Institutions and Economy~II – The Statesman

Over the past decade, there has been a renewed need to implement the reform process. India reaffirmed its policy of fiscal prudence, with a new timetable to reduce the national budget deficit to 3% of GDP.

The industrial policy remains liberal and puts more emphasis on the “ease of doing business”. Opening up of foreign trade, a liberal environment to attract FDI, opening up new areas such as defense and raising the ceiling on insurance capital have been some of the salient features of the enhanced reform process. .

Emphasis on capital spending, increased public investment, investment in logistics through “Gatishakti” and other infrastructure such as roads, drinking water and housing have been a feature of the budget from 22-23. Another important movement has been in the digital realm. IT infrastructure and in the introduction of a biometric system of Aadhar to facilitate the receipt of direct financial benefits. The introduction of the Goods and Services Tax is a major reform of domestic indirect taxes that would enable India to have a state-of-the-art domestic indirect tax system; the insolvency and bankruptcy code should speed up the debt collection process and create incentives for bankers, are the large-scale reforms pushed by a government that means business.

The government’s inclusive intent is evident in the Right to Education Act and the National Digital Health Mission as well as the National Medical Commission. With voluntary dispensation pushing through the process of reforms and resurgence in economic policy, India is truly poised to become one of the world’s biggest economic players in the days to come.

In this context, it would be interesting to study the alternative model of the widely acclaimed East Asian development model, centered on Japan and China, and its impact on one of India’s neighboring countries. , Sri Lanka. Gao (2002), in “Japanese Economic Ideology and Industrial Policy”, observed that neither neoclassical, Keynesian nor Marxist theories could explain Japan’s rapid development in the 1980s.

China’s subsequent development is somewhat comparable in the context of structural similarities or procedural differences in China’s reforms and opening-up policy. Studies on the applicability of K Akamatsu’s “flying geese model” to explain East Asia’s economic renaissance, conducted by Gill and Kharas in 2007, showed that the main differences between the Japanese development model and that of China lay in their divergent attitudes. towards the market and the resulting institutional arrangements, especially with regard to capital formation, international trade relations, the degree of technical innovation, dependence on resources and trade.

The institutional parameters that pushed the Japanese paradigm were the system of private property and a market economy, the theoretical constructs of capitalism. To sustain continued growth in per capita income, however, long-term government intervention in the market was necessary, particularly to provide much-needed market economic stimulus. Similarly, the effective role of government was most visible in China’s socialist market economic system. These recognize the relevance of effective governance in the East Asian development paradigm.

The next institutional factor that emerges from the East Asian development model is the role of bureaucracy. In Japan, a team of talented elite bureaucrats have been trained to operate in a system designed to ensure innovation and performance. Civil servants were responsible for identifying and selecting industrial structural policies, formulating industrial rationalization policies, and monitoring performance to ensure effectiveness. Johnson (1982), in his book “MITI and the Japanese Miracle: The Growth of Industrial Policies” aptly observes that “the Japanese model of bureaucracy distinguishes the right to govern from the right to govern”. Another important institutional parameter, namely industrial policy, has been pushed into the background of the state as a minimal system. The state, while supporting the market economy, would ensure redistribution by imposing constraints on parliamentary democracy. Such an industrial policy extracts the economic effects of industrialization, the ability to coordinate production and the expansion of national productivity from industry to the economy. While Japan’s industrial policy followed a strategy of technology-intensive industries, China, in comparison, followed a strategy to encourage labor-intensive industrialization.

The Japanese development paradigm has been successfully emulated by other Third World countries, particularly in Southeast Asia and Latin America, some of whose growth stories have even exceeded that of Japan. One of these South Asian countries, Sri Lanka, shortly after its independence, ranked high in economic and social indices, superior even to Taiwan and South Korea. As times and policies changed, such an advantage gradually eroded. The Sri Lankan government embarked on a tentative policy of economic liberalization in the late 1960s, but took much longer than other Asian economies to implement import substitution policies and did not fundamentally failed to alter its economic performance.

Three factors have mediated a shift in the direction of the island nation’s economic policy, namely criticism of the inward-looking economic policy, the impact of the East Asian development model and the conditionality imposed by the World Bank and other aid agencies. In 1977, the new government came to power changing the economic strategy and a liberalized economic structure was established in the process of its integration into the world economy. Market mechanisms have begun to play a key role in this country, ignoring its large agricultural sector which previously contributed 20% of GDP, overtly relying on export-led industrialization and overemphasizing a fragile sector such as tourism.

Therefore, while other countries following the East Asian development paradigm escaped the development dilemma and became developed countries, Sri Lanka, despite so many decades of liberalization and open market policy , continues to remain a developing economy. Yan He (2020), in his research paper “Developmental government and economic development in Sri Lanka”, finds that government intervention, bureaucracy and industrial policy provide “a new explanation for economic growth and change in regime in Sri Lanka over the past 15 years”.

Yan would observe that the island nation has enough historical evidence and favorable institutional conditions for government interventions in its economic development and that Sri Lanka’s experience between 2005 and 2019 reveals that strongman politics is indeed a model. effective governance which has been a key factor in driving its economic development. growth. Such charisma has also facilitated the maintenance of a stable environment for development and the creation of an efficient administrative apparatus.

Nevertheless, as the following years will show us, the deficiency of this strategy is evident, posing a crisis to the very legitimacy of the regime, ultimately losing the confidence of the electorate despite the improvement in economic performance of the previous years. Paradoxically, the coalition government that followed, widely hailed as a victory for democracy, could not stay in power for more than one term.

Institutional and organizational shortcomings in the bureaucracy have rendered the administration largely dysfunctional. Family politics and nepotism challenge notions of fairness and efficiency and have led to pronounced inequalities, threatening the very viability of the regime. In its supposed attempts to promote efficiency in policy implementation, the bureaucracy has only succeeded in restricting reform and innovation. Sri Lanka’s economic policy has also hampered realistic growth prospects.

Despite liberalizing the entry of FDI in infrastructure development, industrial policy in its oversimplified form failed to take off and the island nation, having failed to take advantage of its free trade zones d export, continued to depend on exaggerated exports. led to industrialization and over-reliance on imports, even for basic necessities. Sri Lanka, unlike Japan in the 1980s, has failed to reap the benefits of industrial upgrades, technological innovation or the qualification of its human resources. Its overreliance on imports has prevented it from taking advantage of economies of scale. The policies have also not been inclusive and most islanders have not had access to the benefits of the economic growth trajectory in any form.

According to Yan, where effective strongman politics prevail, despite bureaucratic imbalance and oversimplified economic policies, the economy grows. Where such strongman politics is absent, coupled with weak bureaucracy and simplified policy-making, economic decline is inevitable, and this is the lesson learned from our studies of economic development in Sri Lanka. Institutions therefore strongly influence the economic development of countries by determining the framework in which economic exchanges take place.

An efficient government, a well-formulated legal structure, an efficient bureaucracy as well as a pragmatic and dynamic implementation of policies are, among others, the important institutional factors that have enabled countries to “develop”; while in the absence of such institutional support, countries have been relegated to the realm of ‘development’, a development dilemma they have failed to overcome.