Invoking Hitler, Raghuram Rajan warns: A strong govt may not move in the right direction
'Hitler
provided Germany with extremely effective administration – the trains
ran on time, as did the trains during our own Emergency in 1975-77'
Raghuram Rajan
· Feb 21, 2015
When Dr Raghuram Rajan, Governor, Reserve Bank of India, was invited
to DD Kosambi Ideas Festival held on February 20, 2015 in Goa, who'd
have thought that he would discard his RBI hat and put on his hat as "a
professor in the field known as political economy "? And go on to give an extraordinary speech titled Democracy, Inclusion, and Prosperity, in which, among other things, he also made some pointed observations that have already set tongues wagging:
Strong
governments may not, however, move in the right direction. Hitler
provided Germany with extremely effective administration – the trains
ran on time, as did the trains during our own Emergency in 1975-77. His
was a strong government, but Hitler took Germany efficiently and
determinedly on a path to ruin, overriding the rule of law and
dispensing with elections. It is not sufficient that the trains run on
time, they have to go in the right direction at the desired time. The
physical rail network guiding the trains could be thought of as
analogous to rule of law, while the process by which consensus is built
around the train schedule could be thought of as democratic
accountability.
But why do we need both rule of law and
democratic accountability to keep strong government on the right path?
Would democratic accountability not be enough to constrain a dictatorial
government? Perhaps not! Hitler was elected to power, and until Germany
started suffering shortages and reversals in World War II, enjoyed the
support of the majority of the people. The rule of law is needed to
prevent the tyranny of the majority that can arise in a democracy, as
well as to ensure that basic “rules of the game” are preserved over time
so that the environment is predictable, no matter which government
comes to power. By ensuring that all citizens have inalienable rights
and protections, the rule of law constrains the majority’s behaviour
towards the minorities. And by maintaining a predictable economic
environment against populist democratic instincts, the rule of law
ensures that businesses can invest securely today for the future.
Full text of the speech: Democracy, Inclusion, and Prosperity
Thank
you for inviting me to this Festival of Ideas. Since this festival is
about ideas, I am not going to tax you with the Reserve Bank’s views on
monetary policy, which are, by now, well known. Instead, I want to talk
about something I have been studying for many years, the development of a
liberal market democracy. In doing this, I will wear my hat as a
professor in the field known as political economy, and discard my RBI
hat for the time being. If you came here expecting more insights on the
path of interest rates, as I expect many of you did, let me apologize
for disappointing you.
My starting point is the truism that
people want to live in a safe prosperous country where they enjoy
freedom of thought and action, and where they can exercise their
democratic rights to choose their government. But how do countries
ensure political freedom and economic prosperity? Why do the two seem to
go together? And what more, if anything, does India have to do to
ensure it has these necessary underpinnings for prosperity and continued
political freedom? These are enormously important questions, but given
their nature, they will not be settled in one speech. Think of my talk
today, therefore, as a contribution to the debate.
Fukuyama’s three pillars of a liberal democratic state
In
his magisterial two-volume analysis of the emergence of political
systems around the world, political scientist Francis Fukuyama builds on
the work of his mentor, Samuel Huntington, to argue that liberal
democracies, which seem to be best at fostering political freedoms and
economic success, tend to have three important pillars: a strong
government, rule of law, and democratic accountability.
I propose
in this talk to start by summarizing my (necessarily imprecise) reading
of Fukuyama’s ideas to you. I would urge you to read the books to get
their full richness. I will then go on to argue that he leaves out a
fourth pillar, free markets, which are essential to make the liberal
democracy prosperous. I will warn that these pillars are weakening in
industrial countries because of rising inequality of opportunity, and
end with lessons for India.
Consider Fukuyama’s three pillars in
greater detail. Strong government does not mean one that is only
militarily powerful or uses its intelligence apparatus to sniff out
enemies of the state. Instead, a strong government is also one that
provides an effective and fair administration through clean, motivated,
and competent administrators who can deliver good governance.
Rule
of law means that government’s actions are constrained by what we
Indians would term dharma – by a historical and widely understood code
of moral and righteous behaviour, enforced by religious, cultural, or
judicial authority.
And democratic accountability means that
government has to be popularly accepted, with the people having the
right to throw unpopular, corrupt, or incompetent rulers out.
Fukuyama
makes a more insightful point than simply that all three traditional
aspects of the state – executive, judiciary, and legislature – are
needed to balance one another. In sharp contrast to the radical
libertarian view that the best government is the minimal “night
watchman”, which primarily protects life and property rights while
enforcing contracts, or the radical Marxist view that the need for the
government disappears as class conflict ends, Fukuyama, as did
Huntington, emphasizes the importance of a strong government in even a
developed country.
