Ever since the financial crisis broke a few months back, there has been a rising chorus of voices denouncing the recent era of unbridled capitalism and globaliSation. Much has been written in newspaper editorials, both in India and overseas, about the excesses of the free market and the need for greater government oversight and regulation.
Left-leaning political commentators have remarked smugly that India’s regulatory structure has protected India from the downturn seen overseas. Many commentators that have benefited from India’s economic reforms, including research analysts, investors and investment bankers, have voiced their support for greater regulation.
I beg to differ. I voice my whole hearted, unequivocal, unabashed support for the free market capitalist system despite its much-publicised ills. The empirical evidence from India’s experience with state control is on my side.
Those of you that were born in the 1970s or earlier will remember that when we were growing up India was a regulator’s paradise. Political consensus was in favour of state direction of resources and there was a belief that socialism would eventually prevail. Public sector companies were dominant.
Licence Raj
Private companies needed licenses to enter a new sector and separate government approvals each time they wanted to increase production. We were as regulated as a country could be without being explicitly communist (some would argue that we were more socialist than China, which had already embarked on Deng Xiaoping’s reforms). If regulation is good, then the India we grew up in should have been great.
However, what I remember of that India was quite the contrary – appliances such as colour TVs were a luxury, air travel was reserved only for the rich, long distance calls to relatives were rare and those were reserved for late night to avail of discounted rates. First generation entrepreneurs were few and far between and any child that excelled at academics was urged to migrate to the West – “beta, yahaan pe tumhara koi future nahinâ€. National pride was low, there was a sense of despair within the professional class and the country was falling farther and farther behind its Asian neighbours.
Opening Up
Then, in 1991, a balance of payments crisis allowed a bureaucrat-turned-politician, Dr. Manmohan Singh, to break decades of political consensus and start the nation on a path towards a free market system. In the initial few years, it was hard to make out whether the change in course had paid off or not. But by the early 2000s, there was incontrovertible evidence that reforms were giving results.
Salaries had moved up across the board – not just executive salaries rose, but even domestic help commanded better remuneration. Colour TVs were now a common sight and were often spotted even in slum shanties, middle class families could occasionally upgrade from trains to air travel, telecom accessibility had exploded and long distance calls became affordable. First generation entrepreneurs mushroomed and a growing economy started attracting skilled NRIs back to their homeland.
The Numbers Speak
Statistically speaking:
• the percentage of Indians living below the global poverty line ($1.25 PPP income per day) dropped from 60% in 1981 to 42% in 2005,
• GDP growth rate rose from 4% p.a. pre-reforms to 6% p.a. post reforms,
• Domestic air travelers increased from 5 million in 1981 to 32 million in 2008
Is your experience any different from mine? Didn’t we all grow up in the same country? What am I missing? I can understand commentators in America arguing for more regulation; after all, they haven’t breathed first hand the stifling air of a controlled economy. But what are young Indian professionals smoking when they call for greater regulation? I’m sorry - I just don’t get it.
Why Capitalism Will Thrive
Looking beyond our shores, the history of the 20th century demonstrates three trends clearly:
a) Socialism failed: It started off well in some countries, but its initial good intentions inevitably got subverted by a procession of bureaucrats, central planners and power-crazed dictators. The task of micro-managing an entire country proved to be too overwhelming, even for the best brains in Russia. China saved its one-party system by selling its socialist soul; its economic growth is now as much a tribute to capitalism as it is to socialism.
b) Capitalism is messy: Periods of growth are followed by periods of painful restructuring. In the long term though, it allocates resources efficiently, survives (probably thrives) with minimal state support, rewards innovation and delivers higher growth than communist regimes.
c) Capitalism works best when supported by an environment that promotes equal opportunity – a strong legal system, universal access to education and freedom of speech. The absence of such a supporting environment leads to crony capitalism (Indonesia is a case in point) which helps the common man no more than socialism does.
If any readers of this column disagree with me, I would be happy to offer them a wager that two years from today, the financial crisis will be behind us and that the large majority of economic commentators will again be urging the Indian government to move further on the path of economic liberaliSation. Email me at cyrus@helix-investments.com and we can structure a meaningful bet (would it be politically incorrect for me to refer to that as a structured product?).