 "Narendra Modi: The one handed Prime Minister")
An exasperated President Harry Truman famously asked that he be sent a “one- armed economist”—someone who could take a stand on issues and didn’t caveat every argument with "On the one hand, this" and "on the other hand, that".
Harry Truman could have been expressing the sentiment of India’s English speaking elite. Indians were tired of the politics of consensus. And they were tired of socialism. So they elected the confident and capitalist Narendra Modi. Or so the narrative goes.
The idea that a strongman in Delhi is needed to solve India’s immense problems has long been dear to every Delhi drawing room. But since liberalization in 1991, this strongman, imagined in the mold of Lee Kuan Yew, is sought in the service of free market reform. And it is this is the idea that I wish to challenge.
You can believe that a stern, disinterested patriarch who rises above the Liliputian aspirations of coalition politics is good for India. Or you can believe in the free market. Behind seemingly sophisticated arguments, lies real confusion about basic ideas. The loudest yelps for free market reform are coming from those most innocent of what it means.
We usually invoke Fredrick Hayek and the disaggregated nature of information to make a case for the free market. The free market works because, for example, the machinist knows that sticking chewing gum in the nozzle of the machine will fix it, but the central planner doesn’t. In his clumsy Austrian-English, Hayek called this phenomenon the “knowledge of particular circumstances”. Had he been Indian, he might instead have, more correctly and colorfully, called it jugaad. The free market works because no Dear Leader—however strong, decisive, honest or Hindu—could ever know the millions of jugaads it takes to produce, market and sell the good and services we consume.
Information is so disaggregated that no intertemporal model can reliably take a policy proposal as input and spit out GDP growth as output. Indeed macroeconomic models do a terrible job of accounting for observables and making predictions. The Economist reports that models used by the IMF failed to predict a downturn in all 220 instances studied. A random number generator did better with a success rate of 18%!
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Because we can’t model a nation’s economy, we have democracy. Just as the market is a process to discover the right price, democracy is a mechanism to discover the right policy. Self-interested politicians go out and try and get information about what their constituents want. Then they come together at a legislature to truck, barter and haggle for the best deal that they can get. And it is this messy resolution of self-interest that you must trust over any pristine policy proposal plucked from without.
The nature of information and limits to knowledge is the most fundamental argument in support of free markets. It is the strange idea that you could do more for your country by making money, living well and looking after your family and friends than by generally stomping about chanting, “NAMO, NAMO”. It is so because of the nature of information.
Of course, not all decisions can be decentralized. There remain issues that a central authority must confront. So what should a rational individual placed in such a position, with such a lack of information—by definition risk—do? He should hedge; diversify. He should diversify his counsel by seeking the views of all stakeholders and he should try and build a consensus. Think of it as investing, in an index rather than in a stock of a company.
Dr. Singh was the wise money manager investing our future in a diversified portfolio of policies. The compulsions of coalition politics delayed fuel subsidy reform but those compulsions also delayed capital account convertibility, thereby shielding our markets from a hard knock in the wake of the credit crisis. That is how indices work.
Modi, on the other hand, is like the stockbroker who calls you with a hot stock tip. Don’t listen to him. It is not that he doesn’t know. It is that he cannot know. No one person can. At the level of complexity of, say financial sector reform, swashbuckling decisiveness—the fantasy of every reform dhamaka type—is indistinguishable from recklessness.
You might counter that all this theory is fine. But do these ideas work in practice? More importantly, do they work in India? Rarely will you get a natural experiment so neatly laid out that suggests that they might. Compare the two decades when India returned decisive mandates, from 1970 to 1990, to the era of coalition governments from 1991 to 2010. After two decades of strong mandates India was bankrupt and burning. It easy to forget the annus horribilis in 1990 —Punjab, Kashmir, Mandal, Mandir, Sri Lanka, Balance of Payments.
But deep from within the civilizational ethos of ordinary Indians came the evolutionary response. A Cambrian explosion of talented political entrepreneurs— PV Narasmiha Rao, Dr. Singh, Ms. Gandhi, Mayawati, Lalu , Mulayam , Sharad Pawar, Deve Gowda, Atal Bihari Vajpayee, Sushma Swaraj, Arun Jailey, Jayalalitha, Karunanidhi, Harkrishan Singh Surjit, Sitaram Yechuri---came together to solve very difficult problems. I note parenthetically that not one of these people was born into any sort of privilege. Power was decentralized, violence did recede and growth did pick up. We had two weeks worth of foreign exchange in 1990. Today, Dr. Rajan’s vaults are stuffed with over 300 billion dollars. That much maligned government of Dr. Singh and Ms. Gandhi presided over the highest average growth rate in the 5000 years of Glorious Hindu CivilizationTM, its policies lifted millions out of poverty and its public health initiatives eradicated polio and bested AIDS.
A fractured mandate in Delhi and a decisive one at the states and municipalities is— given what we know about information and risk— structurally sound. Unlike the Americans who baked states’ rights into the initial constitutional bargain, our founding fathers left such questions to the ‘wisdom of a later day’. Sure enough, a poor and largely illiterate country could, by trial and error, get to the right answer. I can’t help but marvel at the beauty of this thought.
What must we then make of the ugly hankering for a quick policy fix? Why, in the face of a mere business cycle downturn in 2012, did the greatest beneficiaries of a system seek to abandon it? Why did people whose wealth, education and access, which should have offered perspective, panic instead? I don’t know the answer. But such is the rapture of the idea of a policy magic wand; so impervious is it to argument and evidence that these people were even willing to make a Faustian bargain with Hindu extremism.
Now that initial euphoria of the Modi government is waning, it would be wise to remember the limits of what Delhi can do for economic growth. The marginal governance constraint is almost entirely at the states and the municipalities. It would also be wise to remember that centralized systems like the Soviet Union and China can indeed marshal resources and produce extraordinary growth for some time. But the laws of economics hold in the end. Our noisy, disorderly democracy works just fine. Stay the course. It ain’t broke. Don’t fix it.
Twitter: @postcolonialist
