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### Introduction
- Transformative epoch: sustained fast growth can produce structural transformation from low income → middle income → high income.
- Four objectives:
  - (1) Learn from fast growing economies how to sustain growth.
  - (2) Show reforms of the 1990s caused higher Indian growth in the 2000s and identify mechanisms and potential sustaining reforms.
  - (3) Explain paradox of higher growth potential co-existing with unchanged/declining growth trend.
  - (4) Recommend reforms to help sustain fast growth in India.
- India growth phases and J curve:
  - Phase I (1951–1979): per capita growth 1.3 per cent per annum.
  - Phase II (1980–1991): per capita growth about 3.7 per cent per annum (tripling from phase I).
  - Phase III (post-1990s reforms): growth potential doubled to around 7.5 per cent per annum in per capita GDP.
  - Per capita GDP growth averaged about 7.5 per cent during 2003-4 to 2007-8; averaged about 7 per cent during 2003-4 to 2011-12 despite 2008 shock.
- Definitions and methodology:
  - HGE: average growth rate of per capita GDP of 7 per cent or more for a contiguous period of 10 years or more; exclude recovery from below-peak per capita GDP.
  - pHGE: per capita GDP growth average of 6 per cent or more for at least a decade, excluding recovery periods.
  - Sustainability index Ix = (1 + AvgGr(T))^T, with period T determined by 10-year moving average rules.
  - Data: World Bank WDI supplemented by IMF WEO; ~190 countries, ~8,500 country-years, 1960–2011.
- Empirical finding: sustaining fast growth across decades is rare; only four countries achieved compound per capita growth ≥ 7 per cent for two decades.

### High Growth Economies (HGEs): identification, composition, and lessons
- Identification and sample treatment:
  - Forty two countries had a 10 year average growth rate of 7% at some point post-1960; after truncating recoveries below previous peaks, nineteen countries remain genuine HGEs, of which three were still HGEs in 2011.
  - Thirteen excluded countries were in former Soviet Union/East Bloc.
- Sustainability classification:
  - Ten of nineteen classified as marathoners (Index > 3 per cent).
  - Nine as sprinters (3 > index > 2).
- Resource-rich HGEs:
  - Preliminary econometrics: resource rents contribute 0.17 per cent point to growth for every per cent of GDP increase in resource rents.
  - Of 19 HGEs, a little over a third were resource rich.
  - Notable cases:
    - Oman: per capita GDP in 2011 was eleven times that in 1960.
    - Equatorial Guinea: per capita GDP is 13 times its pre-growth spurt peak (growth spurt started in 1990s; partly recovery).
    - Iran, Saudi Arabia, Gabon: large initial gains; Iran and Saudi Arabia lost all gains a decade later; Gabon lost half.
    - Bhutan: used Hydro power (non-oil rents) to sustain growth.
- Non-resource (normal) HGEs and regional composition:
  - About a dozen non-resource HGEs across 1961–2011; half marathoners, half sprinters.
  - Asian marathoners (China, S. Korea, Singapore, Japan, Hong Kong SAR and Thailand) constituted 83 per cent of marathoners.
  - Other HGEs: Malta, Portugal, Greece, Bosnia-Herzegovina, Antigua & Barbuda, Botswana.
  - Data-quality cautions: Bosnia and Herzegovina, Myanmar.
- China’s exceptional experience:
  - Attained HGE threshold in 1985 and maintained it for 26 years; peak 10 year growth 10 per cent in 2011.
  - Only country to average over 7 per cent per capita (7.4 per cent) for three decades and the only non-resource rich HGE still in HGE status in 2011.
  - TSLS/HAC analysis suggests gross fixed capital formation, FDI (ratios to GDP), export growth and resource rents played significant roles.
  - “Party led Growth” features: banking system as fiscal variant, regional experimentation, focus on growth objectives, transformation of FDI-export strategies; system characterized as “Party Capitalism.”

### pHGE transitions, regional concentration, catch-up, and determinants
- Transition probabilities and outcomes:
  - 0.22 probability of moving to HGE in the third year.
  - 0.22 probability of remaining in the pHGE category before eventually moving to HGE.
  - 0.33 probability of continuing in pHGE category for three or more years.
  - 0.22 probability of ceasing to be a pHGE next year.
  - Six of eight successful pHGE→HGE transitions were Asian; none of the ten pHGEs that failed to transit were Asian.
  - Conditional probability of an Asian country transiting from pHGE to HGE observed as 1 in the sample.
  - Five current pHGEs (Vietnam, India, Cambodia, Bhutan and Maldives) are Asian.
- Regional concentration (2002–2011 decade): eight countries with per capita GDP growth > 6 per cent; seven in Asia (India, Bhutan, Maldives, Vietnam, Cambodia, Myanmar, China).
- Catch-up and Middle Income Trap (MIT):
  - MIT range defined as between $10,000 and $16,000 (Eichengreen et al (2011)).
  - Only Equatorial Guinea transitioned from low income to beyond MIT range as an HGE.
  - Japan, Hong Kong, Ireland and Singapore substantially caught up with the USA during fast growth.
  - Of eight fast growing countries still classified as fast growing, six (including China and India) started from lower income and are still below MIT range.
  - Of twenty two countries no longer growing fast: six slowed down before MIT range; nine slowed within MIT range; seven slowed after crossing MIT range.
  - Less than half (0.4) of fast growing countries slowed within MIT range.
- Correlations and determinants (selected sample statistics from Table 2):
  - Growth rate w Pcgdp: Mean 7.22, Stdev 2.51, No of Obs 33.
  - Natural Resource Rent Ratio to GDP: Mean 9.51, Stdev 18.00, Correl 0.76, No of Obs 32.
  - Gross Domestic Saving: Mean 25.91, Stdev 17.20, Correl 0.52, No of Obs 32.
  - FDI inflow (net): Mean 4.04, Stdev 4.30, Correl 0.47, No of Obs 27.
  - Gross Capital Formation: Mean 29.77, Stdev 7.90, Correl 0.37, No of Obs 32.
  - Export of G&S: Mean 45.53, Stdev 33.80, Correl 0.20, No of Obs 32.
  - Import of G&S: Mean 49.43, Stdev 34.00, Correl 0.02, No of Obs 32.
  - Per Capita Gdp PPP Starting: Ratio to USA: Mean 0.19, Stdev 0.15, Correl -0.17, No of Obs 30.
- Signals of potential slowdown:
  - Declines in fixed investment and/or FDI, deterioration in balance of payments, worsening trends in resource rents/savings/investment ratios.
  - Price of capital goods and cost of credit affect investment and growth.

### Fiscal lessons from financial crises and political economy
- Crisis response and complacency:
  - V/U-shaped recoveries from 2008 induced complacency; Stage 2 Euro crisis in mid-2011 increased global risk.
- Fiscal context:
  - India: fiscal deficit and gross debt-GDP ratios relatively high among emerging economies; net debt-GDP low and little sovereign foreign holdings.
  - IMF research cited: net foreign debt to GDP ratio is the only significant predictor of financial crises.
- Political-economy lessons (country examples):
  - USA: postponing structural fiscal reforms, subsequent deficits, and sovereign rating downgrade—lesson to maintain steady fiscal progress and structural solutions in good times.
  - Greece: lower real rates on Euro entry induced transfers/consumption over debt reduction—lesson to use booms to secure long-term fiscal soundness.
  - Italy: long-term growth decline and fiscal reversals—lesson to address structural decline and avoid partisan subsidy preservation that undermines growth and raises debt.
- Implications for emerging economies:
  - Do not postpone structural fiscal reforms during good times.
  - Use favorable conditions to implement structural fiscal solutions.
  - Fiscal sustainability depends on medium-long term growth and real interest rates.

