HIGHLY EFFECTIVE COUNTRIES
LESSONS FOR INDIA
First published in May 2008 by Indicus Analytics Pvt. Ltd., International Policy Network and The Law Review Project.
The Indian version of Habits of Highly Effective Countries is based on the original version of this publication, which was conducted and conceptualised in South Africa by the Law Review Project
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About the Authors
Leon Louw is Executive Director of the Law Review Project. He is the author of many published articles, and co-author of two books. He is an internationally respected policy analyst who has delivered papers and addressed audiences, including some of the world’s most distinguished organizations, in over thirty countries. He is a Nobel Peace Prize Nominee, and has received various international awards. Bibek Debroy is currently faculty at Centre for Policy Research, International Management Institute, New Delhi and Senior Visiting Research Fellow, Institute for South Asian Studies, Singapore. He has worked in academia, research institutes, industry and the government. He has researched and published widely on a range of issues, he is the author of several books, papers and popular articles. He is a member of the Mont Pelerin Society. Laveesh Bhandari heads Indicus Analytics, an economics research firm in New Delhi that conducts studies on socio-economic development, finance, policy and governance issues. He has conducted a wide range of studies on Indian economy and policy and economic geography and has published extensively.
About the Sponsors
ComMark Trust was established in 2003 with funding from the UK’s Department for International Development (DFID). It is a regional development initiative that aims to reduce poverty through improving the legal, regulatory, policy, institutional and business service environments in high-growth, pro-poor sectors. The Friedrich Naumann Foundation is an independent, nonprofit, nongovernmental organization that is committed to promoting liberal policy and politics. Originating in Germany, the Foundation prides itself in promoting freedom as the ultimate precondition of a society where people can live freely and in peace. It aims to establish and maintain such a society, by application of liberalism’s core principles such as human rights, rule of law, liberal democracy, and a free market economy.
About this Publication
Habits of Highly Effective Countries is an empirical analysis of how India compares with policies associated with success and failure internationally. It illustrates inter alia that the integrity of the legal system is one of the most important factors – perhaps the most important – associated with success. This work has been done under the Law Review Project (LRP) which is a not-for-profit NGO established in 1984 to promote the Principles of Good Law with special emphasis on economic development and the reform of laws that impact negatively on small business. It provides advice and consultancy services to governments, businesses and individuals with a view to improving the quality of laws and administrative practices. The LRP promotes a climate of informed opinion regarding the integrity of the legal system, especially the philosophical and practical significance of constitutional provisions and values, such as the rule of law, due process, public participation in policy-formulation, the separation of powers and natural justice.
Characteristics of Winners and Losers
Reinventing the wheel
Why not reinvent the wheel? Scientists at the CSIR in Pretoria entertained themselves by doing so, and their musings turned into a multi-million dollar impact roller, a square wheel that became the first breakthrough in decades for compacting soil. We are to some extent reinventing the research wheel. With the real world of policy-makers in mind and at their request we needed to adopt new approaches. As a result of their request we have examined old research in new ways with a view to making it more practical and accessible for policy makers.
Experts know that the course of events is the consequence of an enormously complex concatenation of factors, perhaps too complex to analyze by way of pure empiricism. It is encouraging, however, that work done to date and for the purposes of this project enables the isolation of a few crucial factors which, when combined with the complex world beyond them, appear to be both necessary and sufficient conditions for prosperity to be achieved in any country.Whilst it is now possible for a government to know that it can achieve prosperity for its people by implementing a short list of decisive policies, common sense must never be forgotten. Obviously, a given country can have all these policies in place without prospering if there are intervening factors that nullify their potential. If a country’s population is devastated by disease, civil or international war, natural catastrophe or dramatic shifts in international markets, the policy ‘short list’ may not rescue them.
One of the extreme examples is Nauru. Nauru achieved one of the world’s highest per capita incomes by exploiting its enormous guano deposits. When these ran out, the country’s principal source of prosperity disappeared and it collapsed into destitution. Such a dramatic shock could have been ameliorated, though not avoided, had the government implemented appropriate policies.
Conversely, Botswana is reputed to have the world’s most extreme AIDS pandemic. A shock of such extreme proportions would normally be sufficient for a country’s economy to collapse and for it to descend into destitution. However, Botswana’s government has not only achieved one of the highest prosperity scores of any African country according to almost every index, but has improved its score systematically and purposefully. Notwithstanding enduring the world’s most severe health catastrophe, Botswana has maintained the world’s highest economic growth rate for ten years. Perhaps most decisively, it maintained a particularly high score on the short list established, after the fact, in this research.Nearby Mozambique experienced unimaginable devastation when much of the country was flooded so severely that it became unusable and the flooding was so substantial that significant volumes of water had not drained years later.
At the time Mozambique was experiencing one of the world’s highest growth rates. Not surprisingly, there was a general expectation that the country’s economy would not be able to withstand the impact, especially since it is one of the world’s poorest countries. In truth, its extraordinary high growth rates dropped slightly, but Mozambique has maintained one of the world’s highest growth rates.These and many other anecdotes coincide with what our research predicts, namely, that sound policies can withstand almost any shock, and produce prosperity under almost any conditions.
One of the important revelations of our research is that many loudly proclaimed policies might be of little or no value. They often appear to make things worse. There is virtually no empirical evidence in favour of aid, subsidies, debt relief, technical assistance or protection of third world indigenous enterprise. Such factors are less characteristic of high growth than of low growth countries.There are frequent anecdotal references to such abnormal phenomena as the Marshall Plan and the New Deal. It turns out that not only are they exceptions to the rule, but that there is more mythology than reality in the popular conception about the consequences of implementing these policies, even among scholars who should know better. The New Deal, for instance, was not followed by high growth. America’s recovery from the Great Depression came much later, and the New Deal, if anything, appears to have prolonged the depression.
