One of the things Slumdog Millionaire does a great job of is implicitly portraying is the economic seachange in India over the past 20 years – a rising tide may not do it equally, but it does eventually lift all boats including Jamal Malik’s. Reason.tv dug into this a bit more & came away with lessons about India’s economy and hopefully ours as well –
“One IT company doesn’t just employ computer professionals,” says Dalmia. “It also needs landscaping services, cleaning services, and restaurants. There was this tremendous spillover effect that allowed people to lift themselves out of poverty.”
With politics & conventional wisdom in the US tipping towards equating deregulation with financial ruin (contrary to the the actual Bush legacy) it’s nice to see the gains from liberalizing markets celebrated elsewhere.
this is just so true that i am surprised more indians are not (vocaly) conservative. at least within my friends and relationships circle, we do not believe government is a benign influence, we do not believe that handouts and mass welfare programs yield to societal good, we do not think affirmative action programs lead to an equal society, we think unions suck donkey dick, we believe that accumulating wealth is essential to creating change we can believe in ™ and we KNOW from our experience of india that entrepreneurs are the best way to lift society from squalor – so give them the tools and get the government out of the way instead of nannying them via a 20-step program.
One can always expect the libernuts at Reason to miss the forest for the trees. The article does not come close to addressing the failure to regulate derivatives, which have led to the Wall street collapse. The libernuts have never heard of credit swaps.
TM – your fact filled comment goes far in addressing that.
Someone is going to have to explain to me where the “tinge of red” description so lovingly provided on this blog’s FAQ applies.
i don’t see why libertarians have to be doctrinaire about deregulation. some regulation is good, some is bad. why can’t we be a little bit more empirical about this? collective action problems necessarily must be solved by regulation of some kind (maybe not necessarily the government; but the government is sometimes best-placed to carry out certain certain kinds of regulation eg police functions, patrolling borders, certifying what counts as ‘food’ or ‘medicine’).
clearly regulation is beneficial in some cases. if monopolistic practices are not curbed, then you risk creating a behemoth firm which can increase barriers to entry or introduce predatory pricing to drive its competitors out. if firms start colluding on prices, then customers will get screwed. if there are obvious conflicts of interest that arise in a certain industry, then you need to weed those out. if a consumer is told that a product is safe for her toddler, then somebody has to make sure that is actually true. kids, even those with nimble fingers, need to be kept out of factories.
now, regulation is obviously bad in some cases. getting entrepreneurs to jump through all kind of licensing hoops discourages innovation. too strict investment codes will take away jobs and foreign investment from a country. clamp down on banks too much, and they won’t be able to lend to worthy projects.
ps: india at its most liberalized now, doesn’t even compare to the US. the degree of liberalization obviously matters. if certain sectors of the US economy are deregulated to the point that no warning systems or benchmarks exist, isn’t that a problem? somebody needs to monitor them volcanoes, right? right, bobby?
Oh yes, government corruption and exploitation is holding back development in India. If it were only replaced by corporate corruption and exploitation, we would be better off.
Typical right-wing pap where they take a few factoids and try to portray them as statistical evidence supporting their argument. IT business created a hiring boom of the lower classes for support jobs? Some people believe what they want to believe.
by…? ….said that America’s economic difficulties resulted when “regulations were gutted for the sake of a quick profit at the expense of a healthy market.” Who gutted which regulations?
Perhaps it was President Bill Clinton who, along with then Treasury Secretary Larry Summers, removed restrictions on banks owning insurance companies in 1999. If so, were Mr. Clinton and Mr. Summers (now an Obama adviser) motivated by quick profit, or by the belief that the reform was necessary to modernize our financial industry?
Perhaps Mr. Obama was talking about George W. Bush. But Mr. Bush spent five years pushing to further regulate Fannie Mae and Freddie Mac. He was blocked by Democratic Sen. Chris Dodd and Rep. Barney Frank. Arriving in the Senate in 2005, Mr. Obama backed up Mr. Dodd’s threat to filibuster Mr. Bush’s needed reforms.
