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Table of contents
- MThe "Three Reforms" in China: Progress and Outlook
- Competition policy reforms in Australia and the changes made
- Comparing State-level policy responses to economic reforms in India
That advancement has facilitated migration out of and remittances to poor areas. Once unconnected India is now globally connected. In India's main exports were textiles and cut-and-polished gems. Today, its main exports are computer software, other business services, pharmaceuticals, automobiles, and auto components. Most developing countries grew fast by harnessing cheap labor. India never did so, because its rigid labor laws inhibited labor flexibility, and they still do so today. The range of business services has expanded from call centers and clerical work to high-end financial, medical, and legal work.
Credit ratings agencies like Moody's and Standard and Poor's, which once gave India very poor ratings, now do a significant amount of their work out of India. In Indian companies used obsolete technologies based on ancient licensing agreements and did very little research and development. Suzuki and Hyundai have made India a hub for small-car research and production. Imports and exports, of both goods and services, have soared as a proportion of GDP because of India's opening up and consequent globalization.
The World Bank estimates that in the period , India's total trade imports and exports as a proportion of GDP was 49 percent, higher than the only two other continental-sized economies: China 42 percent and the United States 30 percent. Many Indian politicians are still instinctively protectionist, yet the data show how much opening up has already happened. India has become a global hub for computer software development. IBM has more employees in India than in the United States, because Indian skills are often as good as — and much cheaper than — those in the West.
That fact has led to many complaints that IBM is shifting jobs to India. Many Indian engineers and scientists who used to work for multinationals abroad have returned to work in the companies' Indian subsidiaries and branches. The former brain drain has turned into brain circulation. India is now a low-cost commercial satellite launcher. By October , it had launched 51 satellites for foreign countries, with payloads of less than 1, kilograms.
To gain market share, it needs to develop payload capacity of over 3, kilograms, and building that capacity is a work in progress. In India produced fewer than 50, engineers per year, mostly from government colleges. India's economic success after has spurred the creation of thousands of private engineering colleges, with estimated admissions of 1.
One oft-quoted rule of thumb is that half the graduates are useless, a quarter are usable, and a quarter are world-class. That outlook suggests massive waste. Yet producing up to a quarter million world-class engineers per year is a very solid base for future progress. In Indian politicians and industrialists feared that economic liberalization would mean the collapse of Indian industry or its conversion into subsidiaries of multinational companies.
Twenty-five years later, Indian companies not only have held their own but also have become multinationals in their own right. Reddy's Labs — are now multinationals with higher sales abroad than in India. Through acquisitions, ArcelorMittal became the biggest steel company in the world. Today, the global slump in metals and the dumping by China have made many acquisitions that were completed in the boom years look like bad deals.
Yet the fact remains that Indian companies are now viewed as having global management skills worthy of global takeovers. Ironically, although Tata has decided to sell its steel assets in the United Kingdom, one of the potential buyers is Liberty House, founded by another person of Indian origin, Sanjeev Gupta. India is about to reap a demographic dividend that will give it a big edge over rivals.
The number of working-age people between 15 and 60 is expected to rise by million between and , even as China's workforce dwindles from 72 percent to 61 percent of a soon-to-be declining population. India's working-age population has started rising, yet participation in the workforce has actually fallen in recent years, especially for females. The reason is partly that more young people are now studying in high school and college instead of working.
It is partly because, as families rise from low-income to lower-middle-income status, they pull their women out of manual work as a mark of social superiority. Indeed, young women who do not work can expect to get a better class of husbands in the arranged marriages that dominate Indian social behavior. However, as families move up to upper-middle-class status, their daughters become college graduates and re-enter the workforce.
That change means that India's demographic dividend has been delayed, but will soon come, and its quality will improve because its workforce will be better educated. That holds promise for future GDP growth. As Table 5 shows, the male work participation rate has remained unchanged in rural areas and has risen marginally in urban areas since But the rural female participation rate has crashed from Given that India has roughly million females, the data suggest that over 40 million women pulled out of the workforce between and That number is more than the entire female population of all but a handful of countries in the world.
