Back in 2019, I released this video to explain how the World Trade Organization (WTO) has been a net plus, helping to lower trade taxes and other barriers to cross-border commerce.
Ever since it was created, trade taxes have been falling.
Sadly, though, the WTO has been weakened in recent years. Trump bears some of the blame, to be sure, but other politicians (including Biden) have caused problems because of their protectionist policies.
Foreign politicians also are pushing in the wrong direction. For instance, the European Union may be about to trigger a global trade war by pushing for carbon protectionism.
That’s the bad news.
The good news is that this could be an opportunity for a reinvigorated WTO. As reported by Reuters, India will be bringing a case to block the EU’s anti-trade scheme.
Indian plans to file a complaint to the World Trade Organisation over the European Union’s proposal to impose 20% to 35% tariffs on imports of high-carbon goods like steel, iron ore and cement from India, top government and industry sources said. …”In the name of environment protection, EU is introducing a trade barrier that would hit not only Indian exports but also of many other developing countries,” said a top government official with direct knowledge of the matter. The government was planning to file a complaint to the WTO against the EU’s unilateral decision and would seek relief for exporters, particularly small companies, the official said without disclosing further details. India sees the proposed levy as discriminatory and a trade barrier.
Some people may point out that India’s government is very bad on trade, and that’s true. But the fact that Indian politicians are hypocrites does not mean the EU’s protectionism is justified.
Blocking the EU’s awful plan is an opportunity for the WTO to reclaim its role as a protector of the interests of taxpayers and consumers.
P.S. Today’s column is about how the WTO hopefully can stop something bad. Unfortunately, I don’t think the organization has the ability to push for anything good. If there is any progress in the future, it will probably come from bilateral and plurilateral free trade agreements.
At the end of last month, I wrote about the growth-maximizing size of government, citing a study that estimated that the public sector in Sudan should not consume more than 11.17 percent of the nation’s economic output.
I realize that very few people care about Sudanese fiscal policy, but the research gave me an opportunity to condemn the OECD, IMF, and UN for peddling the nonsensical argument that more government spending would promote faster growth in poor nations.
Today, I want to cite another study, in this case about the growth-maximizing size of government in India. But, once again, I’m citing some research to make a bigger point.
First, here are the findings from the study, written by Neha Jain and Niharika Sinha.
The present study aims to examine the relationship between government size and economic growth in India for the period from 1961 to 2018. Additionally, as a novel contribution, the current study also attempts to examine the existence of Armey curve and estimate the threshold level of government size in India. …The result of the study confirms…the existence of Armey curve and supports the Armey curve hypothesis in India. There exists a positive impact of government size till the threshold level, and beyond the threshold level, the coefficient of economic growth tends to decrease. The estimated optimal government size is 11.89% for India…the findings of the study also suggest that a large size of the government can be harmful for the efficiency of economic growth; thus, adjusting the government at its optimum is crucial to the economy.
By the way, the Armey Curve is the Rahn Cure and the Rahn Curve is the Armey Curve (there’s ongoing discussion of who was the first to visually depict the upside-down-U-shaped relationship between the size of government and economic performance).
But let’s set aside that discussion. Regardless of who deserves credit, it’s vitally important that policymakers understand that excessive government spending is very harmful for prosperity.
But while it’s good to have a discussion on the quantity of government spending, let’s not forget that the quality of government spending also matters.
To be more precise, some types of government spending can be helpful to growth and other types of spending are usually harmful to growth.
Rule-of-law spending – If done effectively, spending for pure public goods such as administration of justice and enforcement of contracts can create a favorable environment for more growth.
Physical capital spending – The growth impact (or anti-growth impact) depends on whether money for ports, roads, etc, is spent efficiently, thus offsetting the cost of diverting resources from the economy’s productive sector.
Human capital spending – The growth impact (or anti-growth impact) depends on whether money for education, training, etc, is spent efficiently, thus offsetting the cost of diverting resources from the economy’s productive sector.
Defense/military spending – May be necessary for national survival, but otherwise bad for growth since labor and capital are diverted from the economy’s productive sector to government.
Social welfare spending – May be compassionate (or dependency inducing), but otherwise bad for growth since labor and capital are diverted from the productive sector to government.
The purpose of today’s column is to conceptually explain how different types of government spending may or many not affect economic performance, but I can’t resist noting that the United States does a terrible job of spending money on human capital and physical capital.
P.S. Developing nations do a bad job of providing rule of law, but I have near-zero faith that more government spending will lead to improvements. Instead, more spending will be a vehicle for ruling elites to cement their power by buying votes.
What I like most is that he does a very good job of showing that concern for the disadvantaged is the most important reason to support free markets and limited government.
But I want to focus on his discussion of India’s partial economic liberalization. We’ll start by perusing the most-recent edition of Economic Freedom of the World to confirm that there was a significant increase in economic liberty during the 1990s.
But it’s also important to stress that India’s partial economic liberalization was…well, partial.
India is currently ranked #108 for economic freedom, which is mediocre at best, and it does especially poorly in areas such as regulation and trade.
The good news is that the country’s policies are not as bad as Venezuela’s. The bad news, though, is that it’s also nowhere close to being as good as Singapore.
If you want to understand economic policy in India, you should read this study by Swaminathan S. Anklesaria Aiyar.
He starts by explaining the awful policies that existed prior to 1991.
India was in such poor shape before 1991 that it takes an effort to recall how bad things were. …India’s slow-growing, inward-looking socialism made it unimportant in global terms, save as an aid recipient. …India’s poverty ratio did not improve at all between independence in 1947 and 1983; it remained a bit under 60 percent. …In 1991, it took two years for anyone to get a telephone landline connection. N. R. Narayana Murthy, head of top software company Infosys, recalls that in the 1980s, it took him three years to get permission to import a computer and over one year to get a telephone connection. …In 1991 Indian politicians and industrialists feared that economic liberalization would mean the collapse of Indian industry… Before 1991 very high tax rates (up to a 58 percent corporate tax) plus a high wealth tax meant that businesses kept income off the books.
There was a decent amount of economic liberalization in the 1990s.
