India’s Market Liberalization Myth

Amit Varma of India Uncut has written a long op-ed for the Asian Wall Street Journal, and has posted on India Uncut. Here is an excerpt:

Indian Prime Minister Manmohan Singh is due to visit Washington in a few weeks, and editorialists and commentators have already started writing about the emerging economic power of India. New Delhi’s decision to start liberalizing its economy in 1991 is touted as a seminal event in India’s history, the moment when it threw off the shackles of Fabian socialism and embraced free markets. It is the stuff of myth-and to a large extent, it is exactly that.

While part of India has benefited from being opened up to foreign products and influences, most of the country is still denied access to free markets and all the advantages they bring. India opened its markets in 1991 not because there was a political will to open the economy, but because of a balance-of-payments crisis that left it with few options. The liberalization was half-hearted and limited to a few sectors, and nowhere near as broad as it needed to be.

Amit goes on to explain the barriers entrepreneurs face in starting a venture in India:

[E]ntrepreneurs find it next to impossible to get a legal permit to start a business at all. Street hawkers and shop owners in the cities often cannot get a license at all. (Even those who do have to comply with draconian regulations that offer so much discretion to the authorities that corruption is inevitable.) They survive by paying regular bribes to municipal authorities and policemen, which are generally fixed in such a way by this informal market that they can barely survive on what they earn, and cannot expand their business or build their savings. They are trapped in a cycle of enforced illegality and systematic extortion by authorities, which results in a tragic wastage of capital. It serves as a disincentive to entrepreneurship, as well as to urbanization, the driving force of growing economies.

Read the full thing.

When the government puts too many restrictions on businesses and entrepreneurs to operate legally, the net result is to criminalize business. Only criminals can operate their business profitably because they can cut through all of the red tape of regulation. Politics and not economics determine which businesses thrive and which go under. This sad story is repeated in many countries around the world.

What good reason should there be for government not to be on the side of business development and entrepreneurship? If you want business to thrive, if you want people to find meaningful work – and why wouldn’t you want this – you need to allow businesses to freely operate with a minimum of interference.