What Detroit Can Learn From Bangalore

A booming city's lessons for a town in decline

Shikha Dalmia from the June 2006 issue

(Page 5 of 5)

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.

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The biggest idea myth about poverty in the 3rd world is that 3rd world countries are chaotic and disorganized. In reality, they are highly regulated it is just that the regulations exist largely to provide those in the government with power and the opportunities for graft.

One of the biggest harm done by naive, democratic-socialist in the West was creating the rationale for a micromanaging state that kleptocrats in the 3rd world would use to loot their own people. Micro-regulation that isn't so relatively destructive in a country with long stable political systems and rule of law become just a license to steal in countries without those attributes. Millions have died unnecessarily because of the poverty caused by these socialist rationalizations.

I think target tax breaks serve the same purpose as regulation. Both keep the politician a key player in important economic decisions. When politicians find they can no longer regulate directly without killing the golden goose, they then put themselves in the position of picking the economic winners and losers.

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