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Harness the power of the middle class

Narendra Modi’s challenge will be to overcome the obstacles to growth-promoting policies, using democratic methods. Michael Mandelbaum writes.

ht view Updated: May 27, 2014 23:36 IST
Michael Mandelbaum

The Indian election once again demonstrated how different in political terms India is from China. However, the new government, which sworn in on Monday, must try to match the superior economic progress that China has achieved over the last three decades. To do so, it will have to foster, in a different political context, two key ingredients of China’s economic success.

The first ingredient is a robust industrial sector composed of manufacturing industries that use unskilled labour, which would offer a route out of poverty for India’s hundreds of millions of rural labourers and their families. It is the route that China, and other countries before it, has taken.

The second ingredient is the infrastructure that all economic growth requires: Roads, bridges, ports, and schools, as well as reliable supplies of electricity and clean water. Poor infrastructure constrains the industry that India does have. Factories need reliable supplies of power to operate effectively, good roads and railways to source inputs and distribute products, and, if they are to export those products, ports for cargo ships and airports for high-value items and business travel. China has these things in abundance. India does not.

Power outages are routine in India, nearly half the country’s households lack any electricity at all, and modern highways are scarce. While a trucker in the US can haul a load a thousand miles in about 20 hours, in India the equivalent trip takes four-five days.

The underlying cause of these two shortcomings is one of the fundamental features of Indian democracy, and indeed of all democracies: The power of minorities. In democracies, people are free to organise themselves, and often do so on the basis of common economic interests. Such groups work politically to bring benefits to their members, but the benefits can come at the expense of the general welfare — and in India they have blocked the development of low-skilled industries and high-quality infrastructure.

While India abounds in workers with low (or no) skills, laws governing employment make it all but impossible for large firms to fire workers, discouraging them from hiring in the first place. The most efficient companies tend to avoid precisely the industries that could, if established on a large scale, lift millions of Indians out of poverty. Similarly, laws restricting the use of land make it difficult to build facilities such as factories and hotels, which could employ large numbers of people.

It is a particular kind of interest group — trade unions — that promotes and defends the laws that discourage large firms from entering industries that employ unskilled workers. While these laws benefit union members, who make up a very small fraction of the total workforce, they penalise India as a whole. Political minorities also inhibit the construction of infrastructure and the development of the educational system that India needs by using the democratic process to divert resources to themselves, which then cannot be used to build roads or pay teachers.

Modi’s new government cannot — indeed, must not — abolish the democratic rules that permit minorities to flourish. So Modi’s challenge is to overcome the obstacles to growth-promoting policies, using democratic methods. Here, the election has brought good news: the growing strength of India’s growing middle class, a potent ally in the cause of pursuing the needed economic reforms. His success in office will depend on how well he can harness the power of the middle class to overcome the political obstacles to the economic growth that its members demand.

Michael Mandelbaum is the author of The Road to Global Prosperity

Copyright: Project Syndicate, 2014

The views expressed by the author are personal