K.G. Nanjappa, the mustachioed, 35ish driver I hired for my five-day stay in Bangalore, was not given to many opinions. But there was one thing this soft-spoken, diminutive man was certain of: “It is bery good thing I.T. companies here, madam.”
Yes, he admitted, the influx of information technology companies into this South Indian city of nearly 6 million people had made his job more stressful. The sudden burst in traffic had cratered the streets faster than municipal authorities could say “pothole.” (Bangalore residents je that while elsewhere people drive on the left of the road, they drive on what’s left of the road.) Commute times had quadrupled, and road rage was on the rise.
But just a few years after Nanjappa and his family had moved from a nearby village to Bangalore, his base salary had doubled from $60 to $120 a month. In addition, he routinely took in as much as $60 a month in tips, putting his income in a range he had scarcely imagined possible.
It’s not that he doesn’t miss his old village life, he explained. But by carefully managing his finances, he can send his daughter to a private school while planning for a second child. All of this, he maintains, is well worth trading the simple pleasures of his bucolic past life for the hassles of his new, grungy city existence.
Evidently, Nanjappa is not the only one who feels this way: Every week, nearly 3,700 new people from all over India—from high-tech professionals to semi-skilled service staff—vote with their feet by moving to Bangalore, the I.T. and outsourcing capital of the East. A fraction of them, as we’ll see, were driven from their homes by a land-grabbing government, but the vast majority are simply pursuing the city’s many opportunities. Even skilled expatriates from Australia, California, and Europe are returning, undeterred by Bangalore’s ubiquitous poverty, squalor, and chaos after years of life in plush, clean, and orderly surroundings. The city’s population has ballooned from just 1 million residents in 1960, giving Bangalore a 5.7 percent annual rate of growth that has made it one of the fastest-growing cities not just in India but in all of Southeast Asia. There are signs this influx is beginning to slow, due to the city’s dismal infrastructure. For now, however, it has injected new energy into a town that was once so dull that Winston Churchill compared it to a prison.
Giant multinationals such as Microsoft, Intel, and Dell are cramming the city with glittering new glass-and-steel buildings. Every inch of real estate in the city proper has been spoken for, pushing Indian computer behemoths such as Infosys and Wipro to erect their sprawling, lush, and unabashedly opulent campuses on the outskirts. Hotels ranging from the sumptuously luxurious five-star Leela Palace to the low-budget Woodlands run at full capacity. Trendy little boutiques and high-rise malls selling everything from ethnic wares to Western goods are everywhere. New restaurants featuring Italian and Thai food are challenging the culinary domination of traditional Indian restaurants.
When I return home to the Detroit area, where I have lived for the last 18 years, the contrast couldn’t be starker.
To be sure, Detroit has many of the trappings of wealth that come from sitting in the lap of the richest country in the world: an excellent freeway system, a sparkling riverfront, good sanitation. Bangalore, in turn, has many of the afflictions of a poor country: pollution, open sewers, slums. But there is a palpable buzz in Bangalore’s air that comes when industrious people are engaged in creating wealth. That’s missing in Detroit, where a big chunk of the population lives off welfare.
While Bangalore grows, Detroit continues to lead the United States in population decline. Every week, on average, 370 residents leave its crime-ridden, economically depressed neighborhoods for a better life in the suburbs or elsewhere in the country. The city’s population, close to 2 million in the late 1950s, has shrunk to less than 900,000. Formerly the fifth largest city in the country—bigger even than Chicago—Detroit is now smaller than San Jose.
This is not to deny that some economic movement has occurred in Detroit in the last decade: The city in February pulled off the Super Bowl at the new state-of-art Ford Field Stadium without a hitch—no mean feat given that, until a few years ago, it could not even plow its streets after an evening snowstorm for kids to walk to school in the morning. General Motors has sunk $500 million to renovate the Renaissance Center, a complex of glass office towers that sat nearly vacant on the Detroit River for about two decades. In part due to generous tax subsidies, Detroit got its first significant new office building in a decade with the opening of the Compuware Center. Three new casinos have opened, including one in the thriving Greek Town area—one of Detroit’s few bright spots, where pedestrians actually can walk at night without fearing for their lives. And in a burst of government largesse, some old rococo gems such as the Fox Theater and Detroit Opera House have been restored, along with Campus Martius, once the busiest public square in America.
But these grand projects haven’t jump-started Detroit’s economic engine. While stores like Esprit, Nike, and Adidas open showrooms by the dozen in Bangalore, not a single major national retailer has expressed interest in Detroit since the closing of Hudson’s department store in 1982. The opening of a Ben & Jerry’s ice cream parlor in the Compuware building last year was cause for celebration.
