February 19, 2002

Even though the book is confined to one country, India, reading this text is not only vindicating but also illuminating. It serves to illumine the wrong economic path that Pakistan has been treading since it undertook the much touted economic reform in the late 1980s. Despite little or no visible progress on the ground, the economic policy direction in Pakistan remains unchanged. As was said of American businesses once that when unable to find gold, they would dig 20 feet deeper even though the gold might be 20 feet to the side.

This is precisely the case with Pakistan which has been digging deeper and deeper in the same direction even though there is a need to change the economic policy focus and direction significantly. A look at the Indian experience, therefore, ought to be instructive for the country’s economic policy makers.

In 1991, the Indian economy was thrown open and became less regulated than before. As per the dominant IMF and World Bank orthodoxy rooted in neo-classical economic thought, it was expected that Indian openness and greater international economic integration would, by themselves, promote growth. As it turned out, industrial growth was not spurred by openness. The level of industrial production in the 1990s actually remained below the extrapolated trend from the pre-reform period of 1980-90.

The naysayers had it. As argued by Joseph Stiglitz, trade liberalization worked differently under different conditions. Dan Rodrik argued that openness was no independent source of growth and was not a substitute for a national development strategy.

We feel vindicated as this has been a part of our critique of Pakistan’s liberalizing economic policies pursued relentlessly under the aegis of the IMF and the World Bank in utter disregard of domestic concerns and advice.

Greater Indian openness has also not been able to improve India’s export performance, other contributory factors notwithstanding. India’s new economic policies failed to promote industrial investment and employment generation. The reasons included, inter alia, low levels of demand and high borrowing cost. While India could attract more foreign investment, the FDI inflows’ increase was relatively modest. The view that openness by itself would spur industrial investment is clearly flawed.

In the event of failure of the openness policy, the argument usually advanced by the donors who tout undiluted liberalization is that soft states are unable to push it through. They, therefore, blend their liberalization advocacy with good governance. India, however, does not view itself as an aid dependent soft state being more accountable to the donors than to its own citizens. It views itself as an intermediate state with a certain administrative capacity fairly independent of the political power elite and the economic interest groups. However, state autonomy faces challenges in both a national and an international context due to a growing influence of extra societal factors on the Indian policy apparatus.

This takes us into a second key area of contention which is abot the role of the state versus that of the markets. While the almost parrot-like advocacy in Pakistan is that the state should be clearly rolled back with maximum reliance on the markets alone for economic growth and development, Indians are well aware of the recent state of the debate on the subject. The neo-classical counterrevolution of the 1980s lost out in the theoretical debates on the subject by the beginning of the decade of the 1990s when a new balanced approach appeared and gained intellectual popularity.

A balance was struck between the state-managed and the market-led model. The East Asian miracle was also studied more realistically through objective lenses independent of the view communicated by the IMF and the World Bank. This independent view clearly demonstrated the role played by the state in developing market-led new industrializing economies in East Asia which was a major break from the World Bank’s view of sole reliance on the markets.

Despite the above developments in economic thought, the IMF and the World Bank continued to push the neo-classical agenda well into the mid-1990s when they began to appreciate belatedly the complementary relationship between the markets and the state. The state was, however, no longer viewed as an engine of growth but as a framework of institutions to facilitate the growth and development of markets.

The author of this book takes a different view for India. The book, explores how institutions have affected industrial patterns since 1951. Between 1951 and 1991, a large public industrial sector was allowed to grow in sync with the growth of the private sector. The industrial approval system allowed for political and bureaucratic interference in the management of the private sector, impairing the efficiency of the latter.

The pathologies generated by the system included corruption, rent-seeking, and discrimination in favour of large conglomerates. While concentration of economic power in the large private sector could not be prevented, private sector growth was impeded nonetheless. So, while the institutional framework during 1951 to 1991 did facilitate import substitution, diversification, and industrial growth; the industrial development process remained lop-sided. The country’s industrial potential could not be realized.

Some of the old institutional legacy featured even when the economy started liberalizing after 1991. While the domestic players thought that the economy was opening up too fast, the foreign entrants viewed a tilt towards the domestic players. The domestic industry has similar fears dreading a tilt in favour of the foreign investors. However, all of them are of the view that the institutional mechanism has been impeding industrial growth.

So, while openness may not have yielded the desired results if viewed in isolation, the institutional framework adds to the constraints experienced by the Indian economic players. Should then the foreign messiahs advocate institutional reform in India as well? The answer will depend upon the type of state being dealt with. India, being an intermediate state, is to be clearly communicated with in a language different from the one used to communicate with the weak and the soft states. Also, intermediate states enjoy a greater autonomy in the policy choices they make.

So, while there has been a shift from ‘swadeshi’ to a more pragmatic global outlook, there is firm belief in manufacturing-led growth and manufactured exports. This combined approach is being facilitated by closely calibrating the reform process with a view to creating an enabling environment for the domestic players to succeed in. While an attempt has been made to carry the representatives of various interest groups along despite their reservations against market reform and liberalization, the final outcome will remain dependent upon the success of Indian businesses and their ability to compete and/or forge strategic alliances with the TNCs.

The possibility of reverting to an inward-orientation cannot be ruled out if the above attempt does not succeed. This will, in turn, determine whether the external influences will shape the Indian industrial and economic policies.

India is, therefore, a country that chooses to respond in one or various ways to external environmental factors in stark contrast with Pakistan that merely keeps reacting to external economic factors with little or no success. India is, therefore, perched a notch higher on the strategic ladder with Pakistan mostly wondering as to what happened in the external environment before it even chooses to react. A sad situation indeed for Pakistan!

Policies, institutions and industrial development: coping with liberalization and international competition in India
By John Degnbol-Martinussen
Sage Publications, M-32 Market, Greater Kailash-I, New Delhi-110 048, India
ISBN 0-7619-9548-X
260pp. Indian Rs475

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