India’s Tryst with Destiny…

…So is the name of Jagdish Bhagwati and Arvind Panagariya’s book, subtitled Debunking myths that undermine progress and addressing new challenges. While it lives up to its subtitle well, this forceful argument for trade liberalization fails to match the watershed after which it is named, Jawaharlal Nehru’s famed speech. In many ways, Bhagwati and Panagariya deliver a nicely edited review of literature on India’s growth since its reforms. Even as someone fairly well-read on India’s economic history, the sheer collection of empirics in Bhagwati and Panagariya’s arsenal is baffling – enough to give serious pause to anyone skeptical of free trade.

What Bhagwati et al. deliver in evidence and reason, they lack in insight (the true measure of their fantastic scholarship can be found in the plethora of self-citations riddled throughout the book – while the rest of this review may be critical, I don’t kid, their work is rich and informative). There are precious few comments on the underlying idea of India, and its tryst with destiny. While the thorough treatment of liberalization and its positive effects is much needed in our political discourse, perhaps the American version has a more apt, and humble, title: Why Growth Matters.

The method in which Bhagwati et al. focus their argument also leaves much to be desired. Presumably to magnify the import of their claim, the text is saturated with a vast embellishment of what the Left actually believes. Further, Bhagwati et al. fall prey to the stereotypical liberals (in the Indian sense) who chant growth is good, with little appreciation for nuances or caveats. For example this book has not a mention of hugely depleted aquifers in North India, the condition of our rivers, and that of our skies.

Indeed, when in their favor, Bhagwati et al. readily accept that there are subtleties to every question:

Then again, the causes of suicides are many. This is so even in the case of farmer suicides. It is, therefore, unlikely that a single cause like BT seeds would emerge as the main factor.

I agree completely though, am left wondering, why the same doubt cannot apply to a hugely more complex phenomenon, India’s growth itself. But perhaps the most striking flaw in the book is the devious representation Bhagwati et al. make of economists on the Left. The reader is made to believe that Brad DeLong and Dani Rodrik were somehow content with the level of liberalization before 1991. They, further, claim that DeLong and Rodrik believed that the most important reforms happened during Rajiv Gandhi’s tenure:

Unfortunately, both the statistical assertion by DeLong about allegedly robust pre-1991 growth and its explanation by Rodrik are wrong.

However, in a 2001 paper, here is what DeLong has this to say:

What comes next for India? The governments that followed the Rao government–first the United Front and now the BJP-led coalition–have continued reform and liberalization, albeit not as rapidly as one might have hoped given the pace of economic reform in the first half of the 1990s. But the amount that is still left to be done is staggering. 

Whether Indian real economic growth continues at the rapid pace of the past decade even if reform slows down and government budget deficits continue will tell us much about the resiliency of the growth process.

If Indian real economic growth does continue to be rapid even in the face of erratic public-sector performance, that will suggest to us that the most important factors were those that changed in India in the 1980s. (Emphasis added)

DeLong clearly admits that India is a far cry from a liberal democracy. It’s interesting that Bhagwati et al. paint DeLong’s conditional, predicated on continued successful growth without further reform, as an assertion. Indeed, it is unfair to the reader who does not check the full extent and qualification of DeLong’s opinion.

There is another oddity in criticizing Rodrik and DeLong’s purported belief that the sea-change in liberalization happened during the 1980s, in no small part because Bhagwati et al. make this argument themselves. There are numerous instances in which the authors respond to “critics” that don’t believe growth in the past two decades can be attributed to liberalization, because of high growth rates during the second Gandhi’s tenure as prime minister. Their (correct) reply to this (false) claim is that reform had started silently in the ’80s itself, and the Narasimha Rao policies only deepened the change.

This sort of exaggeration is common throughout the book. For example, the authors claim that:

A common refrain of the left-wing critics is that the post-1991 ‘neo-liberal’ reforms have led to an exponential increase in corruption.

They cite, for this claim, an article from New Age Weekly – the loud-horn of India’s Communist Party. To ascribe a “common refrain” to “left-wing” critics from the most ideologically radical publication in the country is edging on absurd. There are very good reasons to distrust anything and everything Vandana Shiva has to say. There are very good reasons to be skeptical of anti-BT cotton activists. There is very little reason to equate all left-wing thinkers in this category.

