eBusiness Weekly
Alfred M. Mthimkhulu
In his memoirs, “A Promised Land”, former US President Barack Obama describes Dr Manmohan Singh, the former Prime Minister of India, as “a gentle, soft-spoken economist”.
In their engagements, he found him “to be wise, thoughtful, and scrupulously honest”. He writes that Prime Minister Singh “engineered the modernisation of his nation’s economy … managing to lift millions of people out of poverty.”
A glowing review as this is likely to make any professional to whom it is directed uncomfortable moreso if the professional is a soft-spoken economist as him.
Dubbed “the accidental Prime Minister”, he wears that title without a trace of hurt. In fact, he amplifies the title with humorous sincerity: “people say I was an accidental prime minister (but) I was also accidental finance minister”. He was minister of finance in Prime Minister Rao’s government from 1991 to 1996. He was the accidental prime minister from 2004 to 2014.
It is rather awkward to attribute India’s economic success to Dr Singh’s premiership. This is not just because “it takes a village” but that even Prime Minister Rao, who is often credited with setting-off India’s ascent, arguably rolled-out policy ideas that had circulated in the country for decades.
India gained independence in 1947. Import substitution, which had been the key industrial policy for the colony since the 1920s, continued as such after independence.
In the five years to 1974, India was at her autarkic peak. Meanwhile, empirical evidence on the failure of import substitution to galvanise industrialisation in the global south was mounting and some countries were abandoning it.
In that heightened state of autarky, government undertook studies exploring how the economy could be rejuvenated.
Recommendations were: liberalise the economy and improve international trade ie, export orientation. Nothing much came of it.
When Indira Gandhi returned to power (1980 to 1983) having lost in 1977, her attempt at economic reforms did not dent established policy. When her son Rajiv Gandhi took over (1984 to 1989) after her assassination, opposition to reforms didn’t wane.
Then the Berlin Wall came down in 1989.
The fall presented India with what Daren Acemoglu and James Robinson in “Why Nations Fail” call a critical juncture: an unplanned event which, depending on how a society acts on it, substantially changes the society’s futures from previously likely trajectories.
In 1991, Prime Minister Rao took charge of government and Dr Singh became the accidental finance minister in a minority government with odds staked against it.
Yet, economists who had been brushed aside for years found their voice. Prime Minister Rao himself was one of them. His strategy was to improve productivity, attract capital and ramp-up exports.
Interestingly back in 1961, the accidental finance minister had titled his PhD thesis “India’s export performance, 1951–1960, export prospects and policy implications”. Now was his moment.
The new government faced many challenges from word go. The economy had been struggling for decades. In 1991, inflation was in mid-teens.
Public debt was US$72 billion from US$18 billion in 1980. Since exports had never really been competitive, the trade account was a sorry sight exerting pressure on the currency hence Moody’s downgrade.
That was not all. In 1990, Iraq had invaded Kuwait and this affected migrant workers in the Gulf hence remittances.
What did government do to address all this? Just like Zimbabwe in the 1990s, India opened-up the stock exchange to foreign investors.
Tariffs were slashed from 72,6 to 29 percent within a decade. The currency was devalued and convertibility allowed on the capital account.
As in Zimbabwe, the telecoms sector (among others) was opened up. But unlike Zimbabwe, reforms in India were not a World Bank programme. They were home-grown plans informed by own analyses and driven mainly by own resources.
The World Bank just happened to like what it was seeing and so did others.
Many local industrialists opposed the reforms. The “Bombay Club” for instance argued that entry of multinationals was costing jobs. Numerous chambers of commerce protested the bilateral, regional and multilaterals trade arrangements government was pursuing.
For sure, India was giving away too much in some agreements eg, trade deals with Sri Lanka. But it was all for the long haul and ultimately the deals boosted exports and dwarfed the initial sacrifices.
After initial hiccups in the Look East Policy mainly because of historic tensions with Pakistan and the Asian Financial Crisis, India managed to insert herself in the region’s economic arrangements especially after September 11, 2001 attacks in the US and when the accidental Finance Minister accidentally became Prime Minister in 2004.
Today, the country is a major player in the global economy.
In his memoirs, Timothy Geithner Secretary of Treasury in President Obama’s first administration writes: “We gave the major emerging market economies such as China and India a seat at the table so that they would be part of designing new rules and therefore more willing to impose them on their own emerging financial markets”.
President Obama in his memoirs tells us how he, unannounced, walked into a closed meeting of leaders of Brazil, India, China and South Africa at the Copenhagen Summit (2009) to ensure the four defiant emerging countries accepted US proposal on a framework to mitigate climate change.
The defiant countries’ fundamental argument was that the West is responsible for global warming, it must fix the problem, it must not overburden developing countries struggling to improve their delicate state.
Clearly, the post-WW2 order and tensions are still in place yet partnership such BRICS are intriguing especially the fact that countries as autarkic as India was five decades ago are now key players in the global economy.
Import substitution was India’s main industrial policy for decades.
The policy appeals to locals to minimise consumption of foreign goods. Governments buttress the appeal by rousing nationalistic sensations on one hand and on the other, limiting imports through steep tariffs or outright bans.
On the contrary, a mantra such as “Made in India” is an appeal to anyone anywhere in the world to consider setting up a factory in India.
This plea when honest exerts pressure on government to ensure the country is a competitive investment destination. In December 2020, UNCTAD awarded Best Investment Promotion Agency to India’s confirming not just that the investment climate in that country is competitive but that its policies are implemented scrupulously.
The path to economic prosperity was clear way back in the 1960s: export-oriented industrialisation.
Through it, efficiency in making things and in providing services becomes the basis for patriotism.
Countries like South Korea saw the path early and swiftly abandoned import substitution.
Others like India took a bit longer to get their act together. Africa has been meandering to a promised land for a long time but maybe for not much longer.
The African Continental Free Trade Area which kicked-off this month is that home-grown plan bound to change the continent’s futures from previously likely trajectories. It redefines local and that is good.
Email: [email protected]/Twitter: @mthimz