M. Nam
Perhaps it was President Bill Clinton who, along with then Treasury Secretary Larry Summers, removed restrictions on banks owning insurance companies in 1999. If so, were Mr. Clinton and Mr. Summers (now an Obama adviser) motivated by quick profit, or by the belief that the reform was necessary to modernize our financial industry?
Thats ludicrous. The Gramm-Leach-Bliley Act which you are referring cannot be attributed to the Democrats. Every Democrat in the Senate (save one) voted against this bill while every Republican voted for it. So because Clinton did not veto this monstrosity, Karl Rove and his minions can now pin this down on the Democrats even though every Democrat voted against it?
Most IT companies have campus style offices which are serviced by gardeners, cleaners, transport companies, caterer, aren’t those low skilled support jobs. One of my dads former driver has gone on to start a transport company and supplies Tata Indica to transport call centre employees, he has hired a few drivers.
How much of poverty is in the metros as opposed to tier-2 cities or rural areas ? Most IT companies don’t operate in the latter two categories. How much of hidden poverty (in terms of under-employment) is created when people move to metros to lead a better life (like immigrating to west for rising up the value chain in terms of the actual work done ). I agree spill over effect is not totally untrue but it is high time India demands that they want to create/innovate and build “batteries” along with doing service jobs.
Though to be fair, most Democrats did eventually vote for the bill after the CRIS portions were strengthened but as the initial vote show, this was not a Democratic bill.
8 · Pagal_Aadmi_for_debauchery said
come ON! it’s moornam.
bill clinton is still on record saying the repeal was good, and i think he’s right. the least we can say is this crises had nothing to do with the repeal, in fact one could argue the repeal helped stave off a worse crises, as banks that operated as if the ban was in effect (merril, bear, countrywide for example) found some solice in the new mega-banks: BOA and JPMorgan.
its true that this was a republican bill, but like nafta and welfare reform it is part of the great clinton legacy.
moornam, btw, didn’t attribute this to the dems, did he?
Another thing that Republicans keep holding back because they’re terrified of the political correctness brigade: Did the reason that Barney Frank continue to fight against Fannie/Freddie regulation have something to do with the fact that the head of the GSE’s mortage division Herb Moses was his gay partner at that time?
He deserved the Reilly treatment.
M. Nam
14 · MoorNam said
yep. if there’s one thing the republicans are afraid of, it is offending the gays.
No. Not the democratic party. But individuals who were Democrats.
They cooked up the mess. They caused it. They executed it. Now they’re voted in charge to take the blame for the fallout.
Karma strikes again!
M. Nam
16 · MoorNam said
hear! hear! the greatest econmic history of our times!
1 · khoofia said
khoofia: i think indians are very vocal about economic liberlization, having lived under the horror of socialism for so long, but, except for some bjp types, are less likely to link this to opposing oppression.
a lot of indians are stuck between the hindu right and longstanding socialist hegemon that was/is the license raj… both of whom tie their polices directly to anti-colonialism. this linkage is very emotional, with the incediary implication that those on the other side are sahibs of sorts.
so those in the middle tend to view the arrival of economic liberalism to India with a sense of detachment, with the notable exception of a little nationalistic rah rah over economic growth.
Check out this link for an example of the kind of entrepreneurship that can exist in India with the proper support system. This kid through his hard work has lifted his family out of poverty. (link)
Ah, Lawrence Summers, look what he did to Harvard. If the markets stay this way, I wouldn’t be surprised if Harvard goes bust by this time next year.
The banks always knew that they would be bailed out, so it was a game with a safety net (though now it looks as if they overestimated the strength of the net). It was never real deregulation, which would mean letting the banks and its executives face the music for their actions. It was cheat-deregulation, letting bank executives take risks with the public’s money, at no cost to them. This was plain irresponsible, it has nothing to do with liberalization, just shows the power of lobbies. The dichotomy between deregulation and state control doesn’t really hold in this case.
Interestingly, the CPM in India is now trying to get credit for blocking foreign insurance companies and fancy derivative trading. I think the RBI’s conservative policies saved India. The Indian government and bureaucracy, whatever its faults, do think about the man on the street while making such decisions.
