You see any earthly reason for it? I don’t.
On India’s Republic Day, January 26, the New Delhi-based Centre for Civil Society will launch a campaign for school choice. It’s an apt day for the event. While India’s constitution guarantees universal and free education, the government has utterly failed that mission. It’s time to encourage the private sector to step in.
Public primary education in India is in dire straits. According to a 2006 study by Pratham, a nongovernmental organization, more than half the children who join school in the first grade drop out before reaching eighth grade. A study conducted the prior year by the same organization found that 35% of school-going children surveyed between the ages of seven to 14 failed a reading test involving a simple paragraph; 41% of them couldn’t subtract or divide properly.
Little wonder that private schools are sprouting up like wildfire to fill the gap. Often illegal, these schools don’t just serve the rich and middle classes, but the poor as well. And the quality of education these schools provide is often higher than in their public counterparts. A 1999 government report titled the “Public Report on Basic Education in India” found that private schools across rural parts of North India were vastly superior to public schools in terms of facilities and learning environment. On surprise visits during school days, the researchers found only 53% of the accredited public schools actively engaged in teaching.
The Centre for Civil Society’s campaign aims to enable more parents to send their children to private schools by promoting school vouchers. (Currently, India doesn’t boast any school voucher schemes, though a few are in the works.) Inspired by Milton Friedman, vouchers enable parents to enroll their child in a school of their choice. Variations on the idea include tuition reimbursement and direct cash transfers. In each scheme, the principle is the same: empowering parents with choice to increase competition among educational institutes and engender better quality education.
Much more could be done. Currently, India’s private sector is actively discouraged from setting up educational institutes. To offer state-approved degrees, a school must meet a number of parameters, including government-trained teachers, large playgrounds, and other onerous requirements. Above all — inanely — private schools cannot operate for a profit. Entrepreneurs evade these hurdles through innovative financial structures such as trusts, but the necessity of this kind of manipulation scares away many would-be entrepreneurs. According to a 2001 CCS study, it takes 14 different licenses from four different authorities to open a private school in New Delhi – a task that, if done legally, could take years.
India’s parents aren’t waiting for a government fix. A 2005 study by education specialists James Tooley and Pauline Dixon showed that 65% of schoolchildren in Hyderabad’s slums attend private unaided schools—for which their parents had to pay—rather than a free government alternative. In a similar finding, an October 2006 survey by CCS showed that 14% of households in Delhi earning less than 5,000 rupees ($113) per month opted to send their children to a private school.
It is a common canard that the cost of education is higher in private schools than in public schools. Numerous studies have shown that private schools use capital as much as twice as efficiently as their public sector peers. Why? When competition is absent, waste ensues. Voucher schemes, put simply, allow public money to be put to better use.
As in any society, education is the foundation of future economic success. The Centre for Civil Society’s campaign for school choice may be a nascent effort, but it’s of critical importance to the India of today — and of tomorrow.
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Further resources: Do check out Pratham’s comprehensive reports, ASER 2005 and ASER 2006. Tooley and Dixon’s landmark report is summarised and available in full here. Andrew Coulson’s paper, How Markets Affect Quality (pdf link), is an excellent resource on the subject. You can read about the PROBE Report here, and buy it here and here. Mayank Wadhwa’s CCS paper on the licenses required to start a private school in Delhi is here, and the findings of the latest CCS survey are summarised here.
A version of this piece by me was first published on November 8, 2005 in the Wall Street Journal as “Self-Delusion.” (Subscription link.) It was also posted on India Uncut and the Indian Economy Blog.
Organized slavery ended decades ago, but to go by the criticism of some leftist commentators in India, one would imagine that it is alive and flourishing in the world’s largest democracy.
Recently it has become especially fashionable to hit out at call centers, or business processing outsourcing (BPO) units as they are officially known. A study published by an institute that comes under India’s Labor Ministry compared conditions in Indian BPO outfits with those of “Roman slave ships.” Chetan Bhagat, the author of a new book set in one such unit, “One Night @ The Call Center,” recently claimed that call centers are “corroding a generation.” It is common, almost clichéd, to hear call-center workers referred to as “cyber-coolies.”
