{"id":4234,"date":"2020-03-12T07:23:34","date_gmt":"2020-03-12T13:23:34","guid":{"rendered":"https:\/\/trends.ufm.edu\/en\/?post_type=articulo-semanal&#038;p=4234"},"modified":"2020-03-12T19:07:01","modified_gmt":"2020-03-13T01:07:01","slug":"indias-liberalization-1991","status":"publish","type":"articulo-semanal","link":"https:\/\/trends.ufm.edu\/en\/article\/indias-liberalization-1991\/","title":{"rendered":"The Success of India\u2019s Liberalization in 1991"},"content":{"rendered":"<p>This is an excerpt from a report on the failure of industrial policy in India and the success of its liberalization policies in 1991. To download the full report, click <a href=\"https:\/\/trends.ufm.edu\/en\/report\/india-2020\/\">here<\/a>.<\/p>\n<p>There is an everlasting debate about which policies a country should implement in order to encourage economic growth. Is it better for a government to intervene and choose which industries to develop, or should it allow the private sector to decide what to produce?<\/p>\n<p>While there are success stories of countries that have followed industrial policies, such as the Asian tigers in the 1960s and 1990s, there are also stories of failure, such as India in the decades prior to the 1990s. What led to the economic miracle in India during the 1990s?<\/p>\n<h2><strong>Before Liberalization <\/strong><\/h2>\n<p>The Indian government sought to encourage industrialization by directing investment toward the production of capital goods and by restricting imports. At the same time, it tried to help its poorest citizens, who lived in rural areas. As a result, the return on capital in the public sector during the 1980s was only 1.5 percent.<a href=\"#_ftn1\" name=\"_ftnref1\"><sup>[1]<\/sup><\/a><\/p>\n<p>The private sector suffered under other restrictions, including the following:<a href=\"#_ftn2\" name=\"_ftnref2\"><sup>[2]<\/sup><\/a><\/p>\n<ul>\n<li>Import restrictions that did not permit the free exchange of goods and knowledge<\/li>\n<li>Antitrust laws that did not allow businesses to grow<\/li>\n<li>Public monopolies that operated very inefficiently<\/li>\n<li>The License Raj, which complicated the process of opening new businesses<\/li>\n<\/ul>\n<p>So it is not surprising that GDP per capita grew at an annual rate of only 3.5 percent in the years prior to the 1980s.<a href=\"#_ftn3\" name=\"_ftnref3\"><sup>[3]<\/sup><\/a> Considering how poor India was, even in the following decade, (GDP per capita was $447 in 1985), the growth rates were alarming. They were not high enough to lift the population out of poverty.<\/p>\n<p>Like many other countries that no are unable to produce enough to finance their government projects through taxation, India financed itself with public debt. In 1991, the public debt reached $70 billion and India was on the verge of declaring bankruptcy. To avoid this disastrous last resort, India was forced to take immediate action to fix the problem.<\/p>\n<h2><strong>The Economic Liberalization <\/strong><\/h2>\n<p>In 1991, the Indian government broke with industrial policy, which had failed. In a surprising 180-degree twist, the new policies encouraged business activity, stimulated growth in the private sector, and revived international trade.<\/p>\n<p>Some of the most important measures include:<a href=\"#_ftn4\" name=\"_ftnref4\"><sup>[4]<\/sup><\/a><\/p>\n<ul>\n<li>Eliminating the industrial license requirement for most sectors<\/li>\n<li>Removing limits on capital accumulation<\/li>\n<li>Eliminating licenses for importing the majority of goods<\/li>\n<li>Reducing tariffs<\/li>\n<li>Opening the private sector to many activities that had previously been reserved for the public sector<\/li>\n<li>Reducing requirements for bank reserves and restrictions on interest rates<\/li>\n<li>Eliminating restrictions on foreign investment<\/li>\n<\/ul>\n<p>Liberalization achieved the desired results, as reflected by the following data:<a href=\"#_ftn5\" name=\"_ftnref5\"><sup>[5]<\/sup><\/a><\/p>\n<ul>\n<li>GDP per capita grew at an annual rate of 6 percent in the 1990s, driven by the service sector, which would come to represent 53.5 percent of GDP by 1999.<\/li>\n<li>Exports grew at an annual rate of 17.3 percent during the 1990s, in large part because of a boom in the software sector.