On December 29, 2013, my wife and I boarded a United Airlines flight from New York to Mumbai for our first trip to India. We spent three days in Mumbai and one in Delhi. That short trip gave me a chance to observe a tiny sliver of a vast, diverse, and contradictory country. The startling contrast between rich and poor is so vividly etched in my mind that I’d like to devote this column to what I observed on my trip. The country’s many microenvironments and the larger macroeconomic picture help explain the great disparity of wealth.
The View on the Ground
In Mumbai, within shouting distance of heated toilet seats in luxury hotels, there lies squalor and poverty. The exteriors of most of the ramshackle structures that line Mumbai’s packed streets are battered and pock-marked. Upstairs, tiny, decrepit dwelling units lie hidden behind endless amounts of laundry hung out to dry. Downstairs are the small shops that are literally holes in the wall crammed full of merchandise, much of it foodstuff and electronics. There are no large shops in evidence, and the distribution system that services this peculiar form of retailing can only survive because of some hidden set of restrictions that prevent the emergence of larger and more rational forms of industrial organization.
The fragmentation of this system was made real to my wife and me when we sought to buy a local phone to make the occasional call back to family in the United States. What should have been a simple transaction became a major production. At stage one, our intrepid driver weaved and darted through a bewildering maze of streets to a small shop to have my picture taken for the needed government form. Eight copies of the same photograph were duly provided. The next leg of our car trip had us purchase the phone at another tiny shop; the SIM card was procured at yet another shop, smaller than the first.
But we discovered that the phone could not be issued until we complied with government security measures that were put into place after the 2008 terrorist attack on the Taj Mahal Hotel. To comply, I had to secure copies of my passport, along with copies of our driver’s identity card, as he was required to vouch for the purchase. The SIM card was then inserted into the phone only after the proprietor filled out detailed forms. Then we had to purchase a package of minutes. All in all, seven separate stages were needed to execute this transaction, each of which was expertly executed by a reasonably well-educated work force.
This episode raised two obvious questions. First, how could the registration of every phone purchase in India control a terrorist threat when potential terrorists can find other ways to acquire telephones inside and outside the country? Second, why were seven steps needed for a single transaction? There is a strong state bureaucratic impulse in India. The first question shows a mismatch of means to end, while the second implies a maze of protectionist government regulations that block integrated producers from opening up shop in India.
This pattern probably accounts for the many other cottage industries in Mumbai. The details of production are like something out of the nineteenth century. Our first stop was to the food market that operated on a hub and spoke system that long antedates Federal Express. Large numbers of Indian women prepared lunches that bike riders picked up and brought to a central location, navigating murderous traffic with nonchalance. Once collected, the packages were sorted and shipped out on bicycles to their intended recipients. There could have been as many as 100 riders present, and they came and went with as many as 20 or 30 meals, each packaged distinctively. The sorting was done quickly by color-coded papers, with very high levels of accuracy and prompt delivery. Individual ingenuity and group cooperation combine at a very high level to offset the enormous deficits in capital spending.
The situation with the meals was replicated with the Dhobi Ghat laundry. Once again, the hub and spoke system brought heavy laundry of different colors to a central location where at any time some 8,000 to 10,000 dhobis collect, sort, clean, and dry heavy sheets and uniforms before packing them and shipping them on their way. Dhobi Ghat is not just a place of work, but it also serves as ramshackle homes for the families of these workers.
Nearby women prepared round bread wafers with one simple iron implement that they wielded with incredible accuracy and speed, near their homes which were off narrow passage ways, above which were tied bundles of wires that brought TV reception into their units. Out of view were the rag pickers, about whom the less said the better. But the locals have assured me that these people have migrated to large cities from villages where the conditions are even more desperate.
The overall picture that emerges from countless episodes of this sort is not one of the idle poor. Quite the opposite: it is one of ceaseless labor undertaken at high skill levels by men and women who face what in the United States would be regarded as intolerable conditions. Indeed, many of these workers are not regarded as poor in India, but as members of the lowest strata of the middle class, where the median income is about $1,219 per year, which puts India at 142nd in the world. In terms of purchasing power parity, that works out to about US$3,608. The obvious question is what can be done to improve conditions in India.
Micro and Macro Solutions
At the micro-level, there is nothing that any outsider can say to instruct these Indian workers on how best to improve their lives. The problem in India is not with individual character or skills. What is required is an identification of the particular obstacles that stand in the way of local improvements, like the levers that should be pulled in order to lower the barriers to free trade. By the same token, at the macro level, it is possible to make very strong claims about the path that India must follow to continue on the path of growth that started in 1991, when the country abandoned the hopeless forms of Fabian Socialism that Jawaharlal Nehru, India’s first prime minister, brought into public life between 1950 and 1990.
In approaching this problem, it is imperative to reject the all too common line that it is impossible for westerners who work in the classical liberal tradition of Adam Smith and other free traders to make recommendations for the reorganization of Indian society on the ground that its internal social norms, religious practices, and historical traditions are so radically different from those of Great Britain and the United States, where these ideas had their intellectual birth.
At the root of the debate lies this simple but powerful idea. In choosing how a government is designed, we should not dwell on differences in history, culture, and religion. The key question for all societies is whether a country will seek to develop a planned economy behind high tariff walls, which allows key political players to suck out the wealth of a country through a bewildering array of taxes, permits, licenses and regulation, or whether it will move to a different political system in which a strong set of property rights and open competition displace the endless array of state-owned businesses and private monopolies that have proved to be economic disasters everywhere they have been tried.
It is worth noting that Nehru was educated at Harrow and Trinity College, but he showed no hesitation in importing his own destructive brand of Fabian Socialism into India’s alien soil. Nehru’s government failed not because of social conditions, but because the command and control economy that it championed could not overcome the tremendous drawbacks of the modern socialist state. No one at the center has the information to initially and continuously make sensible decisions about allocation, and every well-connected political actor has the incentive to highjack government programs for private advantage. The massive level of government discretion breeds corruption, which is a major problem throughout India.
Today, the central reforms that are needed in India have nothing to do with local cultural, historical, and religious differences. The usual panaceas of minimum wage and housing laws will not do the trick. The conditions are so arduous and deplorable that any more regulations, however modest, would consign millions of innocent Indians to a fate worse than that which they face by stripping from them the few options that are left under the current system.
At this point, the entire enterprise of reform should be directed toward growth. Toward that end, a three-pronged program is very much in order. First, India must prioritize unlimited foreign investment, no strings attached. That investment must be protected against expropriation from confiscation, regulation, and a weak legal system that is biased in favor of home players. The second reform is to remove all barriers of entry and exit into labor markets, by way of licensing restrictions and other similar tests. The third is the removal of all barriers of entry into the real estate markets, so that Indians have the option to shop at and work for western employers, such as Wal-Mart, which can offer efficiencies that cannot be matched by the current hodge-podge system.
There is no question that these reforms will displace many businesses that have been cosseted for too long. But it is one thing to stop these businesses by regulation; it is quite another to offer opportunities that will induce these workers to move to jobs that promise higher wages and safer working conditions. There is no way to improve the overall system by trying to let every current business operate indefinitely in its current form. Nor is it possible to achieve sensible results by embarking on policies, which India today may be poised to do, to increase the level of transfer payments to the Indian poor.
The toxic mix of populism and central planning held India back for all too long. It seems highly unlikely that the country will be foolish enough to return to Nehru’s socialist policies. But just as the progressive spirit burns brightly in the United States, so it burns all too brightly in fashionable Indian intellectual circles. Only in India, there is no margin for error, when literally every decision can make the difference between life and death for a great many people.
Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).