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Popularly, economic reforms denote the process in which a government prescribes declining role for the state and expanding role for the private sector in an economy. So let’s unravel the reform process based on the author’s classroom interactions with students. It is safer to see economic reform as a policy shift in an economy from one to another or ‘alternative development strategies’. Economists attribute the differences in the performance of economies to the differences in the ‘strategies’ they follow. The different strategies of development evolved through a long period of trial and error by different countries under the influence of different sets of ideologies. But the process has been like an educational trip. To understand the term ‘economic reform’ and more so to clarify the confusion concerning it in the Indian context, we must see the different ‘alternative development strategies’ which evolved through time. A brief description is given below:
Till the rise of the Soviet Union, the prevalent development strategy in the Euro-American countries was the capitalist system of economy, which promoted the principles of laissez-faire and dominant role for private capital in the economy. Once the Soviet Union went for the planning model (Later the East European countries and finally China in 1949) most of the developing countries after their independence were influenced by socialism and the governments there took a central role in planned development. As these economies were dominated by foreign colonisers, they worried that opening the economy to foreign investment would lead to a new form of domination, the domination by large multinationals. That is why most of these countries went for ‘protectionist’ economic policy with import substitution as one method, side by side. But by the 1970s, the world was
having convincing proofs that the socialist as well as the planned economies1 were inclined to follow their kind of development strategies—either because they had very slow and lower growth rates or were stagnating. The experiences of these economies gave rise to a new ideology which became popular as the ‘Washington Consensus’.
By the early 1980s, a new development strategy emerged. Though it was not new, it was like the old idea getting vindicated after failure of a comparatively newer idea. After the world recognised the limits of a state- dominated economy, arguments in favour of the market, i.e., the private sector, was promoted emphatically. Many countries shifted their economic policy just to the other extreme arguing for a minimal role of the government in the economy. Governments of the socialist or the planned economies were urged/suggested to privatise and liberalise, to sell off state-owned companies and eliminate government interventions in the economy. These governments were also suggested to take measures which could boost the aggregate demand in the economy (i.e., macroeconomic stability measures). The broad outlines of such a development strategy were regarded as being inspired by the Washington Consensus.2
This consensus is broadly termed as the popular meaning of the ‘economic reform’ followed by almost all the socialist, communist and planned developing economies during the 1980s in one form or the other3—the term economic reform got currency around the world during this period. The term was usually seen as a corollary for promoting ‘naked capitalism’, openness in the economy and an open attitude towards foreign investments, etc. The governments of the developing economies were criticised by the political parties in the opposition and the critiques for being soft to the dictates of the IMF and the WB, and becoming a party to promote ‘neo-imperialism’.
But these policies, in many cases proved little better than the previous policies in promoting economic growth over an extended period of time. But somehow a mood in favour of the market economy had gained ground. The United Kindom under Mrs. Thatcher had gone for politically most vocal
privatisation moves without any political debates (the only such example of privatisation moves among the democracies, till date).4 It should be noted here that after the Great Depression of 1929 a ‘strong state intervention’ was suggested (by J. M. Keynes) and such a policy did really help the Euro- American countries to mitigate the crisis. The favour for the state intervention in the economy was being reversed by the Washington Consensus. But soon this consensus was also to be replaced by another development strategy. More detailed discusstion on the Washington Concensus is given in Chapter 1.
By the mid-1990s, it had become increasingly clear that neither of the extremes—the Washington Consensus or the state-led planned economy— were the ultimate strategies of development.5 The success achieved by the East Asian economies even if we take into account their setback due to the financial crisis of 1997–98, stands out in marked contrast to the experiences of other economies of the time who were following the Washington Concensus.6 The East Asian economies have not only been able to propel higher growth rates, but they have been greatly successful in reducing poverty, promoting education and healthcare, etc.
The East Asian economies had promoted a development strategy, which had its most distinctive feature as the balance they were able to strike between the role of the state/government and the market/the private sector in their economies. This was really a new kind of mixed economy, which was never permanently inclined towards either state intervention or the free market, but always a balanced mix of the state and the market according to the requirement of the socio-economic situation of the economy. The East Asian countries had pursued market-oriented policies that encouraged development of the private sector—augmenting and governing the market, not replacing it.7
Technically speaking, shifting of economic policy of a country from one to the other above-given three ‘alternative development strategies’ is economic reform. But in the history of world economy, it was inclination of the
economies towards the market economy, which have been referred as economic reforms. In the Indian case, economic reform has always been used in this sense. Here, one should note that when India started the programme of economic reforms in the early 1990s, the world view was in favour of privatisation, liberalisation, de-nationalisation, etc., as the main plank of economic reforms. But by the mid-1990s, not only the world view has polarised in favour of a mixed economy’, but one another change was about to sweep the world economies, i.e., the favour for globalisation sponsored by the World Trade Organisation (WTO). Now, the developing economies (mixed economies with planning as their development strategy) as well as the transition economies (Russia and the whole Eastern Europe, and China)— who were already promoting the market-oriented reform process were faced with a dilemma. To prosper and compete in the globalising environment while they needed immediate liberation from their state-dominated mode of economies at one hand, they also needed to strike a balance between the state and the market on the other. Each one of them tried to strike the balance in their own way with mixed results. In India, the governments have not been able to convince the masses that the economy needs reforms and the attempted reforms will benefit all. In every election since the reforms of 1991, the voters have not supported a pro-reform government. Though the process of economic reforms started in India with the slogan ‘reforms with human face’—the slogan has utterly failed to garner the empathy of the masses. We may hope that in coming times the masses will start connecting with the reforms and will able to get the message clear, i.e., reforms are to benefit all.