governance, political economy, institutional development and economic regulation

Posts tagged ‘Open Economy’

Sustaining growth in an unfriendly world

unfriendly

Put it down to the heavy snow in Davos or to a rare case of blunt honesty by an international agency. Whilst sharing the good news of the revival of the world economy in 2017 and its expected continued growth till 2019 at 3.9 percent, Christine Laggard – the IMF Managing Director, cautioned that 20 percent of the developing world was not part of that revival, tempering the WEF celebrations with sobriety. Latin America and resource dependent economies, had suffered negative growth, even in 2016.

India’s growth angst

India’s angst is real with growth dropping to 6.5%, versus the 7% plus real growth of recent years. We are new to this business of high growth. The two decades from 1980 to 2000 only had a growth rate of 5.7 percent per year. It is only post 2000 that a growth rate of 7 percent per year become part of our expectations. In comparison, China’s high growth period of 8 plus percent per year – with minor annual deviations – began in 1977 and continued for over three decades till 2011.

Trade liberalisation and world growth – China timed it right

The 1970s and 1980s were a good time to grow. Under the General Agreement on Trade and Tariffs (GATT) the Kennedy, Tokyo and Uruguay rounds of negotiations (1963 to 1993) reduced average tariffs from 22 percent to 5 percent. World exports as a share of world GDP increased by 40% between 1972 to 1982 (from a level of 14% of world GDP to 19%). Over the next two decades, till 2002, world exports further increased by nearly one third to a level of 25% of world GDP. The bulk of Chinese growth happened during this period of trade liberalization.

India – a growth laggard, got the timing wrong

India lost the favourable two decades from 1962 to 1982 to domestic political headwinds. We liberalized, tentatively, from 1985. But reform put down roots only from 1992. By then world growth had tapered off. During the quarter century after 1992 till 2016, only in four years, did the world grow at 4% per year or more. In the quarter century before 1992 there were 14 years when growth exceeded 4% per year with 1964 being the high point at 6.7%. India has struggled against the declining trend in world growth to pull itself up. Fresh challenges can be expected over the next decade.

Can India replace the broken “open economy” model

The world grew rapidly using the “open economy” model over fifty years till 2008. Is it now broken? And did rising inequality within economies kill it? And are we now left only with the long, dark alley of “directed Chinese capitalism”, as a viable “growth model”?

Yes it can, if only we collected more tax revenues

India can offer an alternative model aligned with the “open economy, freedom, democracy” matrix, if we can boost our tax to GDP ratio to generate the resources required for “sharing growth”. The combined revenue receipts, in India, of governments at all levels is 22% of GDP.

Meanwhile public outlays are critically short in health by 4 % of GDP; education by 3% of GDP; infrastructure by 3% of GDP and defence by 2% of GDP. This adds up to 12% of GDP.

Around one third of the additional fiscal resources could come from continuing to grow at 6% per year – an achievable target. Another one third could be met from non-tax receipts like from privatization and savings on pro-poor subsidies by targeting and distributing them better, including digitally. But we cannot escape increasing our tax to GDP ratio (all of government) to 26 % of GDP.

The broad anti-corruption framework offers hope

The drive against corruption; stricter adoption of banked transaction norms and the increasing popularity of digital transactions and online marketing are expected to ensure that tax collection in fiscal 2018 meets the budgetary targets of Rs 19 trillion (including state share of Rs 6.7 trillion).

This is despite a reduction in the budgeted nominal growth of GDP over last year from 11.8% to 9.5%. This buoyancy gives hope that continued rationalization of tax rates; improved assessment and review processes and fairer and faster settlement of tax cases will induce better tax compliance.

Specific incentives for officials can seed growth filters in local decision making

We should learn from China how to devise local incentives for enhancing revenues. 99% of the 50 million Chinese officials are locally recruited and are never transferred away. They are truly a “permanent” bureaucracy.

Secondly, a significant part of their pay is linked to the fiscal health of their local unit. A healthy unit means higher bonuses and benefits for employees. Fiscal downturns bring austerity even in the take home benefits for employees. This close and sustained identification of officials with local offices and the localities where they exist, creates a shared bond between citizens and the officials – all of whom sink or swim, together.

Recruit officials locally & keep them there, for better identification with local needs

In India, officials are birds of passage, even at the village level. Their take home pay and benefits are completely unlinked to the fiscal health of the local office or the locality they serve in. It is no surprise then that rent gouging is widely prevalent with no concern for making the locality or the employing organization fiscally healthy.

