This is an archived blog post from The Acorn.
India is in the midst of a burning discussion about the pros and cons of market-friendly reforms and greater economic liberalism. We all know what the package contains—competition, labour-market flexibility, liberalisation of services, lower taxes, and privatisations.
The traditional debate runs as follows. These reforms are “right wing” policies. They may increase efficiency — perhaps even economic growth—but they also tend to increase inequality and to be detrimental for the poorest in society. Therefore—and here comes the typical “socially compassionate” Indian argument—be very careful moving in that direction. Governments should proceed cautiously and be ready to backtrack at any point.
Much of this reasoning is fundamentally wrong. Labour-market flexibility, deregulation of the service industry, pension reforms and greater competition in university funding is not anti-equality. Such reforms shift financing from taxpayers to the users themselves and, as such, tend to eliminate rents. They tend to increase productivity by basing rewards on merit rather than on being an insider. They tend to open up opportunities for younger workers who are not yet well-connected. Pursuing pro-market reforms does not imply facing a trade-off between efficiency and social justice. In this sense, pro-market policies are “left wing”, if that means reducing the economic privileges enjoyed by “insiders”.
If there is no trade-off then between social justice and efficiency in today’s India, why are reforms so slow in coming? Why is the typical “compassionate” Indian voter confused about the pro-poor features of pro-market reforms? The answer is the usual one in political economics—the “insiders” block reforms, although the political mechanisms vary from country to country. Alas, they can’t simply say no to reforms just because they would hurt their interests. They need the rhetoric of defending the weak and poor.
Reformists in India should refuse to be pushed in the corner of the equation: “more market equals more injustice”. It is exactly the opposite. Accepting this equation—and trying to apologise for it—is certainly not the way to win the battle. If the Indian left wants to be able to say honestly that it fights for the neediest members of our society, it must adopt as its battle cry the pursuit of competition, reforms and a system based on meritocracy.
_*With due apologies to Alberto Alesina and Francesco Giavazzi at VoxEU.org who wrote this in the context of Europe. I just swapped ‘Europe’ with ‘India’._
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