Time to shift the burden of proof
Sep 03 2014
Leaving aside the WTO move, which seen in the light of the toxic nature of Indian trade politics is less surprising, the favours doled out by the Modi government since the beginning of August indicate a pro-incumbent corporate bias. A bailout for Indian airline companies is in the works. Prime minister Modi instructed a ministry to eliminate the trade deficit in electronics by 2020. Another government department held up Chinese subsidies as a model for promoting India’s telecom sector. Industrial policies are alive and kicking then.
For sure, the recent Union budget signalled a relaxation of certain restrictions on foreign direct investment. However, in the insurance sector, a domestic backlash against lifting investment limits is already underway in Parliament. Moreover, official habits of yesteryear seem hard to shake off. A clutch of trade distortions on areca nuts, gold, silver, and sugar have been introduced in recent weeks. Plus, a leading state-owned firm announced it would buy even more locally-produced content, curtailing foreign sales opportunities further. While it’s too early to completely write off the Modi administration’s reformist talk, the initial omens aren’t encouraging. The honeymoon with investors could soon be over.
India isn’t alone in confounding expectations on economic reform. The news that Italy is in its third recession in recent years is casting prime minister Matteo Renzi in a different light. Like Modi, gone are the expectations of reform trumpeted after Renzi’s resounding electoral success in May. Gushing assessments such as “Who can doubt that Matteo Renzi, Italy’s prime minister, is man of the hour?” (as one Oxford professor wrote) now jar.
Why is it that foreign analysts make such bad calls and can we do any better? Now, one mustn’t overdo the case for the prosecution. Sometimes foreign analysts get it right. Re-reading editorials and expert commentary around the time of French president Francois Hollande’s election in 2012 reveals a due sense of scepticism. Even Holland’s own economic adviser reckoned his boss was cautious! The recent ejection of left-wing ministers from the French government doesn’t mean that widespread reforms will necessarily follow.
Still, in too many cases, foreign analysts have overstated the reformist credentials of newly elected governments. What biases could account for this? Misreading evidence is one. Perhaps, too much credence is given to English-speaking local analysts’ interpretations of national political dynamics — some of whom are all too aware of foreign preferences for opening markets. Plus there are always a few ambitious economists cheerleading each major party at election time.
There are other sources of bias as well. After a government has stalled reform or worse, reversed it, perhaps, there is a tendency to believe that the leading opposition candidate must be more market-friendly? In elections, then, the grass may appear greener on the other side. Perhaps, a foreign analyst’s conviction that a country needs economic reform clouds their judgement as to the likelihood of that reform happening? Perhaps, our expectations of change are far too high? After all, as far as reforms are concerned, there aren’t many examples of shock therapy in recent years.
Faults in analysis matter too. Less emphasis in political risk assessments should be given to amorphous concepts such as “political will.” Ambiguous statements in favour of reforms should be discounted, especially if they are not repeated to the local non-English speaking press. Lessons learned in pushing through reforms at the local level need not carry over to the national level, where constitutional arrangements often differ. Why should corporate backers of political parties — often incumbent firms — back market opening? Tough questions such as these shouldn’t be overlooked.
Given the bias of so many analysts towards reform optimism, perhaps, the best corrective is to start from the position that nothing will change and probe that. It’s time to shift the burden of proof. Doing so might persuade truly reformist governments to act sooner, lest the impression of foot-dragging gain ground.
(The writer is a professor of international trade and economic development at University of St Gallen, Switzerland)