All this criticism is terribly misguided. Contrary to being a form of economic imperialism, as its critics claim, India’s BPO industry is an indication of what is possible for a country to achieve with free markets. India’s call centers make use of one of its comparative advantages—cheap, English-speaking labor. More importantly, it empowers the estimated 350,000 people who work in this industry, instead of “stripping them of their dignity,” as a common canard goes.
The people who work in these call centers—indeed, in any company in India—do so out of choice, not coercion. They make that choice on the basis of the options available to them, options which are now far wider than they were a decade ago. When this writer was in college in the early 1990s, it was next to impossible for a young graduate to get a job on the basis of his degree alone.
Today, a working knowledge of English suffices. In the socialist decades after independence a middle-class man could save up enough to buy a house and a car only when he was in his 30s, or even 40s. Today, young people in their 20s can do so. Many of them use their time in the BPO industry to better their lives substantially. Some support families, others save up to go abroad for further education. Some simply make money, a goal apparently anathema to grizzled socialists.
Why, then, the criticism? One of the natural consequences of socialism is that a few stand in judgment of many, and make their choices for them. As India has moved away from the Fabian socialism it embraced on achieving independence in 1947, more and more people have been empowered by an ever-widening array of choices. Socialists in India have seen the Soviet Union collapse, the Berlin Wall fall, and India begin to liberalize. Their beliefs have traditionally been strengthened by what behavioral psychologists call the confirmation bias – accepting only the evidence that seems to support their worldview. Alas, such evidence has been vastly diminished in the last two decades. So they resort to reflexively lashing out at anything related to free markets.
India’s leftist “intellectuals,” and those who aspire to fill their shoes, view the world through a utopia-tinted lens, a utopia that is entirely their own construction. When they examine their own policies, they do so on the basis of the ideal world they are meant to result in, and not the mess they create in the real world. And when they criticize the choices people make in the real world, they do so on the basis of the choices they would have in this utopian socialist paradise.
These “intellectuals” do not condescend just to BPO workers, but to all those Indians whose aspirations are not aligned with theirs and who, typically, have more choices available to them because of free markets. To them, shopping malls are bad because they turn people into consumerist buying machines. They disparage the large number of television channels as being filled with Western junk, ludicrously proclaiming that the one state-owned channel India had two decades ago was better. They do not accept that increased choices are a sign of progress, and condemn the way other people choose to live their lives, insulting them by denigrating their choices.
But times are changing, and such self-righteousness is increasingly being exposed for the self-delusion that it is.
Imagine this scenario: someone kidnaps a child and, for decades, maims and exploits him. Then, in a sudden revelation, we learn that the kidnapper was once under the pay of a branch of the mafia that is now defunct. There is instant outrage, and everyone condemns the crime. “How could you have taken money from the mafia?” they ask.
This is, more or less, what happened this weekend when LK Advani, the leader of India’s opposition, demanded a “public enquiry” into “the biggest scandal of independent India.” He was referring to the recent revelations, in a newly released biography by a well-known former KGB operative, that much of the Indian government had been bought by the KGB in the 1970s.
“The Mitrokhin Archive II: The KGB and the World”, by former KGB archivist Vasili Mitrokhin, details an institutionalized corruption in India that the agency used to its advantage superbly. The book describes how the KGB paid bribes and retainers to members of India’s Left parties, as well as the ruling Congress party.
According to the book, politicians were by no means the only ones on the take, and the KGB had a number of newspapers and a press agency on its payroll in the early 1970s. But of course, it is the details about senior government officials that titillate. Many ministers in the government of Indira Gandhi, who ruled from 1966 to 1984, were under its pay, and suitcases full of banknotes would be sent to Mrs. Gandhi’s house to fund the Congress. The entire Indian establishment, it would seem, was up for sale.
The Left parties, predictably and amusingly, have denounced the book as a CIA conspiracy, while the Congress has maintained what Mr. Advani terms a “guilty silence.” Mr. Advani’s outrage, though, is misdirected. “The biggest scandal of independent India” is not the money that the Indian establishment under. Mrs. Gandhi may have taken from the KGB, but the inspiration it took from the Soviet way of doing things, and the pernicious ideas it borrowed, which condemned millions of Indians to a poverty that still persists, and vastly increased the powers of an already oppressive state.