No matter how thuggish or arbitrary the
government in a tin-pot dictatorship, these are weak governments, not
strong ones. Their military or police can terrorize the unarmed
citizenry but cannot provide decent law and order or stand up to a
determined armed opposition. Their administration cannot provide
sensible economic policy, good schools or clean drinking water. Strong
governments need to be peopled by those who can provide needed public
goods – it requires expertise, motivation, and integrity. Realizing the
importance of strong government, developing countries constantly request
multilateral institutions for help in enhancing their governance
capacity.
Strong governments may not, however, move in the right
direction. Hitler provided Germany with extremely effective
administration – the trains ran on time, as did the trains during our
own Emergency in 1975-77. His was a strong government, but Hitler took
Germany efficiently and determinedly on a path to ruin, overriding the
rule of law and dispensing with elections. It is not sufficient that the
trains run on time, they have to go in the right direction at the
desired time. The physical rail network guiding the trains could be
thought of as analogous to rule of law, while the process by which
consensus is built around the train schedule could be thought of as
democratic accountability.
But why do we need both rule of law
and democratic accountability to keep strong government on the right
path? Would democratic accountability not be enough to constrain a
dictatorial government? Perhaps not! Hitler was elected to power, and
until Germany started suffering shortages and reversals in World War II,
enjoyed the support of the majority of the people. The rule of law is
needed to prevent the tyranny of the majority that can arise in a
democracy, as well as to ensure that basic “rules of the game” are
preserved over time so that the environment is predictable, no matter
which government comes to power. By ensuring that all citizens have
inalienable rights and protections, the rule of law constrains the
majority’s behaviour towards the minorities. And by maintaining a
predictable economic environment against populist democratic instincts,
the rule of law ensures that businesses can invest securely today for
the future.
What about asking the question the other way? Would
rule of law not be enough? Probably not, especially in a vibrant
developing society! Rule of law provides a basic slow-changing code of
conduct that cannot be violated by either government or the citizenry.
But that, by itself, may not be sufficient to accommodate the
aspirations of new emerging groups or the consequences of new
technologies or ideas. Democratic accountability ensures the government
responds to the wishes of the mass of the citizenry, allowing emerging
groups to gain influence through political negotiation and competition
with others. Even if groups cannot see their programs translated into
policy, democracy allows them to blow off steam non-violently. So both
rule of law and democratic accountability check and balance strong
government in complementary ways.
Where do these three pillars come from?
Much
of Fukuyama’s work is focused on tracing the development of each pillar
in different societies. He suggests that what the nature of states we
see today is largely explained by history. For instance, China had long
periods of chaos, most recently before the Communists came to power;
groups engaged in total war against one another. Such unbridled military
competition meant groups had to organize themselves as hierarchical
military units, with rulers having unlimited powers. When eventually a
group was victorious over the others, it was natural for it to impose
centralized autocratic rule to ensure that chaos did not remerge. To
rule over the large geographic area of the country, China needed a
well-developed elite bureaucracy – hence the mandarins, chosen by exam
based on their learning. So China had strong unconstrained effective
government whenever it was united, and Fukuyama argues, unlike Western
Europe or India, did not have strong alternative sources of power
founded in religion or culture to impose rule of law.
In Western
Europe, by contrast, the Christian church imposed constraints on what
the ruler could do. So military competition, coupled with constraints on
the ruler imposed by canon law, led to the emergence of both strong
government and rule of law.
In India, he argues, the caste system
led to division of labour, which ensured that entire populations could
never be devoted totally to the war effort. So through much of history,
war was never as harsh, or military competition between states as
fierce, as in China. As a result, the historical pressure for Indian
states to develop strong governments that intruded into every facet of
society was muted. At the same time, however, the codes of just
behaviour for rulers emanating from ancient Indian scriptures served to
constrain any arbitrary exercise of power by Indian rulers. India,
therefore, had weaker government, constrained further by rule of law.
And, according to Fukuyama, these differing histories explain why
government in China today is seen as effective but unrestrained, while
government capacity in India is seen as weak, but Indian governments are
rarely autocratic.
Any of these grand generalizations can, and
should, be debated. Fukuyama does not claim history is destiny, but does
suggest a very strong influence. Of course, the long influence of
history and culture is less perceptible when it comes to democracy where
some countries like India have taken to it like a duck to water. A
vibrant accountable democracy does not only imply that people cast their
vote freely every five years. It requires the full mix of a raucous
investigative press, public debate uninhibited by political correctness,
many political parties representing varied constituencies, and a
variety of non-governmental organizations organizing and representing
interests. It will continue to be a source of academic debate why a
country like India has taken to democracy, while some of its neighbours
with similar historical and cultural pasts have not.
