Markets: Eerie calm

Markets: Eerie calm

it is not clear when market sentiment can change; as in the past, it can be quite sudden.
At a turn and yet not

At a turn and yet not

RBI could be tempted to cut policy rate to support growth at its bi-monthly review.

Column : Indian State must do only three things

Aug 04 2009, 22:12 IST
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SummaryThe economic transformation of India rests on three things. Macro economists like myself get agitated about issues of exchange rate policy, interest rates or the institutional structure between the RBI and the securities regulator.

The economic transformation of India rests on three things. Macro economists like myself get agitated about issues of exchange rate policy, interest rates or the institutional structure between the RBI and the securities regulator. Fiddling around with these things is not unimportant, but it is not going to make the difference between success and failure. And let us be clear what failure means, because for armchair intellectuals like myself, and those who do most of the writing and reading, national economic failure does not have huge consequence. It means, quite literally, life and death for our poor neighbours. It means more, and more sustained poverty, and poverty means high infant mortality rates, low life expectancy rates and much misery in between. Slumdog millionaire is fiction. The three things that will make a difference are, in order, of importance, education reform, judiciary reform and public sector reform.

Many of my socialist friends will consider this a right-of-centre agenda. All I know is that the single most important way to empower poor people, to lift them out of poverty, to transform the life chances of their children, is to educate them. And at the same time, the State is very poor at doing this. It spends not insignificant amounts of money on education, but too much of it is spent on State administration, failing schools or underperforming teachers. Administrators and teachers’ unions are at the centre—not children and parents. Which is why you have the ridiculous situation of poor parents scratching and scrambling to send their kids to private school. This is a generalisation. Some public schools are a success. But at a national level, publicly funded education is not doing enough to educate and empower the poor.

We need to take the entire education budget, divide it by the number of children and give it to parents to spend only on education and guarantee a real increase of 5% per year in this parental entitlement. Publicly funded education, privately delivered, with set standards and obligations. There are many who deep down actually hate the idea of empowering the poor. They would rather get paid to line them up, shout at them and tell them what’s best for them and their kids. Unsurprisingly, parents are abandoning the system. Huge resources, expensively corralled and collected, are spent on a service that most would reject if they could.

We have touched on re-arranging public education before and so let me move to another issue. Judicial reform. One of the reasons why India will overtake China in my lifetime is that India is a democracy—of sorts, I know, but more of a democracy than China. A critical component of democracy is an independent, and efficient judiciary. If you get justice, but only if you wait for ten years and spend a fortune on lawyers, this is not the kind of justice that all can share. Nor is it the kind of justice that businesses and investors can rely on.

Today, international big business loves China and hates India. They can cosy up to the Chinese government, talk in grand tones of national strategic partnership and walk away with a State monopoly somewhere. In India they are stuck in the courts for ten years. We can say with equal amounts of shame and pride that what really brought down Enron was not US regulators, its blue chip banks or world-class auditors, but the length of time they spent in Indian courts. There are other countries, some poor, some large, who manage a more efficient legal system and we need to learn from them. The economic consequences, far less the human and social consequences, of letting the lawyers hold us to ransom is too large to countenance any more.

Once we have helped to empower people through education, provided health care and safety nets for the most vulnerable, defended the country and established fair and efficient rule of law, the next role of government is not to get in the way of law abiding citizens doing their business. We have some competition between state governments and there have been advances with e-government. There is much more than can be done. Queuing up for half a day to get my driving licence, or waiting six months to get a business permit, or lying in hope for the positive outcome of a random planning process are considerable costs that impede our daily lives and inhibit investment. It is a big problem for those who cannot send their driver to queue up for them, or did not go to private school with the public servant.

Policies in these directions, if not detail, would make a big difference to India’s economic success. But they are unlikely. Each would threaten a powerful group: teachers unions, lawyers, the public service and the middle classes who have learned to ride “the system”. No government wants to do that, unless of course, they are in government to lead.

The author is chairman, Intelligence Capital, chairman, Warwick Commission, member, UN Commission of Experts and member of the Pew, US Congressional Task Force on Financial Reform

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