Promoting Economic Freedom as a Precursor to Economic Development

Deepanshu Mohan

freedom

“The guiding principle in any attempt to create a world of free men must be this: a policy of freedom for the individual is the only truly progressive policy.”

-Friedrich Hayek, The Road to Serfdom, quoted by Miller and Kim

Over the past few months in India, the political and economic climate has been undergoing an undesirable change, where the current government, in its attempt to work for everyone’s economic development, compromises on the state of economic freedom. There have been no apparent drastic positive changes in the country’s economic and business environment; on the contrary, evidence from performance indicators (such as industrial productivity levels, export trade data, openness to FDI, Business Confidence Index, etc.) presents a clear negative trend.

economic freedom

Source: Index of Economic Freedom, 2015

Since the last year, in spite of the government’s rich electoral mandate in the lower house of the parliament, it has failed to initiate and implement the key economic reforms  it has been pressing for (e.g. cleaning up the mess with GST, the Land acquisition bill, etc.). If I am to believe the words of our Prime Minister and his party, the focus of the government is to achieve higher growth for the economy while catering to other developmental objectives like skill development and employment generation through the increased role of Public Private Partnership (PPP) model (where the government will involve and work jointly with the private sector on welfare issues).

However, what seems to be missing from this approach – and is also the fundamental problem with the very vision of the government (including previous regimes) – is a failure to realize a holistic vision for the economy, one which goes beyond obsession with growth parameters to development of an economically “free” society. The inherent value of economic freedom needs to be considered by the governments in power, both at the state and centre levels, as the ultimate goal. This article is an attempt at explaining the meaning of economic freedom in today’s context and how relevant it is for developing economies like India.

In the first chapter of the 2015 Index of Economic Freedom report, Ambassador Terry Miller and Anthony Kim further explain, “[In The Road to Serfdom,] Friedrich Hayek’s keen insights into economic freedom are based on the moral truth that each person is, as a matter of natural right, a free and responsible being with inalienable dignity and fundamental liberties that righteous and effective political systems should regard as unassailable” (my emphasis).

This applies best to the idea of a developing economy trading more “freely” (within or outside a region) which allows it to grow with more income and access to resources, and to unconditionally converge with the income levels of wealthy countries. Similarly the presence of quality public and private institutions that help ensure property rights, appropriate regulatory structures, along with the autonomy and independence of the judiciary, prevent the bureaucracy (i.e. the executive wing) in an economy from taking the system for granted. All this holds vital importance for economies in not only successfully growing over time but moving towards an economically free society, ideally displayed by economies such as Singapore, Hong Kong, Australia, and New Zealand (also ranked as the “freest” economies in the index discussed below).

A country like Botswana in Africa which Daren Acemoglu, Simon Johnson, and James Johnson wrote about way back in 2003 still presents itself as an interesting case study. Over decades, the government heavily invested and intervened in the economy and the public sector accounts for a larger share of the economy—an uncommon feature in African economies. The institutional arrangements present in that country ensure protection of property rights of actual and potential investors. Effective state intervention and governance have ensured a more “free” functioning society within their economy. By using the term “free” I do not argue as an absolute free market proponent, but stress the importance of the fundamental values of openness and, transparency in effective governance by a state in emerging economies.

While in theory and in an ideal scenario, this may sound great, in practice, there is a need to identify tangible parameters that measure economic freedom in a way where policies can be framed by the state to guarantee and protect it. A lot of development economists and noted scholars since Amartya Sen like Pranab Bardhan, Mrinal Datta Chaudhuri etc. have worked and written extensively on the idea of development as freedom, state directed development and  how it is the job of the state to invest in creating social opportunities for its people (through investments in education and healthcare, along with trade liberalization and physical investment needs). But a study on measuring economic freedom as a precursor to economic development computed through an index is a rich find and one that needs to be valued.

