Professor Deepak Lal: Departure of a Free Market Champion

Originally appeared on Economy Next

By Sarath Rajapathirana

On the night of Thursday the 30th of April 2020, Professor Deepak Kumar Lal passed away in London after a brief illness. Thus ended a remarkable life journey as a celebrated intellectual and thought leader.

An author of highly acclaimed papers and books, a professor with a stellar academic career in two continents. Economic adviser to Governments for over 55 years. His observations went beyond book learning to be actually engaged with policymakers from many countries including the United Kingdom, India, Sub-Saharan Africa, Japan, Sri Lanka, Philippines, Brazil and Russia. While there have been many been appreciations and remembrances of Deepak in India, UK and the United States, one missing aspect of his life was his scintillating conversations with his friends and associates in three continents who will miss him sorely.

Deepak the Person

Those who associated with him closely would bear witness to his contributions as a great conversationalist. His vast knowledge of economics, history, and political science, sociological explorations in his quest to understand how economies and societies worked in the broadest possible ways made him great company. He was not inhibited by researching ancient history or in praising empires.

His astonishing knowledge, gentle ways and ability to analyse and advance economic issues set him apart from many academics. He was one of the more well-read individuals. He was always up to date on world politics, newest contributions to economics. He was a voracious reader, reading into the early hours of the morning, even when he had returned home past midnight. He read everything from learned research papers, novels to articles in leading newspapers of the world. His monthly column in the Indian Business Standard was read internationally.

In this essay which is short compared to his vast presence in the economics literature, we capture the most important and salient aspects that have helped many economists including us, to refine and change our world view on economics and economic policymaking.  The best description of Deepak is that he is a classical liberal. And, one who had made formidable contributions to free-market economics and its importance to specially help developing countries to grow faster, reduce poverty and improve income distribution.

Status Quo in Economic Thinking for Developing Economies

In the 1950s, thinking on economic development was influenced by the two main sources. These were the Soviet model and the other the ideas of Latin American structuralists. (Excluding China which claims to practice socialism with Chinese characteristics). The Soviet model was adopted by India for two important reasons, free-market economics was associated with British imperialism and the ideological position of the Indian leadership led by Pundit Nehru.

The Soviet Union was seen as “India’s ally and implicit role model” “(Srinivasan and Tendulkar 2003). In the case of Latin America, its colonial past was a century ago. Its leadership followed the Soviet model too,  implicitly with the special characteristic of being “ structuralists” implying a rejection of the price mechanism under the influence of a few British economists, especially from the University of Sussex, such as  Dudley Seers, Hans Singer and Latin American economists such as Celso Furtado and Raul Prebisch of Brazil and Argentina respectively.

A common issue with the followers of the Soviet model and structuralists was their failure to grow (referred to as the “Hindu rate of growth” of India, partly pejorative characterization by RajKrishna (1978). Mainstream Indian economists in the 1950s were planners, deeply suspicious of the free market. They were influenced by Mahalonabis a leading Indian scientist and statistician who postulated that in order to raise domestic consumption in India, it needed to invest in capital goods based on what was called the Feldman-Mahalonabis model. Moreover, the approach was to use a closed economy model with high import barriers to promote industrialization.

Deepak Lal’s Contributions

Deepak’s contributions which took on the above sources of dissent against free-market economics were more credible following the collapse of the Soviet economy in 1989, the poor growth rate of India the largest economy following the Soviet model and the sheer failure of economic policies of the Latin American structuralist school that led to high inflation and low output growth.

Deepak was in a group of world-class economics Professors such as I.M.D little, Maurice Scott, and Max Corden at Nuffield College, Oxford University.

They were critical of the planning approach to economic development and for the exclusion of the price mechanism to allocate resources. Interventions were justified in the presence of externalities in which case free markets could under-produce goods and services.

But even here there were better ways of intervening on externalities and infant industry grounds.
This particular group was well versed in economic theory, its application in developing countries and had practical experience in working on developing countries.

There are four books among the 40 books and pamphlets he had written that putDeepakat the top tier of economists who have advanced the case for free markets in developing countries.

They are ‘The Poverty of Development Economics’ (1983), ‘The Hindu Equilibrium’ (1989). ‘Poverty, Equity and Growth: A Comparative Study’ (with Hla Myint) 1999 and ‘Against Dirigisme’ (1994).

It would be important to provide a context in which Deepak advanced his ideas on free-market solutions for developing countries’ economic challenges.

The majority of mainstream economists in the 1950s to 1970s argued for planned economic development.

India was the leading light for most economists in the developing world. And, to buttress this position India’s leading scientist turned statistician and member of the Planning Commission, Mahalonabis had shown that in order to raise levels of consumption in India, it had to make investments in the capital goods sector based on the Feldman-Mahalonabis model.

And, the Planning Commission espoused this position in Indian plans, particularly in the second five-year plan, creating heavy industries, with little regard to rates of return or the possibility of producing iron and steel products that could compete in the world market.

Most Indian economists at the time believed that India’s large size (both in geography and population) justified producing for the domestic market.

Taking the view of a closed economy was consistent with the Socialist model espoused by leading politicians such as Pandit Nehru a Fabian socialist who favoured Soviet-style planned development.

On the other hand, Gandhi’s ideas were to support self-sufficient village-based economies where 83 per cent of the Indian population lived in 1950. In effect, both models were closed economy models protected from foreign competition.

Deepak wrote powerful critiques of the status quo thinking on economic development prevailing at the time beginning with ‘The Poverty of Development Economics’ first published in 1983 but revised and expanded in 1997.

It provided a robust critique of the statist model of development which denigrated both trade and free markets. He argued that the death of this dogma would be beneficial to the economic health of developing countries.

The history of the last thirty years has vindicated the veracity of Deepak’s critique. The dogma in its old form has gone.

