Learn from Past Mistakes and Move On

11/21/2008 05:12 am ET | Updated May 25, 2011

The recent convulsions in the international financial markets have provoked an unseemly amount of gloating on the part of many in the developing world. That presidents Fidel Castro and Mahmoud Ahmadinejad should pronounce themselves vindicated by the crisis in global capitalism is hardly surprising, since capitalism has over the years been so strongly identified with America that both see the problem through the lens of their own anti-Americanism.

What worries me, though, is the number of people in India who are saying similar things. "See, we were right in opposing all this liberalisation," one told me, stressing that our intrusive regulatory system had saved India from a similar fate much earlier. Another approvingly quoted right-wing rants in the US about the dawning of a "Socialist Republic of America" and added, "We should nationalise the banks again -- after all, even the Americans and Brits are doing it!"

They are wrong, and it's important to say so before too many people in our political classes find themselves persuaded by this lapse into historical amnesia.

The debate between capitalist globalisation and self-reliance is hardly new, but a few months ago one would have been justified in assuming that it had definitively been resolved. Yet, in India it had required a huge paradigm shift. Whereas, in America, most people axiomatically associate capitalism with freedom, India's nationalists associated capitalism with slavery -- because the British East India Company had come to trade and stayed on to rule. So from 1947, our nationalist leaders were suspicious of every foreigner with a briefcase, seeing him as the thin edge of a neo-imperial wedge.

Instead of integrating India into the global capitalist system, as only a few developing countries like Singapore so effectively were to do, India's leaders were convinced that the political independence they had fought for could only be guaranteed through economic independence. So self-reliance became the slogan, the protectionist barriers went up, and India spent 45 years with bureaucrats rather than businessmen on the "commanding heights" of our economy, wasting the first four and a half decades after independence in subsidising unproductivity, regulating stagnation and trying to distribute poverty. This only goes to prove that one of the lessons you learn from history is that history sometimes teaches the wrong lessons. It would be tragic if recent events in the world of finance led us to learn the wrong lessons again.

The reactionaries today seem quickly to forget that it took a humiliating financial crisis in 1991 (one in which the nation had to physically ship its gold reserves to London as collateral for an IMF loan) to prompt India to change course. And change course we did, for the better. A measure of the extent to which the globalisation debate had turned came for me a few months ago in Kolkata when I heard the chief minister of West Bengal, Buddhadev.

Bhattacharya, say: "Some people say globalisation is bad for the poor and must be resisted. I tell them that is not possible. And" -- the emphasis is mine -- "even if it were possible, it would not be desirable." When a Communist chief minister speaks that way about global capitalism, one can argue that debate is largely over.

For decades, the theory of development economics had suffered from two intertwined historical circumstances -- the experience of the Great Depression in the 1930s, when only robust government intervention saved a number of economies, and the fight for freedom from colonial rule, which involved the overthrow of both foreign rulers and foreign capitalists (though few nationalists could tell the difference). The development gurus firmly believed in the wisdom of top-down rule and government planning by all-knowing, all-seeing economists, of whom India suffered from a superabundance.

Our rulers, in turn, mistrusted what ordinary people could achieve for themselves when they were freed to pursue their own prosperity within a framework of government-supported structures that ensured a level playing field, fair regulation and social justice (the model that came to be adopted in the western democracies, though increasingly dismantled in Republican-ruled America). Instead, they created a license-permit quota raj that denied Indian businesses the opportunity to prosper and grow.

The result was what was derisively called the "Hindu rate of growth," at which India chugged along at three percent while much of the rest of Asia shot ahead. Resources that the state could have spent on infrastructure development, education, health and agricultural reform went instead to massively inefficient public-sector projects that employed many and produced little.

It is sadly impossible to quantify the economic losses inflicted on India over four decades of entrepreneurs frittering away their energies in queuing for licenses rather than manufacturing products, paying bribes instead of hiring workers, wooing politicians instead of understanding consumers, and "getting things done" through bureaucrats rather than doing things for themselves. The disastrous inefficiencies of the system were masked by subsidies from the national exchequer, and a combination of vested interests -- socialist ideologues, political opportunists, bureaucratic managers, self-protective trade unions and captive markets -- shielded it fiercely from economic reality, as millions of Indians languished in poverty. Is this really what we want to return to?

In the last 15 years, India has pulled more people out of poverty than in the previous 45 -- averaging some 10 million people a year in the last decade. The country has visibly prospered, and despite population growth, per capita income has grown faster and higher in each of these years than ever before. The current financial crisis, far from prompting us to retreat, is an opportunity to safeguard those gains and to build on them. For more than four decades India suffered from the economics of nationalism, which equated political independence with economic self-sufficiency and so relegated us to chronic poverty and mediocrity. Let us not condemn Indians again to repeating the mistakes of that unlamented past.

Originally published in the Times of India, October 19, 2008.