Thursday, December 06, 2007


It is almost 20 years to the day when socialism in the former Soviet Union and Eastern Europe imploded with such startling spontaneity. There is now both a general awareness, and a general consensus, that the collapse came about because socialism as an economic and political system was deeply flawed.

In India, our own extended flirtation with socialism came to an unhappy end a little later, sometime in 1991. A legacy of the four decades under a socialist mindset is a continuing and widespread ignorance of what really makes the free market economy tick. That is why, at the slightest hint of trouble in the market place, so many voices can still be heard calling upon the government to intervene. Like so many idiots asking to be shot in the foot.

That India’s reforms began (unlike in the socialist bloc) a little before our economy had well and truly fallen into pieces, has another unhappy consequence. Many of us have at best a half-baked understanding of the contradictions in socialism which so thoroughly undermined this wonderful piece of theoretical construct. And, while faith in socialism has suffered extensive erosion, it has not been replaced by outright hostility, as in Eastern Europe. This is understandable. For the people of Eastern Europe, the experience would have been like being thrown into an inferno and coming out burnt and scarred. The Indian experience, by contrast, was milder and involved rescue before permanent damage. This explains why a decade and a half after that near-fatal encounter, ideas inspired by socialist idealism still keep popping up in our public discourse with such appalling regularity.

Why did socialism give up the fight without a fight? Within the unrepentant leftist movement, some of the more moderate voices attribute the collapse to political reasons like the lack of the essential freedoms of a democracy. A prominent left wing economist speaks of a “democracy deficit” that let the system down. This is a hypothesis easily refuted. All you have to do is to think of the major economic success stories in the last two decades.

The most talked about example is China and we know very well that this country has an acute democracy deficit. Singapore, a city-state that began its existence in the 1960s as a collection of fishing hamlets, is now an economic powerhouse but far from being a model democracy. Hong Kong was administered for long as a colony by the British, without much of a say for the local people and that is how the Chinese are carrying it forward today. South Korea, Taiwan and Chile are prosperous democracies these days, but at the relevant points in history when their economies took off, they were dictatorships for prolonged periods.

The point is clear, beyond debate, and therefore needs an emphatic reiteration; the collapse of communism in the Soviet Union was driven by economic failure. It took 70 years in the making because this was, after all, a militarised and totalitarian society. The order and enforced discipline made sure that some good things would also come out which served to paper over the cracks. That is why even as its foundations were eroding and the contradictions catching up, the socialist state managed impressive strides in education and healthcare and maintained a semblance of full employment (The quality of output from the ‘full’ employment was, however, a different matter altogether).

When socialism collapsed, the largest pillar that gave way was the role of the government in the economic sphere. Under socialism, government was an overbearing, overarching presence which stifled creativity and initiative and standardised mediocrity. The example of collectivised agriculture in the former Soviet Union is telling. About 97percent of the total land under cultivation was farmed by the state either through collective or state farms. The remaining 3 percent was allowed for private farming and it accounted for 1/3rd of the total agricultural output of the country. Not surprisingly, the Soviet Union was a frequent importer of food grains, from Australia, Canada, Argentina, and its nemesis, the United States.

The United States is today is the richest and most powerful country in the world. It has been so for the best part of the 20th century. It stands to reason that for this country to have come so far, its government must have done a lot of things right over the years. The US does not have a public sector in the way we have, although the federal government does run a bureaucracy that, critics say, has become too vast and too costly. The US government does not own any airlines, oil refineries, commercial banks, factories producing armaments, warplanes, cars or whatever. And yet, this country has a powerful, influential section within its intelligentsia who distrust big government and want its role to be kept to the minimum possible. They believe in the government getting off the backs of its people.

