Don't Let Populism and Central Planning Wreck India

By Richard Epstein

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.

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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.

Originally published by the Hoover Institution.

(AP Photo)

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