The emerging reform agenda for economic development
Monday, 1 October 2007
Muhammad Mahmood
It is important that we understand the context within which the stimulus has come to undertake economic reform measures to stimulate economic growth and development in developing countries. Since the very late 1970s and the early 1980 we have witnessed significant shift in economic policy orientation in all most all the industrialised countries towards what can be described as neo-liberalism. Such a neo-liberal view of the world has been embraced by the whole spectrum of political persuasions from the left to the right. Its basic tenets include economic openness, privatisation of public business enterprises, and many instances even public services (both public and merit goods), and deregulation. The focus of this policy reorientation has been directed towards the introduction of market forces to improve the performance of the economy.
The ability of a competitive market to raise the level of efficiency has been well recognised in the economic literature but for some the promotion of market forces was also canvassed on the ground of "choice". All in all market is viewed both as an instrument to increase efficiency as well as a mechanism for wider choices that can be made available to both consumers and producers. From the neo-liberal point of view a set of economic assumptions and policy prescriptions emerged to deal with economic stagnation and high unemployment of the1970s in industrialised countries. Eventually multilateral institutions such as the International Monetary Fund (IMF), and the World Bank have also endorsed and embraced those assumptions and policy prescriptions.
In responding to the early 1980s debt crisis experienced by many developing countries, the IMF required these countries to balance the budget, privatise SOEs, open up the economy to international competitive forces which necessitated removal of a variety of regulations including regulations restricting trade and investment flows. This appeared to have resulted in achieving better results than any other alternative policy initiatives thus making it the basis for economic policy reforms in developing countries.
In this context trade liberalisation has become central to the promotion of free and open market to engender economic growth for developing countries. The superior economic performance of NICs of East Asia since the 1970s has also provided further support to neo-liberal argument that countries that were heavily dirigist and protectionist performed very poorly in terms all macroeconomic performance criteria and also failed to maintain macroeconomic stability. Furthermore, the pervasive state failure in stemming corruption in government which could be directly attributed to a very high level of state intervention in the economy in those economies. A market oriented open economy will significantly reduce or eliminate the ability of state functionaries to undertake rent seeking activity and hence will help reduce cost to businesses making them more competitive. Economists generally suggest that poor governance entails negative externalities for private transactions, consequently raises transaction costs with negative effect on growth and development. Indeed multilateral bodies have now-a-days started to pay a much greater attention to the issue of governance in developing countries to deal with issues of underdevelopment and poverty. The liberalisation of trade regime in particular and the economic liberalisation process in general do not imply weakening of the role of government, but rather a redefinition of its functions, especially its economic functions. In an open competitive economy the role of government is to maintain macroeconomic stability and beyond that government has a very reduced economic role.
As a result of a series of financial crises experienced by many developing countries in the 1990s and the early 2000s, the consensus view held by the IMF and the World Bank has come under attack, but even the critics as an alternative to the neo-liberal view do not suggest to go back to the 1950s and 1960s policy prescriptions. These critics also agree to the basic tenets of neo-liberalism such as economic liberalisation and greater emphasis on the market mechanism, but argues that state be allowed to perform a complementary role to strengthen the functioning of the market by streamlining the regulation of the financial system and above all to ensure the provision of infrastructure and the development of skills and technology acquisition. The consensus paradigm that now has emerged recognises that markets and states are complementing each other, rather than substituting. Within such a paradigm well functioning states are recognised as the most important institution for the effective functioning of markets. However a well functioning state entails instituting market-like mechanisms to forestall government failure without which market failure can not be corrected.
In light of the experience of the last two decades it has clearly been apparent that in developing countries like Bangladesh, economic liberalisation policies can not alone foster the economic development. These policies must be supplemented by institution building which will enable the state with the necessary ingredients of market oriented reforms capable of fostering economic growth and development. It is true effective institution building can be time consuming, but unfortunately there is no way out of this for any developing country including Bangladesh. In a country like India and the successful East Asia economies, it took many decades for necessary institutions to take shape and function properly. This was possible because there has been a strong political commitment on the part of the elite in those countries not only to develop and embed appropriate institutions to foster economic growth and development but also to embrace the essence and culture inherent in those institutions.
The current political crisis in Bangladesh has clearly demonstrated how far the country is behind in developing let alone embedding appropriate institutions at a functional level relative to its immediate neighbour and other successful East Asian economies. Building effective institutions and embedding the essence and culture inherent in those institutions are the integral part of creating an enabling environment for undertaking market oriented reforms for stimulating economic growth and development. But this requires a strong political commitment on the part of the elite in the country regardless of their divergent political affiliations.