That factor makes India's rapid GDP growth in the s even more remarkable: all other miracle economies in Asia had rapid increases in workforce participation in their fast-growing phase. A sudden scarcity of rural labor has helped raise rural wages quickly, a phenomenon buttressed by rapid GDP growth and a National Rural Employment Guarantee Act ensuring days of work per family on government projects after During the 11th five-year plan , nominal farm wages in India increased by Those wage increases were an important cause of the record drop in poverty.
The Indian word jugaad has crept into management literature. It originated when Indian farmers wanted an inexpensive vehicle and got the idea of strapping an irrigation pump on a steel frame with four wheels to create a functioning vehicle called a jugaad. Many variations of that vehicle are assembled by small local companies in many rural towns using spare parts of existing vehicles. It represents grassroots homegrown ingenuity. The vehicle can ferry goods or carry up to 50 passengers.
Jugaad no longer means just the original vehicle. It has now come to mean, simply, innovation around obstacles of all sorts — in designing, selling, managing, and even surmounting government controls. Thus, jugaad includes forms of corruption and tax evasion no less than frugal engineering. By solving problems by hook or by crook, it raises moral issues but gets things done under the most difficult conditions. India has become a world leader in frugal engineering, a concept that did not exist in Frugal engineering is the capacity to design and produce goods that are not just percent cheaper than in Western countries but percent cheaper.
It was a commercial flop and did not meet Indian consumer aspirations. But it was nevertheless an engineering feat. Bajaj Auto has developed a low-cost quadricycle that could put three-wheelers and small cars out of business. India's telecom industry is the cheapest in the world, with calls costing just two cents per minute.
The Jaipur Foot is an Indian artificial limb that is sold at th the price of competing artificial limbs in the United States. Narayana Hrudayalaya and Aravind Netralaya are hospitals that provide heart and eye surgery, respectively, at one twentieth or less of the cost of surgery in the West — one reason for the emergence of what is now called medical tourism. The Bombay Stock Exchange, set up in , is one of Asia's oldest.
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Yet before the economic reforms of the s, it was viewed as a snake pit. A handful of brokers could rig prices at will, fake share certificates abounded, and settlement periods were extended for months on end if that suited the brokers controlling the exchange. A major scandal in — when broker Harshad Mehta shamelessly rigged the market using illegal borrowings from government banks — led to a stock market overhaul. Various financial agencies created a completely new National Stock Exchange with high technical and ethical standards.
It was fully electronic, with no trading floor at all, and bids and offers were matched automatically by computer, preventing a lot of old-style rigging. The National Stock Exchange went fully electronic before London and New York did: it was a state-of-the-art exchange, a rare case when India leapfrogged global bourses. That change both slashed costs and ended most forms of rigging. The Securities and Exchange Board of India was created, along the lines of the Securities and Exchange Commission of the United States, and gradually brought order and trustworthy practices that were earlier absent.
It decreed that paper share certificates must be dematerialized and held in electronic form by depositories, to end the menace of fake certificates. To survive, the Bombay Stock Exchange had to clean up its act and also go electronic. So since the s, India has developed one of the most efficient stock markets in Asia. Before very high tax rates up to a 58 percent corporate tax plus a high wealth tax meant that businesses kept income off the books. Many listed companies diverted profits into the hands of controlling families by dubious means, cheating minority shareholders. Improving shareholder value meant higher stock market prices, which would have been welcomed in other countries but constituted a recipe for personal bankruptcy in India.
High share prices meant high wealth tax liabilities that required promoters to sell shares to pay the tax, with the prospect of losing control. After direct tax rates gradually came down substantially to 30 percent plus surcharges for individuals and corporations. The wealth tax on shares was abolished, making it possible to raise shareholder value without being penalized for it. Indeed, by keeping all profits in a company instead of milking them, a company could raise share prices and attract foreign investors at a handsome premium, making honesty an ingredient for success.
Foreign investors soon started paying much higher prices for companies with good governance than those with dodgy tactics.
