Reformers come out better in the end. Today developed nations are offering ever larger stimulus packages to ease the shock of the pandemic, but they are running up debts that will slow growth in the future.
Many commentators complain that now, with the pandemic-stricken economy already “in the ICU”, is exactly the wrong time to push painful reform. But if not now, when? Precious few nations ever accept harsh medicine unless they are forced to by a crisis.
Reformers come out better in the end. Today developed nations are offering ever larger stimulus packages to ease the shock of the pandemic, but they are running up debts that will slow growth in the future. Meanwhile, India is just one of the many emerging countries that, lacking the funds for more stimulus, are instead pushing reforms which are likely to boost productivity and growth.
India’s reforms encompass the controversial agricultural reforms, the new privatisation push, and the broad shift in spending away from subsidies and other freebies to capital investment. Indonesia’s reforms are as ambitious, including looser labour laws, tax cuts, deregulation, and most recently a push to open up the financial sector. The Philippines just lowered its corporate taxes from among the highest to among the lowest in Asia, and will emerge more competitive.
In the Middle East, Egypt, Saudi Arabia and the United Arab Emirates have pushed forward with efforts to impose more discipline on their public spending, with subsidy cuts, tax reforms and other measures. The Saudis and Emiratis are also taking radical steps to open their economies, for example by allowing foreigners to buy property and businesses for the first time.
Even Brazil, a chronic over-spender, has imposed caps on its deficit and is working to meet them by downsizing a wildly generous pension system and, most recently, taking steps to streamline bureaucracy by making it easier to fire public workers and cut their benefits. By comparison, there is nothing particularly harsh about the way Modi’s government is treating its patient.
The inspiration for this tough love is simple: Lack of resources for any other approach. Back in 2008, emerging nations had been on a hot growth streak, and they went into the global financial crisis that year with lower government debt, lower deficits, and more money to spend than they have now. Spend they did, offering stimulus packages almost as generous as those of far richer countries.
For all that stimulus, however, the big emerging nations got a brief burst of growth, followed by a decade in which they struggled to pay down the resulting debt, as growth slowed. Now many simply can’t afford to ramp up stimulus the way developed countries have – even though the economic downturn is much more severe than in 2008.
My research shows that the typical emerging nation did increase total stimulus (including government spending, money printed by central banks, and credit guarantees) from 6% of GDP in 2008 to 9% in 2020; India’s stimulus increased from around 9% to 15% of GDP in the same period. But that was spare change compared to the typical developed nation, which more than tripled outlays from 10% to 33% of GDP. In effect, developed nations spent nearly four times more on stimulus last year than emerging nations did.
The biggest shift from stimulus to restraint came in China. In 2008 Beijing was widely praised for massive stimulus that supposedly “saved” the global economy, but China itself spent much of the next decade paying down debts as its economic growth rate slowed. Last year Beijing changed course. While all the developed countries rolled out much more stimulus than in 2008, China committed less. And now, as rich countries debate calls to “go big” on new rounds of stimulus, China’s central bank is already reducing monetary stimulus, worried about the consequences of racking up more debt and the risk of inflating financial bubbles.
Emerging nations have always had their own ideas about how to handle questions of economic survival, so in that respect this crisis is no different. In the 1990s, crises battered emerging nations from Turkey to Thailand. Western experts advised them to tough it out. The International Monetary Fund, always a pillar of Western consensus thinking, urged emerging nations to maintain spending restraint and high real interest rates in a crisis, coupled with “structural reform” to promote growth afterward. Emerging world leaders bridled at the harshness of these “austerity” programmes.
Now austerity has fallen out of fashion in the West, replaced by a new consensus that government deficits and debt don’t matter, and the IMF is advising nations rich and poor to spend generously. Only none of the big emerging nations are seeking IMF help. Many including India are embarking – of their own volition – on campaigns of structural reform very similar to what the IMF would have proposed in the 1990s.
And financial markets are cheering. After a lost decade, most of the big emerging stock markets, including India’s, have been in recent months outperforming developed stock markets by a significant margin. Reform is not the only reason, but it is one of them.
When the sugar rush of stimulus fades, the effect will not be felt equally. Nations that exercised restraint and prioritised economic reforms are likely to see their growth prospects continue to improve. Those that spend heavily to ease the pain are likely to pay for it in higher debts and slower growth. This was the lesson of 2008 and every major global crisis: seize the opportunity to reform, or it will never happen.
(Ruchir Sharma is the author of the upcoming ‘10 Rules of Successful Nations’. Views expressed are personal and not of http://www.economictimes.com)