Three Economic Books That all Indians Should Read (For Now )

There are a lot of great books on economics out there, and I’m sure the world would be a better a place if every single individual alive were able to read them. Imagine, all the best idea’s in economics familiar with everybody. I’m sure the world would be a more intelligent place. They’d be fewer people who were driven to enforce ideas because of ideological convictions and more people who looked at decisions  an ideas with a rational and logical mindset.   The more a population is made up of these kind of rational characters, the better classical and neo-classical economic theory works (since it’s underlining assumption is that the individual is rational) and the better and more predictive the world of business runs. Wishful thinking? Probably. But in any case in the past few months I’ve come across three great books discussing macro-economic ideas that I think  all Indians should read to better understand the  basic frame-work of liberal economic policy that I believe is very much needed to underly all economic decision making in the country, so as to improve the condition of our country and it’s people.

                 1.       Why Nations Fail, (Daron Acemoglu and James A. Robinson, 2012) is a discussion of just that. And the conclusion of it’s authors ? That the long term success or failure of a nation depend’s primarily on the quality of it’s institutions (the informal and formal laws and rules of an economy)

    Giving very concrete historical examples from Europe, South America, Africa and the United States, the authors reject the other various hypotheses that have come about trying to explain the disparities  in individual and state wealth across the world, such as cultural differences or Geographical differences, a theory proposed by Jared Diamond in Gun’s Germ’s and Steel. A good example that they give to counter these other explanations  is by showing  the difference in trajectory between South America and North America in terms of economic growth. South America had huge resources such as gold and minerals etc. Which could be exploited, and duly were by the Spanish. The Spanish created institutions of authoritarian rule so that they did not have to share the spoils of South America with the Native Indians. In fact the Spanish rule actually forced them to become slaves. The South American Story is an example where the authors say, institutions were of an extractive nature (What they call extractive institutions).  A situation of taking, and not creating scenarios for growth.

The opposite happened in North America.This was because firstly, there were no real resources to exploit in North America. Secondly, the citizens living in North America revolted against the first  real colonists and rulers of North America, the United Kingdom. The reasons were varied and included high taxes (the rejection of which was made famous by the Boston Tea Party incident). In revolting they were fighting for freedom and liberty of the repressive institutions of the United Kingdom. They decided they were going to rule themselves, in a manner opposite to that of how they had been ruled which presumably had been in a very authoritarian, freedom-stifling manner, and so they created a constitution that focused on liberty and individual rights. The rest is history.

  But in South America, no such fight for liberty came about. No similar constitution calling for freedom. The path of North and South America diverged because of this difference. A difference that has lasted all these centuries. 

  For Acemoglu and Scott, it is the countries institutions that determine if a nation manages to remain stable or not. A more liberal, democratic and secular nation is so because of it's institutions which need to be strong and liberal to make a country and it's people equally free and democratic and voice opinions that dissent against violent and discriminatory authority. As important, these institutions  need to continously evolve and allow space for particular processes like creative destruction to get rid of the defunct and anarchic  and allow the growth of the new and more efficient, and more in with the times,  whatever form that may encompass.

    Which means, according to Acemoglu and Scott that the phenomenal growth rate of a  country like China, unless it's leaders decide to give more freedom  to its people in the form of more political and economic reforms, as well become more flexible in allowing creative destruction to replace  the status quo with better systems of accountability and transparency  in terms of institutions  the present  phenominal growth in China  will come to a stand still. This theory is yet to be vindicated . But the overall lesson of the book has important lessons for Indians. There is a large section of people in India  who believe that coming out with law after law banning or restricting something (Like not allowing alcohol advertisments, not allowing dance bars, attempting to ban pornography....the list is very long ) will bring about some form of cultural morality among the population. Why Nations fail rehects that hypothesis, believing that the institution of trust, honesty,  ethics that naturally come about in a  free population will determine what path a nation will head toward: Prosperity or Poverty.

      2. Why Growth Matters (Bhagwati and Panagariya, 2013) – Most Indians who dwell on economics and keep track of the political and economic events in India will  know very  well, the archaic and horribly restrictive laws that control trade and business activity in India to almost kafkesquian levels. This book is definetly good in listing and  detailing all those rules and laws that are cause for  economic growth in this country not reaching it's full potential. For example, there are the restrictive labour laws that do not allow women to work night shifts,   the  Right to Education Law wrongly emphasizes more on inputs such as the area in square feet of a school, teacher to student ratio, and ignores output such as the development of stronger arithmetic, writing and reading ability of children.

