The Gradual Origins of Indo-Lanka Liberalization Reforms
When dealing with the question of structural reforms in South Asia, there are two interesting issues that arise, especially in the case of India and Sri Lanka. Firstly, we notice that the impact that the reforms have had in India were quite negligible in improving the rates of growth in manufacturing industry, total factor productivity rates, aggregate economic growth, employment rates in the manufacturing sector and of capital formation. Many scholars argue that in fact a much larger shift in the trend of growth rates can be observed during the 80s in India, that is, a decade before the reforms were carried out most forcefully. Conversely, in Sri Lanka, post-1977 reforms led to a burst of short-term economic growth with a jump in GDP rates within four to five years. Secondly, we see that in the case of both Sri Lanka and India, this new economic vision of reforms was as much a product of immediate and internal economic crises as it was a political project to redefine new alliances and state priorities.
Dr. Manmohan Singh, then Finance Minister of India, officially announcing the liberalization reforms in 1991. (Source)
In this essay, I argue that there are, broadly, two factors can be identified that explain the gradual structural transformation of these economies: (i) firstly, the growing dissatisfaction with the state-led planning economy, which which has arisen not only because of the states’ underperformance over the decades, but also because of a general ideological shift in understanding the role and the nature of the state; (ii) secondly, the gradual culmination of internal crises, coincidentally with various exogenous shocks or externally dependent or determining conditionalities. It is also worth noting here that, additionally and perhaps more interestingly — and this is to some extent a partial product of the two factors mentioned above — a peculiar link started to be drawn between socio-ethnic conflicts and the advancement of a liberalized economy, which became an essential part of the discourse of nationalism and sovereignty in general. In other words, the third factor underscores the attempts of these states to produce ‘economistic’ discourses in order to either make sense of or justify concomitant incidences of ethnic violence seen at the time.
Given this, there were generally two camps of thought which actively debated these issues. One, largely critical of the reforms, emphasized that the supposed failures of state-led development were not as acute as neoliberal writers were claiming, and that therefore, it was important to trace the political economy changes, i.e.; the role of bureaucratic-businessmen alliances, or the shifting governmental priorities pushed forth by, and in favour of, elite interests in order to understand the emergence of reforms. Then there were those who actively advocated reforms, pointing out to the stifling measures of state-led planning economy, which was unable to unleash the entrepreneurial spirits of the nation, or improve the overall economic efficiency, and therefore could not integrate into the global market by attracting foreign capital and increasing incentives for domestic private investment. There are, needless to say, considerable variations within each of these camps which I will try to present as well.
The underlying argument here is that a failure of the socialist developmental schemes led to a gradual but partial reversal in the states’ responses to the constraints present at the time of reforms which motivated them to liberalize. Here, I use the word ‘partial’ in a double sense: in lieu of Corbridge (2000), as being partial or favourable to elite interests, and secondly, as ‘incomplete’, in the sense that there was never a complete or absolute withdrawal of the state from the economic apparatus.
