by Pranab Bardhan
All of the articles in this series can be found here.
In the 1990’s Andrei Shleifer was only one among many in the proselytizing army of reformers who went out to the transition economies, mainly in Central and Eastern Europe but also in developing countries, to make them ready for capitalism. They were in a hurry to implement reforms of liberalization and privatization according to some general, often one-size-fits-all, formula. The purse strings of emergency financial help by international organizations like the IMF and the World Bank and US agencies like USAID were also controlled by stern macro-economic ideologues of ‘structural adjustment’. The reformers were in possession of the canonical gospels which it was their sacred duty to spread among the heathens as quickly as possible, given the golden opportunity after the fall of the godless communists and socialists.
I went to some of the international conferences on the Economics of Transition in this period, held usually in cities like Budapest or Prague or Riga. Soon I gave up going to such conferences as I felt I did not know enough of those countries to really say anything that’d make sense to the local audience. But I did go to one organized in Kolkata by the eminent political economist Mancur Olson. (Mancur grew up in a Norwegian-American family in North Dakota. When he came to know that the name Mancur, a traditional name in such Scandinavian families, was a variation of the Arabic name Mansoor, he speculated: “In fanciful moments, I imagine a Viking raid on the Levant.”) I had admired his past work on collective action and I thought he deserved a Nobel Prize for that work, which he did not get. When he asked me to contribute to a collection of essays on institutional economics he coedited, I gladly did.
But on reform-mongering sometimes he went a bit overboard. I remember he was coming for the conference in Kolkata for the first time immediately after his visit to his Mongolian reform project, and saw on the road from the Kolkata airport to his hotel, many people on the roadside selling small amounts of vegetables and other odd bits. Mancur had a flamboyant dramatic style of talking with a lot of energetic waving of his hands. Next morning in his conference lecture he said with a flourish: “India has a great future. A great prospect for market reform here. On my way from the airport I saw all around me market forces blossoming!” In the coffee break I told him, “Mancur, those roadside vegetable sellers have been there all over India probably for the last 5000 years”. I did not tell him that India has markets even in things where markets are missing in advanced capitalist countries: with enough money to bribe you could, for example, buy a driver’s license, even though you did not know how to drive.
Once in a conference in Berkeley Mancur gave a lecture in his usual grand style. I also gave a lecture at this conference. My friend Mrinal was visiting from India and attended the conference that morning. He was with his two small sons, whom he got seated for a time at the back of the auditorium. Afterward when they were at our house, Mrinal asked his sons whose lecture they liked best. Since I was there, they made some polite noise about my lecture but the one they liked best, they said, was by “that lo-and-behold guy”, meaning Mancur.
Even though I did not get much involved in the on-going international gung-ho reformer frenzy of the economists of transition, I did participate in the mainly political-science project of my friend, Adam Przeworski on the transition to Democracy. (Adam had by then left the September group). He was born in Warsaw, Poland; I understand he never saw his father who was a physician, conscripted in the Polish Army just before his birth and killed in the Katyn forest where thousands of Polish officers were killed by Stalin’s secret police—I have earlier referred to the famous Polish film director Andrzej Wajda, whose father was also killed in the same massacre. (In 2007 Wajda made a film based on a historical novel on this massacre, what he called an ‘unhealed wound’ of Polish history). On September 11, 2001, when Adam saw from the balcony of his office at New York University in Lower Manhattan the burning twin towers collapsing, he was, he told me, immediately and involuntarily transported to his early childhood memories of devastation in wartime Warsaw.
Adam is a distinguished theorist of democracy and comparative politics. In the middle 1990’s he was the leader of the Group on East-South Systems Transformation, which had 21 social scientists (including myself) from 11 countries and 4 academic disciplines. It included some very well-known political scientists like Guillermo O’Donnell, Alfred Stepan, and David Laitin. I also got along well with a fellow member Bresser Pereira who was once the Finance Minister of Brazil, and later served as a Minister for some years in the Cardoso Government.
