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POVERTY Vs GROWTH

Bhagwati, Sen and India's fight against poverty

VIJAYAWADA (AP) MONDAY, 11/10/2010: A roadside vendor takes a break to have a quick lunch on hot day near old Government General Hospital in Vijayawada. PHOTO: V_RAJU (DIGITAL MAGE) | Photo Credit: V_RAJU

V.S. Sambandan of The Hindu Centre for Politics and Public Policy critically assesses the implications of a recent debate, between distinguished economists Amartya Sen and Prof.Jagdish Bhagwati, that revisits issues of growth and equity, saying that to better understand, and gain, from the debate, it is essential to place it in the context of India’s fight against poverty and the performance of its social sector.

It’s been described as a war of words between India’s two internationally renowned economists: Amartya Sen and Jagdish Bhagwati. To the pessimist, it was a clamour to outsell books by the distinguished authors – not really an argument, but more of a cynical wag’s dismissive taunt. To the over-interpretative media, it was a proxy Rahul Gandhi Vs Narendra Modi for the real Congress Vs BJP clash of the political parties in the next Lok Sabha elections.

To economists it is a matter of much more significance as this relates to core policy-making in a developing economy that aims to reduce its stubborn poverty. The questions that arise are both economic and political. In the area of economics, the key ones are what economic tools does a state use to provide a boost to growth and reduce poverty, and what is the role of the state, specifically, in economic policy making that address social issues?

The debate has also strayed into the political discourse, with Bhagwati’s endorsement of the Gujarat model of development at a time when the world’s largest democracy heads to the polls, due by mid-2014. This gives rise to the important political question: is economic efficiency, even if borne out by official figures, an adequate enough measure of success to justify a political ideology?

type=box-article;; position=left;; articleid=5061406;; To better understand, and gain, from the Sen-Bhagwati debate on economics, it is essential to place it in the context of India’s fight against poverty and the performance of its social sector. A caveat is also called for: Rather than cast either Sen or Bhagwati in the possible “pro-poor” or “pro-rich” moulds, and then view their positions on growth / development, it is important to also recognise that both economists see poverty alleviation as the end to which policies should be crafted, and then seek to find out what they stand for, and as a consequence, what their positions mean for India.

From this point of agreement arises the disagreement, which centres on two critical outcomes of economic policy making: growth and redistribution. The difference is not that one wants to ignore either of the two outcomes at the cost of the other. The difference is that of strategic approach and causal relationship. That there is varying evidence in favour of both sides of the debate only emphasises the complementary nature of these two approaches. And, the need for a more serious debate – both academic and public.

In this common goal of reducing poverty, according to Sen, redistributive justice, buffeted by institutional reform, should take precedence, which would, in turn, drive growth. For Bhagwati, “redistribution, as distinct from growth, cannot be the answer to removing poverty”. The single major point of divergence between the two economists is, therefore, one of accent and is linked directly to India’s stubborn poverty, which persists despite decades of state efforts.

This difference in emphasis, however, is also important. For, causation is at the core of economics. In addition, there is no one-size-fits-all in economic policy. A policy that may be excellent in a country, or even one State in India, could fail in another – an example being the implementation of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). The varied experiences of the MGNREGA, for instance, can be directly attributed to the role of the State and local level political factors, and administrative capabilities to implement the scheme.

To get a grasp on what the two are debating about, it is also important to locate the outcome of India’s economic policies in two broad areas – poverty alleviation and social sector performance – in independent India.

First, an overview to explain India’s economic policy framework since Independence. The first phase, from Independence to the mid-1980s, was marked by a planning driven, public sector dominated approach to running the country’s economic affairs –referred to as the Nehruvian model (or more caustically as the permit-quota-licence-raj). The second phase, since the mid-1980s, commenced with the Long Term Fiscal Policy initiated by the Rajiv Gandhi government and categorised as a market-friendly “reform” phase, which evolved into the economic reforms of 1991.

Although there is criticism that the first, Nehruvian phase, resulted in a low growth rate for decades, termed by the late Prof. Raj Krishna as the Hindu growth rate, it was during this phase that the foundations for the take-off stage of the economy were laid. Public sector-led industrialisation catalysed the process of social change by enhancing capabilities and by providing increasing access to social goods. This was a critical backdrop for the reforms to deliver results. For instance, literacy rate, which was 30.7% in 1961, rose to 51.6% in 1991 ( Census of India, 2011 , Primary Census Abstract). Similarly, the urban population, which was 18.0% in 1961 rose to 25.7% in 1991 ( Census of India, 2011 , Primary Census Abstract), and life expectancy at birth rose from 43.10 years to 58.62 years between 1961 and 1991 (World Bank).

One of the undercurrents to this debate is the validity or otherwise of trickle-down economics. Pronob Sen, the chairman of the National Statistical Commission sees the dynamics of trickle-down economics at work. Bhagwati [in Why Growth Matters , 2013, pp xviii] makes it clear that he would refer to this process by the “now-popular phrase of ‘pull-up’ strategy”, which Bhagwati used earlier in 1987 ( Poverty and Public Policy , the 12th Vikram Sarabhai Memorial Lecture).

