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A Review of Banik’s The Indian Economy: A Macroeconomic Perspective

Posted by Alex M Thomas on 24th June 2015

Undergraduate economics education in India relies heavily on American textbooks, especially to teach Microeconomics and Macroeconomics. So it was a welcome change to see Nilanjan Banik’s The Indian Economy: A Macroeconomic Perspective published in 2015 by Sage Publishers. It is intended to be a Macroeconomics textbook for Indian students. As Banik writes in the Preface, ‘the available standard macroeconomic textbooks have limited information about how macroeconomics works for India.’ And therefore, ‘[t]his book is for anyone who wants to clear their concepts on Indian macroeconomy.’ This blog post critically reviews (only) Chapter 1 of this book titled ‘Introducing Macroeconomics’.

Banik starts Chapter 1 with an explanation of why macroeconomics – output, employment and inflation levels – is of significance to a ‘common man’. Here, basic macroeconomic concepts and their measurement are explained. Some discussion on the evolution of growth theories is also present. Economic prosperity of common person, according to Banik, is ‘encapsulated in a higher growth rate of GDP and lower inflation and unemployment rate, since these are the factors which directly or indirectly affect his/her well-being.’ But, we must also recognise that an individual’s employment and India’s overall unemployment rate are interdependent variables, and consequently we cannot draw a simple causal line of ‘prosperity’ running from overall employment rate to an individual’s well-being. [By interdependent, I mean that the aggregate employment rate is a summation of individual employments. Not only this, but also that the magnitude and trend of aggregate employment rate often impacts the rate of investment and therefore individual employment.] And, later, on p. 19, he draws a totally reverse causal line: ‘A summation of individual well-being gives us a sense about how an economy is doing.’

Output and employment levels are determined by factors affecting aggregate supply and demand. ‘Economy-wide demand and supply conditions are aggregation of all individual market conditions.’ Is this correct? Market supply and demand curves are an aggregating of individual market supply and demand curves. But, is it legitimate to extend this argument to aggregate supply and demand? Or, is Banik here making a microfoundations argument? A macroeconomic equilibrium is characterised by the equality between planned saving and investment and therefore of aggregate supply and demand. Banik is committing the fallacy of composition in the above quoted sentence wherein aggregate demand condition is seen as an aggregation of all the individual market demand conditions.

Subsequently, Banik starts the discussion on economic growth by clarifying to the reader that the growth rate of an economy refers to the growth rate of real gross domestic product (GDP) of that economy. ‘Supply of output is determined by the availability of factor endowments such as labour, capital, organization, and technology in the economy.’ Aggregate demand is made up of consumption, investment, government and foreign demand. The full-employment level of output, as in neoclassical economics, according to Banik, is determined by supply-side factors. Therefore, it follows that supply-side policies are to be undertaken in order to increase the full-employment level of output. Hence, he writes:

‘However, any policy measure to increase the supply of output requires time. … So managing supply-side components is not that effective in the short run; however, in the long run, components such as investment in education, health-care, and physical infrastructure will have an influence over the availability of future supply of output.’ (p. 6)

What is the role for demand-side policies in this growth framework? They are employed only to take care of ‘fluctuations’ for they have no role to play in determining the full-employment level of output. This is validated by the following excerpt from Banik.

‘Demand management policies would not have been important if there was no fluctuation in demand, taking the output away from the full employment level of output.’ (p. 7)

It suffices here to note that this is a contested assertion with the contestation emerging from the research on demand-led growth.

Among historians of economic thought and economists with a historical understanding, classical economists refer to Adam Smith, David Ricardo, Robert Malthus and Karl Marx, who, while distinguishing himself from their works also employed their framework – the surplus approach to value and distribution. However, in textbooks of Macroeconomics, pre-Keynesian economics is commonly, although incorrectly, classified as classical economics; Keynes is also responsible for this confusion. Banik has a very different understanding of classical economics or as he writes, the ‘classical school of economics’. For him, it comprises ‘particularly, the Austrian school of economists led by Hayek, Robbins, and Schumpeter’ (p. 7).