Many of those policies are still in place – indeed, remained in place even when Mr. Advani’s party was in power – and India, like the kidnap victim of our earlier analogy, is still struggling to break free.
The Fabian Socialism that India embraced under Jawaharlal Nehru, India’s first prime minister and Mrs. Gandhi’s father, and the statist direction he took the country in could be put down to an ideological mistake that many of his generation made. But under his daughter the state became a conscious tool of oppression. Her government used ideology merely as rhetoric, and concentrated solely on accumulating power at the expense of the freedom of citizens.
Economic freedom was the first casualty. In 1969, Mrs. Gandhi nationalized all the big banks in the country. Gradually, this was followed by a series of draconian bills designed to suffocate private enterprise. The Foreign Exchange Regulation Act (1973) restricted foreign investment and imposed currency controls. The Industrial Disputes Act (amended by Mrs. Gandhi in 1976 and 1982) prevented companies with more than 100 workers from laying them off without government permission, thus distorting labor markets and providing a disincentive to industrial expansion.
The Urban Land Ceiling Act (1976) distorted land markets in urban areas, exacerbating the growth of slums. Mrs. Gandhi also reserved certain industries for small-scale companies, denying larger companies from benefiting from economies of scale, and pegging back labor-intensive manufacturing and preventing an export boom.
Mrs. Gandhi admired not just the economic policies of the Soviet Union, but clearly shared that empire’s disdain for democracy and political freedom. In 1975, after a judge found her guilty of election fraud in 1971 and ruled that she give up her seat in parliament, she declared a “state of emergency.” Articles 352 to 360 of the Indian constitution specify that when the country is faced with external or internal threats, the government can impose a state of emergency and assume what are, in effect, totalitarian powers.
The Emergency, as it is popularly known, lasted 19 months. Civil rights effectively ceased to exist, and people who opposed Mrs. Gandhi, including politicians and journalists, were summarily thrown into jail. It was a Stalinesque era. Mrs. Gandhi’s younger son, Sanjay, became notorious for his rampant behavior, bordering on the criminal and similar to that displayed years later by Saddam Hussein’s elder son, Uday. Among Mr. Gandhi’s pet schemes was a misguided family planning program under which thousands of young men were forcibly made to undergo vasectomies.
Mrs. Gandhi revoked the emergency in 1977, called for general elections, and was voted out of power. That was a tactical error, not a change of heart, and it came about partly because of self-deception. She truly believed that she enjoyed popular support, a perception partly based on the reports of intelligence agencies, who naturally told her what she wanted to hear. But the people of India have a short memory and little in terms of choice (and, some would argue, discretion). Mrs. Gandhi did come back to power in the next elections in 1979, using the ironic slogan, “Elect a Government that Works.”
It is tragic that Mrs. Gandhi is still evoked as a hero by members of her own party, and that her policies, which continue to cripple India, still find support. The liberalization of 1991, forced as it was by a balance-of-payments crisis, was partial and half-hearted. The License Raj that Mrs. Gandhi expanded with such autocratic zeal remains largely in place, as do most of the parliamentary Acts that shackled enterprise. Indeed, it is ironic that Sonia Gandhi, her daughter-in-law and heir to the Congress – not so much a party any more as a family heirloom – is commonly lauded as resembling Mrs. Gandhi. This is praise?
The strenuous denials of the KGB payouts and the furor over them repeat the same mistake that the Indian people have made for half a century now – of giving importance to intent over outcome. It makes no earthly difference now whether or not the KGB paid off the establishment in those terrible years. What matters is what the government of the time did, not why it did those things, and the molehill of intent is irrelevant besides the mountain of action. That mountain is in the public domain: the gradual stripping down, layer by layer, of personal and economic freedom. Most of that freedom has still not been restored, and the people of India just don’t seem to care. Even when it affects their own lives so intimately, economics is boring, a spy thriller is much more fun.
The road to hell is paved with good intentions—and nobody knows that better than India’s poor. There can be no better intention than removing poverty but, for more than half a century, a well-intentioned and bloated state has only perpetuated it with misguided policies and regulations. And New Delhi still hasn’t learned from these mistakes. The Indian government is soon to embark on perhaps the grandest waste of taxpayers’ money yet: the Rural Employment Guarantee Bill.
