After independence from the British in 1947, both India and Pakistan (including East Pakistan or present-day Bangladesh) had adopted Soviet-type import-substituting policies and erected high walls of protection on all sectors of the economy. This had meant not only high tariffs but also various forms of licensing to control entry into industries. The resulting “license raj” — rigid government controls over production and distribution of goods — in these countries had created inefficiencies, promoted public sector corruption, and constrained the rate of economic growth. The smaller South Asian countries — Bhutan, Maldives and Nepal — had also adopted a similar development strategy. It was only 2 or 3 decades later in the 1980s and the 1990s that South Asian countries started the economic reform process. These reforms had placed the countries on a higher growth trajectory and analysts were focusing on when these countries would catch up with East Asia (ASEAN+3). Presently, however, the pace of economic growth in South Asia (SA) has slowed considerably. For example, after nearly a decade of 6-9 percent per annum GDP growth which peaked at 10.3 percent in 2010, India now struggles to maintain a moderate 5 percent growth. This is for two reasons. First, the global economic environment facing SA has deteriorated. After the global economic crisis of 2008- 2009, economic recovery has begun in the industrial countries, but it is still weak with a jobless recovery in the U.S. and only tentative signs of a turnaround in Europe. The second reason for the economic slowdown of South Asian countries is domestic, namely the slowing pace of economic reforms that were once the key drivers of the region’s dynamic economic performance and resilience. For example, the Manmohan Singh government in India was expected to take reforms to the second phase since 2004, but allegations of corruption and the ensuing political paralysis slowed the pace, and in some cases, reversed the reforms. This paper focuses on the second reason for the recent economic slowdown in South Asia. McKinnon (1993) has argued that it is neither theoretically defensible nor practically feasible to implement all aspects of reform policies simultaneously. Inappropriate design and sequence can lead to the failure of reform programs. Economic history has recorded a number of such instances. An example is the Southern Cone Latin American case where efforts to reform the financial and trade sectors failed in the mid-1980s. Following Rana (2011) and Rana and Hamid (1995), this paper argues that South Asian countries did not sequence their reform programmes properly. The first round of reforms in South Asia that began in the 1980s and the 1990s focused on macroeconomic areas of monetary, fiscal, and exchange rate management. Industrial deregulation had contributed significantly to the private sector-driven economic growth. These reforms should have been followed by the more microeconomic reforms — sectoral and the so-called “second generation” reforms — to strengthen governance and institutions.11 But they were not and the private sector-led economic growth due to “first generation” reforms ran out of steam because of, among others, lack of law and order and red tape and corruption in the public sector. Keyfitz and Dorfman (1991) identified 14 institutional requirements for sustained operation of private markets. These include law and order, the security of persons and property, and trust. South Asian countries failed to achieve these institutional preconditions for markets to work. Panagariya (2014) also argued that the abandonment of the reforms initiated by the earlier government is responsible for the recent slowdown in Indian economic growth. Section II of this paper briefly surveys the policy reforms implemented by various South Asian countries during the 1980s and 1990s and identifies the lack of actions in the area of microeconomic reforms. Section III assesses the impacts of the first round of policy reforms on the economy. It argues that economic policies have mattered. Section IV focuses on the “governance gap” in South Asia that refers to how South Asia lags behind East Asia in terms of various governance indicators and how some countries within the South Asian region are ahead of others in these indicators. A number of analysts have argued that South Asian countries have the potential of achieving a sustained annual 8 to 10 percent economic growth in the long-term (Section V). However, in order to realise this potential, South Asian countries should take actions to implement microeconomic reforms, among others. This poses a challenge because unlike macroeconomic reforms, these reforms require a wider consensus and political support and have a longer-term focus. Finally, Section VI highlights that microeconomic reforms are the centerpiece of the new Narendra Modi government in India that is attempting to revive the manufacturing sector. As in the 1980s and 1990s, these efforts in India should encourage other neighboring South Asian countries to implement these difficult reforms. The remaining policy agenda for individual South Asian countries is presented in this paper.
Keyword: Corporate governance, Company, Investor, Shareholders, SEBI, Report, Management, Security, Director, Company Act, 2013.
Dr Pradumna B. Rana
Dr Wai-Mun Chia