1. By Sanjeev Sabhlok, 15 November 2011
Can India catch up? Can Australia do better? - - Giving freedom a chance
By Sanjeev Sabhlok, 15 November 2011

2. Copyright © Sanjeev Sabhlok
Based on personal research and a talk I have given in March, August and November 2011
Related to my book, Breaking Free of Nehru, and draft manuscript, The Discovery of Freedom.
My research is ongoing so this presentation is a sketch.
Note: This talk simplifies complex ideas considerably and focuses on the big picture

3. Structure of the talk An explanatory framework
India is now the world’s largest free market laboratory
Can India catch up?
Impacts on the world: a tsunami of competition unleashed
But opportunities are increasing rapidly
How should Australia respond?
Can Australia do better?

4. 1. An explanatory framework

5. The natural effort of every individual to better his own condition is so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.
- Adam Smith
anticipating the socialists and Keynesians even in 1776

6. Freedom leads to innovation which leads to growth
“Any restriction on liberty reduces the number of things tried and so reduces the rate of progress”
- H.B. Phillips (mathematician)
Key observation
Innovation is not driven by central planners (bureaucrats) who “pick winners”. Such attempts:
merely reduce the number of things that people can try; and
destroy wealth by wasting tax revenues in “projects” that impose no personal consequences for ‘central planners’ (they don’t lose their house and shirt if a $2 trillion Keynesian “stimulus” fails)

7. Simplified explanatory framework Growth = f (freedom, opportunity)
Two obstacles to freedom 1
1) Governance
Nanny, paternalistic state:
interfering policies and laws
“Food police”
Injustice
contracts not enforced
People innovate better if the
government gets
out of their way
Opportunity
(technical
frontier) 2
Innovation
pushes
out the
frontier
2) Social
interfering religious beliefs
science and critical thinking
insufficiently valued
Ideas
don’t
come from
governments 3 n
Governance must
enable liberty
(social reform is not a government’s job)

8. The rise and fall of freedom in the West
Post-1688
1947
1991
High levels
of freedom
Keynesian
socialism
Hayekian
fight back
Bigger government, “fine tuning”, “Keynesian stimulus”, paternalistic regulation = falling levels of liberty
= inability to compete (e.g. Detroit)
Keynesian
socialism
By 1970s most major businesses in the world (including the West) had been nationalised (goal: to control society’s investment and reduce private savings)
Hayekians fought back (his Road to Serfdom underpinned Margaret Thatcher’s work) and prevented the West from going bankrupt in the 1980s
The Keynesians and socialists are behind this decline
Massive welfare state has been operationalised
Currencies severely degraded
The US dollar is worth less than 5 per cent of its value 100 years ago
Borrowings at untenable levels - without productive capacity to repay
Results flowing in : Ireland, Spain, Portugal, Greece, Italy, (USA?)
The take-over of academia
Few economists today know about Adam Smith’s system of natural liberty
Excessive use of the language of “equity” (Fabian socialist concept)
Positive liberty concepts: language of “promotion of health” (paternalism)

9. What’s been the trajectory of freedom in India?
1947
1991
Colonialism Keynesian socialism Some freedom
India’s story: increasing freedom
Colonialism till 1947 – almost zero growth
Fabian socialism till early 1990s – poor growth
Nehru was Fabian socialist. Keynesian ideas were commonly used.
“Commanding heights” of the economy
As is inevitable, India was duly bankrupted in 1991
India borrowed $5 billion from IMF to prevent default
India learnt its lesson and has liberalised (partially)

10. 2. India is now the world’s largest free market laboratory
Can India catch up?

11. India: the world’s largest test case for liberty
Freedom has been increasing rapidly since 1990s in India
Most sectors have been liberalised
Some sectors are free simply because the government doesn’t deliver what it says it will
Overall, still low levels of freedom (on various international indices)
significant opportunity to increase liberty

12. India’s output has responded rapidly to the limited increase in freedom
Historical context
India was the world’s largest economy for most of human history
In 12 out of the last 20 centuries it was the largest
In 6 (of 20) it was the second largest (after China)
Its share of world GDP was between 30 to 33% (comparable with its share of world population)
Poor performance between 1750 and 1990 not due to any innate reason
Key deficit: Lack of liberty relevant to modern productivity society

13. Liberty works – the cases of China and India
Table: Share of world output measured in terms of PPP
China will overtake US, even at current exchange rates, by 2020
Source: IMF’s World Economic and Financial Surveys: World Economic Outlook Database, April 2011