In fact, Detroit’s landscape has barely changed since I first peered out the window of a friend’s upper-floor apartment at Wayne State University in 1987, into a hauntingly beautiful abandoned building across the street. Its rooms were stripped bare, every piece of cabinetry likely sold for firewood by local junkies. And its brick facade was marred by row after row of shattered windows—like a lovely face ravaged by pockmarks.
Entire blocks of such buildings have been razed in recent years. But with few new investors stepping forward to redevelop the sites, many have reverted to urban prairies. The 10,000 or so abandoned buildings that have escaped the bulldozers serve as both a reminder of the city’s lost glory and a taunt to its hopes of a renaissance.
Bangalore, a Third World city beginning with nothing, has experienced meteoric economic growth, while Detroit, once a formidable industrial powerhouse, can’t crawl out of its economic rut. If Detroit wants to boom again, it could learn some lessons from Bangalore. The factors that made India the world’s economic basket case after it obtained its independence from Britain in 1947 are precisely what have stymied Detroit’s resurgence: excessive bureaucracy, destructive taxes, and bad labor laws. While India has yet to address the last, it has attacked regulations and taxes with a vengeance, with results Detroit’s leaders should note.
Bangalore has also made an important mistake. By favoring the I.T. industry with measures that range from preferential tax treatment to outright land grabs it has created a town too dependent on a single industry. In that respect, it could learn a sobering lesson from Detroit’s sad decline.
More Than Cheap Labor
The conventional wisdom in the U.S. is that companies are flocking to India because its cheap, English-speaking, high-tech labor offers compelling cost savings. India produces 200,000 or so engineers every year, about three times more than the United States. And they typically make about a fifth as much as U.S. workers doing similar jobs.
But India’s technical talent pool has been available for about half a century. Why did the world discover it only in the last 15 years? And why did sleepy little Bangalore take the lead?
Outsourcing began as far back as the 1980s, with U.S. companies contracting out low-end, noncore tasks such as data entry and medical transcription. Although the people performing these jobs were often trained professionals, American companies had little inkling of their true potential until the impending Y2K “crisis” forced them to turn to their Indian partners to reprogram the internal clocks in computers on short order. This event opened up whole new vistas for technical collaboration that are still unfolding.
For instance, Progeon, the outsourcing arm of the Bangalore-based I.T. giant Infosys, began as a call center to deal with customer queries for banks and credit card companies. But soon it began handling all kinds of sophisticated back-office functions, such as processing payrolls and insurance claims. Recently it ventured into knowledge services, offering equity research, credit analysis, fixed income research, bond analysis, economic analysis, industry analysis, and company analysis to investment banks around the world.
Far from being low-end or noncore, points out Vijay Menon, vice president of marketing and communications at Progeon, these services are high-end and essential. “Any service that does not require a direct customer interface or intimate knowledge of local culture or geography is potentially something that can be outsourced,” Menon maintains.
Detroit’s auto companies have jumped on the bandwagon too. The Big Three—Ford, G.M., and Chrysler—and many of their major suppliers have been quietly outsourcing simple computer programming jobs to India for a while. But now they are contracting with companies such as Bangalore’s Harita Infoserve to develop computer models of auto parts and run computer-simulated tests of cars. All three have opened technical centers in India for R&D. And G.M. some time ago handed Reva, a small company in Bangalore, a plum contract to design an electric car. The fastest growing Indian exports right now are not computer programs or software but automotive components, says C.K. Prahlad, an Indian-born professor of management at the University of Michigan business school.
While the outsourcing/I.T. boom that Bangalore spearheaded has spread to other Indian cities, Bangalore remains at the cutting edge of this globalization-of-work trend. It is rapidly moving up the value-added chain so that the foreign companies are now flocking to the city not for its cheap labor, as wages in India are beginning to catch up with those in the West, but for its scientific prowess and business-process know-how. “They came for the cost arbitrage but are staying for the quality arbitrage,” notes Prahlad.
But it was not just serendipity—the Y2K crunch—that caused the West to discover India’s I.T. potential. Nor can you attribute it all to India’s technical talent pool, a necessary but not sufficient condition for the I.T. boom. What was indispensable was the radical restructuring of India’s autarkic economy. Karnataka, the state where Bangalore is located, aggressively took advantage of India’s new climate of economic openness, attracting huge new investments from abroad and, as important, unleashing its entrepreneurs at home.
