[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

REIMAGINING INDIA
policy enforcement can significantly reduce
persistence of corruption as a major
structural backlash of an economy in
transition such as India. However, tax
competition, competitive and secure contractual
law, deregulation, private ownership,
strong protection of property rights
and other components of political stability
and economic prosperity are the guiding
swords in fighting against corruption 15
as an obstacle to long-term growth and
stability.
brightest reform concepts and case studies
of the macroeconomic and structural
reforms. I suggest learning from two small
countries, Ireland and Iceland.
Ireland dramatically changed its fiscal
policy over the past 20 years. Once a bastion
of poverty, now became the second
wealthiest economy in the European Union
according to real GDP per capita,
after Luxemburg. Ireland’s reform agenda
included a supply-side package of policy
inputs. For example, top individual income
tax rates was slashed from 65 percent
to 42 percent and the corporate tax
rate was reduced
to 12.5 percent
and was made flat. Low Taxes,
Tax competition
In 1980s, unemployment
was se-
Sound regulation
vere at a doubledigit
rate and government spending
consumed more than 52 percent of total
output. Consequently, growth rates were
rachitic and high tax rates discouraged
the creation of productive behavior. Ireland
quickly became the “sick-man-of-
An increase in one percentage point in tax pressure – two
thirds of what was observed over the past decade in the
OECD sample – could be associated with a direct reduction
of about 0.3 percent in output per capita
Europe”. In early 1990s, Irish policymakers
decided to embrace supply-side
economic policy, deregulate product markets,
cut the size of government and slash
the expenditures. After decades of low
output, overall government spending was
reduced from 52.3 percent in 1986 to 37.7
percent in 1996. Free trade, rigorous tax
cuts and productive education policies
turned the incredible emulation of the
Irish hare into the Celtic Tiger .16 There is
an interesting comparison between Ireland
and Slovenia as a case study between
the supply-side success and Keynesian
failure. Using the data from Penn World
Tables 17 , by the end of 1990, Slovenia and
Ireland had the same real GDP per capita
after inflation, using current prices as
a comparison measure. Throughout the
1990s, Slovenia’s output grew at low rates,
recovering from economic depression in
transition while having high taxes, high
fraction of government ownership and
weak institutions, while Irish economy
International Lessons For India
The growth experience of countries from
around the world offers a useful guideline
in learning from the world’s best and
Picture No.2: Dynamic Engines Of Growth
Sophisticated
Infrastructure
Cost and prices,
Environment of
the firm
Quality of the
Labor Supply
SUSTAINABLE
GROWTH
Human Capital
Source: Forfas, author’s own projections
Business
Performance
Productivity
Performance
Innovation,
Competitiveness,
Entrepreneurship
TARGET
ESSENTIALS
Property Rights,
Rule-of-Law
Free Markets
I
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P
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150 THE IIPM THINK TANK