The contrast with India is striking. For the best part of 40 years after independence we wasted our time trying to build a welfare state on a foundation of unrelenting poverty. In the pursuit of equity, our national preoccupation was with dividing the cake, no concerns about growing or enlarging it. Our government invested heavily in airlines, oil refineries, commercial banks, insurance, factories making armaments, warplanes, cars, watches, scooters, metals, textiles, coal … name an activity and there’s a fair chance that there is a public sector enterprise involved in that. Our experience in economic development gave birth to the notion of the ‘Hindu’ rate of growth, to this day one of the finer examples of sarcasm in economics. It is painfully obvious that our government got it wrong on so many counts. And yet, our intelligentsia continues to be dominated by people whose most creative utterances are peppered with “the government should do this, the government should do that.” Having shot themselves in one foot, they now seek parity for the other foot.

Our greatest achievement to date  our world class IT industry  grew into a giant because the government for many years was unaware of what was taking shape and forgot to both tax it and throttle it. Our next best achievement  the telecom sector  took off when the government of the day had the courage to step back and let in the private players after the state monopoly had become a model of sloth and inefficiency.
In fact, examples abound to show that whenever the government steps back, productive forces are unleashed in the economy.

Why, then, do governments have this uncanny knack of making a mess of it even when their intentions are good? Here is an example that gives more than an ample hint.

As usual, I shall ask you to imagine that you are the top government official in a remote poverty-stricken district entrusted with the mandate of improving the lot of the people. During your travels, you come across two neighbouring villages separated by a river. There is frequent movement of people and a flourishing trade between the two sides carried on country boats operated by a community of indigenous boatmen. In a particular year, you receive substantial funds from the government to be spent on roads and infrastructure projects. And you decide to build a bridge across the river at the point separating the two villages. After all, it makes so much sense with all its potential for improving the lives of people on either side, with improved connectivity, access to markets and by further integrating the economies of the two villages.

But no sooner is the decision announced  although a thought experiment, it is still set in India  that all hell breaks loose. There is a virtual revolt by the community of boatmen. They fear, and rightly, that once the bridge is built, their livelihood will come to a halt. Fortunately, unlike our current crop of politicians, you are made of sterner stuff. So, even when you get frantic phone calls from the local MLA and then one from the MP, you remain steadfast. You are convinced that this is what progress is all about. The likely harm to a few cannot and should not be allowed to hold back progress for so many.

And then one day, you receive word that the leader of the boatmen is at your office and wants to meet you. He walks in with a young boy, a spare, slightly-built man with the weather-beaten face of one who works in the sun all day. There is no hostility, no defiance in his tone, only an abject helpless pleading. “In my family, like all our community here, we have all been boatmen for generations. But my son (and he indicates the boy) is the first to go to school. My only hope in life is to see him grow up with an education so that he does not become another boatman.” He pauses, as he gathers his thoughts. “But if that bridge goes ahead, that will be the end of an occupation for me and the end of school for my son. I just don’t know what will happen to us.” The tears well up in his eyes and he looks down. This is a proud man but today he looks beaten.

Even as you don’t say anything, you look at his son. And, as he holds your gaze, his eyes have the same look of helpless pleading. It is a poignant moment. What you hold in your hands is a power that in its own way is greater than that of life and death. It is the power, literally, to make or break a life. And you must decide.

I will end the story here because my purpose is not to tell a tale but to make a point. It is a simple proposition that by now should have been drilled into our consciousness. And yet, we are in many ways farther from this truth than ever before; that when governments overreach into the economic sphere and arrogate to themselves the powers to decide what should and should not, what can and cannot be done, more often that not, the decisions go against the long term interests of its own people. And this is particularly true in a democracy where it is necessary to be seen as being responsive to the people. Because, in practice, it is always expedient to respond to the pressing concerns of a section of the people, than to be true to a general concern for progress of an entire people.

And that is why countries where governments have a large, disproportionate say in the economy end up poorer and more backward than those where the government’s role is limited to, and subject to, well defined and robust boundaries. The United States of America is today the richest and most powerful country in the world today. It is not a coincidence.