What Detroit can learn from Bangalore: a booming city's lessons for a town in decline
Urmi Sen
town in decline.
By Shikha Dalmia
Shikha Dalmia (shikha...@reason.org) is a senior analyst at the
Reason Foundation.
Link to this page
<a href="http://www.thefreelibrary.com/What%20Detroit%20can%20learn
%20from%20Bangalore:%20a%20booming%20city's%20lessons%20for%20a...-
a0146345614">What Detroit can learn from Bangalore: a booming city's
lessons for a town in decline.</a>
K.G. NANJAPPA, the mustachioed 35ish driver I hired for my five-day
stay in Bangalore, was not given to many opinions. But there was one
thing this soft-spoken, diminutive man was certain of: "It is bery
good thing I.T. companies here, madam."
Yes, he admitted, the influx of information technology companies into
this South Indian city of nearly 6 million people had made his job
more stressful. The sudden burst in traffic had cratered the streets
faster than municipal authorities could say "pothole pothole, in
geology, cylindrical pit formed in the rocky channel of a turbulent
stream. It is formed and enlarged by the abrading action of pebbles
and cobbles that are carried by eddies, or circular water currents
that move against the main current of a stream. ." (Bangalore
residents joke that while elsewhere people drive on the left of the
road, they drive on what's left of the road.) Commute times had
quadrupled, and road rage See Web rage. was on the rise.
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But just a few years after Nanjappa and his family had moved from a
nearby village to Bangalore, his base salary had doubled from 860 to
$120 a month. In addition, he routinely took in as much as $60 a month
in tips, putting his income in a range he had scarcely imagined
possible.
It's not that he doesn't miss his old village life, he explained. But
by carefully managing his finances, he can send his daughter to a
private school while planning for a second child. All of this, he
maintains, is well worth trading the simple pleasures of his bucolic
past life for the hassles of his new, grungy grun·gy
adj. grun·gi·er, grun·gi·est Slang
In a dirty, rundown, or inferior condition: grungy old jeans.
--------------------------------------------------------------------------------
[Origin unknown. city existence.
Evidently, Nanjappa is not the only one who feels this way: Every
week, nearly 3,700 new people from all over India--from high-tech
professionals to semi-skilled service staff--vote with their feet by
moving to Bangalore, the I.T. and outsourcing capital of the East. A
fraction of them, as we'll see, were driven from their homes by a land-
grabbing government, but the vast majority are simply pursuing the
city's many opportunities. Even skilled expatriates from Australia,
California, and Europe are returning, undeterred by Bangalore's
ubiquitous poverty, squalor, and chaos after years of life in plush,
clean, and orderly surroundings. The city's population has ballooned
from just 1 million residents in 1960, giving Bangalore a 5.7 percent
annual rate of growth that has made it one of the fastest-growing
cities not just in India but in all of Southeast Asia Southeast Asia,
region of Asia (1990 est. pop. 442,500,000), c.1,740,000 sq mi
(4,506,600 sq km), bounded roughly by the Indian subcontinent on the
west, China on the north, and the Pacific Ocean on the east. . There
are signs this influx is beginning to slow, due to the city's dismal
infrastructure. For now, however, it has injected new energy into a
town that was once so dull that Winston Churchill compared it to a
prison.
Giant multinationals such as Microsoft, Intel, and Dell are cramming
the city with glittering new glass-and-steel buildings. Every inch of
real estate in the city proper has been spoken for, pushing Indian
computer behemoths such as Infosys and Wipro to erect their sprawling,
lush, and unabashedly un·a·bashed
adj.
1. Not disconcerted or embarrassed; poised.
2. Not concealed or disguised; obvious: unabashed disgust. opulent
campuses on the outskirts. Hotels ranging from the sumptuously
luxurious five-star Leela Palace to the low-budget Woodlands run at
full capacity. Trendy little boutiques and high-rise malls selling
everything from ethnic wares to Western goods are everywhere. New
restaurants featuring Italian and Thai food are challenging the
culinary domination of traditional Indian restaurants.
When I return home to the Detroit area, where I have lived for the
last 18 years, the Years, The
the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109]
See : Time contrast couldn't be starker.
To be sure, Detroit has many of the trappings of wealth that come from
sitting in the lap of the richest country in the world: an excellent
freeway system, a sparkling riverfront, good sanitation. Bangalore, in
turn, has many of the afflictions of a poor country: pollution, open
sewers, slums. But there is a palpable buzz in Bangalore's air that
comes when industrious people are engaged in creating wealth. That's
missing in Detroit, where a big chunk of the population lives off
welfare.