After 1991 direct tax rates gradually came down substantially (to 30 percent plus surcharges for individuals and corporations). The wealth tax on shares was abolished, making it possible to raise shareholder value without being penalized for it. …The corporate tax was cut from a maximum of 58 percent to 30 percent, yet corporate tax collections increased from 1 percent of GDP to almost 6 percent at one point. …Personal income tax rates also fell from 50 percent to 30 percent, but once again collections rose, from 1 percent of GDP to almost 2 percent. …economic liberalization has facilitated the rise to the top of a vast array of new entrepreneurs. …In the two decades since 1991, India’s literacy rate has shot up by a record 21.8 percentage points, to 74 percent…much faster in the era of reform than in the earlier era of socialism. …Life expectancy in India is up from an average of 58.6 years in 1986-91 to 68.5 years. Infant mortality is down from 87 deaths per 1,000 births to 40.
This partial liberalization has produced good results, as illustrated by Table 2.
India’s growth rate has improved, which is why various social indicators (poverty, literacy, mortality) have improved.
But India should not be considered a role model.
There is still far too much government.
How can we sum up 25 years of economic reform? Three major trends are visible. First, the vast majority of successes have been private‐sector successes, whereas the vast majority of failures have been government failures, mainly in service delivery. Second, wherever markets have become competitive and globalized, the outcomes have been excellent. …In the 1990s, the government gradually opened up the economy, abolishing industrial and import licensing, freeing foreign exchange regulations, gradually reducing import tariffs and direct tax rates, reforming capital and financial markets, and generally cutting red tape. Those changes enabled India to boom and become a potential economic superpower. But some areas were never liberalized, such as land and natural resources, and those areas have been marked by massive scams.
I’ll close by sharing this chart, which is based on the Maddison database.
As you can see, per-capita economic output climbed faster after a few pro-market reforms were implemented.
After giving some speeches in India back in 2018, here’s how I summarized my conflicted assessment.
Indians are enormously successful when they emigrate to the United States. And they also do very well when they migrate to Singapore, South Africa, and other places around the world. Yet Indians in India remain comparatively poor. …There’s a saying in the country that “India grows at night, while government sleeps.” …In other words, policy is generally not friendly, but the private sector manages to find “breathing room” to operate in spite of government. So poverty is falling, slowly but surely.
It would be great if poverty could fall much faster, but the current government doesn’t seem to have any interest in the policies that would make that happen.
I spend much of my time analyzing the foolish and counterproductive policies imposed by Washington. Often accompanied by some mockery of politicians and their silly laws.
And since this is “International Liberty,” I obviously like to pay attention to what happens in other nations as well. I guess you could call it the global version of misery-loves-company.
We’ll start in Egypt, where we got a version of alchemy. Except instead of turning a base metal into gold, a donkey was turned into a zebra.
A zoo in Egypt has denied painting black stripes on a donkey to make it look like a zebra after a photo of the animal appeared online. Student Mahmoud Sarhan put the images on Facebook after visiting Cairo’s International Garden municipal park. Aside from its small size and pointy ears, there were also black smudges on its face. …the enclosure contained two animals and that both had been painted. When contacted by local radio station Nogoum FM, zoo director Mohamed Sultan insisted the animal was not a fake.
The most amusing part of the report, though, was learning that zoos routinely try to mislead customers.
This is not the first time that a zoo has been accused of trying to fool its audience. Unable to find a way around the Israeli blockade, a zoo in Gaza painted two donkeys to look like zebras in 2009. Another Gaza zoo put stuffed animals on display in 2012 because of the shortages of animals. In 2013, a Chinese zoo in Henan province tried to pass off a Tibetan mastiff dog as an African lion, and in 2017 a zoo in Guangxi province disappointed visitors by exhibiting blow-up plastic penguins. Weeks later, another Guangxi zoo drew condemnation for displaying plastic butterflies. …Papua New Guinea is one of the poorest countries in Apec, with 40% of the population living on less than $1 a day according to the UN.
I have to confess, though, that I don’t know if any of these zoos were private. So maybe we have a problem that isn’t just limited to government.
Our next story is from India.
It seems that the military doesn’t understand that submarines are supposed to be watertight.
…it’s a good idea to, like, close the hatches before you dive. Call it a lesson learned for the Indian navy, which managed to put the country’s first nuclear-missile submarine, the $2.9 billion INS Arihant, out of commission in the most boneheaded way possible. The Hindu reported yesterday that the Arihant has been out of commission since suffering “major damage” some 10 months ago, due to what a navy source characterized as a “human error” — to wit: allowing water to flood to sub’s propulsion compartment after failing to secure one of the vessel’s external hatches. …It’s hard to articulate how major a foul-up this is… Indian authorities ordered the pipe replacement because they “likely felt that pipes exposed to corrosive seawater couldn’t be trusted again, particularly pipes that carry pressurized water coolant to and from the ship’s 83 megawatt nuclear reactor.”
Sounds like India’s navy would have been better off if the person in charge of the hatch had been one of the country’s famous no-show bureaucrats.
Now let’s turn our attention to Papau New Guinea, where the roads are so poor that it makes no sense to have fancy, high-speed cars.
Yet that didn’t stop the government from using a summit as an excuse to buy 40 Maseratis
Papua New Guinea’s government is under scrutiny for importing 40 luxury Maserati cars from Italy for the…Asia-Pacific Economic Cooperation (Apec) summit. The Quattroporte sedans, which cost more than $100,000 each (£75,000), will be used by foreign leaders. Media and activists have questioned if the poor Pacific country has wasted millions. …Apec Minister Justin Tkatchenko said the cars, which can reach speeds of 240 km/h (149 mph), would “provide the level of carriage for leaders that is the standard for vehicles used at Apec summits”. …Some of the Pacific country’s main roads are poorly maintained, with vehicle speeds limited to 80 km/h (50 mph). Other roads wind through mountainous terrain and often require a four-wheel-drive vehicle to navigate.
Incidentally, the government claimed that the Maseratis would be resold to private buyers, meaning no net cost to taxpayers. Highly unlikely, to be sure.
