Mon, May 19, 2014 - Page 9 News List

In a race with China, India is at a democratic disadvantage

By Michael Mandelbaum

In an impressive exercise in democracy, about 551.3 million out of 814 million eligible eligible voters participated in India’s 16th general election. Narendra Modi of the conservative Bharatiya Janata Party (BJP), who presided over rapid economic growth in his 13 years as chief minister of the state of Gujarat on India’s northwest coast was elected. Modi won because most Indians believe that he can deliver further rapid growth in the country as a whole.

The election once again demonstrated how different in political terms India is from its giant neighbor, autocratic China. Now, however, the new government must try to match the superior economic progress that China has achieved over the last three decades. To do so, it will have to foster — in a different political context — two key ingredients of China’s economic success.

The first is a robust industrial sector composed of manufacturing industries that use unskilled labor, which would offer a route out of poverty for India’s hundreds of millions of rural laborers and their families. It is the route that China and other countries before it have taken. By contrast, the underdevelopment of the industrial sector has kept India from realizing its full economic potential.

The second ingredient is the infrastructure that all economic growth requires: roads, bridges, ports and schools, as well as reliable supplies of electricity and clean water. Poor infrastructure constrains the industry that India does have. Factories need reliable supplies of power to operate effectively, good roads and railways to source inputs and distribute products and, if they are to export those products, ports for cargo ships and airports for high-value items and business travel. China has these things in abundance. India does not.

Power outages are routine in India, nearly half the country’s households lack any electricity at all, and modern highways are scarce. While a trucker in the US can haul a load 1,600km in about 20 hours, in India the equivalent trip takes four to five days.

The underlying cause of these two shortcomings is one of the fundamental features of Indian democracy — and indeed of all democracies: The power of minorities.

In democracies, people are free to organize themselves and often do so on the basis of common economic interests. Such groups work politically to bring benefits to their members, but the benefits can come at the expense of the general welfare — and in India they have blocked the development of low-skilled industries and high-quality infrastructure.

While India abounds in workers with low or no skills, laws governing employment make it all but impossible for large firms to fire workers, discouraging hiring in the first place. The most efficient companies tend to avoid precisely the industries that could lift millions of Indians out of poverty if established on a large scale.

Similarly, laws restricting land use make it difficult to build facilities such as factories and hotels, which could employ large numbers of people.

It is a particular kind of interest group — trade unions — that promotes and defends the laws that discourage large firms from entering industries that employ unskilled workers. While these laws benefit union members, who make up a very small fraction of the total workforce, they penalize India as a whole. Other interest groups obstruct the growth of employment-creating businesses. Local protesters, for example, sometimes prevent the use of land for industrial and other commercial purposes.

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