While Bangalore grows, Detroit continues to lead the United States
United States, officially United States of America, republic (2005
est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North
America. The United States is the world's third largest country in
population and the fourth largest country in area. in population
decline. Every week, on average, 370 residents leave its crime-ridden,
economically depressed neighborhoods for a better life in the suburbs
or elsewhere in the country. The city's population, close to 2 million
in the late 1950s, has shrunk to less than 900,000. Formerly the fifth
largest city in the country--bigger even than Chicago--Detroit is now
smaller than San Jose San Jose, city, United States
San Jose (sănəzā`, săn hōzā`), city (1990 pop. 782,248), seat of Santa
Clara co., W central Calif.; founded 1777, inc. 1850. .
This is not to deny that some economic movement has occurred in
Detroit in the last decade: The city in February pulled off the Super
Bowl at the new state-of-art Ford Field Stadium without a hitch--no
mean feat given that, until a few years ago, it could not even plow
its streets after an evening snowstorm for kids to walk to school in
the morning. General Motors has sunk $500 million to renovate the
Renaissance Center The Renaissance Center, nicknamed the RenCen, is a
group of seven interconnected skyscrapers in Detroit, Michigan, and
the tallest building in Michigan since 1977. Located on the Detroit
International Riverfront, the entire Renaissance Center complex is
owned by General , a complex of glass office towers that sat nearly
vacant on the Detroit River Detroit River
River, southeastern Michigan, U.S. Forming part of the boundary
between Michigan and Ontario, Can., it connects Lake St. Clair with
Lake Erie. It flows south for 32 mi (51 km) past Detroit and Windsor,
Ont., where a bridge and tunnel connect the two cities. for about two
decades. In part due to generous tax subsidies, Detroit got its first
significant new office building in a decade with the opening of the
Compuware Center. Three new casinos have opened, including one in the
thriving Greek Town area one of Detroit's few bright spots, where
pedestrians actually can walk at night without fearing for their
lives. And in a burst of government largesse lar·gess also lar·gesse
n.
1.
a. Liberality in bestowing gifts, especially in a lofty or
condescending manner.
b. Money or gifts bestowed.
2. Generosity of spirit or attitude. , some old rococo gems such as
the Fox Theater and Detroit Opera House The Detroit Opera House is an
opera house located in Detroit, Michigan. It is the venue for all
Michigan Opera Theatre productions and other events.
The Opera House was designed by C. have been restored, along with
Campus Martius Campus Martius: under Rome see Rome before Augustus;
Roman Empire; Renaissance and Modern Rome. , once the busiest public
square in America.
But these grand projects haven't jump-started Detroit's economic
engine. While stores like Esprit, Nike, and Adidas open showrooms by
the dozen in Bangalore, not a single major national retailer has
expressed interest in Detroit since the closing of Hudson's department
store in 1982. The opening of a Ben & Jerry's ice cream parlor Ice
cream parlors are places that sell ice cream and frozen yogurt to
consumers. Ice cream is normally sold in two varieties in these
stores: soft-serve ice cream (normally with just chocolate, vanilla,
and "twist", a mix of the two), and hard-packed, which has an
assortment of in the Compuware building last year was cause for
celebration.
In fact, Detroit's landscape has barely changed since I first peered
out the window of a friend's upper-floor apartment at Wayne State
University Wayne State University, at Detroit, Mich.; state supported;
coeducational; established 1956 as a successor to Wayne Univ. (formed
1934 by a merger of five city colleges). in 1987, into a hauntingly
beautiful abandoned building across the street. Its rooms were
stripped bare, every piece of cabinetry likely sold for firewood by
local junkies. And its brick facade was marred by row after row of
shattered windows like a lovely face ravaged rav·age
v. rav·aged, rav·ag·ing, rav·ages
v.tr.
1. To bring heavy destruction on; devastate: A tornado ravaged the
town.
2. by pockmarks.
Entire blocks of such buildings have been razed raze also rase
tr.v. razed also rased, raz·ing also ras·ing, raz·es also ras·es
1. To level to the ground; demolish. See Synonyms at ruin.
2. To scrape or shave off.
3. in recent years. But with few new investors stepping forward to
redevelop the sites, many have reverted to urban prairies. The 10,000
or so abandoned buildings that have escaped the bulldozers serve as
both a reminder of the city's lost glory and a taunt to its hopes of a
renaissance.
