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Lack of chances can hit free enterprise: Rajan

Rajan cited the example of Russia where property rights have not received popular support

Written by Express News Service | Bangalore |
April 2, 2013 2:54:33 am

The government’s failure to create an economic environment that is “competitive and efficient”,where rewards are allotted to the bright and capable “rather than just the well-connected”,will stifle support for free enterprise in a democracy,chief economic adviser Raghuram Rajan said Monday.

Speaking on ‘Democracy and Free Enterprise in India’ at the 38th convocation of IIM-B,Rajan said India faces three bad outcomes — fascism,communism and economic chaos — if an equilibrium between democracy and free enterprise is not established.

“To the extent that the rich are self-made,and have come out winners in a competitive,fair and transparent market,society may be better off allowing them to own and manage their wealth while taking a reasonable share as taxes,” he said.

“The more,however,that the rich are seen as idle,incompetent,or crooked,the more the median voter should be willing to vote for tough regulation and punitive taxes on them,” he added.

Rajan cited the example of Russia today where property rights have not received popular support “because so many of the country’s fabulously wealthy oligarchs are seen as having acquired their wealth through dubious means. They grew rich because they managed the system not because they managed their businesses well”.

Among the conditions for free enterprise to enjoy popular support,apart from being competitive and efficient,“is that most people should believe that they have a reasonable shot at success in the free market”,Rajan said.

“A certain amount of inequality in circumstances is inevitable but too much and it breeds resentment of the free enterprise system. Why would the poor vote for expanding free enterprise,for more good jobs in finance and other services,when they know they simply are not good enough to get one themselves? Why not instead vote for the traditional politician who promises patronage and sometimes even delivers on it,” he argued.

India,he said,is at a stage where three bad outcomes are possible if the balance between democracy and free enterprise is not maintained – corporatist capture where industrialists or trade unions skew the system in their favor as being seen in Mexico; socialist policies where entrepreneurs are seen as parasites and are heavily taxed as in France; and competitive populism where the elite compensate for their wealth with cheap credit or free consumer goods to the less well-off leading to economic chaos as seen in the sub-prime crisis in the US.

The rich,Rajan said,must play their part by paying taxes. “Why not give a Padma Bhushan to the highest income-tax payer in the country every year as a recognition of their carrying out their national responsibility?” he asked.

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