March 26, 2013

HOW TO LIFT A NATION OUT OF POVERTY: Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries, by Columbia University professors Jagdish Bhagwati and Arvind Panagariya is reviewed by Diana Furchtgott-Roth in the Washington Examiner:

Bhagwati and Panagariya show how India’s economic reforms started in earnest in 1991 after a balance-of-payments crisis. Before 1991, India’s economy was characterized by extensive government intervention, with strict industrial licensing for capacity creation and utilization. The results were Kafkaesque. Bhagwati told me that the problem with India was that Adam Smith’s invisible hand was nowhere to be seen.

Before 1991, India’s inefficient public sector tainted not just natural monopolies but every kind of activity. Public-sector enterprises were often given monopolistic positions, with no private entry allowed and with import controls preventing foreign competition as well. When India produced inputs such as steel, the inefficiency undermined several user sectors in turn. Hence, India’s share in world trade and trade-to-GNP ratio declined. Direct foreign investment shrank, and in 1991 equity investment into India had fallen almost to $100 million — less than the annual budget of some major American universities.

Bhagwati and Panagariya show that the 1991 economic reforms swept away industrial licensing, reduced tariffs and opened the way to entry by private firms into industries previously reserved for the public sector, forcing all to compete.

New businesses such as Jet Airways entered private aviation, forcing Air India to raise its level of performance. The effect was a sharp rise in India’s growth rate, followed by a reduction of poverty.

In contrast, America has gone in precisely the opposite direction. Some call this “bad luck.”

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