Government Causes Poverty

I once went around the world to try to answer the question: what makes a nation prosperous?

The answer: economic freedom.

The answer is not, as students suggested, "democracy" or "natural resources." India has both, but in India I interviewed people like the factory owner whose business had to close because a government electric plant didn't deliver steady power. A private company offered to build an electric plant to supply the factory, but it couldn't get approval from government bureaucrats. So 400 employees lost their jobs. Other entrepeneurs complained that government rules made it nearly impossible to open any business.

It made me wonder: what would happen if a town had businesses, but no government?

Now I know. One Indian town ended up, by accident, without any local government. It happened after Indian bureaucrats decided to divide an existing Indian state in half, the NY Times reports:

One half would revolve around the city of Faridabad, which had an active municipal government, direct rail access to the capital, fertile farmland and a strong industrial base. The other half, Gurgaon, had rocky soil, no local government, no railway link and almost no industrial base.

As an economic competition, it seemed an unfair fight. And it has been: Gurgaon has won, easily. Faridabad has struggled to catch India's modernization wave, while Gurgaon's disadvantages turned out to be advantages, none more important, initially, than the absence of a districtwide government, which meant less red tape capable of choking development.

Wow, even the New York Times says there is too much regulation.

The article also notes that while the government didn't get in the way, it didn't provide basic services, either. Without a reliable electric grid, sewer system, post office, or even adequate policing, how could anything succeed?

Things succeed because companies build their own infrastructure. One company, Genpact:

has backup diesel generators capable of producing enough electricity to run the complex for five days... a sewage treatment plant and a post office, which uses only private couriers, since the local postal service is understaffed and unreliable. It has a medical clinic, with a private ambulance, and more than 200 private security guards and five vehicles patrolling the region...

"We pretty much carry the entire weight of what you would expect many states to do," said Pramod Bhasin, who this spring stepped down as Genpact's chief executive.

With less government, the city has thrived. The population skyrocketed from 100,000, when the local government was eliminated thirty years ago, to 1.6 million today. And there are now:

26 shopping malls, seven golf courses and luxury shops selling Chanel and Louis Vuitton. Mercedes-Benzes and BMWs shimmer in automobile showrooms. Apartment towers are sprouting like concrete weeds, and a futuristic commercial hub called Cyber City houses many of the world's most respected corporations.