What is the aim of any economic reform? Is the objective to reduce prices through competition? Is it the welfare of the consumers? Or is it to generate jobs and create growth?
I think it is none of those. I think the only objective of economic reform is to deliver “economic freedom”! It is to give a free hand to individuals to conduct business amongst themselves on mutually agreeable terms. All the above are probable effects of the reforms, but not the main objectives.
The debate on reforms is too often led astray because of faulty assumptions about the objectives. And many a times decisions are taken which help achieving some of the above objectives but still leave a lot of scope for the state to indulge in its favorite game of dealing in favors using public money.
Take the example of the liberalization of the telecom industry. It has seen mind boggling success in terms of the effects, like reduced prices, better services, job creation etc. But is the industry truly free? We still have the state involved in the business of telephony through BSNL and MTNL. It is also the policy maker. The fact that there is an inherent contradiction in the state being both the policy maker and also a participant in the market is completely neglected by everyone! The industry continues to be over regulated with high levels of taxation, with restrictions on innovative means to reach the end customer and a continued protection of the vested interests of the government owned companies.
Ideally the first step in a process of introducing competition and private money in a state induced monopoly should be to break up that monopoly and sell the pieces completely to private players. This way nobody starts with an unearned competitive advantage. Therefore, BSNL should have been privatized first and the government should have exited the industry completely. Simultaneously, the rules should have been simplified to make entry and exit in the industry easy.
The way telecom was liberalized in India, BSNL started off with a comparative advantage due to its ownership of a huge network, which it had built up slowly over time when there was NO COMPETITION. It will continue to have an advantage due to its early start and the fact that it is also the policy maker.
Similarly, another industry which is seeing increased private participation is the aviation industry. There too the same state prevails. The state is still an active participant in the market through AAI and its two carriers IA and AI. Even though some airports are being privatized, the public monopoly is being replaced by a private monopoly.
Therefore, after the main airport in Mumbai is privatized, will it face any competition? Can another private firm buy land and set up from scratch a whole new airport in competition to the existing one. Then the airports will really want to attract both the airlines and the passengers to make use of their infrastructure for take off and landings.
Let me clarify that I do not insist on competition per se. Competition is not the objective of reform! But in a really free market, there is always a chance to compete, which means no regulatory barriers to entry.
Like I said, if setting up a second airport in a city is an unviable financial proposition, then no one will try to do that. But if the law of the land disallows it when it could be financially feasible, then we have a situation where the monopoly is forced.
Take the example of railways. If and when the government decides to privatize it, will the simple privatization of the railways work? Will the industry reach the same equilibrium that it would have reached had the government not interfered at all?
Think about what would have happened if the entire railway network in India would have been built by private companies. Company A would have built a track from Bombay to Pune and run a daily train service. Company B would have got the same idea and would have started the service between Delhi and Lucknow. Slowly, the railway network as we know now would have been built up, with different companies building and own in different parts of it.
One day, company C would have decided to run a train from Mumbai to Delhi. It would have made agreements with A & B to use their tracks. And so on. Then one day, company A with its huge profits, would have decided to take over company B to form a big network, as it might have been economically more feasible to own the rail tracks. These kind of developments would have shaped the ownership structure, and an equilibrium would have been reached which would have created maximum overall value!!
Now, if we simply sell off the whole railways to one company and disallow any other company from building up a parallel network, the public monopoly will simply be replaced by a private monopoly. Will the industry ever reach the equilibrium?
Therefore economic reforms have to achieve one and only one objective, and that is to set individuals free to trade on mutually acceptable terms. All other objectives eventually destroy value!