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Montek Ahluwalia, Some Lessons from Economic Reforms in India Watch Video Connection Speed: High Speed Low Speed Audio    Event Title : Practitioners of Development Seminar Series Date : 3/10/2004 Duration : 131 minutes Language  : English Country/Region : World Keyword :  Economic Development  Financial Sector  Poverty Presenter : Montek  Ahluwalia Otaviano Canuto James Bradford  DeLong Richard  Eckaus Nurul Islam | Related Material | Recommendations |Related B-SPAN Videos |  DESCRIPTION  Octaviano Canuto, the Bank’s Executive Director, provided introductory remarks. He noted that an upcoming Bank conference in Shanghai will explore development successes and failures. He also noted Montek Ahluwalia, the guest speaker, had been both a practitioner for development with the Indian government and a Bank economist, so had the perspective of both donor and recipient. Ahluwalia is currently the Director of the International Monetary Fund’s (IMF) Independent Evaluation Office. Canuto described some of the background of economic policy and growth in India during the second half of the 20th century, noting that the early emphasis was on growing GDP did not translate into poverty reduction at the micro level. Ahluwalia was instrumental into tying growth and distributional dynamics with poverty reduction. Canuto then provided some background on the commentators of the lecture. Ahluwalia noted that perhaps it is best left to scholars to determine how valid his experiences and lessons learned have been for development. India’s growth over the past three decades has been substantial. When he returned to India in 1979 after a decade in the Bank, its growth was quite poor. India growth acceleration during the 1980’s was because it rethought its development policies, he said. Changes, however, were incremental. Technocrats had to push the political establishment slowly in efforts to liberalize the system. In the early 1990’s, a balance of payment crisis paved the way for larger system changes with recognition of the importance of the competition in private sector and opening markets to trade to facilitate growing the economy. Growth increased dramatically again, though it slowed after several years. By any account, however, India had become a success story, Ahluwalia said. There were six key lessons Ahluwalia said he found from the India experience. First, was the importance of home grown reforms. These reforms, he suggested were not new, but had been done by Indians rather than outsiders. This translated into reforms with distinctly Indian characteristics. These reforms were stretched out over a decade. They also did not include parts of established Washington Consensus thinking such as privatization. Policymakers were also very cautious about opening up capital accounts. The second lesson was highly participatory democracies force gradualism for the implementation of reforms. Technocrats, he suggested, were in front of the political establishment in pushing for reforms. Part of the reason for these gradual changes was more than political, however, as the complexity of reforms forced policymakers to rethink and redesign policies in the aftermath of implementation. Ahluwalia discussed some of the particulars of reducing import and tariff restrictions during the last two decades. In retrospect, he said much of the reforms moved too slowly and should have been quickened. He noted gradualism minimized the pain, but also postponed the benefits. He also suggested gradualism allowed reform opponents to mobilize. On the issue of privatization, the impetus came from within the country as many public sector enterprises were losing revenue and putting a strain on national finances. This was not politically acceptable at the start of the 1980’s, and Ahluwalia went on to describe a succession of governments and the evolution of responses on privatization. The gradualism on the thinking about privatization and its implementation was criticized from the outside, but Ahluwalia suggested it created a broader understanding of the issues internally and that the issue had been fairly debated. The third lesson was that the complexity of some reforms compelled continual redesigns. India was a country that suffered significant infrastructure deficits, he noted. Public sector constraints meant infusions of quick capital were no longer feasible. The government said the private sector could provide these services, but without careful planning they found both a lack of participation from the private sector and public concern that they were suddenly going to pay more for services. He used the example of power and telecommunication sectors to illustrate his point about underachieving reforms. Ahluwalia said sequencing was very important for broad based reforms, especially in the context of gradualism. Sequencing was important for tariff reform and liberalization of the capital accounts, and he provided some background on the issue of capital accounts. The fifth observation was the role of state governments is important. Resources go to where conditions are favorable in a liberalized environment, he noted. Enlightened state