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Friday, January 26, 2007

Understanding the Emergency of 1975-1977

Capitalism and freedom

Great reading on Milton Friedman, by Gary Becker, Samuel Brittan, Brad DeLong, Paul Krugman, Ila Patnaik, Richard Posner, Larry Summers, Martin Wolf. For me, personally, growing up around a cancerous State in India in the 1970s and 1980s, Friedman's ideas obviously resonated. Capitalism and Freedom remains one of the most important books of my life.

Understanding the Emergency

For all of us who are used to Indian democracy and freedom, and the success of India, the Emergency (1975-1977) was a shocking failure. For those 18 months (roughly 2.5% of the life of post-independence India), we descended to the ranks of the ordinary authoritarian third world country. I think India's slide into socialism and the loss of liberty makes for a great illustration of the themes of `Capitalism and Freedom'.

Sometimes, it is felt that Nehru and Mahalanobis converted India into a socialist country. However, a more careful reading of the evidence suggests that in the early years, there was only a thin overlay of a State with a relatively free economy. There was even a sense amongst early planners - supported by views in the private sector - that the role of the State was to do the stuff that the private sector could not do, such as large capital-intensive problems which were out of reach of the then-fledgling financial sector. The process of taking away economic freedom did begin pretty early, when capital controls came in, but for a while after that conditions did not deteriorate sharply.

Indian economic policy really turned sharply towards socialism after Indira Gandhi became PM. See two articles on this by Shekhar Gupta and Ila Patnaik. In a fascinating recent article Party linkages and economic policy: An examination of Indira Gandhi's India, Charles Robert Hankla argues that the `Congress system' involving a party with a deep set of linkages to the populace was (a) breaking down and (b) controlled by `the Syndicate' and not Indira Gandhi. The license-permit raj she chose to emphasise represented a short-term political strategy to use the levers of economic policy to reward supporters and punish opponents in an environment where she was politically weak.

In the Indian case, then, we see two facts: (a) economic freedom was greatly curtailed from 1966-1975 and (b) political freedoms were curtailed in 1975. In the spirit of `Capitalism and Freedom', we wonder: Is there a link between these two facts?.

By 1975, the State was very, very powerful. The State controlled the profit rate of every firm in the country. I believe this made it difficult for people to criticise the government. There were isolated elements of rebellion in the media like Indian Express, but they were the exception. I think socialism enabled a fearful silence in the public space, which set the stage for the Emergency.

We can actually discern a two-part influence of the economic policy mistakes of the 1966-1975 period. From 1966 onwards, the economic policy got worse, so growth suffered, giving a discontented population, and raising a political challenge to the administration. But at the same time, this same bad economics enabled the administration - that controlled the commanding heights of the economy - to announce the Emergency.

Looking forward

Looking forward, the power of the State has been greatly diminished. The profit rates of a large number of firms are completely unaffected by the State. This has surely enabled greater dissent; more people are willing and able to speak out. This helps reduce the probability of a future Emergency. And, the level of discontent is lower because better economic policy has given higher GDP growth.

India now appears to be well placed to harness the synergies between expanding political freedom and expanding economic freedom. Expanding economic freedom is giving expanding political freedom, and expanding political freedom is placing restrictions on the ability of the State to take away economic freedom.

As an example, India has a very embarassing set of restrictions on the media - a role for the State that no liberal society should accept. But thanks to growing prosperity, millions of households have the Internet and are able to access all the newspapers, radio and television that the government tries to block. Citizens have greater voice so if the government tries to take away economic freedom - e.g. making the rupee inconvertible on the current account - there would be an uproar which no administration can countenance.

In China, there is a fundamental tension between growing economic freedom and growing political freedom based on the question about what will happen to the CPC. In India, my sense is that incremental progress on both fronts is feasible and synergistic; there are no fundamental roadblocks that inhibit the emergence of India as a liberal society in the 21st century, where the term `liberal' applies to both politics and economy.


  1. One reality, to my mind, it the apparent disconnect the persons in "power" have over the mindset of the "ruled" ! One sees mid-70s prescriptions liberally sprinkled across, divisive politics, reinstatement of controls - in fact, measures which any economy/country having a semblance of pride would have hoicked out of the window ! Till such time as there is a connect in aspirations of masses & policies of the elected, we would need to bear the pain. The mind boggles at the time taken !

  2. "there are no fundamental roadblocks that inhibit the emergence of India as a liberal society in the 21st century, where the term `liberal' applies to both politics and economy."

    I am not so sure about that. Looking at the reservations debate (or non-debate) and calls for over hauling the constitution itself (by a state governor no less) do not bode well. If 60s and 70s were about taking away economic freedoms without a word of serious protest, now it seems the freedoms in the name social experiments - reservation in jobs (both public and private), education - are taken away from vast number of people.

    This is being done by our apparently enlightened economist PM! Middle class India is still under assault by their government. Free middle class a main ingredient for economic and social freedoms to prosper.

  3. Hi. Your blog rules!

    I have a question: China Construction Bank (CCB) acquired 100% equity in Bank of America (Asia) Ltd on 30th Dec 2006. What does this mean for the Chinese banking system, and its trade relations with the US? Are banks in China & the US really insolvent?

  4. The "Free to Choose" TV series is available on Google Video, and is really fantastically made.

  5. Ajay,
    Have you ever read "Atlas Shrugged" by Ayn Rand?

    No doubt Friedman advanced utilitarian arguments for freer markets, but seems like the bigger barrier is cultural. Ayn Rand made a primarily ethical case for capitalism.


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