The disparity in the wealth and poverty of nations is starkly evident and has been a perpetual source of puzzlement and inquiry for centuries. Why do some nations languish in heartbreaking poverty while others prosper? Is there a poverty trap that some fall into accidentally and are unable to get out of without external help? Can they be helped, and if so, how?
Economists study that question and some extremely brilliant minds have struggled with it. Indeed, economics as a subject started with the study of the nature and causes of the wealth of nations. Surprisingly, the answer to at least one part of that question appears to be quite simple. There’s a factor that is sufficient for the poverty of a nation, and necessary for the wealth of a nation. That factor is economic policy.
What is economic policy and why does it play such a decisive role? Why are bad economic policies decisive as a sufficient condition for poverty, and why are good economic policies a necessary condition for prosperity? Let’s consider an analogy. There are a set of recommendations that are generally associated with good health and fitness: good nutrition, adequate rest and exercise, a healthy environment, absence of physical and mental stress, etc. Those are necessary for a healthy and long life, but they are not sufficient. Even if you did have all those, you could still get run over by a bus or get a genetically inherited disease. That’s called an “external shock.” Conversely, if a person is a couch potato, drinks like a fish, smokes like a chimney, and eats at McDonalds, that’s sufficient to ensure a short and nasty life. That is, even without the help of adverse external circumstances, one’s internal health policy can lead to disaster.
There is general consensus among most economists – a tribe not particularly known for agreeing with each other – what constitutes good economic policies, policies that lead to material prosperity. An open economy is one of them. Economies that are closed to trade (autarky) or which impose extensive barriers to trade (both domestic and international) needlessly burden themselves. Policies that promote economic freedom are good for the economy. This is not surprising since freedom in all its forms is a good thing, both as an instrument and as an end. In socialist economies, people lack economic freedom. The evident failure of socialist economies relative to the successes of free market economies can be explained analytically. Property rights play a critical role. If your property is subject to arbitrary confiscation by the state, the incentive to produce and save is blunted. If the state, instead of protecting private property becomes a bandit preying on the people, eventual material impoverishment is unavoidable.
While good economic policies are themselves not sufficient for the prosperity of a nation, bad economic policies are sufficient (although not necessary) for the poverty of a nation. If you look carefully at India, India’s poverty is due to bad economic policies, since there’s nothing else even remotely causally connected to it. India is not under foreign domination, it is not subject to repeated colossal natural disasters, it is not composed of absolutely retarded people, it is not under some divine curse, etc. India’s persistent poverty is the result of an easily understandable cause. The proximate cause is bad policies.
All economic policies – good or bad – are naturally made by people. Policymakers are just like the rest of us, with the same human ambitions, failings and drives. They seek to advance their own interests, whatever they may be. Policies are therefore a derivative of the objectives of the top policymakers – who are usually the political leaders – of an economy. Economic policies are a function of the politics of a nation. It is not so much whether a policy is good for the country but rather whether it is good for the political leaders.
Now it could be that some policy which is objectively good is also good for the policymakers. About those we don’t have to worry although how many instances of that actually occur is a different matter. But there are policies which while good for the country, are against the interests of the policymakers. The vast majority of good policies are not in the interests of the policymakers. Why are good policies often not in the interests of the policymakers?
Politicians are interested in continuing to be in power, and if in order to do so they have to sacrifice the general welfare of the country, they will do it. They cannot be blamed for this since this is normal and natural for self-interested creatures such as us. It’s only human. Saints and do-gooders do not generally get to positions of power. The competition to get to the top of the heap is usually intense and only the most battle-hardened bloodied warriors make it to the top.
Every policy – good or bad – has consequences, which is the whole idea behind having policies after all. And every policy has positive and negative consequences. You can have policies that are good for some of the people all of the time, and policies that are good for all of the people some of the time, but there are no polices that are good for all of the people all of the time. (I will leave it as an exercise for the interested reader to test the validity of that generalization.) That implies that every policy will have winners and losers – at least in the short run. In the long run, however, good policies help everyone. (If a policy is not good for some even in the long run, the winners can compensate the losers.)
Good policies are universally good in the long run (by definition, and therefore this is a tautology) but like all policies, they too have short-run winners and losers. If those who lose gang up against the policymakers, the policymakers lose. Therefore it is not in the interests of the politicians to make good policies (which we should stress have long-run benefits) since they care about their own fortunes which they have to make in the short run. Even for the best intentioned policymakers, it is a fine balance that they have to maintain: make good policies that have short run adverse consequences for some voters and run the risk of losing power; or make policies that please their supporters but which are harmful for economic growth in the long run.
To sum up, India is materially impoverished because of bad economic policies. These policies were made (and are being made) by short-sighted myopic self-serving stupid politicians and bureaucrats. The political system selects short-sighted myopic self-serving stupid politicians and bureaucrats. India is a large economy. It has a very large population and therefore a large domestic market. Let’s spell it out: a large domestic market means there are large number of producers and consumers. If there are no external reasons for why the economy does not produce enough, then the reason has to be internal. If Indians as a whole are not congenitally stupid, then we have to conclude that India’s poverty is due to bad economic policies made by terrible policymakers.
The way out is therefore easy to state: change the system so that it selects good people as the policymakers. No amount of futzing around with elections and schemes to uplift the poor will amount to anything other than more of the same.
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