Author: Rajesh Jain

Japan’s Transformation

Japan’s Meiji Restoration of 1868 opened up the country to Western influence and laid the foundation for its modernisation. Here is how Japan transformed, as explained by an essay on Columbia University’s website:

When the Meiji emperor was restored as head of Japan in 1868, the nation was a militarily weak country, was primarily agricultural, and had little technological development. It was controlled by hundreds of semi-independent feudal lords. The Western powers — Europe and the United States — had forced Japan to sign treaties that limited its control over its own foreign trade and required that crimes concerning foreigners in Japan be tried not in Japanese but in Western courts. When the Meiji period ended, with the death of the emperor in 1912, Japan had

• a highly centralized, bureaucratic government;
• a constitution establishing an elected parliament;
• a well-developed transport and communication system;
• a highly educated population free of feudal class restrictions;
• an established and rapidly growing industrial sector based on the latest technology; and
• a powerful army and navy.

Japan had regained complete control of its foreign trade and legal system, and, by fighting and winning two wars (one of them against a major European power, Russia), it had established full independence and equality in international affairs. In a little more than a generation, Japan had exceeded its goals, and in the process had changed its whole society.

What changed? Japan opened itself to the West. From Wikipedia:

The Japanese knew they were behind the great Western powers when US Commodore Matthew C. Perry came to Japan in 1853 in large warships with armaments and technology that far outclassed those of Japan with the intent to conclude a treaty that would open up Japanese ports to trade. Figures like Shimazu Nariakira concluded that “if we take the initiative, we can dominate; if we do not, we will be dominated”, leading Japan to “throw open its doors to foreign technology.”

The leaders of the Meiji Restoration, as this revolution came to be known, acted in the name of restoring imperial rule to strengthen Japan against the threat of being colonized represented by the colonial powers of the day, bringing to an end the era known as sakoku (the foreign relations policy, lasting about 250 years, prescribing the death penalty for foreigners entering or Japanese nationals leaving the country). The word “Meiji” means “enlightened rule” and the goal was to combine “modern advances” with traditional “eastern” values. The main leaders of this were Itō Hirobumi, Matsukata Masayoshi, Kido Takayoshi, Itagaki Taisuke, Yamagata Aritomo, Mori Arinori, Ōkubo Toshimichi, and Yamaguchi Naoyoshi.

Here is more from Britannica:

[A] growing popular rights movement, encouraged by the introduction of liberal Western ideas, called for the creation of a constitutional government and wider participation through deliberative assemblies. Responding to those pressures, the government issued a statement in 1881 promising a constitution by 1890. In 1885 a cabinet system was formed, and in 1886 work on the constitution began. Finally in 1889 the Meiji Constitution, presented as a gift from the emperor to the people, was officially promulgated. It established a bicameral parliament, called the Diet—in full Imperial Diet (Teikoku Gikai)—to be elected through a limited voting franchise. The first Diet was convened the following year, 1890.

Economic and social changes paralleled the political transformation of the Meiji period. Although the economy still depended on agriculture, industrialization was the primary goal of the government, which directed the development of strategic industries, transportation, and communications. The first railroad was built in 1872, and by 1890 the country had more than 1,400 miles (2,250 km) of rail. Telegraph lines linked all major cities by 1880. Private firms were also encouraged by government financial support and aided by the institution of a European-style banking system in 1882. Those efforts at modernization required Western science and technology, and under the banner of “Civilization and Enlightenment” (Bunmei kaika), Western culture, from current intellectual trends to clothing and architecture, was widely promoted.

Change does not happen automatically. The conditions have to be created. Japan’s leaders set aside their ego and past, and learnt from the West – adopting the best ideas to modernise their nation in just a couple generations.

Tomorrow: Part 7

Architect of Prosperity

Neil Monnery has written a biography of Cowperthwaite entitled “Architect of Prosperity”. In an Econtalk conversation with Russ Roberts, he says:

At various points, people in government, or people in business, suggested that it would be good to have some top-down planning to see which sectors they wanted to move into, or whether or not they’d grown certain sectors too far, and therefore they should be constrained in some way. And really, that was the battle of ideas that Cowperthwaite was so strong on, and really set the course for Hong Kong. Not doing that in a top-down fashion, but rather allowing the various entrepreneurs, the people who were deploying their own capital to make those decisions as to where to invest. Some of which worked. Some of which didn’t work. But very much a bottom-up entrepreneurial system. And also very much allowing the greater destruction of those industries that no longer were competitively advantaged, because Cowperthwaite was always being assailed by various people who wanted to enter into supporting one sector or another; and he pretty much always turned them away, and said, ‘If it’s a good industry it will work; if it’s a bad industry, it won’t work.’ ‘But it has really nothing to do with me.’ And that was a very powerful stance through that period of the 1950s, 1960s, and so on afterwards.