MThe "Three Reforms" in China: Progress and Outlook
So corporate honesty began to be rewarded for the first time, and that rather than any moral imperative made Indian business cleaner. It attracted household investment and enabled ordinary citizens to participate in the stock market boom that raised the Sensex India's equivalent to the Dow Jones Index in the United States from just 1, in to 28, in The corporate tax was cut from a maximum of 58 percent to 30 percent, yet corporate tax collections increased from 1 percent of GDP to almost 6 percent at one point.
That was a major reason for the revenue boom that facilitated increased spending on education, health, and infrastructure. Personal income tax rates also fell from 50 percent to 30 percent, but once again collections rose, from 1 percent of GDP to almost 2 percent. For the first time, real estate transactions in some cities were conducted entirely by check: earlier, a big chunk of the sale price was paid in black cash to escape high capital gains taxes and the stamp duty. The Bollywood film industry, once run entirely on black money financed by the underworld, is today reputed to make payments to top stars almost entirely by check.
In many developing countries, a handful of crony capitalists like Pakistan's notorious 22 families have dominated industries, thanks to their political contacts. India was no exception until , because the license-permit raj made all clearances a favor to those with clout. But since then, economic liberalization has facilitated the rise to the top of a vast array of new entrepreneurs. Their market value vastly exceeds that of most traditional big business houses. Some of the new businesspeople notably in real estate and infrastructure are called crony capitalists, and certainly they have strong political contacts.
Kickbacks in India are more accurately called extortion by politicians than classical cronyism, because the returns to kickbacks are uncertain and sometimes disastrously negative. Economic liberalization and competition have led to the crash and sometimes bankruptcies of famous old companies Hindustan Motors, Premier Automobiles, JK Synthetics, DCM , indicating stiff competition and survival only of the fittest.
Of the 30 companies constituting the Sensex in , only 9 were still there two decades later. This business churn indicates healthy competition across industry as a whole. Former prime minister Manmohan Singh said of the new entrepreneurs: "These are not the children of the wealthy. They are the children of liberalization. Economic liberalization has benefited Dalits, the lowest of the Hindu castes, once condemned to the dirtiest work, such as cleaning latrines, cremating the dead, and handling dead animals and their hides.
A seminal survey in two districts of Uttar Pradesh revealed striking improvements in the living standards of Dalits in the past two decades. TV ownership was up from zero to 45 percent, cell phone ownership was up from zero to 36 percent, two-wheeler ownership of motorcycles, scooters, and mopeds was up from zero to Even more striking was the improvement in Dalits' social status. The proportion of cases in which Dalits were seated separately at weddings was down from The proportion of non-Dalits accepting food and drink at a Dalit house went up from 8.
Halwaha bonded labor incidence was down from 32 percent to 1 percent. The proportion of Dalits using cars for wedding parties was up from 33 percent to almost percent. Dalits running their own businesses went up from 6 percent to 37 percent. And the proportion of Dalits working as agricultural laborers was down from Beyond all expectation, thousands of Dalits have emerged as millionaire businesspeople and established a Dalit Indian Chamber of Commerce and Industry.
Its president, Milind Kamble, says that just as capitalism killed feudalism, it is also killing casteism. In the fierce competition of a free market, what matters is suppliers' prices not their caste. This fierce competition, brought about by economic reforms, has opened new commercial space that did not exist during the license-permit raj, and Dalits have been able to occupy part of the new space.
In the two decades since , India's literacy rate has shot up by a record In the earlier two decades, it rose by less: India's literacy rate remains poor by global standards, but it has improved much faster in the era of reform than in the earlier era of socialism. In the past decade, the improvement in all-India literacy 9. Female literacy improved even more dramatically, by Life expectancy in India is up from an average of Infant mortality is down from 87 deaths per 1, births to These are major improvements.
Yet they lag well behind achievements in other countries. Despite 25 years of economic reform, India remains substantially unfree and plagued by poor governance and pathetic delivery of all government services. Leftist critics accuse India of going down the path of neoliberalism. The actual process could better be called neo-illiberalism. Although many old controls and licenses have indeed been abolished over the past 25 years, many new controls and bureaucratic hurdles have appeared, mostly in such areas as the environment, forests, tribal rights, and land and in new areas like retail, telecom, and Internet-related activities.