14. But can India actually catch up?
Positives
Westminster model of liberal democracy and laws
Indians take to science and maths as a duck takes to water
Rapid social change is under way, breaking previous barriers
Total factor productivity is rising rapidly
Urbanisation is increasing rapidly
Negatives
Significant misgovernance across the board, including education
High levels of corruption and “crony capitalism”
Massive red tape
Poor infrastructure and continuing poverty

15. Forecast - assuming unchanged governance
Assuming no change to governance
India is very likely to overtake USA by 2030 (10-year lag to China’s)
India will probably overtake China by 2050 (consistent with Citibank’s forecast) and remain the world’s largest economy thereafter
Three reasons:
1. Democracy
India’s democracy makes it resilient
democracy as “shock absorber”
China’s authoritarianism makes it brittle
2. Private sector driven
Led by Indian private companies
Many are now multinational
Significant number of billionaires

16. Third reason: Young population
By 2050, nearly 40 per cent of China’s population will be older than 65

17. But catch-up is not about GDP. It is about per capita GDP
Indian per capita income is 10 times less than the West’s
India may achieve per cent of Western per capita income by 2050
But with current governance it can’t catch up – ever
Gets harder and harder to catch up
Radical change in governance (and society) needed
No current political party capable of delivering the necessary governance

18. Impacts on the world: a tsunami of competition unleashed But opportunities are increasing rapidly

19. Those who catch up can do better (than the leader)
Catch-up hypothesis assumes that followers copy, hence don’t threaten the leader
But that’s not true
it is a myth that the West is “safe” at the “high end” or “design” end
the “design” space being contested by India and China
Intense innovation now occurring in India (and China)
Cut-throat price competition in the huge Indian market
goods now sometimes nearly 90% cheaper
Reversal of ‘brain drain’ occurring
the best Indians aren’t leaving India today –plenty of opportunities at home
Indian migrants abroad are returning (not helped by perceptions of racial discrimination in the West)
many high quality Western managers now working as expats in India
Many multinational companies now have R&D base in India
Many good Western universities have established Indian branches
Indian universities increasing their quality rapidly

20. Examples where India is already one of the leadersIT
$50 billion worth of IT outsourcing to India
Microsoft’s major development centre in India
Hollywood has outsourced much animation to India
Mobile phones
600 million mobile phone subscribers
Lowest charges in the world
Drugs
Half the world’s vaccines produced in India, and significant share of generic drugs
Hospitals (of world-class standard) and medical equipment
Cost of heart surgery = $2000
Cost of delivering a baby = $40
Finance
Major Wall St companies now conduct back office operations from India
Steel
Indian firm now owns large share of world steel plants
Rapid growth of Indian multinational companies
Tens of examples documented
in many recent books

21. Bad news: Mammoth competitive pressure on the West
Creative destruction is underway on an unprecedented scale
Competition from India and China is just one of many pressures
Advanced technology is making thousands of jobs redundant
Customer as producer (supermarket checkouts, airport baggage check-in)
Robotics will at least partially replace teachers, personal assistants, surgeons, and others
A business or society that does not anticipate and adapt will die – quickly!
e.g. Detroit lost 25% of its population in the last ten years

22. Good news: New opportunities
Economic growth is never a zero-sum game!
As the pie expands, new opportunities arise for everyone
New goods, better goods, cheaper goods
Opportunities for Australia include:
significantly increased exports
India is already Australia’s third largest export market ($19.8 billion worth of exports in )
cheaper imports (including outsourcing of high-end services)
huge investment opportunities in India (education, e.g. TAFEs)
increased tourism to Australia

23. 4. How should Australia respond?
- and, can Australia do better?

24. Australia remains inside the technical frontier
Positives
Relatively better managed than most others
E.g. relatively deregulated and flexible financial system
But huge restrictions on freedom, and significant inefficiencies
Heavily padded bureaucracy, and a big government that directly operates schools and hospitals (and buses!) - inefficiently
Paternalistic policies and onerous regulation of most activities
Redistributive welfare with significant churn, hence wastage
Old, ailing infrastructure (e.g. Melbourne’s traffic congestion)
Taxpayer funds dumped into Keynesian black holes (won’t name but obvious)
Habit of “picking winners” and “fine tuning”, thus crowding out R&D and other investment – such efforts are always based on false assumptions

25. How could Australia do better?
Blocking freedom was fine in a less competitive world. It won’t do now:
Increase freedom: Get out of the way
Padding and Keynesian fine-tuning and meddling should come to an end
Many suggestions in Breaking Free of Nehru are also applicable to Australia
Step back from the abyss of the granny (super-nanny) state
Be strategic: Shape the future
Inform but don’t spoon-feed businesses
business associations can do far better than DBI, for instance
Build policy partnerships with India
be seen to be India’s friend, e.g. free trade agreement (already some movement on this front)
build strategic networks with India’s governance system to influence the right kind of change
e.g. Victoria could develop an exchange program for policy staff and executives to work in the Indian government (for 12 months each) and vice versa
Note: Geo-strategic imperatives also support stronger ties with India.

