In What Way should the Economy be Reformed?

 All political parties, Left to Right, across the Indian political spectrum, are aligned about one agenda: a need for substantial reform of the economy. India’s impressive GDP growth has not increased incomes at the bottom sufficiently. Demand is slackening. Private investment is sluggish despite government inducements. Farmers, workers, and unemployed youth, across the caste and religious spectrum, are restive, more actively protesting. 

Three current events in Delhi reveal widening cracks in the ‘liberal’ ideology that has ruled the country’s economics since the 1991 economic reforms: the upcoming elections in Delhi; the national budget; and the central government conceding, reluctantly again, that it must negotiate with farmers objecting to the imposition of ‘free market’ agriculture reforms and demanding that government ensure they get fair prices for their produce. 

The capitalist Right wants the 1991 economic liberation agenda to be completed with more freedom for capital in land, agriculture, and labor markets. The socialist Left wants better governance of these ‘factor markets’ to ensure adequate prices for farmers and decent wages for workers to boost incomes. All political parties, whatever their ideology, are competing to compensate citizens at the bottom for the failure of markets, giving ‘revadis’—direct money transfers of money to women, unearned pensions, and food price subsidies, which have become politically necessary but are not sustainable economists complain. 

A scientific way to settle the ideological debate about the best economic strategy for India is a comparison of how much growth of GDP has increased incomes of the poorest people in other developing economies since the 1990s. Compare India and China, two countries with over a billion citizens, both of whom were very poor until the 1980s, both opening their economies around the same time to increase foreign trade and private investments. And Vietnam, which was even poorer in the 1980s, and has now emerged as another Asian tiger, competing with India to draw away investments from China where labor costs have increased with its remarkable economic success. 

India China Vietnam

GDP per capita, 1989 $330 $314 $98

GDP per capita, 2023 $2400 $12700 $4350

Number of times 

per capita GDP increased 

between 1989 and 2023  7.3 40.4 44.4

I have compared the strategies of the three countries in two articles this week, in the Business Standard and The Tribune. 

Here are the links to them. 

https://www.business-standard.com/economy/analysis/bad-economics-is-corrupting-politics-undermining-good-governance-in-india-125011900471_1.html

https://www.tribuneindia.com/news/comment/why-indias-good-economics-is-corrupted-by-bad-politics/

Why have China’s and Vietnam’s economies done six times better than India’s in lifting incomes at the bottom over the same period? India’s economy reformers should examine this scientifically and non-ideologically. 

For one, China and Vietnam did not give up the communist-socialist moorings of their economic policies after the collapse of the communist Soviet Union in 1991, when the Washington Consensus around liberated financial capitalism swept the world. Russia was persuaded by US economists to switch from communism to capitalism with a ‘big bang’, with disastrous consequences. Crony capitalists gouged the country’s wealth, became extremely wealthy, bought mansions in London and yachts in the Mediterranean, and corrupted Russian politics. 

China and Vietnam joined the global economic system on their own terms in the 1990s. Deng Xiaoping adopted ‘Socialism with Chinese Characteristics’, incorporating features of capitalism into central planning to enhance the welfare of the people. US economists complain China cheated when it was admitted into global markets because China did not give up socialism and state planning. It protected its public sector and nurtured private sector giants now being sanctioned by the US, the champion of free markets, who is destroying multi-lateral trade and financial institutions to protect its own domestic producers! Vietnam followed the Chinese precedent of economic reforms with minimum political reform of its single-party governance system. It declared it would also adopt a ‘market economy with a socialist orientation’. Consequently, the US refuses to recognise Vietnam as a ‘market economy’, even though Vietnam has implemented 17 free trade agreements with the EU, UK, and other countries. 

‘Communists’ and ‘socialists’ are considered threats to the American consumptive way of life and dangerous for the nation’s security. US ideologues are allergic to ‘socialist’ systems which require governments to look after the welfare of citizens with a visible hand, as existential threats to their own system of privatised financial capitalism in which an ‘invisible hand’ supposedly looks after everyone fairly. 

‘A rose by any other name would smell as sweet’, Shakespeare said. Instead of wasting precious political space debating whether the word ‘socialism’ should be removed from the Constitution, India’s leaders should get down to fundamentals. The success of economic policies must be measured by how much they increase incomes, affordable and accessible health and education, and social security of citizens, not by how much the GDP increases and the wealth of the 1% on top balloons. India’s billionaires are already world class in their consumption. After 35 years of India’s supposedly liberating economic reforms since 1991, Indians in the lower half of the economic pyramid have yet to catch up with the living standards of Chinese and Vietnamese citizens who were as poor or poorer before, and whose economic conditions have improved six times faster since then. 

India’s theoretical economists complain that good economics is corrupted by bad politics. Whereas bad economics is corrupting good politics for the people in India. India’s economic reformers should not remain beholden to free market ideologies, corporate lobbies, and sentiments of fickle stock markets. Before embarking on the next major reforms, they should pause to learn more from socialist countries in the East, than from capitalist countries in the West where too movements are rising from both Right and Left sides of the political spectrum shaking up neo-liberal economic theories.