Lesson One: Break the Regulatory Shackles
It needs to be said at the outset that no government in the U.S., not even Detroit’s, has ever imposed the kind of crushing regulations that the Indian government imposed during the height of the notorious License Raj in the mid-’50s. Key industries—steel, telecommunications, airlines—were nationalized, but even more harmful was the Kafkaesque web of regulations that the remaining private businesses had to endure in the name of ensuring a “rational allocation of resources.”
Every move of private industry, big or small, was subject to licensing. Forget setting up a new plant or a factory. If an enterprise wanted to buy or import equipment, change its product mix, or even produce more than its allotted quota for a product, it had to first obtain permission from the Directorate General of Technical Development, a process that could take years and a small fortune in bribes, points out Gurcharan Das, author of India Unbound and former CEO of Procter & Gamble, India. “Large business houses set up parallel bureaucracies in Delhi to follow up on files, organize bribes, and win licenses,” he recalls.
Confronted with a massive fiscal crisis and the prospect of defaulting on its international debt obligations, the Indian government dismantled much of this ridiculous licensing regime in 1991. In a bid to boost exports to replenish the country’s empty foreign exchange reserves, it also eliminated all import licensing and slashed tariffs on capital goods. Both were relics of India’s import-substitution days, when manufacturers were discouraged from buying equipment from abroad in order to build the domestic industry. This jacked up production costs and made the country’s exports hopelessly uncompetitive.
Trade liberalization was a boon for the I.T. industry, which already had escaped many of the stultifying controls that other industries faced simply because the architects of India’s industrial policy had failed to anticipate its birth. Thus, while there was a ministry to regulate every other sector—steel, banks, insurance—there was no Ministry of Information Technology until 1999. (After India won several international beauty contests in a row, one politician quipped that the country had experienced an I.T. boom and a beauty boom because the state had stayed out of both.) Yet despite the availability of a crucial resource—a ready pool of English-speaking high-tech professionals—the industry was thwarted by the country’s restrictive trade laws.
Once those were relaxed, writes Infosys founder N.R. Narayana Murthy, the man who pioneered India’s I.T. revolution, it no longer took 13 months and 25 visits to Delhi just to obtain a license to purchase a computer. “Or a wait of five days,” he adds, “to get permission from a clerk at the Reserve Bank of India [the government bank monopoly] to decide whether the managing director of a software firm could travel abroad for a day.”
All this improved the business climate dramatically. Karnataka went even further than the rest of the country to liberate private industry, especially the I.T. sector, from the remaining government shackles.
A 2001 report prepared for the U.S.-based chipmaker Intel by Feedback Consulting, one of the most respected consulting companies in South India, recommended Bangalore over other cities for the company’s India headquarters because along with perfect weather—a huge advantage in attracting talent—Karnataka had the most industry-friendly state government in the country. One of the most important moves Karnataka made to acquire this reputation (surpassed in recent years by other states) was that it signed up for the central government’s Software Technology Parks of India (STPI) initiative ahead of other states. The importance of this initiative in making Bangalore the Silicon Valley of India cannot be exaggerated.
STPI gave I.T. companies in Karnataka a nearly complete exemption from central government taxes. In addition, it enabled Karnataka to release its businesses from the government’s telecommunications monopoly by opening Internet access to competing private providers. This meant better, cheaper, and more reliable lines of communication with overseas clients, something Indian companies sorely needed to deliver projects in an efficient and timely manner.
Aside from prying open the government’s telecom chokehold, the most liberating feature of STPI was that it established a special liaison between I.T. companies and the central government for all the statutory approvals—project approval, import approval, bonding and export certification—they needed to proceed with their projects. “This single-window clearance meant that industry no longer had to go from department to department to obtain licenses,” explains B.V. Naidu, STPI director in Bangalore.
What’s more, unlike other states that limited STPI certification to companies located on special campuses, Karnataka extended it to any company anywhere in the city. “This made all of Bangalore a potential business area,” notes V. Ravichandar, Feedback Consulting’s founder and CEO.
Combined with the state’s lax enforcement of zoning laws against mixed uses, broad STPI certification empowered any geek with a computer and e-mail to write and deliver software to anyone in the world right from his home. So while Bangalore has its share of corporations in downtown high-rises and on sprawling I.T. campuses, it is also home to multimillion-dollar companies operating out of modest bungalows in residential neighborhoods.