### Phasing of liberalization, competition dynamics, and domestic entrepreneur-led growth
- Competition dynamics (three aspects):
  - Freedom to compete: production, investment, price and distribution controls in India restricted medium-large firm competition and firm size, limiting economies of scale.
  - Pressure to compete: competitive pressure can arise from domestic producers, FDI or imports; replacing QRs with equivalent tariffs maintains threat of imports; paradoxically, overall QR liberalization with higher nominal tariffs reduced rents and corruption, increasing effective competition in the 1980s.
  - Means and ability to compete: access to inputs and capital goods, technology, skills and land; liberalized product markets increase both pressure and ability to compete.
- Role of FDI and spillovers:
  - FDI bundles technology, management, marketing and capital; most effective in modern industries and new products; positive spillovers highest in industries with large global technological change (e.g., automobile sector).
  - Competitive market and industrial environment are prerequisites for FDI spillovers to materialize.
- Phasing and sectoral sequencing:
  - Access to disembodied technology and capital liberalized early 1990s; QRs on intermediate and capital goods eliminated early 1990s; QRs on manufactured consumer goods eliminated end-1990s/early 2000s.
  - Tariff reductions were broadly proportional but with exceptions (refineries, capital goods) yielding higher effective protection early on.
- Public-private mix:
  - Public sector pre-1990 presence in industries (steel, aluminum, refineries) constrained private entry; liberalization and de-licensing allowed private firms to increase production shares, raising productivity if private efficiency exceeded public sector.
- Incomplete reforms and remaining restrictions:
  - Agriculture largely bypassed by import liberalization; FDI ceilings remain in key service sectors (Multi-brand Retail 26 per cent; Insurance 26 per cent; Commercial Airlines 49 per cent).
  - Mining virtually open to FDI but coal mining retains public monopoly issues.
  - Regulatory independence/objectivity concerns in infrastructure; financial sector liberalization pursued "with all deliberate speed" as risk-minimizing.
- Domestic entrepreneur-led growth:
  - Indian growth acceleration in the 1980s and 1990s driven mainly by domestic entrepreneurship; FDI remained a small fraction of total investment/stock.
  - J-curve of growth and productivity: reforms produced a net J-curve effect of -2.6 per cent points; initial acceleration held down then followed by stronger long-term gains.
  - Re-estimation (GDP at constant 2004-05 prices, 1980–2011) shows growth acceleration from 5.1 per cent in phase II to 7.4 per cent in phase III.
  - Investment/GDP jumped from 13.7 per cent in phase II to 22.8 per cent in phase III but was held down by a J-curve effect of -7.1 per cent points.
  - GDP growth averaged almost 9 per cent during 2003-04 to 2007-08 and 8.5 per cent during 2003-04 to 2010-11; per capita about 6.9 per cent.
  - GDP growth trend decline of (-) 0.16 per cent per annum during 2003-04 to 2011-12 (from ~8.75 per cent in 2003-4 to ~7.5 in 2011-12).
  - Restoring fiscal–monetary mix and removing temporary shocks needed to return to trend; return to medium term trend of 8.5 per cent requires coherent reforms.

### Policy reforms for sustaining growth (overview and sectoral recommendations)
- Four broad policy areas:
  - (a) Macro-economic stability and sustainability.
  - (b) Market reform to increase competition.
  - (c) Institutional reform and conflict resolution.
  - (d) Social equity and inclusion.
- 1990s reforms raised growth potential to 8.5 per cent to 9 per cent.
- Macro-economic priorities:
  - Restore fiscal and current account balances to pre-2008-9 trends.
  - Fiscal targets: total (center + states) fiscal deficit around two percent and total Debt-GDP ratio of 40 per cent over the next ten years as helpful to attain a triple A rating and reduce dependence on unstable capital flows.
  - Return to tax reform approach: Direct Tax Bill and Goods and Service Tax to create unified market and facilitate competition.
  - Balance government expenditure between public goods/human capital and income/consumption transfers.
- Sectoral policy recommendations (selected):
  - Oil/energy:
    - Separate subsidies from pricing; replace kerosene subsidy with free solar lanterns and cookers; train village youth to service solar items.
    - Replace diesel subsidy with subsidy for fuel efficient engines.
    - Subsidize adoption/development of new technology but allow prices to reflect global energy prices.
    - Medium-term: promote Green Cities; publish designs and train urban planning officials.
  - Food prices and policy:
    - Food inflation drivers: doubling per capita income growth rate driving demand change, urban land price boom, higher fuel/transport costs, fragmented supply chains.
    - Recommend food retail revolution via FDI in grocery retail (allow 74 per cent FDI in grocery/food retail initially), reform APMC Acts and ECA (delist perishables from schedule 1), predictable import-export regime (price bands with variable tariffs/duties), and build road/water grids to connect villages.
  - Urban governance and land markets:
    - Dramatically increase supply of habitable/accessible urban land; genuine decentralization to city governments; modernize laws for land use change and sale (competitive auctions); additional measures beyond Land acquisition and Relief and Rehabilitation laws in parliament required.
  - Human capital and skills:
    - Provide usable skills built on sound primary education; large-scale skills training in rural/poor urban areas under a "Let a hundred flowers bloom" strategy with sound regulation; government to educate educators and train trainers.
  - Resource rents and corruption:
    - Address rents from natural resources, land use, and government procurement.
    - Natural resources: auctions with post-auction tradability and capital gains taxation; sound regulations to prevent post-auction renegotiation.
    - Land use: improve planning, stakeholder hearings, transparent information to reflect true land value.
    - Government procurement: create "Public Accountability Information System (PAIS)" with full public disclosure of jobs/purchases and payments.
- Infrastructure and investment environment:
  - Policy-regulatory regime promoting competition in private goods infrastructure (Coal, electricity generation, rail services) is prerequisite to eliminate bottlenecks.
  - Parcel coal fields and auction; allow PSUs to bid.
  - Benchmark competition and open access to distribution networks for electricity.
  - Focus on public goods infrastructure: permanent road network, drinking water/sewage/sanitation grids, irrigation-drainage grids.
  - Accelerate development of Long Term Debt markets to reduce volatile capital flow dependency and increase infrastructure financing.
  - Improve investment environment by simplifying regulations and removing bureaucratic constraints.

### Macro Economics: fiscal-monetary mix, fiscal deficits and conclusions
- Fiscal-monetary mix:
  - Post-2009 V recovery: tighter fiscal and looser monetary policy with targeted attacks on supply bottlenecks would have produced better results.
  - Historical note: Virmani (2003) showed fiscal deficit and 0.5 elasticity of CAD to central fiscal deficit caused 1991 BOP crisis; flexible exchange rate with 30-40 per cent devaluation could have avoided crisis.
- Fiscal deficit and debt targets:
  - Critical danger point for debt-GDP ratio between 60 per cent and 100 per cent.
  - Recommendation: total fiscal deficit ~ two percent and total Debt-GDP ratio of 40 per cent over next ten years to strengthen credit rating and resilience.
- Conclusion and outlook:
  - Sustained fast growth is key to structural transformation; sustaining growth is more difficult than accelerating it.
  - 1990s reforms raised potential growth from ~5.5 per cent to over 8.5 per cent.
  - Economy grew ~9 per cent per annum during 2003-4 to 2007-8; average fell to 7.7 per cent in 2008-9 to 2011-12.
  - Two slowdown factors: continuing financial crises/capital flow volatility and domestic bottlenecks and socio-political conflicts amplified by the V-shaped recovery.
  - Near-term risks: significant probability of external shocks (Euro melt-down, oil price spikes) in next two years.
  - Probability observations:
    - Over 1/5th probability of India’s decadal per capita growth rate falling below 6 per cent if reforms remain at recent levels.
    - Potential to attain HGE status by reversing downward trend and returning to per capita GDP growth of 7 to 7.5 per cent (GDP 8.5 per cent+).

### Appendix 2: China Growth (econometric findings)
- Methodology:
  - Two stage least squares (TSLS) with HAC procedure, sample 1983 to 2009, instruments: World GDP growth, World export, World commodity prices, time and lagged variables.
- Base equation (PcGgr):
  - PcGgr = 1.9 PcGDP(t-1) + 0.25 GFCFgr + 0.06 Exportgr + 0.60 FDI/GDP + 0.59 Rent/GDP
    - Reported t-statistics: 1.6(1.1)  0.09(2.7)*  0.025(2.5)*  0.15(4.0)**  0.15(4.0)**
  - Goodness of fit: R2 = 0.71, R2 (adj) = 0.66 ; DW = 1.9.
  - GFCF, FDI, Exportgr, and Rent/GDP significant contributors to China’s growth in this specification.
- Alternative specification (rent decomposed):
  - PcGgr = 1.1 PcGDP(t-1) + 0.22 GFCFgr + 0.06 Exportgr + 0.66 FDI/GDP + 0.68 Rentyf + 0.27 Rentyr
    - Reported t-statistics: 1.5(0.8)  0.04(5.4)**  0.019(3.1)**  0.18(3.6)**  0.11(6.3)**  0.33(0.83)
  - Goodness of fit: R2 = 0.77, R2 (adj) = 0.72 ; DW = 1.9.
  - Trend and cyclical rent decomposition leaves coefficients largely unaffected; cyclical component not significant.
- Rent/GDP regression:
  - Rent/GDP = 3.9 – 0.76 FDI/Gdp + 0.16 GFCFgr – 0.095 Exportgr + 0.94 WrldGdpgr
    - t-statistics: 2.1(1.9)^  0.35(-2.2)*  0.09(1.7)^  0.05(-1.9)^  0.33(2.8)**
  - Goodness of fit: R2 = 0.60, R2 (adj) = 0.53 ; DW = 1.4.
  - Implications:
    - World demand and domestic investment drive resource rents; land rents were generated alongside urban investment.
    - Companies owning resources used as conduits for indirect/hidden subsidies to exports and FDI.
    - Quantitative effects: 10 per cent point increase in export growth → 1 per cent point decline in recorded Rent/GDP; 10 per cent rise in FDI:GDP → 2/3rd of a per cent point reduction in recorded Rent/GDP.
    - Indirect/hidden subsidies to exports and FDI estimated around 3.4 per cent of GDP based on average values during high growth period.
- Quantitative contributions:
  - Of the 8 per cent average growth since 1970, FDI and Exports contributed 1.7 per cent and 0.8 per cent point respectively.
  - Significance of rent variable flagged as a surprising result requiring further analysis.