It’s a common misconception to club free-enterprise, deregulation and credit availability together. While the first two are related, the third however, is not only unrelated, but a political creation by the vested interests in Government. So when it fails, the first two are blamed along with it.
There should be no credit available for consumption or speculation. Never ever. Credit should be only available for production.
So if people want to buy houses/cars/vacations/plasma TV’s – it should be via the old fashioned way. Cash. Or calling up your rich eccentric uncle to say what a fine man he is. Or sheepishly going to Soprano and pay 30% interest rates.
Similiarly, if people want to speculate on stocks, derivatives, hedge funds – they should not be allowed to borrow on margin. They speculate their money and make it or lose it.
But farmers who need to borrow for seeds and fertilizer, the movie producer who needs funding, the factory owner or truck operator who needs to make payments – they should get credit from the system to keep the economic system running. They and only they.
That’s it. You don’t need any more regulation beyond this.
M. Nam
i think you assumed i was refering to Indians in India. I meant indians as in desis in north america – more specifically 1st gen, 2nd gen. ideologically, the republican party in the united states is the better fit (per my statement in #1) per my understanding of your political system. in canada, my affection swings between the liberals and the conservatives depending on the party leadership. i was on the Paul Martin train but moved over to Stephen Harper after Martinites got fat and lzy.
more specifically on this forum, i have just been surprised by the overwhelming fascination for the democratic party. i suspect it is because the republican party is dominated today by social conservatives [abortion, religion etc] as opposed to fiscal pragmatists [deregulation, taxation etc.].
With politics & conventional wisdom in the US tipping towards equating deregulation with financial ruin
It isn’t just politics, the facts show that deregulation & lack of enforcement by the SEC by allowing mortgage backed securities to have AAA rating, even though the underlying loans are not, is the root cause of the 2008 depression/recession
For decades would-be entrepreneurs staggered under the weight of corruption and bureaucracy. Want to import a computer for your business? You’d have to get permission from a bureaucrat. Want to sell food from a small cart? You’d need all kinds of licenses.”In the 1990s India started liberalizing its economy,” says Dalmia, “and it did three things: cut taxes, liberalized trade, and deregulated business.” Although they failed to cut the kind of red tape that entangled Slumdog’s orphans, the reforms did make it easier for more Indians to start businesses and hire employees
Interesting post Vinod.
I think the author is conflating business regulation with the Central Planning restrictions regime of quotas, licenses for the quotas, restrictions on total output/sales and import restrictions.
Question for the tax cut lovers: Do the laws of diminishing returns apply to tax cuts or do all tax cuts lead to growth in total tax revenue, aka multiplier effect ad infinitim. There is some empirical evidence that if the marginal tax rates are too high, cutting them can spur productivity and actually lead to an increase in economic activity and hence greater tax revenue after a lag. However, it seems to me that at some point, the tax cuts multiplier effect will not be able to compensate for the loss in revenue and the government tax base will reduce. So if we want to keep the spending at x level, wont that put a floor on the level of tax cuts?
There aint nothing pragmatic about the Republican fiscal policy khoofia.
It isn’t just politics, the facts show that deregulation & lack of enforcement by the SEC by allowing mortgage backed securities to have AAA rating, even though the underlying loans are not, is the root cause of the 2008 depression/recession
Its baffling to me that libertarians who usually have some understanding of economics would not be jumping up and down on the perversity of the rating system. The incentive structure for the rating agencies is completely flawed. The ‘issuer pays’ model used by the US Big Three has the revenue base of the ratings agencies consist of fees paid by the issuer of bonds to the rating agencies.
But that’s not the root cause.
You have a bunch of teenage kids. You have a bar in the house. What’s the use in rating some booze as “AAA”(safe) and other booze as “C”(risky)? That may hold back only some kids, but the rest will get adventurous and they will get hold of the cars keys later as well. After the accident, would you curse yourself for not rating them correctly?