     Most important of all,  the book gives an important way of thinking about economic development  that anyone with leftist and socialist leanings should read and understand. The main jist of the idea is that before we can redistribute the economic pie of the country, we need to make that pie bigger. The way Bhagwati and Panagariya discuss this is in the form of what they call track I and track II reforms. Track I reforms are the base reforms that need to be implemented to make the economic pie larger, such as the liberalization of trade (For e.g. the removal of excessive import duty that unnecessarily chokes private enterprise), or the easing of prohibitive regulation(e.g. the monumental and unnecessary amount of check-lists that one needs to complete to open a factory). This makes small scale business come out into the open as they do not need to fear the burden of unnecessary costs that are billed on them due to an erratic, obscure, and punitive business climate. Which in turn means that they can be taxed. The more businesses you are able to tax, the more revenue you get.
   
What do you do with all that new revenue ? you invest in track II reforms  which are more distributive in nature. A national health policy or a national education scheme giving free education to those who pass the 8th grade to incentivise them to complete thier K-12 education are examples of track II reforms.
 
The important lesson here for left leaning socialists is that a government as poor as India's  can't just redistribute to the poor without first  getting some money. The most effective  way to gain that money is by taxing businesses, but first you have to win thier trust that you will not harm them and keep a stable regulatory environment for them in the mid to long term period.

   That will make them come out of the shadows of the black market, where, in india at least, the majority of small businesses (by far the largest employers in terms of total numbers) reside. 

 
3. The Price of Inequality (Joseph E. Stiglitz)- In India we talk about the government and public sector having too much power; discretionary as well as  monopolistic. But Stiglitz argues that other extreme is possible and does occur in the United States. He argues that in the US the businessmen have too much power, He lays accusations particularly at the  1 %, made infamous by the occupy wall street protests. These are the people right at the top of the income scale. He accuses them of being  corrupt, not in the most obvious way, but through lobbying and donations that they give to politicians to influence legislation that Stiglitz claims  helps them and the big businesses that they own and run at the expense of the  rest of the 99%. 

     Stiglitz lays the  blame on the influencing and lobbying power of  the 1% for the many loopholes in the business regulatory environment especially on taxes. These loopholes, Stiglitz claims are created so that these businesses can duck paying taxes. For example, companies have the ability of to park business profits for a few months in tax havens like the Cayman Islands for a few months and then bring it back in the guise of FDI (which according to US law isn't required to be taxed). Another problem ( for which, I must point out Stiglitz does not propose a very clear solution) is the way the judicial structure is implemented. He argues that in the US the businesses with deepest pockets win. Why ? Because cases  can drag on for years and years, and therefore Stiglitz argues that those who are likely to get financially exhausted are more than likely to lose most of the time. Only the larger can pay out billions in litigation fees and fines. Therefore they are the ones that win a lot of the time. They are the ones, according to Stiglitz, that break  most of the rules in the first place.  And because they are able to pay-out the most, they are hardly affected by punitive punishments. It's the small and mid-level business that get affected the most.

 Now I don't agree with the many proposed solutions Stiglitz has to offer. His solutions to solve this monopoly of business are  too simple, raw and socialist for my tastes. In fact as an Indian I cringe a little when I read some of his solutions which are basically stronger business regulations and higher taxes and strong capital controls. I don't like these restrictive kinds of solutions because they are similar in restrictive intensity as the regulations that the Indian government follows at present. And if you want to see the problems that any restrictive controls create for business and finance, please come to India. I'm not denying the problem that Stiglitz is trying to bring our attention to; Just that the solutions need to be more proactive and intelligent  and create efficiency and not ineffiency in all transactions related to business.
  Despite this major flaw of not providing too viable  a solution, I think that this book has a lesson for India.

  In India it is clear that government needs to relinquish it's hold on a number of industries and business regulation overall. But again,  what Stiglitz warns us about in this book is the other extreme: When private business gets too much freedom. Something that is far from occurring in India. However, what is important for Indians to realize, and this book helps to do so,  is that there will always be a fine line that our law makers and regulators will have to tread on.
 
   Assuming the political situation will remain stable,  our law makers and regulators will continue to make mistakes; creating laws that  sometimes lean too much to the left and at other times too much to the right. But if the general trend is to try and keep it on this very thin, centrist line, India should be in a good long term position. Of course, Let's not get ahead of ourselves, we've got a long way to go before we need to worry about this.

  Why ? Well, below is a graph showing the ideal trajectory  the country should take with regard to Private business Freedom and (my guess) of where we are right now. If you agree with me then you know we have a very long way to go before we need to worry about private  businesses becoming the  bad guys. Our government machinery is taking up that position right now.