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Mumbai, Terrorists and Capitalists

December 08, 2008

By Steven Malanga

Although the identity and ultimate goals of the terrorists who attacked Mumbai remain murky, the Indian city's role as its country's international financial center and as a magnet for foreign tourists clearly helped to lure the attackers to it.

In the last 20 years or so, India has liberalized its economy and, in the process, attracted many talented expatriates back to the country, helping spur an economic boom nearly as impressive as China's. That's made India's entrepreneurs and the foreign investment they draw a target for terrorists, who view the economic prosperity and democratization of society that accompany liberalization of markets as a threat to their cause. Even as we in the U.S. debate the future of capitalism, terrorists continue to attack its advance throughout the world because they fear its power.

For decades after it gained its independence in 1947, India remained an economically stagnant country whose leaders tried to manage its economy with a combination of European socialism learned from the British and Soviet-style central planning. Nehru, the country's first prime minister and patriarch of a family that ruled India off-and-on for some 40 years, nationalized key industries and put them in control of a few families who had vigorously supported the Indian independence movement. He also set up the notoriously bureaucratic and eventually corrupt License Raj, a regime built around a series of regulations and permits that made it difficult to open a new business in the country without first gaining the permission of a central planning commission.

The results were predictable. Incomes stagnated and the economy barely grew. Hundreds of millions of people were stuck in poverty and the graduates of India's elite technical schools, the pride of the country, went elsewhere to pursue their dreams, especially to the United States, Canada and Great Britain.

That all began to change in the late 1980s, ironically under Nehru's grandson, Rajiv Gandhi, who succeeded his mother, Indira, as prime minister after she was assassinated. Unlike his mother, who had continued her father's heavily centralized control over the economy, Rajiv opted for liberalization. Looking out over the rapid economic gains of countries like China and South Korea, and frustrated because little in Indian society worked as well as it did in the West where he was schooled, Rajiv and his successors began dismantling the License Raj, making it easier to start a business in India. That not only brought home some expatriates, it attracted foreign direct investment into the country. The country also liberalized industry, inviting private carriers to compete with the monopoly power of Indian Airlines, for instance. And India reduced tariffs that had isolated the country economically. The collapse of the Soviet Union made it easier for India to accept these changes because it neutralized critics of free markets within the country, and prompted India's leaders to improve ties with the United States.

Indian economic growth has been impressive since then, averaging annual gains in the double digits for much of the 1990s, making it the fastest growing developing economy next to China's. Although about a quarter of the country's population lives in poverty, according to the World Bank, that's down from 60 percent in the early 1980s. India now has its own thriving information technology sectors in places like Mumbai and Bangalore, and its agricultural sector, bolstered by the use of genetically modified seeds, has turned the country into a net exporter of foods. Bollywood, based in Mumbai, is one of the world's largest entertainment producers. Its films earn on the order of $100 million in the United States alone.

But India's economic growth hasn't attracted the attention of China's, in part because China's leadership has created a few economic enclaves where they have channeled much new investment to showcase their gains, including diverting resources to attention-grabbing attractions like the Summer Olympics. In democratic India, by contrast, capitalism has been messier. New building programs, like giant infrastructure initiatives, have to pass environmental review and are influenced by public sentiment, which can derail projects in a way that they can't in China. It would be virtually impossible in India to reroute massive resources toward something like the Olympics, when so much else needs to be done there.

The attacks on Mumbai temporarily derailed the Indian economy. Its stock market closed, just as New York's did in the wake of 9-11. Airlines have cancelled flights, and the city's main business district has seemed like a ghost town. The most pessimistic of Indian observers are predicting that the attacks will reverberate for the next year on India's economy, especially in Mumbai.

On the other hand, if you had stood looking over New York's giant hole in the ground shortly after 9-11 and witnessed the mess that was Lower Manhattan, you might have imagined, as some did, that the city's future as America's financial capital had been severely compromised. But New York turned out to be amazingly resilient. Now it's Mumbai's turn. Its stock market opened on Friday after being closed only a day. We may discover that the embrace of free markets that's been going on there will serve the city well in the wake of these attacks.

Original Source: http://www.realclearmarkets.com/articles/2008/12/mumbai_terrorists_and_capitali.html

 

 
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