Thoughts on economics and liberty

Tag: Freedom in India

Is the tide turning? Is India becoming receptive to capitalism?

Finally, some good news. Nearly 60 per cent of the respondents from India in a survey conducted by Globescan reported a positive or strongly positive view about free markets. 12,884 people were interviewed across 25 countries. This is not a particularly great sample but perhaps it can provide a feel for the overall direction?

If this survey is even remotely useful, it would indicate that the tide of socialism is now beginning to retreat in India. After destroying the lives of millions of Indians, socialism could be on the way out. 

Is India Breaking Free of Nehru?

This is also good news for the Freedom Team which could find more members and supporters in the coming years. 

Methodology for the survey

The question used was: Please tell me if you strongly agree, somewhat agree, somewhat disagree, or strongly disagree with each of the following statement: The free market system and free market economy is the best system on which to base the future of the world

The results

The  results of this survey are considered accurate within +/- 3.0 to +/- 4.9 per cent. 

How does India fare against others?

This graph from  The Economist is self-explanatory. I'd hazard a guess that in the coming decades those economies that have greater confidence in freedom will outperform those that do not. 

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The beliefs of the liberal

Classical liberalism has been vindicated in the 20th century through the collapse of totalitarian regimes in Germany and Italy, and communist USSR. Attempts in the West to promote a social democratic welfare state have also floundered badly. These ideas – that give the government a role beyond delivering law and order and a modicum of infrastructure – have by now been thoroughly discredited.
 
Freedom First has bravely defended classical liberalism in India for over 57 years in the face of socialist delusions. But not only have liberal ideas emerged unscathed, the only things that have actually worked in India since independence are based on the liberal philosophy. Thus, its 1950 constitution has defended at least some civil rights, and the liberal economic policies forced upon reluctant socialists (after they had bankrupted India in 1991) have helped it recover from a disastrous experiment with socialism.
 
Despite the sterling success of liberalism (even in India), even today there is no national liberal political party, and the shenanigans of corrupt socialists continue, unchecked. It is crucial for liberals to assert the moral claims and worldly benefits of liberalism, and to put to bed socialist and other collectivist ideas that have harmed India for so long.
 
Why freedom?
Liberalism gives primacy to two key values: life and liberty. It asks for the protection of “autonomous spheres in which the ends of the individuals are supreme” (Hayek). It asks that we must be allowed to do what we want as long as we don’t harm others.
 
This crucial value – of freedom – can be explored from two angles: the moral and empirical. The moral imperative requires everyone to be treated equally under the law, which means everyone should have the same freedom of action. All moral theories of justice also lead us to freedom. Individual justice (not social justice: a vacuous concept) is the other side of the coin of freedom. The idea of justice makes sense only where free-will prevails. Only a free man can be held to account.
 
The other aspect – empirical – argues that freedom is the only value capable of ensuring a harmonious society. The liberal, as a scientist, observes human weaknesses and limitations; and hence promotes a system that will permit us freedom but hold us to account. Another key empirical justification for freedom is that it generates huge amounts of wealth.
 
Institutions of liberty
The institutions of liberty are designed to empower self-interested individuals with widely differing tastes to cooperate voluntarily to achieve their personal goals using knowledge which is scattered across the society. I highlight below some of the key institutions below. A detailed excursion into liberty and its institutions is provided in my draft manuscript, The Discovery of Freedom (http://discovery.sabhlokcity.com/).
 
The state – for the defence of our freedom
Liberalism opposes anarchy. A state (nation) with an agreed boundary and government is the basic liberal institution. Also, “[o]ne must be in a position to compel the person who will not respect the lives, health, personal freedom, or private property of others to acquiesce in the rules of life in society. This is the function that the liberal doctrine assigns to the state: the protection of property, liberty, and peace” (Ludwig von Mises). The government must therefore perform the key functions of defence, justice, and police. In particular, justice must be quick, proportionate, and accessible.
 
Limited government
Functions beyond these core areas of responsibility can be taken up by a government only where a strong case for the provision of public goods, or a level of equal opportunity, exists. In doing so, the government must not reduce our liberties, nor skimp on the delivery of its core functions. It is particularly important also that each citizen is allowed to pursue his own happiness the way he or she pleases. The government must never become our nanny.
 
Live and let live
A harmonious society can arise only when no one is permitted to forcibly impose his personal beliefs (religious or otherwise) on others. Note that liberalism is not against religion. Far from it. But it does demand tolerance and freedom of expression. It is intolerant of intolerance.
 
Separation of the domains of the state and religion
The liberal state is non-denominational. It does not support nor comment on any religious matter. Thus it does not make religious law, nor fund religious activity. Religions, similarly, are expected not to impose their demands on the functions of the state.
 
Participative government
As part of equal freedom, every adult should have equal political rights – including democratic franchise. Different views exist, however, on which form of democracy is best. Based on an analysis of incentives (see Breaking Free of Nehru: http://bfn.sabhlokcity.com/ for details), I recommend continuing India’s current form of democracy, subject to a few reforms.
 
