The genesis of financial reforms
Monday, 29 September 2008
Muhammad Abdul Mazid
FOREIGN capital inflows constitute part of the world's savings. Over the past three decades world savings in proportion to world income has fallen. The decline in world savings implies that not every country can maintain its level of domestic investments by increasing foreign capital inflows. The decline in foreign capital inflows to developing countries has necessitated structural adjustment in the form of an increase in export earning or a reduction in import expenditure. The national accounting identities imply that the adjustment must also raise national savings or reduce domestic investments. To maintain or increase rates of economic growth, the adjustment must be in the form of increased exports and increased national savings. Faced with changed circumstances countries now have no choice but to adjust. During 1980s governments of countries at all income levels and remarkably, of all ideological stripes have come to recognise the need for reforms to increase economic efficiency and flexibility.
At the most abstract level, adjustment programmes use changes in fiscal, monetary and sectoral policies; in regulations, and in institutions to alter relative prices and the level of spending and thereby redirect economic activities. The real exchange rate and the real interest rate are key relative issues because they both affect economic activity and saving as well as export and import and the rate of investment.
The scope of the economic reforms that needed in the developing world varies widely. Some countries need to privatise state-owned enterprises or invest in education, health, and infrastructure. Everywhere these measures are based on macro-economic stability. Experience shows that the surest path to development is to improve policies in all these respects. Reforms have to deal with tradeoffs among macro-economic, political and even social policies. For example reform of the financial sector often calls for distressed financial institutions to be restructured. In the short run, this may rise public spending and make it harder to cut to budget deficit. Adopting positive real interest rates will lower the burden of credit subsidies but increase the cost of servicing domestic debt. Lower tariffs may initially reduce government revenues, whereas shifting from quantitative restrictions to tariffs will generally raise them. The net effect may be a bigger fiscal deficit.
Low inflation, external viability, fiscal discipline, financial stability and trade liberalization constitute the key elements of a successful structural adjustment programmes. Expectations of high net, rate of return to domestic investment are also essential, which may be achieved by eliminating debt overhang and removing barriers to the efficient allocation of resources within the economy. Again export growth is a determining factor for the viability of any economy. The most effective way to establish export is to liberalize imports in general, trade liberalization requires devaluation. It is thus particular important to think of trade liberalization and exchange rate adjustment as representing a policy package. Under a managed exchange rate system, import liberalization necessitates the adoption of a realistic exchange rate policy to prevent the depletion of foreign exchange reserves.
The sequencing of the institutional restructuring at the macro level and the price liberalization are required to be decided carefully. It is quite clear that it would be counter productive to adjust and liberalize prices before economic agents have the incentives and sufficient freedom to respond. Regarding the sequencing of domestic institutional and price measures on the one hand and liberalization of foreign trade and rate of exchange on the other the flexibility of exchange rate movements and convertibility is required to be established at a relatively early state of the reform process.
However, structural adjustment has been complicated and slow. It remains specially difficult till now and all the more necessary-because many developing countries were in dire financial straits. Countries needed external resources to offset the costs of adjustment. In the 1980s both the IMF and the World Bank have helped finance economic programmes contributing to the adjustment process. Sixty-eight countries received long-term structural adjustment credits or loans from the World Bank between 1980 and 1992. Four Countries in the Indian subcontinent (Sri Lanka January 1979; Pakistan, November 1980; Bangladesh, December, 1980; India, November 1981) negotiated extended facilities adjustment programmes from the IMF. The adjustment strategies were designed to improve resources allocation, promote domestic investment and savings and strengthen external competitiveness. Key elements in these structural adjustment programmes were (i) increased public sector savings through tax reforms, reduced subsidies, wage restraint and realistic pricing policies by public enterprises (ii) increased private saving stimulated by higher real rates of interest (iii) more flexible adjustment of administered prices, such as agricultural procurement prices (iv) deregulation of industry (v) liberalization of import controls and (vi) a commitment to maintain a realistic exchange rate to improve profitability and competitiveness of the export sector. Performances have been disappointing and mostly mixed in most of the economies which embarked structural adjustments. Exchange rate policies demonstrated unusual behaviour in some countries. However, all these countries could maintain their investment ratios despite a worldwide recession. During first half of the 1980s, growth rate remained unchanged in Bangladesh, rose marginally in Sri Lanka but fell in both India and Pakistan. But most part of 1990s and since the beginning of the new millennium, growth rate have had on the path of slower but steady progress in these countries of the Saarc region.