*Source: _wp12185 - IMF working paper content provided in the prompt.*

### 1.            Introduction                                                                                              

### 1. Introduction

### Transformative epoch and focus
- Economic growth is transforming the world economy because of the number of people involved and its rate of growth.
- Economic development involves structural transformation: low income → middle income → high income.
- Sustained fast growth can produce such transformations.
- The paper focuses on economies that have grown fast for a sufficient period to transform their economy; definitions of "fast" and "sufficiently long" are necessarily somewhat arbitrary and chosen to be simple and transparent.

### Four interlinked objectives of the paper
- (1) To learn from the experience of fast growing economies how to sustain growth.
- (2) To show that the reforms of the 1990s are the cause of the higher growth of the Indian economy in the 2000s, and to identify the mechanism through which they operated and potential growth-sustaining reforms.
- (3) To explain the paradox of higher growth potential co-existing with either unchanged or declining growth trend.
- (4) To identify and recommend reforms that will help sustain fast growth in India.

### India: growth phases, reforms, and J curve
- India’s reforms of the 1980s led to a tripling of India’s per capita growth rate from 1.3 per cent per annum during 1951 to 1979 (phase I) to about 3.7 per cent per annum during 1980 to 1991 (phase II).
- The more extensive economic reforms of the 1990s doubled the growth potential of the Indian economy to around 7.5 per cent per annum in terms of per capita GDP.
- The economy entered a third higher growth phase in the 1990s (phase III), though this was not clearly visible in aggregate data during the 1990s and remained elusive till the mid-2000s because of the J curve of growth.
- Per capita GDP growth averaged about 7.5 per cent during 2003-4 to 2007-8 before being struck by the global financial crisis in 2008.
- Despite the exogenous shock, per capita GDP growth averaged about 7 per cent during the nine years 2003-4 to 2011-12.

### Organization of the paper (as described)
- Section 2: Analysis of fast growing economies, divided into High Growth Economies (HGEs) and potential High Growth Economies (pHGEs); situates India in the pHGE category and draws lessons for sustaining growth to reach upper middle income.
- Section 3: Political economy aspects of sustaining fast growth, including fiscal problems exposed by the global financial crisis.
- Section 4: Link between India’s 1990s reforms and economic growth; timing and phasing of key reforms and the nature of the growth transition.
- Section 5: Analysis of higher growth potential created by these reforms.
- Section 6: Suggested reforms to return India to the fast growth track and sustain growth over the next decade.
- Section 7: Conclusion.

### Definitions: fast growth, HGEs, and pHGEs
- Fast growing economies are divided into two sub-categories: High Growth Economy (HGE) and potential High Growth Economies (pHGEs); HGEs and pHGEs together constitute fast growing economies for the paper’s analysis.
- HGE definition: countries with an average growth rate of per capita GDP of 7 per cent or more for a contiguous period of 10 years or more (implying per capita GDP doubled during the decade).
  - Additional HGE criterion: the growth rate must exclude data points representing recovery from a per capita GDP level that is below a previous peak.
  - Both 10-year simple and compound annual average growth rates are calculated; the compound annual average is used to classify countries.
- pHGE definition: countries whose per capita GDP has grown by an average of 6 per cent or more for at least a decade, excluding recovery periods returning to a pre-growth-spurt peak of per capita GDP.

### Sustainability index and methodology
- A simple sustainability index integrates average growth rates, maximum growth rates, and periods into a fast growth time period and the ratio of per capita GDP at the end over the beginning of the period; it ranks HGEs for sustained performance.
- Growth period T determination (method summary from the source):
  - Start of period is year (-10) in which the ten-year moving average equals or exceeds 6 per cent (Yf).
  - End of period is the year in which MA10 falls below 6 per cent.
  - Compute simple average of per capita GDP growth over this period (AvgGr(T)).
  - Index Ix = (1 + AvgGr(T))^T.
  - If T > ten years, negative and very low growth rates at the end points are eliminated resulting in a lower T.
- Data used: World Bank WDI data supplemented for recent years by IMF WEO; analysis covers about 190 countries and about 8,500 country-years for 1960 to 2011.

### Empirical finding: non-sustainability of fast growth across decades
- Many countries have had episodes of fast growth (average of five years or more) but very few have sustained fast growth for a decade or more.
- Historical literature typically uses 5 per cent average per capita GDP growth to identify fast growers; this paper uses higher cut-offs and simpler methods.
- Using updated cross-country data, there is very little correlation between countries that grew fast in the 2000s and those that grew fast in the 1990s or 1980s.
- Out of about 190 countries with up to 50 years of data, only four countries achieved a compound average per capita growth rate of 7 per cent or more for two decades, and four countries averaged 6 to 7 per cent for two decades.
- A correlation matrix for average per capita GDP growth per decade across countries for five decades from 1961 to 2010 shows declining correlation:
  - The decade-to-decade correlation was about 37 per cent across two contiguous decades until the latest decade when it declined to 0.04.
  - Correlation across non-contiguous decades declined from about 1/3 (1990s vs 1970s) to about 1/10 (2000s vs 1980s).
- Conclusion: Sustaining fast growth over decades is an extremely challenging task.

*Source: _wp12185 - 1. Introduction (excerpt) — IMF working paper content provided in the prompt.*

### 2.2 High Growth Economies (HGEs)

### 2.2 High Growth Economies (HGEs)

### Identification and data treatment
- For the post 1960 data, forty two countries had a 10 year average growth rate of 7% during some point of their history.
- About half of these countries had a sharp fall in their per capita GDP in the period preceding their fast growth or part of the faster growth was from a lower base resulting from a fall in per capita GDP below its past peak.
- The analysis truncates and eliminates the data for the recovery period when per capita GDP was below the peak attained earlier; periods during which per capita GDP was below the earlier peak are excluded from unconditional averages.
- As a result of this truncation and elimination, twenty three countries fail the growth criteria because:
  - some have still not attained their former peak per capita GDP, or
  - do not have (in 2011) 10 years of data after re-attaining this level, or
  - fail the growth criteria.
- Thirteen of these excluded countries are in the former Soviet Union or East Bloc.

### Final HGE sample and classification
- Nineteen countries remain that can be genuinely classified as high growth economies during any period in their history, of which only three are still HGEs in 2011.
- The sustainability index is used to rank HGEs for sustained performance.
- Classification by sustainability index:
  - Ten out of the nineteen can be classified as marathoners (Index > 3 per cent).
  - Nine as sprinters (3 > index > 2).
- Over periods ranging from one to five decades and growth rates averaging 5 per cent to 10 per cent, these countries more than doubled their per capita GDP.

### Resource-rich HGEs
- Preliminary econometric analysis suggests resource rich countries have the potential to grow significantly faster than countries with no such resources, contributing 0.17 per cent point to growth for every per cent of GDP increase in resource rents.
- Of the 19 HGEs, a little over a third were resource rich countries in which resources seem to have contributed significantly to their success.
- Of these resource-rich HGEs:
  - Only one, Equatorial Guinea, is currently still an HGE.
  - Another country, Bhutan has dropped one notch below to pHGE category.
  - In five of the seven resource-rich countries, oil rents were a predominant source of resource rents; in one (Bhutan) non-oil rents were dominant.
  - Four of these were in a position to take advantage of the oil price rise of 1973 and had by 1975/1976:
    - doubled their per capita GDP [Iran and Saudi Arabia], or
    - quintupled their per capita GDP [Oman and Gabon].
  - Iran and Saudi Arabia had lost all their gains a decade later, while Gabon had lost half its gains.
  - In 2011, their per capita GDP were about 2.2, 1.1 and 2.4 times their pre-growth spurt levels respectively (context implies Iran, Saudi Arabia, Gabon).
  - Oman managed to sustain and enhance its gains: its per capita GDP in 2011 was eleven times that in 1960.
  - Equatorial Guinea’s growth spurt started in the 1990s and was partly due to a recovery from reduced per capita GDP levels; its per capita GDP is 13 times its pre-growth spurt peak.
  - Bhutan used non-oil resources such as Hydro power to enhance and sustain its growth.

### Non-resource (normal) HGEs and regional composition
- There were only a dozen non-resource rich (‘normal’) countries that can be classified as HGEs during the five decades from 1961 to 2011.
  - Of these, half were ‘marathoners’ and half ‘sprinters’.
  - Half of this sub-set were Asian countries: China, S. Korea, Singapore, Japan, Hong Kong SAR and Thailand; these constituted 83 per cent of marathoners.
  - Four countries were from Europe: Malta, Portugal, Greece and Bosnia-Herzegovina.
  - One from LAC: Antigua & Barbuda.
  - One from Africa: Botswana.
- Data limitations and data-quality cautions:
  - Uncertainty exists for Bosnia and Herzegovina due to non-availability of data on the previous peak per capita GDP and whether adjusted growth was due to recovery from past collapse.
  - Myanmar’s appearance among HGEs is surprising and there are questions about the quality of data provided by the authorities, which underpin WDI and WEO data sets.
  - Greece and Portugal’s fast growth period was in the 1960s to the early 1970s (forty years prior to the paper), and more recent experiences highlight fiscal profligacy and dangers of complacency.

