A new list of reforms for Indian economy

A Mint story pointed y’day about a Goldman Sachs paper(authors GS economists- Jim O’Neill and Tushar Poddar).

The paper says India needs to do 10 reforms to achieve a per-capita GDP of $20,000 (Rs8.58 lakh today) by 2050. Currently it is around (as per wikipedia) $4,542 at PPP and $1,089 in nominal terms. These 10 reforms could also add 2.8% pa to India’s existing growth rate.

1. Improve governance
2. Raise basic education levels
3. High end education
4. Inflation targeting
5. Introduce a credible fiscal policy.
6. Liberalize financial markets.
7. Increase trade with neighbours.
8. Increase agricultural productivity.
9. Improve infrastructure.
10. Improve environmental quality.

The list of reforms reminded me of two one-time famous list of reforms- Washington Consensus (WC) which was a 10 point reform list released in 1990 and Mckinsey’s 13 reform list for India (free subscription; you can see the list of 13 reforms here as well) in 2001. WC was a set of reforms applicable to all countries that would help countries become developed and Mckinsey was focused on India that would help India achieve 10% growth rate. 

WC has been hugely criticised by wide number of people (see the wikipedia entry for its straight-jacket approach and is also called a laundry list. WC was thrashed to pieces when countries that adopted WC failed miserably- Thailand, South Korea, Argentina etc. Mckinsey report on the other hand just lost that fanfare after few days of media coverage.

On just comparing the three lists, I see only 2 common points- fiscal policy discipline and  trade liberalization (GS report only mentions trade liberalisation with neighbors). GS has got a big point – improve governance which covers most things related to government policies. On comparing McK and GS reports, I see agriculture, trade, fiscal policy, infrastructure as common points.

I really don’t understand these reform lists. It is easy to suggest reforms but many questions still remain. For instance, How do you decide, which reform is more important? No country can do all the reforms at one go and it is difficult. In practice what happens is you choose some reforms, run them parallely. Some gain momentum, some tug along and some die. So how do you decide? If we look at McK reforms it has reforms which have not been done yet- labor reforms, property rights system and GS report has new set of reforms – education, inflation targeting etc. So, if you look at the two lists what you get is something like 15 odd reforms and you don’t know where to begin. These studies are problematic and you can make n number of reform lists. A better approach is to follow Rodrik et al study – Growth Diagnostics which identifies the constraints and works on them first. Also, these studies should understand second best institutions work equally well.

Another thing I noticed is how the list changes with time and focuses on the “In things”. In 2001, you had lots of talk on SSI reservation, property rights, labor reforms etc and McK report mentions them. These days, we hear a lot about education, financial market liberalisation, inflation targeting etc and that is what we see in the GS report.

And a final most important point, most reforms in McK report have not been done at all or are moving at a slow pace. Still India has touched growth levels of nearly 10% (9.6% in 2006-07) and has been above 9% for the past 3 financial years 🙂

PS. I remember attending a talk by one of India’s eminent economists at the time this Mck report was released. He said I had asked the team to come to my office and explain their list of reforms. The team never showed up.