Wednesday 23 April 2014 4:26 pm

Why freedom – not foreign aid – is the only real route to development

Tom Welsh is City A.M.'s business features editor.

Tom Welsh is City A.M.'s business features editor.

INDIA, the world’s largest democracy, is currently holding the world’s longest general election. But does this mean India is economically and politically free, in the sense that it provides the degree of openness required for fertile economic growth? I think not.

National and local contexts will differ between Mumbai and Dubai, the UK and the US, but the underlying principles won’t. Freedom matters. The same rules do apply. Political and economic freedom, correctly understood, are the foundation of the market, genuine competition and wealth creation. But how does this apply to India, and what does it say about Western development policy?

Genuine political freedom focuses on an equality of opportunity for the individual, which is difficult to achieve with a caste system. Instead, the idea that your place in life, including your job, is set at birth (supposedly abolished by India’s liberal constitution), still enforces and embeds a poverty culture instead of a prosperity mindset.

Freedom also requires the protection of property rights, which is a problem when swathes of society lack the power or influence to challenge corruption. The 2013 Global Corruption Barometer found that 62 per cent of the Indian citizens surveyed had paid a bribe to the police in the past year, while political parties were the most corrupt institutions in Indian life. The World Bank puts India at 134th on its ease of doing business ranking, with enforcing contracts a particular problem. Corruption, statism, paternalism – where is the dignity of the individual?

The government’s job is to level the ground on which business builds. Wherever you are in the world, there is market failure and a role for the state in establishing and maintaining property rights, core infrastructure, basic education or other public goods.

But as William Easterly points out in his brilliant and masterly account of economic development, The Tyranny of Experts, the issue is more than just states versus markets. It’s about conscious design versus spontaneous order. In other words, the contrasting views of two Nobel Laureates in Economics; Gunnar Myrdal and Friedrich Hayek. The former is top down development, the latter is bottom up.

And this has significant implications for the efficacy of development policy. Put simply, if we doubt governments in developed economies have the degree of knowledge and understanding to intervene in markets in their own countries, how on earth do we expect “foreign experts” to be successful in developing economies where they lack historical and cultural understanding?

And bottom up development doesn’t mean it has to be small or inconsequential. Just as the Silicon Valley entrepreneur sets out to change the lives of 100m people with a new app, so too can emerging market entrepreneurs bypass traditional business models and meet the electricity, communication or other needs of an equal number, with decentralised solutions beyond the wit of government. Take the rapid development of mobile money in Kenya. Despite having just one ATM per 18,000 people, thanks to new mobile payment services, 86 per cent of mobile subscribers used mobile money in 2012, leapfrogging the developed world and acting as a new platform for all kinds of innovative services.

Indeed, if large corporates see an idea mushrooming, they’re likely to jump on the back of it as well, accelerating the race to scale and mass market. The journey from an Indian to a global village can be short. This is real CSR, not companies satisfying regulators.

Ah, I hear you say, so much more could be achieved if advanced economies gave more. In other words, foreign government aid lacks scale. I beg to differ. Meeting UN targets for giving 0.7 per cent of GNP has direct and indirect costs. The direct cost is bureaucracy. The indirect cost is the dependency culture it helps create. Foreign state aid is a band-aid, treating the symptoms, not the disease. Sadly, too often it’s an infected band-aid making the situation worse.

The ongoing critique of anybody proposing a greater role for the market in development is to cite the enormous disparity in income which often exists between rich and poor in developing economies. Yes, there are huge disparities, but the issue isn’t the disparity today, it’s how to reduce it tomorrow. State intervention and foreign aid hasn’t worked, but real political (individual rights) and economic freedom can.

Political freedom can create economic opportunity for all and erode corruption. Economic freedom can increase market entry to erode excess profits and income disparities. The worst solution is to end up with a dependency culture and high levels of taxation, which deters foreign direct investment.

Within a genuine competitive market framework, firms are incentivised to be self-interested but not selfish. If they charge excess prices, their market disappears. If they don’t innovate and satisfy consumers, the consumer walks. These are the true lessons for development.

Graeme Leach is director of economics & prosperity studies at the Legatum Institute in London.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.