India’s capacities for building consensus must catch up with the complexities of its reform agenda
Two ideas, with increasing strengths, have been contending in the last 25 years to shape the structure of societies and economies. One is the idea of democracy and human rights. The other is the idea of global markets and free trade. In practice, they are not always compatible.
Advocates of unrestricted flows of finance and trade across national boundaries rail against democratically elected national governments who, prodded by domestic concerns, resist the prying open of their markets to foreign investors. The evangelists say that free trade will improve efficiencies and global output because each country will produce only what it can most efficiently and buy the rest of its’ needs from other countries that produce those. With all global resources being used most productively, global output will increase. The problem is how to get to this ideal from where we are, with people employed in activities they should stop because someone in another country can perform them more efficiently. Bakers in India should stop baking bread and make candles to export. Dani Rodrik had calculated that to obtain a dollar gain in overall global output by such shifts of production, as many as seven dollars of incomes may have to be shuffled around within countries. He points out in The Globalization Paradox: Why Global Markets, States, and Democracy Can’t Coexist, that Adam Smith’s example of the baker and candlestick maker was set within a village economy where local governments and social institutions could moderate the affects on people of this purely economic idea.
Actions by national and local governments to adjust economists’ solutions to their local social conditions create various local rules. Free traders do not like such local rules because they increase ‘transaction costs’ at the borders. They dismiss countries that impose local rules on trade as ‘protectionist’ and anachronistic. Thomas Friedman bemoaned in The Lexus and the Olive Tree that such countries were unwilling to join the beautiful ‘flat world’ emerging, by remaining rooted in ancient ideas of their people’s identities and needs. The concern now is that ideas of the world as an economy and society as a set of economic transactions have been carried too far since the 1980s. According to these ideas, the goodness of governments’ actions must be gauged by the effect they have on ‘investors’ sentiments’ and by how the stock market responds to them. Thus capitalism turned into ‘super-capitalism’, says Robert Reich in Supercapitalism: The Transformation of Business, Democracy, and Everyday Life. And according to Rodrik, globalization became ‘hyper-globalization’. Reich shows that trends of growth of incomes of the poorest Americans as well as reductions in inequalities within the USA have reversed since the 1980s. And Rodrik reveals that global economic output had increased faster until the 1980s, pre-WTO, when national governments’ sovereign rights to limit free trade and investments across their borders were respected.
Democracy is Government for the people and by the people. Governments must be accountable to their people, not international investors. They must respond to people’s concerns which will depend on the condition of the society. There cannot be a universal solution when conditions vary. Practical solutions must be developed locally. Therefore good governance, with full representation and accountability, requires national governments; and in large countries federal structures; and strong local governments too.
A point that gobalizers and flat-worlders seemed to miss is that a boundary-less world can become ungovernable with risks sloshing through it uncontrollably: a lesson brought home with the recent global financial contagions. There must be boundaries to slow down the sloshing, albeit permeable boundaries. As a Chinese policy-maker said, “When you throw open the window, you must put up a mosquito screen to prevent bugs from outside biting your people.”
Good governance requires many governments, each close to their own people and accountable to them. Whereas the thrust of integration movements, such as the European Union and WTO, has been to reduce the policy space of national governments, Rodrik explains that good governance requires that national and local governments are given more policy space, not less. Undoubtedly there are many benefits from common standards and from reduced transaction costs. On the other hand, local governments must be given adequate freedom too. Countries, and within countries states, have different conditions and are at different stages of development. The Indian states are vociferous that one size national policies cannot fit all. The European Union is suffering because it may have homogenized too fast. Global trade and climate change discussions are stalled by demands for differentiation amongst countries.
Economists often lament that politics comes in the way of implementation of technically- correct solutions. Implementation of change must always be a political process because to obtain the overall gain, there will be some shuffling around of incomes within the system: thus winners and losers in the interim. The story of FDI in Indian retail is an illustration of such adjustments.
Therefore, stakeholder support must be obtained. Whereas economists describe the future in numbers, good political leaders speak to people in stories of fear and hope, because people see their futures through narratives of change. Investors’ demands and economists’ arguments will not be sufficient to carry people along. Informed political debates are necessary too. Reforms have stalled in democratic India, with its freedoms of representation and speech, may be because its capacity for consensus-building has not caught up with the complexity of its reform agenda.