A decade ago any suggestion to do “What works for and in India” would have been dismissed by the reformists as Neanderthal economics. Free market thinkers for whom economic laws are universal and immutable had long assumed what works else must work in India too. This West-driven economic dogma had gripped the world almost through the entire 20th century. But the dogma weakened in 2005 and was almost given up in 2008. Now, a throw back to the 1990s when the whole world did a U-turn to the West.
U-turn by West
When the Socialist order melted down in the early 1990s free market economics as theorised in and by the US emerged as the universal model for the world. Post-Socialist Indian economic discourse merely echoed the US economic theories.
Not being conscious of the cultural and behavioural differences of Indians, the Indian economic establishment merely presumed that what worked in and for the US would work in and for India as well. But by 2005, however, doubts arose in the West itself about the efficacy of its model for the rest of the world. The Asian Crisis of 1997 and the dot.com crisis of 2001 forced the West to rethink. In 2005, the “Washington Consensus” evolved by free market thinkers in the 1970s, which advocated complete financial and trade integration of the world -- later labelled as globalisation -- was explicitly given up by the West. Finance Ministers and Central Bank Governors of the G20 countries announced on October 15-16, 2005: “We recognise there is no uniform development approach that fits all countries. Each country should be able to choose the development approaches and policies that suit its specific characteristics, while benefiting from the accumulated experiences in policy making over decades, including strong macro-economic policies for sustained growth.”
Later the World Bank, in its letter of May 2008, months ahead of the global meltdown, conceded: “In our work across the world, the World Bank has learned the hard way that there is no one model that fits all. Development is all about transformation. It means taking the best ideas,testing them in new situations, and throwing away what does not work.” Yet the Indian economic discourse did not echo even a word of this realisation by the West.
Both Marx and Market, Wrong
In fully socialised economies, where family farms and business entrepreneurship had been done away with, reform meant allowing greater space for the private corporate sector-- local or foreign. Except in China, nowhere did the non-corporate, small sector, figure in ‘reforms’. Market economics celebrated not only the demise of small ones, it also accepted the death of big ones to be replaced by the bigger or the better ones, as creative destruction.
Modern economics teaches that, scale being critical, one need not shed tears for the demise of small businesses or farms nor try to save them. While theories of Karl Marx saw the non-corporate economy, including family farming, as private capitalist, the capitalist theories did not see it as either capitalist or socialist but saw it as just a transient reality moving towards demise. This is where theories of both Marx and Market proved wrong. In theory and practice, small farms and small businesses were neither socialist nor capitalist.
Both Socialists and capitalists were wrong in thinking that big was fitter to survive and small had no chance. It proved that actually it was the other way round.Whether it is the free market US or the Socialist market China, it is small businesses that produce most jobs and sustain the economy. Now, see how Socialist theories destroyed family farms and tiny businesses.
Chayanov Right, not Lenin
In Russia and and China, which nearly fully Socialised their economies, those at the base of the pyramid were robbed of their economic activities. To illustrate, farm families lost their lands and self-employed, their jobs. Both were given government jobs. In Russia, Alexander Chayanov, a sensible Socialist, who argued family farming was more efficient and economic and protested against Socialising it, was first incarcerated by Lenin and finally shot dead by Stalin. Chayanov regarded family economics as distinct and different from both capitalist and Socialist. Several decades after Chayanov’s death many economic thinkers of the world now see how right he was and how wrong both Socialist and capitalist economists were. Now, many agree family and small scale farming is more economic, environmentally safe as compared to large-scale farming. While Socialist Russia had collectivised 80 per cent of its agrarian economy, in de-socialised Russia now, Dacha [household] gardens account for just 3 per cent of arable land, but grow an astounding 50 per cent by value of the food eaten by Russians. Government statistics say 35 million plus families [71 per cent of Russia’s population] engage in Dacha gardening which provide 92 per cent of Russia’s potato, 77 per cent of vegetables, 87 per cent of berries and fruits, 59 per cent of meat and 49 per cent of milk. This is neither Socialist nor capitalist. Just family economics. Has any Indian modern economist heard of Chayanov?
Mao Wrong, Deng Right
Likewise in the late 1970s Deng Xiaoping realised China’s blunder in the 1950s and began reviving self-employment and jobs through Town and Village Enterprises [TVEs].
Economic reform in China started with retrenching millions from government jobs, forcing them to go for self-employment. Result? In ‘How China Became Capitalist’  Nobel Laureate Ronald Coarse and Ning Wang wrote:“By the early 1980s, self-employed barbers and street vendors in China earned more than surgeons and nuclear scientists” and the number of self-employed household businesses increased from 1,40,000 in 1978 to 2.6 million in 1981.”
In 1980, only 4 per cent of the rural labourers were engaged in running their own small businesses. By 2007, the share of the rural labour force that were self-employed (and living at home) rose to 15 per cent. In other words, there are around 75 million persons in rural China, who are self-employed. China’s poverty headcount declined by 154 million, by far the most impressive record during China’s three decades of reforms.
Contributions of foreign capital toward China’s initial poverty reduction in this period are minuscule. Employment generated by firms funded by foreign capital was 60,000 in 1985 and 6,60,000 in 1990. The said two figures for TVEs are 69.8 million and 92.7 million, respectively. China’s take off in economic growth in the late 1970s and its poverty reduction for the next couple of decades was completely a function of its rural development and its internal reforms in general.
Now, 28 million TVEs employ 128 million Chinese-- some 2/3 of the the manufacturing jobs of China. This was China’s economic reform, to start with. In the book Deng Xiaoping And the Transformation of China, the most authentic work on how Deng changed China, the author says: “Deng realised he could not simply import an entire system from abroad, for no alien system could fit into the unique needs of China-- which had a rich cultural heritage but was also huge, diverse and poor. He realised what some free market thinkers did not, that one could not simply solve problems by opening up markets; one has to build institutions gradually. He would encourage officials to go everywhere and learn about what brings success... but to experiment to see what works at home.” The success formula of Deng is the core idea of Niti Aayog. Russia had to revive small farming that had died under Russian state capitalism and China had to re-establish self-employment that had ceased to be under Chinese people’s Socialism. But in India both have survived India’s part-time Socialism and have been vibrant whether under quasi-Socialist or quasi-free market India.
Contrary to the popular notion that economic reforms mean promoting private or foreign corporate sector, in Russia it included reviving private farms and in China it largely meant giving rebirth to small businesses in the name of TVEs.
What then should India’s economic reform should really mean? Precisely what Modi’s Niti Aayog says. Will the NDA Government internalise Modi’s thoughts at all levels and act?
S Gurumurthy is a well-known commentator on political and economic issues.