It's Time to Re-Regulate, Not De-Regulate

‘Milei, Modi, Trump: an anti-red-tape revolution is underway,’ is the headline of a lead article in The Economist on February 1, 2025. Its cover announces, ‘The Revolt against Regulation’. President Milei is on a crusade to reduce the size of Argentina’s government. Milei sees his policies as not just economic reforms but a broader ideological movement against socialism. President Trump has given Elon Musk, the world’s richest man, charge of a new Department of Government Efficiency. Musk has set about his task with missionary zeal, firing employees overnight as he did when he took over Twitter, which he rebranded ominously as X. 

India’s finance minister Nirmala Sitharaman declared, while presenting the national budget on February 1, that the government’s strategy for boosting economic growth is to ‘de-regulate’ the economy further. While Indian economists and corporate leaders are debating the efficacy of her proposals to reduce taxes, they endorse de-regulation as the strategy for growth. Ominously, Prime Minister Narendra Modi posted on X after meeting Elon Musk in Washington on February 13 that he had discussed “India’s efforts towards reform and furthering ‘Minimum Government, Maximum Governance’”. Does he want, like Musk does, a downsizing of government and governance of the country by the richest persons? 

An ideology was indoctrinated into economic policies by the end of the 20th century: ‘private’ is good, ‘the public’ is bad. The best way to govern an economy according to this ideology is to get government out of the way and leave everything to the private sector.

Also, the government has no business to be in business, and the business of business should be only business.

According to this confused ideology, businesses can solve all social and environmental problems, provided they are not tied up by government regulation. This anti-government ideology has evolved, from Margaret Thatcher and Ronald Regan, into the extremism of Donald Trump and Elon Musk, who are shutting down government programs and firing government employees to make the world a hunting ground for real estate and technology tycoons, whose rights to hunt freely are protected by governments with the strongest armies. 

It seems odd that economists continue to promote de-regulation as a strategy for growth when the need and demand for better regulation is widely evident. The 2008 global financial crisis was caused by excessive de-regulation of the US financial sector. Economists vowed to discover a ‘new normal’ for the economy. Instead, ‘too big to fail’ financial institutions were bailed out by the government, and ‘too small to survive’ citizens were left to the care of the heartless market. 

The ‘Big Bang’ that China escaped

The collapse of the Soviet Union in 1991 ended the history of ideological conflict, said political scientist Francis Fukuyama. The Washington Consensus won. Democracy had beaten authoritarianism; capitalism had defeated socialism. All countries were expected to dismantle their public sectors and follow the US liberal markets ideology. 

Russia was persuaded by US economists to privatise and marketise its economy with a ‘big bang’ in 1991. China resisted US pressure: it followed its own path of markets with socialist characteristics. Russia’s share of world GDP almost halved, from 3.7% in 1990 to 2% in 2017, while China’s share increased close to sixfold, from a mere 2.2% to about one-eighth of global output.  

“Almost all of the post-socialist countries that applied some version of shock therapy experienced a deep and prolonged recession,” writes Isabella M. Weber in How China Escaped Shock Therapy: The Market Reform Debate (Routledge Studies on the Chinese Economy). She points out that, “Beyond the devastation documented by economic indicators (by European Bank for Reconstruction and Development, 1999; UNICEF, 2001) most measures of human well-being, such as access to education, absence of poverty, and public health collapsed”. 

Weber goes on to say, “The famous Harvard development economist Dani Rodrik represents the economics profession more broadly when he answers his own question of whether ‘anyone can name the Western economists or the piece of research that played an instrumental role in China’s reforms’ by claiming that ‘economic research, at least as conventionally understood’ did not play ‘a significant role’ (Rodrik, 2010)”.

India’s leaders should rethink the country’s strategy for growth. India’s economic planners are calculating the growth of GDP necessary for India to rise further up global GDP rankings. Presently India, with $3.6 trillion GDP, ranks fifth. Its leaders aim to grow the economy to $26 trillion, to third place behind the US and China. To achieve this, growth must increase from the present 6.8/7% to 8.1% for the next 25 years. 

The problem of economic growth is complex. Not only must the rate of GDP growth be faster. But it should be more inclusive too, and environmentally sustainable. India’s pattern of growth since the liberalization of its economy has not been as inclusive as China’s and Vietnam’s. 

See table 1: Pace of inclusion in economic growth

India is the most densely populated, large country in the world. India has an acute problem of ensuring that economic growth does not come at the cost of further damage to India’s natural environment.

See table 2: Environmental sustainability: Footprints on the earth countries with over 250 million population

The US is the richest country in the world and has ample environmental resources. The US economy has grown without care for the sustainability of its natural resources. India must not follow the US’s technology-and-capital’ driven growth model growth any longer, which will harm India’s over-strained natural resources further. India must return to a more ‘natural’ model. Moreover, the US capitalist model is not designed for inclusive growth, unlike the socialist development models of China and Vietnam.  

A conflict between capitalism and democracy

When the Soviet Union collapsed in 1991, political scientist Francis Fukuyama prematurely declared the ‘end of history’. He believed that capitalism and democracy – the Washington Consensus – had finally prevailed over socialism and totalitarianism.  

History has returned. Ideological conflict between democracy and capitalism has not ended. In fact, the two ideologies are conflicting within the Western victors of the old Cold War. Civil society movements are speaking in the West on behalf of people left behind by the “free market” of private enterprise. Other voices on “the Left” demand a larger role for governments in providing public services and social security. And others speak for protection of the natural environment. Meanwhile the Right advocates for lower taxes, less regulation, and more freedom for capital to roam the world. 

