It is 25 years since India shifted from an import substitution industrialization strategy and boldly embraced globalization and privatization as the leading paradigm for driving its economic development. The July 24, 1991 Union Budget that Dr. Manmohan Singh, the then Finance Minister presented,was arguably the most important Budget in the history of independent India. Presented at a time of unprecedented Balance of Payments crisis in the country, the budget came at the back of an 18% devaluation of the Indian rupee and an overhauling of the Industrial Policy Framework in the country. It set the broad rubric for India’s economic trajectory for the past two decades and more.
The abolition of the Planning Commission and creation of the NITI Ayogin December 2014,was but the latest manifestation of the decisive shift in economic thinking. It is therefore ironic that this silver jubilee for our country should also coincide with strong rumblings against the Washington Consensus from the very authors of the consensus. An IMF research team headed by Jonathan Ostry, Deputy Director of the IMF Research Team, has found evidence to support the claim that certain elements of the Consensus had definite costs without according any or only doubtful benefits .
Washington Consensus
The birth of the WC, also disparagingly known as the neoliberal agenda, coincided with what Francis Fukuyama called the End of History. In 1990, after the collapse of Soviet Russia and the fall of the Berlin Wall, history as we came to know itwas coming to an end. History as a tussle between capitalism and socialism that was also manifested in the Cold War,would come to an end and in the future Fukuyama predicted that history would just be a triumphant march of democracy and capitalism over other forms of economic and political philosophies. Coined in 1990, by John Williamson the WC in its essence consisted inter-alia of, policy measures to reduce controls in the economy, trade liberalization by reducing imports and quotas, increased fiscal discipline, allowing free movement of capital into the country by capital account liberalization, reduced public debt and privatization. In other words the WC essentially consisted of easing out the ‘visible hand’ of government in the economy and a move towards the ‘invisible hand’ of prices and the market system of demand and supply.
This consensus was pervasive because economies that ended up seeking assistance from the World Bank or the IMF to tide over financing difficulties or Balance of Payments crises would be asked to implement one or the other version of the Washington Consensus. This straitjacket of ‘one size fits all’ approach was criticized over the years by many economists including Amartya Sen, Joseph Stiglitz, DaniRodrik among others. The armoury of the Washington Consensus was strengthened by the creation of the World Trade Organisation in 1994 which took up the trade agenda of the Washington Consensus in right earnest abolishing quotas and reducing tariffs across the board. The research team at the IMF has singled out two elements of the Washington Consensus. They look at policies aimed at Capital account liberalization and fiscal austerity to empirically examine the impact these has had on economies in the world. We look at each in turn.
Capital Account and
the Washington Consensus
They find that inflow of short-term capital, consisting of speculative debt inflows and portfolio investment and banking inflows only have the effect of increasing volatility without impacting growth to any appreciable degree. They document that since 1980 there have been more than 150 episodes of capital surges in more than 50 emerging economies and these led to financial crises 20% of the time. Moreover, these capital flows are associated with higher inequalities in the economies in question leading to a further dampening of economic growth.
Removing controls on movement of short-term capital improves the efficiency of the financial system as capital is allocated to those uses that provide the largest returns. This allocative efficiency is expected to be good for the economy as a whole.However, the empirical findings of a high frequency of booms and busts cycles point to the perverse nature of these flows and hence the need for adopting a cautious approach to the policy of capital account liberalization.
Fiscal austerity and
the Washington Consensus
Similarly, the proposition of fiscal austerity does not have any standing on economic theory or practice. Sustainable level of public debt is a function of the country’s history in servicing its debt obligations and the overall growth potential the country has. Hence, if public debt of 60% of GDP can be termed sustainable for an emerging market economy it might be the case that for an economy like the US, UK or Germany the sustainable level would be much higher at say 100 or 120%. This is because markets know that these latter economies will not default on their loan obligations and hence they are willing to lend money to them at benign interest rates. Apart from the country-specific nature of debt-sustainability, there is also the matter of alternatives to public debt as a resource mobilization mechanism.
It is generally advised that taxation should replace public debt as a mechanism for resource mobilization. However, the latter leads to distortions in the production and the consumption side. Advice to switch from a non-distortionary form of resource mobilization to a distortionary form of resource mobilization is questionable because the costs associated with higher debts- like crowding out and increased interest rates etc are sunk costs and therefore cannot be reversed. WC also recommends that increased taxation be accompanied by reduction in government expenditure. The reduction on welfare schemes can impact the levels of inequality in the economy as much as lead to reduced demand and therefore greater unemployment and lesser growth in the economy.
Lessons for India
Does that mean what India did in 1991 was wrong? The Indian economy was precariously poised on the door of default. Our twin deficits in the government account (fiscal deficit) and the current account (more imports than exports) were symptomatic of very basic flaws that came to dominate our economic system. There was therefore a need to address them in an effective and bold manner. Moreover, our country never fully subscribed to the Washington Consensus view, always keeping the capital account less open than many other developing and developed nations. What stands out is that dogma of any variety is neither helpful nor sustainable for policy-making. The ultimate test lies in how the policies play out in the lives of those affected by them. It seems that the appropriate place for dogmas of any variety is in the dog-house.
(The author is an IAS officer of Nagaland cadre. He may be contacted at vyasan_r@yahoo.com)
