Reform Never Stops
Feyi Fawehinmi has a good post on Murtaza Syed’s viral Twitter thread on the budget speech that changed India. His underlying point that economic reform is a never-ending job is an important one, and I want to make some points to bolster his argument.
Some African commenters on Syed’s thread wished their countries could have such a turnaround moment — but surprisingly, many Indians today will happily downplay the historical significance of Manmohan Singh’s reforms. The main reason is that many Indians believe that the transformative effect of Singh’s reforms is oversold. After all, India’s growth record during these ‘’miracle’’ years pales in comparison to its current geopolitical rival, China. While China has reportedly lifted 800 million people out of poverty, India was the poverty capital of the world until very recently. Critics believe this is because there was very little capital investment in public infrastructure that could have improved India’s competitiveness during the years of Singh’s Congress Party. This is something the current government of Narendra Modi is being widely praised for.
There is also the argument that growth during the reform years was uneven and not ‘’inclusive’’, leaving many poor people disaffected. Thus, the seeds of the current divisive ethno-nationalist politics were sown.
Disillusionment with reform is also a familiar narrative in Nigeria. Former super minister, Babatunde Fashola, even publicly questioned the logic of repaying the country’s foreign debt during the reform years of President Obasanjo, instead of building infrastructure. Though this period kickstarted a decade of high headline growth rate in Nigeria — it was also an uneven growth without a reduction in poverty across the country. Even worse was that this created the perfect political condition for the electoral victory of Muhammadu Buhari — who presided over one of the worst economic mismanagements in the history of Nigeria.
Just like the Indian example, economic reforms are hard to sustain — and there is always the risk of political merchants who can exploit public discontent for the ascent of mis-governance. When this happens, it is pretty common to blame citizens as shortsighted people, who have no appreciation for the long-term benefits of the reforms.
No one speaks for the poor
Economic reform is political. Politics is often about the interests of those being served and the ideas on how to serve them. On both counts, poor people have no voice until they are needed for elections. When a society is largely poor and unequal, widespread discontent can be exploited by skilful political merchants. This does not make poor people the clueless and helpless sheep we always make them out to be. They are choosing within the set that is on offer by the larger political structure.
A good reformer must know that economic reforms must be seen to have positive effects for everyone, and not just a few.
Reform must be transformational
The legacy of many reform episodes has been tainted by IMF debt restructuring programs that sometimes come with them. Implementing an IMF-style program often means cuts to public spending and adjustments in interest and currency exchange rates that lead to sudden rises in domestic prices of nearly everything — with the hope that the hardship from these measures will be temporary. The IMF is often criticised that its basket of recommended policies does not lead to long-term growth. But no longer should political leaders escape criticism for the profoundly misguided (and dishonest) belief that an ‘IMF receivership’ is all the economic reform you need.
The task of avoiding or getting out of an economic crisis sometimes requires a different set of policies from the ones necessary to put an economy on a path to broad-based growth. Sometimes, the political consensus and commitment to reform are merely to buy some time with spending cuts enough to return to the old ways — rather than a true commitment to reallocating public investment. Economic reform must go beyond managing a crisis to reducing poverty and improving the lives of people. For this to happen, public policy has to incentivise investment that increases productivity across all sectors of the economy and creates more jobs.
Hope and Hirschman’s Traffic Jam
To return to the core point of Feyi’s argument. Reform gets a bad rap — and is given short shrift by the public — because policymakers sometimes do not set a transformation agenda for policies. But even when this condition is met, prosperity takes time and voters can be impatient. So how can well-meaning reformers retain the confidence of the people? Keep in mind that mishandling economic reform carries the risk of not only despair but also chaos.
The short answer is that political leaders must always perform a ‘’rebalancing act’’. This comes from the realisation that economic growth is an ‘’unbalanced’’ process. Policies and growth cycles will not serve everyone equally and at the same time. The late economist Albert Hirschman was one of the first to reckon with the problem of unequal growth and its relevance to economic development. He described it succinctly in a 1974 paper using this now-famous analogy:
In the early stages of rapid economic development, when inequalities in the distribution of income among different classes, sectors, and regions are apt to increase sharply, it can happen that society’s tolerance for such disparities will be substantial. To the extent that such tolerance comes into being, it accommodates, as it were, the increasing inequalities in an almost providential fashion. But this tolerance is like a credit that falls due at a certain date. It is extended in the expectation that eventually the disparities will narrow again. If this does not occur, there is bound to be trouble and, perhaps, disaster.
To make this proposition plausible, I shall first argue by analogy. Suppose that I drive through a two-lane tunnel, both lanes going in the same direction, and run into a serious traffic jam. No car moves in either lane as far as I can see (which is not very far). I am in the left lane and feel dejected. After a while the cars in the right lane begin to move. Naturally, my spirits lift considerably, for I know that the jam has been broken and that my lane’s turn to move will surely come any moment now. Even though I still sit still, I feel much better off than before because of the expectation that I shall soon be on the move. But suppose that the expectation is disappointed and only the right lane keeps moving: in that case I, along with my left lane cosufferers, shall suspect foul play, and many of us will at some point become quite furious and ready to correct manifest injustice by taking direct action (such as illegally crossing the double line separating the two lanes).
For many people, the solution to unbalanced growth is for government to spend more on direct interventions in the lives of the least well-off. This is equivalent to the traffic officer handing out ‘’soft drinks’’ to people stuck in the non-moving lane in Hirschman’s analogy. The reality is that many developing countries do not have the fiscal capacity to accommodate the scale of the spending involved. Even if they can and this buys more time before people become furious, the central issue is that they did not leave the house for free drinks in a traffic jam.
The alternative is for public policy to keep incentivising (through public spending and regulation) investment in new capabilities for the economy — some of which may not appear profitable to the private sector at first. Creating new markets and niches of growth is one of the most undervalued purposes of government.
This is not a direct refutation of arguments in favour of redistribution. However, I am more persuaded that rebalancing the economy through opening up more opportunities will make people hopeful, and more tolerant of sincere reforms. Every lane may not move at the same pace, but at least let us keep the traffic moving.