Bangalore, a Third World city beginning with nothing, has experienced
meteoric me·te·or·ic
adj.
1. Of, relating to, or formed by a meteoroid.
2. Of or relating to the earth's atmosphere.
3. economic growth, while Detroit, once a formidable industrial
powerhouse, can't crawl out of its economic rut. If Detroit wants to
boom again, it could learn some lessons from Bangalore. The factors
that made India the world's economic basket case basket case Train
wreck Vox populi A derogatory term for a Pt with a dread disease or a
terminal illness; a person to be pitied after it obtained its
independence from Britain in 1947 are precisely what have stymied
Detroit's resurgence: excessive bureaucracy, destructive taxes, and
bad labor laws. While India has yet to address the last, it has
attacked regulations and taxes with a vengeance, with results
Detroit's leaders should note.
Bangalore has also made an important mistake. By favoring the I.T.
industry with measures that range from preferential tax treatment to
outright land grabs it has created a town too dependent on a single
industry. In that respect, it could learn a sobering lesson from
Detroit's sad decline.
More Than Cheap Labor
The conventional wisdom in the U.S. is that companies are flocking to
India because its cheap, English-speaking, high-tech labor offers
compelling cost savings. India produces 200,000 or so engineers every
year, about three times more than the United States. And they
typically make about a fifth as much as U.S. workers doing similar
jobs.
But India's technical talent pool has been available for about half a
century. Why did the world discover it only in the last 15 years? And
why did sleepy little Bangalore take the lead?
Outsourcing began as far back as the 1980s, with U.S. companies
contracting out low-end, noncore tasks such as data entry and medical
transcription
This article is an allied medical field. For other uses, see
Transcription and MT disambiguation pages. Although the people
performing these jobs were often trained professionals, American
companies had little inkling of their true potential until the
impending im·pend
intr.v. im·pend·ed, im·pend·ing, im·pends
1. To be about to occur: Her retirement is impending.
2. Y2K See Y2K problem and Y2K compliant.
--------------------------------------------------------------------------------
Y2K - Year 2000 "crisis" forced them to turn to their Indian partners
to reprogram re·pro·gram
tr.v. re·pro·grammed or re·pro·gramed, re·pro·gram·ming or
re·pro·gram·ing, re·pro·grams
To program again.
--------------------------------------------------------------------------------
re the internal clocks in computers on short order. This event opened
up whole new vistas for technical collaboration that are still
unfolding.
For instance, Progeon, the outsourcing arm of the Bangalore-based I.T.
giant Infosys, began as a call center to deal with customer queries
for banks and credit card companies. But soon it began handling all
kinds of sophisticated back-office functions, such as processing
payrolls and insurance claims. Recently it ventured into knowledge
services, offering equity research, credit analysis, fixed income
research, bond analysis, economic analysis, industry analysis, and
company analysis to investment banks The following is a list of
investment banks Financial conglomerates
Large financial-services conglomerates combine commercial banking and
investment banking, and sometimes insurance. around the world.
Far from being low-end or noncore, points out Vijay Menon, vice
president of marketing and communications at Progeon, these services
are high-end and essential. "Any service that does not require a
direct customer interface or intimate knowledge of local culture or
geography is potentially something that can be outsourced," Menon
maintains.
Detroit's auto companies have jumped on the bandwagon too. The Big
Three--Ford, G.M., and Chrysler--and many of their major suppliers
have been quietly outsourcing simple computer programming jobs to
India for a while. But now they are contracting with companies such as
Bangalore's Harita Infoserve to develop computer models of auto parts
Auto parts are components of automobiles. They mainly are, in
alphabetic order (only car specific articles or articles with car
section):
Air filter
Automobile self starter
Bell housing
Brakes
Bucket seat
Bumper
Buzzer
Battery
and run computer-simulated tests of cars. All three have opened
technical centers in India for R&D. And G.M. some time ago handed
Reva, a small company in Bangalore, a plum contract to design an
electric car. The fastest growing Indian exports right now are not
computer programs or software but automotive components, says C.K.
Prahlad, an Indian-born professor of management at the University of
Michigan (body, education) University of Michigan - A large
cosmopolitan university in the Midwest USA. Over 50000 students are
enrolled at the University of Michigan's three campuses. The students
come from 50 states and over 100 foreign countries. business school.
