Saturday, July 22, 2006

Collective Wisdom: Why the Many Are Smarter Than the Few

Dance of democracy T T RAM MOHAN The Economic Times THURSDAY, JULY 13, 2006
Indian democracy exasperates many in India and abroad, however much they may swear by the virtues of democratic processes. It is seen as giving organised groups, such as labour unions, the power to veto important economic decisions. It enables small political parties to wield disproportionate influence over policy-making. Its central tenet of going by votes tends to render long-term interests hostage to short-term populism. For critics of Indian democracy, the government’s decision last week to put disinvestment on hold was confirmation of how democratic processes can thwart sensible decisions.
Certainly, that is how it was projected in the English media. The decision, critics said, would send the wrong signals to foreign investors. A regional party had hijacked the reform process. Dr Manmohan Singh had been shown up again as a weak PM. The CII even warned of growth slowing down as a result. But was the decision such a big deal? Disinvestment has been on hold ever since the UPA government came to power. The UPA’s Common Minimum Programme had stated clearly, “Generally profit-making companies will not be privatised.” In the two years that disinvestment has been on hold, neither economic growth nor stock market performance has suffered.
The economy has grown at over 8%. The sensex has shot up by 116%, again giving the lie to the argument that the absence of privatisation or disinvestment would dampen foreigners’ enthusiasm for the Indian market. Disinvestment proceeds are to go to a dedicated fund to be used for social sector investment and for turning around sick PSUs. So, disinvestment will not even help bridge the fiscal deficit. At best, it will help augment budgetary allocation for the social sector. Disinvestment may yield political dividends for the UPA government by helping it go the extra mile on social sector spending. But the implications for the economy, at least in the near term, are not significant whether or not disinvestment takes place. So what is all the fuss about?
If the reformers had had their way, many of our best-performing PSUs would have been privatised long ago. Since the companies were not doing well at the time, they would have been sold cheaply. Because the companies were not privatised, because gradual disinvestment has been the preferred route for the most part, the government is richer today as the market capitalisation of PSUs has risen considerably. The increase in market capitalisation reflects the improvement in performance of PSUs as they responded to deregulation and competition. So, thank Indian democracy for stalling privatisation all these years.
In The wisdom of crowds, widely regarded as one of the best business books ever written, James Surowiecki shows how in a variety of contexts — the stock market, organisations, the prediction of election results — the collective intelligence of ordinary people produces better outcomes than the judgements of experts. He contends that, subject to some limitations, this is true of democratic processes as well. The Indian experience with disinvestment is an excellent illustration of Surowiecki’s point.
The debate on quotas provides another example of how democratic processes can be a force for good. Quotas are a political response to the clamour from disadvantaged groups for inclusion in the process of betterment. Yet, many experts can only see quotas as undermining merit and efficiency. Just as India is poised to emerge as a major economic power, politicians are determined to play spoilsport — this has been the dominant refrain in the media. The debate on quotas, like that on capital punishment, will never be resolved. But it has at least thrown up one positive outcome: a significant expansion in opportunities in higher education as the government seeks to preserve the seats available for the merit category while providing quotas for OBCs.
Again, democratic politics is prodding the country in the right direction. The turnaround in the Indian Railways is yet another example of how democratic processes can produce happy outcomes. The experts told us that the Railways faced disaster unless passenger and freight fares were rebalanced, the Railways operated strictly on commercial lines and government was distanced from management of the Railways. Democratic politics did not permit these solutions. Instead, we have had imaginative solutions of the sort that Laloo Yadav has pushed through. Experts tend to portray democratic politics as undermining “reforms”, thwarting progress. But if India’s experience is anything to by, democracy has a way of throwing up pleasant surprises. (The author is professor, IIM Ahmedabad)

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