Taxed by Democracy

The Wayback Machine - https://web.archive.org/web/20160706071423/http://wakinggiants.net/articles/taxed.html Taxed by Democracy? home The Economist calls it the greatest show on earth. With over 650 million eligible voters and thousands of candidates, elections in the world’s biggest democracy are staggering in their scale. India is rightly praised for staging them in what is basically a free, fair and nonviolent manner. This year, the surprise defeat of the ruling coalition, which defied pollsters and media pundits, is being celebrated as a triumph for democracy. Yet, when the curtain fell on May 13, Indian voters did more than show that they have the power to do the unexpected. They also left their country, and the world, with profound and troubling questions about the relationship between democracy and economic development. Much of the post-election analysis praises voters for not being taken in by the hype surrounding the ‘India Shining’ campaign, a ‘feel good’ marketing blitz launched by the ruling NDA in order to counter the usual anti-incumbency factor. (Sitting governments almost always lose in India, due to the corruption and inefficiency of local politicians. Undoubtedly, this played a crucial role in this year’s stunning upset.) Yet the ‘hype’ was grounded in reality, not mere rhetoric. India is emerging as a key player in the global economy, life is improving for an ever growing middle class, the vibrant IT sector, which survived the Internet bust, is in the midst of an outsourcing boom, the overall economy grew at above 10 % in the last quarter, outpacing China for the first time in at least 20 years. Its growth for the last fiscal year was 8.5 % making India one of fastest growing countries in the world. Secularists, meanwhile, are delighting in what they perceive as a vote against the Hindu right. The defeat of the BJP, they believe, speaks of a country-wide rejection of an ugly nationalism that manifested itself in the destruction of the temple at Ayodhya, changes to history textbooks, and the terrible riots in Gujarat. Yet one of the most encouraging aspects of this year’s elections was the extent to which the BJP had already marginalized the Hindu right, choosing to focus instead on economic prosperity, stable government and peace with Pakistan. India’s jittery post-election markets have provided a different analysis. Despite denial among reformers, it is hard to interpret the result as anything other than a popular revolt against globalization and economic liberalization, delighting left-leaning Indian columnists and politicians. Nowhere is this more obvious than in the devastating defeat of Chandrababu Naidu in the Southern state of Andhra Pradesh. Naidu’s loss matters because -- incredible as it may seem -- he is one of the very few democratic politicians in the world to run on a platform unapologetically focused on economic growth. It is often said that India pays a price for its political freedom. Inside the country this is known as a ‘democracy tax’, a term which is used to explain India’s failure to compete with China, in everything from health and literacy to trade and poverty rates. For nine years Naidu seemed to counter this unpalatable idea that a commitment to rapid economic development depends on authoritarian rule. Under Naidu’s leadership, Andhra Pradesh was the first state to directly negotiate a World Bank loan and was leading the way in privatization. His government focused especially on massive urban renewal for the state capital, Hyderabad,

