The pot-holed road

Thoughts about India, the United States, and occasionally, the world at large.

Archive for December 2008

WHAT THE CRISIS DOES NOT MEAN

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(The global financial meltdown may be a failure of the system but does it not make more sense to see it as a failure of the people who were responsible for running it? Also, some thoughts about the way Indian communists have gone about claiming they have saved the country)

These are clearly not good times for global capitalism and for folks like me who happen to be ardent votaries of the free market economy. Every passing day brings more of bad news. In fact, it’s a bit like waking up every day to a bad hair day.

And, much as the times are bad for ‘us’ folks, equally, these are good times for ‘them’ folks; the unrepentant communists and socialists who have not forgotten any of their dogmas and (consequently?) have not learnt anything from history. Besides, there are the social democrats, progressives and all the others who place themselves on the left hand side of the ideological divide. Many among this lot are aware of and accept the greater efficiency of the market mechanism but could never reconcile to its inherent amorality.

Global capitalism is in trouble, deep trouble. The crisis it finds itself in is widely acknowledged to be the worst ever since the Great Depression. The scale of the troubles afflicting the banking and financial services sector, the very heart of a modern free market economy, is unprecedented. There is a nervous realisation that this is not just another cyclical downturn characteristic of free markets. Not surprisingly, questions are being asked, doubts raised, even about the fundamental viability of the system.

Okay, granted that things look bleak, but does that mean the doomsayers have a point about capitalism being in such a fundamental crisis, that it can emerge from it only by altering itself beyond recognition from its former self.

I don’t think so.

I believe that rather than the system being at fault, it was the people in charge of it who are more to blame. Here is an analogy that should make it clear. Imagine you have an expensive car and have hired a chauffeur to drive it. One day, there is an accident. Initially, you have no way of knowing whether it was the fault of the driver or whether something was critically defective in the car. Later on, you come to know that at the time of the collision, your driver was quite drunk. Now, would you blame the car manufacturer any more?

For the last eight years, George Bush was at the helm in America. It is like having a driver short on competence and very high on an alcohol-like cocktail of bluff, arrogance and ignorance. The NY Times columnist Thomas Friedman wrote recently, “I have always thought the American political system was devised by geniuses so it could be run by idiots. Now I know I was wrong”. He speaks of the political system. Well, it was the same folks who ran the economy.

The point therefore is, just as we do not find fault with our car manufacturer when we know our driver was incompetent, maybe we need to think twice before concluding that the system is at fault.

And then, even as we talk of a crisis, remember that ‘crisis’, and also terms like recession and depression, are actually relative terms. During the past few decades, capitalism has delivered unprecedented prosperity to millions of ordinary people across the western world and beyond, and more recently to people in China and India. What is now at stake here is the loss of a portion, a fraction of that extra prosperity achieved over the years. It does not mean that people in America, Europe and elsewhere where economic freedom prevails, get pushed back to the stone ages.

And so it is that even as many in these countries are put to real hardship, a North Korean plucked from his country and magically transported to America, would still exclaim “Hey, this is paradise”. And a Cuban citizen, given an assurance of even a half chance of survival, would still happily plunge into the shark-infested waters of the Straits of Florida to escape from the unrelenting desperation of his crisis-free socialist ‘paradise’.

Okay, there is no denying the crisis. But then, this is the crisis of a system that has consistently delivered results. Now, a part of what has been achieved over the years is at risk. With this perspective in mind, it becomes clear why now is not the time to go looking for alternatives that have never delivered anything and therefore, where nothing is at risk.

The reaction in India, particularly of the Left

And then there is the reaction of the Indian communists who, for the past four years, have been a part of the federal government playing the role of a millstone around its neck. They have really done much to block all attempts at further reforms in the economy.

Now, the communists have gone to town proclaiming that thanks to their role in stonewalling reforms, the country has been saved from a major disaster. This is a claim that, like so many other things about them, can only be described as bogus. And yet, quite a few in the country seem to be giving credence to it. A leading Indian news magazine made the question (Did the Left save India?) its cover story, conceding an element of respectability to what is patently a spurious claim.

Why do I say that?

Let’s begin by putting things in perspective. Ten years ago, the world economy was rocked by the Asian financial crisis. Almost all the major economies in Asia were affected, particularly those that were part of the elite club known as the “Asian economic miracle”. South Korea, Thailand, Malaysia, Indonesia, Philippines, Taiwan and Singapore were all affected. Yet, India was relatively unscathed. Now the left cannot (and does not) claim credit for that because in those days, they did not have a say in the corridors of power. Indeed, for much of the period of the crisis, India was ruled by the bête noire of the left, the BJP, so if anyone should take credit, it is the BJP.

What then is the story behind the communists and their tall claims?

It would be helpful to use the automobile analogy again. The western countries and some of the Asian countries like Japan, South Korea, Singapore, Taiwan etc. are relatively advanced and mature capitalist economies where people enjoy a high standard of living. Think of these countries as smooth, expensive cars moving at a high speed of, say, 80 mph. The other side of the freeway belongs to countries like China, India etc. which are now broadly ‘free market’ but are still weighed down with a host of residual command economy controls and restrictions on free movement of goods, services and capital. The people here have enjoyed modest gains in the standard of living. Importantly, in the more recent years, with economic liberalisation, there has been a marked quickening of the pace at which living standards have risen. Think of these countries then as cheaper cars that for a long time moved along at a slow speed of 20 mph, and now have begun to accelerate and touch a speed of 30 mph.

Of course, the cars that travel faster reach their destinations quicker. But yes, they also run the risk of meeting with an odd collision, maybe a fender-bender, or perhaps even something serious. And sometimes, it can even be a fatal accident. And so it has come to pass with the US and the leading western economies. Their cars have crashed and while the extent of the damage is not fully determined, it is expected to be substantial and serious.

Here is my problem with the communists and their boast. To begin with, the accident happened to those cars moving at 80 mph and more. It is just not likely that an economy moving far slower and incapable of approaching anywhere near those speeds would crash with the same extent of damage.

Secondly, there is the role of the left in successfully stalling reforms about which there is no dispute. But I would contend that this ‘success’ was the equivalent of preventing our car now moving at a modest speed of 30 mph from increasing any further, say, to 40 mph. After all, the reforms that the left takes so much pride in blocking were incremental rather than revolutionary in nature. They were measures like allowing greater foreign investment in the insurance sector, allowing voting rights to foreign investors in our private banks above the present ceiling of 10%, consolidation of state-owned banks, permitting the state owned pension funds to invest a fraction of their corpus in the stock market etc. It may be said then, that these measures were designed to increase the speed of our car marginally, from 30 mph to say, 40 mph. They were never designed to take us to 80 mph.

By stalling reforms, the left has not saved us; instead they have made our journey on the road leading away from poverty (and towards prosperity) a little more slow and a lot more troublesome. Therefore, they deserve not praise but condemnation (as usual).

I began this article with a reference to a bad hair day. Well, here is a revelation of particular interest to all those left behind communists and socialists around the world who imagine that what they see now is the beginning of the end of capitalism.

Even on a bad hair day, capitalism looks far better than socialism.

Written by Ranjan Sreedharan

December 5, 2008 at 7:36 pm