“Authoritarian” China is effectively more decentralised than “democratic” India

The Chinese government does not habitually, bail out bankrupt local governments. They must work themselves out of the holes they dig for themselves. At the same time, the government does not hesitate to formally allow policy departures, at the local level, driven by exigency. Ironically, this makes “authoritarian” China, extremely decentralized and participative, whilst India – part of the “free world”, looks hopelessly rigid and centralized in general. We must build up the bright exceptions.

PARAM IYER

 

No job is too dirty for me

Parameswaran Iyer, Secretary, Government of India, a sanitation specialist, recruited from the World Bank,  walks the talk, by demonstrating that composted pit latrines are no longer dirty. Commitment to field level results and competence in action.

 

Resilience to overcome future challenges comes from open-order economies, promoting innovation and flexible structures

The WEF has cautioned that the near-term future is full of security, climate, technology and economic risks. They advise that resilience is the best antidote to risk. For complex organisations, enhancing resilience means embedding flexible, modular structures and business relationships, which allow the freedom to alter the scale of operations to fit demand and to cultivate innovation and the capacity to work at “the edge” of the frontier. Tellingly, none of this is aligned with a heavy top down, centralized, cookie-cutter, approach. Change is upon us. We must bend lest we break.

Adapted from the the author’s opinion piece in TOI blogs, January 28, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/sustaining-growth-in-an-unfriendly-world/

Packaging Budget 2015

jaitley face

(photo credit: india.com)

The annual ritual of the government’s budget with allocations of money in billions is just gobbledygook for the average citizen. It is the “tone” of the budget which people tune into first and foremost. What must Finance Minister Jaitley do to get the tone right?

First, clothes make a man, as they do a woman. One hopes that the FM will avoid the intricately embroidered shawls he has shown a preference for through winter. He would do well to wear a tailored, dark “bandh gala” (Nehru jacket), now that he has the figure to flaunt one, perhaps with a low- key, accessorized collar. More importantly, the jacket would set the tone of the budget to follow- non-frivolous; cut to a reduced shape to fit the cloth available; modern with a link to the India’s rich past and prescient of India’s glorious future.

A budget theme

Second, he should depart from the tradition of the FM rambling on, in the early part of the speech, about the state of the economy. This is already adequately covered in the Economic Survey released a day or so earlier. Instead, he could usefully spend this time defining a “budget theme” which he must then follow through in the rest of the budget speech by linking specific allocation and taxes to the overall theme.

This writer suggests the theme of “open economy, markets and poverty reduction”. All three fit nicely with the “growth” expectations unleashed by PM Modi. Also these are the three legs for equitable growth.

Open Economy stance

An “Open Economy” policy stance has been consistently followed since 1991 in external trade. It is just that, India has not benefited as much as our neighbours in East Asia. The fault is clearly ours.

Our governments have not seized opportunities overseas which could be dovetailed with domestic comparative advantage, to make the economy part of global value chains. This becomes vital now if jobs are to be added in India.

The real issue is what must we do next to “open” the economy to competition- domestic and international? Four steps suggest themselves.

First, linking markets physically by a first rate “infrastructure grid”-ports, roads, rail and electricity is key to create a seamless national market.

Second, a digitized “tax grid” linking national, state and local level tax systems can enhance revenues; prune evasion and reduce the aggregate tax burden by avoiding “the pancaking of multiple autarchic taxes”. The ongoing Goods and Services Tax (GST) initiative barely scratches the surface.

Third, aggressively privatizing state owned enterprises, including in arms and ammunition, can provide the required business momentum for competitiveness; assist in reaching fiscal deficit targets and benefit consumers.

Fourth, why not open, hitherto closed, domestic markets in land, legal and media services to foreign investment except where considerations of national security exist.

The FM could signal the second wave of liberalization and reform to follow up on the 1991 wave- external trade reform and industrial delicensing, by (A) tweaking competition thwarting domestic regulations and (B) supporting Indian business to reap the benefits of an open economy internationally.

Living by market logic

The BJP has always enjoyed the trust of business. But their commitment to expand markets and competition is not deeply etched enough. There is a lingering fondness for using and growing, the already vast powers of the State to bypass markets and “fast-track” development in a top- down “Developmental State” mode.