I will not
dwell on this. Instead, I turn to a different question that Fukuyama
does not address. Clearly, strong governments are needed for countries
to have the governance to prosper. Equally, free markets underpin
prosperity. But why is it that every rich country is also a liberal
democracy subject to rule of law?
I will make two points in what
follows: First, free enterprise and the political freedom emanating from
democratic accountability and rule of law can be mutually reinforcing
so a free enterprise system should be thought of as the fourth pillar
underpinning liberal market democracies. Second, the bedrock on which
all four pillars stand is a broadly equitable distribution of economic
capabilities among the citizenry. That bedrock is fissuring in
industrial countries, while it has to be strengthened in emerging
markets like India.
Free Enterprise and Political Freedom
Why
are political freedoms in a country, of which representative democracy
is a central component, and free enterprise mutually supportive?
There
is, of course, one key similarity: Both a vibrant democracy and a
vibrant free enterprise system seek to create a level playing field
which enhances competition. In the democratic arena, the political
entrepreneur competes with other politicians for the citizen’s vote,
based on his past record and future policy agenda. In the economic
sphere, the promoter competes with other entrepreneurs for the
consumer’s rupee, based on the quality of the product he sells.
But
there is also at least one key difference. Democracy treats individuals
equally, with every adult getting one vote. The free enterprise system,
by contrast, empowers consumers based on how much income they get and
property they own. What then prevents the median voter in a democracy
from voting to dispossess the rich and successful? And why do the latter
not erode the political rights of the ordinary voter. This fundamental
tension between democracy and free enterprise appeared to be accentuated
in the recent U.S. Presidential elections as President Barack Obama
appealed to middle-class anger about its stagnant economic prospects,
while former Massachusetts governor Mitt Romney appealed to business
people, disgruntled about higher taxes and expanding healthcare
subsidies.
One reason that the median voter rationally agrees to
protect the property of the rich and to tax them moderately may be that
she sees the rich as more efficient managers of that property, and
therefore as creators of jobs and prosperity that everyone will benefit
from. So, to the extent that the rich are self-made, and have come out
winners in a competitive, fair, and transparent market, society may be
better off allowing them to own and manage their wealth, settling in
return for a reasonable share of their produce as taxes. The more,
however, that the rich are seen as idle or crooked – as having simply
inherited or, worse, gained their wealth nefariously – the more the
median voter should be willing to vote for tough regulations and
punitive taxes on them.
In some emerging markets today, for example,
property rights of the rich do not enjoy widespread popular support
because so many of a country’s fabulously wealthy oligarchs are seen as
having acquired their wealth through dubious means. They grew rich
because they managed the system, not because they managed their
businesses well. When the government goes after rich tycoons, few voices
are raised in protest. And, as the rich kowtow to the authorities to
protect their wealth, a strong check on official arbitrariness
disappears. Government is free to become more autocratic.
Consider,
in contrast, a competitive free-enterprise system with a level playing
field for all. Such a system generally tends to permit the most
efficient to acquire wealth. The fairness of the competition improves
perceptions of legitimacy. Moreover, under conditions of fair
competition, the process of creative destruction tends to pull down
badly managed inherited wealth, replacing it with new and dynamic
wealth. Great inequality, built up over generations, does not become a
source of great popular resentment.
On the contrary, everyone can
dream that they, too, will become a Bill Gates or a Nandan Nilekani.
When such universal aspirations seem plausible, the system gains added
democratic support. The rich, confidant of popular legitimacy, can then
use the independence that accompanies wealth to limit arbitrary
government, support rule of law, and protect democratic rights. Free
enterprise and democracy sustain each other.
There are,
therefore, deeper reasons for why democratic systems support property
rights and free enterprise than the cynical argument that votes and
legislators can be bought, and the capitalists have the money. The
cynics can only be right for a while. Without popular support, wealth is
protected only by increasingly coercive measures. Ultimately, such a
system loses any vestige of either democracy or free enterprise.
The Bedrock: Equitable Distribution of Economic Capabilities
There
is, however, a growing concern across the industrial world. The free
enterprise system works well when participants enter the competitive
arena with fundamentally equal chances of success. Given the subsequent
level playing field, the winner’s road to riches depends on greater
effort, innovation, and occasionally luck. But success is not
pre-determined because no class of participants has had a fundamentally
different and superior preparation for the competition. If, however,
some group’s economic capabilities are sufficiently differentiated by
preparation, the level playing field is no longer sufficient to equalize
a priori chances of success. Instead, the free enterprise system will
be seen as disproportionately favouring the better prepared. Democracy
is unlikely to support it, nor are the rich and successful as likely to
support democracy.
Such a scenario is no longer unthinkable in a
number of Western democracies. Prosperity seems increasingly unreachable
for many, because a good education, which seems to be today’s passport
to riches, is unaffordable for many in the middle class. Quality higher
educational institutions are dominated by the children of the rich, not
because they have unfairly bought their way in, but because they simply
have been taught and supported better by expensive schools and private
tutors. Because middle class parents do not have the ability to give
their children similar capabilities, they do not see the system as fair.
