Why governments make poor economic choices

Governments take a populist turn in economic policymaking for different reasons—primarily because they think it is a formula for success in elections

My most recent column interrogated the putative relationship between good economics and good politics, suggesting that we have reason to be sceptical of the oft-repeated claim that there is a causal relationship between the two. Good economics, in short, may or may not be good politics. It falls, therefore, on incumbent politicians to pursue good economic policies, if they choose to, not purely looking at short-term electoral calculus, but taking the long view.

Aye, there’s the rub. Incumbent politicians must be convinced that good economics is, indeed, embedded in an understanding of the state which sees government as the guarantor of the rule of law and property rights, provider of internal and external security, and of a small and well-circumscribed set of public goods and services, or, more broadly, as intervening in sectors characterized by chronic market failure.

Unfortunately, such a view, which one might dub a “classical liberal” or (moderate) libertarian position, is not the norm amongst India’s political class, which still harbours unreconstructed predilections towards statism and government command and control.

It is not hard to understand the genesis of such views. I have had the opportunity to speak at some of the best university campuses in India over the years, and am consistently struck by how fundamentally anti-free market the prevailing intellectual currents run and how strong remains the faith that the government knows best. And these views are prevalent not just in the humanities departments, as you would expect, but even among students of economics and business. And their professors are often worse! There are, in other words, multiple drivers of poor economic policy choices by governments, not merely political expediency.

Governments take a populist turn for different reasons—first and foremost, of course, because they think it is a formula for electoral success. Yet, the success of advocacy for populist policy interventions is not merely a matter of cynical electoral math but reflects also this statist mindset. After all, you have to believe in the primacy of liberty and of free markets, to push for it aggressively when you are in office, unless your back is to the wall and you are doing so out of necessity.

Readers of my work will know that I have dubbed this failure to make an intellectual, principled case for pro-market reforms going back to 1991, the “original sin” of reform in India. The trouble is, if the rationale for good policies is that they are done in a mode of crisis, the resolve to persist with those policies will fail to stick when the crisis has passed.

Please note that I am not here re-litigating the tiresome and already settled debate of whether economic reforms were imposed on India as part of a so-called Washington Consensus. That bogey has been debunked, and it is now, or should be, well understood that there were important indigenous intellectual drivers of reform—the work of economists such as Jagdish Bhagwati notable amongst them. In other words, there was an ideational background to the 1991 reforms, but this does not mean that the politicians who carried them out after the initial crisis receded carried conviction.

The notable exceptions in India were, of course, prime minister P.V. Narasimha Rao, the godfather of Indian economic reforms in the early 1990s, and prime minister Atal Bihari Vajpayee, the father of the far-reaching reforms of the late 1990s—yet these are the exceptions, within their own parties, and more generally.

As I and others have argued in detail elsewhere, the 10 years of Congress-led rule from 2004-14 were marked by a notable lack of conviction in pursuing the second generation of economic reforms, with, instead, a penchant for entitlement-based welfare schemes.

In part, this reflected a smug complacency driven by the high rates of gross domestic product (GDP) growth that India managed to achieve without much reform. Indeed, 2010 saw year-on-year GDP growth touch a magical 10.26%, according to World Bank data—marking India’s very brief entry into the double-digit growth club. If you have already been admitted to the club, after all, there’s very little short-term incentive to pay the entrance fee after the fact.

But this is not the whole story. Again, as I have argued elsewhere, the last Congress-led government evidently lacked intellectual conviction in favour of reforms, making it easy to push these into the future as long as growth was good. And, when growth turned down, it was too late to turn things around before the electoral defeat of 2014.

Former Congress leaders, and writers sympathetic to them, point out, with some justice, that several of the flagship schemes of the current Bharatiya Janata Party-led government are the progeny of schemes going back to the previous government. Perhaps the would-be reformers in that government might now be looking back with regret at missed opportunities, maybe even former prime minister Manmohan Singh.

We are again in a situation with acceptably high but not double-digit growth, and again without a clear sense that the government of the day feels any particular urgency in pursuing potentially unpopular reforms in its remaining time in office. We have seen this movie before. Let us hope for a different ending.