Many developing countries in the world have made mixed progress towards restructuring trade reforms and exchange rate policies. In some cases, industrial policies in support of earlier import substitution strategies have maintained a protectionist stance, despite trade reforms. In other cases, inefficient financial systems continue to distort interest rates. In many countries, the failure of fiscal reforms in undermining the adjustment achieved so far and preventing further progress. Unsustainable fiscal deficits create economic uncertainty, contribute to, in many cases high inflation and subvert domestic financial system.
If reforms are to succeed investment must respond. Expectations of the business community are crucial to induce investment. The private sector may choose to wait and see, and let the government prove its commitment to the new policies. But this may be a vicious cycle, because if it takes too long to restore confidence for investment, the programme may fail for that reason alone. Credibility can be improved by first achieving macroeconomic stability. Often, the government has no choice but to rebuild its reputation and then guard it zealously. In this respect, it is important not to promise too much. It may also be necessary for policy makers to overshoot to prove that the reformers really do mean business.
Macroeconomic stability also makes reform of the financial sector more likely to succeed and thus supports the development of capital market that can foster private investment. The aim of financial reform is to increase savings and to see them used more efficiently, effectively and economically. In many cases, it involves removing interest rate ceiling to achieve positive real interest rates, and abolishing regulation that affect the size and condition of bank credit. Close link with world financial markets require domestic interest rates to be high enough relative to international rates for investors to keep their financial assets in the country. For this to work, macroeconomic stability and strong bank supervision are both needed to be in place.
In many cases, adjustment also aims to reverse the bias against agriculture. Taxes in many poor countries discourage domestic food production and encourage food imports. Better incentives and agricultural modernization can raise the income of the rural poor, increase food security and generate foreign exchange. Recently, attention has also been focused on the short-run effect of adjustment on the poor. Fiscal consolidation often involves cuts in government programmes and a temporary rise in unemployment. Different groups are affected in different ways by fiscal cuts. The needs of the persistently poor and the new poor who have become so by losing jobs, should not be seen on a same angle, nor are those of urban and rural households. Especially in an agro-based economy where the maximum of the population live below the poverty line. Special programmes should include temporary measures to protect the groups who are most at risk. This is a worthy goal in its own right, but it may also help to maintain political support for adjustment.
Governments have to reduce their role in the economy and to focus their spending on priority areas. This means curbing spending on the civil service, on subsidies and on state owned enterprises. Even some governments (for example in Ghana) have cut spending by creating a roster of the civil servants to ensure that only bona fide workers-and no 'ghost' or 'phantom' workers are on the payroll. An alternative is to release workers with a lump sum benefit. This may increase the short sun cost of reducing the size of the government and may encourage the better workers to leave but in some countries it has provided and impetus for the development of private entrepreneurship. A sudden removal of subsidies may not be possible, but targeting them to the truly needy further reduces costs as many subsidies benefit urban dwellers who are relatively well off. Labour markets play an important role in determining the outcome of adjustment. Downward flexibility of real wages will cushion the effect on output and implementation of policies that are intended to reduce domestic absorption.
Rapid population growth also may offset the improved economic performance through adjustments. Kenya, Senegal and Somalia, despite a fairly strong economic growth in 1980s, have yielded low or negative growth in per capita GNP. Excessive population growth accelerates the problems of food security, education, urbanization and environmental degradation.
Traditional economic reform in some cases has been viewed as a reform-trap. At the microeconomic level, the traditional reform is understood decentralization, which is a mistake in many senses. Decentralization essentially means shifting the locus of decision making without making parallel changes in the basic characteristics of the system, starting with ownership on the one hand and with incentives on the other. Even if at first sight the idea of decentralization in an over centralized economy sounds rational, often it is misused and the outcome cannot overcome the investment. It is a trap because all other things being equal, shifting the locus of decision making to macroeconomic agents without changing the basic characteristics of the system brings problems than solutions.
