Economy Dec 21, 2012
By Shanmuganathan Nagasundaram
"It is no crime to be ignorant of economics, which is, after all, a specialised discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."
- Murray Rothbard
In the circle of free-market economists, there is usually a debate - if not a serious one, at least as light-hearted banter - on who is the greatest economist the world has ever had. The choice usually boils down to Ludwig von Mises and Murray Newton Rothbard. The marginal differences notwithstanding, my personal preference is for Rothbard, while most Austrian economists today swear by Mises.
So when Manmohan Singh used a Rothbardian phrase to chide those who opposed foreign direct investment (FDI) in retail as being "ignorant about global realities or are constrained by outdated ideologies", I was very pleasantly surprised, even delighted. For he had just used a politically incorrect, but economically accurate, description of the opposition's economic thinking.
That said, Manmohan Singh is no Rothbard. The reforms in his "economic thinking" over the decades have happened more or less at the margins. That too has been dictated by the economic realities of poverty and the dire necessity of foreign capital, and not by an innate desire to really understand the economic school that accurately describes the way the world works.
To the extent that he has been part of national policy making in one form or the other for the last several decades, he has to take a major share of the blame for the flawed economic rationale that pervades not only our political circles, but also policy making circles.
Back to FDI in retail. The claims of the opposition parties are that small traders and kiranas will be affected. Going back in time, if we had given power to our politicians to decide whether cars should come into India, these same politicians would have argued that allowing cars would create unemployment among bullock-cart owners and buggy-whip manufacturers. The BJP would have argued that the bullocks that have been part of our cultural tradition would starve to death and become extinct.
And perhaps the Congress would have included legislation as part of the "FDI in cars" bill to mandate that all transportation within the car-making factory would be done using bullock-carts... or that a portion of the investment should go towards maintaining a bullock farm to feed the bulls that have now become unemployed. The Congress ministers would term these as "safeguards" built into the bill to suit Indian transportation conditions.
This is the level of discussion and debate that's happening within the country today. That free markets should be the way to go should be obvious, looking at the few success stories we have had in India. Whenever we had the power of government discretion in deciding the appropriate course of action to be taken, the end result has pretty much been a disaster - whether we are talking about allocation of natural resources or even in simple cases such as to "what a project is" when it concerns the IT industry.
Decision making is painfully slow and invariably leads to corruption or lobbying, or at the very least, a huge waste of time and energy.
Back to Manmohan. While the image of Manmohan Singh in India is that he is a great economist (Prakash Singh Badal, an opposition CM, even rated him as the world's most distinguished economist), if Manmohan Singh is truthful to himself, he should be able to see the writing on the wall. After nearly two decades of a reform process that he has been part of for most of that period, the fact that half the nation still lives in poverty should indicate a very poor scorecard.
It would be very convenient for Manmohan Singh to blame it on the opposition or the lack of a political consensus. But he should not forget that most of the problems are his own creations. Whether it's the tremendous waste of resources on schemes such as NREGA or the farm loan waiver or any number of social schemes (such as the infamous aid to Salman Khurshid's trust) adopted by the government, the result invariably is a transfer of wealth from the productive sectors of society to the political/well-connected class. In the absence of these capital destroying activities, we would have made far greater progress on all fronts, including the social one.
The damages are not limited to these capital destroying activities. Every legislation - whether it be the mandatory CSR (corporate social responsibility) ideas in the Companies Bill, government interference in purely private transactions such as sugarcane pricing, or price fixing in energy commodities such as petrol, almost all activities that the government interferes with are the byproducts of an "outdated ideology" that Manmohan Singh accuses the opposition of.
It's very unfortunate that Singh has surrounded himself with economists who themselves are self-serving government-endorsing savants. That there's not a single voice espousing free-markets and capitalism in his entire team is in itself a testimony to the fact that he continues to be blind-spotted by the Keynesian ideology that he probably imbibed in his formative years. Even for the very limited role or power that a chief economic advisor holds, all we could find was another economist linked to these ways of thinking.
As we head into what's likely to be a very tumultuous period for the world economy and currency markets in 2013-14, we certainly need reforms at a much greater speed. It's time we got some sound money and limited government advocates into the system if we are to handle the crises that lies in our path. While we have undeniably managed some meaningful reforms in the last few days, the single most important reform that's required would be on the currency front.
But in this area, as Doug Casey of Casey Research would say, not only is the Indian government doing the wrong thing, they are doing the exact opposite of the right thing. Whether the recent steps to lower gold imports, as advocated by Raghuram Rajan and others, have been done at the behest of the US Fed (as has been suggested by James Turk of GoldMoney.com, amongst others, with quite a bit of credibility) or with the intention of lowering the current account deficit (CAD), as they explicitly state, it really doesn't matter.
If the government wants to lower the import of gold, then they should reform the currency to ensure that the need felt by private citizens to hold gold falls. To argue that the government would continue to be fiscally irresponsible while at the same time telling citizens that they cannot protect themselves from inflation and currency debasement is just political doublespeak - not sound economic advice. Raghuram should realise that we have enough of that in India already.
There's no point in singling out individuals - whether Raghuram or Kaushik Basu. They are all products of a worldwide system that encourages government interference - when almost always the best the government can do is to step back and allow free market forces to work. Manmohan Singh needs to get himself an economic advisor who can offer some genuine free-market insights - not the band-aids that are suggested today.
Shanmuganathan "Shan" Nagasundaramis the founding director of Benchmark Advisory Services - an economic consulting firm. He is also the India Economist for the World Money Analyst, a monthly publication of International Man. He can be contacted email@example.com
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