Many state governments have failed to liberalize sufficiently. Hence, entrepreneurs complain bitterly of red tape and corruption. Of the foundation's five categories — free, mostly free, moderately free, mostly unfree, and repressed — India falls into the "mostly unfree" category. The Fraser Institute's index of economic freedom ranks India at th of countries. India's freedom score as calculated by the Fraser Institute has actually declined in recent years, from a peak of 6.
The World Bank's Doing Business report puts India at th of countries in the ease of doing business in the country. That change is an improvement from its earlier nd position, but it still leaves India in the bottom half of countries. India ranks especially low in the ease of getting construction permits rd , enforcing contracts th , paying taxes th , and starting a business th.
Markets cannot function without good governance. With almost no exceptions, the delivery of government services in India is pathetic, from the police and judiciary to education and health. Unsackable government staff members have no accountability to the people they are supposed to serve, and so callousness, corruption, and waste are common. Politicians like a patron-client system in which they earn gratitude by helping constituents and sundry groups through the many controls and permits, rather than abolishing the controls and permits, which would level the playing field but also leave them less powerful.
The judicial system is a mess. Justice is supposed to be blind. In India, it is also lame. India holds the world record for legal case backlogs India's Law Commission has recommended the appointment of 50 judges per million population in the United States, the ratio is much higher at per million. The current sanctioned judicial strength is just 17 per million, and unfilled vacancies are as high as 23 percent in the lower courts, 44 percent in high courts, and 19 percent in the Supreme Court. No wonder the staggering backlog of cases does not diminish, and most people are reluctant to litigate to redress their grievances.
Lengthy procedures and constant adjournments mean that cases can linger for decades or even more than a century. In the case of the murder of L. Mishra, a prominent politician, 20 different judges took 38 years to reach a verdict, although the case was supposed to be heard on a day-by day basis. Of the 39 witnesses called by the defense, 31 died before the case ended. When the accused sought to have the case dismissed saying the long delay had made justice impossible, the court declared that 38 years was by no means too long.
However, there are two bright spots. First, the judiciary is quick to decide on writ petitions against arbitrary government action, which has proved a great comfort to investors. Second, faced with an incompetent and corrupt administration that fails to deliver, judicial activism has frequently taken the shape of orders to the government on executive matters. Purists will object that the judiciary should stay within its area and not interfere in the executive branch. But for many Indians, court activism is the only way to get redress from a callous administration.
The police system is a mess. India has policemen per , population, almost half the UN recommended level of and far below the levels in the United States and Germany Huge unfilled vacancies are common in all states. In Uttar Pradesh, a state of million people, the overall shortage is 43 percent, with the shortage of head constables being 82 percent and inspectors 73 percent. In many states, they will not even register complaints without a bribe. Saxena, who headed the National Police Commission, once wrote that the police had ceased to regard crime detection and criminal conviction as their key goals.
The reason was that the agenda of home ministers in every state was very different. The top priority of home ministers was to use the police to harass political opponents. The second priority was to use the police and prosecutors to tone down or dismiss cases against their own parties and coalition members. The third priority was to use police for VIP security. And the last priority was to use police for crime detection — which yielded no political dividends and so received the least attention. One consequence of a lousy police force and lousy courts is that virtually no influential person gets convicted beyond all appeals: he or she is likely to die of old age first.
The system rewards lawbreakers and penalizes law abiders. And that erodes every walk of life from business and politics to education and health. Without better governance, economic liberalization will not work properly, because the first assumption of all market economics is the existence of rule of law. If not, the quasi-mafia and crony capitalists will rule supreme. Politics are criminalized. In India, criminals take part in politics and often become cabinet ministers. That gives them huge clout and ensures that charges against them are not pursued.
An analysis by the Association for Democratic Reforms looked at of the members of Parliament elected in and found had criminal cases pending. In the earlier election, the figure was Of the winners in , have been charged with serious offenses, such as murder, kidnapping, and crimes against women.
