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.
