How Deng guided India’s reforms

There is an old saying about inventions, that if you build a better mousetrap, the world will beat a path to your doorstep. A mousetrap is a device to catch mice. And Deng Xiaoping has replaced the Pied Piper of Hamelin as the most famous mouse-catcher in history. Mao’s communism was revolutionary, but Deng’s capitalism was even more so. It was based on the commonsense notion that it did not matter whether a cat was black or white as long as it caught mice. For Mao, the colour of the cat was all-important. For Deng, the catching of mice was what mattered. And the world did indeed beat a path to Deng’s mousetrap, pouring] more than $ 40 billion of investment into China last year.

Much has been written by others about what Deng did for China. I want to write about what Deng did for India.

From independence till the 1980s, Indian intellectuals, politicians and bureaucrats defended indefensible policies on the ground that India was different. They simply ignored the lessons emanating from miracle economies like Korea, Singapore, Taiwan or Mauritius on the ground that these were all small countries whose experience was irrelevant for a large country like India. Liberals like me pointed out that (1) a large country is simply a collection of small regions; (2) a large capitalist country like the USA has succeeded as well as, indeed better than smaller ones like England and France; (3) Japan and Indonesia, with populations exceeding 150 million, can hardly be called small.

But we liberals were waved aside as ignoramuses. The state and its Leftist cheerleaders believed, in effect, that India had nothing to learn from others. In the early 1980s, I asked a World bank economist who had led missions to both India and China what was the main difference between the two. He replied, ‘The Chinese are eager to learn from the rest of the world. Indians believe they have nothing whatsoever to learn.’ No wonder a despairing Prof Raj Krishna declared, ‘We are knowledge-proof.’

The only country comparable to India in size is China. The Indian establishment long invoked the mantra of size to claim that India had much to learn from Mao in China and nothing to learn from Chiang-kai Shek in Taiwan. The fact that Taiwan under Chiang had become 20 times as rich as China under Mao was dismissed as irrelevant. So was the fact that thousands of poor Chinese swam across shark-infested waters from Mao’s supposed egalitarian paradise to capitalist Hong Kong, while nobody swam in the opposite direction.

Mao accomplished a major feat in providing an iron rice bowl to the Chinese poor. But economic growth under Mao was modest and the country remained poor. However, he succeeded in distributing poverty evenly. More important, he invested in education, health and rural development, strong foundations on which Deng would later build. Mao, poor chap, believed he was preparing China for socialism. In fact he had unwittingly prepared China for capitalism, as Deng soon demonstrated.

Deng saw that distributing poverty evenly gave great joy to Leftist intellectuals but none to the poor. He recognised that the way to empower and enthuse the poor was to give them a chance to become rich by reaping the rewards of greater productivity. Mao claimed that money was the root of all evil. But Deng perceived that, once you had provided a safety net to all, lack of money was the root of most problems. He had the courage to say, ‘To get rich is glorious.’ His reforms were explicitly anti-egalitarian. Instead of Mao’s uniform poverty, he wanted to harness the entrepreneurship and innovation of ordinary Chinese by giving them ample rewards for higher productivity. And he saw that this inegalitarianism would help the poor by creating new economic opportunities.

His reforms started in agriculture, replacing cultivation by communes with private farming and Chinese agricultural production and income suddenly soared to unimagined heights. The cat had changed colour, but was now catching mice.

He then extended the same logic to industry and services, showing enormous intellectual courage in abandoning the shibboleths of the party he had served all his life. He first allowed private industrial investment, and then foreign investment. He moved from an inward-oriented command economy to an outward-looking, market-oriented economy.

Far from—Seeing international trade as an imperialist trap, he proved it could raise living standards rapidly. So too with the inflow of global capital. Within two decades, China had become the fastest-growing economy in the world, the biggest destination of global foreign investment, and the fastest-growing trader in the world. Far from being impoverished by trade with imperialists, it chalked up a trade surplus of $ 12 billion with the USA.

In short, Deng destroyed conclusively the notion that large countries could not liberalise successfully, could not rely on export-oriented policies, could not rely on foreign investment. He proved that even the largest country in the world could switch from self-sufficiency to interdependence with enormous gains. He proved that integration with the global economy was a recipe for prosperity, not poverty.

This, combined with the collapse of the Soviet Union, finally eroded the knowledge-proof fortress of the old Indian establishment. The old guard tried to fight the economic reforms of 1991, but was constantly undercut by Deng. He proved that even a country as touchy about its sovereignty as China could see great gains in joining the World Trade Organisation, pricking the balloon of Indian leftists who claimed WTO membership meant a surrender of sovereignty. The left initially hailed Deng’s policy of limiting dividend repatriation by multinationals to their exports, and of opposing US demands for intellectual property rights. But soon Deng lifted the dividend limitation and accepted a more stringent patents regime than even the one proposed by WTO. In this fashion Deng, quite unwittingly, came repeatedly to the rescue of Indian reformers when they were under pressure.

So, let nobody think that Dr Manmohan Singh alone shaped India’s economic reforms in 1991. The reforms were guided by the invisible hand of Deng, no less than the invisible hand of Adam Smith.

The author adds: Many readers say they are stunned by the figures in last week’s Swaminomics showing how remittances from abroad have plugged the trade gap, and want to know my source. Some even accuse me of inventing the figures! The data come from page 160 of the Reserve Bank’s Annual Report} for 1995-96.

What do you think?