On Keynes’s principle of effective demand, Banik has the following to say. ‘

Keynes tried to explain the occurrence of an event like the Great Depression through his notion of effective demand. Effective demand is the quantity of goods and services that consumers buy at the current market price. According to Keynes, economic agents behave like animals – all of a sudden becoming optimistic or pessimistic about the future. When on average, economic agents become pessimistic about the future, then consumers start spending less money, firms cut down their production, and the economy enters into recession. In Keynesian model, the emphasis is on demand-side factors.’ (p. 7)

The principle of effective demand states that aggregate activity levels are determined by aggregate demand, and that planned saving adapts to planned investment. This principle was advanced in opposition to the neoclassical Say’s law which states that supply creates its own demand. Moreover, this principle works even without having recourse to animal spirits.

Following this, Banik presents a brief overview of Samuelson’s neoclassical synthesis, Lucas’s critique, real business cycle theory and new classical approach (pp. 10-11); and, he categorises the following economists within the ‘new Keynesian group’: ‘Gregory Mankiw, Lawrence Summers, Olivier Blanchard, Edmund Phelps, and John Taylor’ (p. 12). Such a classification of economists along with the overview of different macroeconomic schools is of much value to the student readers.

After carrying out a short empirical discussion on India’s macroeconomy and empirical definitions such as consumer durables, service exports, etc, Banik makes a fallacious statement regarding the relationship between saving (S) and investment (I).

‘…in a closed economy framework … one would expect domestic savings to be the only source of investment. Accordingly, what is saved is invested and hence investment is expected to be equal to savings. In the present context, however, there is a divergence between investment and savings components of GDP. This divergence is on account of the fact that we are considering an open economy framework where we allow for foreign transactions. Typically, the more open is the economy, the more is the extent of this divergence.’ (p. 17).

In a two-sector economy (with firms and households), the accounting identity S=I holds. But, what is the explanation or theory behind this? It is the principle of effective demand: planned saving adapts to planned investment (via changes in activity levels). The mainstream neoclassical view is that planned investment adapts to planned saving (via changes in a sufficiently sensitive rate of interest). In a three-sector economy (with firms, households and a government), the accounting identity becomes: S+T = I+G, where T is taxes and G is government expenditure. And, in a four-sector economy (with firms, households, a government and the foreign sector), the accounting identity is: S+T+M = I+G+X, where M is imports and X is exports. In other words, the above 3 identities reaffirm the condition for macroeconomic equilibrium: leakages must equal injections. Thus, in equilibrium, there can be no divergence between saving and investment in a two-sector economy and in general, in equilibrium, leakages equal injections. Banik appears to be confusing macroeconomic theory with accounting identities, and disequilibrium with equilibrium positions. The above statement of Banik is therefore conceptually incorrect.

Next, he presents a commentary on growth economics, with a focus on the Harrod-Domar and Solow growth models.

‘One of the earlier works in the area of supply-side economics was independently undertaken by two economists – Roy Harrod in 1939 and Evsey Domar in 1946. The relevance of the Harrod-Domar model lies in its ability to give a dynamic flavour to the Keynesian model. The Keynesian model is a static model putting emphasis on aggregate demand and its effect on the output gap in the short run.’ (p. 21)

In the mushrooming, although at a moderate pace, research on demand-led growth, the growth model of Harrod is a seen as an early contribution to demand-led growth and not supply-side growth. It is not clear why Banik places Harrod’s contribution under supply-side economics. He goes on to point out limitations of Harrod’s model.

‘Another limitation of the model is that it assumes that labour and capital and used in equal proportions (equal prices for labour and capital).’ (p. 22).

Here, he makes yet another incorrect statement because Harrod assumed that labour and capital are used in constant not equal proportions. With this glaring error, one cannot help but wonder whether this macroeconomics textbook went through any serious internal or external reviewing. Banik then goes on to discuss the Solow model and undertakes a very brief survey of the endogenous growth models of Paul Romer, discusses the work of Robert Hall and Charles Jones on social infrastructure, and Robert Fogel’s study of the positive association between health and economic growth. Next, the author moves on to issues involved in the measurement of GDP, and in this context clarifies the meaning of operating surplus and mixed incomes.

