Managing modernisation

Talaat Abdel-Malek* looks east and west for lessons in modernisation

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Simon Kuznets, a Nobel Laureate and an accomplished contributor to our knowledge about development, referred to economic growth as a process that requires "institutional and ideological adjustments" in society, to enable it to cope with technological change. This statement was made over 50 years ago when the pace of such change was well below what we experience today.

This requirement has become today, more than ever before, both more relevant and more urgent. While the much- publicised industry modernisation is badly needed, overall development of society cannot be accelerated without a holistic approach. Indeed, effective industry modernisation demands that sectors intertwined with industry also undergo upgrading.

Implicit in this context is the need to manage the modernisation process. Policy and decision makers responsible for managing it at all levels would have to develop a vision based on a genuine understanding of the complexities of modernisation. This must also become a shared vision, in order to avoid contradictions in policy direction and practices.

In formulating that vision, we have to acknowledge three fundamental truths: First, societal entities are interdependent, whether they be economic, social or political. Second, there are tremendous energies and resources which both the private sector and civil society are capable of contributing to modernisation, a fact that underlines the need to do away with outmoded notions depicting government as the dominant or sole legitimate player. Third, market forces play a vital role in guiding resource allocation, but must do so under the watchful eyes of government, whose responsibility is to create a conducive business environment and deal firmly with market imperfections and malpractices.

Rather than rely on theories, we will first refer to the experience of Portugal -- a country that has undergone modernisation during the past quarter century. The case of Portugal may appear to be distant from those of developing countries. Although some features are different, Portugal was one of the poorest and least developed of European countries, sharing many features of underdevelopment with the Third World. Much of the material to follow was drawn from an OECD report Managing Modernisation: Key Points in the Portuguese Experience with Public Management Reform, available on the OECD Web site.

The "carnation revolution" of 1974 replaced a dictatorship that believed in excessive centralisation of authority, isolationism and strict controls on society and its institutions. This dramatic change, reinforced in 1986 by Portugal's admission to the European Union, triggered a transformation process that aimed to establish a more open, outward-looking and citizen-oriented society. Key to the success of Portugal's efforts was the adoption of a public management reform movement. Despite many changes in government, all successive administrations preserved and supported the reform programme, ensuring a continuity of effort while retaining a degree of flexibility to deal with emerging priorities. Citizen orientation became the focus of change, serving individuals, businesses and other entities in society.

To achieve this, measures were taken to achieve the following: bring administration closer to the citizens; apply more decentralisation; simplify procedures and reduce rigidities; ensure citizen participation in the formulation and implementation of policies; improve the quality of services; move from a rule-dominated to a result- oriented work environment; and institute feedback mechanisms to respond quickly to grievances.

Let us take just a few examples. To ensure citizen participation, the Portuguese business community is represented on the commission that deals with administrative burdens. Another body, Citizen's Forum, brings citizens' concerns to the attention of government authorities and actions are taken to deal with them. This allows a wide spectrum of community interests to put their weight behind reform.

Another example is shown by Portugal's rejection of a modernisation imposed from the top down, having recognised that this can only bring resistance to reform efforts. Instead, modernisation was decentralised by creating small operational units across a wide front, each developing and "owning" its action plan within a national framework.

Reference must also be made to the adopted motto of "making managers manage". This represented a fundamental change in the way government administration functions. It highlighted the importance of accountability and led to the introduction of better expenditure management, performance measurement and management audit systems.

Without expounding further on this list, it is abundantly clear that every one of these goals applies to the reform process in any developing country. The major difference lies in how these goals are being or have been achieved -- a question that can best be addressed in light of each country's conditions. Accomplishments are determined mainly by the calibre and commitment of leadership, the soundness of policies applied and their sustainability.

To the sceptics who reject comparisons with Portugal, let us consider India. Here is a country with much bigger problems, whether economic, political, ethnic or regional. Or, at least that was the situation a mere 10 years ago. One has to refer to Kashmir, domestic ethnic conflict, and the extreme poverty, especially in rural areas, to appreciate the enormity of the difficulties facing India.