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Some of those charges may be false but not most. No party is clean — all have criminals aplenty, since those people provided money, muscle, and patronage networks that every party finds useful. Only institutional change can break the criminalization of politics. Exposure of criminal cases is not enough. India needs a new law mandating that all cases against elected members of Parliament and members of the Legislative Assemblies will receive top priority and will be heard on a day-by-day basis until completed.
That law will make electoral victory a curse for criminals — it will expedite their trials instead of giving them the political immunity they seek. If such a law is enacted, we may well see criminal legislators and ministers resigning in order to get off the priority trials list. Such a reform can truly transform the existing perverse incentives. Corruption has experienced a recent backlash. Corruption in countries often gallops upward with GDP, and India in the past 25 years has been no exception.
In one sex scandal, the governor of a state had to resign after the madam of a brothel circulated photos of him with three naked girls. Why did she do so? Because the governor had promised her a mining license, and when he failed to deliver, she exposed him in revenge. Only in India is the supply of naked girls a potential qualification for getting a mining license. The comptroller and auditor general CAG , who for decades had produced little-read audits of government finances, suddenly started calculating the possible revenue lost by the government by allocating spectrum on a "first come, first served basis" in reality favoring friends who were tipped off on the deadline instead of auctioning it.
He estimated the loss at Rs 1. Later, the CAG estimated the loss to the government from coal mines being "allotted" by ministerial discretion instead of being auctioned at Rs 1. The Supreme Court joined the anticorruption party by castigating discretionary allotments of any natural resource and cancelling spectrum licenses for which foreign companies had paid millions of dollars.
The court also held individual bureaucrats responsible, sending a chill through the entire bureaucracy, which hitherto had assumed they were protected by the decisions of their ministers. An anticorruption crusade led by Anna Hazare, a veteran social activist, attracted massive public response. The anticorruption uproar led to complete paralysis in decisionmaking: no bureaucrat or minister wanted to sign any file for fear of being accused of corruption.
The stink of corruption led to the decimation of the Congress-led United Progressive Alliance government in the election, which brought Narendra Modi of the Bharatiya Janata Party to power. Critics claim that economic reforms brought in the massive corruption. In fact, areas that were comprehensively liberalized saw the disappearance of corruption. Before , bribes were needed for industrial licenses, import licenses, foreign exchange allotments, credit allotments, and much else.
But economic reform ended industrial and import licensing, and foreign exchange became freely available. Lower import and excise duties ended most smuggling and excise tax evasion. However, the economic boom hugely raised the value of all natural resources and the telecommunication spectrum, thus raising kickbacks for their allotments.
Many infrastructure areas earlier reserved for the government were opened to private-sector participation, often in public-private partnerships, and many of them were bedeviled by crony capitalism. Businesspeople said most areas became cleaner after liberalization, but some areas worsened — namely, natural resources, real estate which was always highly corrupt and highly regulated , and government contracts. Transparency International's Corruption Perception Index rated India 34th of 41 countries in its first report in , improving to 45th of 52 countries in Its position further improved to 84th of countries in and stood at 76th of countries in So India has moved from being in the bottom quintile of countries to the top half.
Extensive corruption in recent years in some sectors cloaks a general improvement in the fully liberalized sectors. Narendra Modi was elected on an anticorruption platform, and businesspeople say extensive corruption has largely ended in New Delhi. But it continues in state capitals that control 62 percent of all government spending. And for the average person, the worst corruption is that of low-level government functionaries. Even as liberalization has abolished regulations and associated corruption in traditional areas, it has seen the rise of hundreds of new controls related to the environment, health, safety, forests, tribal areas, and land acquisition.
Every year, the central and state legislatures enact more laws and regulations without abolishing thousands of obsolete ones. Many state governments have brought in new price controls. So India remains a difficult country in which to do business. Lousy government services lead to lousy social indicators. The quality of the delivery of government services remains poor. The big improvements in private-sector competitiveness are not even remotely replicated in government service competitiveness.