<\/li>\n<li>India\u2019s score on the Fraser Institute\u2019s Index of Economic Freedom rose from 4.8 in 1990 to 6.2 in 2000, reflecting remarkable improvements in the freedom to trade internationally.<\/li>\n<\/ul>\n<h2><strong>How Do We Know Whether India\u2019s Economic Development Was the Result of Liberalization Policies?<\/strong><\/h2>\n<p>Although the economy grew after liberalization, one could argue that this is a coincidence and that the growth was really a belated effect of the previous industrial policies. It could also be argued that economic growth would have occurred even without any policy changes.<\/p>\n<p>To determine whether the improvements in the Indian economy were a result of liberalization reforms, we apply the synthetic-control method. This is a statistical method in which researchers compare a unit that received a treatment with a combination of units that did not receive the treatment. In this case, the unit is a country and the treatment is liberalization policies. We compare the treated unit to countries that did not implement liberalization policies. The synthetic control creates a synthetic unit\u2014an imaginary country that never received the treatment. The synthetic unit permits us to consider how certain variables would have developed in the absence of the treatment.<a href=\"#_ftn6\" name=\"_ftnref6\"><sup>[6]<\/sup><\/a><\/p>\n<p>We use GDP per capita as the indicator of economic growth. If the GDP per capita of the synthetic India behaves the same way as that of the real India, we cannot conclude that liberalization caused the exceptional growth of the 1990s.<\/p>\n<h2><strong>Creating the Synthetic Control<\/strong><\/h2>\n<p>To create a synthetic India, we must choose a group of countries whose combination best resembles India. The selection criteria to achieve this are the following:<\/p>\n<ul>\n<li>Countries that did not undergo any kind of economic reform during the period under study<\/li>\n<li>Countries that did not have special factors affecting their economic performance, such as wars or crises<\/li>\n<li>Countries that were also poor at the beginning of the period<\/li>\n<li>Countries located near India<\/li>\n<\/ul>\n<p>These filters reduce the donor pool to thirteen Asian and African countries, out of which the model selected four: Nepal, Pakistan, Eswatini, and Bangladesh. This combination of countries best mirrors India\u2019s economic performance prior to 1991.<\/p>\n<h2><strong>Result: India\u2019s Economic Liberalization Was a Resounding Success <\/strong><\/h2>\n<p>Figure 1 shows the results of the synthetic-control test.<\/p>\n<p><iframe id=\"datawrapper-chart-zkSRj\" style=\"width: 0; min-width: 100% !important; border: none;\" title=\"Figure 1: Results of the synthetic control\" src=\"\/\/datawrapper.dwcdn.net\/zkSRj\/1\/\" height=\"387\" frameborder=\"0\" scrolling=\"no\" aria-label=\"Interactive line chart\"><\/iframe><\/p>\n<p>The synthetic India mirrors the real India prior to liberalization, represented by the vertical line.<a href=\"#_ftn7\" name=\"_ftnref7\"><\/a> After liberalization, the synthetic India clearly diverges from the real India. This can be seen more clearly in the following figure, which shows the gaps in GDP per capita between the two units.<\/p>\n<p><iframe id=\"datawrapper-chart-bBryr\" style=\"width: 0; min-width: 100% !important; border: none;\" title=\"Figure 2: The gap between India and its synthetic counterpart\" src=\"\/\/datawrapper.dwcdn.net\/bBryr\/1\/\" height=\"400\" frameborder=\"0\" scrolling=\"no\" aria-label=\"Interactive line chart\"><\/iframe><\/p>\n<p>The gap did not exceed $17 prior to 1991. However, the gap became exponentially wider after 1991, reaching $158 in 2001. This gap may seem small, but one must remember that these gaps represent a significant increase in income for Indian citizens and are a direct result of the liberalization. In 2001 the cumulative increase was 25.2 percent. This means that, thanks to liberalization, Indian citizens\u2019 incomes were 25 percent greater than what their incomes would have been had the liberalization policies not been implemented.<\/p>\n<h2><strong>Will All Liberalizations Yield Similar Results?<\/strong><\/h2>\n<p>This is a specific case tied to the specific conditions in India during those years. If there were a perfect formula for achieving economic growth, all countries would follow it and these debates would not exist. Although we cannot extrapolate generalized conclusions from this particular case, economic theory does support the idea that these kinds of policies are beneficial in many ways.