He was passionately concerned with helping the most needy in society, but was very worried that if that started creeping in to providing a lot of support for middle-income people, that would both create incentive problems but would also slow the growth rate. And his logic went something like this: which is, Hong Kong is clearly over this period a developing economy. He believes that if entrepreneurs are left with enough income to [?] surplus to reinvest in new opportunities, that will push up the growth rate going forward. And therefore if he starts taxing that in order to provide free education for the middle classes, then that will be at the expense of future growth, which he sees as central to his mission, if you like to try and push the growth rate up in Hong Kong. So, education is actually in a way the most dramatic, because he at one point says he believes education is a very good thing; but even good things have to be paid for. And so his strong preference is not to provide universal, universally-free education or indeed anything else, but rather to charge market prices and then to give complete subsidies to the most needy. So that there’s very targeted use of state funds–taxation is very well targeted onto those needing it the most.

Marian Tupy, writing at CapX, quotes Cowperthwaite:

I would like to say a few words about some of the principles involved in the question of planning the overall economic development of the colony.

I must, I am afraid, begin by expressing my deep-seated dislike and distrust of anything of this sort in Hong Kong. Official opposition to overall economic planning and planning controls has been characterised in a recent editorial as ‘Papa knows best.’ But it is precisely because Papa does not know best that I believe that Government should not presume to tell any businessman or industrialist what he should or should not do, far less what he may or may not do; and no matter how it may be dressed up that is what planning is.

…An economy can be planned, I will not say how effectively, when there are unused resources and a finite, captive, domestic market, that is, when there is a possibility of control of both production and consumption, of both supply and demand. These are not our circumstances; control of these factors lies outside our borders. For us a multiplicity of individual decisions by businessmen and industrialists will still, I am convinced, produce a better and wiser result than a single decision by a Government or by a board with its inevitably limited knowledge of the myriad factors involved, and its inflexibility.

Leaders make nations. Cowperthwaite made Hong Kong with his decisions.

Tomorrow: Part 6

Hong Kong Miracle

John Cowperthwaite was a British civil servant. He was in charge of Hong Kong as Financial Secretary from 1961 to 1971. From a website about him: “He was central to designing and implementing the economic policies that enabled Hong Kong’s remarkable post-war economic growth. When he arrived in Hong Kong in 1945 it had a per capita income of only 30% of its mother country, Britain. By the time Hong Kong was reunited with China in 1997 it had matched Britain’s gdp/capita. And now it is 40% higher.”

From an article about Hong Kong in Foundation for Economic Education in 2014 by Lawrence Read: “What makes [Hong Kong] so free is music to the ears of everyone who loves liberty:  Relatively little corruption. An efficient and independent judiciary. Respect for the rule of law and property rights. An uncomplicated tax system with low rates on both individuals and business and an overall tax burden that’s a mere 14 percent of GDP (half the U.S. rate). No taxes on capital gains or interest income or even on earnings from outside of HK. No sales tax or VAT either. A very light regulatory touch. No government budget deficit and almost nonexistent public debt. Oh, and don’t forget its average tariff rate of near zero.”

Here is more from Read:

A Scot by birth, Cowperthwaite attended Merchiston Castle School in Edinburgh and then studied classics at St Andrews University and at Christ’s College at Cambridge. He served in the British Colonial Administrative Service in HK during the early 1940s. After the war he was asked to come up with plans for the government to boost economic growth. To his credit, he had his eyes open and noticed that the economy was already recovering quite nicely without government direction. So while the mother country lurched in a socialist direction at home under Clement Attlee, Cowperthwaite became an advocate of what he called “positive non-interventionism” in HK. Later as the colony’s Financial Secretary from 1961 to 1971, he personally administered it.

“Over a wide field of our economy it is still the better course to rely on the nineteenth century’s ‘hidden hand’ than to thrust clumsy bureaucratic fingers into its sensitive mechanism,” Cowperthwaite declared in 1962. “In particular, we cannot afford to damage its mainspring, freedom of competitive enterprise.” He didn’t like protectionism or subsidies even for new, so-called “infant” industries: “An infant industry, if coddled, tends to remain an infant industry and never grows up or expands.” He believed firmly that “in the long run, the aggregate of the decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is likely to do less harm than the centralized decisions of a Government; and certainly the harm is likely to be counteracted faster.”