Moreover, if there was a follow-up story, I wouldn’t be surprised to learn that they magically wound up in the hands of politicians and their family members.
The bottom line is that governments manage to combine malicious venality with staggering incompetence. Quite a feat.
P.S. For what it’s worth, America’s political elite prefers to rely on taxpayer-financed limousines.
P.S.S. I’ve noticed on my trips to Cayman that there are lots of fancy, high-performance cars. In some sense this isn’t surprising. After all, zero-tax Cayman is a wealthy place. Yet I’ve always wondered why people buy such cars on a small island where high-speed travel is both difficult and unnecessary. But at least those are people spending their own money (though the government there certainly is capable of over-spending in other ways).
Last November, I shared a one-minute video from Freedom Partners on the economics of trade.
Here’s a full-length (but still only four minutes) treatment of the issue from the Center for Freedom and Prosperity.
The first part of the video is a quick glimpse at some of the academic evidence for open trade, and I hope it helps make the case against protectionism.
I then cite some country-specific examples, including how Herbert Hoover’s protectionism contributed to the economic misery of the Great Depression.
Argentina is another bad example mentioned in the video. It used to be one of the world’s richest countries, but it plummeted in the rankings in part because of its protectionist policy of “import substitution.”
The video also mentions the examples of China and India. Since I think this point is especially compelling, I want to take this opportunity to briefly elaborate on my comments in the video.
First, let’s establish that both nations did liberalize trade. Here’s a chart from Economic Freedom of the World, and you can see that there was dramatic liberalization starting about 1990.
Both nations are still a long way from total free trade (Singapore and Hong Kong, for instance, respectively get scores of 9.29 and 9.32), but it goes without saying that there was considerable liberalization in China and India.
And how did that work out?
Trade liberalization was a slam-dunk success. Based on data from the World Bank, here’s a look at how China and India started converging with the United States after opening to the world economy.
To be sure, both nations still have a long way to go. And it’s highly unlikely that either nation will ever fully converge to American living standards unless there is a lot more pro-market reform. Not just in trade, but all facets of economic policy.
But as I mentioned in the video, the reforms that already have occurred – particularly trade liberalization – have contributed to huge reductions in poverty in China and India.
Given all this evidence, I’ll close with a version of my two-question challenge. Can anybody identify a nation that has prospered by moving to protectionism (h/t: the USA in the 1800s is not a good answer) or a nation that has suffered because of trade liberalization?
It’s possible, as some of my friends argue, that I’m not actually sane. That would explain why I try to put my finger in the dyke of big government as more and more new leaks keep developing. Only a crazy person would fight against big government when politicians and bureaucrats have a “public choice” incentive to do the wrong thing.
Moreover, if “victory” is restoring the kind of limited government envisioned by the Founding Fathers, then there’s a 99.99 percent chance all my efforts will be wasted.
But allow me to offer a reason for optimism. What if we decide that “victory” is simply hindering the growth of government so that the private sector has enough “breathing room” to continue making our lives richer and better?
That’s the basic message of Human Progress, Marian Tupy’s website showing how the world is constantly improving. And we see good long-run developments from Economic Freedom of the World.
In other words, we don’t need to achieve Libertarian Nirvana. We just need to throw sand in the gears of government.
And that’s why I don’t think my life is pointless. To be sure, I haven’t given up on my dream of replacing the odious internal revenue code with a flat tax, but if the only thing I achieve is to protect America from a value-added tax, I’ll nonetheless go to my grave feeling like I did something very valuable for my country.
But there’s something else that keeps me sane. I also enjoy laughing at government. I regularly write about “great moments” in government and point out that incompetence and stupidity is a regular feature of the federal government, of state governments, and of local governments.
And I also enjoy mocking the spectacular screw-ups and bizarre blunders that are a feature of foreign governments as well.
And that’s our topic for today. So let’s start with this story from India about a very unusual example of vote buying.
A south Indian state has become possibly the first in the world to offer publicly-funded breast implants, its health minister arguing, “Why should beauty treatment not be available to the poor?” The Tamil Nadu state health department on Wednesday launched the free service at a clinic in the capital Chennai. …The clinic had already been providing breast reconstruction surgery for cancer patients, but was now extending the service for people who wished to alter the size of their breasts for other health or cosmetic reasons. The head of plastic surgery at the clinic, Dr V Ramadevi, said some of her patients…sought to augment or shrink their breasts for a boost in confidence. “There is a psychological benefit. Many girls who have larger breasts don’t like to go out. There is no reason this surgery should be restricted from the poor.” The procedure would also be available to men, she said. …Tamil Nadu’s government is known for its largesse, particularly under former chief minister Jayalalithaa, who pioneered free food canteens and doled out wedding jewellery and venues to the poor.
And since taxpayer-financed cosmetic surgery exists in the United Kingdom and the United States, Indian taxpayers can take solace that they’re not alone.
Prince Laurent of Belgium has had his monthly allowance docked for a year, after a vote by the country’s federal parliament. The sanction was imposed after the prince attended a Chinese embassy reception last year without government permission, in full naval uniform. Lawmakers voted for a 15% cut to his €307,000 (£270,000; $378,000) annual allowance. …Prince Laurent, who is the younger brother of King Philippe, wrote a lengthy emotional letter to parliament before the vote on his endowment, arguing that, as a royal, he is unable to work for a living. He described the vote as “the trial of my life” and said it would “likely cause me serious prejudice” if MPs went against him. …The prince, 54, said the royal family had obstructed his attempts to be financially independent. …Lawmakers ultimately rejected his claim that no citizen of their country had been so exploited, voting to cut his stipend by 93 to 23 votes. …He had previously been criticised for attending meetings in Libya when the late Muammar Gaddafi was still in power, and making an unsanctioned 2011 trip to the Democratic Republic of Congo, a former Belgian colony.
I suppose this is a feel-good story in that politicians actually voted to cut spending.
Though we should never forget that this is the country where the public sector consumes half of economic output but officials actually complained that it’s hard to fight terrorism because of “the small size of the Belgian government.”
Now it’s time for ar stop in Malaysia, where corrupt politicians spent the country into debt and now they want taxpayers to voluntarily cough up extra money.
