Inappropriate template for a legitimate target

By Moderator July 19, 2019 11:54

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Ramkishen S. Rajan, Professor at the Lee Kuan Yew School of Public Policy compare East Asian model with Indian Model to achieve economic growth.

Important Analysis

  • The recently-released Economic Survey either glosses over or ignores many acute challenges faced by the Indian economy — like
    • The severe agrarian crisis;
    • The troubles of loss-making and debt-ridden public sector units; and
    • The issues plaguing public sector banks.
  • While the Survey rightly highlight the importance of incorporating insights from psychology into economics.
    • Many other countries like the U.K., Australia and Singapore have for long being applying such points to policy design and implementation areas and the issue has been discussed in India over the last few years as well.
    • It is unclear what added value the report truly has to offer here.
  • One issue that the Survey rightly underlines is the need for India to revive private investment if it is to achieve the magical $5-trillion economy status by 2024-25.
    • However, the document invokes the age-old comparison between India and East Asian countries.
    • It is rather strange that the Survey brings up something that has been taught in economic development classes over the last two decades.

East Asian model

  • The East Asian model was largely a story driven by the newly industrialised economies (NIEs) of Singapore, Hong Kong, South Korea and Taiwan, and Japan earlier.
  • Specifically, the prime goal in various NIEs from 1960s through to the 1990s (prior to the Asian Financial Crisis) was to raise gross savings rates.
  • While the rise in household savings was partly due to the positive demographic dividend, a variety of other factors, including
    • macroeconomic stability,
    • low inflation,
    • lack of social safety nets,
    • inability to leverage (due to a highly regulated banking system) and
    • forced savings (fully-funded Provident Funds) also played a role.

Fiscal Discipline and Private Saving

  • State-owned enterprises had to operate with budget constraints. This, coupled with the fiscal discipline practised by the economies, ensured that the public sector did not crowd out private savings and, in some cases, actually added to national savings.
  • Another goal was to ensure that the private savings were actually intermediated into the formal financial system, failing which the cost of capital would remain high and the availability of capital for investment would be low.
    • To achieve this, importance was given to the establishment of a safe and secure public sector banking system (usually in the form of postal savings networks) where deposits were guaranteed by the central bank and interest incomes was taxed lightly, if at all.
    • The state-owned banks were tightly regulated as financial stability was the cornerstone of overall macroeconomic stability.

Financial Inclusion

  • Financial inclusion was encouraged, though the focus was on actual use of the deposit accounts rather than just their opening.
    • Singapore initially adopted a dual banking structure that sheltered the domestic economy largely from significant short-term bank flows.
    • It resorted to a calibrated policy to allow fully licensed foreign banks only in the late 1990s.

Financial regulation

  • Central banks of these economies maintained tight oversight, and selective capital controls ensured that the low-yielding savings did not leave their countries of origin, while limited financial development forestalled the possibility of people looking for savings alternatives.

Industrial policies to promote domestic investment

  • The governments undertook sophisticated industrial policies to promote domestic investment, much of which was export-led (though not necessarily free-market based).
    • The governments understood that a vertical industrial policy (of ‘picking winners’) would not work without a sound horizontal industrial policy (dealing with labour and land reforms, bringing about basic literacy and raising women’s participation in the labour force).
    • Besides, incentives also had clear guidelines and sunset clauses and mechanisms were in place to phase out support. Thus, winners prospered while losers were allowed to fail.
    • While the manufacturing sector was viewed as a growth engine and open to export competition, the banking sector, in all economies apart from Hong Kong, remained tightly regulated and closed to foreign banks.

Embedded Autonomy

  • In addition, the bureaucracies of these East Asian economies had what Berkeley sociologist Peter Evans referred to as “embedded autonomy”. This allowed the state to be autonomous, yet embedded within the private sector and enabled the two to work together to develop policies or change course if the policies did not work.
    • This made industrial policy operate as a process of self-discovery, as emphasised by Harvard economist Dani Rodrik.
    • It is the lack of this embedded autonomy in the next-tier NIEs of Malaysia, Thailand and Indonesia that has been partly responsible for them being stuck in the ‘middle income trap’.

East Asia vs India Case

  • Much of the investment and export acceleration in East Asian countries was due to heterodox policies and reforms that were carefully calibrated, well-sequenced and implemented at a time when the external environment was far less hostile than it is today.
    • These measures allowed the nations to benefit from their demographic dividends and transform themselves into developed economies in record time.
  • In contrast, due to political and other compulsions, India’s reforms since 1991 have been rather haphazard and of a ‘stop-and-go’ nature with perverse consequences, all of which has made it much more challenging for the country to take full advantage of its demographic dividend.
    • Successive governments have neither had the tool-sets and the policy space nor the embedded autonomy needed to drive the industrial transformation as in the East Asian countries.

Way Forward

To replicate East Asian success India, need to focus on measures like

  • Reducing policy uncertainty;
  • Ensuring that the fiscal expenditures do not crowd out private savings and investment;
  • Enhancing the efficiency of financial intermediation;
  • Dealing with land acquisition and environment clearances are all essential to reignite investment


By Moderator July 19, 2019 11:54