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Who benefits from reforms?

Last updated on: June 28, 2012 14:19 IST

Who benefits from reforms?

Ajit Balakrishnan

There are two quick ways to advertise your modernity in India today.

The first is to carry an iPad when you go for meetings, even if all you do with it is read email; and the second is to declare that you are firmly on the side of "reforms".

As a corollary, you must also declare that only more "reforms" will arrest our falling economic growth rate and revive the wilting rupee and the Sensex. Conversely, if you do not carry an iPad to a meeting and don't declare unswerving support for "reform", you are out of touch.

This positive connotation for "reform" probably dates back to October 31, 1517, when Martin Luther, distressed by the Pope's practice of charging a price for forgiving sinners, nailed his 95 "propositions" to the door of a church in Wittenberg, sparking off the Protestant "Reformation".

This positive slant to the word (at least in the non-Catholic countries) was further reinforced during the 19th century in England when various groups lobbying for causes such as improved working conditions, universal voting rights and so on started appending the word "reform" to their names. Thus, there was the "Penal Reform League", the "Electoral Reform Society" and in 1832 even "the Great Reform Act".

The Oxford English Dictionary has stamped its approval on the word by defining "reform" as "make changes in (something, especially an institution or practice) in order to improve it".

 In recent times, another shade of meaning has got loaded onto the word: "reform" as an action that lets market forces set the prices of goods and services as well as interest rates.
Conversely, it means having the state play a lesser role in economic affairs.

Thus, "banking sector reforms" in India have come to mean allowing more private sector banks to set up shop and letting the market, not the Reserve Bank of India, set interest rates. In other words, it means giving banks more freedom to operate.

What is puzzling, though, is that in the US today "banking reform" has exactly the opposite meaning to what it has in India. When American media and policy makers talk of "banking reform", they mean putting more controls on banks.

Thus, the "banking reform" under way there currently, according to The Wall Street Journal, will put "new heightened capital and leverage limits" on big banks, "instructs the government to conduct unprecedented, ongoing audits of the central bank's lending programs".

Not only does "reform" mean different things in different countries, it may also mean different things in the same country at different points of time. For instance, "labour reforms" in the 1950s in India generally meant giving workers the right to form unions.

Today, however, they mean the opposite: giving employers greater flexibility in hiring and firing workers.

It is also useful to remember that a "reform" of one era could result in a situation that requires "reforms" of another era to be undone. For example, the general sentiment in the 1960s was that Indian banks were too cosy with business groups that owned and controlled them, and were not risk-taking enough in opening branches and lending to new entrepreneurs.

These sentiments, in the course of time, led to the nationalisation in 1969 of 14 of the largest banks, which were then pushed to expand. By 1990, deposits had increased eightfold to Rs 1.1 lakh crore and the number of branches tenfold to 60,000. But this heady expansion also created non-performing assets and hidden losses on their balance sheets. Voila! The 1991 "banking reforms" recapitalised these banks, with the government pumping money.

You can also set different standards for "reform" for yourself and for others. Thus, the stockbrokers on the Bombay Stock Exchange are always in the forefront of calls for "financial reform" in the economy but resist "stock exchange reforms". So strong was the brokers' resistance to, for example, computerisation that the government had to set up a parallel stock exchange, the National Stock Exchange, to get it done.

The success or failure of reforms can also be invented. In their recent working paper, "The Social Construction of Successful Market Reforms", Oxford University sociologist David Stuckler and the co-authors say that the success of "reforms" and the statistics to prove that they are successful are socially constructed by motivated actors such as the bureaucrats in agencies that ran their programmes and players in the financial services industries. For instance, the extensive statistics published by the European Bank for Reconstruction and Development (EBRD) about the East European experience in the 1990s are the basis of the belief that large-scale privatisation (="reforms") leads to rapid economic growth. But when the authors re-examined the same data, "the positive growth effect of large-scale privatisation disappears ... [suggesting] that many cross-national studies using the EBRD's statistics have potentially substantially overstated the links between neo-liberal reforms and positive outcomes".

The next time you hear a call for "reform", it might be useful to ask, "For whose benefit is this reform?"