| The pennies and pounds in this context are what he calls the minor and major institutions that make things work. Having spent several years in the finance ministry as an important policy advisor, Virmani is well placed to analyse the problems that arise at the junction of economic reform and institutions needed to make the reforms work. |
| The "successful introduction of new policies may require new institutions; and the degree of success in changing policies may depend on the degree to which existing institutions are modified." But there is a major problem in the debates generated over institutional reform. |
| They almost always focus on the BIG institutions, "such as the Constitution, rule of law, property rights, informal rules embodied in culture" and so on. |
| Fine, says Virmani, but should we focus only on these? After all, it takes a generation to change them or build new ones, and in the meantime there are several smaller reforms waiting to be carried out. What about those? |
| So he has focused on what he calls the "microstructure" of institutions. If you change these "" and change can be quick here, he says "" reform stands a better chance of success than if you focus solely on the big things that may or may not get done. This is an important insight because it pinpoints the fundamental reason why reform in India has been so unimpressive. |
| So "successful economic reform requires knowledge by those driving the reforms of where the country is located in the policy distortion-institution quality space and a clear idea of the medium term goal." In less daunting terms, you must know where you want to go and where the speed-breakers are. |
| Virmani gives several examples. One of these pertains to power sector reform, which has been the least successful so far even though it was the first sector to be "opened" up. The reason is that very little attention was paid to reforming the institutions that inhabit the power sector. |
| "Without a credible unbundling of the monolith or a politically credible regulator, private generators were unwilling to enter without guarantees at the state level and counter guarantees at the Central level backed by global arbitration clauses," whence the Enron and Orissa fiascos. |
| To make his point about the need for small-institutions reform, Virmani gives a counter-example of success. This is reform in the telecommunications industry, which had gotten off to a slow start. |
| Why? Because, first, there was a Big Bang element to it via the 1994 policy that allowed the private sector into both fixed and mobile telephony. Two years later, the legislation to set up a regulatory authority was in place and it started functioning in 1997. |
| Once these two elements were there, it was mostly a matter of fine-tuning and that was done quickly. Result: its contribution to the rate of growth of GDP "accelerated from an average of 6.3 per cent per annum during 1980-81 to 1991-92 to 18 per cent per annum during 1992-93 to 2002-03." |
| Virmani also discusses highway reform as being perhaps "the most successful case of institutional reform" and says that "policy changes played merely a supporting role". |
| Alas, he is quite wrong here. A forthcoming study by the Asian Institute of Transport Development "" with which I am associated "" shows that, in fact, there has been little institutional reform in this sector. |
| Another section that Virmani could profitably add to this paper is on the distinction between reform through legislation and reform through administrative measures. There is a belief in India, assiduously fostered by the bureaucracy and the politicians with a vested interest in not reforming, that most reform requires the former. |
| This view needs detailed study, if only to puncture a widely-held belief. |
| *Economic Reforms: Policy and Institutions - Lessons from Indian Reforms, ICRIER Working Paper No 121, https://bsmedia.business-standard.comwww.icrier.org/pdf/ wp114.pdf |
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