India's social indicators remain dismal. Yet India has the fastest economic growth in South Asia. Back in , only one of its neighbors, Sri Lanka, had better social indicators, but now India looks to be second worst, ahead of only trouble-torn Pakistan. Indian social indicators have improved faster in the past 25 years of liberalization than in the earlier socialist era, but the improvement is clearly insufficient. Government services of all sorts remain basically unreformed and are delivered by a callous, unsackable bureaucracy.
Prime Minister Modi shows no sign of taking on this bureaucracy. Chief ministers who have tried to take on the trade unions of the civil service have typically been forced to retreat. Table 7. Note: In some cases, the rank is ambiguous for want of data from Nepal and Bhutan. Surveys have shown that half of government schools have no teaching activity at all: teacher absenteeism is chronic, which induces high pupil absenteeism.
As Table 8 shows, the ratio of teacher salaries to GDP is an average of 3. Many teachers are deep into politics, and many become legislators. Teachers staff polling booths during elections, which is one reason no party wants to crack down on teachers: they may retaliate by collaborating with rivals in stuffing ballots. Yet these same teachers often do not teach at all: desperate poor families are pulling their children out of free but useless government schools and putting them in private schools, which are somewhat better.
The government's reaction was to stop participating in future surveys. Arithmetic remains a challenge. Only India's public spending on health, which elsewhere commonly provides health care access to the poor, has always been among the lowest in the world. India has world-class hospitals for the elite, but the masses are at the mercy of quacks and dubious practitioners of traditional indigenous medicine. Table 9 shows how far India lags behind other regions in public health spending. Given this low rate of public spending, the quality of public health is poor, and health indicators in India are typically worse than in neighboring countries of South Asia.
India has some of the worst nutritional indicators in the world. Anemia affects over 80 percent of the population in several states, including many in the richest one-third. Child malnutrition, measured by low weight for age, affects A family health survey suggests that virtually no improvement in child malnutrition occurred between and , despite rapid GDP growth. However, data from the National Nutritional Monitoring Board show some improvement. By global standards, Indian children suffer from stunting, low weight, and wasting.
The puzzle is that malnutrition and anemia affect high-income groups too. Calorie intake is falling despite rising income — poor people want to switch to superior, tasty foods rather than get more nutrients out of basic foods. One reason for the measured malnutrition is that open defecation spreads diseases that inhibit the absorption of food nutrients.
Better sanitation is vital and is a public health issue. Nutrition is a bigger problem than hunger, so nutritional education and fortification of food with vitamins, iron, and iodine should be on the agenda. Subsidies, freebies, and waste are still a problem. Formal subsidies as defined by the central government have fallen from 2.
But that definition excludes a variety of goods and services provided below cost, and which are often free. The National Institute of Public Finance and Policy has estimated subsidies, broadly defined as nonrecovered costs of services and goods, at Subsidies for public health education and basic services are surely warranted. While this compromise and power-sharing helped Tunisia avoid some of the pitfalls that affected other Arab countries, from an economic policy perspective, however, the politics of consensus led to myopia and inaction.
Fondation Jean-Jaures, None of the two major parties wanted to pay the price of significant economic reforms, including austerity measures, or reforms to level the playing field, given the low probability of benefiting from the resulting economic improvements in the future, as both felt they were in a weak position — Nidaa because of its internal divisions, and Ennahdha because of the deteriorating regional situation especially after the coup in Egypt.
As the election cycle approached municipal , parliament and presidency , there were incentives to continue with expansionary policies, as is usually the case in democracies, and especially young ones. MIT Press, But if the political parties, driven by their myopic concerns, were unwilling to be disciplined by the prospects of a worsening future, why is it that the main labour union, the Tunisian General Labour Union UGTT , which, because of its sheer size, could go beyond the traditional role of a labour union and advocate for more responsible policies, instead, continued to push for higher wages even when it became clear that the economic situation was becoming unsustainable?