While the outsourcing/I.T. boom that Bangalore spearheaded has spread
to other Indian cities, Bangalore remains at the cutting edge of this
globalization-of-work trend. It is rapidly moving up the value-added
chain so that the foreign companies are now flocking to the city not
for its cheap labor, as wages in India are beginning to catch up with
those in the West, but for its scientific prowess and business-process
know-how. "They came for the cost arbitrage but are staying for the
quality arbitrage," notes Prahlad.
But it was not just serendipity--the Y2K crunch--that caused the West
to discover India's I.T. potential. Nor can you attribute it all to
India's technical talent pool, a necessary but not sufficient
condition for the I.T. boom. What was indispensable was the radical
restructuring of India's autarkic au·tar·ky or au·tar·chy
n. pl. au·tar·kies or au·tar·chies
1. A policy of national self-sufficiency and nonreliance on imports or
economic aid.
2. A self-sufficient region or country. economy. Karnataka, the state
where Bangalore is located, aggressively took advantage of India's new
climate of economic openness, attracting huge new investments from
abroad and, as important, unleashing its entrepreneurs at home.
Lessons One: Break the Regulatory Shackles
It needs to be said at the outset that no government in the U.S., not
even Detroit's, has ever imposed the kind of crushing regulations that
the Indian government imposed during the height of the notorious
License Raj in the mid-'50s. Key industries--steel,
telecommunications, airlines--were nationalized, but even more harmful
was the Kafkaesque web of regulations that the remaining private
businesses had to endure in the name of ensuring a "rational
allocation of resources allocation of resources
Apportionment of productive assets among different uses. The issue of
resource allocation arises as societies seek to balance limited
resources (capital, labour, land) against the various and often
unlimited wants of their members. ."
Every move of private industry, big or small, was subject to
licensing. Forget setting up a new plant or a factory. If an
enterprise wanted to buy or import equipment, change its product mix,
or even produce more than its allotted al·lot
tr.v. al·lot·ted, al·lot·ting, al·lots
1. To parcel out; distribute or apportion: allotting land to
homesteaders; allot blame.
2. quota for a product, it had to first obtain permission from the
Directorate General of Technical Development, a process that could
take years and a small fortune in bribes, points out Gurcharan Das
Gurcharan Das is a columnist for The Times of India and other
newspapers. Currently he is a venture capitalist and a consultant to
Industry and Indian government. , author of India Unbound unbound
said of electrolytes, e.g. iron and calcium, and other substances
which are circulating in the bloodstream and are not bound to plasma
proteins so that they are available immediately for metabolic
processes. See also calcium, iron. and former CEO (1) (Chief
Executive Officer) The highest individual in command of an
organization. Typically the president of the company, the CEO reports
to the Chairman of the Board. of Procter & Gamble, India. "Large
business houses set up parallel bureaucracies in Delhi to follow up on
files, organize bribes, and win licenses," he recalls.
Confronted with a massive fiscal crisis and the prospect of defaulting
on its international debt obligations, the Indian government
dismantled much of this ridiculous licensing regime in 1991. In a bid
to boost exports to replenish the country's empty foreign exchange
reserves Foreign exchange reserves (also called Forex reserves) in a
strict sense are only the foreign currency deposits held by central
banks and monetary authorities. , it also eliminated all import
licensing and slashed tariffs on capital goods Capital Goods
Any goods used by an organization to produce other goods.
Notes:
Examples of capital goods include office buildings, equipment, and
machinery.
See also: Capital Expenditure, Disinvestment
--------------------------------------------------------------------------------
Capital goods . Both were relics of India's import-substitution days,
when manufacturers were discouraged from buying equipment from abroad
in order to build the domestic industry. This jacked up production
costs and made the country's exports hopelessly uncompetitive.
Trade liberalization lib·er·al·ize
v. lib·er·al·ized, lib·er·al·iz·ing, lib·er·al·iz·es
v.tr.
To make liberal or more liberal: "Our standards of private conduct
have been greatly liberalized . . . was a boon for the I.T. industry,
which already had escaped many of the stultifying controls that other
industries faced simply because the architects of India's industrial
policy had failed to anticipate its birth. Thus, while there was a
ministry to regulate every other sector--steel, banks, insurance--
there was no Ministry of Information Technology until 1999. (After
India won several international beauty contests in a row, one
politician quipped that the country had experienced an I.T. boom and a
beauty boom because the state had stayed out of both.) Yet despite the
availability of a crucial resource--a ready pool of English-speaking
high-tech professionals the industry was thwarted by the country's
restrictive trade laws.