One such company is Dhruva Interactive, which designs video games. It is sandwiched between the walls of two houses on a street so narrow that two cars have difficulty scraping past each other. Dhruva’s neighbors have been complaining about the odd hours it keeps—a result of the time difference with its overseas clients—so it plans to move to another location after 10 years in its current space, says Rajesh Rao, 35, the company’s sweetly exuberant and immensely tech-savvy founder. But there are other streets nearby where people have sold to commercial developers the homes in which they had long planned to retire.
Bangalore is in the midst of a huge reshuffling of real estate, as property, unencumbered by rigid, U.S.-style land use rules, freely changes hands from less to more valued uses. This is making a lot of people very rich very quickly. And it is creating the sort of densely packed, mixed use neighborhoods celebrated by the urban theorist Jane Jacobs, as doctors’ clinics, home accessory boutiques, and roadside cafés—not to mention the proverbial corner grocery stores—crop up like mushrooms in areas that once were almost exclusively residential.
If Bangalore has made giant strides to release its entrepreneurs (at least its I.T. entrepreneurs) from stifling government regulations, Detroit has taken a few baby steps at most. Some of its leaders, such as former Mayor Dennis Archer, began talking about creating a one-stop shop akin to STPI’s single-window clearance for prospective businesses back in 1992. But Archer’s hip hop–loving, earring-sporting successor, Kwame Kilpatrick, is preoccupied with attracting big, glamorous Aswan Dam–type development projects and has little time for mundane process improvements.
In Detroit the city does not even know what property it holds, as a steady stream of abandoned buildings keeps reverting to its ownership. Prospective developers trying to acquire land are left languishing in limbo for months as the city council—a dysfunctional entity that has to approve the sale of all city-held property—tries to clear up title and lien issues. For developers, time is money, and more often than not they simply give up in disgust.
The city’s bureaucracy and red tape thwart not only outside developers seeking to do business in Detroit but an even more critical source of urban vitality: entrepreneurship by city residents themselves. In the name of protecting public health and safety, the city imposes a plethora of licensing requirements and fees on 265 occupations (60 more than the state government licenses), from street vendors to day care centers. A home-based business needs 70 or so building or equipment permits to get started. Hair braiders have to spend thousands of dollars and 1,500 hours in mandatory training for a cosmetology license.
The taxi industry is virtually nonexistent in Detroit, as any visitor who has tried to hail a cab can testify. The city has restricted the number of taxi licenses so tightly that new entrants simply can’t get one, even if they can somehow arrange the $10,000 or so that a license costs on the open market. As if this were not enough, Detroit revised an existing ordinance in 1996 to further regulate and restrict the number of limousines and vans, so they have been squeezed out of the city as well. If my Bangalore driver Nanjappa had moved to Detroit rather than Bangalore, he probably would have been crushed by the city bureaucracy and wound up on welfare.
Lesson Two: Remove Destructive Taxes
Bangalore has benefited not just from the central government’s efforts to reduce onerous bureaucracy and red tape but from its radical reform of the federal tax system, once among the most punitive and complicated in the free world. Now Indian states also have started to simplify their tax schemes, something neither Michigan nor Detroit has found the will to do.
At its peak in the 1970s, India’s top marginal corporate income tax rate was 93.5 percent. This, combined with an 8 percent tax on wealth, meant those who played by the rules could count on effectively handing over their entire profits to the government at the end of the year.
The 1991 reforms dramatically changed this situation. India not only lowered the marginal income tax rate for corporations and individuals to between 30 and 35 percent (not counting deductions); it slashed the wealth tax to 1 percent and abolished the estate tax. The reforms are ongoing and are not limited to the national government: Last year 21 of India’s 29 states joined hands—a major political miracle—to end a bewildering system of multiple state-level sales taxes that even seasoned accountants couldn’t fathom. This system taxed not just the added value but the whole accumulated value of a good at each stage of the production process, including the taxes paid at prior stages. “In effect, you had taxes on taxes on taxes,” explains Anil Sood, founder of Digital Promoters, a New Delhi–based company that makes industrial equipment. This generated mountains of paperwork, created numerous market distortions, and bumped up prices for consumers without delivering better products.
This insane system has been replaced with a far simpler retail-level value-added tax of 12.5 percent. “This is not necessarily lower,” says Sood, “but it is more rational and less capricious.”
Tax reforms, coupled with trade liberalization that exempted all exports from taxes and slashed duties on imported goods, gave a big boost to I.T.
The Indian government, acting on the theory that the I.T. industry would propel broad-based economic development in the country, has given the industry targeted tax breaks as well. Around 1999, New Delhi declared a 10-year holiday from corporate income taxes for all STPI-registered companies.