However, he showed it in a postscript that brings the original text up to date, both in terms of statistics and in terms of the history of ideas.

Nevertheless, as he warns, dirigiste tendencies have not disappeared totally, but are emerging in new guises in the wake of the CORVID 19 epidemic.

Early calls for protection have arisen in countries like Sri Lanka. Ominous signs appear with the Central Bank of Sri Lanka banning many imports on the claim that it was necessary to address the balance of payments problems, ignoring the distortions in resource allocation that it would create. And the economy becoming non-competitive as a result.

Some policymakers casually suggest that Sri Lanka should adopt such a policy. This would cause a bias against export production since resource allocation is influenced by relative strengths of incentives. Besides, limiting imports would raise domestic prices of these goods and lead to inefficient import substitution not being subject to foreign competition.

In Deepak’s multi-country study with Hla Myint on ‘The Political Economy of Poverty equity and Growth: A Comparative Study’, they used a counterfactual approach of “twining” countries with similar resource endowments.

Sri Lanka and Malaysia both of which were British colonies and both had large plantations, one of the seven paired country studies. In the case of Malaysia, a mining export sector coexisted with a peasant rice economy.

The expansion of the plantation and mining sectors in past centuries attracted large numbers of immigrant Indian and Chinese workers and created plural societies composed of different ethnic groups with different cultures and traditions.

Native Malays were designated as “bumiputras” and have preferential treatment in securing public sector jobs and access to credit. However, despite this common background, (except for ethnic preferences) these two countries have had very different experiences in economic development since their independence.

Malaysia achieved unusually high growth rates but had trouble with equity and employment creation being relatively more market-friendly policies than Sri Lanka. However, Sri Lanka did well on equity by maintaining its culture and heritage, but its market unfriendly economic policies before the1977 liberalization created problems with productivity growth and balance of payments difficulties. Consequently, there was virtual economic stagnation by early 1970.

Deepak and Hla Myint and their associates point to the constraints within which governments made policies and they sought to evaluate the origins and validity of these constraints.

In the case of Sri Lanka, the departure from free-market policies through high import controls led to low GDP growth. Without the high growth, the Government of Sri Lanka (GOSL) could ill afford to subsidise its large social expenditures without straining the Government budget.

Important reasons why Sri Lanka could not achieve high growth was its high protection, large inefficiency and losses of state-owned enterprises that stood in the way of raising productivity growth. However, the analysis of both these countries underscores the importance of free-market policies as a solution to raising productivity growth which generally accounts for more than 50 per cent of the overall growth rate in worldwide studies.

Deepak’s masterly two-volume ‘Hindu Equilibrium’ deals with cultural stability and economic Stagnation in India over millennia in volume I and aspects of Indian Labour in volume II. They lead him to trace the origins of present India’s present status as a predatory and dirigiste state.

Bringing culture and standard economic analysis, he comes to these conclusions. It is the neo-classical framework that allows him to examine phenomena over three millennia. And, then come to the conclusion that India has to change its course by adopting a free-market approach to reach and sustain high rates of economic growth.

The very high growth rates achieved following the 1991 reforms in India vindicates the position taken by Deepak in this work.

‘The Repressed Economy: In this outstanding collection of essays on economic liberalization, Deepak lays the claim to be one of the world’s leading development economist. He questions why many developing countries have followed policies which have retarded both growth and achieving equity, before discussing why and how these policies need to be reversed.

‘The Repressed Economy’ brings together Deepak’s most important work on economies that function unsatisfactorily because of government policies that distort the working of the free market. He explains both why governments create these distortions and when, if at all, they are likely to heed the technocratic advice of the economists to eliminate or reduce them.

The theme of the repressed economy is explored throughout these essays, include applied studies of developing economies in Asia (China, India and the Philippines), Africa (Kenya), and Latin America (Brazil).

The role of ideas, interests and ideology are explored, as is the importance of differences in initial resources are discussed in this book of essays. Simple political economy models are developed to explain the actions of the governments concerned.

An intellectual biography is included which outlines how Deepak’s practical experience in the Third World led him to become a free–market-oriented development economist.

Conclusions

First, even a limited survey of Deepak’s contribution as above shows the wide breadth and depth of his work on development. No matter whether countries are large or small, with different factor endowments and locations, the successes and failure of their efforts depend on the type of development strategies adopted, whether they are market-friendly or not.

Second, the wide scope of the studies using simple analytical tools show that free market-based approaches to economic management can bring greater success than the alternative of heavy economic interventions. The opportunity costs of failure are high in terms of low growth rates, limited equity and skewed income distribution outcomes.

Third, Deepak notes that dirigisme has not been totally eliminated and that it can raise its ugly head again with the anti-openness attitudes engendered by the likes of CORVID-19.

Finally, noting his total contributions to economic development, Deepak has made honest and brave contributions to our understanding of economic development.

Witness his delving into economies that go back to 3.5 millennia and his praise for some empires that led to better institutional arrangements as found in the former British colonies that left behind sound legal frameworks regulatory institutions and even partial democracies.

Bibliography

T.N.Srinivasan and Suresh D. Tendulkar ‘Reintegrating India with the World Economy’ Institute for International Economics, Washington D.C 2003.

Deepak Lal,’The Poverty of Development Economics’, Hobart Papers 16, Institute of Economic Affairs, London 1983.

‘The Hindu Equilibrium Volume’. 1 and Volume 2, Clarendon Press, Oxford 1989.

‘Against Dirigisme’, The Case for Unshackling Economic Markets, International Centre for Economic Growth, San Francisco CA: ICS Press, 1994.

Hla Myint, ‘Political Economy of Poverty, Equity and Growth – A Comparative Study’, Clarendon Press, Oxford 1996.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.