Just lock up the bar. That’s what the libertarians wanted in the first place.
M. Nam
27 · MoorNam said
Paternalism and libertarianism go together like Ron Paul and crazies!
you could be right. plus talk is cheap.
And there lies the rub. Placing legal limits on consumer credit and consumption will work no better than the regulation of any other vice, and it will inevitably empower criminals and encourage corruption. By fair means or foul, people will find a way…
Remember how well Prohibition went? Notice how the “War on Drugs” is working out? Do you really think your proposed “War on Credit” will be any more successful?
No idea what Ms.Dalmia’s Indian econ creds are. But her claim of halving of Indian poverty in the last fifteen years seems like delusion. Angus Deaton et al. have debunked exaggerated claims of poverty reduction resulting from liberalization. Poverty levels were already on a downward trajectory and there hasn’t been a significant break or downward shift in that since the reform process took off in the early 90’s.
I think the zeal for regulation and taxation to curb companies who ship job overseas should also be directed towards foreign tax havens of US companies. But this loophole is not adequately talked about in the media as much as the job loss overseas issue. Wonder how much of the revenue (that should be going towards local developments) the US govt loses this way ? I have heard that this practice by major companies hurts the developing countries Is there any plans to do something abt this by Obama’s admin ? According to WaPo & GAO it seems that the bailed out companies have a lots foreign tax havens
28 · moronam said
y’know in this crisis, there are only a handful of people who were eerily prescient. every phony blames everyone else for the housing bubble but were these genius’ buying credit default swaps in order to profit from their now obvious insight? krugman get credit. roubini even more. and moornam has been giving dire warnings for a long time now, so i fail to see how his brand of libertarianism must answer for this crises while the democrats who failed to regulate fannie and freddie get off scot free.
add to that list ron paul. here he is in 1999 voting against Gramm-Leach-Briley , i report, you decide:
The growth in money and credit has outpaced both savings and economic growth. These inflationary pressures have been concentrated in asset prices, not consumer price inflation–keeping monetary policy too easy. This increase in asset prices has fueled domestic borrowing and spending.
Government policy and the increase in securitization are largely responsible for this bubble. In addition to loose monetary policies by the Federal Reserve, government-sponsored enterprises Fannie Mae and Freddie Mac have contributed to the problem. The fourfold increases in their balance sheets from 1997 to 1998 boosted new home borrowings to more than $1.5 trillion in 1998, two-thirds of which were refinances which put an extra $15,000 in the pockets of consumers on average–and reduce risk for individual institutions while increasing risk for the system as a whole.
The rapidity and severity of changes in economic conditions can affect prospects for individual institutions more greatly than that of the overall economy. The Long Term Capital Management hedge fund is a prime example. New companies start and others fail every day. What is troubling with the hedge fund bailout was the governmental response and the increase in moral hazard.
This increased indication of the government’s eagerness to bail out highly-leveraged, risky and largely unregulated financial institutions bodes ill for the post S. 900 future as far as limiting taxpayer liability is concerned. LTCM isn’t even registered in the United States but the Cayman Islands!
…My main reasons for voting against this bill are the expansion of the taxpayer liability and the introduction of even more regulations. The entire multi-hundred page S. 900 that reregulates rather than deregulates the financial sector could be replaced with a simple one-page bill.
“Poverty rate cut in half in the last fifteen years”! That’s an incredible claim. I would like to believe it. All I’ve found is this chart from wikipedia. http://upload.wikimedia.org/wikipedia/en/4/48/BPL_Data_GOI_.png But it ends in 2000. It seems like it has been trending downwards for decades before the liberalization of the 90s. And if the trend between 2000 and today were the same as before, her claim would actually be true. I’d be happy to see an independent confirmation of her claim.
33 · Manju said
34 · ashvin said
I’ve actually seen the same claim about cuts in the poverty rate, but it’s important to keep in mind that the poverty line in India is pretty low. So even if they’re not “poor” they’re still liable to be poor. It’s progress and we should be mindful of that. But there is still work to be done.