But special tax breaks, notes Arvind Panagariya, an economist at Columbia University, have at best helped the industry at the margins. “If it were up to me, I’d end them today,” he bristles. The fundamental reason for the software boom, in his opinion, was that India abandoned its import substitution approach and made it easier for the I.T. industry to acquire cheap equipment from abroad and combine it with cheap, high-skilled labor at home to produce cost-effective global exports.
India could do this in the manufacturing sector as well, argues Panagariya, if the country’s labor laws did not prevent it from taking advantage of its massive reserves of low-skilled workers. Those rules make it virtually impossible for factories with more than 100 workers to fire anyone or to shut operations, even when they are losing money hand over fist. Factory owners have been known to lock up plants in the dead of the night and skip town to avoid total financial ruin. Such labor laws have perversely encouraged manufacturers to adopt capital-intensive technologies in a country with a large pool of unemployed people.
Like India, Detroit knows how to use the tax code to play favorites. Nearly every large company that has moved to Detroit in the last decade, including Compuware and G.M., has done so only after being promised hefty tax breaks. But what the Indian central and state governments are also doing—and Detroit and Michigan are not—is reforming the overall tax climate to make it more friendly to enterprise.
According to the Mackinac Center for Public Policy, a Michigan-based think tank, Michigan is one of just a handful of states that levy a sales tax, a personal income tax, and a business tax. The last, called the Single Business Tax (SBT), has the most pernicious effect on entrepreneurship and job growth because it taxes firms on their costs and investments rather than their profits. If a company adds employees, its SBT goes up. If it raises wages, its SBT goes up. If it buys new equipment, its SBT goes up.
Political leaders from both parties have long recognized the perversity of this tax, but they haven’t been able to muster the political will to wean the state off it. (At press time, reformers were making a renewed push to scrap the SBT.) Michigan’s political pusillanimity contrasts sharply with the bold reform of the state sales taxes in India, where leaders divided by language, religion, class, and caste managed to unite behind a single tax scheme, even persuading local politicians to forgo what they have long regarded as their God-given right: selectively handing sales tax exemptions to favored groups to build their fiefdoms.
On top of all the state taxes, Detroit adds several of its own, including a 5 percent tax on residents’ utility bills (which goes, bizarrely, to the police), a 2.5 percent personal income tax on residents, a 1.25 percent personal income tax on people who work in Detroit, and a 1 percent corporate income tax. As if that were not bad enough, the city charges such a high assessment on property when it is sold that few buyers are willing to pay it, freezing the real estate market and forcing owners to burn or abandon their houses. For a family of four making $50,000, Detroit is the eighth highest-taxed city in the nation.
Radical tax cuts along with deregulation awoke the world to Bangalore’s I.T. potential. It is unclear where Detroit’s potential is; only a free-market discovery process can reveal it. But whatever it may be, it will remain hidden so long as Detroit’s onerous tax burden and regulations keep scaring businesses away from the city.
What Detroit Can Teach Bangalore
Bangalore—and India—have not done everything right. On the theory that a continuing I.T. boom will lift India out of its poverty, Indian policy makers have made it their top priority to satisfy the industry’s needs, as opposed to continuing the general liberalization of the economy. “We want to promote, not obstruct, I.T.” is a mantra among India’s bureaucrats.
That’s a sign of I.T.’s success in transforming the country’s Zeitgeist: The intelligentsia that reviled private industry as a rapacious exploiter 20 years ago is now embracing it as a savior. Former Prime Minister Atal Bihari Vajpayee called India’s software technology parks the “new temples of modern India.”
But hitching your wagon to a single industry does not a resilient economy make. For proof, you need look no further than the ruins left by Detroit’s dying auto industry.
While India’s central government has released I.T. from the shackles of the License Raj, most state governments, including Karnataka, have yet to release other service industries from the Inspector Raj. Madhu Menon, the founder of Shiok, a trendy Thai restaurant in Bangalore, laments that city inspectors trolling for bribes routinely threaten to shut him down on the slightest pretext.
Furthermore, while there are entire bureaucracies dedicated to helping I.T. companies obtain all the government clearances they need, small businesses like Menon’s get no help whatsoever. Quite the opposite: To obtain a license to open his restaurant, he had to pay four times its cost in bribes. Indeed, the I.T. industry’s ability to put more grease on bureaucratic palms for the few government clearances it does need has significantly bumped up the going rate of bribes for people like Menon.