### Asian HGEs and China’s experience
- Japan, Singapore, Hong Kong SAR and Korea were the first four Asian countries (in that order) to become high growth economies.
  - Singapore was an HGE for 11 years from 1970 to 1980 with a peak 10 yr compound growth rate of 9.9 per cent per annum (1974).
  - Hong Kong SAR crossed the 7 per cent threshold in 1970, 1973, 1978 and 1981; its peak 10 year growth was 7.4 per cent.
  - South Korea first attained 7.1 per cent 10 year growth in 1977; it returned to HGE levels in 1990 and stayed there till 1996, achieving a total of 8 years with a peak of 7.9 per cent (1991).
- China:
  - Attained HGE growth threshold in 1985 and has maintained it for 26 years, with a peak 10 year growth of 10 per cent in 2011.
  - It is the only country in history that has grown at an average per capita rate of over 7 per cent per annum (7.4 per cent) for three decades.
  - It is the only non-resource rich country that is still an HGE in 2011.
  - Preliminary econometric analysis shows gross fixed capital formation and FDI (as ratios to GDP), export growth and resource rents (ratio to GDP) appear to have played a significant role in China’s growth.
  - Analysis suggests control over natural resources, whether through State owned companies or party controlled/directed ones, appears to have been used as a conduit for indirect/hidden subsidies to exports and to attract FDI.
- China’s “Party led Growth” model features that may not be replicable elsewhere:
  - Use of the banking system as a sophisticated variant/extension of the fiscal system.
  - Intellectual openness to the external world combined with active search for means and methods to achieve development goals.
  - Regional/provincial/local experimentation with new policies and balancing centralization and decentralization.
  - A razor-like focus on the growth objective and the building and maintenance of incentive structures for Government, Party and State and Party enterprises that reward fulfillment of growth objectives.
  - Transformation and continuous modification of FDI-export strategies: from labor-intensive exports shifting supply chains from Hong Kong SAR and Taiwan Province of China to Mainland China, to broader export efforts involving State and Party led companies, to emphasis on backward integration and reduced capital and input imports, to broader FDI encouragement from developed countries, to infrastructure investment after the Asian crises, and later to real estate investment and high tech FDI.
  - The paper characterizes much of China’s private sector as largely consisting of a ‘party controlled’ (directly or indirectly) sector and refers to the system as “Party Capitalism” (a variant of Lange’s “Market Socialism” in the paper’s view).

### Other HGE episodes and notable cases
- The next three countries to attain a 10 year growth of 7 per cent were:
  - Thailand in 1993 for a duration of 5 years and a peak of 8.2 per cent (1996).
  - Bhutan in 1995 for two years and a peak of 7.2 per cent.
  - Myanmar in 2001 for 11 years and a peak of 11.6 per cent (2007-2008).

*Source: Author’s calculations based on data from WDI 2012 (augmented by 2011 data from IMF WEO April 2012 data base).*

### 0.22 probability of moving to HGE in the third year, another 0.22 probability of remaining in

### _wp12185 - 0.22 probability of moving to HGE in the third year, another 0.22 probability of remaining in

### pHGE transition probabilities and outcomes
- 0.22 probability of moving to HGE in the third year.
- 0.22 probability of remaining in the pHGE category before eventually moving to HGE.
- 0.33 probability of continuing in pHGE category for three or more years.
- 0.22 probability of ceasing to be a pHGE next year.
- Six of the eight countries that successfully transited to HGE status through pHGE were Asian.
- None of the 10 pHGEs which failed to transit to HGE were Asian.
- Conditional probability of an Asian country transiting from pHGE to HGE is 1 (for the observed sample).
- All five countries currently in pHGE category (Vietnam, India, Cambodia, Bhutan and Maldives) are Asian.
- The growth prospects for all six Asian countries that successfully transited are described as extremely good provided they undertake the necessary policy reforms.

### Regional concentrations and high-growth performers (2002–2011 decade)
- Eight countries with an average growth rate of per capita GDP of more than 6 per cent over the previous decade (2002 to 2011).
  - Seven of these are in Asia:
    - South Asia: India, Bhutan, Maldives.
    - ASEAN: Vietnam, Cambodia, Myanmar.
    - East Asia: China.
- Myanmar noted as a potential bridge between South Asia and S.E. Asia.
- Statement: The probability of India’s per capita GDP growth falling below 6 per cent can be dramatically reduced by learning and applying lessons from Asian HGEs and potential HGEs.

### Catch-Up Growth and Middle Income Trap (MIT)
- Two examined approaches:
  - Potential for catch-up measured by per capita GDP relative to the USA at the start and end of the fast growth period.
  - MIT range defined as between $10,000 and $16,000 (based on Eichengreen et al (2011)).
- Only one country (oil-rich Equatorial Guinea) made the transition from low income to beyond MIT range as a high growth economy (per Charts 5 & 6).
- Japan, Hong Kong, Ireland and Singapore substantially caught up with the USA during the fast growth period.
- Saudi Arabia and Gabon’s catch-up partly reversed after the fast growth period.
- Of the eight countries still classified as fast growing, six (including China and India) started from a lower income level and are still below the MIT range (Chart 6); all six therefore still have substantial potential for catch-up growth.
- Of the remaining twenty two countries that are no longer growing fast:
  - Six slowed down before they reached the MIT range.
  - Nine slowed within the MIT range.
  - Seven slowed after they crossed the MIT range.
- Less than half (0.4) of the fast growing countries slowed within the MIT range.
- Among countries whose fast growth started at low income but has ended:
  - Korea crossed the MIT range.
  - Two slowed down within the range (Botswana and St Kitts & Nevis).
  - Three slowed before reaching the range (Thailand, Paraguay and Cape Verde).
- Seven others including India are still low income countries that are growing fast (in 2011).

### Correlations and determinants of fast growth (Table 2 summary)
- Negative correlation between the average growth rate during the high growth period and ratio of per capita GDP to USA at the start of the fast growth period (consistent with convergence).
- Strong positive correlation between real per capita GDP at the end of the high growth period (or 2011 for current) and the average growth during the high growth period.
- Correlation coefficients indicate positive correlations of per capita GDP growth with:
  - Natural Resource Rent ratio to GDP.
  - Gross Domestic Saving.
  - FDI inflow (net).
  - Current Account Balance.
  - Goods & Services Balance.
  - Gross Capital Formation.
  - Gross Fixed Investment.
- Implication: A worsening trend in any of these variables could indicate potential slowdown in growth.
- Reported sample statistics (from Table 2):
  - Growth rate w Pcgdp: Mean 7.22, Stdev 2.51, Correl 1.00, No of Obs 33.
  - Per Capita Gdp: Mean 3.32, Stdev 2.50, Correl 0.20, No of Obs 33.
  - Natural Resource Rent Ratio to GDP: Mean 9.51, Stdev 18.00, Correl 0.76, No of Obs 32.
  - Gross Domestic Saving: Mean 25.91, Stdev 17.20, Correl 0.52, No of Obs 32.
  - FDI inflow (net): Mean 4.04, Stdev 4.30, Correl 0.47, No of Obs 27.
  - Current Act Balance: Mean -3.01, Stdev 10.00, Correl 0.41, No of Obs 24.
  - Goods & Service Bal.: Mean -3.91, Stdev 5.70, Correl 0.37, No of Obs 32.
  - Gross Capital Formation: Mean 29.77, Stdev 7.90, Correl 0.37, No of Obs 32.
  - Gross Fixed Investment: Mean 28.38, Stdev 8.20, Correl 0.36, No of Obs 32.
  - Export of G&S: Mean 45.53, Stdev 33.80, Correl 0.20, No of Obs 32.
  - Age Dependency Young: Mean 58.11, Stdev 17.80, Correl 0.19, No of Obs 30.
  - Import of G&S: Mean 49.43, Stdev 34.00, Correl 0.02, No of Obs 32.
  - Age Dependency Old: Mean 9.5, Stdev 3.7, Correl -0.17, No of Obs 30.
  - Per Capita Gdp PPP Starting: Ratio to USA: Mean 0.19, Stdev 0.15, Correl -0.17, No of Obs 30.
  - Per Capita Gdp PPP Ending: Const 2005 price: Mean 12241, Stdev 87900, Correl 0.34, No of Obs 30.

### Sustaining Growth: lessons and policy signals
- Indicators of potential slowdown: declines in fixed investment and/or FDI, deterioration in balance of payments positions, worsening trends in resource rents, savings, investment ratios.
- Price of capital goods is an important determinant of investment (Hsieh and Klenow (2007)).
- A rise in the price of capital goods (e.g., due to policy actions) could contribute to growth slowdown; conversely, a fall (e.g., via import liberalization) can raise growth (Virmani (2004) for India in the 1980s).
- Cost of credit/capital (interest rates, supply of risk capital) affects the overall price of investment.
- Eichengreen, Park and Shin (2011) findings (for late-developing countries with per capita GDP > $16,500 constant 2005 international dollar):
  - 85 per cent of the slowdown is associated with a decline in the contribution of TFP growth from about 3 per cent to virtually nil.
  - Slowdowns are slower in more open economies and those with higher consumption shares in GDP.
  - Slowdown is accelerated in countries with high and variable inflation and undervalued exchange rates.
- Policy implications highlighted:
  - Maintain macro stability/sustainability.
  - Maintain a market-determined exchange rate.
  - Further open closed sectors such as agriculture.
  - Improve policy environment for productive investment including FDI.