Once those were relaxed, writes Infosys founder N.R. Narayana Murthy,
the man who pioneered India's I.T. revolution, it no longer took 13
months and 25 visits to Delhi just to obtain a license to purchase a
computer. "Or a wait of five days," he adds, "to get permission from a
clerk at the Reserve Bank of India The Reserve Bank of India (RBI) is
the central bank of India, and was established on April 1, 1935 in
accordance with the provisions of the Reserve Bank of India Act, 1934.
Since its inception, it has been headquartered in Mumbai. [the
government bank monopoly] to decide whether the managing director of a
software firm could travel abroad for a day."
All this improved the business climate dramatically. Karnataka went
even further than the rest of the country to liberate private
industry, especially the I.T. sector, from the remaining government
shackles.
A 2001 report prepared for the U.S.-based chipmaker chip·mak·er
n.
A manufacturer of electronic and integrated circuit chips. Intel by
Feedback Consulting, one of the most respected consulting companies in
South India South India is a commonly used term that is used in India
to refer to the South-of-India or Southern India. The Southern part of
the Indian peninsula is a linguistic-cultural region of India that
comprises the four states of Andhra Pradesh, Karnataka, Kerala and
Tamil Nadu and the , recommended Bangalore over other cities for the
company's India headquarters because along with perfect weather--a
huge advantage in attracting talent Karnataka had the most industry-
friendly state government in the country. One of the most important
moves Karnataka made to acquire this reputation (surpassed in recent
years by other states) was that it signed up for the central
government's Software Technology Parks of India Software Technology
Parks of India (STPI) is a government agency in India, established in
1991 under the Ministry of Communications and Information Technology,
that manages the Software Technology Park scheme. (STPI STPI Software
Technology Parks of India
STPI State-Trait Personality Inventory
STPI Stentor Telecom Policy, Inc.
STPI Software Test Process Improvement
STPI Services Transaction Program Interface (IBM) ) initiative ahead
of other states. The importance of this initiative in making Bangalore
the Silicon Valley of India The Silicon Valley of India is a nickname
of the Indian city of Bangalore. The name signifies Bangalore's status
as a hub for information technology (IT) companies in India and is a
comparative reference to the original Silicon Valley, based around
Santa Clara Valley, California, a cannot be exaggerated.
STPI gave I.T. companies in Karnataka a nearly complete exemption from
central government taxes. In addition, it enabled Karnataka to release
its businesses from the government's telecommunications monopoly by
opening Internet access See how to access the Internet. to competing
private providers. This meant better, cheaper, and more reliable lines
of communication "Lines of Communication" is an episode from the
fourth season of the science-fiction television series Babylon 5.
Synopsis
Franklin and Marcus attempt to persuade the Mars resistance to assist
Sheridan in opposing President Clark. with overseas clients,
something Indian companies This is a list of major companies based in
India. Please note that the list is highly incomplete and does not
have every company of all sizes. More information about the companies
can be found in the links to the company articles. A
Aditya Birla Group[1].
sorely needed to deliver projects in an efficient and timely manner.
Aside from prying open the government's telecom chokehold, the most
liberating feature of STPI was that it established a special liaison
between I.T. companies and the central government for all the
statutory approvals project approval, import approval, bonding and
export certification--they needed to proceed with their projects.
"This single-window clearance meant that industry no longer had to go
from department to department to obtain licenses," explains B.V.
Naidu, STPI director in Bangalore.
What's more, unlike other states that limited STPI certification to
companies located on special campuses, Karnataka extended it to any
company anywhere in the city. "This made all of Bangalore a potential
business area," notes V. Ravichandar, Feedback Consulting's founder
and CEO.
Combined with the state's lax enforcement of zoning laws against mixed
uses, broad STPI certification empowered any geek A technically
oriented person. It has typically implied a "nerdy" or "weird"
personality, someone with limited social skills who likes to tinker
with scientific or high-tech projects. The origin of the term dates
back to the late 1800s. with a computer and e-mail to write and
deliver software to anyone in the world right from his home. So while
Bangalore has its share of corporations in downtown high-rises and on
sprawling I.T. campuses, it is also home to multimillion-dollar
companies operating out of modest bungalows in residential
neighborhoods.