The major question we deliberated in this Group was how to make democracy viable and sustainable in the varied country contexts against considerable economic and political odds. One distinguishing feature of this Group was to discard the idea of transplanting the American or West European model of policies and institutions irrespective of local contexts, cultures, political processes and pre-existing institutions. We met at various international venues (including Bellagio in Italy and Antalya, the beautiful ancient Turkish city on the Mediterranean coast). The Group ultimately produced a book titled Sustainable Democracy published by Cambridge University Press.
Looking back to this period I can see how my views have evolved over time on the twin transformations that were being attempted, one was on political democratization and the other on economic liberalization and privatization. Where do I stand on those issues which so preoccupied us in the 1990’s? Let me briefly take stock, in a somewhat nerdy way, on a few of the key issues involved. On democracy, elections have been easily accepted all over (subject to some questions about the nature and conduct of such elections), but liberal values and primacy of individual autonomy and rights have been much more difficult to plant. As early as 1948, B.R. Ambedkar while drafting the Indian Constitution, had said: “Democracy in India is only a top-dressing on an Indian soil, which is essentially undemocratic”. This has been in effect the case in many other countries, particularly in countries where traditional rural societies (and their overflows into urban centers) are important—not just in India, Indonesia, Ethiopia and Turkey, but also in Russia, Poland, and some other countries in southern and eastern Europe. In such societies traditional social hierarchies (including patriarchy) and the sense of structured community privileges and loyalties are stronger than liberal values. Even when rights are recognized the emphasis is more on group rights than individual rights.
Adam Przeworski, following Joseph Schumpeter, has a minimalist concept of democracy; he’d certify a polity as democratic if there are competitive elections in which the incumbent has a chance of being voted down. But electoral sanctions are highly imperfect and blunt instruments, and there are many institutional practices that a democracy needs which may disappear in between elections.
Coming from a country of extreme diversity of groups and social oppression of minorities (and dissenters), I insist on safeguards of individual and minority rights as an essential part of democracy. So for me the institutionalization of those safeguards (through say, separation of powers, independence of judiciary, free media, etc.) is indispensable. In this respect, as we know, many countries have been recently experiencing a basic erosion of democracy, even though regular and even competitive elections have taken place, and there has been some widening of group rights for some hitherto subordinate groups. Strong despotic leaders have succeeded in turning citizens into fan clubs and learned ways of turning elections into a referendum on their charisma. Democracy as a peaceful way of processing social conflicts has been on the wane, yielding place often to strong-armed (ethnicity or religion based) majoritarianism.
On economic reform I have been a general supporter of liberalizing market reforms, but only with sufficient guarantees of social insurance for those who will inevitability lose out in those reforms and with sufficient opportunities for the latter to retool and retrain themselves to adapt to the harsh market changes. If market reform encourages socially undesirable consumerism, as some complain, there are ways of handling this, say through stiff taxation (apart from social reform movements). I am not, however, a supporter of financial liberalization, particularly if it is not substantially regulated.
On the related subject of globalization the importance of supply chains and crucial imports of essential goods and components for all countries are now widely recognized. I also cannot help but note that many opinion polls show stronger support for globalization among low-income countries today than among many rich countries (which used to preach the virtues of free trade before)–more support among poor female garment workers in Bangladesh or Vietnam than among the industrial working class of France or US. But I am against unregulated international capital flows.
On privatization I have found it more difficult to make up my mind. For every well-run public firm (say, in France or Singapore or South Korea) I can, of course, cite many more instances of taxpayer-funded bureaucratically-run white elephants and disasters from all over the world. A part of the reason why the disasters persist is that they are sometimes monopolies so they have no urge to shape up, or that the bureaucrats in charge presume that in case of losses they’ll be bailed out by the government. For many countries the government cannot credibly commit not to interfere in the commercial operations of a public enterprise, for all the autonomy promised on their memoranda of understanding. Patronage distribution through public firms and corrupt income through public procurement are much too tempting for politicians.