Examples include the loss of focus on privatization of state owned enterprises- partially attempted by the Vajpayee government (2000-04); a growing tendency to use the already iffy balance sheets of public sector companies and banks as leverage for funding “impossible public dreams”. Examples are a larger than feasible or necessary target for horrendously expensive and as yet commercially unviable, renewable energy systems and the development of a hundred SMART cities with even the concept remaining undefined nine months down the road.

Neither of these “public dreams” can be funded by market based finance. Both require huge subsidies, either direct budgetary allocations or indirect like “directed” loans from public sector banks. Bad loans which are artificially rolled over in government banks are, as a proportion of total assets, more than double the proportion in Indian private banks. Government owned businesses and banks need to be made autonomous if they are to survive. RBI should censure banks, which make irresponsible “dream” commitments and SEBI should do the same for listed government companies to protect minority shareholders.

The FM must set the record straight on both fronts. The fiscal constraints on public finance are unlikely to permit massive direct allocations for renewable energy or urbanization. He must further clarify that whilst both goals are laudable they should be achieved through projects, which are technically sound and financeable through market instruments.

Commercial finance for renewable energy and urban development

The FM must point out that renewable energy development, whilst a flag ship project, is hampered by the disincentive of subsidized conventional energy supply. Allowing market prices to prevail for retail energy supply is the first step to making renewable energy financeable.

The World Bank initiated a new program of Green Bonds which tap “specific institutional and retail investors with a yen for green development” internationally. Of the US$37 billion Green Bonds issued in 2014 nearly one half were corporate Bonds. Such debt instruments could also be developed for the US$ 1 Trillion Indian domestic Bond market, 25% of which is corporate debt.

Similarly, realism on urbanization agendas is urgently needed. For orderly urbanization the funds must be found within urban areas by rationalizing property and land tax and raising revenue by leasing government land banks for development to private developers. China successfully unleashed Municipal entrepreneurial energy to finance local development. Using national tax resources for urbanization is a poor use of scarce resources. Cities, which on average are 50% richer than rural India, must finance themselves through user charges, local taxes and monetization of local government resources. There can be no free lunch for a city.

Ending poverty by creating jobs

For starters, the FM could usefully adopt the international metric for defining the very poor as those who earn less than $1.25 per day and the poor as those who earn up to $2 per day. But what is much more important is to share a time bound vision for ending poverty.

The World Bank has set 2030 as the year by when world poverty (per capita income >$1.25 per day) is expected to be reduced to a residual economic and social challenge. India could simply align with this challenging target.

Today, 25% of the 1.2 billion poor people are Indian. Setting 2030 as the target for graduating them out of extreme poverty is aggressive. Even with an 8% annual growth, India could only be where China is today. China took 30 years to end extreme poverty (1985 to 2014). India would do well to achieve the same in 50 years (1980 to 2030)

The international consensus on poverty reduction is that strategies which allocate more resources for human development, livelihoods and private sector employment work best. India has lagged in enhancing budgetary allocations to education and health (including water and sanitation), as compared to any other growth oriented economy. One hopes the FM shall redress the skewed allocation since it affects the poor the most.

Small is still beautiful

If this logic is followed, the small and medium scale manufacturing sector, rather than mega projects, should be the focus for jobs and poverty reduction. This is where manufacturing is the least capital intensive; can use existing infrastructure with some rejigging; is most easily related to agriculture and could more easily grow incrementally as business expands.

We must avoid the trap of subverting the “growth” agenda into glitzy but lazy action points. To grow jobs for the poor it is the small things that count, like removing municipal and police harassment of street vendors; simplifying tax assessment processes and “problem solving” by getting local and state governments in growth mission mode.

The FM must pledge to blur the dualism in “well-being”, between 10% of the workforce in the “large, formal” sector and the 90% in the informal sector. The lot of employees in the informal sector can only be improved by “facilitating” employers to grow their businesses. This will happen only if labour regulations are light handed; permit flexible and fair employment practices and adopt a sequenced, incremental strategy for improvement in labour welfare supported by adequate public fiscal support for social protection.

Poverty and jobs filter for budget allocations

Applying a “poverty and jobs filter” to the budget allocations could be an innovative way to present the inter-se allocations across sectors and relate them to the budget theme. This would also discipline government departments to relate their work to the objective of private sector jobs and poverty reduction.

There are many ways of packaging a budget speech which very few actually read though more may hear it through. It should therefore be written for this audience and not the specialist, who will anyway delve between the lines. Best to outline the inflection points in Indian public finance history the budget seeks to create and leave the rest to the TV channels.

1558 words

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