Defenestrating Thoughts from the Bivouac

I couldn’t sleep last night and was thinking more about Slumdog Millionaire and poverty. In yesterday’s post, I mentioned that India has only had its independence for just over 60 years, and the work to build an economy and lift all the poor in India out of poverty was really just picking up steam.

But I missed an important point. While India hasn’t been under oppressive imperial control for 60 years, its only had real economic freedom for the past 20 years or so:

For an entire generation from the 1950s until the 1980s, India followed socialist-inspired policies. The economy was shackled by extensive regulation, protectionism, and public ownership, leading to pervasive corruption and slow growth. Since 1991, the nation has moved towards a market-based system (source).

Some of these policies included:

• Extreme bureaucracy and regulation.
• Unemployment and underemployment, arising in part from protectionist policies pursued till 1991 that prevented high foreign investment.
• Lack of property rights.
• Over-reliance on agriculture. There is a surplus of labor in agriculture. Farmers are a large vote bank and use their votes to resist reallocation of land for higher-income industrial projects (source).

It should be clear what these policies do. The extreme bureaucracy is a huge barrier to entry and protectionist, which prevents bad companies from being replaced by new, better companies. The lack of property rights prevents crucial investments in technology and infrastructure which in turn stagnates the economy. Voting blocks that vote in their own selfish interests cause misallocation of capital and resources.

All together, these policies completely halted economic growth, innovation, but most importantly, it precluded economic mobility: if you were born poor, you’d die poor. And if you were born rich, you’d die rich.

Not surprisingly, when reform lead to economic freedom, poverty numbers decreased dramatically. In India real per capita GDP doubled from 1980 to 2000 while poverty rates dropped from 51% to 26% from 1978 to 1999 (source).

Similar success stories can be found in Botswana, Chile, Ireland, and Estonia.

Economic freedom is essential to having a strong economy. As America and the world considers more “stimulus packages”  in response to the government created recession, we have to stop and consider the effect this will have on our economic freedom and whether we will be inadvertently making the problem worse.