But the question that arises in my mind in this context is: after privatization what is the nature of the government commitment to the firm? Most large private firms have to be under the supervision of a government-appointed regulatory body. Instead quite often one hears stories of regulatory bodies being captured by the firm to be regulated. I suppose much depends on the particular politician-business-bureaucrat nexus in different countries. This nexus also influences the price at which a public enterprise is sold; there are many stories of collusive deals of underpricing and defrauding the taxpayer in the privatization process (not to speak of the oligarchic loot in Russia we have mentioned before).
The evidence on privatization of public utilities (like water, electricity, and railways) in different countries is quite mixed. Privatization often implies turning a public monopoly into a private monopoly, and thus may not make a firm more efficient. For goods that are tradeable, in an open economy the pressure of cheap imports or of competitiveness in export markets can act as a disciplining factor on the inefficiency of a domestic monopoly, whether public or private. Also, comparative efficiency should not be judged in terms of profits alone, because a public enterprise often has socially ordained goals beyond money-making (like serving remote areas or poor people which private firms may not do). Even Andrei Shleifer, an ardent votary of privatization in Russia, has coauthored an important article where he shows that privatizing the prison system (which is common in the US) may not be a good idea because there are social objectives (like humane treatment of prisoners) which cannot be fully spelled out or enforced in a contract with private prisons. In general I have often felt that in comparing the performance of particularly large firms which are necessarily bureaucratic in organization, private or public, much depends on the managerial incentive structure and corporate culture than on who owns the firm per se.
One area where the performance of public firms may be dubious is in the matter of encouraging productivity-enhancing technological innovations. I have seen leftists often overlooking this aspect. There is new evidence, however, from China that in some tech firms that are under mixed (public-private) ownership or in private firms where the state actively provides a large part of the finance and underwrites some of the risks, considerable technological advance has taken place particularly in areas like artificial intelligence and bio-technology. The state can sometimes play a catalytic role in the innovation process through coordination and directional guidance, shaping market expectations, and making strategic initial investments. There are many examples of all of this cited in Mariana Mazzucato’s 2015 book The Entrepreneurial State. As she illustratively points out, every bit of technology that makes the iPhone made by a private company (Apple) so “smart” was government funded: the internet, GPS, its touch-screen display, and the voice-activated virtual assistant Siri.
Sometimes the pattern of innovation is at least as important as the rate of innovation. Much of innovation by private firms is labor-replacing, destroying jobs. But with public firms, or private firms where workers can exert a significant voice in their management, the research may be directed toward more job-creating and labor-empowering innovations and innovations oriented to more social (environmental or public health related) goals.
In all this I have been mainly contrasting private and public enterprises. There is a whole different area where the enterprises may be run by workers and other civil-society organizations, on which there is some limited amount of experience, which we need to study and draw upon. My late friend, Erik Ohlin Wright of the September group, had a whole project of what he called Real Utopias (utopian ideals grounded in the real potential for social change) on exploring institutional alternatives to capitalism (like those ranging from Wikipedia to the Mondragon Federation of worker cooperatives in Spain) and on developing forms of associative democracy. In one of the volumes in this project Joshua Cohen (of the September group) and Joel Rogers suggest ways of strengthening secondary associations mediating between individual citizens and the state and thus enhancing democracy–organizations like unions, works councils, neighborhood associations, parent-teacher groups and women’s societies.
My views supporting many institutions of liberal democracy (instead of dismissing it as ‘bourgeois democracy’), several of the market reforms and an ambiguous position on privatization confuse, if not alienate, some of my leftist friends. Some years back after a public lecture I gave in India, a young man stood up and said, “I do not disagree with most of what you said, but I am wondering, which side are you on?” I said in reply, “Please find flaws in my arguments, not waste time on searching for my ID card”.