One such company is Dhruva Interactive, which designs video games. It
is sandwiched between the walls of two houses on a street so narrow
that two cars have difficulty scraping past each other. Dhruva's
neighbors have been complaining about the odd hours it keeps--a result
of the time difference with its overseas clients so it plans to move
to another location after 10 years in its current space, says Rajesh
Rao, 35, the company's sweetly exuberant and immensely tech-savvy
founder. But there are other streets nearby where people have sold to
commercial developers the homes in which they had long planned to
retire.
Bangalore is in the midst Adv. 1. in the midst - the middle or central
part or point; "in the midst of the forest"; "could he walk out in the
midst of his piece?"
midmost of a huge reshuffling of real estate, as property,
unencumbered by rigid, U.S.-style land use rules, freely changes hands
from less to more valued uses. This is making a lot of people very
rich very quickly. And it is creating the sort of densely packed,
mixed use neighborhoods celebrated by the urban theorist Jane Jacobs,
as doctors' clinics, home accessory boutiques, and roadside cafes--not
to mention the proverbial corner grocery stores--crop up like
mushrooms in areas that once were almost exclusively residential.
If Bangalore has made giant strides to release its entrepreneurs (at
least its I.T. entrepreneurs) from stifling government regulations,
Detroit has taken a few baby steps at most. Some of its leaders, such
as former Mayor Dennis Archer, began talking about creating a one-stop
shop One-Stop Shop
A company or a location that offers a multitude of services to a
client or a customer. The idea is to provide convenient and efficient
service and also to create the opportunity for the company to sell
more products to clients and customers. akin to STPI's single-window
clearance for prospective businesses back in 1992. But Archer's hip
hop-loving, earring-sporting successor, Kwame Kilpatrick, is
preoccupied with attracting big, glamorous Aswan Dam-type development
projects and has little time for mundane process improvements.
In Detroit the city does not even know what property it holds, as a
steady stream of abandoned buildings keeps reverting to its ownership.
Prospective developers trying to acquire land are left languishing
lan·guish
intr.v. lan·guished, lan·guish·ing, lan·guish·es
1. To be or become weak or feeble; lose strength or vigor.
2. in limbo for months as the city council--a dysfunctional entity
that has to approve the sale of all city-held property--tries to clear
up title and lien issues. For developers, time is money, and more
often than not they simply give up in disgust.
The city's bureaucracy and red tape thwart not only outside developers
seeking to do business in Detroit but an even more critical source of
urban vitality: entrepreneurship by city residents themselves. In the
name of protecting public health and safety, the city imposes a
plethora of licensing requirements and fees on 265 occupations (60
more than the state government licenses), from street vendors to day
care centers. A home-based business needs 70 or so building or
equipment permits to get started. Hair braiders have to spend
thousands of dollars and 1,500 hours in mandatory training for a
cosmetology cos·me·tol·o·gy
n.
The study or art of cosmetics and their use.
--------------------------------------------------------------------------------
[French cosmétologie : cosmétique, cosmetic; see cosmetic + -logie, -
logy. license.
The taxi industry is virtually nonexistent non·ex·is·tence
n.
1. The condition of not existing.
2. Something that does not exist.
--------------------------------------------------------------------------------
non in Detroit, as any visitor who has tried to hail a cab can
testify. The city has restricted the number of taxi licenses so
tightly that new entrants simply can't get one, even if they can
somehow arrange the $10,000 or so that a license costs on the open
market. As if this were not enough, Detroit revised an existing
ordinance in 1996 to further regulate and restrict the number of
limousines and vans, so they have been squeezed out of the city as
well. If my Bangalore driver Nanjappa had moved to Detroit rather than
Bangalore, he probably would have been crushed by the city bureaucracy
and wound up on welfare.
Lesson Two: Remove Destructive Taxes
Bangalore has benefited not just from the central government's efforts
to reduce onerous bureaucracy and red tape but from its radical reform
of the federal tax system, once among the most punitive and
complicated in the free world. Now Indian states also have started to
simplify their tax schemes, something neither Michigan nor Detroit has
found the will to do.
At its peak in the 1970s, India's top marginal corporate income tax
rate was 93.5 percent. This, combined with an 8 percent tax on wealth,
meant those who played by the rules could count on effectively handing
over their entire profits to the government at the end of the year.
The 1991 reforms dramatically changed this situation. India not only
lowered the marginal income tax rate for corporations and individuals
to between 30 and 35 percent (not counting deductions); it slashed the
wealth tax to 1 percent and abolished the estate tax. The reforms are
ongoing and are not limited to the national government: Last year 21
of India's 29 states joined hands--a major political miracle--to end a
bewildering be·wil·der
tr.v. be·wil·dered, be·wil·der·ing, be·wil·ders
1. To confuse or befuddle, especially with numerous conflicting
situations, objects, or statements. See Synonyms at puzzle.
