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Ashoka Mody: Beware the saviour fantasy

The obsession for a 'strong' leader can prove dangerous as leadership changes in a democracy rarely have beneficial economic effects

Ashoka Mody 

Ashoka Mody

In the contest for the Varanasi Lok Sabha seat between Narendra Modi and Arvind Kerjriwal are arrayed the two anxieties of the Indian electorate: when will the economic engine revive and will there be respite from the daily humiliation of corruption? Only one of the contestants will win the Varanasi seat, but unless the new government lays out a credible path that deals with both, any progress will quickly dissipate.

Economic growth has lifted millions from poverty and must remain the primary objective of economic policy. But the process has also produced a rentier society in which some have become extraordinarily rich - Indian inequalities have returned to the times of the maharajas. This has consequences: in a generation, the new maharajas will be more deeply entrenched. Those who fear that they will miss the gravy train are scrambling for short cuts, perpetuating mediocrity and corruption.

They are scrambling for access to the Indian state where the well-connected make large fortunes. Governments at all levels dole out dubious contracts at inflated costs. The resulting fiscal deficit is financed by captive access to hard-earned private savings, which are devalued by persistent inflation. Until perhaps a decade ago, the system was not so blatant and economic progress filtered down. But in recent years, as the privileged have continued to gain, the hardships encountered by the majority have multiplied.

In his instant classic, "Capital in the 21st Century", Thomas Piketty insists that there exists no self-regulating mechanism to reverse such a rentier system. The consequences are devastating: growth is hurt, cronyism flourishes, and democracy is undermined.

Kejriwal has proven a failed messenger. Without the discipline of hard work in his brief stint as Delhi's chief minister, he anointed himself a saviour. In his impatience, he pursued wild ideas that made no economic or political sense. Not surprisingly, he petulantly threw away the challenge and the opportunity to make a real difference. That his cause remains a magnet for many is a testament to the real anxiety among those who need to fend for themselves.

The other saviour answers the call for a business-friendly government. The phrase "business-friendly" is considered synonymous with "growth-friendly". And that congruence can certainly occur. Indeed, the "strong" leader can, in principle, promote growth and rein in corruption.

But the evidence for this premise is very weak. Academic studies show that leadership changes in a democracy rarely have meaningfully beneficial economic effects. The premise that our past prime ministers have had a material impact on economic growth, either falsely attributes to them the consequences of their circumstances or it implies that some have had de facto authoritarian powers. The harm caused by such powers is well known.

The danger with an obsession for a "strong" leader is clear. Italy - with which India shares a taste for fine cuisine and a brilliant history of art, music, and architecture - warns us of the risks. Italians have repeatedly sought a saviour prime minister and while some have, indeed, dragged the country backwards, even the best-intentioned have been unable to pull the country out its interminable morass.

Piketty's statistics show that of all the advanced economies, Italy has the highest wealth-to-income ratio: aggregate Italian personal wealth is eight times the annual national income. And yet, the Italian government debt has reached levels that maintain perpetual market angst. The only reason Indian public debt is not headed to Italian levels is that inflation, which hurts the weakest, also chews up the real value of public debt.

Italy has low "non-existent" growth and unmanageable public debt. India has declining growth and persistent inflation. Either way, the more vulnerable families and businesses bear the greater economic and social burden. These are not inevitable consequences. They are political choices, reinforced by the adapting cultural norms.

Those who seek technocratic solutions to this political impasse look back for inspiration to the economic reforms of the early 1990s. Those reforms were possible because the Berlin Wall had fallen, industrial licensing and trade barriers had long-since become anachronistic worldwide, and the vent of strong world trade offered alternatives. Even India could not be held back.

Today, the call for technocratic solutions from a strong leader arises from real frustration. Investment projects are stuck, clearances for land and environmental safety have become the source of political patronage, and the bureaucracy has frozen. The tangle feeds on itself. Cutting through it and releasing the pent-up energy will help.

The outgoing government's record was so terrible that the likely new administration will at least partly improve these matters - or so the financial markets think. But what happens next?

Truly bold economic policy must go beyond speeding up clearances for infrastructure projects. Yes, we need that too. But the politics endemic in our rentier system will soon co-opt the gain into self-limiting growth.

The political handicaps that India faces today plague many nations - the differences are a matter of degree. Hence, criticisms of corruption and political connections in India are quickly deflected with the reasonable retort that it is a global phenomenon. With the world economy in a phase of weak growth, the energy devoted to dividing the economic pie is far greater than that applied to entrepreneurship for growth.

In Piketty's vision, the task for Italy - and for much of the world - is far reaching. As Indians, we must pay heed. Winning the big prize requires a steeply progressive wealth tax, with rates going up to possibly 25 per cent on the most wealthy. Those resources should finance a new generation of world-class public schools. Instead of looking with envy at China's authoritarian regime, we should be inviting Shanghai's school administrators - just as the rest of the world is doing - to help set up school systems where teachers are the society's elite who proudly deliver world-class kids.

Sure, this is a fantasy. Even in the land of the Mahatma, the notion that personal wealth is held in trust for the greater good is, at best, quaint. For this reason, the saviour fantasy will live on - and it will continue to disappoint.

The writer is Charles and Marie Robertson visiting professor in international economic policy at the Woodrow Wilson School, Princeton University

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First Published: Tue, April 15 2014. 21:46 IST