The Congress pursued reform first out of desperation, then opportunistically, and not from a conviction that liberal economic reform, within an appropriate regulatory framework, is the best pro-poor policy
With a downgraded growth forecast, rising inflationary pressure, and an alarming dip in foreign investment, short- to medium-term prospects for the economy are looking bleaker than they have for some time. The smug assumption that double digit growth rates were around the corner has had to face reality, and there is now a serious question mark over whether this will be attainable at any time in the foreseeable future.
Many commentators have correctly pointed to the lack of progress on much-needed “second generation” economic reforms under UPA-2, labour law reforms in particular. But few have provided a compelling explanation as to why none of the major political parties has articulated a pro-reform agenda. Ironically, it is only the now-moribund Left that has consistently argued an intellectually coherent, if questionable and outmoded, stance on reform and liberal economic policy, albeit a hostile one. But there has been a signal failure by both the Congress and the BJP to counter the Left’s articulate and suave voices against reform with its own speaking in favour of it: where is the counterpart to Brinda Karat?
Understanding why governments fail to undertake needed economic reforms is one of the fundamental questions of both economics and political science research. The conventional wisdom is that an incumbent government believes it will be punished at the polls if it pushes through politically unpopular or unpalatable reform measures (http://www.voxeu.org/index.php?q=node/6641). That is certainly a persuasive explanation for the failure to enact tax and spending reforms in the periphery of the European Union, which continue to fuel Euroland’s debt crisis.
However, these conventional explanations don’t help us much in the Indian case. Take labour law reform. The overwhelming number of people, and potential voters, will benefit from increased flexibility in the job market, while only a few members of entrenched unions will stand to lose. The political calculus should suggest it’s a no-brainer to push ahead with such reforms, and be rewarded, rather than punished, at the next election. Yet these reforms go abegging.
I would suggest a deeper explanation: what I have called elsewhere the “original sin” of 1991 (http://pragati.nationalinterest.in/2010/12/where-are-the-second-generation-reforms/). That is, the first generation reforms, which swept away the worst excesses of the license-permit Raj, were undertaken in a crisis mode. They were pursued out of necessity, to stave off a foreign exchange crisis, and not out of intellectual conviction that it was the right thing to do. Mani Shankar Aiyar, probably the most thoughtful and candid voice within Congress, told me as much, and has been a critic of economic reform in various fora (http://vimeo.com/19155434). Indeed, many within the Congress were as surprised as those on the Left when the reforms actually began to bear fruit!
The Congress never really believed in reform and liberal economic policy, but pursued them first out of sheer desperation, then opportunistically. The closest we came to the wholehearted embrace of reform was during the period of NDA rule, but since losing the election in 2004 the BJP has retreated as well, calling into question how genuine their conviction was to begin with.
Why is this important? An opportunistic rather than principled embrace of good economic policy has an Achilles heel. It works fine when times are good, but is difficult to stick to when times are tough. It is very easy in the latter situation to revert to tested and true methods, and pull a trick or two from the old populist playbook that helped win elections in the past. This explains, I would argue, the fixation on large-scale but flawed welfare programmes such as NREGA, the right to education, the right to food, and all of the other new entitlement programmes that are emblazoned under the slogan of inclusiveness.
As experience in China and East Asia has shown us, the right road to “inclusive development” is a policy which builds redistribution on rapid economic growth, rather than pitting redistribution against growth. These are lessons that have not been learned, perhaps because they have fallen onto intellectually unreceptive ears amongst the major parties. Those who have an intrinsic mistrust or aversion to market-based capitalism are more likely to cloak inclusiveness in large-scale public spending programmes rather than make the effort to understand and then to articulate the case that growth, coupled with sensible redistribution, is the best way to pull up the poor and disadvantaged.
What we are going through in India now is not new in intellectual history. As the great libertarian philosopher and Nobel economist, Friedrich von Hayek, observed a long time ago, the right has to work harder to make its case than the left, the latter always being able to appropriate the moral high ground in a debate. Articulating the case that liberal economic reform, within an appropriate regulatory framework, is the best pro-poor policy one can follow is a difficult one, and not as easy as the emotionally satisfying but intellectually facile argument that redistributive schemes alone, without sustained growth, can put an end to poverty and its associated social ills.
Hayek’s prayers were answered, late in his life, first by Margaret Thatcher in the UK and then Ronald Reagan in the US, who made economic reform, or “deregulation” in the jargon of the day, comprehensible to the common man and therefore a political winner. The real testament to Hayek’s intellectual victory was, fittingly, in the transformation it wrought on the left of the political spectrum: Tony Blair’s “third way” Labour Party and Bill Clinton’s “new” Democrats were much more on the right than the Conservative or Republican parties of a generation earlier, so much had the mindset changed on the right balance between the government and the market to control the economy. Of course, the recent global financial crisis led to a rethink, and a reining in of the excessively lax regulation of the financial markets, but certainly no wholesale abandonment of liberal economic philosophy, as some had predicted.
We have had our Hayeks in India, economists such as Jagdish Bhagwati, who argued, when it was deeply unfashionable, that economic reform was the only was forward. Many hoped that Manmohan Singh’s elevation to Prime Minister in 2004 might have been our Thatcher or Reagan moment. In this, as in much else from Dr Singh, we have been sadly disappointed.
Vivek H Dehejia is an economics professor at Carleton University in Ottawa, Canada, and a Mumbai-based commentator on Indian economic and political affairs. You may follow him on Twitter @vdehejia.