One of our earlier attempts at public policy. Marc and I were
walking around Ann Arbor, Michigan in 1997 or 1998, right after the
nuke blasts in Pokhran. Much of the opinion in India was in a whining
mood and breaking out into ‘We are the world, we are the victims’ song.
It was as if IMF, World Bank, Japan, US and the rest of the world owed
us their money.
We decided to take a different approach. Make use of the
opportunity and get rid of politically directed government to
government or quasi-government to government aid.
The following was published in The Economic times. Interestingly,
lot of what we said then has come true. India, from what I understand,
is now a donor to IMF. The immorality of this can be debated elsewhere.
Read on ….
Why International Sanctions Could be Good News for India
by Raj Cherubal and Marc Cooper
The five nuclear tests recently conducted by India have triggered a
wave of international economic sanctions. From the cutoff of aid by
Japan to the pledge of the United States to thwart disbursement of aid
by multilateral agencies such as the IMF and the World Bank, the
international community has determined that India must be punished for
the Pokhran blasts.
Conventional wisdom claims that poor nations require economic
assistance to lift themselves out of poverty and that by depriving a
poor nation of desperately needed capital that nation will suffer
enough economic harm to change its course of action and bend to the
will of the sanctioning nations. We believe that by displacing the need
for private capital inflows and delaying free market reforms, perpetual
international aid usually causes more harm than good. It is also our
contention that the elimination of handouts will, in the long term, not
hurt India, but could actually help by compelling its political leaders
to accelerate economic liberalization measures which will lead to
enhanced growth.
International aid has created a legacy of dashed hopes, arrested
economic development, and dependency. The sorry history of the IMF
highlights some of the many problems that plague the aid industry. As
recently noted by Bryan Johnson and Brett Schaefer of the Heritage
Foundation, more than 50% of the nations receiving funds have shown no
economic improvement and one third are worse off. At some point it must
be acknowledged that not only has years of economic assistance failed
to help these nations, but that it may have even harmed them. Such aid
permits the political leaders of these nations to continue promoting
failed socialists economic practices and avoid implementing vital free
market reforms that would lead to long term economic growth.
Additionally, capital flows which are directed by political means
rather than by the market are all to frequently misallocated and thus
do little to improve the plight of the nations receiving aid.
Also, international aid can be capricious. Donor nations are
primarily driven by domestic political concerns not the requirements of
the needy nations. So aid can be summarily cutoff just when it is most
needed and thus can be an unreliable source of capital. There are also
questions about sovereignty. Aid usually comes with strings attached
and desperate nations are frequently compelled to placate the donor
countries. India finds itself in this predicament. This naked blackmail
is demeaning to a proud nation such as India and also reveals something
about the motives of the donor countries.
India is a poor nation due to lack of capital. A loss of an
important source of capital, unless replaced by other means, will make
India poorer. While this appears troublesome at first glance, we
believe that it could present a positive opportunity. Faced with the
loss of politically directed capital, India must turn to the private
international market to replace this loss. In order to do so, it must
enact key economic reforms to become attractive to investors, and to
assure them that such investments will be safe from capricious
government interference. With its stable democracy, abundant natural
resources, and a huge middle class which is very much Westernized,
India should have no trouble in attracting enough private investment to
more than offset the effects of sanctions, provided that the requisite
economic reforms are implemented
In the past few years, India has taken some encouraging steps in the
direction of economic liberalization. Such steps have resulted in
strong growth of the kind that is necessary to lift the average Indian
citizen out of poverty. Yet poverty remains a persistent problem so
further reforms are required. These reforms include clear and secure
private property rights, relaxed capital controls, reduction in
government interference in the private sector, removal of restrictions
on foreign ownership of Indian companies, etc.
Many of these measures will face intense political opposition, but
this is where the imposition of international sanctions could help
India’s leaders. By claiming that such measures are necessary due to
the sanctions, the Indian government can use the international
community as a scapegoat and gain political cover. This political
dynamic is just what is required to break the stranglehold of
entrenched bureaucratic and protectionist interests and to accelerate
the pace of economic liberalization.
Instead of being viewed as a harbinger of economic troubles, the
sanctions that are being imposed on India could represent an historic
opportunity. The only path to long term economic growth is via capital
accumulation. If sanctions compel India to enact reforms required to
attract private capital and reduce its dependency on international aid,
than sanctions could be a blessing in disguise.