When Malaysian Prime Minister Mahathir Mohamad unexpectedly won his bid for office in May, he pledged to…get the country’s $250 billion worth of debt under control. And this week, he announced the government had found a way to at least get started: crowdfunding. Within 24 hours, the “Malaysia Hope Fund” raised almost $2 million, the BBC reported. “The rakyat (people) voluntarily want to share their earnings with the government to help ease the burden,” the finance ministry said in a statement, announcing that it would be accepting donations to a special fund set up to help relieve the country’s debt. …The crowdfunding idea started with a 27-year-old named Nik Shazarina Bakti, who recently launched a private crowdfunding initiative to help relieve Malaysia’s debt. She raised around $3,500 before the government stepped in. In a sense, the effort is a version of what she said Malaysians did during their struggle for independence from Britain, when they donated jewelry, money and valuables. It’s also similar to what South Korea did as it attempted to pull itself out of economic crisis in the late 1990s, and regular citizens lined up to donate their most prized possessions to the government, including wedding rings and trophies.
Hmmm…, $2 million raised to pay off $250 billion of debt. Methinks they won’t meet their goal.
Though this story reminds me that politicians like Elizabeth Warren want the rest of us to pay more tax, yet she conveniently doesn’t participate in her state’s version of voluntary crowdfunding.
He’s a dead man walking and the court ruling is final. A Romanian court has rejected a man’s claim that he is still very much alive, after he was officially registered as deceased, the Associated Press reports. Constantin Reliu, 63, lost his case in Vasului because he appealed too late on the ruling, a court spokeswoman said Friday. The story goes that Reliu had traveled to Turkey in 1992 for work and lost contact with his family. Since his wife had not heard from her husband in years, she acquired a death certificate for him in 2016, the AP reports. However, since Reliu was discovered by Turkish authorities this year with expired papers, he was deported back to Romania. That’s when he discovered he had been declared dead.
Last but not least, here’s a report from Spain that should leave you skeptical about the efficacy of additional NATO spending.
An attempt to deploy a new submarine for Spain’s navy has run aground again, after it emerged it cannot fit in its dock, Spanish media report. The S-80 boat was redesigned at great expense after an earlier mistake meant it had problems floating, and it was lengthened to correct the issue. Spanish newspaper El País now reports that after the changes, the docks at Cartagena can no longer fit the vessel. The cost for each has almost doubled, the newspaper said. …The original problem with the submarine dates back to 2013, when it was discovered that it was about 100 tons heavier than it needed to be. That caused a problem for its buoyancy – so it could submerge, but might not come back up again. A former Spanish official told the Associated Press at the time that someone had put a decimal point in the wrong place, and “nobody paid attention to review the calculations”. …the base at Cartagena will have to be dredged and reshaped to accommodate the now-floating longer vessel, the El País report said. Spain’s Defence Minister Margarita Robles, speaking on Spanish radio, admitted that “there have been deficiencies in the project”.
Call me crazy, but “deficiencies” doesn’t really describe what happened. Almost makes the Pentagon look frugal. Almost makes the German intelligence service look competent.
I’ve just finished up a week of lectures and meetings in India. It was an interesting trip, but not an encouraging trip.
My first observation is that Indians are enormously successful when they emigrate to the United States. And they also do very well when they migrate to Singapore, South Africa, and other places around the world.
Yet Indians in India remain comparatively poor. Per-capita income is only $5,350 based on purchasing power parity (and far lower on a exchange-rate basis).
Why the difference? Let’s start with Economic Freedom of the World, which measures the degree to which misguided government policy suppresses the private sector.
The bad news is that India is ranked only #95, which puts it in the bottom half of the world.
Its worst score is on trade, where India is a miserable #142. And since there are only 159 nations that are included in the Fraser Institute’s ranking, that’s close to the bottom.
The regulation score also is quite bad. Not quite in the bottom third of nations, but close. Monetary policy and legal system/property rights (i.e., rule of law) are a bit better, but still in the bottom half of the EFW rankings.
The country’s only good score is for fiscal policy. But I would argue that the #22 ranking is an overstatement. India does well mostly because the government is too disorganized and incompetent to collect a lot of revenue. That’s the only reason why the burden of government spending is modest.
Below is a chart from EFW that maps India’s score starting in 1970. The good news is that India’s score – though still depressingly low – did improve considerably in the 1990s.
But here’s a very important caveat. India’s score increased, but its relative ranking has declined. Simply stated, other nations have improved their scores at a much faster rate.
Here’s some data on fiscal policy from a report by the Organization for Economic Cooperation and Development.
We’ll start with data on tax revenue as a share of economic output. By that measure, India is a low-tax country.
But now check out corporate tax rates. As you can see, the system is relatively onerous.
So a possible conclusion, as I noted above, is that revenues are low because of an unfriendly tax system. Hello Laffer Curve.
I’ll close by shifting from macro data to personal observations based on my trip.
Here are four reasons why I’m leaving India with a pessimistic feeling.
I had lots of meetings with people in the business community and there is not only skepticism of free trade, but also considerable support for protectionism.
Similarly, the business community has a semi-favorable view of big government because the state is a source of subsidies and handouts.
India has a federalist system, but state governments are basically administrators of programs designed by the central government (unlike Switzerland).
The big “pro-market reform” in India has been the “single window” for regulatory clearances, when the right policy would be to abolish red tape altogether.
But I’ll close with a bit of optimism (above and beyond what I wrote the other day about the burgeoning role of the private sector in education). There’s a saying in the country that “India grows at night, while government sleeps.” And there’s even a book with that title. In other words, policy is generally not friendly, but the private sector manages to find “breathing room” to operate in spite of government.
So poverty is falling, slowly but surely. And hopefully globalization will gradually lead the government to be more open to trade liberalization and open markets.
P.S. Another reason to be pessimistic about India is that the government recently imposed “demonetization.” Any nation that joins the war against cash generally has the wrong mindset.
P.P.S. I can’t resist linking again to a truly bizarre case in India of government handouts encouraging very bizarre behavior.
