Messages from India’s Economic Reform Guru

“In an increasingly volatile world, flexibility in government policy is essential” argued Dr. Montek Singh Ahluwalia, the respected Indian economist and former World Banker, at an event in Colombo yesterday. That was my main takeaway from his one-hour long tour de force on undertaking economic policy reforms in a country. He argued that flexibility in policymaking can ensure that countries don’t get stuck in a rigid model and are able to be more nimble and quickly respond and adapt to global and local economic changes.

Dr. Ahluwalia was a key player in India’s market-oriented reforms during the 1990s, and Chaired the country’s key economic policymaking body – The Planning Commission.

Ahluwalia remarked that when he often gets asked what should the most important policy reform priorities be he prefers to stay away from naming a list – “I don’t believe in policy check lists”. But he argued that there are a couple of fundamental areas that a country needs to get right and at the top on the agenda should be fighting macroeconomic imbalances. He said macro imbalances are the most damaging to developing economies in particular. He called for keeping a close watch on budget deficits, and not to assume that any particular “level of debt” is a sustainable one especially as reliance on foreign debt grows. He remarked that countries like Sri Lanka should try as much as possible to get loans from multilateral lenders, rather than go for commercial borrowing. However, he didn’t explore in detail how this would work for a country like Sri Lanka that is no longer eligible for ultra-concessional loans. He probably meant that we should go for at least the semi-concessional, long-tenor loans from lenders like the World Bank and ADB, which have long repayment and grace period, rather than relying on commercial borrowing through sovereign bonds.

He went on to highlight a few key areas that countries like Sri Lanka should focus on, in placing the country on a sustained growth path

  • Creating more jobs and not relying on public sector to pick up the employment creation slack.
  • Encourage public private partnerships to meet infrastructure needs, as debt-fuelled infrastructure spending is now sustainable
  • The importance of creating well-functioning and dynamic financial markets, which can finance firms of all sizes
  • Bring dynamism in labour markets through reforms for labour market flexibility

Dr. Ahluwalia was speaking at the MILODA Academy of Financial Studies, of the Ministry of Finance, as part of the ‘Eminent Speaker Series’ supported by ADB. This evening he is scheduled to speak on ‘Managing Economic Reform’ at the Bandaranaike Centre for International Studies, where I teach some courses on international financial institutions. I just might go and listen to him there too….

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