Monday, March 15, 2010

Red Tape Indian-Style

Certain times in history belong to specific places. Chicago in the 1890s, New York in the '50's, Paris in the '20s; where all the varied currents in the world seem to come together in one spot and define a moment. Right now the moment belongs to the BRICs; Brazil, Russia, India, and China.

To visit India now is heady stuff. In Mumbai they are repaving the airport's runway with a gang of women using hand tools and baskets full of gravel on their heads. But the airport is busy with new low-fare airlines, and increased middle class air travel is pushing that expansion. An Indian wine industry is gaining real traction.

Our generation is the last to know a pre-reform India--a country that derided its own stagnant economy as the "Hindu rate of growth." There was nothing inherently Indian about the poverty, though. It was the country's forty-year experiment in socialism that held it back. Rampant protectionism, planned economies, and a self-propagating bureaucracy strangled an economy that, at independence in 1947, was one of the developing world's most vibrant and industrialized. Now the restraints are falling away.

Not that there aren't still problems--poverty and inefficiency being the most visible--but it seems that the tide has turned. Venture capital is germinating. Listing rules for public companies have been revised to try and break the tradition of poor corporate governance. And the generation that came of age after Singh's 1991 reforms wants even more liberalization.

For everyone, the lesson is clear. Poor economic development is not the result of innate characteristics. You cannot look at a poor country and say, "They don't know how to do business." Everyone knows how to do business. The question is one of barriers, of laws. In much of the world, it is prohibitively expensive and difficult to form a corporation (the Middle East is notorious for this). That obstacle means only the elite enjoy the benefits of limited liability; lower capital costs, increased ability to take risks, etc. When those barriers are removed, and the market is opened in a way that is responsive to local culture and traditions, the game is changed.

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