Now let’s focus on the solution to this problem. Simply stated, we need to break up the government education monopoly and unleash market forces.
Previous columns have looked at the success of school choice in Sweden, Chile, and the Netherlands.
Now let’s look at India, another country where private education has experienced amazing growth. I’m actually in that country for some speeches on regulatory reform (specifically, how India can improve its Doing Businessscore) and I’ve taken advantage of this situation to learn about the amazing developments in education.
We’ll start with some excerpts from a remarkable story in the Hindustan Times.
Between 2010-11 and 2015-16, student enrollment in government schools across 20 Indian states fell by 13 million, while private schools acquired 17.5 million new students, according to a new study that offers insights into India’s public-school education crisis. Average enrollment in government schools–where teachers are paid, on average, salaries that are four times those in China–declined from 122 to 108 students per school over five years, while it rose from 202 to 208 in private schools… Why are students opting out of India’s government schools, which educate the poorest and most vulnerable students until the age of 14 for free, and migrating to fee-charging private institutions in such large numbers? …private schools offer better value for money and better teaching than government schools.
Yet you won’t be surprised to learn that teachers in the government schools are lavishly compensated.
India’s government teachers earn more than…their counterparts in private schools… Teacher salaries in of teachers in Uttar Pradesh are four to five times India’s per capita gross domestic product (GDP) and more than 15 times the state’s, according to a 2013 analysis by Amartya Sen and Jean Dreze. This is much higher than the salaries paid to teachers in OECD countries and India’s neighbours.
Much of the data in that story was taken from a 2017 study published by a German think tank.
Here are some of the other findings from that report.
Official data show a steep growth of private schooling and a corresponding rapid shrinkage in the size of the government school sector in India, suggesting parental abandonment of government schools. …affordability is an important factor behind the migration towards and growth of private schools. The main reason for the very low fee levels in private schools is their lower teacher salaries, which the data show to be a small fraction of the salaries paid in government schools; this is possible because private schools pay the market-clearing wage…whereas government schools pay bureaucratically determined minimum-wages. Private schools’ substantially lower per-student-cost combined with their students’ modestly higher learning achievement levels, means that they are significantly more cost-effective than government schools.
The study is filled with extensive data.
But rather than quote long passages, here are two charts that caught my eye. First, we see better performance in private schools.
Given these impressive results, the logical response would be for India to scrap government schools and adopt a nationwide system of school choice.
But there’s a very powerful interest group standing in the way. As you can see from this second chart, government teachers are grossly overpaid and they will fight to the death to maintain the status quo.
Now let’s look at some of the findings from a report prepared by Ernst & Young on elementary and secondary education in India.
Once again, we see that parents are voting with their money to send their kids to private schools. Why? Because even though government schools are “free,” parents actually want their kids to get a good education.
…one of the most striking trends in Indian school education is the increase of private sector participation with an estimated 3 lakh private schools with 40% of the total student enrollment. Private enrollment in elementary schools is approximately 35% and over 50% at the secondary level. …private schools deliver higher quality education as gauged by educational outcomes such as performance on board exams and evidence from standardized assessments.
And here are some charts from the report, starting with a look at the share of kids in private schools.
And here’s some additional evidence that private schools generate better student outcomes.
What makes these results especially amazing is that the government has created all sorts of barriers to private schools.
I wrote about this in 2013, but the E&Y report quantifies how politicians and bureaucrats are trying to stifle competition.
Let’s take a look at some more research.
The Centre for Civil Society also has a must-read report on private education in India.
We’ll start with an excerpt that reinforces the fact that parents are voting with their scarce funds because they want a better future for their children.
Private fee charging schools are loved and loathed in equal measure in India: loved in the sense of being sought after by parents for their children’s education and often reviled by the press/ public/ authorities… The emptying of government schools…is largely the result of an exodus of students from government schools and migration toward private schools… The evidence suggests that most private schools in India can be considered ‘low fee’ in the precise sense that their fee is below the government’s… This evidence discredits the oft-repeated belief that much of private schooling in India is elite and exclusive.
Here’s data showing that the private schools cost less.
And here’s data showing that private schools deliver better results.
Finally, let’s look at a study by the World Bank that measures inputs and outputs to determine “value for money” (VFM).
PPE in MP government school system is Rs 9384 per annum and in private schools Rs 3700 per annum. Thus, government schools’ PPE is 2.5 times private schools’ PPE. However, the learning units are higher in private schools: 58% of private school students and 28% of government students of class 5 could read a class 2 level text in 2014-15. Thus government schools’ learning output is just about half that in private schools. Putting the output and expenditure items together, we find that the cost per unit of achievement is Rs 338 in government schools and Rs 63 in private schools, implying that private schools are 5.3 times as cost effective as public schools, or that government schools are one fifth as efficient in producing output as private schools. …When home background is strictly controlled for, the raw public-private learning gap greatly falls but is usually not eliminated. … if only 25% of the raw public-private achievement gap of MP is attributed to superior private school quality (e.g., lower teacher absence rates), then private schools are 3.25 more efficient than government schools, rather than 5.3 times. …In summary, there is very low VFM from government expenditure on education, in terms of producing the valued outcome of ‘learning’ among students. The private schooling sector gets significantly higher VFM.
And here are a couple of visuals from the report.
We’ll start with a look at enrollment patterns (a “lakh” = 100,000), further confirming that an ever-growing number of parents would rather pay for a private school than send their kids to a “free” government school.
And here’s some data starkly showing how government teachers are vastly overpaid.
All of which reinforces the “value for money” argument that the private schools get far more bang for the buck.
Let’s conclude with a video. One of the world’s experts on private education in the developing world is James Tooley and his interest was triggered by what he saw in India.
Here he discusses developments in India and other developing nations.
P.S. For those interested in more information about India, I wrote last year about how excessive government is stifling the nation’s economy. Indeed, the country is ranked a lowly #95 in the latest iteration of Economic Freedom of the World. This is very unfortunate because India should be a rich country. Indian-Americans, for instance, are the most successful immigrant group in America.
P.P.S. But it will be hard for Indians in India to achieve similar success since the government keeps imposing bad policies such as “demonetization.”
