Tuesday, December 01, 2015

Why such intolerance of reforms?

How have Japan, Korea, Singapore and China become so rich while India has remained poor? They took advantage of an abundance of cheap labor to manufacture cheap goods which they exported to other countries. In other words, they used the poverty of their people to grow rich. Businesses are of 2 types - tradable and non-tradable, explains a professor from Harvard. Grocery stores, beauty parlors, and movie halls are examples of non-tradable activities. However, countries cannot produce everything and so have to import them from other countries. Oil, planes and even food have to imported. To pay for these we have to sell products that other people want, a kind of gift exchange system. But other nations cannot be forced to buy our products because they have a wide choice of producers from different parts of the world, which means that the products we manufacture must of high quality, at reasonable prices, so that they can beat the competition. Quality can only come from a high degree of specialisation and a low price from very high productivity. Our diamond polishing sector is an example of using cheap labor to produce high quality finished products, 90% of which is exported. To manufacture goods for exports requires highly skilled labor, great infrastructure and a constant upgrading of technology so as to be the best. Nokia, once the largest handset maker, has almost disappeared after the appearance of the IPhone and oil prices have dropped more than 60% because of US shale oil production. It is very hard work. Much easier to have a protected market, with import restrictions, which make it easy to sell shoddy products to fellow citizens, and lots of tax exemptions to make easy profits. The Ambassador car started to die when the tiny Maruti 800 hit the roads in India. Socialism was written into the constitution by the Congress which protected our fellows and allowed redistribution. That brought the country to near bankruptcy in 1991, when Narasimha Rao instituted the first phase of reforms, by devaluing the rupee and opening up many sectors of the economy to foreign competition. The Congress has tried to wipe out his achievements. AB Vajpayee continued the reforms which led to the high growth rates between 2004 to 2007, which was squandered by the Congress on expensive social schemes to buy votes. Now Modi wants to continue their path with tax reforms, which will bring down corporate tax rate but eliminate all exemptions. He wants to stimulate manufacturing so that people have jobs and are not dependent on handouts. In the US 34 to 56 cents leak out of every dollar spent on redistributing wealth from rich to poor. In economics this is known as 'Okun's bucket'. In India 84 paise leak out of every rupee. Reforms will severely cut this loot. That is why there is a manufactured outcry against 'intolerance'. Actually it is intolerance of reforms. By the crooks.

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