The fundamental conflict between the core principles of capitalism and democracy – i.e., between the rights of owners of capital on one hand, and the rights of all humans on the other – continues. It is a conflict between political conservatives and political progressives. Between conservatives, who want to retain their power to fix the rules of the game from which they have benefitted, and progressives who want to change the rules for the benefit of those left behind.

Democracy and capitalism are founded on different conceptions of fundamental rights. Capitalism’s foundation is property rights. Democracy’s is human rights. Capitalist institutions run on the principle that whosoever owns something has the right to use it as he wishes, and that whosoever owns more of a shared resource must have a greater say in how that resource is used. Therefore, whoever owns more shares in a corporation has a larger vote than those who own fewer shares. 

On the other hand, ownership of property does not matter while assigning voting rights in democratic institutions. Because, in democracy, every living person, whether she has a billion dollars of wealth, or no dollars at all, has an equal vote in the governance of the collective human enterprise. 

The clash between capitalism and democracy is a clash of fundamental principles for good governance of societies. When appliances designed to run on AC power are plugged into sockets providing DC power, there will be blow-outs. Similarly, when institutions of capitalism and democracy designed to run on fundamentally different principles are plugged into each other, something will blow up.

Re-regulate, not de-regulate

“Done right, deregulation could kick start economic growth”, recommends The Economist on February 1, 2025.

An economy is a complex system, embedded within a more complex, social system, which is embedded in a wider, complex, natural system. The economy depends for its sustenance on the social and environmental systems around it. Economists model economic systems as internally self-regulating markets (by an ‘invisible hand’) which use human communities and the natural environment as resources for their growth. In their models, impacts of growth of the economy on society and the natural environment are ‘externalities’.

Complex systems take many forms. Complex machines, like airplanes, are complex systems composed of many complex sub-systems – mechanical, electrical, hydraulic, and electronic – which must work harmoniously. Designers of airplanes must ensure compatibility amongst the sub-systems to enable an airplane to fly. Modern airplanes are equipped by their designers with internal, self-governing mechanisms to regulate the interactions amongst an airplane’s internal systems, thus enabling it fly on auto pilot. 

Biological systems, such as human and animal bodies, are also complex systems with internal self-governing mechanisms. The difference between complex machines and complex natural systems is that complex machines designed by experts, is that machines cannot evolve by themselves into new forms to fit changing environments, whereas natural systems can. Machines are complex rigid systems; natural systems are complex adaptive systems. 

Human societies are adaptive systems too, but they are even more complex. They have the capability to self-intentionally adapt. Humans invent institutions to regulate their collective behaviour. Humans can reform the institutions they have invented when they are no longer fit for purpose. This has hazards, however. With their hubris to control the world around themselves, and by using the wrong model of the complex system they want to control, they can harm the system’s self-sustaining ability. 

Systems’ science explains the distinctive architecture of the different varieties of complex systems that enable them to function effectively and sustain themselves. All systems need stability to survive. The architectures of natural and human systems have features that provide stability and also enable them to change themselves over time to fit their changing environments. One of these features is an ‘economy of rules’. 

Systems need rules to govern themselves. Systems’ studies reveal that while “no rules” is not an option (it will lead to chaotic behaviour), too many rules slow down the adaptability of the system. Self-intentionally adaptive systems, which human societies are, can apply too many rules to govern themselves, thus harming, rather than improving their performance. When they add a good new rule, they must learn to let go of an old rule which will not be as useful any longer, thus always applying only a minimal set of critical rules. Regulation of a system is a process of learning and discovering the best, minimal set, of critical rules for the regulation of the system’s behaviour.

The right process will produce the right reforms

No regulation is not an option for governance of complex systems. And bad regulations can cause harm. How can regulation be done right? 

The Indian government is unable to find solutions for common people’s difficulties in earning decent incomes with dignity. The people have lost trust in the government’s ability to listen to them. BJP governments have been unable to make “pro-market” reforms in India to open labour, energy, and agricultural markets since 2014; even in 2019 with a large majority in the parliament. Agriculture reforms were withdrawn when farmers protested that they were not consulted; the farmers were shut out and camped on highways around the capital for months. The new labour codes cannot be implemented because unions say they were not consulted adequately. 

Economic science is in a rut. For supporters of free markets trouble in an economy is a sign it has not ‘reformed’ enough. It was too socialist. Its’ government did not get out of the way of the private sector sufficiently; its’ government continued to nurture domestic industries and employment; it continued to deliver services to needy citizens rather than handing them over to the private sector. The harm IMF’s structural reforms have caused are visible in many countries. Very few governments have openly resisted. A socialist government elected in Greece after the 2008 financial crisis was beaten into submission by the IMF and European Central Bank and it fell. 

The IMF has now examined why many governments have been forced to dilute IMF-backed structural reforms and even backtrack, in the IMF World Economic Outlook Report (October 2024). It concludes that stakeholders are not consulted sufficiently before policies are designed because experts think that common people do not understand their own problems as well as experts do. Consultations if any are pro forma and insincere. Unsurprisingly, the reforms are resisted when they are imposed on the people. The shortcomings of the reforms could have been avoided if policymakers were willing to listen to the perspectives of all stakeholders, especially those most affected by them. 

Experts complain that the problem of reforms is that governments are unable to implement the good reforms designed by the experts. Whereas the problem is that they are not consulting all stakeholders before they design the reforms. If they listened to all stakeholders, they would see the contours of the system from many perspectives and understand the system better than data-based models which exclude forces in the system that experts cannot measure quantitatively. With adequate and sincere consultation, policy reformers can design better reforms. Also, all stakeholders will cooperate in the implementation of reforms if they are included in the process of reform and reforms are not forced on them.    

Arun Maira is a former member of the Planning Commission and former Chairman, BCG India.