It is best to avoid “jhatka” economics, carry out incremental reforms on a continuous basis and do so in a number of sectors and regions.
That which has been done well has been done quickly enough — Augustus
Even if economic reforms are good overall, they obviously hurt some people. This may be unavoidable but it helps to carry out reforms incrementally instead of big bang reforms. This is not to say that we carry out a few reforms and do so occasionally. There are very many sectors and regions in India and there is a need for reforms almost everywhere. So, if reforms in several sectors and regions are undertaken, then the reform process can be fast even though individual reforms in each place are incremental.
Big bang reforms are often justified in the name of Joseph Schumpeter’s idea of creative destruction. This is, of course, a great idea in economics. However, creative destruction need not be sudden — more so when a change is by public authorities and not by private corporations. It can be gradual. This minimises chances of a flare up due to ideology, politics and sentiment.
A gradual approach should not be misunderstood as a lazy approach. In fact, a well-thought-out phased programme requires significant additional homework. This applies to the Government of India (GOI). It also applies to whoever is in charge of a particular reform. It could be institutions like the Reserve Bank of India, the Supreme Court of India, and the Securities and Exchange Board of India.
Consider an example involving the GOI. At one time it reduced the subsidy on diesel by 50 paise per litre per month over several months. This reform would have been very difficult if the entire subsidy had been removed in one go. But a gradual approach worked. Can this approach always work? It is true that a policy like demonetisation can have any meaning only if it is a surprise big step. However, note that demonetisation can have several different economic objectives. Now each of these objectives may be realised separately through alternative means, and in an incremental and not in a disruptive manner that affects the entire country.
It may be argued that if some big and sudden reform hits only two or three states, then the possible disruption does not matter very much. However, a state in India can be the equivalent of an entire country in, say, Europe. So, there is a need for an incremental approach even in such cases.
But shouldn’t we think big like Margaret Thatcher did? This usually means a big change in some area. However, this maxim can have another meaning. We can think of small changes in very many areas. That is also thinking big! Of course, there is a need for several different teams, each of which works on a particular area. Many small changes can be woven into one large, coherent, non-divisive, routine, transparent, anti-fragile and sustainable reform process. If it is continuous, the power of compounding over time, as Albert Einstein emphasised, is massive.
The approach to use small changes but on many fronts also avoids a situation in which too much happens in one sphere and hardly anything happens in another sphere. It reduces the suspicion that people with vested interests may be pushing big reforms in one area for their own benefit. With less suspicion in public mind, the reforms can progress smoothly almost all the time.
In the time of a crisis, there’s opportunity. This is true. However, this does not mean an opportunity to rush major policy changes; that can be a case of opportunism. That is not the intent in the original saying.
A crisis is sometimes used to push a long-delayed reform. Now are we saying that we should move gradually even in such cases? Well, often these are cases of delay from the viewpoint of the policy-makers. The stakeholders may not be aware of the “delay”. For them it can be abrupt. That makes the implementation difficult. So, it is important to move incrementally, though firmly.
It may be argued that incremental reforms can face the problem of “the boiling frog syndrome”. Basically, the argument is that people may not change their ways if reforms are gradual. However, scientific experiments have made this fabled syndrome highly questionable. This suggests that the reform process can include gradual and non-sensational changes.
No news is good news! It is interesting that nations that rank high in the happiness index are often not in the international news. Why? One possible reason is that by and large they do not carry out big bang reforms. But still they have been changing their economies.
It is best to avoid “jhatka” economics, carry out incremental reforms on a continuous basis and do so in a number of sectors and regions.The writer is visiting faculty, Indian Statistical Institute, Delhi Centre