In 1993, the World Bank published a study on the causes of the unprecedented high growth of eight East Asian economies. It was provocatively titled The East Asian Miracle, and inspired reams of further analysis and commentary. In retrospect, perhaps the growth experience of these countries was not so miraculous—they followed reasonably good economic policies that encouraged trade and investment. Most of all, those of the eight that did best already had, or developed, good initial conditions: stable societies with relatively high levels of education and broad participation of the populations in the economic transformation. China, the East Asian giant that followed in the footsteps of the eight, fitted the pattern in many respects.
Through this lens, India’s recent economic performance has been closer to being miraculous. Its economic reforms have been incomplete, its democratic government is often creaky and ineffective, and its society is riven by fault lines. Yet it came tantalizingly close to matching East Asian rates of growth for a few years. The real success, however, will come from sustaining growth of 8% or more over a couple of decades. With a new government about to come into power, it is tantalizing to think how close India is to this goal, if it can implement some key policy reforms. The feasibility of reforms is always a challenge, but what would be an ideal set of national policy moves to make an Indian growth miracle?
• First, strengthen local governments economically. Give them real fiscal capacity by allowing them to piggyback on some state and Central taxes, as well as increasing transfers to local governments. Compensate the states by also giving them new tax authority, including piggybacking on the national income tax. Let states and local governments be responsible for raising their own revenue at the margin, to cover their marginal expenditures. Fiscal decentralization will improve the efficiency of government expenditures, and simply make substantive the political decentralization that has already taken place in India.
• Second, push state and local governments to do their most important job, of delivering basic health, education and safety to their citizens. One by one, leaders in India’s states, even now in Bihar, have been figuring out that their electorates care most about good government in this fundamental sense. The Union government needs to set broad outcome goals, make block grants, and let the states compete to serve their citizens. Mobility and media have changed fundamentally from the India of 20 years ago, so that they provide checks on sub-national governments, and the apparatus of planning and doling out earmarked money for various “schemes” has long since become obsolete.
• Third, overhaul macroeconomic management, including the mechanisms governing monetary and exchange rate policy setting. There is far too little transparency in these policies, so that economic actors are left guessing as to what might happen, rather than having a clear and openly stated set of policy rules that allow for rational planning of investment and allocation decisions. On top of this opaqueness, there are still dozens of discretionary or even conflicting controls and restrictions that hinder the workings of domestic and international financial markets. The previous government commissioned superb studies on financial sector reform, and the time has come to carry out the recommendations.
• Fourth, keep pruning away the thicket of rules and regulations that still make doing business in India (including starting and stopping) unnecessarily cumbersome. Just as with the old licence raj, many of the controls favour large firms and politically connected incumbents. Politicians should realize that, just as with corporate income taxes, they can increase their take by growing the base of successful businesses. One sector where a limited number of domestic incumbents cannot keep up with demand is higher education. The logic of liberalization applies strongly to this sector, which has been strangled for decades by inefficient government controls. Allowing businesses to flourish across the whole economy will be crucial to generating the additional employment opportunities that India’s young population needs.
Perhaps the true miracle will be if any of the above changes are actually implemented. But in any of these four areas, there is so much room for improvement that even piecemeal and incomplete reforms can yield growth dividends. What is interesting is that many politicians, technocrats and academics have been articulating an agenda for reform that can enhance growth as well as expand the set of its beneficiaries. The greatest resistance seems to come from an old elite, a combination of civil servants and members of the “intelligentsia”.
My guess, though, is that the tide has turned. The last government distributed some of the benefits of growth to the rural hinterland, crudely and inefficiently, but still with an impact: People now widely understand the possibilities and benefits of growth.
As a version of that coalition returns to power, it will be the first continuous decade of rule after a long time, and may yet make a miracle happen.
Nirvikar Singh is professor of economics at the University of California, Santa Cruz. Your comments are welcome at firstname.lastname@example.org