A few weeks ago, a recommendation by economist Tyler Cowen on his blog Marginal Revolution led me to the book "Knowledge and the Wealth of Nations," one of the more enlightening works on economics I've had the pleasure to read. So I was quick to follow another recommendation posted today: "an excellent essay on Indian reforms and why the outsourcing boom started."
Er. Not so much. The essay, "What Detroit Can Learn From Bangalore," by Reason Foundation senior analyst Shikha Dalmia, is pretty standard libertarian fare. The basic thesis: India started booming after getting rid of the regulatory shackles of its old "License Raj." If Detroit wants to reverse its own long decline, it too should cut taxes, et cetera, et cetera. No surprise there; you know what you're going to get from the Reason Foundation, and it's not going to be an endorsement of industrial policy.
That's not to say Dalmia can be easily dismissed. Unlike the paid-for propagandists at think tanks like the Competitive Enterprise Institute, Dalmia has done her homework, and makes a powerful argument. She had me scurrying to look up some papers analyzing the development of India's software industry, a topic about which I don't know as much as I should.
India's government did a great deal to proactively support the software industry, including a long list of tax breaks and other regulatory incentives, along with subsidized education and, most important, the Software Development Parks initiative, which created special tax-free, export-friendly zones for the software industry. But I was bedazzled by Dalmia's rhetorical flourish -- after acknowledging the role that the Indian government played, she then turned around and boldly called it all a big mistake. Bangalore's dependence on the software industry could lead it to be vulnerable to a single economic sector's collapse, she argues, dooming it to eventual decline, just as Detroit was doomed by the failing automotive industry. Plus, it's just not fair to other industries to single one out for help.
"The lesson for Bangalore from Detroits experience is that when government takes the economy in its own hands," writes Dalmia, "three things inevitably happen: It tramples on people's rights; it assists not the most promising but the most powerful businesses; and it squeezes out the spontaneous economic activity that is the source of sustained growth. That is not an approach worth emulating."
Is it really too much to imagine that there are possibilities for economic development in this world that fall between a completely unfettered free market fantasy-land and a totalitarian command economy? There is no question that prior to 1990, India has suffered under an oppressive regulatory regime that severely crippled economic growth. Dismantling the "License Raj" was essential for kick-starting growth, and no doubt there is more to be done along those lines. But one of the reasons why India and China have been two of the star performers, economically, in the world over the past decade, is that even as they opened up their economies, they operated with clear governmental priorities that targeted industrial sectors deemed to be the most advantageous in a competitive global economy. Meanwhile, the world is littered with examples of nations that followed the rules laid down by the Washington Consensus -- and went nowhere.
Libertarians and right-wing free market hard-liners like to keep it simple: Just get rid of those tiresome regulations, and all will be fine. Then you can put Detroit in the same basket as Bangalore! It seems trite to argue, in response, that the world is complex and every country is different, and thus different strategies for growth and development are likely to be appropriate in different situations. What's right for Bangalore may not be what's right for the Rust Belt.