The Index of Economic Freedom computed by the Heritage Foundation (US) is one such critical measure that helps us in taking the concept of this approach forward while being pragmatic to a country’s economic profile and scope. India’s economic freedom score is 54.6, as per the 2015 Index, making its economy the 128th freest. As per a recent report,

“India’s score  is down by 1.1 points from last year [i.e. since the current government came in power], with meek improvements in the categories of busi­ness freedom, property rights, and freedom from corruption offset by declines in labor freedom and trade freedom.” India is ranked 26th out of 41 countries in the Asia–Pacific region [China ranks 30th], and its overall score continues to be below the regional and world averages.”

index of economic freedom India

Source: Index of Economic Freedom, 2015 – India

In the same Index, China is ranked even below India, being the 139th freest. One of the major reasons for this is because of its poor performance in the Rule of Law, Regulatory Efficiency, and Open Market categories. For example, China (when compared to the world) ranks 138th in Property Rights, 147th in Business Freedom, and 158th in Investment Freedom, despite being defined as one of the most economically powerful countries today.

India, being a multi-party democracy unlike China, may be doing better in most of these categories, but still has a long way to go when compared in terms of the other “free” economies (qualified as “free” by scoring more than 80 out of 100).

country comparison

Source: Index of Economic Freedom, 2015 – India

Jean Dreze and Amartya Sen in their book Indian Development: Selected Regional Perspectives, more than a decade ago expressed how,

“Policy debates in India have to be taken away from the overwhelming concentration on issues of liberalization and marketization. The nostalgia of the old debates ‘Are you pro or anti market?’ or ‘Are you in favor or against state activities?’ seem to have an odd hold on all sides, so that we concentrate only on some issues and ignore many—often more important—ones.”

The debates on issues pertaining because of liberalization, marketization continues to still dominate most of the academic and policy discourses, whereas what is needed is a discourse today on how an economically “free” society can be created through the actions, policies, reforms of the state studied endogenously. It is critical to focus more on the role of the government in (dis)allowing more freedom to enterprises, households and financial institutions—the three key elements in the efficient design of an economy’s circular flow model of income generation.

Thus, the process of “broad based economic dynamism” can best be facilitated through the designing of policies that keep growth-inducing social development as a means to achieve economic freedom in a society as an end goal. Efforts at securing everyone’s development cannot rest purely on promoting more foreign investment internally, but structural efficiencies in guaranteeing the operation of rule of law, fiscal, monetary, labor freedom with the freedom from corruption must complement the benefits accrued from incoming foreign investment.

Deepanshu Mohan is the Assistant Director of Centre on International Economic Studies at Jindal School of International Affairs 

Are ‘Smart Cities’ Enough for India?

smart  Shahana Chattaraj

Narendra Modi is a leader with an urban vision. As the chief minister of Gujarat, he transformed Ahmedabad with an award-winning sustainable bus transit system and a ‘world-class’ river-front recreation space. Modi’s most ambitious projects in Gujarat are the two planned new ‘smart cities’: the Gujarat International Finance Tec-City, on the outskirts of Ahmedabad, and Dholera, an industrial hub on the Delhi-Mumbai corridor. Still in inception, these cities are at the heart of the new administration’s ambitious plan to transform the crumbling and chaotic image of Indian urbanisation by building a hundred new smart cities.

China is an inspiration for Modi, in the country’s push for modernisation through urbanisation, as well as its state-of-the-art cities such as Tianjin’s famous Eco-city. For urbanising countries such as India and China, smart cities are an opportunity to harness urban growth to sustainable development. Top-of the-line infrastructure is a means to leapfrog the development ladder, jettisoning older, inefficient and unsustainable systems and avoiding the costs of retrofitting. Modi’s new policy has generated excitement amongst business leaders and upwardly-mobile middle-classes tired of living in ‘third-world’ environments. Whether India’s smart city policy will translate into desired outcomes—more sustainable, productive and better-governed cities—is debatable.

Megacities in India, unlike in most other countries, lack autonomous governments with the power to shape their affairs. They are controlled by provincial administrations and managed by a patchwork of state, city and municipal bodies, public and private corporations and village panchayats. For smart systems to substantively improve planning, coordination and governance, it will be necessary to have a centralised metropolitan governing structure in place, accountable to city residents.

