Human societies are rule-based. Rules not just define human societies but rules also differentiate between societies. Sufficiently large collectives of of people (say 100,000 or more) are indistinguishable in terms of their endowments because we all belong to the same species and we are just random draws from the same gene pool with minor variations. IF that is so, then what’s the origin of the inequality we observe in the wealth of nations? Why is Burundi not as wealthy as Sweden? The answer is that different societies follow different sets of rules, and the outcomes differ. Out of all the rules, norms, customs and traditions of a people, the formalized high-level set of rules is called the constitution.
In the following piece, co-authored with Rajesh Jain, I argue that India needs a new constitution. It was published today in Quartz. Here it is, for the record.
Why India needs a new constitution
The widely acknowledged fact that non-resident Indians are successful in the US in general—and the Silicon Valley in particular—stands in sharp contradistinction to the fact that Indians are not very successful in promoting India’s prosperity. Even after seven decades of Independence, the country has failed to become a developed nation.
The question why that is so needs an answer not for any academic reason, but because the prosperity of more than a billion people hinges on it. Without understanding the precise reasons for India’s continued under-performance, it is unlikely that it will break out of this trap.
A quick review of factors that could potentially prevent a country’s economic growth is useful. Among those factors that destroy all possibilities of wealth creation are devastating foreign invasions or protracted wars; decades-long chronic internal civil conflict; frequent country-wide natural disasters such as earthquakes, floods and droughts; acute lack of natural resources; total lack of human, social and cultural capital, among others.
Clearly, in India’s case, those factors do not apply—either individually or in combination. That leaves two factors that were not mentioned but could explain India’s case. One is divine decree and the other is poor governance. Assuming that the gods are not maliciously inclined towards India, we focus on the government factor.
The claim made here is that the proximate reason for India’s lack of progress are policies that prevent sustained growth, and that these policies ultimately derive from the Constitution of India.
Economic policies flow from the type of government and its objectives. Growth-oriented governments implement policies that promote economic development. Contrast that with governments that implement extractive policies, which retard or altogether prevent development, primarily because extractive policies are not consistent with development. It is the Constitution that directly determines what kind of government a nation has, and thereby indirectly the economic policies.
Economic policies have consequences. How an economy performs depends on policies that the government implements. Nobel prize winning economist Douglass North observed that “economic history is overwhelmingly a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth.”
Is there any reason to expect Indian governments to be exploitative? History provides a plausible answer. For nearly a century, India was under comprehensive colonial British rule. As can be rationally expected, the government that the British imposed on India was not primarily directed towards development, but rather towards extraction. That is only reasonable because wealth extraction is the rationale for colonial rule.
The British, therefore, created the institutional structures, which necessarily includes the government that controlled India through comprehensive government control of the economy. This structure administration and control was left intact when the British decided to leave India, and was taken over by the government of Independent India. Although India attained political independence from the British raj, Indians did not become free of a controlling—and extractive—government.
Independence brought political freedom to Indians, but not economic freedom. The positive correlation between economic freedom and the prosperity of a country is so robust that the causal link between the two is impossible to miss or deny. Countries with the most economic freedom are the most prosperous. Consider the Fraser Institute’s Economic Freedom of the World: 2015 Annual Report, in which they rank 157 countries for the year 2013. In the first quartile, the most economically free, you find the prosperous large advanced industrialized countries such as the UK (10th rank), the US (16th), Japan (26th) and Germany (29th). The fourth quartile is the least free and understandably economically backward countries like Iran, Brazil, Argentina and Venezuela. India falls near the bottom of the third quartile (114th), behind Mexico (93rd), Russia (99th) and China (111th).
As noted at the beginning, Indians are not incapable of creating wealth. Where they have economic freedom, they do prosper. Indian Americans constitute the most economically successful of all ethnic groups in the US, with a median annual household income of around $100,000, which is nearly double that of the US as a whole. This fact is noteworthy because it points to a fundamental structural difference between India and the US even though they are both large democracies. This is a consequence of the “different rules of the economic game,” which arises from differences in the Constitutions of the two countries.
India’s Constitution is very large, gives the government enormous powers to intervene in the economy, allows the government to enact laws that discriminate among citizens based on attributes such as sex, religion, and caste, restricts freedom of speech, and limits the right to property. In short, it allows deliberate political and economic exploitation. The US constitution, by contrast, is short, grants freedom of speech, protects property rights, prohibits discrimination among citizens, and limits the power of the government.
The most salient distinction between the US and Indian Constitutions lies in the relationship between the people and the government that the two define. The US Constitution places the people as the principal and the government as its agent. This is evidenced in the limits that the Constitution imposes on hthe power of the US Congress. The Indian Constitution places the government as the principal and the people as its agent—as can be expected of a government that is essentially colonial in nature. Like the British government before it, the governments of post-1947 India impose what’s known as the “permit, permission, license, quota control raj.”
The deleterious effects of the license-control-quota-permit raj are too evident. Economic policies frame the economic environment and, therefore, the economic opportunities. Competent people who lack economic opportunities vote with their feet—if they are able to—in search of greater economic freedom. Looked at it this way, Indian Americans are economic migrants and economic refugees. The wealth they create for themselves and their adopted country is immense, but it also represents the wealth that could have been potentially created in India but was lost. The government of India, while celebrating the successes of NRIs, must also do a bit of soul-searching and ask why so many Indians are compelled to leave India.
India is a functioning democracy. General elections are regularly held and power is transferred routinely and peacefully. Every election is met with great hope that with different political leaders, that things will change for the better. But, although the governments and leaders change, there is very little real change. Regardless of which party or coalition of parties is in power, the policies hardly change.
Nobel laureate economist, James Buchanan Jr, wrote, “It is folly to think that ‘better men’ elected to office will help us much, that ‘better policy’ will turn things around here. We need, and must have, basic constitutional reform, which must of course be preceded by basic constitutional discourse and discussion. This is our challenge.”
The conclusion has to be that India’s problem is structural and systemic, and not idiosyncratic. If the Constitution were to change, the ultimate rules of the game would change, the policies (the derived rules) will change, and thus the action on the ground (the play of the game) will change, and therefore the outcome will change.
India needs a new Constitution that is consistent with a nation of free individuals living in a complex, modern, large economy. This modern Constitution has to be one that guarantees economic freedom to the individual, prohibits the government from making any laws that discriminate among citizens, guarantees freedom of speech and the press, prohibits the government from entering into businesses that are properly the domain of the private sector, and so on. In other words, India needs a Constitution that protects the comprehensive freedom of the individual: economic, social and political.
India’s journey will not be successful by doing a new paint job on the car, or even getting a more competent driver, if the basic problem is under the hood. Perhaps India needs a new engine because the old one is broken and can never deliver the power needed for the journey.
The IPO season is back with a bang. First, the company behind the Cafe Coffee Day chain Coffee Day Enterprises will hit the markets today with its IPO to raise around Rs 1,150 crore or US$ 176 million. Then, later this month, India’s only profitable airline, Indigo, will open subscriptions to its Rs 2,500 crore or US$ 400 million IPO.
It is so easy right now to start a business working out of your home but it is not actually quite so easy to make that business, start making you money. And this is where a lot of entrepreneurs find themselves. And this is why a lot of entrepreneurs quit. How can you make sure that you do not become one of these people that this happens to? Do you know these three major issues that cause entrepreneur to drop out of the race? 1. Stuck in Reverse Are you stuck looking back at all the mistakes you have made and the reasons why you think you cannot succeed as an entrepreneur? Maybe you think that because no one in your family has ever done […]