Milton Friedman’s extempore comments at the 1989 Hawaii conference: on India

This extempore may be one of the great comments on India Economy! It is worth to note few paragraphs.

"I think you have to distinguish sharply between a redistributive state and a regulatory state.  I give you Sweden, which is a very highly redistributive state, but is not a highly regulatory state.  As I understand it, the original Constitution of India called for a redistributive state.  The ethos called for a regulatory state, and they turned out to be both very different and I would say ultimately incompatible.

That was a large part of the motivation behind some of the measures that were taken then.  Secondly, you are quite right that one of the things that India inherited was a good civil service.  I came back from India on my first trip there saying that in my experience, I had never met a class of civil servants who were as able as the Indian Civil Service.  However, they weren't in accord with the principles that were going to be followed.  Many of them, particularly Mr HM Patel, would not have gone along, I suspect he would not have been an enthusiastic participant of the Mahalanobis Plan.  I don't know….you tell me.  Am I wrong?  There were people at the time who recognized fully what the consequences were going to be, the most notable example is BR Shenoy in his dissenting view on the committee of experts examining the Second Five Year Plan.

In my opinion, the most serious problem of India in the economic sphere can be pinned down very quickly.  It has to do with the pegging of the exchange rate and the existence of change controls.  My view on this is based not only on India alone; it is based on country after country.  There is no other measure which opens itself so much to corruption than to spreading from one regulation to another.  In some ways, if you could pull that pin out, much of the rest of the superstructure would collapse.  On that particular issue, it was initially an open issue in India.

On a very different subject that you touched in your comment, I share completely with you the outrage at the picture of extraordinary ostentation in the midst of extraordinary poverty.  I venture to predict that if you ask where the money comes from that finances that ostentation, you will find in almost every single case it comes from government favour.  It is created by the present system of planning.  The idea that the present system of planning is directed at egalitarianism is, I think, an absurd idea…  I remember an incident which I think is very amusing.  I once was in Hong Kong ten years ago, and I was entertained at the home of a very wealthy Hong Kong Indian businessman.  He's the person who owns the Hilton, Hare Nina.  It was at his home.  This is a man who has 50 people to dinner every night.  One of the people who was present there was an Indian capitalist who would be an absolutely perfect image for a New Yorker cartoon of a bloated capitalist sitting on a pile of money.  He was big, fat and just looked the image.

I want to go back for a moment about two comments about T.N.'s.  One is, there are certain words which are red lights to fallacies.  One of those words is "need".  I do not know any sentence that anybody ever uses with "need" which doesn't turn out to have a fallacy embedded in it.  The word that leads me to is not need but "essential".  "Essential import".  Every economist knows that if you have adjusted your resources properly, every item you buy is essential at the margin.  It is a distinction between marginal and average.  The word "essential" is a meaningless word, and any place you see it used, you can be sure there is a fallacy.  The same thing with the word "shortage".  I noticed that when T.N. came to the word shortage, shortage of foreign exchange, he hesitated.  He said an "alleged shortage".  Economists may not know much, but there is one thing we know very well.  That is how to create shortages and surpluses.  Tell us what you want a shortage in, and we'll create it.  The only thing you have to do is set a maximum price that is below the market price, and you'll have a shortage.  If you want a surplus, we'll produce that, too.  We'll give you a case in which we'll offer a price higher than the market price.  We've got a surplus of wheat for that reason in the United States, and we've got a shortage of housing in New York for that reason.  The talk about a shortage of foreign exchange is always an evasion of a problem.  Some how or other, economists ought to get into the practice of never using the word shortage without accompanying it by at what price."

One more point and I'll be through.  You say that you want to dismantle the exchange rates over a ten year period.  I think you're wrong.  There are some things you want to do immediately overnight and some things you want to drag out.  There are two aphorisms that bring out the point.  One is: don't cut a dog's tail off by inches, and the other is haste makes waste.  They're the opposite of one another, but each is right in some occasions.  It seems to me as a generalization with respect to any price control that it should be done instantly.  You should cut the dog's tail off at once.  If you're going to abolish exchange control, it ought to be announced on a Friday or Saturday night to be done on Sunday morning.  Just as Ludwig Erhardt in the German reform announced overnight, over a weekend, he did it on Sunday because the American and British control offices were closed and so they couldn't countermand his order.  That is why he did it on a Sunday.  He did it at one full stroke, all price controls abolished.  Margaret Thatcher abolished exchange control in Britain overnight.  Exchange control, it seems to me, is one of those things you have to abolish overnight.  If you stretch it out, you will never abolish it.

I don't think we ought to get involved in words, and I don't mind if we drop the word socialism.  I would say that a system of detailed controls or whatever you call it, is a system which generates inequality.  The private ownership of property is not enough.  Some of the main beneficiaries from your controls are private enterprises and moreover as I cited in my example, they also support the system of controls and regulation.  What I say is that the combinations of controls and regulations, whatever you call it, produces inequality, and chief among them is the foreign exchange control.  If you could eliminate the foreign exchange control, you will eliminate a good bit of the harm which is currently being done by all your regulations.

If I might say, I have enormous sympathy with this view that it's the same old story.  It is!  Exactly, and that's what's distressing about it.  It's a shame that in 40 years, there been no real major change in the structural characteristics of the Indian economy.  That's the real tragedy."