City and local governments, responsible for basic public services, have the most direct impact on well-being, particularly that of the poor, but there is a glaring mismatch between their functions, and their finances and capabilities. In India, urban local bodies account for a third of public expenditure but just 3% of revenue. In China, they account for half of public expenditure and 25% of revenue. Property taxes, the main revenue base for municipal governments, constitute just 0.44% of India’s tax revenues, strikingly lower than in other emerging economies. This figure remained stagnant over the past decade, over period of high urban population and GDP growth. The more dependent urban local bodies are on higher-level transfers, the more they underspend on public services and amenities.

In China, unlike in India, city and local governments play a key role in urban development. China is politically centralised, but administratively and fiscally far more decentralised than India. City governments have the tools and resources to plan and manage growth. Urbanisation, historically, has been a time where public institutions are built and strengthened, from utilities to regulatory institutions to social welfare services to public libraries and hospitals. The fragility of civic institutions will have a serious impact on India’s ability to deliver broad-based improvements in well-being to its rapidly growing urban population. In situ rural urbanisation accounted for nearly 30% of urban growth in India over the past decade, creating hundreds of newly-urban settlements without municipal institutions capable of collecting taxes, planning urban development and delivering public services. As a result, slums and informal settlements, once a big city problem, are becoming more widespread.

Most so-called ‘smart city’ or ‘new city’ projects under way in India develop outside official city boundaries. They are not new cities at all, but self-contained commercial, residential or industrial enclaves adjacent to major cities. As the planned enclave grows, so does the informal city outside its bounds, catering to construction labour, domestic workers, contract workers, daily wagers and small-scale retailers, a pattern that has accompanied new city development in India since colonial times.

This pattern of privatised, enclave urbanisation undermines the potential of city governments to grow into effective, well-resourced and democratically-accountable institutions. Provincial levels of government, in charge of urban development policy, typically capture revenues from urban development, while municipal and local authorities deal with the costs. State governments have an incentive to undertake lucrative and prestigious smart city projects without taking into consideration their feasibility or real costs. Some will be vanity projects or real-estate boondoggles, diverting precious public resources that would be better spent improving existing urban settlements or providing public services and infrastructure in urbanised rural areas.

India is experiencing rapid urban growth in a context where city governments are weak or non-existent. Deficiencies in urban governance and management in India reflect structural and institutional problems that will not be resolved by advanced data systems or sensor-equipped infrastructure networks. Public-private partnerships, the Modi government’s preferred model for smart city development and management, in order to serve the public interest as well as private interests, will require an effective and locally-accountable government partner. The trappings of a smart city—cyber highways, digital sensors, smart cards and computerised management systems—will remain just trappings, like the city development plans and environmental policies Indian cities regularly prepare but rarely implement, unless city governments have the incentives and resources to use them.

As an example, a centralised data system might help city authorities analyse where flooding is likely during the monsoons and anticipate related problems of water contamination, disease outbreaks and electrical fires. They could take steps to mitigate risks, reach out to affected communities and line up resources to respond quickly. But their incentives to take coordinated action, which localities to prioritise and which ones to disregard, have to do with politics. A city administration is more likely to be responsive if it is accountable to local citizens. And, of course, if it has the data analysts, engineers, fire-fighters and fire-trucks, public health facilities and staff to execute its plan. Even India’s largest and wealthiest cities are under-resourced and under-equipped.

The plan to build a hundred new smart cities is both grandiosely ambitious as well as deeply inadequate. By 2040, India’s urban population will be over 600 million. Amartya Sen describes India as a place where ‘islands of California’ exist amidst a ‘sea of sub-Saharan Africa’. To mitigate, rather than entrench inequities, India needs an urban agenda that is more wide-ranging, inclusive, sustainable and locally-driven than the one centred on new smart cities. To improve urban environments, support decent jobs, tackle urban poverty or adapt to climate-change, cities need not just policies and computerised management systems, but the incentives and the means to implement them.

