In pursuit of structural reforms

When economists talk about structural reforms, what they mean are reforms that free the economy from the control of the government and allow markets to allocate resources. (Representational image)  

The economic slowdown has pushed many people to demand more structural reforms from the government. But what exactly counts as a structural reform? Former Finance Minister P. Chidambaram stated that the government does not understand what structural reforms mean. He also said that only a handful of reforms in the last few decades can really be classified as major structural reforms. Few critics of the government, however, care to elaborate on what they mean by structural reforms and why such reforms are so important. At best, they spell out land and labour reforms without offering a broader framework for a structural reform programme. This has led not only to the portrayal of incremental reforms as radical structural reforms that will imrove growth, but also to the adoption of bad reforms that only benefit special interest groups at the cost of the overall economy as actual structural reforms.

Free from government control

When economists talk about structural reforms, what they mean are reforms that free the economy from the control of the government and allow markets to allocate resources. The classical liberal economists of the 19th century believed that a minimalist ‘night-watchman’ state that limited its role strictly to the efficient provision of police, and courts that protected people’s property rights and enforced contracts, could bring economic prosperity. Some even argued that the marketplace, in which multiple businesses compete to provide goods and services to consumers, can also offer better policing and legal services than an inefficient monopoly like the government. When Prime Minister Narendra Modi promised “minimum government, maximum governance” before he assumed power in 2014, the expectation was that he would turn India into a free market paradise. But in the last five and a half years, the role of the government in the economy has only increased significantly with measures such as demonetisation and GST severely undermining people’s economic right to own what they earn.

A minimalist or limited government, in the classical sense, however, would allow private individuals to own and exploit all economic resources. No sector of the economy would be shielded from private ownership and there would be an active attempt to disinvest almost all the assets that are under the control of the government. It would allow individuals to freely buy and sell anything they wish at whatever price they deem fit through voluntary trade. People will also be allowed to keep almost all of what they earn from such free trade, and private contracts rather than onerous government regulations would be allowed to regulate commerce. Such unfettered free trade, while it benefits consumers, will likely create winners and losers among producers. A minimalist government, however, will have no legal powers to save any business, whether small or large, from failure. People will be allowed to freely enter or exit a market as they wish and compete against anyone they want. Such genuine free market competition would ensure that the production of goods and services rises, prices fall, and the standard of living of the masses increases many-fold as a result. It was through such a drastic cut-down in the role of the government in the economy that countries such as Hong Kong, Singapore, New Zealand and China managed to achieve great economic prosperity.

A poor ranking

The government has flaunted its performance in the World Bank’s ‘Ease of Doing Business’ ranking to prove its commitment to reforming the economy. But India’s performance in the ‘Index of Economic Freedom’ ranking (129 out of 180 countries), which cannot be easily influenced by cosmetic changes to a few laws, should be of concern. The ranking, which measures the degree to which an economy is market-oriented, also classifies India as a “mostly unfree” economy. If genuine structural reforms are to be expected, economic freedom should become the guiding principle of policymaking.

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Printable version | Sep 25, 2021 11:14:20 PM |

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