Economic Policies Matter

Economic policies matter. All else being equal, lousy economic policies create lousy economies.

Individually people all over the world have approximately the same natural endowments. What makes a difference is the nurture provided by the environment. And that environment is exogenous to an individual but endogenous to the entire collection of individuals which is called the society or the economy.

The assembly-line is an advance in technology which once invented was available to whoever wanted to use it. Its adoptin, however, is dependent upon the institutions and consequently the economic policies of the economy. The US has been lucky to be endowed with vast natural resources, a very motivated labor force, and enlightened leaders who created the institutions that create wealth (and to some extent distribute that wealth.) It is not possible for India to duplicate the trajectory that the US took because times and technology have changed. India cannot enslave about 100 million people, for example, to work on its cotton fields. The present day alternative is sweat shops. India could have had the option of going that route if its economic policies were not so inimical to foreign direct investment. The ethics of sweatshop are complex but the economics are fairly well-understood.

India could have leap-frogged the manufacturing stage and gone straight from the agricultural stage to the information/service stage. The snag was that we neglected universal primary education and therefore hobbled ourselves. Even now it is not too late provided that instead of the inefficient subsidies that bleed the public purse, we start concentrating on educating the hundreds of millions. Fortunately the technology is available to do so inexpensively. Whether the economic policies of the government allows this miracle to happen or not depends on the telecommunications policies.

I am afraid that the indications are that the government’s objective in the telecommunications sector is short-term revenue maximization instead of public welfare maximization. On the one hand it talks loudly about the need for affordable telephones for all, and on the other hand it imposes unsustainably heavy burdens of license fees, revenue sharing and taxes on entrants to the sector. This suppresses the investment and consequent expansion of the sector.