### Political economy, institutions, and reform strategies
- Effective economic advisors combine theoretical knowledge, empirical evidence, and socio-political intuition to adapt advice to country constraints (parliament, bureaucracy).
- Durlauf, Koutellas and Tan (2008): institutions (constraints on executives) and macroeconomic policy (government consumption net of defense and education) have a negative effect on factor accumulation and growth.
- Acemoglue et al (2003): good institutions may reduce macroeconomic volatility (inflation, current account deficits).
- Weakening institutions, increased government consumption, inflation and macroeconomic volatility could contribute to downtrends in Gross Domestic Investment growth and FDI (example: India since 2008).
- Successful reform characteristics:
  - Pragmatic (what works/what doesn’t).
  - Non-ideological.
  - Persistent removal of bottlenecks as they arise.
  - Big bang reforms can raise growth potential but steady stream of reforms is critical to sustain high growth.
- Examples of crisis responses:
  - Japan: unable to respond adequately to 1973 and 1979 oil crises; long-term per capita growth declined after each crisis.
  - Korea: responded to 1979 oil crisis with devaluation, tightening monetary policy, energy efficiency programs; maintained fast growth and rising exports share to GDP; per capita growth fell from over 6 per cent in 1978 to around 5 per cent in 1982, rose over 6 in 1987 and peaked at 7.9 per cent in 1991.
  - Vietnam responded to Asian crisis and accelerated per capita growth (10 year) to 6 per cent by 2001.
  - Korea and Thailand experienced declines below 5 per cent following shocks (Korea: per capita decadal 7.3 per cent in 1996; Thailand: 7.1 per cent in 1997).
  - Malaysia fell from peak decadal growth rate of 6.4 per cent (1997) to less than 4 per cent; Indonesia experienced a similar fall (per capita decadal 5.9 per cent to less than 4 per cent).
- Shared gains and shared prosperity (declining poverty and largely unchanged income distributions) noted as features of fast growing Asian economies during high growth periods.

### Conflict resolution and institutional bottlenecks
- Political gridlock in India, conflicts over land acquisition and rehabilitation, and slow adaptation of laws/practices for leasing natural resources have led to rent seeking, crony deals and corruption.
- Faster growth and increased revenues have expanded government expenditures faster than institutional capacity, generating allegations of corruption.
- External shocks coincided with incomplete institutional reforms, slowing institutional reform momentum.
- Rodrik (1999): social conflicts interact with external shocks and domestic conflict-management instruments to slow growth and diminish productivity by delaying fiscal and relative price adjustments, generating uncertainty, and diverting activities from productive to redistributive spheres.
- Policy recommendation: Rebuild the consensus of the 1990s (within and between parliamentary parties) to put reform back on a steady track; with such reform a per capita GDP growth rate around 7 per cent can still be sustained.

*Source: _wp12185 - 0.22 probability of moving to HGE in the third year, another 0.22 probability of remaining in the pHGE category before eventually moving to HGE, a 0.33 probability of continuing in pHGE category for three or more years and another 0.22 probability of ceasing to be a pHGE next year.*

### 3.3 Fiscal Lessons from Financial Crises

### 3.3 Fiscal Lessons from Financial Crises

### Overview of crisis response and ensuing complacency
- The financial crisis caused US and World exports and industrial production to crash during the second half of 2008.
- Quick and effective fiscal and monetary policy loosening by virtually every large economy limited the fall and induced a V or U shaped recovery in 2009-10 (in terms of production in the advanced countries and in terms of growth in the Emerging economies).
- This recovery engendered complacency in governments and political establishments, resulting in neglect of basic economic reforms essential for restoring growth to its full potential.
- Underlying problems remained unresolved; political gridlock in the USA and the Euro-area countries triggered “Stage 2” of the financial crisis in the middle of 2011.
- Since then the risk of another financial crisis, originating in the Euro area, increased significantly, creating a high risk environment for the rest of the world including India and other emerging markets.

### Fiscal context for India and emerging economies
- India’s fiscal deficit and gross debt GDP ratios are relatively high among the emerging economies, even though its net debt-GDP ratio is low and there is virtually no sovereign debt held by foreigners.
- Recent IMF research (as cited) indicates that the only significant factor in predicting financial crises is a country’s net foreign debt to GDP ratio.

### Political-economy lessons from three advanced economies
- USA
  - Long-known unsustainability of Social Security and Medicare was repeatedly postponed politically.
  - A new administration converted deficits into a surplus by 1998 and maintained it till 2002 through moderation in expenditure growth coupled with faster GDP growth.
  - A subsequent administration’s tax reductions and increased War expenditures converted it back to a deficit by 2003 and laid the basis for an explosion in government debt when the bubble burst and automatic stabilizers kicked in during the ‘Great recession.’
  - Political gridlock later made it difficult to address the problem, resulting in the first sovereign rating downgrade in modern US history.
  - Lesson: maintain steady progress on fiscal goals when democratic changes in government occur; find structural solutions when the economic and political situation is good to avoid being unable to act when both are bad.
- Greece
  - On joining the Euro, Greece experienced lower real interest rates and accelerated growth, which politically tempted increased transfers and consumption rather than sovereign debt reduction.
  - Fiscal structure deteriorated during the boom; when the bust came via European and global recession, the fiscal problem became unsolvable and default was virtually inevitable.
  - Lesson: advice on fiscal probity seems absurd when the going is good; fiscal sustainability depends on medium-long term growth rates and real interest, not current ones, so use opportunities to secure long-term fiscal soundness rather than waiting for market pressure.
- Italy
  - Over the last four decades Italy’s average per capita growth rate declined by over 1 per cent point per decade to 0 per cent in the last decade.
  - Political focus remained on preserving partisan subsidies instead of addressing trend decline in growth.
  - One government lowered the fiscal deficit substantially in 1994, but a subsequent government reversed this, and sovereign debt had again exploded by 2001 and was uncomfortably high when the Euro crisis hit.
  - With growth negative for some time, even a modest interest rate requires a substantial primary surplus; any rise in the risk premium requires very painful contraction.
  - Lesson: do not take growth or revival of growth for granted; fundamental structural reforms must address both medium-long term growth and fiscal deficits/debt.

### Implications and policy guidance for emerging economies (including India)
- Emerging economies still have policy, regulatory and institutional reform choices to sustain growth despite high-risk global environment.
- Key messages:
  - Do not postpone structural fiscal reforms during good times.
  - Use periods of favorable economic and political conditions to implement structural solutions to fiscal problems.
  - Fiscal sustainability requires attention to medium-long term growth and real interest rates, not just current conditions.
  - Political stability and continuity in pursuing fiscal goals across democratic government changes are important to avoid reversals that leave debt elevated when crises hit.

### Transition to reform timing and growth dynamics (context for subsequent analysis)
- The chapter transitions into issues of timing and phasing of liberalization, noting trade liberalization’s importance for initiating and sustaining growth when combined with competitive exchange rates, current account surpluses and an external capital structure weighted toward foreign domestic investment.
- India’s 1990s import liberalization aimed at these goals and confirms the importance of import liberalization, FDI, exchange rate flexibility and a cautious approach to current account deficits.

*Source: _wp12185 - 3.3 Fiscal Lessons from Financial Crises*

### 4.2 Phasing of Liberalization: Competition Dynamics

### 4.2 Phasing of Liberalization: Competition Dynamics

### Competition: three aspects
- Freedom to compete
  - India had production, investment, and in some cases price and distribution controls that "restricted or eliminated the freedom of medium-large firms to compete with each other."
  - Limits on firm size constrained exploitation of economies of scale and freedom to compete globally.
- Pressure to compete (competitive pressure)
  - Competitive pressure in output markets can arise from domestic production (indigenous entrepreneurs or FDI) or from imported supplies.
  - Entry of FDI can put competitive pressure on entrepreneurs; imports can pressure both domestic and foreign producers.
  - The threat of imports can be as powerful as actual imports; an import ban or exclusive license eliminates both actual and potential competition.
  - A very high tariff that makes current imports uncompetitive is preferable to a complete import ban because it maintains the threat of imports.
  - Replacement of an import ban or quantitative restriction (QR) by an "equivalent tariff" puts some competitive pressure on domestic producers.
  - Paradox: overall liberalization of import controls coupled with a rise in average tariffs can increase competitive pressure dramatically because higher tariffs on products subject to QRs reduce rents, evasion and incentives for corruption, lowering transaction cost of imports and multiplying the positive effect of QR liberalization (noted as occurring during the eighties).
- Means and ability to compete
  - Competition requires access to inputs and capital goods; liberalization of product markets increases both pressure and ability to compete.
  - Competition also requires access to factors (technology, capital, skills and land) and flexibility to adjust them; lack of reforms in factor markets (urban land, supply of educated/skilled labor) became constraints on sustaining fast growth.
  - Freedom to import inputs and capital goods both increases competitive pressure and expands means to compete.
  - Freedom to import consumer goods increases competitive pressure and, over the long run, increases competitive ability through information flows about product innovations and new materials/technology.
  - Most of India’s exports had access to duty free imports of intermediate inputs and lower tariffs on capital goods even before the 1990s reforms; such exports were probably globally competitive before the 1990s reforms.

