WKD: These 3 Countries Tried Socialism. Here's What Happened
Who would have thought?
Of particular importance was the Israeli high-tech revolution, which led to a 600% increase in investment in Israel, transforming the country into a major player in the high-tech world.
There were troubling side effects such as social gaps, poverty, and concerns about social justice, but the socialist rhetoric and ideology, according to Glenn Frankel, The Washington Post’s correspondent in Israel, “has been permanently retired.”
The socialist Labor party endorsed privatization and the divestment of many publicly held companies that had become corrupted by featherbedding, rigid work rules, phony bookkeeping, favoritism, and incompetent managers.
After modest expansion in the 1990s, Israel’s economic growth topped the charts in the developing world in the 2000s, propelled by low inflation and a reduction in the size of government. Unemployment was still too high and taxes took up 40% of GDP, much of it caused by the need for a large military.
However, political parties are agreed that there is no turning back to the economic policies of the early years—the debate is about the rate of further market reform. “The world’s most successful experiment in socialism,” Light wrote, “appears to have resolutely embraced capitalism.”
Acceptance of socialism was strong in India long before independence, spurred by widespread resentment against British colonialism and the land-owning princely class (the zamindars) and by the efforts of the Communist Party of India, established in 1921.
Jawaharlal Nehru adopted socialism as the ruling ideology when he became India’s first prime minister after independence in 1947.
For nearly 30 years, the Indian government adhered to a socialist line, restricting imports, prohibiting foreign direct investment, protecting small companies from competition from large corporations, and maintaining price controls on a wide variety of industries including steel, cement, fertilizers, petroleum, and pharmaceuticals. Any producer who exceeded their licensed capacity faced possible imprisonment.
As the Indian economist Swaminathan S. Anklesaria Aiyar wrote, “India was perhaps the only country in the world where improving productivity … was a crime.” It was a strict application of the socialist principle that the market cannot be trusted to produce good economic or social outcomes. Economic inequality was regulated through taxes—the top personal income tax rate hit a stifling 97.75%.
Some 14 public banks were nationalized in 1969; six more banks were taken over by the government in 1980. Driven by the principle of “self-reliance,” almost anything that could be produced domestically could not be imported regardless of the cost. It was the “zenith” of Indian socialism, which still failed to satisfy the basic needs of an ever-expanding population. In 1977-78, more than half of India was living below the poverty line.
At the same time, notes Indian-American economist Arvind Panagariya, a series of external shocks shook the country, including a war with Pakistan in 1965, which came on the heels of a war with China in 1962; another war with Pakistan in 1971; consecutive droughts in 1971-72 and 1972-73, and the oil price crisis of October 1973, which contributed to a 40% deterioration in India’s foreign trade.
Economic performance from 1965 to 1981 was worse than than at any other time of the post-independence period. As in Israel, economic reform became an imperative. Prime Minister Indira Gandhi had pushed her policy agenda as far to the left as possible.
In 1980, the Congress party won a two-thirds majority in the Parliament, and Gandhi adopted, at last, a more pragmatic, non-ideological course. But as with everything else in India, economic reform proceeded slowly.
An industrial-policy statement continued the piecemeal retreat from socialism that had begun in 1975, allowing companies to expand their capacity, encouraging investment in a wide variety of industries, and introducing private-sector participation in telecommunications.
Further liberalization received a major boost under Rajiv Gandhi, who succeeded his mother in 1984 following her assassination. As a result, GDP growth reached an encouraging 5.5%.
Economics continued to trump ideology under Rajiv Gandhi, who was free of the socialist baggage carried by an earlier generation. His successor, P. V. Narasimha Rao, put an end to licensing except in selected sectors and opened the door to much wider foreign investment. Finance minister Manmohan Singh cut the tariff rates from an astronomical 355% to 65%.
According to Arvind Panagariya, “the government had introduced enough liberalizing measures to set the economy on the course to sustaining approximately 6 percent growth on a long-term basis.” In fact, India’s GDP growth reached a peak of over 9% in 2005-08, followed by a dip to just under 7% in 2017-18.