That said, it is also important to be mindful of the people being left behind be the progress. This primarily includes the adivasis and other peoples who live in the tribal belt/red corridor. The Indian government needs to get these areas under control so that they can participate in the greater economy. Those folks need roads and trains and access to credit. Give them that and they will take care of themselves.
” it’s nice to see the gains from liberalizing markets…”
I don’t think anyone at this point is against liberalizing economies, but the question is always to what extent. The idea of free market pushed forward by people like Milton Freidman did got us where it would exactly end up, corporations screwing up people and the country for their short term interests – they even argued against FDA. And when the crisis arrives like it did now it is only the government that can bail out these companies, that is socialism for the rich! We all know communism was a stupid idea, but i don’t think anyone can disagree with what Marx speculated as the pitfalls of free market capitalsm in light of the recent events in the recent history.
“Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”(Das Kapial, 1867)
najeeb, very good point. but it raises a question – can consumerism be decoupled from growth ? in particular can new paradigms for sustainable and holistic growth rather than be trapped by ideological underpinnings and models of the past ?
“But it ends in 2000. It seems like it has been trending downwards for decades before the liberalization of the 90s.”
actually, you’re right. there has been a secular trend in poverty reduction anyway. economists who study india have been conflicted about whether liberalization actually increased the rate of poverty reduction.
some say, ‘no, not really, because the gains have accrued primarily to the rich.’ there is some evidence from tax returns to support this. what we think of as middle class indians, count as very rich if you put then income distribution quartiles. others economists claim that the trickle-down will be more visible as time passes. i believe that once the education sector is deregulated, we’ll see more dispersal of economic opportunity. meanwhile, corporate functioning in india is not at all transparent. all kinds of concessions are given to industrialists close to politicians. there is no way to judge how the markets are distorted by this kind of corporate behavior.
Port,
It’s my personal belief that the while the gains are accruing primarily to the rich and are unlikely to trickle down too much on their own, it is still worth it to pursue as rapid a pace of (sustainable) growth as possible. My rationale is that while it doesn’t help them now, we can anticipate that at some point in the future the pie will be big enough that we will be able to build the capacity of the Indian state.
While the economic boom is pulling some people out of poverty, what it’s really doing is dramatically increasing the clout of the middle class. It’s that middle class that becomes envious of their richer upper-class neighbors and starts demanding more meritocratic practices and a substantive crackdown on corruption. Once the larger middle class makes the Indian government more effective, then you will see that government inevitably start to engage in progressive taxation and the kind of redistributive policies that can drag the poor out of poverty.
As it is the biggest impediment to improving India’s human development indicators comes not from any lack of will or money from the government, but from the government’s inability to actually direct the money to where it needs to be without having most of it leak away before it gets there. India nominally has universal primary education and universal healthcare, but the money they allocate in the budget all seems to disappear and what they end up with is imaginary schools/hospitals, teacher/doctors who never show up to work, and equipment that doesn’t do anything if you’re lucky, and actually hurts the people it’s supposed to help if you’re not. Make the government more efficient and the lack of education and healthcare will be taken care of easily. Once the poor are educated, healthy, and have the freedom to engage in entrepreneurship they will pull themselves out of poverty.
Unfortunately this strategy takes patience and a willingness to suffer some ugly consequences in the short-term. Democracies have never been good at that.
Not saying India shouldn’t be a democracy in post 40, we should. But we should be aware of our shortcomings if we want to figure out a realistic and plausible strategy for improving our mother country’s well-being.
To anyone who has lived in India long enough to witness both the pre and post liberalisation era, there is not the slightest doubt about whether the reforms have speeded up reduction in poverty (or not). The results of the process are in front of our eyes, clear and tangible .This growth is most marked in tier two (and three) cities, most of which had been stagnant and sleepy for decades, and have been transformed,some beyond recognition. All this transformation is not benifiting just the rich. A large swath of lower middle class has moved up a notch in the totem pole, and there is also migration from the villages. I agree that rural poverty alleviation remains the major concern and hurdle. That will be the decisive battle over the next decade or two.
