The return of the activist State

The middle class's long push to force the State to retreat from the economy may be reversing, says Ajit Balakrishnan.

There is probably a generation of Indians, now in their twenties and early thirties, who have grown up being taught to believe that the less we see of the State the better it is for society.

Such a set of beliefs plays out in the national discourse in multiple different ways, the loudest heard of which is the chant across India’s mediascape about the need for “reform” -- a value-loaded word, which implies that the change being proposed is a change from something corrupt or inefficient in gradual, incremental steps (to distinguish it from “revolution”).

In an earlier era in India, “reform” meant things like banning child marriage, sati, caste-based prejudice and reducing zamindari land-holdings.

In the current era, the virtuousness of the word “reform” has been conflated with dismantling of the public sector and generally reducing the role of the State in every aspect of economic and social life. 

It is true that this disillusionment with the role of the State was an international wave -- starting in the United Kingdom, moving to the United States and from then on to the rest of the world, including India.

This disillusionment started out in the 1970s when Western economies suddenly started suffering from both low economic growth rates and high inflation.

This was different from the previous two decades where government-sponsored investments in the economy had resulted in sturdy economic growth, as postulated by the economist John Maynard Keynes.

But this time around these economies would not respond to such government stimulus and, slowly, State action was seen to be now a cause of this lack of growth.

Intellectuals such as Friedrich Hayek and Milton Friedman added fuel to this, the former with his The Road to Serfdom which presented an activist State as a stop on the road to totalitarianism, and the latter with his Capitalism and Freedom that presented free markets as the guarantor of political freedom. 

Thinkers like Michael Hunt, a professor of history at the University of North Carolina, go further and explain the push against an activist State as an effort by American businesses wanting to weaken the power of American trade unions in their effort to fight intensifying international competition.

Think-tanks like the American Enterprise Institute, and Ronald Reagan who enlisted all of these plus the evangelists’ concerns about abortion and pornography into a political coalition that articulated the themes of free-market prosperity and individual autonomy.

Mr Hunt also points out that the collapse of socialist Eastern Europe between 1989 and 1991 served to signal the failure of the centralised, planned economy model that had held sway throughout the world, including India, from the end of World War II till then.

Just as the theory of a retreating State being the key driver of economic growth and prosperity was harnessed by the American evangelical movement to espouse their anxieties, for example, about an activist State legalising abortion, in India, the Indian middle class changes its stand opportunistically.

The Indian middle class’s support for State-led industrialisation from Independence till the 1980s was based on unlimited job opportunities that this opened up for themselves and their children in the bureaucracy and in the massively expanded State.

Subsequent actions like the nationalisation of banks, insurance, mines and other key industries created even more opportunities for them.

This party went on in full swing till the State-led development theory fell out of fashion with the worldwide stagflation of the late 1980s.

The same middle class that had crusaded for State-led industrialisation then led the crusade for privatisation.

The calculated stand that the middle class takes vis-à-vis political economy questions is illustrated by Jie Chen, a professor at the University of Idaho, in his analysis of why China's enormous middle class, contrary to many predictions, has not been vocal about democratic reforms.

In his 2013 book, A Middle Class Without Democracy: Economic Growth and the Prospects for Democratisation in China, he points out that this is probably because the contemporary Chinese middle class has close ideational and institutional ties with the State and uses these ties for its social and economic well-being.

This makes the middle class act in favour of the current Chinese system and puts it in opposition to democratic changes.

So long as the middle class in any country is a beneficiary of State-led growth, it supports such a regime, even if authoritarian. (Notable examples: Singapore, Malaysia, Thailand, Indonesia, Taiwan and South Korea).

Now, there are drum beats of another kind. The world economy is limping. Europe and Japan are stagnant. The emergent market economies like Brazil that the world had been depending on to drive demand seem to be in a swoon.

China, with its heady cocktail of communism and capitalism, appears to be faltering.

Central banks in most major economies are keeping interest rates at near zero hoping that at those rates at least some businesses will borrow money and grow and in the process create badly needed jobs.

The businesses of the 21st century want part-timers and contract employees who can be hired or jettisoned at will. But these on-again-off-again workers need to be housed and fed during the periods when their labour is not needed.

Everywhere the call is that governments should open its purses and spend money. Welcome back to the activist State.

Ajit Balakrishnan, founder and CEO of rediff.com, is the author of The Wave Rider, A Chronicle of the Information Age. You can reach him at ajitb@rediffmail.com