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Dancing on the tightrope

Although the democratic constraint on India’s economic reforms is now beginning to emerge, it need not be a reason for alarm. India’s democracy is a short-term constraint but a long-term asset for pro-market reformers

Written by Ashutoshvarshney |
March 14, 2007 1:30:26 pm

India is attempting a transformation few nations in modern history have successfully managed: liberalising the economy within an established democratic order. It is hard to escape the impression that market interests and democratic principles are uneasily aligned in India today. The two are not inherently contradictory, but there are tensions between them that India’s leaders will have to manage carefully.

So far, the reform process of the last 15 years has had positive results: by most conventional standards, India’s economy is booming. But how long will the boom last? That depends on India’s democratic politics, where economic growth has fed pressures for the redistribution of wealth. Mainstream economic theory about markets and human welfare holds that markets will benefit all in the long run. But long-term perspectives do not come naturally to democratic politicians, who must focus on winning elections in the short term. Accordingly, a low-income democracy such as India must nurture the energies of its entrepreneurs while, in the short run, responding to the reservations and resentments of the masses. How well India’s politicians walk this tightrope will determine the outcome of the country’s economic transformation.

There are two aspects to the challenge reformers face within India’s democratic context: Perceptions of the reforms to date and the short-term pain likely to accompany the deeper reforms to come.

The economic reforms undertaken thus far have not been those that would directly affect the lives of India’s poor masses, and this has fed their resentment against the reforms, which they believe have only benefited the upper and middle classes. The employment effect of the reforms — while significant in skill- and capital-intensive sectors —has not been substantial enough throughout the economy to ameliorate this resentment.

Further pro-market reforms — the large-scale privatisation of public-sector firms, the implementation of a hire-and-fire employment policy, changes in agricultural policy, radical changes in small-industry sectors, and the drastic reduction of fiscal deficits — can have a direct and eventually positive effect on the lives of the masses, but the long-term benefits of these reforms are almost certain to be accompanied by considerable short-term pain for the poor.

The electoral consequence of this likelihood has meant that elite-oriented reforms (making investment in real estate easier, deregulating the stock market, liberalising civil aviation) have continued under the current government in India, whereas more radical reforms (changing labour laws, privatising public enterprises, eliminating agricultural subsidies) have stalled. The latter have run into what might be called a mass-politics constraint. As a result, it is now customary to argue that India has a “strong consensus on weak reforms.”

Although the democratic constraint on India’s economic reforms is emerging, it need not be a reason for alarm. India’s democracy is a short-term constraint but a long-term asset for pro-market reformers.

The democratic constraint does mean, however, that reformers in India will have to juggle two separate tasks in the short to medium term: Continuing reforms in the elite-oriented sectors and responding to mass needs through further anti-market state interventions. And if market-oriented economic reforms are to be embraced in areas directly relevant to the masses, politicians will have to answer the following questions: How will the privatisation of public enterprises, the reform of labour laws, and the lifting of agricultural subsidies benefit the masses? And how long will the benefits take to trickle down? All of these reforms are likely to enhance mass welfare in the long run. Therefore, for democratic politicians, this problem will effectively mean taking measures such as reserving a substantial proportion of the proceeds from privatisation for public health and primary education, constructing safety nets for workers as labour laws are reformed, and coming up with a plan for a second green revolution in agriculture in return for drawing down the current huge agricultural subsidies. The last one, in particular, will require both opening up agriculture to market forces and greater public investment in irrigation, agricultural research, and rural infrastructure and education.

But although democratic politics makes life challenging for reformers, it could also turn out to be a huge benefit in the long run. Consider the counterexample of China. It is hard to believe that the single-party state in China will not eventually be challenged from within the existing party structure, by the burgeoning middle class, or by rising peasant and labour unrest. The attendant economic consequences of a political transition or upheaval in China are uncertain. In contrast, democratic India has a viable solution to the problem of political transition: The party, or coalition of parties, that wins elections will run the government. Transition rules are now deeply institutionalised in India, and long-term political stability is a virtual certainty.

The long-term benefits of India’s democracy are enhanced by its rule of law and advanced capital markets. Firm-level innovation is normally facilitated by copyright laws and the rewards that capital markets bring to innovative firms. The rule of law continues to evade China, and its capital markets are heavily government-dominated. Who knows what will happen to China’s economic progress when, faced with competitive pressure from lower-cost producers, it loses its comparative advantage in labour-intensive mass production. India’s innovative firms and skilled labour, on the other hand, are already beginning to make a mark on the international scene — a trend that is likely to continue in the coming years.

The writer is professor of political science, University of Michigan

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