Recent interviews conducted with labour union leaders reveal that while they were well aware of the risks facing the economy, they found the government too divided to be in a position to negotiate credibly on issues of burden-sharing and reform. As a result, it seems that they have preferred to build up their bargaining power in view of future negotiations with a more decisive government.
Besides macro policy, politics have deeply affected the working of the private sector. There were two mechanisms at play. First, firms that were privileged in the past lost these privileges and became less invested - indeed, the assets of many firms associated with the Ben Ali regime were expropriated. Oxford University Press, : Second, the investment climate has not yet improved sufficiently to strongly encourage the emergence of new private actors. Instead, the heightened political competition has pushed parties to seek political finance from firms by offering economic privileges in return.
As a result, new interest groups connected to old and new political business, and regional elites have gained prominence. In the parlance of Lant Pritchett, the "deals space", while becoming more "open", has also become more "disordered". Oxford University Press, Compared to the previous situation then, one can expect gains over time if this greater "openness" allows the capitalistic base to widen, as politicians do not see the private sector anymore as a major threat, as was the case under Ben Ali.
But at the same time, like the situation under Ben Ali, the new political regime continues to exert a corrupting influence on the business sector. OUP, Importantly, useful reforms can move forward under particular circumstances. While the influence of large firms and conglomerates persists, other actors can now also exercise effective pressure. For example, the recent reform of the investment code offered major simplifications relative to the past by reducing the tax differential between onshore and offshore systems, which will increase competition and push for more efficiency.
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In this case, it was the pressure from the EU and the classification of Tunisia as non-cooperative tax jurisdiction that accelerated the process. Still, improved regulations will not be easy to implement in the face of opposition, as seen after the recent reforms of the state owned banks, which were reorganized and recapitalized, but not privatized, mainly because of pressures from the national labour union, which was weary of losing financing for SOEs.
Regional inequalities have become more salient since the revolution, as was evident in the turmoil in Gafsa and Sidi-Bouzid. While nearly a third of the population living in the interior, subsiding on relatively unproductive agriculture, two thirds of Tunisia's poor live there, and unemployment is much higher than in the richer Sahel region.
Access to infrastructure is poorer, making it harder for firms to create jobs. A sizable increase in cash transfers to poor families had significant impact on poverty. But much of the rise in social spending was related to higher fuel subsidies, which mainly benefit richer households. Of these, two thirds went to fuel subsidies. With the parallel rise in public sector wages, inequality between insiders and outsiders has likely increased, and social grievances, which were at the heart of the revolution, have remained largely unaddressed.
A final tension relates to the support Tunisia received from the donors' community. While European financial support rose substantially after , the two IMF programmes in and had been disappointing and ineffective in boosting economic performance.
Comparing State-level policy responses to economic reforms in India
In retrospect, it appears that Tunisian politicians were well aware that they had the upper hand at bargaining ex-post with the IFIs, and loan conditions were often broken especially on the public sector wage bill with little consequence for disbursements. With moral hazard at full play, international support ended up financing increased consumption rather than investment. At a deeper level, the failure of the international community to more effectively help in the stabilization of Tunisia can be related to its inability to offer, so far, effective incentives for gains on the productivity side, as had been the case with Eastern European countries in transition, which were offered to join the EU market once they had reformed their economies and policies according to European standards.
These failures should however not obscure the important gains achieved in the past eight years. One could more generously compare Tunisia's performance not with Eastern European transition countries, but with Egypt. On the political front, democracy has taken root in spite of predictable tensions caused by gains of political Islam in the first elections, and identity issues are unlikely to be the main social cleavage in the coming ones.
There was a smooth transition after the death of President Essebsi. There was no coup or temptation of one in spite of the collapse in public opinions about the attractiveness of democracy. In Tunisia military and security spending rose post, while in Egypt, the Morsy regime was trying to reduce the power of the military Grewal The army and security forces have been strengthened, under democratic control, leading to a decline in terrorism.
A further consolidation is likely to require constitutional reforms. There has also been some modest economic progress. There are hopes of starting to tackle regional inequality with some progress on decentralization and the holding of the first local elections under a new law. A more informed public freely scrutinizes government and such scrutiny is laying the basis for longer-term reforms — even if such reforms have been slow in coming. In recent years, policies have started to focus on measures to fight corruption, trim the bureaucracy, or reduce tax evasion, and the discussions have moved to issues of ambition and effectiveness.