And while the I.T. industry’s tax load has been reduced to nothing because of all the targeted tax breaks, Menon’s tax burden has increased, thanks to the new value-added tax, which applies to previously exempt service industries. Menon concedes that in the pre-I.T. days, people wouldn’t have had the disposable income to support restaurants like his. “But it is simply not fair that I.T. should receive so many freebies,” he insists.
Narendra Pani, a columnist at Bangalore’s Economic Times, complains that I.T. uses its prestige and economic clout to win disproportionate amounts of public funding for projects useful to the industry. S. Nagarajan—founder of 24/7, one of Bangalore’s biggest call centers—retorts that the city’s poor infrastructure forces I.T. to internalize costs that are traditionally borne by the public. For example, his company has to arrange for the transportation of thousands of employees because of the lack of reliable public transportation. He argues that the things I.T. wants—better roads, a reliable power supply—are things everybody else wants too.
But not all of I.T.’s demands are so broad-based. According to Clifton D’Rozario of the Alternative Law Forum, a Bangalore-based public advocacy group that opposes liberalization and globalization, a budget the state government drew up some years ago with the help of the Bangalore Agenda Task Force, a group packed with industry bigwigs, allocated Rs. 75 million (about $1.5 million) to convert a prison in the middle of town into something called the Freedom Park to better showcase the city to foreign investors. What did Bangalore’s 765 slums—about 35 percent of the city—receive for schools, sewage, and drinking water? A mere Rs. 70 million. “What is outrageous about this is not just its inequity,” D’Rozario fumes. “It is the extent to which I.T. has been allowed to insinuate itself in the governance process.”
Worst of all is the state government’s rampant abuse of its eminent domain powers to acquire cheap land for I.T., especially from farmers. Gauri Lankesh—the editor of Lankesh, Karnataka’s premier alternative weekly—notes that the government routinely forces farmers off land they have owned for generations and pays them about a tenth of its market value. “Indian laws don’t allow farmers to either negotiate or refuse the deal,” she seethes. Many of the farmers become penniless squatters in Bangalore’s slums. Farmers are so incensed at these land grabs that some in Bellandur, a village near Bangalore, staged a big protest when Infosys announced plans to build a new campus there. Many of them are being pushed into the arms of an atavistic, anti-globalization left—the only group paying any heed to their plight.
Requiring I.T. companies to buy land on the open market isn’t just basic fairness. It’s also good economics. Detroit paid a heavy price for ignoring this principle back in 1981, when city authorities bulldozed a vibrant little community of Polish immigrants—fondly called Poletown—to make room for a G.M. auto plant. About 4,200 people were displaced and 140 businesses evicted. Just as Bangalore’s I.T. industry is doing now, G.M. promised thousands of new jobs and more tax revenues for the city. Twenty-five years later, the jobs have not materialized, and the city is even more of a wasteland. Entire neighborhoods lie totally gutted. The city’s tax base has completely eroded, and it is in such a big financial hole that half a decade ago it was temporarily put under state receivership.
More recently, using the threat of condemnation, Detroit authorities bought out thriving businesses, including restaurants, pubs, and cement silos, to make room for a massive casino project on the Detroit River. The project fell through, and one of the last happening parts of Detroit is now a ghost town.
The lesson for Bangalore from Detroit’s experience is that when government takes the economy in its own hands, three things inevitably happen: It tramples on people’s rights; it assists not the most promising but the most powerful businesses; and it squeezes out the spontaneous economic activity that is the source of sustained growth. That is not an approach worth emulating.
Lessons for Everyone
By allowing companies to access the best minds and best resources anywhere on the planet, globalization has enriched just about everybody touched by it, from my driver in Bangalore to consumers in the United States. India’s poverty rate has been cut by half in the last 25 years, in large part due to the I.T. boom; meanwhile, a report from the McKinsey Global Institute estimates that global outsourcing returns 45 percent to 55 percent in net savings to businesses, money they can invest to create better products and more jobs. But the biggest advantage of globalization is that by allowing people and businesses to vote with their feet, it helps sort the policies that work from those that don’t, regardless of where they are implemented.
For America’s founders, the states were laboratories to test diverse ideas. In a sense, globalization has made the whole world a giant laboratory whose lessons are equally available to all. The greatest lesson of Bangalore’s and India’s economic experiment, warts and all, is that entrepreneurs unfettered by crippling regulations and onerous taxes are capable of doing great things.
If only Detroit and other depressed cities, both in the U.S. and elsewhere, would learn this lesson.