“Growing middle class is the most exciting social transformation”

In conversation -- Tom Palmer, a senior fellow at the Washington based think-tank Cato Institute


Trithesh Nandan | April 10, 2012

Tom Palmer, a senior fellow at the Washington based think-tank Cato Institute, first heard of India when he was a kid. Whenever he refused to eat, her mother would say, “Eat your food, there are children starving in India.” Times have of course changed since. During his many visits in recent years Palmer has had to look hard to find the India of his mother’s description. He was in New Delhi recently, on an invitation of centre for civil society, this time to talk about a book he has edited, ‘The Morality of Capitalism’, in which eminent economists and commentators including Jagdish Bhagwati, Swaminathan S Anklesaria Aiyar and Gurucharan Das have contributed chapters. In an interview with Trithesh Nandan, Palmer explains why the title of his book is not an oxymoron.

When capitalism is under fire after the global financial crisis, you are talking about its morality.
Absolutely, I think people have mischaracterised the nature of capitalism. The first point is that they have confused free market capitalism with cronyism. That is really an important distinction. A system in which you have private profits and public losses, companies get bailed out and powerful executives get all kinds of government privileges is not the market system but cronyism and state interventionism. Cronyism is a feature of interventionism and not of capitalism as such.

But isn’t cronyism part of the package?
Let’s look at capitalism. It can be marred by cronyism. There have been societies in the world diminished by cronyism dramatically. We should strive for a society without cronyism. When we get rid of licence raj, permits and privileges, you diminish the ability of the powerful and the clever who build the system to manipulate it. There is a very robust inverse co-relation between economic freedom and corruption. When you have free open market, you don’t have to wine and dine the politicians to get access to the market, you have much less corruption and cronyism. It is possible to wipe out cronyism and there are good policies to do that.

If more economic freedom means less corruption, why did the black money outflow out of India increase in recent years?
The reason why people take capital out of their country is that they feel insecure or heavily taxed. I think Indian policymakers would be well advised to look at the problem. The real question is what has happened to the average income of the population... it has risen quite dramatically—and not just for the upper level of society. The middle class has grown so rapidly in India that it is the most exciting social transformation in the history of humanity. However, the tragedy of the reforms (is that they have) not been extended to the bulk of the population in agriculture. In fact, the reforms have not been initiated in this sector. The persistence of income gaps is striking in India, but it is not due to liberalisation.

Are you calling for second generation reforms then?
That’s very important. There is enormous inefficiency in the distribution system throughout the country. This means that people in remote areas suffer. Their goods can’t be brought to the market and middlemen gobble up a huge amount of the gains which should have directly gone to those poor people.

Some commentators talk of crony capitalists in India influencing policymaking post liberalisation.
Those people who have resisted the furthering of market reforms are cronyists. They don’t like losing their privilege positions, market share, government protectionism, government subsidies that they enjoy. Actually, they don’t want people coming in and competing with them, as we say in economics, competing away the rents that they receive from the protected and privileged position. What needs to be done is not to increase interventionism because it causes more cronyism. We need to go and smash all of those monopolies very robustly. Anybody should come in and be able to compete with anybody else regardless of whether he is a friend of the prime minister or finance minister.

What do you have to say about the GDP obsession of capitalist economies?
It is not capitalism but socialism that focuses on state planning or something like GDP. It is a statistical artefact. What matters is that what is available to people in terms of consumption. State planners love these numbers as they can manipulate these figures. A simple farmer who brings tomato to my table is adding value. Someone who is providing a service like a rickshaw driver or airline pilot is adding value. Actually, no businessperson cares about GDP. When every person is adding value, he will generate a big increase in the real GDP but the market economy is not GDP oriented. It is geared towards adding value.

Critics blame income disparities on capitalism, liberalisation or globalisation.
I don’t think it is because of any of those things. Why is South Korea wealthy and North Korea not? It is not language, culture or history but pure economics. Why is South Korea much richer than Ghana though both were on a par in 1966? That year South Korea adopted liberalised market reforms and it prospered and its income rose over 30 times. In Ghana, they struggled through socialism, state planning and cronyism, and suffered. Only in the last few years, Ghana has seen some positive economic growth as they have begun to liberalise.
There is a huge rise of middle class in India in recent years. This is very positive as numbers of poor people who are coming to the middle class bracket is increasing. It is very positive for the future and portends well for the democratic culture of India.

What about the flip side of this rosy picture—the poor India?
It is an important question as to where the change is taking India. The transformation is not happening fast enough. For example, the Indian state education system has failed many poor communities: you go to school, the building is not there and teachers do not turn up. The voucher system is much better to empower parents to take their own decision. People should be given incentives to make the choice. I am optimistic about India but it is temporary optimism to recognise that market liberalism has not reached the whole population.

India was not affected by the financial meltdown, because we have protective restrictions in place. Your comments?
It is based on a misunderstanding, the reason that India was not affected is because it is still not fully integrated into the global market system. That is one of the reasons also for India relatively lagging behind and not catching up with the other countries. Maldova, one of the poor countries, was also not affected by the financial crisis. But I will not recommend that people in Germany should exchange their lives with those in Maldova. The wealthy countries suffered a temporary setback and then they are slowly recovering and are moving forward. India and Maldova were not as integrated into the global economic flow, so they were not affected. Both these countries are much poorer than the countries which are integrated into the global system. Yes, Britain was knocked down during two years of economic slowdown after which a slow recovery is coming. However, that’s much better than not having economic growth in the first place.



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