“Once the larger middle class makes the Indian government more effective, then you will see that government inevitably start to engage in progressive taxation and the kind of redistributive policies that can drag the poor out of poverty.”
So far, India’s middle class (lower or upper) has stayed apolitical. People are not convinced that the government will focus on transparent governance (rightly so), and are happy to participate in the status quo because whenever it benefits them(eg corruption). I think the middle class believes that it is each according to her ability, power, money, and connections. Perhaps that can change, but so far there is little evidence to suggest that. The Indian government has no dearth of redistributive policies including progressive taxation. But there is zero accountability and monitoring, so there are massive inefficiencies and misuse of funds and resources.
“To anyone who has lived in India long enough to witness both the pre and post liberalisation era”
Well, I have; this is not at all clear in the villages of UP, for instance. Higher wages in the cities are yet to be reflected in any dramatic way in malnutrition, education, infant mortality, maternal mortality, potable water, and sanitation outcomes for India taken as a whole. and I’ve no quibble with liberalization, but there is no question that corporate and political behavior is far from self-regulatory/transparent. All kinds of disguised benefits accrue to corporates (eg favorable loan servicing on jet fuel, bungled spectrum auctions), and the consumers don’t see any benefits from these back-room deals. Individual journalists find it difficult to report on powerful conglomerates like Reliance unless they toe the company’s line. Liberalization should continue, but unless inclusive development happens, there is always the risk of massive crime, radicalization, and violence from those who fail to benefit.
They’ve never been a very large or significant portion of the population. Eventually it will go in one of two ways. Either it develops a functional welfare state or it becomes like Brazil or Argentina and gets stuck in an inequality trap. Which way it goes depends entirely on how much the middle class identifies with the poor over the elites. The middle class’ identification will be a function of how effective the political system is at courting them.
“middle class’ identification will be a function of how effective the political system is at courting them.”
I hope your optimistic prediction actualizes via political involvement, rather than my pessimistic one 🙂 Like your brief but punchy comment # 44.
I think that is a universal problem with capitalism.
I agree with you there.
you’re right about the population aspect. i was just reading ToI right now; an article states India apparently has 27% of the world’s undernourished. According to the World Food Progam, every second child in India is stunted . That statistic surely is objectively awful? OTOH, food production for 2008-09 is a record 228m tonnes. Looks like there is a big disconnect between production, affordability, and distribution.
Meanwhile, in optimistic news, a court in Delhi ordered cops to pay back a bribe taken 11 years ago at 9% interest.
Comparing India with the US is like comparing mangoes to oranges.
Right now, the US needs regulation. The pseudo-free markets and pseudo-federal reserves, is majorly responsible for the mess we are in.
Healthcare is being run into the ground by private insurance companies and pharmaceuticals. Real estate has been bloated by home-flippers and careless banks. Wall street has been fluctuating because of fly-by-night internet brokers and quick buck makers. Dont get me started on the oil/energy industry.
All this needs regulation. Start with the federal reserve being 100% federal. Then nationalize one bank or create a new one that will open credit markets, and keep interest rates pegged. Regulate credit-card companies to not charge 39% interest, and not change their policies every other month. Eventually, teach people to save, conserve and spend less. Setup medicare for all. This is a first world country dammit. Fix the patent system that allows pharmaceutical companies to make tons of moolah long after they’ve recouped the cost of researcg on drugs that are produced for pennies.
I could rant forever, but Im pretty sure the people elected this time are a brighter bunch and already know most of this.
This post should actually be classified under humor 🙂
Because, the % of people below the poverty line has increased by 20% in India in the last 5 years.
India shining indeed !
49 · Kumar said
You have to consider, though, that while the headcount goes up the overall percentage of the population could still shrink. All that says is that the poor are reproducing faster. I think usually the “halved poverty” claim is based on the $1 a day/$2 a day poverty lines while India’s official poverty line, according to Wiki, is about $7 a day. So even if you have more poor people below the line, the ones down there are still liable to be better off than they were before. Long story short, poverty statistics are hard to calculate and even harder to interpret.