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Democracy and Capitalism in India

What is unique about India’s experience with democracy and capitalism?

May 11, 2003

What is unique about India's experience with democracy and capitalism?

In this great adventure of modern civilization, each nation is trying to adapt democracy and capitalism to find the right mix of market competition, political pluralism, participation and welfare.

At the present time, more than 50 countries are engaged in economic reform as they make the transition from inward-looking, autarchic economies to open, market-driven ones.

India is one of these — and among the best placed to make a quick and successful transition to capitalism.

In contrast to Russia, India has had a highly developed national market that goes back as far as the 17th century. Its economy which was integrated further when the railways came in the 19th century.

And in contrast to China, India has had a robust, indigenous financial system, which was upgraded into a modern banking system in the early 20th century. Furthermore, unlike both Russia and China, India also had clearly defined property rights, a well-developed commercial law — and an English-speaking entrepreneurial and professional class.

And yet, in almost every nation but India, democracy followed capitalism. In country after country in Europe, voting rights were gradually extended over the past 150 years. That process slowly altered existing capitalist institutions and practices.
Not so in India. There, we had the right to vote well before capitalist institutions developed.

This unique reversal explains a great deal about Indian society today, including the failures in governance and the painfully slow pace of economic reforms.

In the West, as mass political parties and trade unions developed, democracy began to impinge on capitalist institutions and practices. The democratic preference for redistribution and labor unions started to constrain the strict productivity focus and risk-taking spirit of entrepreneurs.

After the Second World War, this process culminated in the welfare state in the West and in Japan. Social insurance and health care as well as extensive regulatory frameworks designed to protect against the shortfalls of capitalism. It is possible that if capitalism had not been so modified by democracy, it may not have survived.

In India, on the other hand, democratic institutions came up well before we had the chance to create an industrial revolution. Even today, over 60% of our people continue live in rural areas, organized labor constitutes less than 10% of total labor.

And the middle class, despite tripling over the last two decades, constitutes less than 20% of the population.

Because of the unique historical reversal in India, populist pressures for redistributing the pie essentially built up before it was baked. Yes, we set up intricate regulatory networks — but we did so before the private economy had transformed a rural into an industrial society. We began to think in terms of 'welfare' before there were welfare-generating jobs.

The result, for India has been throttling of enterprise, slow growth, missed opportunities, huge subsidies and a rapacious bureaucracy. It is the price we have paid for having democracy before capitalism — or rather too much democracy and not enough capitalism.

These institutions do not just happen — they take time to develop. Thus, reform is not an easy path. Experience around the world over the last two decades teaches us that markets generate perverse results in the absence of good regulatory institutions.

At the same time, we may have reformed our policies but we have not dismantled India's huge bureaucracies created by the license raj — which involved a jungle of restrictions on production and imports — and they keep putting up obstacles to change.

While it is easy to blame democracy for our failures, there are other reasons behind India's still poor performance. An important one is our national tendency to always place politics before economics on our agenda. The local press in any country, it seems to me, reflects the concerns of its people.

During a visit to several countries inIn Southeast Asia, in the early nineties, I noticed that the newspapers carry economic and business news on the front page.

In contrast, Indian newspapers stick to politics. Ten years later, in 2001, I visited China and I was again struck by the same contrast.

Whereas economics is at the centre of China's agenda, politics continues to dominate the our debate in India's Parliament, in the newspapers and on the street.

It is a good thing that in the 1990s Indians began to be exposed to how people live in other countries, thanks to the satellite TV channels. I wish our people, especially our members of Parliament, could see the progress made by the people in the east.

I wish we could transport all our members of Parliament to the countries of East and Southeast Asia —especially to China — for a short while. It will open their eyes and make them think twice before they thoughtlessly place politics before economics on the national agenda.

While the ordinary citizen in India obviously cares about food, housing and schools, he does not understand how economic reforms will help improve his life.

He does not understand how 'making India a good place to do business' will translate into more investment, more jobs for his children — and more prosperity for his family.

The average Indian does not understand that Japanese investment will bring technology and work habits with it which will improve the skills of our nation's children. And they do not see that it will improve the quality of our industies' products and raise our capability to export.

Improved exports, in turn, will allow us to import even more products which will compete with Indian products in the home market. And this competition will then force Indian companies to further upgrade their products, productivity and the skills of their workforce.

As skill and productivity climb up, so will wages, and this will eventually result in a higher standard of living and a better quality of life for India's children.

This Triggering this chain of events is also the primary challenge for our politics and all our politicians. They have to translate liberal reforms into the language of the common person.

Just as Nehru sold socialism to the masses in the 1950s, so today's leaders must they sell reforms and liberal economics to the voters.

Unfortunately, none of our political leaders hasdid much about this done this in the 1990s. Instead of selling these ideas to the people in a straightforward manner, they have tried to reform by stealth — and we as a country are paying the price for it today. This is why every prime minister wrings his hands when he is asked why the reforms are stuck.

Adapted from "The Elephant Paradigm" by Gurcharan Das. Copyright © 2002 by Gurcharan Das. Used by permission of the author.