Should reform be gradual or a 'shock therapy'? Gradualism may sometimes be justified when reforms face particularly large economic uncertainties. And, by their nature, some reforms take longer to happen than others. But some gradual reforms (for example, in Japan, Korea and Thailand) may have succeeded because they took place in relatively strong and stable economies. In general, the analytical case for speed is strong. Often speed appears to be the best way because swift actions bring benefits of reform more quickly. Speed may also make sense if the political opportunity for reform is unlikely to last. Gradualism may not be feasible for economies in acute crisis or for governments with limited credibility. If the policy shift is sudden, potentially productive employees may be dismissed from their jobs and in such a distorted climate a gradual policy change may reduce the overall costs of adjustment by spreading out the adjustment overtime. Sometimes gradualism allows for political fine tuning. Policy-makers have time to learn about the probable gainers and losers and to forestall oppositions. Policymakers can diffuse potential opponents by giving them something they want from reform. On the other hand in some contexts, rapid action can improve the political sustainability of reform if it prevents a joint assault by special interest groups against changes that are in the general interest. However, the choice of gradual versus rapid reform is also a choice between two sets of risks; rapid reform is likely to lead to greater dislocation in the short run, whereas slow reform often creates inconsistencies that thwart further progress.
Expectations of a rapid (how rapid?) and positive (how positive?) supply to the set if drastic reform measures introduced should have a limit. There are the first signals of output losses of slight decline in industrial output, but one has to wait for better data because the official statistical data do not measure sufficiently the growth to private business that is underway. There is also more or less a political and social problem in respect of response to reform process. It is a question of how to minimize the ability of some individuals to reap the enormous rents that become available in the existing distorted system when the central controls are lifted. Often it becomes difficult to explain to the politicians, who generally are used to detail plans-full of data and time schedules -that the political decision-makers have to believe that the reform managers know how to play chess and know various opening moves and strategies even without looking at the chessboard.
Political considerations have been an abiding factor for any reform . New governments are in a strong position to initiate reforms, they are less obligated to defend the status quo and their opponents may not yet be well organized. Economic crisis also improves the conditions for reform by strengthening coalitions that favour reform and by helping to subordinate special interests. Output and investment would enlarge the tax base, raise tax revenue and reduce the budget deficit. Sometimes even in the face of economic collapse, reform is blocked by the government's key supporters. The challenge for government is to implement reforms in the face of sometime trenchant political opposition. Streamlining the civil service threatens urban workers with unemployment. Groups that can organise against reforms are to be reckoned with, and the beneficiaries are often dispersed unorganized making it difficult for the government to count on their support.
If output responds quickly to reform programmes support for the programme will increase and the changes can be consolidated. Rapid growth in exports refueled reforms in Indonesia, Korea and Turkey. Strong export growth can also help prevent policy reversals caused by balance of payment problems and dwindling foreign exchange reserves. Reforms that improve the investment climate are more likely to be sustained because new investors will add to the forces in support.
A partial reform is much worse than a non-reform. This is a message learnt from the partial reform in the 1960s in Czechoslovakia, also of Central and Eastern Europe in the last three decades. The partial reform in a distorted economy is a tremendous mistake. The dangers of partial reform are also too clear. Stabilization has caused stagnation for lack of policies to promote investment (as happened in Bolivia and in the Philippines in the 1980s) trade liberalization failed in economies with distorted factor markets, macro-economic instability and inappropriate exchange rate policies (in Argentina, Brazil and Sri Lanka in 1960s . in Peru, Philippines, Portugal, Turkey and Uruguay in the 1970s), domestic deregulation or privatization had created monopolistic business environment in the absence of trade reforms that check domestic market power (in Poland and Togo in the 1980s). In all these cases, broader programmes attacking interrelated issues would have been more likely to succeed.
A reform programme means a plan for several crucial steps in a proper sequence. It may be compared with chess playing. One must know how to play chess, how to move various places on the chessboard and must also know the basic strategies. It may also be compared with conducting an orchestra where harmony and coordination is a must. In implementation of a denationalization agenda the growth of private sector as a suitable substitute is a must, which is more or less dependent on improved law and order situation. Denationalization Programme, thus, indirectly requires a healthy law and order situation, political stability etc.
Again, waiting for an ambitious, intellectually perfect, all details elaborated reform project is postponing the reform process to eternity. In that situation, there will never be a reform. What is even worse, when the reform process has already started, is to wait for the blueprint. It may lead very quickly to a chaotic disintegration of the economy, as it is evident in the former Soviet Union. Waiting, one way of falling into a reform trap has always remained a formidable task, requiring political courage and economic vision. Combining the many different elements is, in itself, enormously difficult. According to the circumstances, the appropriate combination of factors may vary from country. And even when reform is well designed, governments have to be sure to encounter unforeseen setbacks, some of them entirely beyond their control. Development is indeed a challenge but as history tells us, one that can be met.
