Bhagwati on Democracy and Markets

Jagdish Bhagwati has been much in the English popular press in India recently. I have been familiar with his work since my econ grad school days. I had done a couple of courses on international trade (taught by the great Prof Pranab Bardhan) and read from Bhagwati & Srinivasan’s venerated textbook “Lectures on International Trade.” I have referred to Prof Bhagwati on this blog several times previously.

I have learned a lot from Prof Bhagwati and find myself on the same side as he on many political economy issues. Which is more than I can say about Prof Amartya Sen. I think Sen is a brilliant man but I am situated almost diametrically opposite to him on the ideological plane. I believe his policy prescriptions are ultimately severely damaging to India and its development. Like most people, present company included, Sen has his biases: his bias happens to be towards socialism and statism (the government control of economic and social policy.) This suits the UPA and the Congress party really well. What surprised me was that Sen waded into the cesspool of Indian politics and showed himself to be a shill for Antonia Maino by declaring that Narendra Modi is not fit to be the PM of India.

Which side of the Bhagwati-Sen public argument I would come down on should come as no surprise to the readers of this blog. I am allergic to socialism and its fellow travelers. As a mechanism for organizing economic activities, there’s no substitute for markets. In the political sphere, I believe in a constitutional representative government but with serious conditions on qualifications for voters and candidates. Markets and democracy work provided the rules are well-understood, enforced and followed.

Bhagwati contributed to the development literature significantly. Here’s an excerpt from a 1995 paper of his titled “The New Thinking on Development.” This excerpt is taken from the last page of the paper where he talks “about the relationship between political democracy and economic development.”

=== ** Begin excerpt ** ==

Democracy and Markets

. . . Both theory and empirical evidence teach us that, all other things being equal, well-functioning markets lead to development. Sometimes such markets are present in democracies, sometimes not. The same holds true for authoritarian countries. That leaves us with four types of countries:

  1. Market democracies. By and large, these are the Western democracies; they had strong performance indicators until the OPEC crisis of 1973; they also have generally good social-welfare indicators.
  2. Nonmarket democracies. India is the prime example, compiling poor post-independence records in both economic performance and social indicators.
  3. Market authoritarianisms. China in the last decade, and the Far Eastern countries since the 1960s, belong here; they had rapid success in diminishing poverty, and their social indicators are not bad.
  4. Nonmarket authoritarianisms. These are the ex-communist countries; they are abysmal failures in terms of both growth and social indicators.

What can we learn, if anything, from this typology? With due mindfulness of the defects of this rather crude categorization, which leaves out many of the finer points concerning various political and economic systems, let me suggest three broad but defensible lessons.

The first is that where neither democracy nor markets function, incentives for production and innovation will be so weakened as to impair productivity and growth. The second is that markets can deliver growth, with or without democracy. The third is that democracy, without markets, is unlikely by itself to deliver significant growth.

The last proposition, which speaks naturally to India’s postwar experience until the current reforms, is perhaps the most interesting to contemplate further. Why should the relative lack of well-functioning markets nullify democracy’s possibly favorable effects on development?

The answer leaps out from the pages of modern Indian history. Democracy, with its civil and political rights–including freedom to travel, study, and work abroad–has enabled elite Indians, who have had access to modern education for over a century, to master and even improve on innovative ideas and technologies from everywhere. But Indians’ ability to translate expertise into effective innovation and productive efficiency was seriously handicapped by the web of statist restrictions that long straitjacketed economic decision making. Thus while Indian surgeons were quick to get to the frontier in open-heart surgery, the inability to import medical equipment without surmounting strict exchange controls, even when gifts were at issue, prevented the effective diffusion of technology to India on a scale commensurate with her abilities. Equally, the incentives to produce and innovate were seriously compromised because the returns to such activity could not be substantial when there were extensive restrictions on production, imports, and investment.

By contrast, the market authoritarianisms of East Asia profited immensely from the diffusion of technology that their substantially freer domestic and international markets permitted and facilitated. The economic interventions of the Indian government, after the early postwar years of more satisfactory growth and promotional rather than restrictive policies, degenerated quickly into a series of “don’ts” that straitjacketed the economic decisions of the citizens. On the other hand, the Far Eastern economies worked with a series of “do’s” that left considerable room for freedom to produce, innovate, and experiment with new technologies from abroad. The chief lesson may well be that democracy and markets are the twin pillars on which to build prosperity.

=== ** End excerpt ** ==

What Bhagwati wrote 18 years ago is still relevant in today’s India. Indians need the freedom to participate in free markets. But that is not going to happen as long as the dead hand of Nehruvian socialism controls India through the Antonia Maino-led UPA. We need to get rid of her and her gang.

Related post: See “India has been DUPed” (Feb 2011).

One thought on “Bhagwati on Democracy and Markets

  1. I wonder what the OP’s views are regarding the recent appointment of Rajan to lead the RBI? Given his vocal protests warning the crisis of 2008 as early as in 2005 and the mere fact that many US financial bobbleheads were very critical of him makes me think this is a positive step for India. Or will he be swept into the “capable-but-rendered-impotent-due-to-dynasty” category of civil servants?


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