India isn?t China not because our forms of government are different; India has not had strong leadership as the UK had
The recent demise of Margaret Thatcher has brought forth a flood of tributes. She had her faults but she was a great leader in the sense that she cared for using power to deliver change than to worry about her standing in the popularity polls. She wanted to be respected rather than loved. To withstand hostility both from opponents and from within her own party week after week and yet stick to the chosen path was her great achievement.
The roots of the challenge the UK faced as did other western capitalist countries during the 1970s was that the oil price shock had changed the relative costs of manufacturing. Countries that had ample labour supply could out-compete the mature industrial countries. Containers could transport entire factories from Europe and America to Asia. Twenty-five years of full employment had strengthened labour unions and the share of profits in value added was shrinking. The Marxist prophecy of the ?falling rate of profit? was at the door.
It was in this context that Margaret Thatcher, Ronald Reagan and Helmut Kohl changed the rules of the game. Each had some local differences to deal with but they reversed the trend towards greater statist involvement and shifted many activities to private hands. Thatcher surprised the Labour Party by even handing over public housing flats to their tenants?giving what Labour jealously guarded as people?s property back to the people. She made many ordinary citizens shareholders, albeit briefly, before they cashed out with a handsome profit when she privatised the nationalised industries. At the end of a decade of upheaval, many western economies had absorbed their loss of industry and shifted to a service economy. Today, we are seeing another shock to that system but in the meantime 25 years of prosperity have been gained.
Yet, the crisis of a shrinking surplus?profits?was not just the problem of advanced capitalist countries. The socialist economies were suffering from the same disease. In their case, it was a lack of innovation outside the military sector and low rise in total factor productivity which was the problem. The USSR could produce more output as long as more inputs were available but not more output per input.
There were hesitant experiments with liberalisation. Alexei Kosygin tried to liberalise as did Mikhail Gorbachev much later. But Gorbachev chose political liberalisation?Glasnost?above economic liberalisation. The USSR crashed out without a shot being fired by her enemies. The Eastern European bloc followed due to the same reason?inability to raise surplus. In their case, the problem was compounded by their borrowings on the international market when credit was cheap during the 1970s but they could not repay their debt as they could not export and earn hard currency.
China was in trouble due to entirely different circumstances. Ten years of Mao Zedong?s fantasy economics?Great Leap Forward?had caused a famine where 40 million people died and this was followed by 10 years of Cultural Revolution which disrupted the economy even more. Yet Deng Xiaoping was able to see that the socialist economic model was bust, both in its headquarters and at home. My own hunch is that he saw how prosperous Taiwan had become. For a Maoist, the idea that Taiwan could be anything but a miserable failure was shocking. He studied Taiwan, Singapore and Hong Kong, and concluded that he had the same raw material in terms of human capital?the Chinese people?and he could, by following their example, get the same results. He saw the central importance of achieving high surplus by raising productivity and testing the efficiency of enterprise by asking them to export.
The paradox is that authoritarian systems could not transform themselves while democratic systems could. Thatcher could impose pain on her people and still get re-elected because the voters saw the necessity of what was being done. Leonid Brezhnev to Mikhail Gorbachev?all had their power but the deeply conservative system failed to change itself. The issue was winning over the elite and the elite had no reason to give up their privileges. The system went down like the Titanic did with ideological violins praising the socialist experiment, especially in India.
India had the democracy but lacked the strong leadership. The Narasimha Rao-Manmohan Singh reforms were bold only by Indian standards. Even after 20 years the permit-licence Raj endures and so do the bloated public sector enterprises like Coal India Ltd and Food Corporation of India. The nationalised banks are captive buyers of government debt and the educational system has failed to produce a single world-class university. Compromise and consensus are the driving dogma and no wonder the results are so muddled. India is not China not because China is authoritarian and India is democratic, but because India has not had strong leadership as the UK had.
Don?t hold your breath. There is not likely to be much fundamental change whoever wins in 2014.
The author is a prominent economist and Labour peer