Two Models of Divergence
There is an interesting divergence in the development models of India and Sri Lanka before they took on the reforms, which evinces that diversity in approaches to state intervention exists even within development states. While India predominantly focused on heavy industrialization and capital formation as a way to alleviate poverty, by contrast Sri Lanka prioritized public spending on social welfare mechanisms and various subsidizing policies. Over the long-run, while failure to (i) mobilize domestic resources, (ii) direct and sustain savings into productive investment, (iii) to create rural demand and increase agrarian productivity, and (iv) persistent levels of poverty, unemployment and under capacity utilization etc. led to an economic slump in India in the 70s, in the case of Sri Lanka, we see that an overdependence on plantation-led exports revenue could not sustain the pervasive expansion of the public sector in regulation, production and welfare which eventually led to a deteriorating exchange position. (Herring, 1987)
In a sense, these long-term experiences with state-led development that either underperformed (as was the case in 70s India) or pushed the economy to the brink (Sri Lanka in mid-70s) could be seen as feasible economic explanations that led the states’ gradual embrace to a more market-led liberalization economy. In India, a visible shift toward furtherliberalization was already discernible in the 80s before it achieved a state of ‘reforms proper’ in the early 90s. Gandhi’s regime, which returned to power in the 1980 elections banking on the socialist rhetoric of ‘garibi hatao’, could already be seen to be making policies in favour of the indigenous businessmen and industrialists. Also, these tendencies were relatively heightened in the succeeding Rajiv Gandhi regime. A spate of industry deregularization policies were introduced along with the lifting of trade restrictions. In the early 80s, ‘thirty-two groups of industries were delicensed without any investment limit, and this was followed by removal of licensing requirements for all industries except for those on a small negative list, subject to investment and location limitations.’ (Ghosh, 1998) Similarly, in 1985, the coming of Open General License increased the list of exportable items and exporters were now able to access imported inputs at world prices. However, it should be noted that these changes were occurring alongside an increased cutting of subsidies in the public distribution system and dissolution of the Food for Work program in 1982. (Kohli, 2006) Thus, we observe here not only the commencing of these explicit liberalization- friendly policies, but an active emergence of a renewed economic propensity favouring newer priorities. As Kohli (2006) notes, the state was now increasingly seeing itself as a mediator in coalition with big businessmen to achieve economic growth as opposed to the earlier idea of planning economy. Thus, these lucid remarks by Ghosh captures the changing dynamics of the 80s economy:
While the economic expansion that occurred was dominated by the straightforward Keynesian stimulus of large government deficits, the role of planned investments in this process was very limited. Indeed, it was government expenditure that led to economic expansion which was finally reflected in an expenditure-led import-dependent middle class consumption boom. The effective irrelevance of planning meant that growth patterns were determined much more by market processes than by state direction. (Ghosh, 1998, pp. 321)
However, there are, in my view, some certain qualifications that have to be made here. Although, state direction did decrease, as Ghosh points out, this is not to say that India, even in the early 90s, was able to, or willing to, totally ‘withdraw from the economy’, whatever that may entail. Instead, we see that, as in the case of Sri Lanka, undertaking an economic logic of liberalization essentially means a shifting of governmental priorities and a fundamental reshaping of the nature of the state, rather than, what Herring calls, ‘wholesale privatization campaign’. (Herring, 1987)
The Partiality of Reforms
While in India the gradual tilting was discernible through various policies employed in the 80s, in Sri Lanka this shift was most pronounced in the 1971 austerity budget. But, as in the case of India, the role of the state was not completely minimized but only changed. Now, the states would play a lesser role in regulation, commerce, and production. These were discernible by an increased change in composition of overall investment with private investment crossing the levels of public investment in both states and the many deregulation procedures undertaken. However, the state had still to play an active role in developing public infrastructure, which was thought to create the initial conditions necessary to attract and sustain private investment. One subtle irony here was that while the reformist philosophy and the pro-business economy, in practice, emphasized banking on already established private actors, the theoretical rhetoric was that the capital would actually flow into capital-scarce areas and improve labour-intensive growth, thus fuelling employment. But the problem with this was twofold. Firstly, these expectations did not actually materialize as can be construed by the largely unchanging industrial growth rates and employment rates. Secondly, it paved the way for eliminating the existing structures of welfare provisioning mechanisms. Thus, instead of strengthening these measures, which had been instrumental in sustaining formidable rates of human development in these countries, governments took an anti-labour and anti-poor turn.