Limited democracy
There is a belief among some liberals that the ‘will of the people’ is supreme. This is incorrect – to the extent that such ‘will’ tramples on the liberty of a minority. Just as the government should be restricted to its core functions, democracy should be limited through constitutional safeguards that disallow the rule of the mob. Democracy is not an innate social value. Our freedom is.
 
Accountable government
The authority we give to the government is not a blank cheque for whimsical taxation or interference in the economy, or whimsical support for one group at the expense of another. The citizen, as principal, is entitled to hold his agent – his political representative, and the government – firmly to account. The executive must disclose the reasons for its decisions to the parliament, and the parliament must return back to the people every few years to renew its mandate.
 
To bring about greater accountability, the governance system must align our agents’ incentives (i.e. of MPs, MLAs and bureaucrats) with ours, so that our agents advance our security and welfare, not just their own. This means, in particular, that MPs’ and bureaucrats’ compensation must be high enough to eliminate corruption, with a major part of it linked to performance indicators of freedom, integrity, and prosperity.
 
Rule of law, and general rules
As Hayek noted, “[t]he great aim of the struggle for liberty has been equality before the law.” The state must not create special laws for special ‘classes’ of people – whether religious or otherwise, or favour particular businesses at the expense of others. (For instance, it can’t give the powers to issue currency only to a single bank.) Further, the functionaries of government should comply with, and disclose precisely how their decisions are compatible with the general rules. There is no place for whimsy in the free society.
 
Reasonable equality of opportunity
Free societies generate huge quantities of wealth, leaving only a tiny residue of poverty. But while a harmonious society can exist even with extreme economic inequality, poverty dampens the allegiance of the poor to the nation. For many other reasons, as well, the liberal accepts the need for a direct social insurance mechanism that supports, at a frugal level, those who fail to earn a minimum livelihood despite their best efforts.
 
These, in a nutshell, were the beliefs of the liberal. Clearly, India is far from being a free society. The liberals have a lot of work ahead of them to bring freedom to India.
 
Freedom Team of India
FTI (http://freedomteam.in/) is looking for Indian liberals to step forward and lead India to freedom. Please join or otherwise support FTI!
 
[This article by Sanjeev Sabhlok was published in Freedom First on 1 February 2011]
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Laissez faire!

The key lessons about free markets and wealth generation are summarised in BFN, thus:

Recapitulating, a free society generates wealth by the simple expedient of letting markets function without undue hindrance. It creates institutional frameworks to govern markets with a view primarily to ensure justice. India should seek to build market governance institutions of this nature; these institutions must remain fully accountable to us. However, even Western societies find it hard to manage regulators who often hijack policy and start enforcing things they were not asked to. The government and citizens, together, must strongly curb such tendencies.

Given space constraints I will not discuss how these institutions are to be created [DOF contains some more details on this issue], but we can learn much from the experience of the West and from their literature on economic reforms. While endorsing most of the standard literature of economics and economic reforms, I would like to suggest a few words of caution:

  • Our future is too important to be left to economists. We must never let economists monopolize the thinking that we need to put in as concerned citizens. The literature of economics should be used to supplement our holistic thinking; not as a primary source of policy ideas.
  • Economists are driven primarily by the goal of economic efficiency. They do not base their advice purely on the principles of freedom. They are therefore likely to propose interventions by governments on grounds of market failure, information failure, information asymmetry, ‘equity’ and so on. We should soundly reject such advice. We need to back off from any intervention by the government unless it is proven without doubt that such intervention will improve our freedoms including our accountability. Let us follow the imperatives of freedom and we won’t go wrong.
  • Next, we should never use the pretext of ‘equity’ more than once in society’s decision making. If poverty is being addressed by a branch of the government (say, which is implementing the negative income tax), then all other parts of government should provide whatever it is they are required to provide, without reference to equity. Let there not be a thousand policies each trying to remove poverty. That will significantly increase poverty.
  • Finally, policy makers are usually very weak in their understanding of good governance and how to implement things. Policy makers, indeed each of us, must therefore learn more about what drives bureaucrats. We must ensure that bureaucrats have the right incentives, and we must tightly control our bureaucrats.

On the whole, it is relatively easy to build free markets. All we need to do is to get out of the way. Laissez faire!

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India once again found to be “mostly unfree”

Here's India's economic freedom score for this year: "Mostly unfree", with a rank of 124 – well below that of Botswana (28), Mexico (41), Kuwait (42), Uganda (76), Namibia (77), Rwanda (93) and Tanzania (97), and even below Bhutan (103), Pakistan (117) and Sri Lanka (120).

So much for those who claim that India is getting more free. Hiding like an ostrich with our head buried in sand is not a useful strategy to escape from the bitter truth that Indian policy is in SHAMBLES.

