Markets and Economic Growth in South Asia, 1950-97: An Interpretation

What role do output and factor markets play in shaping the pace as well as composition of economic growth in the major South Asian economies? This paper seeks to explain the slow pace of economic growth in these economies since the 1950s using Simon Kuznets-Douglass North Institutional approach to economic growth. This approach emphasizes the evolutionary path dependent character of the growth process focusing on the processes and mechanisms of adjustment and their outcomes for economic growth.

The authors argue that:

• product-market distortions emerging from restrictive trade and exchange rate policies under centrally initiated and public sector-oriented industrialisation constituted the major causal factor behind the slow pace of growth of South Asian economies
• considerable reduction in inward orientation in recent years has improved their growth performance
• the nature of the policy shifts was mainly crisis-driven and not designed as part of the long-term development strategy, as was the case with the star performers in East Asia
• some measurable progress in unilateral trade liberalisation has not been accompanied by concommital removal of distortions in factor markets, undercutting the benefits from such reform
• the unwillingness or the incapacity to carry out commensurate reforms in the factor markets is largely attributable to the "inertia of the past" shaped by adverse political economy rooted in the past strategy of inward orientation

Recommendations include:

• vigilance is needed over maintaining low inflation, especially in case of India and Sri Lanka, the importance of fiscal prudence cannot be exaggerated in this context
• although these economies have made greater strides towards reform, changes in the policy framework are still very modest in relation to the need and in comparison to what other reform-seeking countries have already achieved
• stability is required in the political domain and in macroeconomic management as well as microeconomic policies, low-cost supply of physical infrastructural services and clearly defined contract and property laws along with impartial and speedy judicial process
• further acceleration in the pace of economic reforms is necessary, including macroeconomic discipline, deepening policy reforms in terms of further liberalisation of exports and imports as well as controls on domestic transactions
• a second generation of much harder reforms includes institutional measures such as restructuring the financial markets, introducing greater labour market flexibility in the organised sector and drastic revamping and restructuring of the public sector