A New Freedom Movement

Yazad Jal
Economic Times, New Delhi, January 15, 2000

The lack of freedom and excessive regulation of the Indian State affects the poorest hardest, says Yazad Jal.

In India, the fight for independence and freedom from foreign rule began in earnest around 1900. It took us less than fifty years after that to boot the British. But were the next fifty years really the era of prosperity in India? India is the under-achiever of the 20th Century. What went wrong? And more importantly, what can we do right?

Any usual trot of excuses would list an exploding population, lack of education, poor infrastructure, inequality of income, corruption, the caste system, our 'Indian mentality,' etc.

All of the above mislead us into making wrong policies. Japan has a higher population density and is far richer. Many countries in Africa have a far thinner population density and are poorer than India. Kerala's literacy rate is above 90% but its per capita income is half of Punjab's whose literacy rate is barely 60%. Is the 'Indian mentality' such a terrible stumbling block? Indians do very well all around the world, except in India itself.

Looking deeper, the missing component that explains India's poor progress is freedom. Yes-freedom, Economic freedom. In 1947 we gained independence from an alien British Empire, but in 2000 we are still shackled by the omnipresent Indian State, a little better since 1991, but not enough.

Canada's Fraser Institute, along with 54 other institutes around the world including India's Centre for Civil Society have published the Economic Freedom of the World: 2000 Annual Report. The report is the fourth in a series that rates the level of economic freedom in 123 countries.

In the 2000 Report, Hong Kong and Singapore share the top rating of 9.4 on a scale of 10. New Zealand, the United States, and the United Kingdom make up the five freest economies in the world. The least free economy is Myanmar (Burma), with the Democratic Republic of Congo (Zaire), Sierra Leone, Rwanda, and Madagascar ranking in the last five. India at 86th is barely above the bottom.

Economic Freedom and Quality of Life
There are astounding differences in economic and social outcomes between nations that are more economically free than those that are less free. Life expectancy is 20 years longer for people in the 24 most free countries than in the 24 least free countries. Average income per person in the top 20% was $18,000 in 1997, compared to less than $2,000 for the bottom 20%. No country with a persistently high economic freedom rating during the two decades failed to achieve a high level of income. The extent of income inequality is lesser is the top 20% compared to any other segment.

Even social indicators show a wide gap between the economically free and not-so-free. The average Human Development Index for the top 20% is 0.9 compared to less than 0.45 for the bottom 20% (maximum is 1). For a variety of social and political indicators, economically freer countries fared better than the not-so-free. Countries in the top 20% have far lower rates of adult illiteracy, poverty, and corruption. They have better access to safe drinking water, more political rights and civil liberties, higher labour productivity, a more diverse ethnic structure.

This isn't a developed North versus underdeveloped South divide. Several countries from all areas in the world have improved remarkably in economic freedom, with corresponding benefits for their people. Chile's rating rose from 3.7 in 1975 to 8.2 in 1997. Chile now ranks 18th, up from 54th in 1975. Thailand, with a score of 8.2, also ranked 18th in 1997, rated 5.8 and ranked 36th in 1985. The Phillipines scored 4.9 in 1985 and 7.9 in 1997 and its ranking shot up from 67th to 31st. Peru ranked 108th with 2.3 in 1985 tripled its score to 7.9 and is ranked 31st in 1997. Between 1990 and 1997, El Salvador's rating rose from 5.0 to 8.3, and its ranking jumped from 67th to 14th.

India's progress has been rather slow; our score did improve from 4.1 to 5.8 in the 90's but that is not enough. We need to dramatically improve in three major areas.

Figures in brackets relate to India's score in the relevant area in 1997.

The structure of our economy (3.5)
We have the government running far too many industries that should be wholly in private hands - from hotels to aluminium and steel factories. Private enterprise will do a far better job (and does so!) Price controls on a variety of areas distort economic activity and lead to exactly the opposite of what is intended. We need to privatise large swathes of our public sector, remove price controls and rationalise tax laws.

Freedom to trade (4.1)
Since Nehruvian times there has been the mistaken conception that manufacturing is all-important and foreign trade should be side-stepped. The bogey of neo-colonialism resurfaces now as 'swadeshi jagaran.' This attitude ignores basic human instinct as well as the rich tradition of Indian traders through millennia. Barriers to trade deprive ordinary citizens, both producers and consumers of cheaper products. Import licences and quotas simply help those industries that are willing to pay off politicians for their economic protection. We need a far more liberal trade policy and a reduction of import duties.

Freedom of Exchange in Capital and Financial Markets (3.8)
'We've escaped the Asian Crises'-the smug smiles on Indian policy makers and pseudo-intellectuals were very evident during 1997-98. Well, the East Asian economies have now recovered and are back on the prosperity track. India still has exchange control.

Economic freedom is not just an after dinner discussion topic over Belgian chocolates and Colombian coffee. The lack of freedom and excessive regulation of the Indian State affects the poorest hardest. One small example is the knot of regulations covering cycle-rickshaw pullers in Delhi. Delhi has approximately 2 lakh cycle-rickshaws that ply largely in residential colonies and university areas providing an affordable and available service compared to buses or auto-rickshaws. The Municipal Corporation of Delhi has mandated that rickshaw pullers have to be licensed and only 50,000 licences shall be given out. In one fell sweep three-fourths of cycle-rickshaws are now illegal operations. These laws are manna from heaven for the police and petty bureaucracy. Economic freedom means removing such absurd laws and rules. India needs a new freedom movement to remove the shackles still on us.

Table: Economic Freedom in India

New Delhi, January 15, 2000
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