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.