Economic reform (Part One): The Indian model shows a way out of South Africa’s multiple crises
7 March 2021
South Africa today faces a complex series of crises — fiscal, economic, employment, governance, and the impact of lockdowns and Covid-19. The Indian experience, which boosted growth and drastically reduced poverty, provides hope for this country. Change is possible. Well-chosen reforms can deliver results. Growth can lead to inclusion and significant poverty reduction.
(This is Part One in a two-part series on economic reform.)
Developing countries should learn from one another. This is a view strongly endorsed by Montek Ahluwalia, Deputy Chairman of the National Planning Commission of India (a cabinet position) from 2004 until 2014. I engaged him in a wide-ranging conversation that produced many insights for South Africa. How was India able to implement a reform programme that led to one of the most remarkable economic growth achievements in history?
In the 1970s, many people thought that India was destined to maintain its so-called “Hindu rate of growth” of 3.5% per annum. This might sound like a desirable growth rate for South Africans today, but it was far too low for India’s expanding population and its desperate need to become a more prosperous society.
By the 1990s the government, armed with a clear diagnosis of what ailed the Indian economy and a firm commitment to implement reform, had produced a remarkable acceleration of growth: India’s GDP grew at more than 7% per annum in real terms from 1993-2012 and poverty declined from 37% in 2004 to 22% in 2012 (138 million people). Montek Ahluwalia, with finance minister, and then prime minister, Manmohan Singh, spearheaded the changes that transformed India and in so doing the world. All this in a diverse, fractious and loud democracy.
India’s initial development strategy was based on the notion that the state had to play the dominant role in developing the country. This led to the evolution of an exceptionally detailed, complex system of control that severely hampered private sector activity. “It was based on an excessive preference for the public sector, with high protectionist walls that compromised efficiency and discouraged foreign investment.”
The dysfunctionality of the policy began to be realised in the 1980s and steps were taken to make some corrections, but the real reforms involving systemic change were introduced only in 1991.
India had a severe balance of payments crisis in 1990 and there was a change of government in 1991. Finance minister Manmohan Singh introduced a number of systemic changes: getting rid of many government controls on investment, while simultaneously liberalising imports; keeping the fiscal deficit under control and creating a more liberalised exchange rate policy. The result was that the balance of payments crisis was resolved within three years.
The effects of the reform programme (largely drafted by Ahluwalia) took time to materialise. By the 2000s India regularly exceeded 8% annual GDP growth and this resulted in a “huge increase in growth of per capita income (up to 5.5% per annum) and a big difference to poverty, inequality and structural change”.
In Ahluwalia’s view, “achieving high growth is not a chance development — it requires deliberate policy steps taken by people with conviction and belief in the need for change … Political leadership plays a very important role”.
He argues that reform works best when transparent and systematic. Reformers can adopt a gradualist strategy, identifying the biggest constraints on the economy and the policy reforms that will give the “biggest bang for your buck”. Once those things get done, you can then move on to the next set of constraints while also dealing with new challenges that emerge from the reform process itself.
“The crux of political leadership” is to identify the important things that need to change and then to explain why this is necessary to achieve faster growth. It is vital to get the public on board and to be honest that some people are going to get hurt — every reform produces winners and losers — but that government will help them in the transition period.
“In a democracy any vision of growth has to be inclusive, increasing the prosperity of all. This cannot be sold to the public by civil servants, it can only be put across by political leaders.”
Ahluwalia argues that “politicians have to persuade the public to accept the changes and try to build a large enough consensus for change. I say ‘large enough’ because you can never get change in which everybody agrees with what is being done. But it is possible to develop support for change in which enough people come on board. A small retailer pushed out of business by modern retailing will be unhappy but if his children get better quality jobs in modern retailing, the family as a whole is better off. Political leadership is needed to put this across to make change acceptable.”
India’s attempts to achieve high growth often attracted criticism from NGOs on the grounds that the government was only promoting the private sector, “the fat cats”. “What these critics didn’t quite realise was that the ‘fat cats’ can’t do well unless their businesses expand and when they do, they create jobs for ordinary people.”
While India achieved major success in removing some impediments to growth, it is unfortunately true that, even after these reaped such obvious rewards, there was little political will to implement harder, second-generation reforms. “Despite all of India’s successes, the government was slow in doing even the first-generation reforms, and progress in the second-generation reforms was much slower.”
Partly, this was because during the crisis years of the 1990s it was much easier to whip up a consensus about the need to save the country. Once progress and much higher growth became commonplace, politicians and others took them for granted and became complacent. This kind of situation again requires a lot of political leadership to be clear that further reforms are necessary, otherwise the reform process will run out of steam.
It is also much more difficult to undertake reforms that require institution building. For example, says Ahluwalia, “when you open up the economy to the private sector, new constraints to growth will arise. These include regulating markets properly and building an effective education system to meet the demand for more skilled labour.
Vested interests create serious barriers to reform, and it has been difficult to implement education reforms in the face of strong teacher unions primarily concerned with protecting the interests of teachers as government employees.
“Another challenge has been setting up effective public-private partnerships which have played a critically important role in improving India’s infrastructure. These can descend into acrimony when private-sector participants feel victimised by what they see as highly adversarial government responses to requests for flexibility in long-term contracts that do not reflect changing circumstances.”
South Africa today faces a complex series of crises — fiscal, economic, employment, governance, and the impact of lockdowns and Covid-19. The Indian experience provides hope for this country. Change is possible. Well-chosen reforms can deliver results. Growth can lead to inclusion and significant poverty reduction. Not everything needs to be fixed at once to make progress. Is our reform programme in 2021 bold enough?
It is vital to prioritise the reform agenda. The Indian Planning Commission had 25 priorities for a population of 1.3 billion people as opposed to SA’s National Development Plan with its more than 123 “priority actions” for a country of about 60 million.
It is essential that the country has political leadership focused on the right issues, coupled with a powerful communication strategy and a determined approach to build “sufficient consensus” for action. It can be done. Let’s get to work!
Ann Bernstein is head of the Centre for Development and Enterprise, CDE. Her conversation with Montek Ahluwalia is available in a short report at www.cde.org.za
* This article first appeared in the Daily Maverick