Shahana is a post-doctoral research fellow, Blavatnik School of Government, University of Oxford. This post first appeared in Financial Express. 

Regulatory Impact Analysis: Hopefully, a prelude to ‘Make in India’

In view of the new ‘Make in India’ agenda of the Modi government, Aparajita Bharti argues for the adoption of the Regulatory Impact Analysis, a global practice to evaluate the costs and benefits of a proposed/existing regulation, that has also found favour in Planning Commission and other governmental reports.

With the new government in the driving seat and ‘Make in India’ high on its agenda, improving the regulatory environment for business is a top priority. This is, therefore, a golden chance for the government to introduce in India the practice of Regulatory Impact Analysis (RIA), which is followed worldwide to assess the costs and benefits of a proposed or an existing regulation.

The 12th five yearindiaproduction plan (2012-2017) recommends the employment of RIA for both existing and future regulations that impact the business environment in India. RIA enables the governments to judge the efficiency of the proposed regulatory framework in creating a more competitive market vis-à-vis the compliance and enforcement costs that it puts on businesses and the governments. In some countries, RIA also includes an evaluation of other regulatory options (including self regulation) to judge the most effective way in which a near perfect market can be delivered to the consumers at the lowest cost. RIA is considered an important activity as it exposes compliance and other costs arising out of the new regulations, which are ultimately passed on to the consumer. It enables the governments to weigh these costs against the benefits that accrue to the consumers as a result of the regulation. Although RIA may come across as expensive, however, in the long run, it saves huge costs that are incurred because of an inefficient regulatory framework. Continue reading

The Global Rise of the Right

Amid the rise of right-wing parties to governments across Asia, Apoorv Tiwari cautions against prematurely writing off the Leftist ideology.

The past year has seen elections in several democracies in different parts of our complicated globe. Since the beginning of 2013, voters have exercised their franchise in South Asia (India, Pakistan, Nepal, Maldives and Bangladesh), the far-east (Japan, South Korea), and Europe (including national elections in several countries as well as the recent elections to the European Parliament).  Despite the diversity in terms of culture, geography and issues across these elections, there have been two essential points of convergence.  Firstly, the mandate for the winning party/coalition has been decisive in most cases. Secondly, these elections have ushered in a revival of the political “right”.

This trend is particularly evident in Asia, where three of its largest democracies – India, Japan and South Korea – have voted centre-right political formations to power after decades of centre-left rule. While their policies may differ based on specific requirements within their countries, it would be safe to assume that Narendra Modi, Shinzo Abe and Park-Gun-Hye mark a definite departure towards the right when compared with previous regimes in their respective countries.

In this context, many have begun to write political obituaries of the Left in Asia. In India, even the Grand Old Party which has ruled us for more than five decades has been reduced to an embarrassing minority in the lower house. What then do these left/centre-left parties do? The most logical answer would perhaps be that they reinvent themselves and embrace some elements of the “right”.  They might be advised to look beyond entitlements and doles as strategies for social inclusion, and accept the merits of free-market capitalism.

Logical and intuitive as such suggestions may be, the strategy to challenge the right-wing by blindly moving to the right may be fraught with political risks, and may weaken democracy in India.  Firstly, a rainbow of parties spread across the ideological spectrum always offers more choices to the voter. In this election, people voted for the centre-right, even disregarding traditional determinants of voter behavior such as caste. However, that does not imply that the centre-left has become irrelevant. If anything, it may be relevant to remember that it was “crony capitalism” rather than socialism that was the principal reason behind the many scams that beset the previous government.

Additionally, it may be pertinent to remember that during the 80s, when there was still a fair degree of consensus on socialism as the only viable economic strategy in India, the BJP’s professed ideology of Gandhian socialism found few takers. It was only religious mobilization of the masses that made the BJP truly national party in the early 90s. Similarly, the Congress or the Communists cannot hope to defeat the BJP by abandoning their commitment to socialism. What is needed is a cleansing of socialism to rid it of some of its hypocrisy and distortion.