The writer is chairman, National Board of Revenue and Secretary, Internal Resources Division, Ministry of Finance. The views expressed here are his own
FOREIGN capital inflows constitute part of the world's savings. Over the past three decades world savings in proportion to world income has fallen. The decline in world savings implies that not every country can maintain its level of domestic investments by increasing foreign capital inflows. The decline in foreign capital inflows to developing countries has necessitated structural adjustment in the form of an increase in export earning or a reduction in import expenditure. The national accounting identities imply that the adjustment must also raise national savings or reduce domestic investments. To maintain or increase rates of economic growth, the adjustment must be in the form of increased exports and increased national savings. Faced with changed circumstances countries now have no choice but to adjust. During 1980s governments of countries at all income levels and remarkably, of all ideological stripes have come to recognise the need for reforms to increase economic efficiency and flexibility.
At the most abstract level, adjustment programmes use changes in fiscal, monetary and sectoral policies; in regulations, and in institutions to alter relative prices and the level of spending and thereby redirect economic activities. The real exchange rate and the real interest rate are key relative issues because they both affect economic activity and saving as well as export and import and the rate of investment.
The scope of the economic reforms that needed in the developing world varies widely. Some countries need to privatise state-owned enterprises or invest in education, health, and infrastructure. Everywhere these measures are based on macro-economic stability. Experience shows that the surest path to development is to improve policies in all these respects. Reforms have to deal with tradeoffs among macro-economic, political and even social policies. For example reform of the financial sector often calls for distressed financial institutions to be restructured. In the short run, this may rise public spending and make it harder to cut to budget deficit. Adopting positive real interest rates will lower the burden of credit subsidies but increase the cost of servicing domestic debt. Lower tariffs may initially reduce government revenues, whereas shifting from quantitative restrictions to tariffs will generally raise them. The net effect may be a bigger fiscal deficit.
Low inflation, external viability, fiscal discipline, financial stability and trade liberalization constitute the key elements of a successful structural adjustment programmes. Expectations of high net, rate of return to domestic investment are also essential, which may be achieved by eliminating debt overhang and removing barriers to the efficient allocation of resources within the economy. Again export growth is a determining factor for the viability of any economy. The most effective way to establish export is to liberalize imports in general, trade liberalization requires devaluation. It is thus particular important to think of trade liberalization and exchange rate adjustment as representing a policy package. Under a managed exchange rate system, import liberalization necessitates the adoption of a realistic exchange rate policy to prevent the depletion of foreign exchange reserves.
The sequencing of the institutional restructuring at the macro level and the price liberalization are required to be decided carefully. It is quite clear that it would be counter productive to adjust and liberalize prices before economic agents have the incentives and sufficient freedom to respond. Regarding the sequencing of domestic institutional and price measures on the one hand and liberalization of foreign trade and rate of exchange on the other the flexibility of exchange rate movements and convertibility is required to be established at a relatively early state of the reform process.
However, structural adjustment has been complicated and slow. It remains specially difficult till now and all the more necessary-because many developing countries were in dire financial straits. Countries needed external resources to offset the costs of adjustment. In the 1980s both the IMF and the World Bank have helped finance economic programmes contributing to the adjustment process. Sixty-eight countries received long-term structural adjustment credits or loans from the World Bank between 1980 and 1992. Four Countries in the Indian subcontinent (Sri Lanka January 1979; Pakistan, November 1980; Bangladesh, December, 1980; India, November 1981) negotiated extended facilities adjustment programmes from the IMF. The adjustment strategies were designed to improve resources allocation, promote domestic investment and savings and strengthen external competitiveness. Key elements in these structural adjustment programmes were (i) increased public sector savings through tax reforms, reduced subsidies, wage restraint and realistic pricing policies by public enterprises (ii) increased private saving stimulated by higher real rates of interest (iii) more flexible adjustment of administered prices, such as agricultural procurement prices (iv) deregulation of industry (v) liberalization of import controls and (vi) a commitment to maintain a realistic exchange rate to improve profitability and competitiveness of the export sector. Performances have been disappointing and mostly mixed in most of the economies which embarked structural adjustments. Exchange rate policies demonstrated unusual behaviour in some countries. However, all these countries could maintain their investment ratios despite a worldwide recession. During first half of the 1980s, growth rate remained unchanged in Bangladesh, rose marginally in Sri Lanka but fell in both India and Pakistan. But most part of 1990s and since the beginning of the new millennium, growth rate have had on the path of slower but steady progress in these countries of the Saarc region.