(Dr Muhammad Mahmood teaches economics at Victoria University, Melbourne, Australia.)
It is important that we understand the context within which the stimulus has come to undertake economic reform measures to stimulate economic growth and development in developing countries. Since the very late 1970s and the early 1980 we have witnessed significant shift in economic policy orientation in all most all the industrialised countries towards what can be described as neo-liberalism. Such a neo-liberal view of the world has been embraced by the whole spectrum of political persuasions from the left to the right. Its basic tenets include economic openness, privatisation of public business enterprises, and many instances even public services (both public and merit goods), and deregulation. The focus of this policy reorientation has been directed towards the introduction of market forces to improve the performance of the economy.
The ability of a competitive market to raise the level of efficiency has been well recognised in the economic literature but for some the promotion of market forces was also canvassed on the ground of "choice". All in all market is viewed both as an instrument to increase efficiency as well as a mechanism for wider choices that can be made available to both consumers and producers. From the neo-liberal point of view a set of economic assumptions and policy prescriptions emerged to deal with economic stagnation and high unemployment of the1970s in industrialised countries. Eventually multilateral institutions such as the International Monetary Fund (IMF), and the World Bank have also endorsed and embraced those assumptions and policy prescriptions.
In responding to the early 1980s debt crisis experienced by many developing countries, the IMF required these countries to balance the budget, privatise SOEs, open up the economy to international competitive forces which necessitated removal of a variety of regulations including regulations restricting trade and investment flows. This appeared to have resulted in achieving better results than any other alternative policy initiatives thus making it the basis for economic policy reforms in developing countries.
In this context trade liberalisation has become central to the promotion of free and open market to engender economic growth for developing countries. The superior economic performance of NICs of East Asia since the 1970s has also provided further support to neo-liberal argument that countries that were heavily dirigist and protectionist performed very poorly in terms all macroeconomic performance criteria and also failed to maintain macroeconomic stability. Furthermore, the pervasive state failure in stemming corruption in government which could be directly attributed to a very high level of state intervention in the economy in those economies. A market oriented open economy will significantly reduce or eliminate the ability of state functionaries to undertake rent seeking activity and hence will help reduce cost to businesses making them more competitive. Economists generally suggest that poor governance entails negative externalities for private transactions, consequently raises transaction costs with negative effect on growth and development. Indeed multilateral bodies have now-a-days started to pay a much greater attention to the issue of governance in developing countries to deal with issues of underdevelopment and poverty. The liberalisation of trade regime in particular and the economic liberalisation process in general do not imply weakening of the role of government, but rather a redefinition of its functions, especially its economic functions. In an open competitive economy the role of government is to maintain macroeconomic stability and beyond that government has a very reduced economic role.
As a result of a series of financial crises experienced by many developing countries in the 1990s and the early 2000s, the consensus view held by the IMF and the World Bank has come under attack, but even the critics as an alternative to the neo-liberal view do not suggest to go back to the 1950s and 1960s policy prescriptions. These critics also agree to the basic tenets of neo-liberalism such as economic liberalisation and greater emphasis on the market mechanism, but argues that state be allowed to perform a complementary role to strengthen the functioning of the market by streamlining the regulation of the financial system and above all to ensure the provision of infrastructure and the development of skills and technology acquisition. The consensus paradigm that now has emerged recognises that markets and states are complementing each other, rather than substituting. Within such a paradigm well functioning states are recognised as the most important institution for the effective functioning of markets. However a well functioning state entails instituting market-like mechanisms to forestall government failure without which market failure can not be corrected.
In light of the experience of the last two decades it has clearly been apparent that in developing countries like Bangladesh, economic liberalisation policies can not alone foster the economic development. These policies must be supplemented by institution building which will enable the state with the necessary ingredients of market oriented reforms capable of fostering economic growth and development. It is true effective institution building can be time consuming, but unfortunately there is no way out of this for any developing country including Bangladesh. In a country like India and the successful East Asia economies, it took many decades for necessary institutions to take shape and function properly. This was possible because there has been a strong political commitment on the part of the elite in those countries not only to develop and embed appropriate institutions to foster economic growth and development but also to embrace the essence and culture inherent in those institutions.
The current political crisis in Bangladesh has clearly demonstrated how far the country is behind in developing let alone embedding appropriate institutions at a functional level relative to its immediate neighbour and other successful East Asian economies. Building effective institutions and embedding the essence and culture inherent in those institutions are the integral part of creating an enabling environment for undertaking market oriented reforms for stimulating economic growth and development. But this requires a strong political commitment on the part of the elite in the country regardless of their divergent political affiliations.
(Dr Muhammad Mahmood teaches economics at Victoria University, Melbourne, Australia.)