A similar vein of disingenuous argument is littered throughout the book. The most striking example to this effect is a graph following the authors’ cliam that:

The difference is so huge between the measured farmer and non-farmer suicide rates that one may question the validity of the data.

Right beneath this claim is a figure depicting the vast difference in the total suicides among farmers and the total population. This would, of course, be expected noting that India is, well, not an entirely agrarian nation. Unfortunately, the placement of this graph would trick a reader merely skimming the book for ideas (as I initially did) – removing credence from their greater point that there is no connection between liberalization and agricultural suicide.

By quibbles with the rest of this book rest on dispute not with the method of their argument, but the argument itself. I am a firm believer in liberal trade policy and, as I’ve mentioned, I believe Bhagwati and Panagariya have done a great service in conveying the sheer absurdity of the argument against. We disagree in large part, however, regarding the role Indian government has to play in its growth. The authors’ divide India’s economic future among tandem tracks:

Track 1: Reforms aimed at accelerating and sustaining growth while making it even more inclusive.

Track 2: Reforms to make redistributive programs more effective as their scope widens.

From the way in which the authors interpret the above goals, Track 1 (labor market reform, land acquisition, infrastructure, and higher education) and Track 2 (direct transfers, public work provision, guaranteed employment, healthcare, nutrition, and elementary education) represent supply-side versus demand-side policies, respectively.

There is a clear, (expected), and understandable preference given to the former. However, the evidence and assumptions of their argument do not hold ground. For one, they believe that any real growth implicitly requires formalization of India’s workforce:

There are many indicators of the inefficiencies that constrict growth. For instance, according to a 2007 Government of India report, the high-productivity formal sector […] employed just 13.7 percent of the workers in 2004. Besides, employees who are in the formal sector are not just small in number but have hardly been growing.

For someone not familiar with the Indian context, let me explain what “formal” and “informal” entail. When I go to a mini-Walmart like grocery shop (think Nilgiris, Reliance Fresh, or Spencer’s), I’m confronted with “formal” workers with absolutely no idea how to use the fancy cash registers at their disposal. It’s not uncommon to wait 5-10 minutes for a simple checkout because of how unbelievably incompetent these workers are.

On the other hand, “informal” includes the roadside bookshop or chai-kadai – where one man is serving about ten people at once, with remarkable quality and efficiency. It includes bookkeepers who make the idiots at formal stores look like a joke – for they can manually search the stacks of novels at their disposal in a tenth of the time it takes a so-called “high-productivity” formal worker to access his computer and direct me to the necessary book.

That Bhagwati et al. so casually assume that the formal sector is superior is just, simply, false. As far as services are concerned, this is evident to anyone who’s spent much time in India. I’m no maudlin sob-story who yearns for the “good old days” or the way “things used to be”. I’m all for technology, liberalization, and modernity – but the evidence that formality somehow aids growth (as far as services are concerned) has yet to be demonstrated. And, if you don’t believe me, I invite you to deal with the useless nuts at your local Spencer’s as opposed to the vegetable cart next door.

In their criticism of the Indian labor market, Bhagwati et al. are eager to repeal even the most sensible laws, including:

  • “Benefits related to sickness, maternity, disability, dependents” for employees earning below Rs. 10,000 a month
  • The right for “trade unions to strike and represent their members in labour courts in disputes with the employer”
  • Limiting “work without a day of rest to ten days”
  • Requiring “Proper disposal of waste”
  • “Extensive provisions for worker safety, including fencing of machines and moving parts, use of goggles to protect against excessive light and infra-red and ultra-violet radiation; precautions against fire; and the weight permitted to be carried by women and young persons”.

While they agree that the real culprit of labor rigidity in India is the Industrial Disputes Act (IDA) which makes it well-nigh impossible for factories to fire workers (and, consequently, hire them) – they seem to have fallen the the supply-side myth that grasped most of the USA during the Reagan era that somehow dismantling every worker protection would lead to increased aggregate supply and, hence, economic growth.