reinvigorating the city both economically and aesthetically. With its clean streets, well managed parks and glossy buildings, ‘today’ writes the Asian Wall Street Journal, ‘Hyderabad looks like what India aspires to be.’ Confident of his record, Naidu’s campaign slogan was simple: ‘vote for development’. Naidu’s strategy, during his time in power, was to stimulate the economy by concentrating on certain high growth sectors. In particular he relied on an obsessive commitment to IT. Nicknamed ‘the laptop minister’, Naidu famously converted all of his ideas into power point presentations, and insisted on regular video conferencing with all his staff. His government pioneered a host of ‘e- government’ initiatives and implemented IT-friendly policies aimed at encouraging both software development and outsourcing. The goal was to replicate Bangalore’s success. In this Naidu scored an early and impressive coup when, in 1998, he managed to convince Microsoft to set up a vast research center in the State. Since then Hyderabad’s software export industry has grown at an average annual rate of more than 140 %. At the center of this vision is Cyberabad, a high tech suburb, where giant mirrored buildings with names like Cyber Towers, Cyber Gateway, and - most recently Cyber Pearl - house all the major players in the IT industry, both domestic and foreign, including Microsoft, Infosys, GE, Satyam, Oracle, and Dell. These mega-complexes are complemented by a variety of private companies, educational establishments, exhibition halls and entertainment centers that are springing up in the area. Hotels, apartments and recreation areas are under construction and projects in the pipeline include a hardware park, a biotechnology park and an international airport. By the time of the elections Cyderabad was one of the most important IT hubs in the country. The ambition, scale and speed of Hyderabad’s development reminds one of the science-fiction landscapes of Hong Kong or Shanghai. It is when witnessing the vast transformations in Andhra Pradesh that one feels most confident of India’s ability to keep pace with the giant dragon next door. Yet, if Hyderabad shares China’s promise it also faces many of the same problems. The most important of which is the fact that in the process of liberalization and opening up, the losers blame government policies while the winners congratulate themselves. In China this divide, between those who have benefited from reforms and those who still have not, is evident in the sharp contrast between the vibrant coastal cities and the relative stagnation of the rural west. In Andhra Pradesh it was this same divide that brought the government down. While an urban middle class enjoyed the pleasures of a flourishing city, outside the capital farmers suffered from a severe drought, many committed suicide and many more embraced the opposition’s promise of free electricity and a revival of the subsidies culture that Naidu’s development plan had sought to destroy. Everyone agrees on the importance of spreading the benefits of globalization as widely as possible, and the governments of both India and China could do more to help the rural poor, through land and agriculture reform, consolidation of property rights and increased urbanization. Yet it is also the case that development and absolute equality do not go hand in hand. As Deng Xiaoping, China’s great liberalizer, said: though the goal is ‘prosperity for all’ this will only occur if some are allowed ‘to get rich first.’ India and China are both trying to encourage an exhilarating pace of change in certain sectors of their economies while not leaving others too far behind. Yet, the cruel fact is, that China seems able to negotiate this difficult balance with more flexibility and with a longer term approach because its leadership is shielded from elections. In his book The Future of Freedom Fareed Zakaria argues that democracy should not be naively confused with the liberal institutions that underpin social and economic freedom. While most dictators, he writes, have ‘ravaged their countries for personal gain’ it remains true that: over the past fifty years almost every success story in the developing world has taken place under a liberal authoritarian

regime. Whether in Taiwan, South Korea, Singapore, Chile, Indonesia, or even China, governments that were able to make shrewd choices for the long term were rewarded with strong economic growth and rising levels of literacy , life expectancy, and education. It is difficult to think of a Third World democracy that has achieved sustained growth rates like those of the countries listed above. Those that have gone down the path of reforms are quickly stymied by the need to maintain subsidies for politically powerful groups. India has been unable to engage in sustained reform largely because its politicians will not inflict any pain -- however temporarily -- on their constituents. As a result, for all its democratic glories, the country has slipped further and further behind on almost every measure of human development ... All this is not to suggest that India should embrace authoritarianism. As authors Daniel Yergin and Joseph Stanislaw write ‘India’s commitment to democracy stands as one of the great achievements of the second half of the twentieth century.’ The ability to oust its leaders has no doubt saved the country from long periods of war, famine and tyranny. India has not suffered from anything like China’s ‘Great Leap Forward’ or ‘Cultural Revolution.’ Indians already enjoy a vibrant free press, and we have yet to see how Beijing will manage the inevitable transition to greater political freedom. ‘Democracy’, as Churchill famously said, ‘is the worst form of government except for all the others that have been tried.’ Moreover, the story of this year’s election is far from over. Perhaps a Congress-led government will sustain and even strengthen reforms. This seems more likely after (the somewhat undemocratic) decision to pass the leadership from Sonia Gandhi to Manmohan Singh -- one of the original architects of economic liberalization in India. Alternatively, the pace of reforms could slow, hobbled by political infighting and irresponsible populism. If this should happen those of us who believe that the strength of globalization in the 21st century depends on the rise of India will be hoping that Chandrababu Naidu, or someone much like him, will be waiting in the wings -- and that next time they will win.