It should be noted here that these changeshave taken place within an overall context of partiality. Thus, for example, the passing of Essential Public Service Act in 1979 in Sri Lanka gave the state the powers to outlaw trade union activities across the states. Likewise, the Tamil rural poor had to face unfavourable conditions as, for instance, when the imports of agricultural commodities such as grapes, chilis and onions were liberalized in Jaffna, while the paddy and potato crops, which were mostly grown by the Sinhalese farmers, were protected. Even the public investment programs, which were largely funded by external monetary agencies and banks such as the International Monetary Fund (IMF) and the World Bank, as well as through foreign aid, have led to discriminatory projects. The Mahaweli Development Project was, for instance, seen as a matter of nationalist pride, while the Tamils were protesting against it because the project was deemed to encroach lands that traditionally belonged to them. (Dunham and Jayasuriya, 2001) Similarly, the insistence of the pro-reform Jayawardane government in 1977 on reducing food subsidies was also not a product of economic rationalizing. There was no established evidence or justification to suggest that the closed economy’s trade policies or stunted growth rates was a direct result of public expenditure on food subsidies. (Herring, 1987) In fact, as Dunham and Jayasuriya (2001) pointed out, the annual subsidies on Air Lanka was exceeding domestic expenditure on public transport and sometimes also on food subsidies. Here we can note that the reforms were driven not only by economic considerations, but also by broader socio-ethnic and ideological leanings.
Sri Lanka 1977 riots, the year of liberalization reforms. Source
Just as in Sri Lanka, we can observe a similar bias in Indian reforms. However, it should be noted here that these reforms were not singularly beneficial to the elite classes and favoured majoritarian ethnicities. It is true that there was a short-term growth that was made possible following the 1977 reforms in Sri Lanka and, furthermore, the government was able to deal effectively with the fiscal deficit crisis after the reforms. However, the question of the sustainability and bias of these reforms has to be acknowledged. Thus, the continued failure of the Indian state to invest in education and health infrastructure contributes to the violent inequalities in enabling access to accruing social capital for the lower classes and depressed castes. Additionally, the determining importance of possessing certain initial conditions that favour economic growth (such as availability of infrastructure, presence of formidable human capital, durable climate for investment etc.) stands out in the way post-reform growth pans out. Atul Kohli (2006) discusses this very issue while analysing divergent growth trends in Indian states. Likewise, I believe that it can be assumed that this is true for national economies as well. A further proof of this could be a greater success that East Asian countries have been able to achieve, unlike, for example, India. The fact that South Korea and Taiwan in particular had well-established infrastructure and large state power played a role in ensuring high growth rates through open, export-oriented economies. In contrast, in India, fragmented power structures and differing demands of varied interest-groups have led to slower efforts to rapidly integrate into the global economy. Thus, we can see that the presence of favourable ‘initial conditions’ and a pro-business state are equally important in determining the implementation of these policies.
Thus, one of the cruel ironies was that these programmes of economic stabilization could not necessarily lead to political stabilization, moreover, they led to just the opposite result - increased political instability.
References Cited:
Dunham, David and Jayasuriya, Sirisa. (2001) ‘Liberalisation and Political Decay: Sri Lanka’s Journey from a Welfare State to a Brutalised Economy’. Netherlands: Institute of Social Studies.
Ghosh, Jayati. (1998) ‘Liberalization Debates’ in Terrence J. Byers (ed.) The Indian Economy: Major Debates Since Independence , Delhi: Oxford University Press. pp. 295-335.
Kohli, Atul. (2006) ‘Politics of Economic Growth in India, 1980-2005: Part 1: The 1980s’ , Economic and Political Weekly, Vol. 41, No. 13. pp. 1251-1259
Kohli, Atul. (2006) ‘Politics of Economic Growth in India, 1980-2005: Part 1: The 1990s and Beyond’ , Economic and Political Weekly, Vol. 41, No. 14. pp. 1361-1370
Corbridge, Stuart and Harriss, John. (2000) Reinventing India: Liberalization, Hindu Nationalism and Popular Democracy, Cambridge: Polity Press
Herring, Ronald. (1987) ‘Economic Liberalisation Policies in Sri Lanka: International Pressures, Constraints and Supports’, Economic and Political Weekly, Vol. 22, No. 8, pp. 325-333