…To Cowperthwaite, the planner’s quest for statistics was anathema. So he refused to compile them. When Friedman asked him in 1963 about the “paucity of statistics,” Cowperthwaite answered, “If I let them compute those statistics, they’ll want to use them for planning.”

Hong Kong has consistently topped the economic freedom rankings. (That may change in the coming years depending on China’s recent interventions.) Its per capita income today is almost $50,000. (India is at $2,000.) Cowperthwaite’s policies of non-intervention and letting markets work laid the foundation for making Hong Kong an economic powerhouse and an island of prosperity.

Tomorrow: Part 5

Leaders and Nations

To be a leader of a nation is to be able to shape its destiny – for better or for worse. The impact leaders leave can stay on for a long time – and in many cases, can be hard to undo even if the impact is negative. Therefore, who the leaders are and the decisions they make become important for us to discuss and understand.

Some leaders have guided their countries to prosperity – the Founding Fathers of the US who set the rules via the Declaration of Independence, the Constitution and the early decision in the newly created Republic, Emperor Meiji of Japan who led the Meiji Restoration with the adoption of Western ideas and production methods, Lee Kuan Yew of Singapore who transformed a small island state into one of the richest in the world, Park Chung-hee who laid the foundation for South Korea’s growth through education and exports, John Cowperthwaite who made Hong Kong into the bastion of economic freedom, Deng Xiaoping who laid the foundations for China’s economic rise.

There are other leaders who had power for a long time, but failed in creating prosperity. On one side are the dictators who caused great harm to their nations – Germany’s Adolf Hitler, China’s Mao Zedong, Soviet Union’s Joseph Stalin are three that stand out in the 20^th century. On the other side are the leaders who had the opportunity with the power they wielded but left behind bad economic legacies – every country that is not prosperous today has had one or more leaders whose decisions doomed the people.

India is one such nation. India’s first two significant Prime Ministers – Jawaharlal Nehru and Indira Gandhi – led India for 33 of the first 37 years after 1947. Both had the opportunity and power to make India prosperous, and yet failed. Even as the Indian people blindly worship the leaders, there is limited discussion on their flawed decisions. Their leadership styles were very different, but the choices they made had one thing in common – continuity of the rules that stifled entrepreneurship and limited economic freedom, rules that become harder to undo with each passing year, rules that perpetuated poverty.

The most important responsibility they both had was to undo the legacy of the past that had created the world’s biggest anti-prosperity machine. Neither of them dismantled it. They refused to learn from the economic successes of other nations. In their own way, each of them was an “unfit” leader – for the single most important objective a leader has is the well-being of the people. Popularity and populism do not translate into prosperity. That was true of the past, and that is true today: popularity does not imply prosperity. What matters is rational policy and not the popularity of the person dictating policy.

What did some leaders do differently? Why did India’s leaders fail so miserably? What can we learn about decision-making? What attributes make for good leaders and therefore good decisions? Can India rise to become a great nation? These are some of the questions we will consider in this series.

Tomorrow: Part 4

Harmful Decisions

India’s leader announced a nationwide lockdown on the night of March 24 with a notice of four hours and with the most stringent rules globally. The lockdown decision will be endlessly debated in the years to come. Information about the severity of the virus was limited at that time in March. And yet, decisions had to be made – lock or not, what to lock, what to tell the people, how to handle the cases, what to do about the economy, and so on. Various leaders across the world made different decisions. India’s leader decreed the harshest national lockdown in the world – with an advance notice of four hours. (Coincidentally, the same four hours warning was given when 86% of the nation’s currency was demonetised in November 2016.)

The consequences of the damage down by the lockdown are very visible in India. A 24% contraction of the economy in the April-May-June quarter – one of the worst in the world. The economy is likely to contract by 10% for the year ending March 2021. While government officials keep talking about the rapid recovery and how things are normalising, the key question to ask is: what about all the consequences of the decision made on the lives of people? It is quite clear now that the virus is probably only a little more deadly than the seasonal flu for most people who do not have comorbidities. Have we as a nation paid a very heavy price for the grandstanding of our leader – again?

India’s decision – made by its leader – to lockdown will rank high in measures that hurt hundreds of millions. Supply chains and livelihoods once ruptured cannot be easily mended. One can of course argue that India needed time to get its health infrastructure in place and so on, and many lives were saved. We will never know for sure. But one thing is clear to a dispassionate and unbiased observer – India’s harsh and immediate lockdown announced on the night of March 24 was a Himalayan blunder.

