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30 January 1998

At what cost are reforms and liberalisation being pursued? 

RATNAKAR GEDAM  
I(This is the concluding part of the article titled `Are reforms without cost to the economy' published in Thursday's -29/01/98- edition. In the previous part the author spoke about how reforms were being initiated all over the world indifferent spheres of economic activities and said that it was important for the governments to take discrete policy measures. He also said that it was wrong to assume that reforms did not impose any cost on the economy)

Advocacy for reforms has been on the same tone and tenure as history witnessed the drives for socialism and modernisation which remained unfinished constitutional agenda. Politically ideas of economic development and modernisation were mooted by western economies to challenge to proliferation of virtues of "socialism". Theories of economic development and modernisation of economy heavily relied on the blending of capitalist concepts with socialist tenet and were considered to be an answer to former USSR sponsored drive for introducing socialism indeveloping countries.

However, untimely demise of former USSR the contemporary world is unipolar therefore though concepts of reforms where transnational companies (TNC) are treated as engine for domestic economic growth was basically originated in Western economies and introduced through World Bank and its allied sister organisation these concepts are now accepted equally both in nations dominated with communist ideologies and developing countries. The need for reforms in the developing countries is felt more by developed nations than by developing countries. The management of economy through prescription of reforms in the contemporary world could be compared with era of 1950s when the concepts of socialism were considered as most fashionable and modern.

Western economies have to sell their theories of economic development, modernisation, appropriate technology and self-reliance through education or training of civil servants who may take decisions. Thus outcome was neither socialism survives nor drivefor growth and redistribution nor equality was achieved at any time.

These unfinished agendas have huge cost attached to them. Concentration of wealth in the the hands of few (i.e. growth of capitalism) was considered to be bad therefore public ownership of means of production was resorted. Several PSEs were created out of tax payers money which remained sick and source of drain of scarce resources. Numerous sick private units were taken over by the government under the justification of social unrest of employed or due to threat of unrest by organised union in such sick unit. Such sick units remained sick but consumed huge national resources. Without government's initiative no reforms would proceed. That is, there is still role for the government in initiating, furthering and accomplishment of reforms. The question therefore arises is that "Should such actions be not treated as government's intervention in the economy"? If so, what is the cost of this intervention? Or in other words at what cost thesereforms, liberalisation and globalisation are being pursued? An answer to first question is that reforms, liberalisation, privatisation and globalisation is also an intervention but it is of a different nature. Cost of such intervention is huge than bearing the cost of distortions in the economy by leaving economy without reforms.

That is difference between pre-reforms and economic losses due to reforms is very high. Let us try to estimate the cost of reforms from India's experience. The losses incurred by the economy could be termed as proxy for cost of reforms as well as loss of efficiency. Some of the losses could be attributed to following factors:

* Loss of GDP in absolute value from 1990-91 assuming certain predetermined growth rate.

* Loss in domestic capital formation during reforms

* Loss in domestic saving due to fall in interest rates

* Loss due to scams in the economy during reforms or liberalisation of trade, contracts etc.

* Loss in export volume, fall in export prices, etc. due toloss of competitive and valued due to devaluation of currency.

* Loss of competitiveness of domestic companies due to entry of MNCs in the areas where protectionism prevailed.

* Increased trade deficit due to rising imports due to devaluation.

* Loss to the economy due to servicing of equity and debt to foreign institutions.

* Recession in the economy due to slow down or change in demand management.

* Cost of structural adjustment loan and interest due on it.

* Shift in ownership structure of industrial enterprises, services, banking, etc.

* Rise in income disparities due to wage differences.

* Risk involved in capital flight and loss of credit worthiness.

* Losses due to changes in intellectual property rights.

* Loss of natural monopoly and public ownership.

Conceptually one needs to ponder over the relevant issues. It will be wrong to assume there are no explicit gains, but gains are fewer than losses to economy. Implication of some of the acts of government are undoing what was doneearlier and justified collectively. For example "nationalisation" of private banks, coal and some of the mining companies, insurance companies and others was done in 1960s and now in after 35 years we are talking of privatisation of coal, mining, power, insurance, banks etc. which is undoing what was done earlier. In this process what were the gains and losses to the economy? Privatisation of these sector would imply undoing what was done earlier.

In this process of doing and undoing economy had to meet huge expenditure without serving the purpose for which it was done.

India's 940 million population and its skewed income disparity offer wider market for all TNCs. In a bid to capture the Indian market all those changes which are essential for entries of TNCs are being introduced in the name of reform. The cost of such changes have to bear by the economy for little gains if any. To conclude, advent of structural adjustment, economic reforms, liberalisation, privatisation and globalisation need to betreated as government's deliberate intervention in the economy which are likely to introduce new and unexpected distortions. From theoretical point of view reform is intervention by the government in the economy and from the political-economy point view it needs to be treated as an neo-colonisation of developing countries to allow proliferation of access and control over the economies of developing countries. Whether reforms would bring any success or failure to economic growth, development and redistribution of income needs to be subjected to nation-wide debate. Reforms are like mirage.

All attempts of creating socialistic pattern of Indian society through development and modernisation have remained unfulfilled and abandoned so could be attempts to reforms where counterproductive results have already began to show signals. Reform process is not self propelling but needs impetus from government machinery therefore "rent seeking" may not be absence in reforms as has been seen in scams in capital markets,telecommunication, sugar, urea imports, and power sector. The social, economic and political cost of such government led reforms is bound to be high enough and needs research to quantify the gains and losses to economy under different scenarios.

If it could be empirically found that direct or indirect cost of reforms and losses to economy is less than the gain to the economy and its citizens then it is worth pursuing otherwise approach to reforms needs to be reviewed.

The criteria to be applied should be that whether bottom 30 per cent population and poorest of poor would cross poverty during short term or not. The role of government uld be thach s neist alrtoveranking, etc.

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