In Egypt, on the other hand, there is very little public understanding among the citizens about the state of the economy, as the mainstream media has become a regime mouthpiece, and the authorities severely limited freedom of expression and association. On the private sector side, while the situation has not yet improved, one can argue that — structurally — the scaffolding for future progress is now in place.
While corruption has risen, its economic impact remains less corrosive than in Egypt. As noted earlier, private investment has by nearly recovered to its level. In both countries, cronyism and corruption have weighted down on the business climate. In Tunisia, however, increased cronyism is linked to the need for parties to raise political finance, which impacts growth essentially in rent-filled low growth sectors. Meanwhile, in Egypt, President Sisi, like President Mubarak before him, is wary of allowing private-sector players to gain political clout and has instead propped up army-controlled firms whom he can trust in an attempt to exclude possible opposition from gaining ground in the private sector.
Such predation occurs mainly in the growth sectors and is this much costlier from a growth perspective. The Future of the Private Sector. Much of the political gains in Tunisia have been attributed to its middle class, a tradition of moderation, and a dynamic civil society. Still, many observers have noted a plunge in the popular appeal of democracy in Tunisian opinion polls, which was reflected in the low participation rate in the first round of the presidential election on 15 September Arab Barometer working paper, ; and Grewal, Sharan.
Arab Barometer data shows that by , Tunisia ranked among the lowest in the region on questions related to the attractiveness of democracy, trust in government, and trust in the political parties. Recent research reveals that this phenomenon is closely connected to the high levels of economic insecurity.
Diwan, and I. Mimeo, Moreover, support for the separation between state and mosque has risen over time. But personal trust and social tolerance have taken a big hit, which would weaken civil society if unaddressed in future. All these developments in public opinions and values point to a loss of "innocence", with the realization that the democratic system requires improvements over time. The economic weaknesses described above suggest a large agenda leftover for the next administration, which includes an explosive macroeconomic situation, a challenging structural agenda going from public sector reform starting with SOEs to making markets work better, in addition to a social justice agenda focused on the development of the peripheral regions.
In the immediate future, some measures of fiscal stabilization will be necessary. This will be no doubt difficult for any new administration. Politically, questions such as how to adjust fiscal policy to attain sustainability and at the same time foster social justice will require not only the attention of technocrats, but also hard negotiations among politicians and with citizen groups. The social demands for more and better jobs will also remain high, requiring discussion around sacrifices in the present for gains in the future.
On this front, the issues of competition and innovation will be particularly important. The outcome of the upcoming elections will determine the nature of the range of the possible. There is a possibility of electing a weak president and a fragmented Parliament. In that case, much of the challenges of the coming period will probably reside in Parliament, where solutions will require the building up of reform coalitions and the pressures of a constructive opposition.
After all, contrary to one-party systems where all initiatives tend to emanate from the top, decisions have now to be negotiated with many actors and take into account competing interests. Yet, as witnessed in many young democracies around the world, "messy" democratic orders are not necessarily incompatible with economic progress. As evident, for example, in Kenya, Ghana, Bangladesh, or Mexico, newly established democracies often manage to perform economically quite well while sitting "on the edge of chaos".
Development strategies: integrating governance and growth. The World Bank, The pressure of electoral politics often pushes them to manage to solve some of the important tensions facing the economy, if on an in-extremis fashion. This means that while progress is unlikely to come from state-led development efforts, it may end up being driven forward by the lobbying of an increasingly dynamic private sector and civil society, who will pushed for more performing state and markets, in spite of corruption.
As a result, and while tackling structural weaknesses remains a priority, it is more likely that progress would come from improvements in the workings of democracy. On the reform front, the agenda includes rethinking the rules of the democratic order power-sharing between the Presidency and Parliament, political finance, methods for local elections , 33 Gallien, Max, and Isabelle Werenfels.