P.P.P.S. India is also home to the most perverse example of how handouts encourage bad behavior.
One of my great frustrations (and there are many) is that the conventional wisdom about economic history oftentimes is wrong. It is very common for students to learn things that simply are not true.
Let’s add to that list by looking at the issue of child labor. The conventional wisdom is that child labor was a regular feature of an oppressive capitalist system and that children were eventually saved from abuse thanks to government intervention.
Hardly. Child labor was – and still is, in some places – a way for desperately poor people to stay alive and perhaps create a stepping stone for a better future. And capitalism-enabled prosperity is the best way to end the unfortunate practice.
I previously cited some World Bank research, in a postscript to a column on bureaucracy, showing that restrictions on child labor had negative long-run effects on income for poor people.
Let’s augment that research. Here are some passages from a very sobering study about the unintended consequences of restricting child labor (h/t: Dev Patel via Tyler Cowen).
While bans against child labor are a common policy tool, there is very little empirical evidence validating their effectiveness. In this paper, we examine the consequences of India’s landmark legislation against child labor, the Child Labor (Prohibition and Regulation) Act of 1986. Using data from employment surveys conducted before and after the ban, and using age restrictions that determined who the ban applied to, we show that child wages decrease and child labor increases after the ban.
Some basic economic analysis shows why this happens.
…families use child labor to reach subsistence constraints and where child wages decrease in response to bans, leading poor families to utilize more child labor.
And it’s worth noting that there are all sorts of harmful secondary effects.
The increase in child labor comes at the expense of reduced school enrollment. We also examine the effects of the ban at the household level. Using linked consumption and expenditure data, we find that along various margins of household expenditure, consumption, calorie intake and asset holdings, households are worse off after the ban.
The bottom line on this issue is that some children are born to very poor families in very poor nations. In those tragic situations, child labor is a matter of survival rather than a lifestyle choice.
I don’t think that the businesses employing children are noble. Indeed, I wouldn’t be surprised if some of them mistreat kids. And even the nice ones probably would seem horrifying to those of us lucky enough to live in rich western nations.
But I also don’t believe in putting good intentions above real-world results. Businesses that employ child labor are offering a better (or, to be more accurate, offering a less-worse) opportunity for people stuck in horrid poverty. Capitalism is the only effective escape from economic misery.
Let’s close with some libertarian satire. It’s focused more on sweatshops, but it also applies to child labor (and “neoliberal” refers to “classical liberal” rather than modern leftism).
If we want poor children in poor families from poor nations to have a better life, we should urge the same policies in the developing world. Assuming we prefer good results over good intentions, of course.
I wrote a four-part series about how governments are waging a war against cash, with the first two columns looking at why politicians are so interested in taking this radical step.
In Part I, I looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.
In Part II, I reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.
Part III and Part IV are also worth reading, though I confess you’ll just get additional evidence to bolster what I wrote in the first two columns.
Today, let’s look at a real-world example of what happens when a government seeks to curtail cash. It happened in India last November, and I wrote about the disruption that was caused when the government banned certain notes.
But maybe the short-run costs were acceptable because there are long-run benefits. That’s certainly possible, but the evidence suggests that the Indian government is doing long-run damage.
Derek Scissors of the American Enterprise Institute has a new column on what’s happening with India’s economy. He is not impressed.
There is certainly a long-standing and extensive corruption problem. The discussion of “black money” has become so absurd, however, that it has little relation to corruption. …Taking currency notes out of circulation in a surprise move late last year was said to target black money inside the country. Seizure of cash was justified by a huge amount of hidden funds. …For political reasons, black money is being wildly exaggerated as an economic issue. …Directly related to hoping there is trillions in black money is wanting to tax those mythical trillions. All governments chase revenue but India’s pursuit seems especially misguided. …Good policy enhances competition and individual economic rights for the sake of greater productivity and personal income. Being obsessed with black money, tax revenue, and GDP growth does nothing to enhance competition or individual rights and leaves ordinary Indians worse off.
India’s central bank is even more critical, bluntly stating that the plan failed, as reported by the BBC.
Indians returned almost all of the high-currency notes banned in last year’s shock government crackdown on illegal cash, the central bank says. It said 15.28tn rupees ($242bn) – or 99% – of the money had made its way back into the banking system. Ministers had hoped the move would make it difficult for hoarders of undeclared wealth to exchange it for legal tender. The news that it did not will raise questions about the policy, which brought chaotic scenes across India. …Many low-income Indians, traders and ordinary savers who rely on the cash economy were badly hit. …As per the RBI data, it’s safe to say that demonetisation has been a failure of epic proportions. …Agriculture, the rural economy and property – which rely largely on cash transactions – were sectors hit by the ban. It also contributed to a slowdown in economic growth.
Indeed, the former head of the central bank warned the government ahead of time that the plan wouldn’t work. Here are some details from a Bloombergstory.
Raghuram Rajan was governor of the Reserve Bank of India in February 2016, when he was asked by the government for his views on demonetization… “Although there may be long-term benefits, I felt the likely short-term economic costs would outweigh them, and felt there were potentially better alternatives to achieve the main goals,” he wrote in the book. “I made these views known in no uncertain terms.” …speculation has raged over who thought up the policy, with the debate getting more divisive last week as a slew of data showed demonetization contributed to a growth slump without meeting its targets. …the cash ban devastated small businesses. More than 1.5 million jobs were said to be lost and newspapers reported deaths linked to the decision.
Rajan correctly observed that the best way to boost tax compliance is with low tax rates.
“It’s not that easy to flush out the black money,” Rajan had said, using the local term for cash stashed away illegally to avoid tax. He added that he’d rather focus on the incentives for black money, such as tax rates.
Amen. This is a point I’ve made over and over and over and over again.
Meanwhile, the Indian Express also has a column, written by a former Chief Economist at the World Bank, on how demonetization has been a failure.
…a wealth of analysis and data have become available. Demonetisation’s half-anniversary is a good time to take stock of this historic decision. The verdict is clear. It was a monetary policy blunder. It achieved next to nothing, and inflicted a large cost on the poor and the informal sector. …demonetisation took the wind out of India’s sails. My calculation is that around 1.5 percentage points of growth were lost to it.
