P.V. Narasimha Rao. Photo: Reuters
P.V. Narasimha Rao. Photo: Reuters

The politics of economic transitions

People will follow leaders on a journey of change if they want to go to the place the leaders are taking them

The benefits of international trade are founded in David Ricardo’s theory of comparative advantage. If every country does what it can do best, global productivity will improve and the global economy will grow. Therefore, more free trade will increase global gross domestic product (GDP). However, since people in countries do many things, some of which they should best let others do, a big shuffling around of jobs is required to achieve the benefits of free trade. People in some countries should stop growing crops and let farmers in other countries, with better conditions, produce food for everyone. And factories in some countries must be closed and what they produce should be imported from other countries where costs are lower. Some years ago, Dani Rodrik pointed out that, for every dollar increase in the size of the global economic pie by freer trade, as many as seven dollars of incomes have to be shuffled around.

When some people say they worry that rapid advances in technologies are enabling machines and computers to displace people in manufacturing, services, and even knowledge industries, others dismiss them as Luddites. They point out that, while new technologies will displace people, it has always worked out well in the end. It did, but during the process of transition, which took decades, many people did lose their jobs. For example, the mechanization and chemicalization of agriculture in the US increased the country’s farm productivity enormously. However, it displaced millions who were forced to migrate to urban slums and to work in sweatshops to earn a living. Ultimately, the factories became better regulated and the cities better governed, but the processes of political and social change to bring about the improvements took a long time.

Transitions can take time. They can be messy and take even longer if they are not guided well. Twenty-five years ago, Manmohan Singh, India’s then finance minister, announced economic reforms to bring India into a Ricardian vision of free international trade. Commemorating those reforms, Indian economic journals have run many retrospectives, introspecting into what induced the reforms, and also why their benefits are taking so long to fully materialize. The masterly role played by P.V. Narasimha Rao, India’s prime minister then, in making the change happen has finally been recognized. Singh had quoted Victor Hugo, that nothing can stop an idea whose time has come. Rao knew that politics and people can. He let Singh make the speech, while he worked on the politics of change.

When Manmohan Singh announced the reforms in 1991, the idea that countries are economies was ascendant. The over-arching measure of a country’s progress was its GDP. Globalization was seen through the narrow lens of trade, supply chains and flows of investments across borders. These ideas reached their apogee at the turn of the millennium, when Thomas Friedman wrote his blockbuster, The World is Flat. Since then, with the resurgence of the politics of identities and demands for the security of borders, the concepts of globalization are becoming more rounded.

People in the US, Europe and the rest of the world are becoming concerned about their jobs and social security. They are reminding their governments and economists that the world is not just a production system and a playground for finance. People are saying, if economists and governments will listen to them, that they are no longer willing to sacrifice their security and the well-being of their communities to increase GDP. More balanced scorecards are required for measuring their country’s progress.

Leaders in the corporate world have begun to consider more balanced scorecards too. Until very recently, to sell an idea to corporations, consultants and academicians had to give proof that it would improve shareholder value. For example, chief executive officers had to be convinced that paying attention to societal stakeholders would, ultimately, produce more shareholder returns. Now, a few corporate leaders are daring to measure the impact of their businesses’ footprint on society and the environment because it is the right thing to do, not because it will ultimately improve profits.

People will follow leaders on a journey of change if they want to go to the place the leaders are taking them. Therefore, shared visions of the outcome of change will bring people along. The vision cannot be only an economic one, such as the size of the GDP. It must include a vision of the quality of society: of its equity, fairness and harmony—qualities that matter to people. And, as people have become aware of the impact of economic growth on the availability of clean water, atmospheric pollution, green cover and biodiversity, environmental sustainability has become an important part of a vision of the future that will attract them.

Leaders must manage the pain and the politics of transitions. Getting from here to there, from the present reality to the vision, will require transformational change. Vested interests in the present system will have to let go some of their privileges. As new industries develop, and old technologies and production systems are shaken out and replaced by new ones, jobs will shuffle around.

Some think another crisis is necessary to nudge the political system and the people to support deeper reforms to the Indian economy. People will leave the comfort of the cinema if there is a fire. But when they are outside, they will scatter, unless they have a vision of somewhere they want to go together and leaders who nudge them along.

Economic reform is a socio-political process peppered with economic theory. History teaches that while it is possible to transform economies without economists, it cannot be done without astute political leaders, like Franklin Roosevelt, Deng Xiaoping, Margaret Thatcher and Rao.

Arun Maira is a former member of the Planning Commission.

Comments are welcome at theirview@livemint.com