Many developing countries in the world have made mixed progress towards restructuring trade reforms and exchange rate policies. In some cases, industrial policies in support of earlier import substitution strategies have maintained a protectionist stance, despite trade reforms. In other cases, inefficient financial systems continue to distort interest rates. In many countries, the failure of fiscal reforms in undermining the adjustment achieved so far and preventing further progress. Unsustainable fiscal deficits create economic uncertainty, contribute to, in many cases high inflation and subvert domestic financial system.
If reforms are to succeed investment must respond. Expectations of the business community are crucial to induce investment. The private sector may choose to wait and see, and let the government prove its commitment to the new policies. But this may be a vicious cycle, because if it takes too long to restore confidence for investment, the programme may fail for that reason alone. Credibility can be improved by first achieving macroeconomic stability. Often, the government has no choice but to rebuild its reputation and then guard it zealously. In this respect, it is important not to promise too much. It may also be necessary for policy makers to overshoot to prove that the reformers really do mean business.
Macroeconomic stability also makes reform of the financial sector more likely to succeed and thus supports the development of capital market that can foster private investment. The aim of financial reform is to increase savings and to see them used more efficiently, effectively and economically. In many cases, it involves removing interest rate ceiling to achieve positive real interest rates, and abolishing regulation that affect the size and condition of bank credit. Close link with world financial markets require domestic interest rates to be high enough relative to international rates for investors to keep their financial assets in the country. For this to work, macroeconomic stability and strong bank supervision are both needed to be in place.
In many cases, adjustment also aims to reverse the bias against agriculture. Taxes in many poor countries discourage domestic food production and encourage food imports. Better incentives and agricultural modernization can raise the income of the rural poor, increase food security and generate foreign exchange. Recently, attention has also been focused on the short-run effect of adjustment on the poor. Fiscal consolidation often involves cuts in government programmes and a temporary rise in unemployment. Different groups are affected in different ways by fiscal cuts. The needs of the persistently poor and the new poor who have become so by losing jobs, should not be seen on a same angle, nor are those of urban and rural households. Especially in an agro-based economy where the maximum of the population live below the poverty line. Special programmes should include temporary measures to protect the groups who are most at risk. This is a worthy goal in its own right, but it may also help to maintain political support for adjustment.
Governments have to reduce their role in the economy and to focus their spending on priority areas. This means curbing spending on the civil service, on subsidies and on state owned enterprises. Even some governments (for example in Ghana) have cut spending by creating a roster of the civil servants to ensure that only bona fide workers-and no 'ghost' or 'phantom' workers are on the payroll. An alternative is to release workers with a lump sum benefit. This may increase the short sun cost of reducing the size of the government and may encourage the better workers to leave but in some countries it has provided and impetus for the development of private entrepreneurship. A sudden removal of subsidies may not be possible, but targeting them to the truly needy further reduces costs as many subsidies benefit urban dwellers who are relatively well off. Labour markets play an important role in determining the outcome of adjustment. Downward flexibility of real wages will cushion the effect on output and implementation of policies that are intended to reduce domestic absorption.
Rapid population growth also may offset the improved economic performance through adjustments. Kenya, Senegal and Somalia, despite a fairly strong economic growth in 1980s, have yielded low or negative growth in per capita GNP. Excessive population growth accelerates the problems of food security, education, urbanization and environmental degradation.
Traditional economic reform in some cases has been viewed as a reform-trap. At the microeconomic level, the traditional reform is understood decentralization, which is a mistake in many senses. Decentralization essentially means shifting the locus of decision making without making parallel changes in the basic characteristics of the system, starting with ownership on the one hand and with incentives on the other. Even if at first sight the idea of decentralization in an over centralized economy sounds rational, often it is misused and the outcome cannot overcome the investment. It is a trap because all other things being equal, shifting the locus of decision making to macroeconomic agents without changing the basic characteristics of the system brings problems than solutions.
