Dr Bharat Jhunjhunwala
Photos of Prime Minister Modi enjoying tea with CEOs of Multinational Corporations are published every other day in the newspapers. He is going out of his way to assure foreign businesses that the Government will not “breath on their necks” and that they will be welcomed and honoured. Indeed, businessmen have a critical role to play in the country’s economic development. But the question here is whether the Government and businesses work together as in a cohesive joint family; or they should face each other as in a friendly match?
The Government and businesses work out a common approach to the policy issues at hand in the joint family model. For example, if the Government must decide on relaxing the labour laws, then business leaders and government officials would get together, make a road map and then the Government would implement it. This is like the father and son discussing their business plans over dinner and then implementing the same next morning. This is the Japan and East Asian tradition that advocates close liaison between the two, an intermingling of their roles. Relations between the two are different in the friendly match model. The Government officials and businessmen meet but do not disclose their minds. Instead they try to assess the other side and work out their strategies accordingly. This is the Indian tradition that advocates that they be kept separate from each other in a state of constant friction.
Japan is projected as the most successful example of the Government-business bonhomie. After the Second World War, the standard of living of people of Japan had fallen the pre-World War I levels. But within a span two decades Japan had recouped itself. The Ministry of International Trade and Industry (MITI) is often credited with bringing about this transformation. It acted as the father figure in creating a grand coalition of government, businesses and labour. This example is presented as a proof of the benefits of close contacts between the Government an businesses.
The question here is whether the Japanese turnaround after WW-II was engineered by MITI; or it happened despite the false moves made by MITI?
Chalmers Johnson has written about the constructive role of MITI in the revival of Japan. He shows that MITI had the clout to make a policy and then have it implemented. For example, it successfully starved the traditional textile industry of Japan in favour of heavy industry. Another contribution of MITI was in promoting the electronics industry. MITI acted as the father figure that coordinated the actions of banks, businesses and labour to achieve the desired ends. Success of the Japanese economy is attributed to this proactive approach of MITI. This is the model that Mr Modi appears to be emulating.
Another study by Australian researchers paints an altogether different picture, however. As told above, MITI was behind the development of heavy steel industry in Japan in the 50s. This collapsed in the seventies. MITI had pushed Japan in the wrong direction. MITI had sought to develop a 5th generation computer. That failed. More importantly, MITI had prevented Japanese businesses from importing computers so that domestic computer industry would take off. Japanese businesses were forced to work with smaller Japanese machines. This delayed the growth of Japanese businesses. MITI had opposed Sony’s foray into transistors. Sony persisted against MITI’s directives and became successful. Lastly, MITI had tried hard to get smaller auto companies to amalgamate so as to reduce competition in the automobile sector. Honda was one of the smaller companies that resisted MITI’s directive-again racing to victory in opposition.
The contribution of MITI in the turnaround of the Japanese economy after WW-II is also questioned. A study by the Brookings Institution found that four factors contributed about two percentage points each to the 8.8 percent annual growth rate between 1953 and 1971. These were high domestic savings rate, absorption of new technologies, economies of scale, and smooth labour relations. Here MITI may have had a role in facilitating transfer of technologies, fostering economies of scale and establishing smooth labour relations. The overall sense of these studies is that the success of Japan was based more on the ingrained cultural traits of that country such as veneration of the king, high savings rate and a work ethic among workers. The success of Japan was mainly secured through the initiatives taken by the businesses-often against the guidance given by MITI.
Korea too has had close relations between politicians and businesses. The 30-odd family held chaebols provided money to the Presidents and the latter provided them with an unlimited access to cheap loans. The result of this chummy relationship was that the bad debts of the banks and the weak fundamentals of the chaebols were glossed over by the regulatory authorities. The debts grew unnoticed by the people until it was too late. That led to economic crisis few years ago.
The Indian ethos is entirely different. We believe in friction. The four-varna system is based on each varna living in perpetual tension with others. It is stipulated that the Brahmin, Kshatriya, Vaisya and Shudra should pursue their own desires and be “controlled” by another varna. These are not to be confused with birth based jati. The businessman, for example, should try to make money. He would perpetually be in friction with the workers in negotiation of wages; and with the government in the negotiation of taxes. The final distribution of income between these would be determined by this battle. In the Japanese model, on the other hand, the Government, business and workers will sit on the dinner table and determine the distribution of income among them.
The Japanese system is like that of a circus monocycle. The roles of business and governance have been combined into one wheel. It is quick on the uptake and maneuvers well. But it is difficult to maintain balance for long. The Indian system, on the other hand, is like a tricycle. The government, business and workers represent the three wheels, each tied to the other yet separate. One propels the system, one bears the load while the third maneuvers. It is both slow and rigid. But the constant tension between the three wheels gives it stability.
Mr Modi should beware. He seems to be implementing the Japanese model by trying to forge one-sided close relations with businesses. This is likely to backfire. Businessmen do not understand the pulse of the nation and can lead the Government into anti-people directions. Instead of looking to Japan, he should look inward to our own traditions and keep an equal distance from both businesses and workers. This tradition has helped us survive for five millennia. It will deliver again. Modi must follow real Hinduism; not cosmetic version of the same.
(The author was formerly Professor of Economics at IIM Bengaluru)
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