### Role of FDI and spillovers
- FDI bundles technology, management, marketing skills (including export marketing) and capital, rapidly expanding access to these factors.
- FDI improves national ability to compete and strengthens domestic entrepreneurs through spillover effects.
- FDI is most effective in modern industries and new products where earlier controls created the largest technology gap between domestic and global technology levels.
- Positive effect of FDI is highest in industries with the largest technological change globally (example cited: automobile sector in India).
- Competitive market and industrial environment are essential prerequisites to obtain FDI spillover benefits.

### Phasing and sectoral effects on J-curve
- Exportable industries (e.g., cotton textiles) tend to be relatively immune from the J curve effect; their technology gap with global best practice is relatively low.
- Highly protected industries are expected to have the highest technology gaps and stronger J curve effects.
- Export liberalization effects are modified by the phasing of sector liberalization.

---

### 4.3 Timing of Sector Liberalization

### Sequencing of liberalization in India
- Access to disembodied technology and capital (FDI, equity and external commercial borrowing) was liberalized in the early 1990s; external long term debt opened more gradually.
- Import controls/quantitative restrictions on intermediate and capital goods were eliminated in the early 1990s.
- QRs on manufactured consumer goods were not eliminated till the end of the 1990s-early 2000s.
- Nominal tariffs on consumer goods were reduced in line with other goods, but effective tariffs on consumer goods may have increased during much of the nineties because remaining QRs kept effective protection high.
- Some consumer industries used the protected period to introduce new products using frontier technology and capital, avoiding reductions in TFPG and possibly accelerating it.
- Tariff reductions focused on reducing the peak rate on all non-agricultural goods and were broadly proportional, with exceptions:
  - Refineries: inputs on oil were deliberately maintained at a fraction of average tariffs on refinery outputs, keeping effective protection high.
  - Capital goods: import duties on major inputs such as steel were kept well below average tariffs on capital goods, leading to higher effective protection for some capital goods in early sub-periods with gradual convergence to neutrality by the end of the last sub-period.

---

### 4.4 Public-Private Mix

- Public sector ability to compete and "regulatory arbitrage" by government departments that both manage public sector firms and regulate the industry influence the J curve.
- Industries with significant pre-1990 public sector shares (steel, aluminum, refineries) faced capacity controls and licensing that adversely affected private sector entry.
- Liberalization and de-licensing allowed private sector to raise production shares rapidly with minor balancing investment, tending to raise average industry productivity if private efficiency exceeded public sector efficiency.
- Privatization of loss-making public sector units would similarly offset the J curve effect.

---

### 4.5 Incomplete Reforms: Threat and Opportunity

- Import liberalization largely bypassed the agricultural sector, slowing productivity improvements in production and supply.
- FDI in manufacturing is virtually free except for the 26 per cent equity limit in defense industries.
- Five significant service sectors have equity ceilings; three have major impact:
  - Multi-brand Retail: 26 per cent
  - Insurance: 26 per cent
  - Commercial Airlines: 49 per cent
- Limits on FDI in banking (74 per cent) and Telecom (74 per cent) are less impactful than regulatory and security issues in determining foreign entry.
- Mining sector virtually open to FDI, but public monopoly and restricted private entry in sectors such as coal mining remain serious problems.
- Regulatory independence and objectivity remain serious concerns in infrastructure and related sectors where government/public sector is predominant producer or buyer; effective regulation is required for private-goods infrastructure to realize competition gains and for public-private partnerships in public-goods infrastructure to deliver welfare gains.
- Financial sector liberalization remains incomplete; Indian approach of parallel and coordinated development of financial markets/products and regulatory expertise ("liberalization with all deliberate speed") is considered valid and vindicated by the global financial crisis and regulatory failures.
- Phased opening of cross-border finance (FDI, LTD & equity, MTD, derivatives for hedging national risk) is described as a risk-minimizing approach.

---

### 5 Domestic Entrepreneur Led Growth

- India’s move from low growth to high growth occurred in two stages driven by reforms: first in the 1980s and then in the 1990s.
- Growth accelerations were distinctive because of the role of domestic entrepreneurs and minimal direct government role; government role was mainly lifting controls and restrictions and providing inadequate public-good infrastructure.
- FDI flows and stock remain a relatively small fraction of total investment and capital stock; growth acceleration in both phases is largely attributed to domestic entrepreneurship — termed "Domestic entrepreneur led growth."
- Contrast with other Asian economies where State or FDI played a larger role.

### 5.1 Potential Growth and J-curve evidence
- Prior to 2006, puzzlement that growth rate appeared virtually unchanged after 1990s reforms led to the "J-curve of Growth and Productivity" hypothesis, where reforms produce negative then positive impacts over time.
- Earlier prediction based on pre-1999-2000 NAS GDP series: "the underlying trend growth is currently about 6.3 per cent (6.25 per cent to 6.35 per cent)" and "likely to rise to about 6.5 per cent over the next few years."
- With 1999-2000 NAS GDP series (available in 2006), rising growth trend found statistically significant; post-2007 studies confirmed acceleration from 1992-93 and entry into a third elevated growth stage after 1991-1992 reforms.
- Virmani (2009) estimated potential growth rate between 8.5 per cent and 9 per cent.
- Re-estimation using GDP at constant 2004-05 prices for 1980 to 2011 (excluding phase I) shows growth acceleration from 5.1 per cent in phase II (1980s to 1991-2) to 7.4 per cent in phase III (1992-3 to 2011-12) as a result of 1990s reforms (Table 3).
- A test for the J curve shows a net effect of -2.6 per cent points.
  - Consequently the initial acceleration during the 1st sub-period of phase III (1992-3 to 2002-3) was from 5.5 per cent to 6.2 per cent with a long term increase to 8.7 per cent per annum (seen in 2nd sub-period of phase III), with all significant at 1 per cent.
- Investment: GDP ratio shows a significant J curve effect:
  - Jump from 13.7 per cent in phase II to 22.8 per cent in Phase III was held down (virtually unchanged) by a J curve effect of -7.1 per cent points.
- Manufacturing J-curve analysis suggests initial gains in growth and total factor productivity were from increased allocation efficiency (particularly public to private production), partly offset by obsolescence.
- A significant proportion of subsequent growth acceleration likely resulted from higher investment, including embodied technological change in sectors with large technology gaps.
- Two alternative hypotheses tested:
  - Faster world growth ("A rising global tide lifts all boats") is rejected; world GDP growth has the wrong sign and is not significant.
  - Hypothesis that disappointing performance during 1992-3 to 2002-3 was due to excessive monetary tightening: real interest rate variable (call money rate – inflation of private consumption deflator) is significant at 10 per cent in the base equation but insignificant in the equation with J curve effects.
- GDP growth averaged almost 9 per cent during 2003-04 to 2007-08 and 8.5 per cent during 2003-04 to 2010-11.
  - In per capita terms this translates to a growth rate of 6.9 per cent.
- Despite GDP growth over 7 per cent for more than a decade, India had not completed one decade of per Capita GDP growth of 7 per cent to become a high growth economy (HGE); warnings against complacency were noted.
- During 2003-03 to 2011-12 GDP growth shows a trend (change) decline of (-) 0.16 per cent per annum, from about 8.75 per cent in 2003-4 to about 7.5 in 2011-12.
  - Authors argue that once fiscal–monetary policy mix is adjusted and temporary shocks disappear, growth should return to this declining trend.
  - A return to the medium term trend of 8.5 per cent requires determined, coherent and consistent policy reform action.

*Source: 4.2 Phasing of Liberalization: Competition Dynamics (sections 4.2–5.1) from the provided IMF PDF content.*

### 0.61 per cent (8 per cent of  predicted) points and 0.22 per cent points during 1980-1 to 1991-2, 1992-3 to 2002-

### _wp12185 - 0.61 per cent (8 per cent of  predicted) points and 0.22 per cent points during 1980-1 to 1991-2, 1992-3 to 2002-

### Policy reforms for sustaining growth — overview
- Four broad areas for policy action identified to sustain growth in India:
  - (a) Macro-economic stability and sustainability
  - (b) Market reform to increase competition
  - (c) Institutional reform and conflict resolution
  - (d) Social equity and inclusion
- The 1990s reforms "raised Growth Potential of India to 8.5 per cent to 9 per cent."
- Fiscal and current account balances should be restored to trends prevalent before 2008-9 as a priority given post-2008 inflation, rising current account deficits, and disrupted down-trend in fiscal deficits.

### Macro-economic stability and sustainability (a)
- Findings:
  - Inflation rose sharply in 2008 due to global commodity price boom and poor monsoons; inflation persisted longer than in previous episodes.
  - Current account deficits have risen; fiscal deficit down-trend disrupted.
  - Global crisis increased volatility of capital flows and risks of global liquidity freeze.
- Policy priority:
  - Restore fiscal and current account balances to pre-2008-9 trends.