Note that I don't quite agree with Heritage Foundation's simplistic index of freedom, and would prefer a more nuanced one if possible, based on some of the suggestions made in Breaking Free of Nehru, but this index is useful nevertheless, as a proxy. We ignore its results at our peril.

36.3

avg 64.6

35.0

avg 49.0

67.9

avg. 74.2

40.0

avg 48.5

73.4

avg. 75.4

50.0

avg 43.8

76.1

avg. 65.0

34.0

avg 40.5

67.5

avg. 70.6

57.7

avg 62.1
India’s economic freedom score is 53.8, making its economy the 124th freest in the 2010 Index. Its score is 0.6 point lower than last year as a result of declines in freedom from corruption, business freedom, and monetary freedom. India is ranked 24th out of 41 countries in the Asia–Pacific region, and its overall score is below the world average.
 
India continues to move forward with market-oriented economic reforms and has achieved average growth of about 9 percent over the past five years. The economy has been driven by information technology and other business process sectors. Despite sluggish progress in reducing onerous non-tariff barriers, the trade regime has gradually become more open, with its average tariff rate decreasing.
The state still plays a major role in over 200 public-sector enterprises. Public debt is 80 percent of GDP, leaving little fiscal room to react to the global downturn. India’s overly restrictive regulatory environment does not facilitate entrepreneurship or realization of the economy’s full potential. Corruption is pervasive, and the judicial system remains inefficient and clogged by a large backlog of cases. Labor freedom is especially weak, with rigid regulations a costly impediment to further economic growth and job creation.


The overall freedom to start, operate, and close a business remains restricted by India’s regulatory environment. Starting a business takes an average of 30 days, compared to the world average of 35 days. Obtaining a business license requires more than the world average of 18 procedures and 218 days.


India’s weighted average tariff rate was 6 percent in 2008. Large differences between bound and applied tariff rates, import and export restrictions, services market access restrictions, import taxes and fees, complex and non-transparent regulation, onerous standards and certifications, discriminatory sanitary and phytosanitary measures, restrictive import licensing, domestic bias in government procurement, problematic enforcement of intellectual property rights, export subsidies, inadequate infrastructure, and complex and non-transparent customs add to the cost of trade. Twenty points were deducted from India’s trade freedom score to account for non-tariff barriers.


India’s tax rates are relatively high. The top income and corporate tax rates are 33.99 percent (30 percent plus a 10 percent surcharge and a 3 percent education tax on that total). Other taxes include a dividend distribution tax, a tax on interest, and a value-added tax (VAT). In the most recent year, overall tax revenue as a percentage of GDP was 18.8 percent. [In my view this is too low]


Total government expenditures, including consumption and transfer payments, are relatively low. In the most recent year, government spending equaled 28.2 percent of GDP.


Inflation has been relatively high, averaging 7.7 percent between 2006 and 2008. The government subsidizes agricultural, gas, and kerosene production; applies factory, wholesale, and retail price controls on “essential” commodities, 25 crops, services, electricity, water, some petroleum products, and certain types of coal; and controls the prices of 74 bulk drugs that cover 40 percent of the market. Another 354 drugs are to be brought under controls by a new pharmaceutical policy. Domestic price and marketing arrangements apply to commodities like sugar and certain cereals. Fifteen points were deducted from India’s monetary freedom score to account for policies that distort domestic prices.


Foreign investors generally receive national treatment. If licensing is required, procedures do not discriminate against foreign companies; however, in certain consumer-goods industries, export obligations and local content requirements are imposed. Foreign investment is prohibited in multi-brand retailing, legal services, security services, nuclear energy, and railways. Foreign investment in real estate is limited to company property used to do business and the development of some types of new commercial and residential properties. Bureaucracy is non-transparent and burdensome, and contract enforcement can be difficult. Foreign exchange, capital transactions, and some credit operations are subject to approvals, restrictions, and additional requirements.


Liberalization and modernization have allowed more private banks to compete, but state-owned institutions continue to dominate the banking sector and capital markets. Currently, 28 state-owned banks control about 70 percent of commercial banking assets. Access to financial services varies sharply around the country. High credit costs and scarce access to financing still impede private-sector development. Foreign banks account for less than 10 percent of total assets. Foreign banks operating in India may not directly or indirectly retain more than a 5 percent equity stake in a domestic private bank. Insurance is partially liberalized. Capital markets have been developing but remain illiquid, with foreign participation limited.


The legal system imposes a number of restrictions on the transfer of land, and titling problems can make buying and selling difficult. There is no reliable system for recording secured interests in property. Because of large backlogs, courts take years to reach decisions, and foreign corporations often resort to international arbitration. Protection of intellectual property rights is problematic. Proprietary test results and other data about patented products submitted to the government by foreign pharmaceutical companies have been used by domestic companies without any legal penalties.


Corruption is perceived as significant. India ranks 85th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2008. Corruption remains a major concern, especially in government procurement of telecommunications, power, and defense contracts.


India’s informal economy remains an important source of employment. The non-salary cost of employing a worker is moderate, but dismissing an employee is costly.
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