Does government cause economic retardation? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 10 February 2014
Does government cause economic retardation? A  A  A

Baltimore, Maryland

Last week left us with no clear trends. Stocks slipped on Monday, but by the end of the week they seemed to have recovered their footing.

We spent the week in India.

"I wouldn't invest a penny in India," said our old friend, Jim Rogers. He may know something we don't. Then again, we know so little that anyone could know more.

India was rich 500 years ago, with a GDP per capita among the highest in the world (according to estimates that are probably unreliable.) Now, it's poor. Could it be rich again...or at least richer than it is now?

We don't know. But we traveled to Mumbai via Zurich. A greater contrast would be hard to find. Zurich is spotless. Organized. Efficient and dependable. Mumbai is dirty. Disorganized. Chaotic, even. Zurich is one of the richest cities in the world. Mumbai is one of the poorest.

What accounts for the difference? Race? Culture? Climate? What follows is a discussion of the subject, with no real conclusion.

Many are the theories. Racism was popular before WWII. Before that, and after, climatism was a handy explanation. But neither can explain India's poverty. Look at Indians in America, Africa, or England. Out of their homeland, they are among the most successful of any racial group. In every line of work - art, engineering, business, academia - they are standouts. Even the CEO of Microsoft is from India.

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As to climate, the theory changes with the times. When Egypt, Greece and Rome were the world's leading powers, intellectuals presumed that cold weather was ill-suited to civilization. Then, when the locus of progress moved north, so did the theory. Today, the idea is common among people from cold climates: heat makes people lazy.

Heat may have influenced output in the days before the days of air conditioning. The US Congress used to take the entire summer off - in order to escape the heat of the Potomac. But we grew up without air-conditioning 40 miles from the Capital Building; we don't recall it slowing us down too much. We worked through the hot summer months, doing hard heavy work in the tobacco fields.

And today, Miami and Singapore, both hot cities, flourish while Detroit goes bust and Vladivostok is wretched. Generally, Russia is a cold place. But it is hardly a rich place. By contrast, Australia is quite warm...and relatively wealthy.

One obvious cause of economic retardation is government. The more ambitious and aggressive it is, the more output will be depressed. The Chinese, immediately after WWII, were one of the world's poorest people. You could have blamed it on their race or their culture. But it was neither. Millions of these people fled to Hong Kong, which was little more than a barren rock, seeking the protection of the British government from Mao Tse-tung's government. They brought their culture with them. John Cowperthwaite was the British administrator assigned to watch over Hong Kong from 1961 to 1971. He made it a point not to interfere. He didn't even allow the collection of statistics on unemployment or income. He didn't want to provide the meddlers with any fodder for 'improving' things. On the mainland, no sparrow could fall without being registered by the communist bureaucracy and there was a program to solve every problem. There were Great Leaps Forward, Cultural Revolutions and Five Year Plans aplenty. The mainland Chinese became poorer and poorer, while the Chinese in Hong Kong got rich. By 1996, people in Hong Kong had a GDP per capita that was 137% of their English protectors.

Government reaches the point of declining marginal utility very quickly. A little - protecting property rights, enforcing contracts, and keeping people safe from violence - seems to pay off well. A lot is usually disastrous. Indians have a lot of government - a relic of the Stalinization of the country under Indira Gandhi. After WWII, Indians sent their elite youth - including Ms. Gandhi - to study in England. There, they learned the ideas and policies that retarded UK growth for almost a whole generation. Returning to India, they carried Keynes and Marx in their luggage.

Ms. Gandhi took over the top job from her father, Jawaharlal Nehru. She then came up with 6 sequential Five-Year Plans. One Five-Year Plan is usually enough to kill an economy. The Indian economy took all six treatments and somehow survived.

Traces of the quack medicine remain today. You will experience a bit of it even before you get to India. You must apply for a visa. Doing so requires paperwork. Paperwork takes time. And Indian bureaucrats are very serious about their paperwork. Our application for a visa was rejected when our signature strayed out of the box. We had to reapply!

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "Does government cause economic retardation?"

S.M. Paranjape

Feb 11, 2014

Less than ten years back,there was a loud chorus about the great turn-around that India had achieved due to the economic "revolution" ushered i.n by the Rao-Manmohan Singh duo and the Nehruvian era was now our antediluvian past! Peans were sung to the success of the BRICS and how India and China would overtake the advanced nations - mainly Europe. One author even predicted a huge speed breaker for China and that the course was clear for India.
Flogging a dead horse is worthless; the vanishing of jobs is a reality. Our youth are entitled to more than lip-worship about their being the demographic dividend.


S Sudeer

Feb 10, 2014

Perhaps, Mr. Boomer do not know that such kind of visa rules exist in other countries. US frisked Dr. APJ Abdul Kalam and US insisted it is their rule. It is time that people woke up to the reality. Mera Bharat Mahan.

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