Should reform be gradual or a 'shock therapy'? Gradualism may sometimes be justified when reforms face particularly large economic uncertainties. And, by their nature, some reforms take longer to happen than others. But some gradual reforms (for example, in Japan, Korea and Thailand) may have succeeded because they took place in relatively strong and stable economies. In general, the analytical case for speed is strong. Often speed appears to be the best way because swift actions bring benefits of reform more quickly. Speed may also make sense if the political opportunity for reform is unlikely to last. Gradualism may not be feasible for economies in acute crisis or for governments with limited credibility. If the policy shift is sudden, potentially productive employees may be dismissed from their jobs and in such a distorted climate a gradual policy change may reduce the overall costs of adjustment by spreading out the adjustment overtime. Sometimes gradualism allows for political fine tuning. Policy-makers have time to learn about the probable gainers and losers and to forestall oppositions. Policymakers can diffuse potential opponents by giving them something they want from reform. On the other hand in some contexts, rapid action can improve the political sustainability of reform if it prevents a joint assault by special interest groups against changes that are in the general interest. However, the choice of gradual versus rapid reform is also a choice between two sets of risks; rapid reform is likely to lead to greater dislocation in the short run, whereas slow reform often creates inconsistencies that thwart further progress.
Expectations of a rapid (how rapid?) and positive (how positive?) supply to the set if drastic reform measures introduced should have a limit. There are the first signals of output losses of slight decline in industrial output, but one has to wait for better data because the official statistical data do not measure sufficiently the growth to private business that is underway. There is also more or less a political and social problem in respect of response to reform process. It is a question of how to minimize the ability of some individuals to reap the enormous rents that become available in the existing distorted system when the central controls are lifted. Often it becomes difficult to explain to the politicians, who generally are used to detail plans-full of data and time schedules -that the political decision-makers have to believe that the reform managers know how to play chess and know various opening moves and strategies even without looking at the chessboard.
Political considerations have been an abiding factor for any reform . New governments are in a strong position to initiate reforms, they are less obligated to defend the status quo and their opponents may not yet be well organized. Economic crisis also improves the conditions for reform by strengthening coalitions that favour reform and by helping to subordinate special interests. Output and investment would enlarge the tax base, raise tax revenue and reduce the budget deficit. Sometimes even in the face of economic collapse, reform is blocked by the government's key supporters. The challenge for government is to implement reforms in the face of sometime trenchant political opposition. Streamlining the civil service threatens urban workers with unemployment. Groups that can organise against reforms are to be reckoned with, and the beneficiaries are often dispersed unorganized making it difficult for the government to count on their support.
If output responds quickly to reform programmes support for the programme will increase and the changes can be consolidated. Rapid growth in exports refueled reforms in Indonesia, Korea and Turkey. Strong export growth can also help prevent policy reversals caused by balance of payment problems and dwindling foreign exchange reserves. Reforms that improve the investment climate are more likely to be sustained because new investors will add to the forces in support.
A partial reform is much worse than a non-reform. This is a message learnt from the partial reform in the 1960s in Czechoslovakia, also of Central and Eastern Europe in the last three decades. The partial reform in a distorted economy is a tremendous mistake. The dangers of partial reform are also too clear. Stabilization has caused stagnation for lack of policies to promote investment (as happened in Bolivia and in the Philippines in the 1980s) trade liberalization failed in economies with distorted factor markets, macro-economic instability and inappropriate exchange rate policies (in Argentina, Brazil and Sri Lanka in 1960s . in Peru, Philippines, Portugal, Turkey and Uruguay in the 1970s), domestic deregulation or privatization had created monopolistic business environment in the absence of trade reforms that check domestic market power (in Poland and Togo in the 1980s). In all these cases, broader programmes attacking interrelated issues would have been more likely to succeed.
A reform programme means a plan for several crucial steps in a proper sequence. It may be compared with chess playing. One must know how to play chess, how to move various places on the chessboard and must also know the basic strategies. It may also be compared with conducting an orchestra where harmony and coordination is a must. In implementation of a denationalization agenda the growth of private sector as a suitable substitute is a must, which is more or less dependent on improved law and order situation. Denationalization Programme, thus, indirectly requires a healthy law and order situation, political stability etc.
Again, waiting for an ambitious, intellectually perfect, all details elaborated reform project is postponing the reform process to eternity. In that situation, there will never be a reform. What is even worse, when the reform process has already started, is to wait for the blueprint. It may lead very quickly to a chaotic disintegration of the economy, as it is evident in the former Soviet Union. Waiting, one way of falling into a reform trap has always remained a formidable task, requiring political courage and economic vision. Combining the many different elements is, in itself, enormously difficult. According to the circumstances, the appropriate combination of factors may vary from country. And even when reform is well designed, governments have to be sure to encounter unforeseen setbacks, some of them entirely beyond their control. Development is indeed a challenge but as history tells us, one that can be met.
The writer is chairman, National Board of Revenue and Secretary, Internal Resources Division, Ministry of Finance. The views expressed here are his own