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Another Blow to the “License Raj”

The economic revolution in India continued this week, when the cabinet voted to allow in big box stores such as Wal-Mart and Home Depot.

This is a major change, as Indian retail has long been dominated by an endless number of mom-and-pop stores. Indeed India has one of the highest densities of stores to people in the world, with one store for about every ten people. With each store doing only a tiny business, economies of scale are impossible and prices are high. The distribution network behind these stores is primitive, inefficient, and causes much spoilage, which again assures high prices.

There are, of course, restrictions. Foreign firms will need domestic partners who will have 49 percent ownership and the stores can be located only in cities with a population of at least 1 million. But India has an astonishing 51 cities with more than a million people (the U.S. has nine). Assuming the reform comes to fruition, it will raise the standard of living for nearly everyone, with lower prices and better goods. With people in the large cities benefiting, political pressure from voters in smaller cities will soon open them up as well.

Jawaharlal Nehru was the father of Indian independence, but he was also the father of Indian economic stagnation with his admiration of the Soviet planned economy. While he didn’t impose tyranny, he did develop what came to be called the “license raj,” in which a businessman could hardly hang a picture in his office without a license to do so. As many as 80 agencies had to sign off before a firm could begin to produce a product, and the state decided how much could be produced, where the capital would come from, what price it would be sold for. The invitation to corruption was vast and frequently accepted. Only in about 1990, with the Indian economy in deep trouble, did the license raj begin to collapse and the Indian economy begin to grow. Its dismantlement still has a way to go, but this is a very big step in the right direction.

Now, if only New York City would follow India’s example and allow its citizens to enjoy lower prices, more choice, and higher quality, it might aspire to first-world status as well.