Financial Daily from THE HINDU group of publications
Friday, Aug 16, 2002
Rule-based system Willing a winning nation
"No society can survive if it allows its members to behave towards one another in the same way in which it encourages them to behave as a group toward other groups; internal co-operation is the first law of external competition."
Will Durant, The Story of Civilization, Part 1, Our Oriental Heritage
IT WOULD be sobering to know that the law did not permit citizens until recently to hoist the national tricolour in India when, how and where they liked. They could be punished for transgression. But persons of Indian origin and citizens living outside India could hoist the flag elsewhere to express their patriotism without constraint. The law pertinent to the tricolour has since been amended. There is greater freedom now to hoist the flag, but in a manner specified by the law.
Many other laws can be compared to the past restrictions on hoisting the flag. These hinder the ability of citizens to hoist themselves to their full potential. They have been constrained in their efforts to improve their lives and incomes. As a result, India has not been able to improve its human development index and its global competitiveness. These laws should be amended.
There are other devious practices that do not have underlying laws. These practices are inconsistent with a rule-based society. India should enable its citizens fulfil their aspirations in a manner that can be compared to the fulfilment other countries offer Indian citizens and persons of Indian origin. A return to lawful practices is a must for citizens to hoist themselves to their full potential. An earnest effort towards reinforcing a rule-based society is the first step towards economic and military security.
Nationhood and laws
We could take the first step today because laws specify what is right. The law related to the flag reminds us that we live in a society that operates on rule-based systems. Rule-based systems are not as spontaneous as patriotism. But supporters of national soccer teams know that patriotism has its limitations in spurring teams to victory. There are a few technically right ways to play, and many subjective ways to lose. Quite unsurprisingly, rule-based systems dominate modern governance. They are replicable, reliable and rational. They eliminate subjective and weak approaches to good governance.
Rule-based systems define the primacy of laws. They also reinforce the majesty of nationhood, and add grandeur to the symbols that distinguish nations. Flags and patriotism are vital ingredients of nationhood. If you are Indian and if you walk past the United Nations headquarters in New York, the tricolour's majesty will catch your eye first. August 15 is, indeed, a celebration of India's freedom to display its flag and to assert its nationhood.
But there is more to nationhood. Nationhood allows people living in a nation to design and then enforce a unique set of rules that individually and collectively promote the interests of that people. It is natural for people acculturated to a way of life to think that their unique civilisation, values and aspirations make some rule-based systems more apt than other systems for the promotion of their interests and their advancement. Therefore, the modern icons of successful nationhood are human advancement, high incomes, economic, social and military security.
India's not-so-high human development index, its low mean income of around $460 and very low modal income of less than $100 point to the immense scope for enhancing the majesty of the flag and its nationhood. They point to the need for rule-based systems that promote our interests, values and aspirations. Perhaps, the first leg of the journey to a permanent seat in the UN Security Council involves an earnest return to rule-based governance that promotes the economic security of one billion citizens at home.
People and incomes
It is natural to think of plentiful resources, such as gold, oil, forestland and fertile farmland, as good for a country. But it is dangerously erroneous. Physical resources make a country wealthy, but wealthy countries could become bankrupt when they fail to sustain incomes. Countries that have assumed that their physical resources would sustain prosperity have become economic dwarfs; countries that regard their human resources as their eternal wealth have become giants.
The economic and accounting computation of income is meaningful when the depletion of wealth is reckoned with. A nation may have gold worth $1 billion. If that gold is transformed into jewellery and sold for $1.2 billion, the income is $200 million. It is not $1.2 billion. A nation without any gold could import gold worth $1 billion and transform it into jewellery that is sold for $1.2 billion. Its income, after paying for the imports, would also be $200 million. But one country would appear wealthy and the other smart.
What cannot be denied is that the income of $200 million is produced by people and not by gold. People are the real wealth of nations because they sustain incomes. There is more. The income of $200 million sustains employment and consumption worth $200 million in both countries. The smart country could overtake the wealthy but sloppy country by reducing it to the status of supplier of gold. The smart country could then earn an income of $400 million by shifting economic activity and incomes from the sloppy country. The sloppy country could be reduced to penury.
Smart countries count on people. Sloppy countries turn off people and often count on privileged entitlements and allotments. India could become smarter by reinforcing rule-based governance. Wealth is passive to governance. But people are not. They are sensitive to good and bad rules. Inapt and iniquitous rule-based systems undermine people's ability to produce sustainable incomes. Countries whose rule-based systems truly reflect the aspirations of their people routinely produce more income per citizen than other countries. There is one glittering example. India is not endowed with vast resources of gold and precious stones, but it earns smartly by importing gold and precious stones and exporting jewellery. When you walk down the fashionable streets of New York and Geneva, what catches the eye is glittering jewellery. But on a net-net basis, the glittering necklaces and bracelets reflect the dazzling craftsmanship and competence of India's star performers in the gems and jewellery industry. It is their industry that India exports. India has an incentive to shun sloppiness and make itself smart and rich.
Had India thwarted their efforts and industry, the glittering necklaces would catch the eye, but may reflect the competence of star performers residing in other countries. Some of them could be Indian. Star performers will shift from sloppy countries to smart countries. In a world that has made human capital, knowledge resources and financial capital more mobile than ever in the past, rule-based systems have become the principal competitive resource of many nations. Rule-based systems have made culture, language and civilisation less important than in the past.
The impact of rule-based economic governance on competitiveness is considerable. Rule-based systems have made it possible for countries to attract financial capital of a large magnitude and to enable their talented human resources to work on physical resources. China and Taiwan are shining examples. Other countries, such as Singapore, have used their rule-based governance to systematically attract human talent from many countries, including India.
A country rich in gold and precious stones could upset India's position in the global jewellery business. It could make privileged allotments and entitlements of gold and precious stones to its manufacturers. The gambit would pay off if they augmented the allotments with their competence to cut costs, reduce prices, or increase value to customers. If they did none of these, the privileged entitlements would be wasted.
A devious country could then surreptitiously allow its jewellery industry to use gold alloyed with cheaper metals and thereby lower its costs and improve its competitive position. It is natural for people in a country to think that such alloying would be acceptable because the affected group is in another country. But smart buyers that see through such deception would prefer the import of raw gold to jewellery. It is easier and cheaper to ascertain the quality of raw materials than that of finished products. This explains why sloppy and devious countries will remain at the low end of the world's value chain. Others will move up. India has an incentive to shun deceit.
Some petrol pumps in India are said to adulterate petrol and diesel (`Just running a petrol pump does not pay much', Business Line, August 11). This, like the alloying of gold, shows that there are numerous devious and adversarial relationships within the nation. We have been very cruel and unkind to our domestic customers. We have systematically sapped their capability to compete with the best in the world.
It is difficult to argue that privileged allotments, entitlements and adulteration have not imposed costs on us. Deception will keep India at the low end of the world's value chain.
Devious practices will keep modal incomes low. Low modal incomes will require more adulteration of petrol and diesel to make petrol pumps viable. It is a horrifying chain. A nation that cheats and torments itself cannot be a winning nation.
The majestic flag atop the mast should not mask these, but should remind us that India, its people and its civilisation have existed for many millennia though the nation is only 55 years old.
To be sure, nationhood has enabled the accomplishment of many goals. But we should ask if our rule-based system has come to terms with the principles of global competition and if it enables people to hoist themselves to their full potential.
(The author is a financial analyst. Feedback may be sent to firstname.lastname@example.org)
Send this article to Friends by E-Mail
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | Home |
Copyright © 2002, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line