Saturday, January 27, 2007

Magic of Invisible Hand

Every time I visit my hometown Bangalore, it shows a fast changing picture of society. It is city projecting the modern face of India. Being a pakka Bangalorean myself, I have seen it changing rapidly in the last 15 years. Two decades ago, Bangalore was considered to be a pensioner’s paradise-a calm sleeping city without many economic activities. It was mostly composed of middle and lower middle class people and the city hardly had shown any growth since Independence.

Last decade changed the very face of Bangalore and came to be termed as Silicon Valley of Asia. Bangalore became the buzzword for development and growth in modern India. Dictionaries added the term ‘Bangalored’, to refer US jobs outsourced to India. Books like ‘Bangalore Tigers’ have been written on the rise of Indian giants in software Industry. BBC news has captuured the changing face of Bangalore in its series of articles. Roots of India’s spectacular economic growth (more than 8% GDP growth per annum) lies in growth of cities like Bangalore. Hyderabad and Chennai too have a similar story to tell. The world is singing India’s economic boom.

What do these development have for the average man? First, there has been drastic reduction of poverty and improvement of quality of life. The Human Development Index (HDI) of Bangalore has increased from 0.623 to 0.753 in the last decade and is one of the highest in the country. HDI measures the average quality of life through various parameters like education level, life expectancy and purchasing power of people. In comparison, Bangalore’s HDI rating is higher than that of Kerala, which stands number 1 in state ranking.

Changes can be also seen in various public and private services. Public transportation has improved a lot in Bangalore. Variety of new and improvised BMTC buses and many of them are equipped with modern GPRS tracking system. All autos are clean, well maintained and equipped with digital meters. Restaurants, Darshini’s and numerous fast food chains have come up serving wide variety of foods while maintaining good hygiene and quality. Railways stations have become lot cleaner and modern. City is changing its face every moment.

An average person can now afford much more than what they could a decade ago. Purchasing power and consumerism has grown rapidly among all sections of people. An auto driver on an average earns Rs.10,000 per month. Most of the middle class youngsters working in software, call center earn a huge some of salaries and spend proportionately. The salaries in public sectors have also shot up rapidly. Salaries of lecturers, government employees have almost doubled in the last five years where as the inflation has grown at a slower rate (compound at 5% per annum makes a rise of 30% in five years). So even they can afford much more than before. The spending habits of people have influenced the growth various commercial activities. Number of shopping malls, pizza huts, mobile revolution, restaurants have shot up and have created numerous jobs reducing unemployment drastically, thereby providing uplifting the lower socio economic classes. It is also true that income disparity has widened. Even though everyone doesn’t have same share of the pie, the pie has definitely gotten bigger.

Who is responsible for these changes? Is it the government with its rhetoric of ‘Garibi hataov’, ‘rozgaar yogna’ , ‘framers subsidy’, or is it due to bunch of philanthropists giving money to NGO’s to alleviate poverty?

Neither the Government, nor the pure charity has bought any significant changes. Root of all these changes lie in government becoming ‘liberal’ since the 90’s by ending the ‘Licence Raj’ in economy and opening the market for international trade. This released the entrepreneurial spirit of Indians to show their potential to the world. We saw the birth of Infosys, Wipro and Satyam. Hundreds of multinationals like Cisco, Yahoo, Texas Instruments and Microsoft saw their destiny in India. The motive behind all these companies was to raise productivity and make profit. Hundreds and thousands of young engineers got jobs in these companies and started earning huge sums of money. They also worked for their own personal gains. Most of them neither directly worked for nor had any intention of contributing actively for the social development. Yet they themselves became the indirect cause of change in the society.

The change, as economists rightly attribute, is due to ‘the invisible hand’ at work. To quote Adam Smith from his ‘The Wealth of Nations’:
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest…. Someone earning money by his own labor benefits himself. Unknowingly, he also benefits society, because to earn income on his labor in a competitive market, he must produce something others value…”.
Each person pursuing his own interest has invested his human and financial capital to allocate resources in the appropriate manner for maximum personal gain. In the process he or she has added substantial value to the society by creating goods and services beneficial to the rest of the society. This process has generated wealth and prosperity and thereby alleviating poverty automatically.

What was government’s role in the whole process? Government helped the whole process not by increasing its role, but by limiting its role in the economic affairs. Economic freedom has also benefited the government by increased taxes collection. As people are getting richer they pay more taxes, governments budget gets fatter. Government with all its inefficient and corrupt usage of resources still leaves a bigger slice of pie for the poor in its social initiatives. Eventually if the government succeeds in empowering all sections of society, almost everyone will be able to the, reap the benefits of liberalization and global trade.

India is rising not by the state but despite the state. Thanks to the power of invisible hand!


Musings.. said...

Bangalore aahh.. good to hear!

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