2. system of multiple state-level sales taxes that even seasoned
accountants couldn't fathom. This system taxed not just the added
value but the whole accumulated value of a good at each stage of the
production process, including the taxes paid at prior stages. "In
effect, you had taxes on taxes on taxes," explains Anil Sood, founder
of Digital Promoters, a New Delhi-based company that makes industrial
equipment. This generated mountains of paperwork, created numerous
market distortions, and bumped up prices for consumers without
delivering better products.
This insane system has been replaced with a far simpler retail-level
value-added tax value-added tax (VAT), levy imposed on business at all
levels of the manufacture and production of a good or service and
based on the increase in price, or value, provided by each level. of
12.5 percent. "This is not necessarily lower," says Sood, "but it is
more rational and less capricious."
Tax reforms, coupled with trade liberalization that exempted all
exports from taxes and slashed duties on imported goods, gave a big
boost to I.T.
The Indian government, acting on the theory that the I.T. industry
would propel broad-based economic development in the country, has
given the industry targeted tax breaks as well. Around 1999, New Delhi
declared a 10-year holiday from corporate income taxes for all STPI-
registered companies.
But special tax breaks, notes Arvind Panagariya, an economist at
Columbia University, have at best helped the industry at the margins.
"If it were up to me, I'd end them today" he bristles. The fundamental
reason for the software boom, in his opinion, was that India abandoned
its import substitution approach and made it easier for the I.T.
industry to acquire cheap equipment from abroad and combine it with
cheap, high-skilled labor at home to produce cost-effective global
exports.
India could do this in the manufacturing sector as well, argues
Panagariya, if the country's labor laws did not prevent it from taking
advantage of its massive reserves of low-skilled workers. Those rules
make it virtually impossible for factories with more than 100 workers
to fire anyone or to shut operations, even when they are losing money
hand over fist. Factory owners have been known to lock up plants in
the dead of the night and skip town to avoid total financial ruin.
Such labor laws have perversely encouraged manufacturers to adopt
capital-intensive technologies in a country with a large pool of
unemployed people.
Like India, Detroit knows how to use the tax code to play favorites.
Nearly every large company that has moved to Detroit in the last
decade, including Compuware and G.M., has done so only after being
promised hefty tax breaks. But what the Indian central and state
governments are also doing and Detroit and Michigan are not--is
reforming the overall tax climate to make it more friendly to
enterprise.
According to the Mackinac Center for Public Policy The Mackinac Center
for Public Policy is a nonprofit free-market research and educational
organization located in Midland, Michigan. Writer and speaker Lawrence
Reed has served as president since 1987. , a Michigan-based think
tank, Michigan is one of just a handful of states that levy a sales
tax, a personal income tax, and a business tax. The last, called the
Single Business Tax (SBT SBT Symplastin bleeding time ), has the most
pernicious effect on entrepreneurship and job growth because it taxes
firms on their costs and investments rather than their profits. If a
company adds employees, its SBT goes up. If it raises wages, its SBT
goes up. If it buys new equipment, its SBT goes up.
Political leaders from both parties have long recognized the
perversity per·ver·si·ty
n. pl. per·ver·si·ties
1. The quality or state of being perverse.
2. An instance of being perverse.
Noun 1. of this tax, but they haven't been able to muster the
political will to wean wean (wen) to discontinue breast feeding and
substitute other feeding habits.
--------------------------------------------------------------------------------
wean
v.
1. To deprive permanently of breast milk and begin to nourish with
other food.
2. the state off it. (At press time, reformers were making a renewed
push to scrap the SBT.) Michigan's political pusillanimity
pu·sil·la·nim·i·ty
n.
The state or quality of being pusillanimous; cowardice.
--------------------------------------------------------------------------------
pusillanimity
a cowardly, irresolute, or fainthearted condition. — pusillanimous,
adj. contrasts sharply with the bold reform of the state sales taxes
in India, where leaders divided by language, religion, class, and
caste managed to unite behind a single tax scheme, even persuading
local politicians to forgo what they have long regarded as their God-
given right: selectively handing sales tax exemptions to favored
groups to build their fiefdoms.