A column in the Harvard Business Review pours cold water on the notion that demonetization is an effective way of reducing corruption.
The original reason given for the drastic demonetization action was to expose the so-called “black” market, fueled by money that is illegally gained and undeclared for tax purposes. …banks were estimated to have received 14.97 trillion rupees (around $220 billion) by the December 30 deadline, or 97% of the 15.4 trillion rupees’ worth of currency demonetized. …These rates of deposits defied expectations that vast troves of undeclared wealth would not find their way back to the banks and that black marketeers would lose this money since they would not be able to deposit their undeclared cash without being found out. This didn’t happen.
It probably “didn’t happen” because the government was wildly wrong when it claimed that cash was the problem.
…when corrupt people need places to park their ill-gotten gains, cash normally is not at the top of their list. Only a tiny proportion of undeclared wealth is held in cash. In an analysis of income-tax probes, the highest level of illegal money detection in India was found to be in 2015–2016, and the cash component was only about 6%. The remaining was invested in business, stocks, real estate, jewelry, or “benami” assets, which are bought in someone else’s name.
Indeed, the Washington Postreports that the new notes already are being used for illegal purposes.
For the first few weeks of demonetization, it was common to meet Indians who felt that their collective suffering and inconvenience was justified because it would ultimately usher in a less corrupt, more equal India. But as the initiative enters its second month, more and more reports are emerging of seizures of vast quantities of hoarded cash in the new notes. Like water reaching the sea, the corrupt, it seems, have found ways to navigate around the government’s new obstacles. …A sense is building that while millions of Indians languish in ATM lines, the old black money system is simply restarting itself with the new notes.
The biggest question is how people are getting their hands on such huge stashes of the new currency. …one way: visiting your local politician.
What’s especially disappointing is that the United States government took money from American taxpayers and used those funds to encourage India’s failed policy.
And here are some excerpts from a report by the Hindu.
The United States on Wednesday described India’s demonetisation drive as an “important and necessary” step to curb illicit cash and actions. “…this was, we believe, an important and necessary step to crack down on illegal actions,” Mark Toner, State Department spokesperson, said in response to a question. …Acknowledging that the move inconvenienced people, Mr. Toner said it was “a necessary one to address the corruption.”
It’s worth pointing out that the U.S. government was encouraging India’s bad policy during the waning days of the Obama Administration, so it’s possible that taxpayers no longer will be funding bad policy now that Trump is in the White House.
I hope there’s a change, but I won’t hold my breath. The permanent bureaucracy has a statist orientation and it takes a lot of work for political appointees to shift policy in a different direction. I hope I’m wrong, but I don’t think that will happen
P.S. The Indian government also is hurting the nation – and poor people – with a value-added tax. Bloomberg has a report on some of the misery.
Before Prime Minister Narendra Modi introduced the country’s new goods and services tax on July 1, Ansari said he was earning 6,000 rupees ($93) a day selling leather jackets, wallets, bags and belts. But India’s new tax classified leather products as luxury items and raised the rate to 28 percent — more than double the 13.5 percent tax levied until June 30. Since then, his business has collapsed. “My business is down nearly 75 percent,” Ansari said… India’s vast informal economy — which accounts for more than 90 percent of the workforce — is struggling under India’s new tax rates…broader pain being felt by many small-and-medium-sized businesses in India’s informal sector, said K.E. Raghunathan, president of the All India Manufacturers Organisation.
The bottom line is that India needs more economic liberty, building on some good reforms in the 1990s. Unfortunately, politicians today are delivering bigger government.
P.P.P.S. Here’s a very powerful factoid. America has many immigrant populations that earn above-average incomes. But, by far, Indian-Americans are the most successful.
Just imagine, then, how fast India would grow and how rich the people would be with Hong Kong-style economic liberty?
But there’s a new example that probably would win the prize if there was a contest for the most sickening behavior enabled by governments giveaways.
People in India apparently are feeding their older relatives to tigers is order to get cash payments from the government.
I’m not joking. India Today has a story on the matter.
What if suddenly a lot of elderly folks start dying because of fatal tiger attacks? Either the tigers have targeted the old people especially or something is just not right. …Authorities surmise that people are sending older members of the family into the tiger reserve for them to become a prey. Once killed, their bodies are relocated to fields, and staged as victims of a tiger attack, so that the respective family can claim lakhs in compensation from the government.
Authorities suspect local families are sending older members into the forest as tiger prey, and their bodies then relocated to fields, to feign attacks and claim lakhs in compensation from the government. Villagers aren’t entitled to compensation if their kin die in the reserve. There has been a string of recent fatal tiger attacks on the elderly, with seven deaths reported in the proximity of the Mala forest range alone since February 16. …Locals, however, say family elders were willing participants in the whole affair. “They think that since they can’t get resources from the forest, this is the only way their families can escape poverty,” farmer Jarnail Singh, 60, told TOI.
And the U.K.-based Daily Mail also has a report on this bizarre situation.
Elderly relatives are being sent into tiger reserves to be killed so that families can claim compensation in a horrifying new trend in India. Younger family members appear to be targeting Pilibhit Tiger Reserve in Uttar Pradesh by sending their elders into the forest to be mauled to death before dumping their bodies in nearby fields. Villagers are not entitled to claim compensation if they die in the reserve, but if they are killed in a tiger attack outside the reserve, they can cash in on government money. …The revelation that this is a deliberate ploy to cash in on compensation money was triggered by Kalim Athar of the Wildlife Crime Control Bureau (WCCB).
Wow. I’m almost at a loss for words.
Imagine the conversation around the dinner table. “Good news, Granny, we’ve arranged an overnight trip for you to the nature preserve.”
It’s even more chilling if the old people are actually willing participants. “Son, make sure to make the scene look realistic after you move my body out of the preserve.”
In some sense, this is actually a broader story about bigger issues such as the degree to which the burden of government is reduced to enable more economic growth in India, including in rural areas. Or the proper balance between environmental stewardship and the needs of the surrounding community.