In our urge to celebrate this period of political stability and a China-like unfettered rule for the next five years, we must also remember that political stability must contribute to a deepening of democracy in India, and not erode its very foundations.

Apoorv Tiwari is an alumnus of IIT Kharagpur and currently working as an associate with Swaniti Initiative. The opinions of the author  are independent of his association with Swaniti.

The Puzzle of the BJP’s Muslim Supporters in Gujarat

Raheel Dhattiwala examines a political phenomenon in Gujarat: the support of Muslims for the Bharatiya Janata Party (BJP) that many Muslims perceive as responsible for the brutal violence in the State in 2002 when at least a thousand Muslims were killed. The findings are based on 23 months of ethnographic fieldwork — in periods spanning three elections in 2010, 2012 and 2014 — and an analysis of 101 polling booths in Ahmedabad city.
The following article is a summary of a policy report by the author.

BJP Muslim

Image credit: Hindu Centre

Are Muslims shedding their resentment for the BJP and voting for it? The potency of this question is greatest in context of Gujarat where it gained significance soon after the BJP’s political rapprochement with Muslims in 2009. This report attempts to answer why Gujarat’s Muslims would support the BJP, a party that many continue to acknowledge as having perpetrated violence against Muslims in the State less than a decade ago. In doing so, it examines the profile of the BJP Muslim supporter and what ‘support’ actually means.

Findings of this report are primarily based on in-depth fieldwork evidence spanning three election periods in Ahmedabad city (2010 to 2014). Indeed, interview evidence suggests an unprecedented surge in public support of Muslims for the BJP in this period. Motivations of support varied for those Muslims who had joined the party as members, from those who were supporters/campaigners for the party. For Muslim party members, political patronage of a party deemed to stay in power in the State was a strong incentive to vocally support the BJP as opposed to value rational incentives for the supporter/campaigner (“to get rid of our anti-national image we have to be with the BJP”). Common to both groups of supporters was the effect of personal experience of the violence. A Muslim with direct experience (e.g. death of a family member) of the violence in 2002 was least likely to voice support for the BJP.

At the same time, inferences drawn from 101 polling booths in seven assembly constituencies in Ahmedabad highlight a distinction between public and electoral support: more Muslims were likely to have supported the BJP in public only, than going out and voting for it as well. This is plausible given that anonymous referendum implies the possibility of public behaviour being distinct from electoral behaviour. The sample booth analysis suggests not more than 10 per cent votes were cast by Muslims for the BJP. This figure is not very different from Muslim voting for the BJP in Gujarat in the years prior to 2009. Of course, making ecological inferences from booth-level data has its own set of caveats, which further highlights the uncertainty of claims— “over 30 per cent Muslims voted for us”—made by the BJP from constituency-level aggregate figures.

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Mandatory CSR: A win-win?

Amid all the bad press the mandatory CSR has received, Akshaya Kamalnath and Ashrita Kotha attempt to demystify and look at the policy implications of the provision which is the first of its kind in the world.

Although there is panic about the government dangling the sword of ‘mandatory’ corporate social responsibility (CSR) spending over corporates, it is important to take a step back to understand what the Companies Act, 2013 (the Act) actually says about CSR. It may turn out to be a win-win for all concerned.

Section 135 of the Act requires that companies of a certain size (those with a net worth of at least ₹500 crore or turnover of at least ₹1,000 crore or a net profit of at least ₹5 crore during any financial year) must spend a minimum of 2 per cent of its average profits of the past three years on CSR activities. While this requirement definitely sounds mandatory, the only consequence for companies failing to spend this amount is that they are required to give reasons for the failure in their annual report. Thus, although it is technically a mandatory obligation, the penalty for non-fulfilment is merely drawing shareholders’ attention to the fact of non-compliance. This has the potential of making companies focus more on reputational value.

Critics argue that companies can use CSR as a competitive strategy only if it remains voluntary. However, in the way the Act conceives CSR, while spending 2 per cent of the preceding three years’ profit is required, companies are free to spend more than this minimum and devise innovative ways of spending to have a greater impact on society.