Support for the free enterprise system is eroding, as witnessed by the
popularity of books like Thomas Pikkety’s Capital in the 21st Century
while the influence of illiberal parties on both the Left and Right who
promise to suppress competition, finance, and trade is increasing. The
mutual support between free enterprise and democracy is giving way to
antagonism.
Moreover, as class differences create differentiated
capabilities among the public, governments can either continue choosing
the most capable applicants for positions but risk becoming
unrepresentative of the classes, or they can choose representativeness
over ability, and risk eroding effectiveness. Neither biased nor
ineffective government can administer well. So government capacity may
also be threatened.
Thus, as the bedrock of equitable
distribution of capabilities has started developing cracks in industrial
countries, all four pillars supporting the liberal free market
democracy have also started swaying. This is, to my mind, an enormously
important concern that will occupy states across the world in the years
to come.
Lessons for India
Let me
conclude with lessons for India. India inherited a kind of democracy
during British rule and has made it thoroughly and vibrantly her own. Of
the three pillars that Fukuyama emphasizes, the strongest in India is
therefore democratic accountability. India also adheres broadly to the
rule of law. Where arguably we may have a long way to go, as Fukuyama
has emphasized, is in the capacity of the government (and by this I mean
regulators like the RBI also) to deliver governance and public
services.
This is not to say that we do not have areas of excellence
strewn throughout central and state governments – whether it is the
building of the New Delhi Metro, the reach of the public distribution
system in Tamil Nadu, or the speed of the roll-out of the Pradhan Mantri
Jan Dhan Yojana – but that such capabilities have to permeate every
tehsil in every state. Moreover, in many areas of government and
regulation, as the economy develops, we need more specialists, with the
domain knowledge and experience. For instance, well-trained economists
are at a premium throughout the government, and there are far too few
Indian Economic Service officers to go around.
An important
difference from the historical experience of other countries is that
elsewhere typically strong government has emerged there first, and it is
then restrained by rule of law and democratic accountability. In India,
we have the opposite situation today, with strong institutions like the
judiciary, opposition parties, the free press, and NGOs, whose aim is
to check government excess. However, necessary government function is
sometimes hard to distinguish from excess. We will have to strengthen
government (and regulatory) capability resisting the temptation to
implant layers and layers of checks and balances even before capacity
has taken root. We must choose a happy medium between giving the
administration unchecked power and creating complete paralysis,
recognizing that our task is different from the one that confronted the
West when it developed, or even the task faced by other Asian economies.
For
instance, a business approval process that mandates numerous government
surveys in remote areas should also consider our administrative
capacity to do those surveys well and on time. If it does not provide
for that capacity, it ensures there will be no movement forward.
Similarly, if we create a multiple appellate process against government
or regulatory action that is slow and undiscriminating, we contain
government excess but also risk halting necessary government actions. If
the government or regulator is less effective in preparing its case
than private parties, we ensure that the appellate process largely
biases justice towards those who have the resources to use it, rather
than rectifying a miscarriage of justice. So in thinking through
reforms, we may want to move from the theoretical ideal of how a system
might work in a country with enormous administrative capacity, to how it
would work in the actual Indian situation. Let me emphasize, we need
“checks and balance”, but we should ensure a balance of checks. We
cannot have escaped from the License Permit Raj only to end up in the
Appellate Raj!
Finally, a heartening recent development is that
more people across the country are becoming well-educated and equipped
to compete. One of the most enjoyable experiences at the RBI is meeting
the children of our Class IV employees, many of whom hold jobs as
business executives in private sector firms. As, across the country,
education makes our youth economically mobile, public support for free
enterprise has expanded. Increasingly, therefore, the political dialogue
has also moved, from giving hand outs to creating jobs. So long as we
modulate the pace of liberalization to the pace at which we broaden
economic capabilities, it is likely that the public will be supportive
of reform. This also means that if we are to embed the four pillars
supporting prosperity and political freedom firmly in our society, we
have to continue to nurture the broadly equitable distribution of
economic capabilities among our people. Economic inclusion, by which I
mean easing access to quality education, nutrition, healthcare, finance,
and markets to all our citizens, is therefore a necessity for
sustainable growth. It is also, obviously, a moral imperative.
Notes:
The Origins of Political Order: From Pre-Human Times to the French Revolution by Francis Fukuyama, 2011, Farrar Straus and Giroux, New York.
Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy by Francis Fukuyama, 2014, Farrar Straus and Giroux, and
Political Order in Changing Societies by Samuel Huntington, 1968, Yale University Press, New Haven.