<\/p>\n<p>For more about the theory that explains the failure of industrial policies and the success of liberalization, read our <a href=\"https:\/\/trends.ufm.edu\/en\/report\/india-2020\/\">special report<\/a> on India.<\/p>\n<h2>References<\/h2>\n<p><span style=\"font-size: 10pt;\">Abadie, A., Diamond, A., &amp; Hainmueller, J. (2010). Synthetic Control Methods for Comparative Case Studies: Estimating the Effect of California\u2019s Tobacco Control Program. <em>Journal of the American Statistical Association, 105<\/em>, 493-505.<\/span><\/p>\n<p><span style=\"font-size: 10pt;\">Emran, M. S., Shilpi, F., &amp; Alam, M. I. (2007). Economic Liberalization and Price Response of Aggregate Private Investment: Time Series Evidence from India (Lib\u00e9ralisation \u00e9conomique et r\u00e9ponse des prix de l\u2019investissement priv\u00e9 agr\u00e9g\u00e9: r\u00e9sultats enregistr\u00e9s par les s\u00e9ries chronologiques pour l\u2019Inde) . <em>The Canadian Journal of Economics \/ Revue canadienne d\u2019Economique, 40<\/em>, 914\u2013934.<\/span><\/p>\n<p><span style=\"font-size: 10pt;\">Kotwal, A., Ramaswami, B., &amp; Wadhwa, W. (2011). Economic Liberalization and Indian Economic Growth: What\u2019s the Evidence? <em>Journal of Economic Literature, 49<\/em>, 1152\u20131199.<\/span><\/p>\n<p><span style=\"font-size: 10pt;\">Thakur, R. (1993). Restoring India\u2019s Economic Health. <em>Third World Quarterly, 14<\/em>, 137-157.<\/span><\/p>\n<p><span style=\"font-size: 10pt;\"><em><strong>Legal notice: the analysis contained in this article is the exclusive work of its author, the assertions made are not necessarily shared nor are they the official position of the Francisco Marroqu\u00edn University.<\/strong><\/em><\/span><\/p>\n<p>&#8211;<\/p>\n<p><span style=\"font-size: 10pt;\"><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a> Thakur 1993.<\/span><\/p>\n<p><span style=\"font-size: 10pt;\"><a href=\"#_ftnref2\" name=\"_ftn2\">[2]<\/a> Kotwal, Ramaswami, &amp; Wadhwa 2011.<\/span><\/p>\n<p><span style=\"font-size: 10pt;\"><a href=\"#_ftnref3\" name=\"_ftn3\">[3]<\/a> Kotwal, Ramaswami, &amp; Wadhwa 2011.<\/span><\/p>\n<p><span style=\"font-size: 10pt;\"><a href=\"#_ftnref4\" name=\"_ftn4\">[4]<\/a> Emran, Shilpi, &amp; Alam 2007.<\/span><\/p>\n<p><span style=\"font-size: 10pt;\"><a href=\"#_ftnref5\" name=\"_ftn5\">[5]<\/a> Kotwal, Ramaswami, &amp; Wadhwa 2011.<\/span><\/p>\n<p><span style=\"font-size: 10pt;\"><a href=\"#_ftnref6\" name=\"_ftn6\">[6]<\/a> Abadie, Diamond, &amp; Hainmueller, 2010.<\/span><\/p>\n<p><span style=\"font-size: 10pt;\"><a href=\"#_ftnref7\" name=\"_ftn7\">[7]<\/a> The average annual error is minimal. It is only 2.34 percent of the actual values.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>How did political control of the economy work in India? Why did India liberalize in 1991? What were the results?<\/p>\n","protected":false},"author":503,"featured_media":4239,"template":"","meta":{"anio":"","mes":"","id_estadisticas":"","newsletter_link":"","portada_informe":"","subtitulo":"","footnotes":""},"tags":[100],"coauthors":[241],"class_list":["post-4234","articulo-semanal","type-articulo-semanal","status-publish","has-post-thumbnail","hentry","tag-india"],"meta_box":[],"_links":{"self":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal\/4234","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal"}],"about":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/types\/articulo-semanal"}],"author":[{"embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/users\/503"}],"version-history":[{"count":12,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal\/4234\/revisions"}],"predecessor-version":[{"id":4257,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/articulo-semanal\/4234\/revisions\/4257"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/media\/4239"}],"wp:attachment":[{"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/media?parent=4234"}],"wp:term":[{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/tags?post=4234"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/trends.ufm.edu\/en\/wp-json\/wp\/v2\/coauthors?post=4234"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}