The REGB, recently passed in parliament with unanimous support across political parties, is supposed to provide 100 days of work in a year to every rural household across the country that wants it. This is expected to cost Rs. 40,000 crore (around US$ 9.1 billion), which amounts to 1.3% of GDP. And by some estimates, costs may reach four times that figure. The bill is in line with the rhetoric of the Congress-led coalition government, which came into power last year disdaining the liberalization policies of the preceding BJP government, and promising to introduce “reforms with a human face.”
The problem is that there is no evidence that the Indian Government is capable of properly implementing any social welfare plan. Former Prime Minister Rajiv Gandhi remarked in 1987 that only 15% of the money spent by the government actually reached its rightful recipient. The rest was wastage. Similar distribution schemes—such as the Public Distribution System and the 1976 Employment Guarantee Scheme in the state of Maharashtra—fell victim to inefficiency and corruption, and have all failed to achieve their stated objectives.
These failures have much to do with the the vast Indian bureaucracy, which is designed in such a way that inefficiency is inevitable, and corruption likely. Bimal Jalan, a former governor of India’s central bank, put it succinctly recently when he pointed out that “the most important problem in governance and administration of projects or schemes launched with great hopes is the involvement of a large number of agencies and ministries in decision-making and implementation. It is also common experience that these multiple agencies do not work in unison to resolve any administrative issue.”
Whatever money does make it through all the confused bureaucracy is prone to being siphoned away at the end of the line, where local distribution is meant to take place. The recently passed Right to Information Act, a welcome move that is supposed to increase transparency by forcing the government to make its paperwork available to anyone who wants to see it, can only be of limited help. Most of the country does not even know about it, or would not dare to use it against an oppressive local government.
The REGB will also have economic consequences. Labor markets could be distorted at local levels if the wages paid by the scheme are more than the local rate decided by the market. If the government runs short of funds and makes drafts on private savings held by banks, interest rates could go up. Then there’s the obvious fact that the money spent on this scheme could certainly be put to better use somewhere else. New Delhi could use it to build much-needed infrastructure like roads, ports and power installations, enabling greater participation in the economy and generating more sustainable employment.
The key to generating employment lies in less government intervention, not more. The government needs to reform India’s archaic labor laws, whose inflexibility hampers industrial growth as well as employment. In a variety of repressive ways, firms are not allowed to enter into free contracting, and cannot manage their workforces according to market conditions. In theory, labor laws are supposed to protect workers from being fired, but in practice such laws discourage industrial units from being set up, and hamper entrepreneurship and industrial expansion. The effect is that employment is far lower than it would have been in a free market.
India also needs to shut down its “License Raj,”—the oppressive web of regulations that acts as a massive disincentive to entrepreneurs and businessmen. It is no coincidence that India ranks 118th on the Heritage Foundation Economic Freedom Index, and 127th on the UNDP Human Development Index. Economic freedom and development go hand in hand, and India could have done as well in manufacturing as it has in services had its entrepreneurs been given the freedom to set up businesses without having to apply for myriad licenses, bribe numerous officials, and sometimes spend years in the process. Increased entrepreneurship and industrial growth would have been far more effective than the REGB in generating long-lasting employment.
India’s 58 years since independence have been ones of lost opportunity, with a waste of human capital and millions of lives lost to needless poverty. Successive Indian governments have made all the right noises about reducing poverty, and then followed all the wrong policies. Sadly, the REGB looks like more of the same.
Indian Prime Minister Manmohan Singh is due to visit Washington in a few weeks, and editorialists and commentators have already started writing about the emerging economic power of India. New Delhi’s decision to start liberalizing its economy in 1991 is touted as a seminal event in India’s history, the moment when it threw off the shackles of Fabian socialism and embraced free markets. It is the stuff of myth—and to a large extent, it is exactly that.
While part of India has benefited from being opened up to foreign products and influences, most of the country is still denied access to free markets and all the advantages they bring. India opened its markets in 1991 not because there was a political will to open the economy, but because of a balance-of-payments crisis that left it with few options. The liberalization was half-hearted and limited to a few sectors, and nowhere near as broad as it needed to be.