For Amartya Sen and Jean Dreze, the lead authors of An Uncertain Glory “a far better pattern of economic development is one in which GDP growth is to an extent traded off for more rapid improvements in health and education” [Partha Dasgupta, Prospect , July 15, 2013].

It is important, at the same time, to recognise that neither is Sen against growth, nor is Bhagwati anti-poverty alleviation. Witness, for instance, Sen’s appreciation for India’s post-reforms economic growth in The Argumentative Indian and Bhagwati’s assertion that the task of reforms is not complete without redistribution [ India’s Tryst with Destiny , with Arvind Panagariya]. Bhagwati’s position on the growth-redistribution debate also can be traced back to the 1987 lecture when he said that both the direct and indirect methods to attack poverty were required. (The indirect method being the one associated with Bhagwati and the direct one to Sen in the present media debate.)

Bhagwati, in 1987, had also said: “the optimal policy design should generally involve a mix of these two approaches unless the ‘productivity’ of either in achieving the target substantially dominates the other”. This observation also provides a basis for academic research to be on the dynamics of the post-1991 policies and poverty alleviation. The importance of growth is not lost on Sen [and Dreze] either, evident from the assertion that “the relation between growth and development – their differences as well as their complementarities” – is central to the theme of An Uncertain Glory .

Evidently, both economists do not advocate one approach at the cost of the other. What is crucial, however, is that a policy set on the course of the indirect route, which focuses on growth, could result in a lower spending on the social sector – as explained by Barbara Harriss-White ( Illfare in India , with S. Subramanian, 1999). Also of relevance in the current context is Harriss-White’s prescient observation that the social sector is “highly divisible” thereby making it easier for piecemeal cuts in expenditure to be made and “does not constitute a political constituency.”

To add to this, Sen and Dreze’s evidence that the post-reform years have not made a significant dent on, for instance, “India’s nutrition indicators for the last twenty years or so” adds weight to the need to strengthen direct intervention methods, particularly for the benefit of India’s millions of poor.

These observations by the two economists and India’s post-reforms experience only go on to re-emphasise the co-validity of both Bhagwati and Sen in India’s battle against poverty. If there has been an emphasis on growth, through liberalisation, there has also been emphasis on direct interventions, such as stepping up of interventions in healthcare and education.

However, rather than conclude that both are right, it is essential that the respective positions are critically examined for the effects that they would have on India’s war against poverty, particularly in the run-up to the elections. For, the difference in emphasis is not as simple as it appears. Take, for instance the hypothetical situation that the indirect approach (as advocated by Bhagwati) is given precedence. This would take away the argument for a nation-wide direct intervention scheme such as the MGNREGA, which has resulted in both assured employment for those in the rural sector and an accompanying rise in minimum agricultural wages.

Clearly, given India’s continued battle against extreme poverty, of which employment is a critical ingredient to move people out of poverty, it is imperative that the direct intervention mode needs continued emphasis, although not at the cost of growth. A meaningful trade-off is called for, but with the accent on the Sen-Dreze mode.

The reforms process, as Prime Minister Manmohan Singh pointed out in his Independence Day address of 2013, has been “continued by all governments that came to power” since 1991. This leads us to the political consequences of the observations made by both Bhagwati, an endorsement of the Gujarat development model and Sen, of not preferring Mr. Modi as the country’s Prime Minister.

By themselves they mean little, but seen against the context of an upcoming election, in which the Opposition BJP, of which Mr. Modi appears to be the party’s forerunner as candidate for the premiership, it has an important implication. Economic efficiency, for instance, cannot be the overwhelming attribute for popular backing at the poll.

Moreover, to view this debate as merely an exchange of differing economic views, which can be compartmentalised from the political situation, runs two risks. Firstly, it would perpetuate a viewpoint that economics can be seen in isolation, divorced of a larger political ideology and the state in which economic policies operate. Secondly, it would mean holding out economic efficiency as a justification for the larger political thinking of those in power.

The political overtones of the Sen-Bhagwati economic policy debate are not easy to ignore either. Particularly in the run-up to what is expected, according to preliminary surveys, to be a battle between the present Opposition, the Bharatiya Janata Party and the incumbent Congress. These two parties are largely in sync in respect of economic policies. But their differences, both in ideology and in actions, on a core idea of India’s nationhood – secularism – exacerbates the consequences of any broad endorsement to Mr. Modi’s economic policies, caveats notwithstanding, given that he represents a divisive and polarising political ideology.

More than economic reasoning, which tends to place the accent on the Sen approach, the political leaning of the Bhagwati argument holds out the dangerous proposition of an untested assertion – that the Gujarat model is indeed successful and calls for replication at a national level – capturing the popular imagination. This is a fallacy that can lead the unsuspecting Indian electorate down the garden path and cause irreparable damage to the Indian political and economic fabric.

To give John Maynard Keynes the last word:

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” - ( The General Theory of Employment, Interest and Money ,1936)

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