governments go after these resources and implement reforms more aggressively, and have done well. So, reform implementation and results have been a checkered if reviewed within the context of state implementation. This has put pressure on the central government on how to help lagging states with reforms. The final lesson is about poverty alleviation. Growth accomplishes poverty alleviation, but the debate remains as to whether growth or targeted programs at poverty reduction is preferable. Ahluwalia takes the view a blend of the two is best. James Bradford DeLong, a professor of economics at the University of California at Berkeley, said the Indian experience allowed the losers in the process the time necessary to make adjustments. He said the lecture left listeners with the hope that technocrats can move democracies. He complimented the privatization process Ahluwalia described by suggesting the Latin American experience left it vulnerable to interpretation that it was a corrupt process. The Indian experience also suggested to DeLong that sequencing is possible via gradualism. India’s comparative advantage in the future, DeLong suggested, would be through further integration of technological knowledge and skills in its service sectors. He alluded to the fact that US domestic politics and international trade issues will also have a large impact on India’s development. He asserted that the US needs to open its markets to Indian goods, and the benefit would be to both countries. Dr. Nurul Islam, Emeritus Research Fellow at the International Food Policy Research Institute (IFPRI), said three factors stood out in the successful implementation of economic reforms. Conviction, consensus and commitment, and competence. He noted that India is less reliant on donor aid than most developing countries. It is also a country with a large economy and a significant military. Dr. Islam questioned whether the home grown reforms noted by Ahluwalia had occurred without input from international institutions, suggesting his skepticism over aid being donated unconditionally. Bangladesh reforms are mostly donor driven, he noted, whether during a crisis or non-crisis situations. Negotiating a consensus was more difficult in the case of Bangladesh, he suggested, because political power was evenly divided among parties. Trade liberalization occurred more rapidly in Bangladesh, and its impact on small and large scale industry and increased access to imported raw materials helped increased per capita income during the 1980’s and 1990’s. Price controls and subsidies were eliminated in the agricultural sector, and Dr. Islam noted that periods of growth corresponded with periods of reform. Critics of subsidy eliminations wondered by neighbors like India had large subsidy programs in place while Bangladesh did not. But the success of reforms muted criticism. Poverty reduction in Bangladesh has been the result of both growth and poverty reduction measures, he said. While poverty had been reduced, a serious concern remains over the increasing inequality of income distribution. He noted that issues of governance and fiscal deficit are very important in Bangladesh, but had not been addressed by Ahluwalia. He closed by stating that the donor community had advised India against its heavy investments in education in the 1950’s, which have resulted in the country’s highly competitive technological and pharmaceutical industries. Richard Eckaus, professor of economics at Massachusetts Institute of Technology (MIT), said mistakes were made in India’s economic policy during the 1970’s and 1980’s, which were then exacerbated by the notion of gradualism. These problems and delays were in part caused by political and bureaucratic ideology. Eckaus discussed the problems of privatizing the power sector as an example of poor policymaking. He did, however, agree with the overall approach to gradualism as more effective to sudden transition to a more open economy. He cited gradualism practices by the Chinese as an example of where it worked and why. They did careful step-by-step testing of reforms there. India, however, implemented gradualism because of a lack of consensus, he suggested. Market reforms, as a result, remains uncertain in India today, and could be reversed. This sense that the Indians lack commitment to the reforms is the reason foreign investments in India pale in comparison to China, he suggested. Corruption has also played an important role, though corruption developed very differently within the two countries. It quickened the pace of reforms in China, but slowed it in India. Eckaus concluded that despite the policy mistakes, much progress has been made in India, in part to the contributions by Ahluwalia.  RELATED MATERIALS   More information on Montek Ahluwalia World Bank and India B-SPAN coverage of the Practitioners in Development Lecture Series RELATED B-SPAN EVENTS Economic Development (416) Financial Sector (90) Poverty (258) RELATED WORLD BANK LINKS B-SPAN Interviews World Bank Chief Economist Francois Bourguignon Saving Capitalism from Capitalists Political Economy of Private Participation in Power Sector Development Pro-Poor Growth: Past Debates and Future Directions