Enhancing reputations
It is precisely for such innovation that Section 135 requires companies to which it is applicable to appoint a CSR committee comprising three or more directors, including an independent director to decide policy. Again, in the spirit of drawing shareholders’ attention to this, the Act also requires that the CSR policy is displayed on the company’s web site. The only restriction is that it has to be framed within the categories specified. But there is still ample scope for innovation as the categories are broadly listed.

Therefore, contrary to all the doom-and-gloom predictions about mandatory CSR, the Section provides an opportunity for companies to take advantage of shareholder attention and to use it not only to make meaningful social contributions but also gain reputational capital from it. From society’s perspective, the Section pushes companies to spend a miniscule portion of their profits for society, while, from shareholders’ point of view, it ensures transparency by requiring that the annual report show what activities the CSR fund was spent on or, if there was no spending, the reasons for this.

Not a tax
The 2 per cent rule does not operate as a tax. A company that does not incur the CSR expense is only required to justify the omission to its shareholders. A tax is a compulsory exaction, levied, collected and spent by the government. The CSR spend is neither imposed nor collected and spent by the government. The CSR expense structure is meant to help identify the specific social initiatives taken by a company and thus highlight its contribution to society. If it is subsumed within the framework of a tax, the prerogative of how much to spend and for which initiatives would be that of the sovereign. CSR spending that aims to form a part of the company’s competitive strategy cannot, thus, be designed as a tax.

Policy angle
One valid policy question one may ask at this juncture is whether the CSR spend is justified in light of the existing gamut of taxes a company pays. These taxes are already supposedly used by the government to finance social programmes and services. Then, what is the rationale for CSR spending, over and above these taxes?

The answer may be found by observing some other policies of the government. A company wishing to undertake foreign investment in the multi-brand retail sector has inter alia to commit to spending 50 per cent of the FDI in back-end infrastructure over a three-year period and satisfy a 30 per cent local procurement condition. Even the Defence Procurement Policy has an offset policy that seems to resonate the same idea.

While the case of foreign investment may be distinguished from domestic corporate activities, the trend of the government’s policy seems to indicate the general opinion that companies are required to increasingly legitimise their existence in society. The backdrop of scams and corruption seems to have shaken the people’s faith in corporate institutions. A CSR policy may thus be better understood as not just a mechanism to highlight a company’s social initiatives but also as part of a larger strategy to restore the position of companies in society.

This article originally appeared in The Hindu Business Line.
Akshaya Kamalnath is a doctoral student at the University of Newcastle.  Ashrita Prasad Kotha is pursuing her BCL at the University of Oxford.

2014 Elections: The Waves of Change?

Although the public discourse surrounding the 2014 general elections seems to be centered on the effects of a “Modi Wave”, Mathew Idiculla stresses the need to remember that elections in India are ultimately a multi-polar contest fought over varied issues.  

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That 2014 would be a year of change seems inevitable. Whichever political formation wins the upcoming national elections, India will soon have a new Prime Minister after nearly a decade under Manmohan Singh. But beyond a mere change of guard, this election has the potential to alter the political and economic trajectory of India. This is not merely because Congress is projected to get one of its lowest ever tallies as per most opinion polls, but also because its chief challenger seems to embody a thought quite different from that held by all previous prime ministers.

2014 could very well be remembered with other landmark years in India’s political history- 1967, when Congress domination ended as it lost power in half the states; 1977, when for the first time Congress was unseated from power at the centre and 1984, when Congress won its highest vote share ever and had for the last time a member of the Nehru-Gandhi family as the Prime Minster. In terms of economic policy, 1991 saw a major policy shift in India with the opening of the markets which was further taken forward by the BJP led NDA government. However, since 2004, India has followed an “inclusive growth” model which sought to go beyond economic growth and focused on delivering social welfare by enacting various socio-economic rights. But with economic growth lowering to 5.5 per cent this year and rising inflation, the viability of this model is under the scanner and the policy priorities of the next government could hence undergo a major shift.

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