26. The end!
Should you wish to discuss, please write to me at

27. EXTRA SLIDES – IN NO PARTICULAR ORDER

28. More info about the framework used in these slides:
My book, Breaking Free of Nehru
also freely available on the internet
Draft manuscript, The Discovery of Freedom
available on the internet – comments appreciated

29. Quick historical overview
Hunter-gather: till appx.10,000 years ago
Secret of success: muscle power, local knowledge
Outcome: small groups, low per capita “income”, high mortality (Malthusian laws applied)
Settled agriculture: circa 8000 BC-1750
Secret of success: animal power, local division of labour, some trade
Caste system of India led to well-oiled agricultural machine, hence successful
Outcome: some agricultural surplus, small tows and civilisation, low per capita income, high mortality (Malthusian laws applied)
Modern Economic Growth: Industrial: circa 1750+
Secret of success: brain power, global division of labour, global trade
Different rules of the game to the agriculture epoch
Outcome: growth without end, Malthusian laws no longer apply

30. The result: Modern economic growth
>> The Western economies started growing: an unprecedented phenomenon!
Source: Madison
Key characteristics
Relatively slow till 1820 (10s of times the pre-1000 growh rate)
Rapid increase after that (100s of times the pre-1000 growth rate)
Effectively, the industrial revolution is less than 200 years old

31. The Discovery of Freedom (available on the internet)
Key changes since 1400
1: The use of reason
Critical thinking
Islam, through Cordoba, helped recover Greek thought
The questioning of authority
Reformation
Induction and the scientific method – Francis Bacon
2: Constitutionalism and liberty
Origin of democracy
Magna Carta -> Glorious Revolution
Theory of the modern state: Thomas Hobbes, John Locke
Society was earlier the centre. Now the individual
3: The secret of wealth creation (free market)
Commercial institutions created
Modern banks, corporations (e.g. Medici family of Florence)
Invisible hand (Adam Smith)
(Refinements by F.A.Hayek)
Detailed discussion
in my draft manuscript,
The Discovery of Freedom
(available on the internet)

32. India was the world superpower till 1750
India’s performance in recent centuries is atypical
It was the wealthiest region during the agricultural age
Largest arable area till the USA came to the scene
Remained the world’s wealthiest in 12 out of the last 20 centuries
First century World GDP share = 33%
11th century World GDP share = 28.9%
1700 world GDP share = 24.4% (similar share of world trade)
Has India been a ‘victim’ of its long-standing success?
Caste system was well-suited to its agricultural society
It is no longer suitable, but is now very difficult to change
Intellectual stagnation
Major philosophical schools and scientific advance (e.g. number system)
Charvaka’s and Buddha’s ideas transmitted to Greece –> Sophists –> Socrates
The breakthroughs of the modern world arose in Italy (Renaissance)

33. Why did India struggle even after the end of colonialism?
Cause 1: Socialist ideology
By quirk of fate, Nehru the Fabian socialists set India’s policies
Rejected Milton Friedman’s specific advice
Rejected von Mises’s views on India’s productivity
Cause 2: New rules of the game not widely understood
Indian education system flooded with socialists
Economics education extremely poor
Cause 3: Arrogance about Indian history and culture
False pride that refuses to believe that the West could actually offer any learnings to India
Caste system not suited to dynamic societies.

34. Per capita income shot up in the West, then Japan, then…

35. Visual depiction China India
China will become the world’s largest economy by 2016
(Maddison thought 2015, but IMF thinks 2016)
Per capita in China will still (in 2016) be only a fourth of that of USA
Ultimately China could become four times the size of USA

36. Comparative growth of India and China

37. China will overtake US in real exchange terms by 2020
Source: The Economist, 25 June 2011

38. India positives Total factor productivity is rapidly rising
Wherever the government has privatised (or is absent) significant progress has been achieved
IT sector and private sector IT education
Mobile phone wireless network
Source of the graph:

39. Already fifth largest two-way trading partner
India is already Australia’s third largest export market ($19.8 billion) in
Already fifth largest two-way trading partner
Will become second largest trade partner in the next decade
Source: Composition of Trade, DFAT.

40. India key negatives One of the world’s most corrupt governments
Low levels of freedom
Failing institutions e.g. judiciary, press
Insufficient focus on infrastructure
However, it now has the largest private sector investment in infrastructure
Difficult in setting up a business
Labour market inflexibility