### Market reform to increase competition (b)
- Findings:
  - Fast growth magnifies price distortions from supply bottlenecks and creates new ones.
- Policy recommendations:
  - Introduce/enhance competition in markets for land, infrastructure services, agriculture and skills.
  - Carefully calibrated competition to stimulate supply, accelerate productivity growth, reduce rents and rent seeking, and sustain inclusive growth.

### Institutional reform and conflict resolution (c)
- Findings:
  - Higher growth accentuates conflicts over land and natural resources, between rent accumulators and outsiders, and between social and political groups.
  - Conflicts affect growth directly (e.g., inadequate supply of urban land) and indirectly via political system capacity to act.
- Policy recommendations:
  - Resolve conflicts through economic policy and institutional reform.
  - Undertake institutional changes that may take time; government should demonstrate credible steps to address problems.

### Social equity and inclusion (d)
- Findings:
  - Need to ensure sustaining fast growth is compatible with inclusiveness and social equity.
- Policy approach:
  - Identify problems carefully, use scientific method to link problems to solutions, choose implementable solutions.

### 6.1 Oil/energy
- Findings:
  - Globally oil price shocks since 1971 have contributed to growth slowdowns in many oil importing countries.
  - Oil and energy import dependency in India is high and increasing, creating implicit taxation-rent transfer to foreigners and adverse long term terms of trade effects.
- Policy recommendations:
  - Separate and disconnect subsidy from pricing.
  - Replace kerosene subsidy with free solar lanterns and cookers.
  - Provide free training to village youth to service solar items in rural areas.
  - Replace diesel subsidy with subsidy for fuel efficient engines (pump sets, generator sets, tractors, trucks, scooters/motor cycles).
  - Give subsidy for adoption and development of new technology, including solar, but allow prices to reflect global energy prices.
  - Medium-term objective: promote Green Cities by engaging world designers/architects to design green buildings suited to Indian conditions; publish and propagate designs; train urban planning and regulatory officials in every State on planning work-residence zoning, public transport and public parking to minimize energy use.

### 6.2 Food Prices and Policy
- Findings:
  - Historically food inflation rises after bad monsoon and returns to normal with normal monsoon and restoration of agricultural production trend growth of about 2.5 per cent per annum.
  - This episode: higher food inflation persisted unusually long.
  - Agriculture has seen little or no economic reform and import liberalization, thus not benefiting from competition.
  - Three significant domestic changes identified in 2008-09:
    - Doubling of the rate of growth of per capita income and its impact on food demand patterns (cereals to vegetables/fruit and milk products).
    - Boom in urban land prices and consequent increases in real estate prices and rents.
    - Increase in fuel prices and its effect on transport costs.
  - Small fragmented supply chains cannot cope with increased demand for basic and new higher level foods.
  - Governments' decade-old plans for cold chain, package of inputs, credit, output markets have not worked; institutions have often deteriorated relative to 20-30 years ago.
- Policy recommendations:
  - Pursue a food retail revolution via competition through FDI in grocery retail.
    - Note: Because of local and regional tastes, there is a stronger inherent/natural incentive for large marketers to build domestic supply chains for food/grocery items; it may be better to focus initially on allowing 74 per cent FDI in grocery/food retail as against 51 per cent FDI in general retail (including grocery) if the primary objective is building efficient food supply chains that benefit farmers and consumers.
  - Complement opening FDI in retail with reforms of the Agricultural Produce Marketing Acts (APMs) and the Essential Commodities Act (ECA) so farmers get the full benefit of increased competition.
    - Example: delisting of perishable commodities like fruits and vegetables and new nutritional items like soya, from schedule 1 of APMC Acts.
  - Establish a more predictable import-export regime for farmers that balances consumer and farmer needs on a permanent basis rather than seasonal extremes.
    - Economic survey of 2007-08 proposed price bands with variable import tariffs and export duties outside band to mitigate extreme price swings and provide correct price signals to farmers.
  - For poorer/less developed States/regions to benefit fully, build a road grid connecting every village and a sustainable water/irrigation grid in every block.

### 6.3 Urban Governance: Land market
- Findings:
  - Reforms to free up land markets and introduce competition have been extremely limited; most land-related policies are under State governments.
  - Stratospheric urban land prices equal or exceed those of countries with more than 10 times India's per capita GDP.
  - Acute shortage of “urban land”, public transport (in metros) and basic urban public goods drives the gap between supply and demand of urban land, increasing wealth inequality and rent seeking.
  - Much extreme inequality arises from abysmal supply of basic public goods affecting bottom 20 per cent to 40 per cent of the population most acutely.
- Policy recommendations:
  - Increase dramatically the supply of habitable and accessible urban land to help low income residents, reduce urban wealth inequalities, and minimize corruption.
  - Urban governance reform requires genuine decentralization from State governments to city governments and modernization of laws, policy and procedures for specifying/changing land use and for sale of land (through competitive auctions).
  - Measures additional to proposed Land acquisition and Relief and Rehabilitation laws currently before parliament are required.

### 6.4 Human Capital: Skills
- Findings:
  - India is in the midst of demographic transition; demographic dividend can be actualized only by providing usable skills built on sound primary education.
  - Recent surveys by Government and Pratham show only a fraction of secondary school students can read even at primary level.
  - A fast growing lower middle income economy like India’s needs intermediate skills in all kinds of services (semi-skilled occupations).
- Policy recommendations:
  - Provide skills especially in rural areas and to the poor in urban areas to promote mobility and inclusive growth.
  - Strategy: "Let a hundred flowers bloom" under a sound regulatory framework that helps trainees understand what they are paying and what they are getting.
  - Government’s critical direct role: educate the educators and train the trainers.
  - Encourage NGOs and private sector contributions.

### 6.5 Resource Rents and Corruption
- Findings:
  - Rents generate conflicts across society and are the greatest source of inequality in income and wealth.
  - Resolution of these conflicts is essential for social harmony and equitable growth.
- Three major sources of rent to be addressed:
  - (a) Natural resources (minerals, land, spectrum)
    - Policy recommendation: Auctions with post-auction tradability between licensed holders; complement with capital gains taxation of such rights.
    - Need sound regulations and regulatory systems to prevent post-auction changes that vitiate auction gains.
  - (b) Land Use
    - Policy recommendations:
      - Raise quality of land use planning and implementation by training city officials and changing rules.
      - Involve stakeholders in land use change decisions through land use hearings and appropriate change of land use based on hearings before acquisition starts.
      - Make information available to all land owners and potential land acquirers so market price reflects true land value.
      - Ensure pending land acquisition and rehabilitation laws level the playing field for all participants while avoiding disincentives for economic development and growth.
  - (c) Government Procurement
    - Policy recommendation: Create a "Public Accountability Information System (PAIS)" that ensures all information (nature and scope of job/purchase, amounts paid and to whom) is put on a website accessible to the public.

*Source: IMF working paper content unit _wp12185 - section on "POLICY REFORMS FOR SUSTAINING GROWTH" and subsections 6.1–6.5.*

### 6.6 Macro Economics

### 6.6 Macro Economics

### Fiscal-Monetary Mix
- Since the V shaped recovery in 2009-10, Indian macro policy would have produced better results if the fiscal policy had been tighter and monetary policy looser and supply bottlenecks had been directly attacked through policy reform.
- Virmani (2003) showed that a rise in the fiscal deficit and a 0.5 elasticity of the Current Account deficit with respect to the central fiscal deficit caused the 1991 BOP crises, but a flexible exchange rate (resulting in 30-40 per cent devaluation) would have obviated the crisis.
- With a flexible exchange rate and devaluation, the government could have had sufficient time for a textbook expenditure switching-expenditure reducing policy to work.

### Fiscal Deficit
- Recent policy research suggests that the critical danger point for the government’s debt GDP ratio is between 60 per cent and 100 per cent, with the threshold being on the lower side for developing countries and on the upper side for developed countries.
- Large fiscal deficits and a high net international debt position increase vulnerability to global financial shocks and terms of trade shocks (e.g. oil price spikes).
- As India’s fiscal deficit is the primary reason for keeping its global credit rating perched on the border of investment grade:
  - A total (center + states) fiscal deficit around two percent and a total Debt-GDP ratio of 40 per cent (over the next ten years) would be helpful in attaining a triple A rating and reducing dependence on unstable capital flows.
  - The Government’s ability to deal with global adverse shocks and to exploit new global opportunities, while sustaining high domestic investment levels and lower inflation, would be greatly strengthened.
- Sustained fiscal reduction requires a return to the tax reform approach initiated in the 1990s and now represented by the Direct Tax Bill and the Goods and Service Tax.
  - The Goods and Service Tax will help in creating a unified market in the country and facilitate greater competition.
- Government expenditure policies must restore the balance between:
  - (a) public goods and human capital (skills, education, public health, communicable disease control) that promote equity and
  - (b) income/consumption transfers and subsidies that incentivize dependency.