One would have expected India’s growth to be driven by labor-intensive manufacturing but, almost by default, it instead came in the poorly licensed area of services exports. The manufacturing sector, ideally placed in terms of labor and raw material to compete with China, never took off. India’s restrictive labor laws, a remnant of the socialist infrastructure that India’s first prime minister, Jawaharlal Nehru, put in place in the 1950s and 1960s, were politically impossible to reform. It remains excruciatingly difficult for most Indians to start a business or set up shop in India’s cities.
This is painstakingly illustrated in “Law, Liberty and Livelihood”, a new book edited by Parth Shah and Naveen Mandava of the Center for Civil Society in New Delhi, which documents the obstacles in the way of any Indian who wishes to start a business in one of India’s big cities. Messrs. Shah and Mandava write: “Entrepreneurs can expect to go through 11 steps to launch a business over 89 days on average, at a cost equal to 49.5% of gross national income per capita.” Contrast the figure of 89 days with two days for Australia, eight for Singapore and 24 for neighboring Pakistan.
But often, even this figure is just a notional one, and entrepreneurs find it next to impossible to get a legal permit to start a business at all. Street hawkers and shop owners in the cities often cannot get a license at all. (Even those who do have to comply with draconian regulations that offer so much discretion to the authorities that corruption is inevitable.) They survive by paying regular bribes to municipal authorities and policemen, which are generally fixed in such a way by this informal market that they can barely survive on what they earn, and cannot expand their business or build their savings. They are trapped in a cycle of enforced illegality and systematic extortion by authorities, which results in a tragic wastage of capital. It serves as a disincentive to entrepreneurship, as well as to urbanization, the driving force of growing economies.
Another disincentive to urbanization is how hard it is for poor people to get legal accommodation in the big cities. In Bombay, for example, an urban land ceiling act and a rent-control act make it virtually impossible for poor migrants to rent or buy homes, and they are forced into extralegal housing. The vast shantytowns of Bombay—one of them, Dharavi, is the biggest slum in Asia—hold, by some estimates, more than $2 billion of dead capital. For most of the migrants who live in these slums, India hasn’t changed since 1991. As that phrase from India’s pop culture goes, “same difference.”
India’s policymakers are aware of these anomalies, but it is an acute irony in India that any proposal to reform the bureaucracy has to first wind its way through the bureaucracy. Arun Shourie, a former disinvestment minister and a respected journalist, wrote in his recent book “Governance” that, “proposals for reforming [the] system are adopted from time to time, and decrees go out to implement the measures ‘in a time-bound manner.’ But in every case, the proposal is put through—some would say, it has to be put through—the same mill.”
It is in the nature of bureaucracies, Mr. Shourie points out, to endlessly iterate. He charts how the apparently simple task of framing a model tender document took the government more than 13 years, as drafts of it circulated between different committees and ministries. Anything even slightly more complicated, and with pockets of political opposition to it, like economic reforms, becomes almost impossible to implement. Dismantling state controls is only possible if there is political will and a popular consensus. None of these exist. On the contrary, there is a popular belief that the economic inequalities in India are caused or exacerbated by free markets.
The socialist left, a natural proponent of such views, believes that free markets are the problem and not the solution. India’s communist parties have blocked labor reform, opposed foreign investment and prevented privatization of public-sector units. They naturally have a vested interest in the “license-permit-quota raj,” as the web of statist controls is called. On all these issues they are supported, surprise surprise, by the religious right.
The Hindu right wing, led by the Bharatiya Janata Party and collectively known as the Sangh Parivar, also fears globalization. Its sustenance comes from identity politics, the impact of which is diluted by the opening up of the cultural mindspace to “foreign influences.” If people are busy chasing prosperity and gaining Western liberal values, they will naturally have less time to focus on “the Hindu identity,” and suchlike. Rabble rousers need the masses to be disaffected.
In between the socialist left and the religious right is the Congress, a party which occupies the center of the political space almost by default. Its position on issues is always malleable, and although it is currently the party of government, it leads a coalition that depends on the left for survival. The pace of reforms has not increased since it came to power last year, and is not likely to do so anytime soon. While the world focuses on the metaphorical bright lights of Bangalore, most of the country—indeed, much of Bangalore itself, which has been plagued by power and infrastructure problems recently—remains in darkness.