On top of all the state taxes, Detroit adds several of its own,
including a 5 percent tax on residents' utility bills (which goes,
bizarrely, to the police), a 2.5 percent personal income tax on
residents, a 1.25 percent personal income tax on people who work in
Detroit, and a 1 percent corporate income tax. As if that were not bad
enough, the city charges such a high assessment on property when it is
sold that few buyers are willing to pay it, freezing the real estate
market and forcing owners to burn or abandon their houses. For a
family of four making $50,000, Detroit is the eighth highest-taxed
city in the nation.
Radical tax cuts along with deregulation Deregulation
The reduction or elimination of government power in a particular
industry, usually enacted to create more competition within the
industry.
Notes:
Traditional areas that have been deregulated are the telephone and
airline industries. awoke the world to Bangalore's I.T. potential. It
is unclear where Detroit's potential is; only a free-market discovery
process can reveal it. But whatever it may be, it will remain hidden
so long as Detroit's onerous tax burden and regulations keep scaring
businesses away from the city.
What Detroit Can Teach Bangalore
Bangalore--and India--have not done everything right. On the theory
that a continuing I.T. boom will lift India out of its poverty, Indian
policy makers have made it their top priority to satisfy the
industry's needs, as opposed to continuing the general liberalization
of the economy. "We want to promote, not obstruct, I.T,' is a mantra
among India's bureaucrats.
That's a sign of I.T.'s success in transforming the country's
Zeitgeist: The intelligentsia that reviled private industry as a
rapacious exploiter 20 years ago is now embracing it as a savior.
Former Prime Minister Atal Bihari Vajpayee Atal Bihari Vajpayee
(Hindi: अटल बिहारी वाजपेयी, IPA: called India's software technology
parks the "new temples of modern India"
But hitching your wagon to a single industry does not a resilient
economy make. For proof, you need look no further than the ruins left
by Detroit's dying auto industry.
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 (1) Surfing, or browsing, the
Web.
(2) Posting derogatory messages about sensitive subjects on newsgroups
and chat rooms to bait users into responding.
(3) Hanging around in a chat room without saying anything, like a
"peeping tom." 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 disposable
income
Portion of an individual's income over which the recipient has
complete discretion. To assess disposable income, it is necessary to
determine total income, including not only wages and salaries,
interest and dividend payments, and business profits, but also 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
internalize
To send a customer order from a brokerage firm to the firm's own
specialist or market maker. Internalizing an order allows a broker to
share in the profit (spread between the bid and ask) of executing the
order. 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
globalization
Process by which the experience of everyday life, marked by the
diffusion of commodities and ideas, is becoming standardized around
the world. Factors that have contributed to globalization include
increasingly sophisticated communications and transportation , a
budget the state government drew up some years ago with the help of
the Bangalore Agenda Task Force The introduction to this article
provides insufficient context for those unfamiliar with the subject
matter.
Please help [ improve the introduction] to meet Wikipedia's layout
standards. You can discuss the issue on the talk page. , 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 drinking water
supply of water available to animals for drinking supplied via
nipples, in troughs, dams, ponds and larger natural water sources; an
insufficient supply leads to dehydration; it can be the source of
infection, e.g. leptospirosis, salmonellosis, or of poisoning, e.g. ?
A mere Rs. 70 million. "What is outrageous about this is not just its
inequity," D'Rozario fumes fumes
odorous gases and other volatile materials; inhalation of irritating
fumes causes coughing and, if sufficiently severe, irreversible
pulmonary edema. . "It is the extent to which I.T. has been allowed to
insinuate in·sin·u·ate
v. in·sin·u·at·ed, in·sin·u·at·ing, in·sin·u·ates
v.tr.
1. To introduce or otherwise convey (a thought, for example) gradually
and insidiously. See Synonyms at suggest.
2. itself in the governance process."
Worst of all is the state government's rampant abuse of its eminent
domain eminent domain, the right of a government to force the owner of
private property sell it if it is needed for a public use. The right
is based on the doctrine that a sovereign state has dominion over all
lands and buildings within its borders, which has its origins in
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
pen·ni·less
adj.
1. Entirely without money.
2. Very poor. See Synonyms at poor.
--------------------------------------------------------------------------------
penni·less·ly adv. 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 at·a·vism
n.
1. The reappearance of a characteristic in an organism after several
generations of absence, usually caused by the chance recombination of
genes.
2. An individual or a part that exhibits atavism. , 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.
Shikha Dalmia (shikha...@reason.org) is a senior analyst at the
Reason Foundation.