### Infrastructure
- Without a fair and rational policy and regulatory regime no amount of infrastructure subsidies and Public sector bank lending to infrastructure will result in a sustained increase in infrastructure investment and supply.
- A policy-regulatory regime that promotes competition in 'private goods infrastructure’ (e.g. Coal, electricity generation, rail services) is an essential pre-requisite for eliminating infrastructure bottlenecks.
  - Coal fields should be parceled into economic and viable mines and auctioned to a dozen producers (PSUs should also be permitted to bid in auctions).
  - Benchmark competition in and open access to the distribution network is essential for effective competition in electricity generation.
- A more focused push is needed on ‘Public goods infrastructure’:
  - The simplest, most effective way to promote social equity and inclusion is by building a permanent road network that connects every habitation in India, a drinking water and sewage/sanitation grid that provides every town and all its residents a healthy environment and an irrigation-drainage (water sustainability) grid covering every block/village.
  - More than finance, the greatest limitation is the lack of understanding and appreciation of the vital role that these simple public goods have played in the transformation of USA and Europe from poor unequal societies to rich and relatively equal ones.

### Investment environment
- Despite several aborted efforts to simplify regulations, introduce automaticity and remove the heavy hand of the bureaucracy on entrepreneurs, investors and producers, India remains close to the bottom on global indicators of “investment environment.”

### Financial Sector
- Accelerate development of Long Term Debt markets to reduce dependency on volatile capital flows, increase financing for infrastructure and consequently improve the investment and growth environment.

### Conclusion
- Sustained, fast economic growth is the key to transforming a low income economy to a middle income one.
- Accelerating an economy’s growth is not sufficient; what sets apart successful from unsuccessful countries is the time period during which growth is sustained.
- The policy reforms needed to sustain fast growth are not necessarily the same as those needed to accelerate growth; sustaining growth requires alertness and a timely and flexible response to:
  - (a) External and exogenous shocks that can derail macro-stability.
  - (b) New bottlenecks and conflicts that arise as a result of faster growth or are accentuated by it.
- Faster revenues growth consequent to growth acceleration is not a license to fiscal irresponsibility or to reverse the policies that raised the growth potential.
- The paper’s three interlinked goals were:
  1. To analyze the experience of fast growing economies and learn about the policies that helped sustain fast growth.
  2. To show that economic reforms of the 1990s raised the trend growth rate of the Indian economy—from around 5.5 per cent per annum to over 8.5 per cent—and that faster growth was not the result of the global boom.
  3. To apply lessons from fast growing economies to identify bottlenecks and problems that must be addressed so Indian growth is sustained and to suggest policy and institutional reforms.
- Key historical and recent growth facts and dynamics:
  - The 1990s economic reforms raised potential growth from around 5.5 per cent per annum to over 8.5 per cent.
  - The economy grew at around 9 per cent per annum during the five years 2003-4 to 2007-8.
  - The average growth rate fell to 7.7 per cent in the next four years (2008-9 to 2011-12) following the US financial crises of 2008.
  - Two factors in the slowdown:
    - Continuing financial crises and accentuated capital flow volatility into India, and global demand deficiency-excess capacity in tradable goods and services.
    - Negative fallout of India’s growth acceleration and political consequences of the V shaped recovery from the 2008 global financial shock, inducing complacency in policy and elites and giving rise to bottlenecks and socio-political conflicts (land, water and natural resources).
  - These conflicts can affect growth directly (e.g. inadequate supply of urban land) and indirectly through their effect on the political system’s ability to act decisively on macro-economic response and fundamental policy reforms.
- Near-term risks and opportunity:
  - There is a significant probability of external shocks during the next two years, such as Euro melt-down and sharp spike in oil prices.
  - Emerging Market Economies, such as China and India, have the policy options and ability to minimize the effect of the continuing global financial crisis and resume/sustain growth at close to potential.
- Comparative and probabilistic observations:
  - There are currently eight countries with an average growth rate of per capita GDP of more than 6 per cent over the previous decade (2002 to 2011). Seven of these are in Asia: three in South Asia (India, Bhutan and Maldives), three in ASEAN (Vietnam, Cambodia, Myanmar (?)) and one in East Asia (China).
  - Of these, the fast growth rate of four countries, all in Asia (China, India, Cambodia and Maldives) is not fuelled by natural resource riches and resource rents.
  - History shows that there is an over 1/5th probability of India’s decadal per capita growth rate falling below 6 per cent, if the pace of (real/genuine) economic reforms remains at the level prevailing during the last five years or so.
  - If India adopts lessons from the highly successful HGEs and pHGEs of Asia, it has the potential to attain HGE status by reversing the downward trend and returning to an underlying potential of per capita GDP growth of 7 per cent to 7.5 per cent (GDP 8.5 per cent+).
- Policy priorities outlined:
  - Urgent policy actions to remove bottlenecks to growth, eliminate rents, and facilitate removal of supply constraints.
  - Increase competitiveness in factor markets, agriculture and ‘private goods infrastructure’.
  - Separate energy and other subsidies from debilitating price distortions and undertake fiscal reforms.
  - Some policy reforms may require a reorientation/adjustment of the approach to political cooperation and competition.

*Source: _wp12185 - 6.6 Macro Economics*

### Appendix 2: China Growth

### Appendix 2: China Growth

### Methodology and data
- Estimation approach: two stage least squares (TSLS) with HAC procedure.
- Sample period: 1983 to 2009 (determined by data availability).
- Instruments used: growth of World GDP, World export and World commodity prices, time and lagged values of all variables.

### Base equation (PcGgr)
- Estimated equation:
  - PcGgr = 1.9 PcGDP(t-1) + 0.25 GFCFgr + 0.06 Exportgr + 0.60 FDI/GDP + 0.59 Rent/GDP
    - (t-statistics shown below in parentheses)
    - 1.6(1.1)                 0.09(2.7)*        0.025(2.5)*       0.15(4.0)**        0.15(4.0)**
- Goodness of fit and tests:
  - R2 = 0.71, R2 (adj) =0.66 ; DW =1.9.
  - *(**) = significant at 5 per cent (1 per cent) level.
- Key findings from base equation:
  - GFCF (gross fixed capital formation), FDI, Export growth (Exportgr), and natural resource rents (Rent) appear to have played a significant role in China’s growth.
  - Initial per capita GDP (PcGDP(t-1)) has the wrong sign but is not significant.

### Alternative specification with modified rent variable
- Rationale: Rent/GDP ratio shows historical variation (rise 1970–1980, decline until 1998, then gradual growth), so rent is decomposed into forecast (rentyf) and residual (rentyr) portions and these replace Rent in the equation.
- Estimated equation:
  - PcGgr = 1.1 PcGDP(t-1) + 0.22 GFCFgr + 0.06 Exportgr + 0.66 FDI/GDP + 0.68 Rentyf + 0.27 Rentyr
    - 1.5(0.8)                 0.04(5.4)**      0.019(3.1)**     0.18(3.6)**        0.11(6.3)**    0.33(0.83)
- Goodness of fit and tests:
  - R2 = 0.77, R2 (adj) =0.72 ; DW =1.9.
  - ** = significant at 1 per cent level.
- Interpretation:
  - Coefficients largely unaffected by replacing rent by trend and cyclical components; the cyclical component (rentyr) is not significant.

### Rent/GDP regression and determinants
- Estimated equation:
  - Rent/GDP = 3.9 – 0.76 FDI/Gdp + 0.16 GFCFgr – 0.095 Exportgr + 0.94 WrldGdpgr
    - 2.1(1.9)^  0.35(-2.2)*       0.09(1.7)^     0.05(-1.9)^        0.33(2.8)**
- Goodness of fit and tests:
  - R2 = 0.60, R2 (adj) =0.53 ; DW =1.4.
  - ^/*/**) = significant at 10 per cent/ 5 per cent/1 per cent level respectively.
- Implications drawn from this regression:
  1. World demand for resources (WrldGdpgr) and domestic demand arising from investment (GFCFgr) are the two important factors in determining China’s natural resource rents.
     - As investment in infrastructure and real estate are part of GFCF, the significant coefficient on GFCF indicates that land rents were officially/formally used for this purpose (i.e., land rents were created simultaneously with their use for urban investment).
  2. Companies (National/State, Provincial and Party led SPVs) owning/producing natural resources are an important conduit for indirect/hidden subsidies to exports and to FDI that the system decides to promote.
     - Quantitative effects reported:
       - A 10 per cent point increase in export growth leads to a 1 per cent point decline in the recorded resource rent to GDP ratio.
       - A 10 per cent rise in the FDI:GDP ratio leads to a 2/3rd of a per cent point reduction in recorded Resource Rent/GDP ratio.
     - Based on average values of the variables during the high growth period, these indirect/hidden subsidies to exports and FDI are estimated to have constituted about 3.4 per cent of GDP.

### Quantitative contributions and caveats
- Of the 8 per cent average growth since 1970, FDI and Exports contributed 1.7 per cent and 0.8 per cent point respectively to the 8 per cent point during the fast growth period.
- The significance of the rent variable is identified as a surprising new result and is explicitly stated to be a hypothesis requiring further analysis and empirical investigation.

*Source: _wp12185 - Appendix 2: China Growth*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12185.pdf_