But it’s hard to focus on those big-picture issues when old people are being sacrificed to tigers to get loot from the government. Somebody – either the families or the willing old people – deserves induction in the Moocher Hall of Fame.
So it’s time to assess overall economic policy in India, which means this is an opportunity to point out that there are some positive developments in the world’s second-most populous nation.
One of my Cato colleagues, Swaminathan S. Anklesaria Aiyar, wrote an exhaustive study on India’s economy last year. The bottom line is that there’s been some progress, most of which took place in the 1990s.
India’s economic reforms over 25 years have transformed it from a low-income country to a middle-income one. But to become a high-income country, India must liberalize the economy much further.
At the risk of oversimplification, India has gone through three phases since its independence after World War II.
It began with a long period of statism and socialism.
Here are some additional excerpts from the study describing that grim period. And I’ve augmented those passages with India’s awful score from Economic Freedom of the World in 1975, when it only scored 4.33 on a 0-10 scale.
…until 1990, India was…hamstrung by a million controls, imposed in the holy name of socialism and then used by politicians to create patronage networks and line their pockets. …The public sector was supposed to gain the commanding heights of the economy. Nothing could be manufactured without an industrial license or imported without an import license, and those licenses were scarce and difficult to get. Any producers who exceeded their licensed capacity faced possible imprisonment for the sin of violating the government’s sacred plan targets. …Indian socialism reached its zenith in the 1970s, when the banks and several major industries were nationalized. The top income tax rate rose to 97.75 percent, and the wealth tax to 3.5 percent. …India’s poverty ratio did not improve at all between independence in 1947 and 1983; it remained a bit under 60 percent. Meanwhile, the population virtually doubled, meaning the absolute number of poor people doubled.
Now let’s look at some good news.
There was a small amount of reform in the 1980s, which became much more significant amount of reform in the 1990s.
In 1991 India embarked on major reforms to liberalize its economy after three decades of socialism… P. V. Narasimha Rao became prime minister in 1991. The Soviet Union was collapsing at the time, proving that more socialism could not be the solution for India’s ills. Meanwhile, Deng Xiaoping had revolutionized China with market-friendly reforms. And so Indian politicians turned in the direction of the market too. …After 1991 direct tax rates gradually came down substantially… The wealth tax on shares was abolished, making it possible to raise shareholder value without being penalized for it. …The corporate tax was cut from a maximum of 58 percent to 30 percent, yet corporate tax collections increased from 1 percent of GDP to almost 6 percent at one point. …Personal income tax rates also fell from 50 percent to 30 percent, but once again collections rose, from 1 percent of GDP to almost 2 percent.
Notice, by the way, that lower tax rates led to more tax receipts. Yet another piece of evidence for the Laffer Curve.
Though I’m much more interested in whether people benefited, not whether politicians collected more money.
And the paper reveals that the reform era generated significant dividends.
Twenty-five years later, the outcome has been an outstanding economic success. India has gone from being a poor, slow growing country to the fastest-growing major economy in the world in 2016. …Per capita income is up from $375 per year in 1991 to $1,700 today. India has long ceased to be a low-income country as defined by the World Bank, which uses a threshold of $1,045, and has become a middle-income country. …areas that were comprehensively liberalized saw the disappearance of corruption. Before 1991, bribes were needed for industrial licenses, import licenses, foreign exchange allotments, credit allotments, and much else. But economic reform ended industrial and import licensing, and foreign exchange became freely available. Lower import and excise duties ended most smuggling and excise tax evasion
There’s even been good news on poverty.
Now let’s shift to bad news. Simply stated, India needs a lot more reform, but it doesn’t seem to be happening.
As illustrated by this chart showing the country’s annual scores from Economic Freedom of the World, India is mired in a modern era of policy stagnation.
In other words, so much more is needed to help India become a rich nation. Yet the reform agenda has been spotty in the past two decades, or even nonexistent.
Here are some final excerpts, accompanied by India’s most-recent EFW scores.
Many old price and quantitative controls should be abolished, and yet more are being enacted. Extensive controls permeate the entire chain of agricultural inputs, outputs, and processed agricultural goods (notably sugar). New price controls have been clamped on seeds and even on royalties paid by seed companies to suppliers of technology. The tax regime is uncertain, and many cases of retrospective taxation have tarnished the investment climate. …Even as old controls have been liberalized, dozens of new regulations are issued every year relating to new areas like the environment, health and safety standards, forests, and tribal areas. As with the old controls, the new controls are issued in the name of the public good and are then used by politicians and inspectors to line their pockets. …The bureaucracy is notoriously corrupt and slow moving… Public-sector corporations remain large, wasteful, and unreformed. Government banks still control 70 percent of bank lending, have the worst record of bad loans and financial losses, and yet are such convenient cash cows for politicians that no party wants to privatize them. …To reach high-income status, India must become a much better governed country that opens markets much further.
The good news, if you compare the 1975 and 2014 EFW scores, is that India now enjoys much more freedom than it did at the peak of the socialist era.
That being said, there are 111 nations with more economic freedom, so there is a lot of room for improvement.
Let’s close with a very powerful factoid. America has many immigrant populations that earn above-average incomes. But, by far, Indian-Americans are the most successful.
Just imagine, then, how fast India would grow and how rich the people would be with Hong Kong-style economic liberty?
Ever since it was created, trade taxes have been falling.…”In the name of environment protection, EU is introducing a trade barrier that would hit not only Indian exports but also of many other developing countries,” said a top government official with direct knowledge of the matter. The government was planning to file a complaint to the WTO against the EU’s unilateral decision and would seek relief for exporters, particularly small companies, the official said without disclosing further details. India sees the proposed levy as discriminatory and a trade barrier.
Villagers aren’t entitled to compensation if their kin die in the reserve. There has been a string of recent fatal tiger attacks on the elderly, with seven deaths reported in the proximity of the Mala forest range alone since February 16. …Locals, however, say family elders were willing participants in the whole affair. “They think that since they can’t get resources from the forest, this is the only way their families can escape poverty,” farmer Jarnail Singh, 60, told TOI.
International Liberty 