Indeed, the very flippant manner in which they claim these crucial provisions increase the “marginal cost” of labor and hence cause unemployment is ridiculous. The theoretical economic argument against this claim is so obvious. Economists argue that few industries are perfectly competitive (the stock market being one, which explains why it’s so hard to “beat” the market). In imperfect markets, the firm earns significant economic rent. This means that even decreased profit will not cause a reallocation of associated factors of production. In other words, a slightly higher marginal cost of labor will have no effect on employment.

Indeed, the greater cost is not even marginal in nature, but rather fixed. Provision of toilets and flow of water are largely independent of the number of workers employed. Similarly, the basic premise on which Bhagwati et al. approach education is flawed:

In contrast to elementary education, which is also a predominantly social objective and for that reason belongs to the Track II policy agenda, higher education belongs to the Track I agenda.

In other words, better universities somehow have supply-side effects in a way that primary education does not. This is simply not the case. For this to be true, Indian universities would necessarily be bottlenecked due to the huge number of highly-qualified Indian high school graduates. However, there are many private universities that are ready to be filled, suggesting a more broken educational infrastructure than the authors assume. A higher education system that can work independent of a weak primary system would need the flow of skilled immigrants the United States sees. Short of this influx, India needs to fix education from the bottom-up to achieve any sizable supply-side effects the, it seems, holy grail of liberalization advocates.

Overall, India’s Tryst with Destiny is a highly worthwhile read. Bhagwati et al. stick to the point, rendering the book a very short (but informative) read. As the authors are acutely aware, myths and lies about India’s reforms abound, and not just among the intellectual Bengali cafes, but even liberals abroad. Bhagwati and Panagariya make a strong case for continued liberalization. I believe I have made a strong case for my ultimate criticism of the book. As a reader fairly in touch with the beliefs of India’s left-wing, I believe the authors unfairly, and to their disadvantage, exaggerated the claims against liberalization. Indeed, I believe they directly misrepresented the opinion of two very respected economists. As an Indian, there is also a little pang that Bhagwati and Panagariya copyrighted the natal utterance of India – it’s very heart and soul – in a book advocating the ultimate removal of labor protections and unions. Contrary to the authors’ belief, Jawaharlal Nehru would not be all to happy with the thrust of this book.
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40 comments
  1. Chanakya said:

    “On the other hand, “informal” includes the roadside bookshop or chai-kadai – where one man is serving about ten people at once, with remarkable quality and efficiency. It includes bookkeepers who make the idiots at formal stores look like a joke – for they can manually search the stacks of novels at their disposal in a tenth of the time it takes a so-called “high-productivity” formal worker to access his computer and direct me to the necessary book.”

    This is a pretty ridiculous argument. You ignore the limitations that all of these informal workers face – They may be efficient and productive given their current size, but that is exactly as efficient as they can ever hope to remain. The informal sector faces serious hurdles in scaling and learning.

    • arra95 said:

      I don’t deny any of that, just the idea that informal is a priori worse. Which is the take Panagariya and Bhagwati support.

      • Chanakya said:

        But that’s exactly why informal IS a priori worse. Shifting to high labour productivity does necessitate a move away from the informal economy. It’s not necessary and sufficient, but it IS necessary. Presuming of course, that one is hoping Indians will not remain shopkeepers or tea sellers or roadside book sellers.

      • arra95 said:

        Look at a formal sector retail operation. Height of inefficiency and uselessness. Completely replaceable by capital. Informal sector jobs, on the other hand? The shop with thousands of stacks where the keeper knows precisely where everything is? The chai-kadai that serves tens of people at once?

        Far more productive. Manufacturing requires organization, granted. Service, less so.

  2. Chanakya said:

    Dude, if all you’re going to be basing your argument on is the in depth study of chai wallas that you’ve done, there’s no point to this. Do have fun.

    • arra95 said:

      Please tell me where exactly I said this? In fact, I’ve ceded both in my comments and post that formal organization is usually better. I’m just saying it’s obviously untrue if there are broad exceptions to the case. There clearly is no point to this if you’re just going to misrepresent what I say. Good day.

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