The Hindu Business Line : Starting point for fresh economic reforms

The World Bank’s Report of the Commission on Growth and Development should be complimented for drawing up a roadmap of essentially good ideas and pointing at the pitfalls of following mistaken ideas. India cannot say it has not been forewarned, says S. VENKITARAMANAN.

The Report of the Commission on Growth and Development received from the World Bank has been released recently. This Commission represents an important turning point in the evolution of ideas on growth on the part of Bretton Woods institutions, particularly the World Bank.

Primarily, it embodies the views of the various developing countries that have subsequently scored sustained success in achieving high rates of growth in recent decades.

It is clearly an improvement on the Washington Consensus, which attracted quite some criticism, although it was at the time a well-intentioned prescription for stability and growth. The Washington Consensus had its detractors and admirers. One critique of the Washington Consensus evolved in 1989 was that it did not give sufficient emphasis to the views of the developing countries outside Latin America.

Even at the time of evaluating the Washington Consensus when it was revisited in an article written by John Williamson, its leading proponent, the present writer had remarked that the Chinese experience in attaining high growth rates of above 7 per cent should be taken into account in evolving future versions of growth policies.

The World Bank Management had obviously listened to such critiques and deemed it fit to give due weight to the success stories of development, including, but not confined to Latin America. This included Brazil, India, South Korea and Indonesia, besides Thailand and Taiwan.

The Commission set up by the IBRD, headed by Nobel Laureate Michel Spence of Stanford University, included representatives of India, China, Indonesia, Mexico and Brazil, to mention only a few of the developing countries represented.

The Commission was aided by a remarkable set of scholars, including Bob Solow, another Nobel Laureate. It also included practitioners drawn from all over the world. It had exchange of views with policy-makers of various countries.

The Report, distilled from these consultations, represents a mature presentation of the academicians’, administrators’ and politicians’ latest thinking on growth strategies, strengthened by actual experiences in the field. The Report was recently released at a Conference in New Delhi.

Too little also risky

What is important is to note the change in perspective since the Washington Consensus was unveiled. Whereas the Washington Consensus of 1989 had thought of limiting the role of Government, the present Report considers that Governments can sometimes do too little instead of too much. Both are equally counter-productive.

In an obvious reference to the suggestions of the Washington Consensus, the Report says that the earlier policy conclusions, which summarise the proposed changes, could be summarised in a phrase “Stabilise, Privatise and Liberalise”.

While there is merit in what lies in the earlier prescription, viz. the Washington Consensus, it is an incomplete statement of the problem and the solutions. The present Report states that while it is true that bloated Government may lead to contraction of private sector, too little government is also fraught with risks, as shown by the pre-Depression situation in the US when it was corrected by the New Deal of President Franklin Roosevelt.

Based on the successful experience of China and other Asian countries, the Report stresses on the role of increased savings and investment. Adequate savings encouraged by Government’s policy and adequate investment thereon on infrastructure, health and education bolsters growth. Government’s appropriate policies play a helpful role in achieving and sustaining a high rate of growth.

It is particularly relevant in the case of infrastructure and even industrial policy, which promotes specific industries in certain areas. The Report comes out clearly in favour of industrial policy, as practised in various countries, such as China and South Korea. It seems to say that industrial policy, which includes export promotion, has a role, up to a point.

The Report is almost a textbook on growth-promoting policies. Let us take a look at some of these aspects.

Exchange rate management

While discussing various issues on development, the Report devotes a few paragraphs to the all important issue of exchange rate management. It notes that economists are passionately divided “for and against” policies of intervention in exchange rate.

The report quotes the famous Hungarian economist Balassa as stating (as quoted by John Williamson): “Give a country an exchange rate sufficiently competitive so that entrepreneurs may be motivated to go through and set up business to sell in the world market and the country will grow. Give it too much easy money from capital inflows and let its exchange rates appreciate in consequence. Too many people with ability diverted to squabbling about rents and growth will be doomed”.

The latter is almost a complete description of India’s present scenario. As the report says, many of the countries that enjoy and sustain high growth have shared Balassa’s views at various times in regard to exchange rate management. To keep their currencies competitive, they have sometimes regulated the amount of capital flows across the border. They have also accumulated reserves.

They have practised a mixture of policies, the use of foreign exchange rates for industrial purposes, that is to maintain competitive advantages while being neutral between different investors. For one thing, these policies can limit the amount of capital available to entrepreneurs.

As Dr C.Rangarajan, Chairman of Prime Minister’s Economic Advisory Council, mentioned at the event in New Delhi when the publication was released, the Report does not come out clearly in favour or against the policy of exchange rate management.

But, as I read it, the tenor of the Report summarising the experiences of various countries that have succeeded on growth seems to be in favour of Balassa’s argument for devaluing domestic currencies.

Avoid the ‘bad ideas’

There is a part of the Report that describes what may be called “bad ideas”, which have to be avoided. Amongst these, the report mentions that one of the important bad ideas is to subsidise energy except for limited subsidies targeted at highly vulnerable sections of the people. Another bad idea mentioned is that of using price control to tame inflation. It is a pity that both these bad ideas are part of the policy regime presently followed by India.

One of the important suggestions is to avoid the bad idea of allowing the exchange rate to appreciate excessively before the economy is ready for decision towards higher productive industry. Obviously, this does not exhaust the report’s list of bad ideas.

To sum up, the report should be complimented for giving a roadmap of essentially good ideas and pointing at the pitfalls of following mistaken ideas. India cannot say it has not been forewarned. Montek Ahluwalia, as past author of the report, should ensure that its warnings are heard and policy advice followed.

It is to be hoped that the Government of India, which was represented on the Commission by no less a person than the Deputy Chairman of the Planning Commission, should study the report thoroughly and use it to formulate policies for a sustained high level of inclusive growth of the economy.

It is an important starting point for a next generation of economic reforms, a justification, which flows from the experience of many developing countries that have successfully managed the challenge of growth with inclusiveness on a sustained basis.

It takes off where the old Washington Consensus left things incomplete. One hopes this marks the beginning of a renewed economic and political consensus in India!