Likewise the Marshall Plan: it entailed much less aid than widely assumed, and Germany’s wirtschaftswunder (‘economic miracle’) followed in the wake of Ludwig Erhard’s radical liberalization, after the Marshall Plan failed to generate prosperity. Furthermore, the UK received much more aid than Germany without achieving high growth. If anything, aid enabled it to perpetuate inappropriate policies.Much can, and probably should be said about such supposed panaceas for poverty. What concerns us in this project is not to draw attention to work that has already been done, and not just to identify positive correlations, but also Popperian falsification of erroneous hypotheses. Most theories of what works are testable.
We found when we checked to see if widely held beliefs are true in the real world that many are not.One of the most celebrated supposed explanations for South Korea’s high growth rates (Alice Amsden – Asia’s Next Giant: South Korea and Late Industrialization (Oxford, 1989)) is that protectionism and fascist-type central planning caused them. Our research refutes such hypotheses by showing that nearly all other countries with comparable policies stagnated or declined. This suggests that the causality of Korea’s success is simply that it had the right factors in place, especially that the government employed a smaller proportion of the workforce and spent a smaller proportion of the GDP than any other industrialized country.
Are ‘The Fundamentals’ in place – are they The Fundamentals?
Critics and critiques of India’s reforms have said on many occasions that while an increase in economic freedom (more liberalization) may have improved growth rates, it has not resulted in sufficient poverty reduction or employment creation and has led to disparities and divides, across regions, caste and gender. This is contrary to what was promised. This research suggests that the answer to this poser is that while some of the reforms are ‘in place’, those that are not in place have denied India the prosperity it hoped for. Accordingly, the government should not abandon ‘fundamental’ policies it adopted, particularly since 1991, in accordance with the world’s experience, as all four governments since 1991 have tended to do, but should
supplement them with the missing pieces of the puzzle. It seems extremely probable that, if it does so, the country will become the world’s next ‘economic miracle’.
Needless to say, government operates under the constraints of political realities, and some of the policies indicated by this research are politically difficult or impossible for it to implement, especially regarding labour. Even so, policy makers are most likely to make good decisions if they are aware of what lessons can be learned from the world’s experience.
The biggest differences between India’s policies, on the one hand, and those of the world’s winners and losers, on the other, do not necessarily suggest the highest priorities for reform. Differences matter most only in areas where policies are associated with high or low growth.Since, for instance, the relative size of education budgets does not correlate significantly with growth, a big difference in size between India’s education budget and that of high or low growth countries is not serious for purposes of economic policy, though it might be for other purposes. This is the context against which one should consider proposals of increasing public expenditure on education to 6% of GDP. On the other hand, a big difference between India’s rule of law index and that of winners and losers is important because of the association between the rule of law and economic growth. This analysis therefore concentrates on identifying the Indian policy characteristics that differ most from those of winners and losers, on the one hand, and high and low growth countries on the other.Because abnormally high rates of growth, or contraction, often occur for short periods of one or two years, winners and losers were regarded in this analysis as highest and lowest growth countries over extended periods of five and ten years respectively. There were no significant policy differences regardless of when the periods commenced, which increases the likelihood that policies associated with high growth in the past will be the same as those associated with it in future.
The following tables show the twenty countries that averaged the highest and lowest growth rates respectively between 2000 and 2005.It is particularly significant that the highest growth countries cover the full range of possibilities, from poor (Trinidad & Tobago) to rich (Iceland), small (Luxembourg) to big (China), formerly capitalist (Ireland) to formerly socialist (Vietnam), resource-rich (Mozambique) to resource-poor (Finland), countries that were colonized until recent decades (Tunisia) and ones that were not (Finland).
There is also a wide range of cultural, religious, ethnic, historical and geographic diversity among high growth countries. Since Africa’s colonization is popularly though mistakenly presumed to explain its poverty, it should be noted that former colonies, including African colonies, are well-represented amongst the world’s highest and lowest growth countries, and that none of the world’s major colonizers appear in either group. This reaffirms the evidence suggesting that any country is likely to prosper, regardless of its circumstances or history, if it implements policies that are associated elsewhere with prosperity.The next two tables show the world’s highest and lowest growth countries averaged over ten years (1990-2000). The characteristics of longer sustained growth or contraction are more instructive than for shorter periods for two reasons. Firstly, economic performance is more likely to be explained by enduring policy variables, and, secondly, operative variables can be identified with greater confidence and conclusions will be more robust.
Only three countries are in the top or bottom twenty, respectively, for both periods. Rising and falling growth rates over extended periods vary for diverse country-specific reasons, but do so mainly in sympathy with changes in economic policy.What India can learn from the experience of other countries is that it is likely to achieve and sustain high growth only if it resists the temptation faced by all governments to abandon a winning formula when sustained high growth is achieved.
That complacency seems to have resulted in India after the high growth witnessed since 2003. As this report shows, markets tend to respond enthusiastically to pro-market reforms, failing which they maintain modest growth indefinitely if there is certainty and stability (slow and slight change) of the kind which characterizes first world democracies. The tables show that average growth for winners during the first five years of the new millennium was higher than for the preceding decade, and the rate of contraction amongst losers was lower, both of which coincide with increased economic freedom in most countries, including India. One country, Trinidad & Tobago, shifted from one extreme to the other having elevated itself from the lowest to the highest growth rate group.