A New Freedom Movement

- Yazad Jal

In India, the fight for independence and freedom from foreign rule began

in earnest around 1900. It took us less than fifty years after that to

boot the British. But were the next fifty years really the era of

prosperity in India? India is the under-achiever of the 20th Century,

with too many promises and too little progress. What went wrong? And

more importantly, what can we do right?

 

Any usual trot of excuses would list an exploding population, lack of

education, poor infrastructure, inequality of income, corruption, the

caste system, our "Indian mentality," etc.

All of the above mislead us into making wrong policies. Japan has a

higher population density and is far richer. Many countries in Africa

have a far thinner population density and are poorer than India. We

have enough to sustain our one billion and more. Kerala’s literacy rate

is above 90% but its per capita income is half of Punjab’s whose

literacy rate is barely 60%. Is the "Indian mentality" such a terrible

stumbling block? Indians do very well all around the world, except in

India itself!

 

Looking deeper, the missing component that explains India’s poor

progress is freedom. Yes—freedom, economic freedom. In 1947 we gained

independence from an alien British Empire, but in 2000 we are still

shackled by the omnipresent Indian State, a little better since 1991,

but not enough.

Canada’s Fraser Institute, along with 54 other institutes around the

world including India’s Centre for Civil Society have published the

Economic Freedom of the World: 2000 Annual Report. The report is the

fourth in a series that rates the level of economic freedom in 123

countries.

In the 2000 Report, Hong Kong and Singapore share the top rating of 9.4

on a scale of 10. New Zealand, the United States, and the United

Kingdom make up the five freest economies in the world. The least free

economy is Myanmar (Burma), with the Democratic Republic of Congo

(Zaire), Sierra Leone, Rwanda, and Madagascar ranking in the last five.

India at 86th is barely above the bottom.

 

There are astounding differences in economic and social outcomes between

nations that are more economically free than those that are less free.

Life expectancy is 20 years longer for people in the 24 most free

countries (the top 20%) than in the 24 least free countries (the bottom

20%). Average income per person in the top 20% was $18,000 in 1997,

compared to less than $2,000 for the bottom 20%. No country with a

persistently high economic freedom rating during the two decades failed

to achieve a high level of income. The extent of income inequality is

lesser is the top 20% compared to any other segment.

Even social indicators show a wide gap between the economically free and

not-so-free. The average Human Development Index for the top 20% is 0.9

compared to less than 0.45 for the bottom 20% (maximum is 1). For a

variety of social and political indicators, economically freer countries

fared better than the not-so-free. Countries in the top 20% have far

lower rates of adult illiteracy, poverty, and corruption. They have

better access to safe drinking water, more political rights and civil

liberties, higher labour productivity, a more diverse ethnic structure.

This isn’t a developed North versus underdeveloped South divide.

Several countries from all areas in the world have improved remarkably

in economic freedom, with corresponding benefits for their people.

Chile's rating rose from 3.7 in 1975 to 8.2 in 1997. Chile now ranks

18th, up from 54th in 1975. Thailand, with a score of 8.2, also ranked

18th in 1997, rated 5.8 and ranked 36th in 1985. The Phillipines scored

4.9 in 1985 and 7.9 in 1997 and its ranking shot up from 67th to 31st.

Peru ranked 108th with 2.3 in 1985 tripled its score to 7.9 and is

ranked 31st in 1997. Between 1990 and 1997, El Salvador's rating rose

from 5.0 to 8.3, and its ranking jumped from 67th to 14th.

India’s progress has been rather slow; our score did improve from 4.1 to

5.8 in the 90’s but that is not enough. We need to dramatically improve

in three major areas.

 

Figures in brackets relate to India’s score in the relevant area in 1997

The structure of our economy—(3.5).

We have the government running far too many industries that should be

wholly in private hands – from hotels to aluminium and steel factories.

Private enterprise will do a far better job (and does so!) Price

controls on a variety of areas distort economic activity and lead to

exactly the opposite of what is intended. A classic example is the onion

shortage in 1998. The top marginal tax rate is 40% in India. Better

than earlier, but the plethora of confusing tax laws and poor policies

exact a huge price. We need to privatise large swathes of our public

sector, remove price controls and rationalise tax laws.

Freedom to trade—(4.1)

 

Since Nehruvian times there has been the mistaken conception that

manufacturing is all-important and foreign trade should be side-stepped.

The bogey of neo-colonialism resurfaces now as "swadeshi jagaran." This

attitude ignores basic human instinct as well as the rich tradition of

Indian traders through millennia. Barriers to trade deprive ordinary

citizens, both producers and consumers of cheaper products. Import

licences and quotas simply help those industries that are willing to pay

off politicians for their economic protection. We need a far more

liberal trade policy and a reduction of import duties.

Freedom of Exchange in Capital and Financial Markets—(3.8)

"We’ve escaped the Asian Crises"–the smug smiles on Indian policy makers

and pseudo-intellectuals were very evident during 1997-98. Well, the

East Asian economies have now recovered and are back on the prosperity

track. India still has exchange control.

Economic freedom is not just an after dinner discussion topic over

Belgian chocolates and Colombian coffee. The lack of freedom and

excessive regulation of the Indian State affects the poorest hardest.

One small example is the knot of regulations covering cycle-rickshaw

pullers in Delhi. Delhi has approximately 2 lakh cycle-rickshaws that

ply largely in residential colonies and university areas providing an

affordable and available service compared to buses or auto-rickshaws.

The Municipal Corporation of Delhi has mandated that rickshaw pullers

have to be licensed and only 50,000 licences shall be given out. In one

fell sweep three-fourths of cycle-rickshaws are now illegal operations.

Another seemingly irrational rule is that the holder of the

cycle-rickshaw has to ply his cycle-rickshaw himself and cannot rent it

out (corollary: one person can own only one cycle-rickshaw). You can

own multiple taxies or auto rickshaws or buses–but not the cheapest

means of transport–the cycle-rickshaw! These laws are manna from heaven

for the police and petty bureaucracy who excel at squeezing bribes out

of some of the poorest inhabitants of our capital city. Economic

freedom means removing such absurd laws and rules.

 

We need a new freedom movement to remove the shackles still on us.

Table: Economic Freedom in India

Year

Components 1970 1980 1990 1997

I Size of Government 8.9 8.7 8.2 8.0

II Structure of The Economy 2.3 1.7 2.4 3.5

and Use of Markets

III Monetary Policy 8.9 8.1 8.6 8.7

and Price Stability

IV Freedom to Use Alternative 0.0 4.5 4.0 7.0

Currencies

V Legal Structure and 3.2 5.9 4.0 7.6

Property Rights

VI International Exchange: N/A 0.7 1.1 4.1

(Freedom to Trade with

Foreigners)

VII Freedom of Exchange in 3.6 3.5 3.5 3.8

Capital and Financial Markets

Weighted Average 4.0 4.3 4.1 5.8

Ranking 51 77 93 86

Total no. of countries ranked 57 107 115 123

Percentile (best=99, worst=1) 10.5 28.0 23.8 30.1

Source: Economic Freedom of the World: 2000 Annual Report.