The State, Democracy and Markets: Lessons for India from the Global Experience is a monograph by Rajiv B. Lall, Distinguished Fellow, Artha Global and former Chairman, IDFC Limited. It provides a critical analysis of the relationship between free markets and democracy and examines the role of the state from an historical perspective. It challenges the neoconservative view that free markets unencumbered by state intervention are the basic recipe for economic development and that liberal democracy and free markets are intertwined and mutually reinforcing companions.
Rajiv posits that while free markets are necessary for generating prosperity, they are not sufficient for delivering transformative economic development. Drawing in part on his rich working experience in Sub-Saharan Africa, China, and East and South-East Asia, he makes the case that late developers cannot rely just on free markets to catch up. For transformational development the state has a pivotal role to play in nurturing market development and building indigenous technological capability.
He explains that the interaction between markets and democracy is fraught with tension and conflict, and using the experience of the U.S. in particular, he points out how capitalistic excess can destabilise democratic polities. Markets, by their very nature, are amoral mechanisms designed for efficiency. They operate on the principles of supply and demand, with little inherent regard for notions of equality or social justice. In contrast, democracy is deeply rooted in the idea of popular sovereignty. It emerges from a collective yearning for representation, voice, and participation in decision-making processes. Comparing the Anglo-American experience with high income European democracies, Rajiv suggests that the single most important determinant of success in managing the inherent tension between free markets and democracy, is state capacity.
Tracing the implications for India, Rajiv argues that for a democracy where the median voter is still poor, ensuring that the state has the capacity not only to complement and regulate, but also to legitimise markets, is the need of the hour. He posits that for India to achieve its goal of becoming a high income country, the state must also learn how to build an ‘indigenous innovation system’ that helps develop domestic industry. He argues that strengthening state capacity in its multiple dimensions is probably the most important reform priority for keeping India on a path of sustained economic growth with social stability.
Structure of the Monograph
My goal in this monograph is multifold. One, it is to examine the interface between the state and markets across various parts of the world, and by drawing in part on my own experiences working in Africa, China, and East and South-East Asia, I highlight the limits to what free markets by themselves can achieve and explore the role of the state in delivering transformational economic change; Two it is to analyse the Anglo-European and Western European experience in managing the inherent tension between capitalism and democracy; and three, I aim to draw broad lessons for India. To be clear at the outset, I am one of those who believes, both as a normative matter and as a pragmatic one, that India has no choice but to pursue a democratic path. It is also my belief that market-based economic policy provides the best prospect for India to succeed in its quest to deliver sustained economic growth. I believe that we have much that we can learn from the rest of the world as we chart our path economic prosperity as a democracy where the median voter is still very poor.
This monograph is structured as follows: I start with reflections on the historical spread of capitalism and democracy on the influential advocacy of the Washington Consensus about the power of economic and political freedom. I make the case that the world has changed in fundamental ways since the break-up of the Soviet Union in 1989 and that there is no room for ideological triumphalism in contemporary global discourse. Next, drawing partly on my first hand experiences in varous emerging markets, I highlight the limits of what free market policies by themselves have achieved across Africa, Latin America, and South-East Asia. I compare this experience with the role that the state has played in the economic transformation of South Korea, Taiwan, Singapore, and China. I then turn to an examination of the tension between markets and democracy and trace the drivers of the ongoing challenges facing Western models of democratic capitalism. Based on a comparative analysis of the Anglo-American and Western European models I examine the importance of state capacity in addressing the inherent tension between free markets and democratic polities. I conclude by outlining important lessons for India.
The broad argument is that for a democracy where the median voter is still poor, ensuring that the state has the capacity to complement, nurture, regulate, and legitimise markets is the need of the hour. Strengthening state capacity in its multiple dimensions is probably the most important reform priority for keeping India on a path of sustained economic growth with social stability.
Introduction: History Did Not End
In a celebrated 1989 essay and subsequent book, Francis Fukuyama, a noted political scientist at Stanford University, posited the ‘End of History.’ His argument was that while there may be many competing forms of social and political organisation, none could claim to be superior, more effective, or more durable than liberal democracy. Fukuyama’s essay came in the wake of the fall of the Berlin Wall and the remarkably widespread embrace of democratic forms of government towards the last quarter of the twentieth century. He went further, arguing that liberal democracies work better and are more sustainable if accompanied by free markets. In the context of the late 1980s Fukuyama meant for the ‘End of History’ to signal the end of ideological contestation with respect to the best way of organising a polity and economy. The pairing of political and economic freedom was an obviously appealing idea at a moment when most of the world had come to terms with the idea of Pax Americana. People had come to accept the avuncular and reassuring Ronald Reagan as the photogenic leader of the Free World, and the Nike swoosh, as the optimistic symbol for the benefits of globalisation and the free movement of goods, services, capital and people across national borders. The ‘End of History’ became a popular metaphor for the end of intellectual debate about what is the best form of political and economic organisation for a nation state: Democratic Capitalism was the widely acclaimed victor and the toast of the so-called Washington Consensus.
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