According to a February survey by The Economist, India's prospects today are brighter than they've been for several decades. India's growth rate reached eight per cent in 2003. The rise in annual growth has been gradual and steady: 3.5 per cent from 1972-82; 5.2 per cent from 1982-92; and six per cent from 1992-2002. Foreign exchange reserves, a mere $1.0 billion in 1991, have topped $100 billion in 2003. Inflation is down, the rupee has turned the corner and is appreciating against leading currencies, while other vital statistics are looking positive. What has been happening?

A series of macroeconomic reforms initiated in 1991, including structural adjustments, have led to accelerated growth. Three major sources of problems had to be overcome since then -- sluggish domestic demand, over-investment in the mid-1990s that caused excess capacity, and higher exposure to international competition following liberalisation measures. Notwithstanding the pain associated with reform, Indian firms have emerged leaner and more efficient thanks to significant productivity increases, outward orientation and lower cost of capital (the base interest rate dropped from 12 per cent in 1997 to six per cent in 2003).

The Economist points out that the newly gained strength is broad-based, including pharmaceuticals, car making (especially car parts), steel, cement and aluminium. One Indian firm claims it is the lowest- cost steel producer in the world. But the most impressive breakthrough is to be found in the IT sector. Building on earlier achievements, India's "outsourcing" firms are growing at phenomenal rates, with some currently doubling their staff every year. The reason is that the globalisation of white-collar services has generated substantial demand by North American and European companies for low-cost, reliable foreign providers.

These services range from the transcription of medical records to desktop publishing, engineering design work, computer software codes, and so on. So far, India has earned top rank in this market, but the Philippines (and China) are trying to catch up. In addition to cost advantages, mastery of the English language is a must. Future growth is estimated to reach 34 per cent annually until 2008, contributing $77 billion in foreign exchange, equivalent to 30 per cent of total earnings.

No one is suggesting that India is problem-free. Foreign direct investment flows are still below expectations; labour laws are deemed too restrictive; and cumbersome and corrupt bureaucracy needs to be handled more firmly. Overall, however, The Economist states "India has done an astonishing job of containing, in a continent-sized country, the tensions of ethnic, religious, regional, social and economic differences." A silent revolution is taking place, where "young people want to fend for themselves and the government is getting out of their way". This statement, reflecting a national strategy, is worth careful consideration for the lessons it embodies. It has given rise to more self- confidence that has led to more private investment, more rapid growth, and a lower budget deficit.

Developing countries are now under growing pressures, from within and outside, to modernise as the only viable means to lifting themselves out of the unhealthy state of their economic and social milieu. Responses have varied in terms of pace and substance. Some are pursuing such a slow pace that results are hardly tangible. Others are giving mostly a rhetorical response that is devoid of substance, and are repeating slogans that mean little because they are neither based on a clear vision of what specifically needs to be done nor followed up by serious reform actions. Finally, a small but growing number have committed themselves to the tough road to modernisation with determination and energy.

In the Arab world, we have generally tended to excel in giving grandiose speeches and publicising impressive slogans, but when it comes to genuine reform measures we are paralysed to act.

The lessons to be extracted from the experiences of Portugal and India are many. Real modernisation is a holistic programme, based on four factors: the pursuit of stable and reform-focused macroeconomic and social policies; maintaining continuity of key policies regardless of changes in government; the promotion of increased private sector and civil society involvement; and, as witnessed in Portugal's case, the prompt reform of civil service and public management of modernisation.

Of the utmost importance is the calibre and commitment of a truly reform-minded leadership at different levels and the effective participation of citizens in determining the directions and strategies for change. These make the difference between mobilising society's drive toward modernity and holding it in a state of stagnation and technological backwardness.

Egypt has many of the requisites to become a dynamic member of the international community and the leader of reform in the Middle East. We are rich in many resources and, what is more important, have enormous dormant human energies that need to be properly groomed and motivated to realise Egypt's potential. We need to heed the lessons learned from the experiences of those ahead of us in this race, if we are to achieve better living standards for our people.

* The author The writer is professor of economics at the American University in Cairo