The sad part is that this was all too expected. India’s leaders through its history as an independent nation have let the people down repeatedly and made lives worse. They had the power to do exactly the opposite. At multiple critical junctures when they had policy choices, they chose the more harmful ones. Why did our leaders make these big mistakes? Can we hope for future Indian leaders who can make the right decisions?

Tomorrow: Part 3

Consequential and Irreversible

It is March 2020. The coronavirus that originated in China is spreading through Italy and parts of Europe. Cases are showing up in other parts of the world. China did a complete lockdown of Hubei province, in which Wuhan is the largest city. You are leading a nation. What do you do?

I was tracking the trajectory of the virus in March. Here is what I wrote to some friends on March 17:

1. We should stop counting coronavirus (CV) cases and publicising them. Just treat them normally as they come in hospitals. Given that (a) half of us or more are likely to contract it, and (b) most of these cases are not going to be severe, just treat them as one treats other infectious diseases. It is going to be impossible to quarantine a country like India. Might as well get over with it.
2. Stopping the publishing of statistics will calm down the nation. Yes, one will keep hearing of deaths – but we have to accept that (see next point). The wealth and productivity destruction that is happening will do long-term damage.
3. Deaths: India death rate is 0.7%. CV leads to 0.5% fatalities. Some overlap since the regular deaths are among the elderly. So, maybe one sees a 50% increase in the deaths. It probably won’t even be noticed unless it’s of a near and dear one.
4. Indians cannot do work-from-home. Most don’t have broadband or separate rooms where they can work undisturbed for 8-9 hours daily. And with kids at home – the problem is compounded.
5. Get on with life with basic precautions of hand washing which is a good thing anyway, and could actually be the best hygiene measure. Keep distance from people with colds and coughs where possible – which is also a good thing.
6. Only 2 practical solutions are possible: immunity and vaccine. First will come before the second.
7. CV isn’t going away anytime soon – so might as well get used to it. Else, the economic disruption will set us way back on the path to prosperity.

I echoed some of these points in a series “Unlock India” on my blog in early April. My recommendations:

1. All 65+ year olds to be quarantined – families to make the decision for their own safety. Most of the deaths globally have been in older people with pre-existing conditions. In India, just 5% of the population is over 65 years of age.
2. Anyone going out should wear a mask. This is for their own safety and for that of others. We are already seeing the rise of the use of masks. We need to get this going faster.
3. We need to increase testing, and have people take a simple smell-and-taste test – since the loss of smell and taste seem to be the early warnings
4. Those who test positive should stay at home to start with – especially if they are below 65 years of age. In most cases, they will recover on their own. If conditions deteriorate in a week after onset of symptoms, they should approach a doctor / hospital. This will also ensure that limited medical resources are used only for the most critical cases.
5. Each individual needs to improve personal hygiene: maintain some distance when possible, and wash hands regularly. We should avoid crowded public spaces for some more time.
6. Should outbreaks happen, those areas will need to be quarantined – think of this as a “Local Lockdown.” Instead of unlocking areas selectively and keeping a national lockdown, we need to unlock India nationally and then make decisions on which areas to lock based on the cases that emerge.
7. We need to decentralise decision-making about lockdowns to the lowest level possible. Every elected representative (MPs, MLAs, corporators) should be “quarantined” in their constituency instead of living in the safety of capital cities. They have been elected by the people and are close to the ground. They should be the “chief ministers” of their neighbourhoods and make decisions on which clusters to quarantine should outbreaks become severe.

As I look back, I got the big points right. I was wrong on some points – the fatality rate is a fraction of what I had anticipated, I had missed the point about masks in the March note but had added it in the April commentary. What I thought then did not matter – but what India’s leader thought did. My thinking was inconsequential to the nation, but the leader’s decision was consequential and irreversible. And that decision – like multiple other economic decisions – was wrong by a mile.

Tomorrow: Part 2

I did a podcast recently with Ashraf Engineer (All Indians Matter) on the need for new economic and political thinking in India.

The introduction from Ashraf: “If ever there was a time for bold, break-out economic and political thinking, it is now. Our economy was tanking even before the pandemic and there is widespread social unrest. Time is running out for India to set itself right. Rajesh Jain was one of India’s earliest internet pioneers and played a role in getting Narendra Modi elected in 2014. Later, he got disillusioned with the Modi government and is today highly critical of it. On the latest episode of the All Indians Matter podcast, he talks about how the government creates barriers for prosperity, the need to return public wealth to the people, why innovative economic and political approaches are desperately needed today and his own journey as a ‘political entrepreneur’.”

You can also listen to it on Apple, Google, Spotify and Saavn.