlikely to be as dramatic as either its detractors or its supporters like to claim).
Clearly, we need other fresh, rigorously evaluated ideas. Microfinance is not one of them. The best evidence suggests that microfinance mostly enables people to change the composition and timing of their consumption and firms to increase inventory. But many consumers get buried in debt. Almost all firms remain micro and never grow up to be the large enterprises that are the engine of employment and growth.
Most non-governmental organizations, with their small and varying resources, cannot create an impact that matches the scale of the long-term social challenges facing India. Roy believes that organizations like the Ford, Rockefeller, and Gates Foundation are lynchpins of a capitalist, neoliberal conspiracy. These foundations may bring with them a whiff of neoliberalism, but the truth is more benign than Roy makes it out to be. Like many NGOs, they are storehouses of innovative thinking and advocates of change.
The tasks before India’s people will be backbreaking. The hardest one of all will be to design and nurture robust institutions of governance that are well insulated from capture. No one really knows how to build good institutions, but the process will lack the glamor of a revolution, and will mostly involve incremental change from within. It should not devolve into simplistic calls for new all-powerful anti-corruption bodies or an overthrow of the current structure of rule. Bihar, pushed into the abyss by decades of shoddy governance, has pieced itself together under a new chief minister and leads every other state in its rate of economic growth. It is a blueprint for how a fairly clean and competent regime can harness the existing system to deliver striking results.
At a moment of slowing growth and rising fear, India should remain patient and optimistic. Dhirubhai Ambani rose from nothing and bequeathed his son a glittering empire in the space of a single generation. This is not a parable of economic mobility in India. It is but one example of the astonishing potential that lies within the country’s people, waiting to be unlocked. India’s path to prosperity will not be straightforward, but if it yokes a firm commitment to markets to durable institutions of government, its future is bright.