A major development of the economic reforms was the remarkable expansion of India’s middle class. The Economist estimates there are 78 million Indians in the middle-middle and upper-middle-class category.
By including the lower-middle class, Indian economists Krishnan and Hatekar figure that India’s new middle class grew from 304.2 million in 2004-05 to an amazing 606.3 million in 2011-12, almost one-half of the entire Indian population. The daily income of the three middle classes are lower middle, $2-$4; middle middle, $4-$6; upper middle, $6-$10.
While this is extremely low by U.S. standards, a dollar goes a long way in India, where the annual per capita income is approximately $6,500. If only half of the lower-middle class makes the transition to upper-class or middle income, that would mean an Indian middle class of about 350 million Indians—a mid-point between The Economist and Krishnan and Hatekar estimates.
Such an enormous middle class confirms the judgment of The Heritage Foundation, in its Index of Economic Freedom, that India is developing into an “open-market economy.”
In 2017, India overtook Germany to become the fourth-largest auto market in the world, and it is expected to displace Japan in 2020. That same year, India overtook the U.S. in smartphone sales to become the second-largest smartphone market in the world.
Usually described as an agricultural country, India is today 31% urbanized. With an annual GDP of $8.7 trillion, India ranks fifth in the world, behind the United States, China, Japan, and Great Britain. Never before in recorded history, Indian economist Gurcharan Das has noted, have so many people risen so quickly.
All this has been accomplished because the political leaders of India sought and adopted a better economic system—free enterprise—after some four decades of fitful progress and unequal prosperity under socialism.
3. United Kingdom
Widely described as “the sick man of Europe” after three decades of socialism, the United Kingdom underwent an economic revolution in the 1970s and 1980s because of one remarkable person—Prime Minister Margaret Thatcher. Some skeptics doubted that she could pull it off—the U.K. was then a mere shadow of its once prosperous free-market self.
The government owned the largest manufacturing firms in such industries as autos and steel. The top individual tax rates were 83% on “earned income” and a crushing 98% on income from capital. Much of the housing was government-owned.
For decades, the U.K. had grown more slowly than economies on the continent. Great Britain was no longer “great” and seemed headed for the economic dust bin.
The major hindrance to economic reform was the powerful trade unions, which since 1913 had been allowed to spend union funds on political objectives, such as controlling the Labour Party. Unions inhibited productivity and discouraged investment.
From 1950 to 1975, the U.K.’s investment and productivity record was the worst of any major industrial country. Trade union demands increased the size of the public sector and public expenditures to 59% of GDP. Wage and benefits demands by organized labor led to continual strikes that paralyzed transportation and production.
In 1978, Labour Prime Minister James Callaghan decided that, rather than hold an election, he would “soldier on” to the following spring. It was a fatal mistake. His government encountered the legendary “winter of discontent” in the first months of 1979. Public-sector workers went on strike for weeks. Mountains of uncollected rubbish piled high in cities. Bodies remained unburied and rats ran in the streets.
Newly elected Conservative Prime Minister Margaret Thatcher, the United Kingdom’s first female PM, took on what she considered her main opponent—the unions.
Flying pickets, the ground troops of industrial conflict who would travel to support workers on strike at another site, were banned and could no longer blockade factories or ports. Strike ballots were made compulsory. The closed shop, which forced workers to join a union to get a job, was outlawed. Union membership plummeted from a peak of 12 million in the late 1970s to half that by the late 1980s.
“It’s now or never for [our] economic policies,” Thatcher declared, “let’s stick to our guns.”
The top rate of personal income tax was cut in half, to 45%, and exchange controls were abolished.
Privatization was a core Thatcher reform. Not only was it fundamental to the improvement of the economy, it was “one of the central means of reversing the corrosive and corrupting effects of socialism,” she wrote in her memoirs.
Through privatization that leads to the widest possible ownership by members of the public, “the state’s power is reduced and the power of the people enhanced.” Privatization “is at the center of any programme of reclaiming territory for freedom.”