To conclude, whilst Banik’s macroeconomics book for Indian students contains serious conceptual errors, the design of the structure of chapter one (and the others) deserves some merit. There is indeed ample scope for improvement and enlargement of the contents. Yet, it is deeply disappointing to come across the errors, such as the ones mentioned in the preceding paragraphs, in a book such as this which is stated to be an advance over existing (foreign) macroeconomics textbooks.

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Posted in Book reviews, Economics, India, Macroeconomics | No Comments »

A Review of Dipankar Gupta’s Revolution From Above: India’s Future and the Citizen Elite

Posted by Alex M Thomas on 28th December 2013

The year 2013 has seen a number of books on India by several intellectuals. Out of a total eleven chapters, Gupta devotes the first five and the last two in developing his thesis of the citizen elite. The four chapters in the middle deal with the economic contributions of the informal sector, universal health, universal education and the need to have planned urbanization respectively. Gupta’s central thesis is that India, and other democracies, require an ‘elite of calling to dig deep and bring out democracy’s many potentials’ (p. xi). This thesis is not well substantiated in the book and also is problematic in the working of a democracy.

First, we briefly engage with Gupta’s ‘citizen elite’. Their views, writes Gupta, may ‘appear utopian’ and they are willing to ‘forsake their immediate class interests’. Gupta’s causal story runs like this: citizen elites do not ‘maximize the given’, instead, it is their active interventions which render a country democratic. They have a ‘vision’ which goes beyond the short term (p. 37). Moreover, they are interested in furthering the society as a whole and not keen on specific interests – be it class, religion, caste or gender (p. 96ff). ‘Utopia is … about making a better future possible by deliberate interventions in democracy’ (p. 42). He considers them to be ‘leaders’ distinct from the voters. His summary of the first chapter on the first page reads: ‘democracy is meant to change reality and not submit to it. … Thus, while the general belief is that people make democracy, the fact is that a select few actually contribute much more’. Fraternity ‘is the single most important tenet of democracy’ (p. 4). ‘Real democrats are answering to a higher call, for they are fired by the ideal of citizenship whose core attribute is that of fraternity’ (p. 10). ‘Democracy is fragile and requires eternal vigilance’ (p. 10). ‘Democracy can be best understood as an art that has scientific possibilities’ (p. 11). The elites think in terms of ‘aspirations’ and how they can be met. He writes: ‘democracy needs leaders to show the way, even as it needs the people to evaluate them’ (p. 19). The elite, according to Gupta, are the ‘vanguards of democracy’ (p. 21). They are responsible for ‘establishing the foundations and principles of a democracy’ (p. 196). Moreover, ‘they force the state to deliver public services like health, education and energy, at quality levels, to every citizen regardless of class’ (p. 24). He places Lois Bonaparte, Otto von Bismarck and Mao Zedong under the group citizen elite; other citizen elites include Earl Grey (Factory Act in Britain), Robert Peel (who discontinued the Corn Law), Richard Cross (Public Health Bill) and Henry Brougham (Education Bill). They have a ‘calling’ and they ‘were answering to a higher voice’ (p. 26). Such claims as to their higher nature are difficult to justify and more so when Gupta denies any agency or role to working-class movements (p. 27). And Gupta concludes that the present ‘welfare state in Europe is an outcome of such elite interventions’ (p. 31). Gandhi and Nehru, according to Gupta, belong to this class of elite citizens. Despite finding Gupta’s thesis of a ‘revolution from above’ unconvincing, his observations about the current state of the Indian economy and society are astute. It to these observations we turn to below.

In India, 76 per cent of health costs are borne by individuals (p. 39, also p. 146). This is of concern in a country where only about 10 per cent people have some kind of health insurance (p. 146). Furthermore, only 35 per cent of Indians have access to essential drugs. India has only 0.9 hospital beds per 1000 population (p. 149). As for human capital, the Manpower Profile of India 2005 informs us that the skill level of the working class is low (p. 39). Only ‘5 per cent of the total workforce, in India has had the benefit of a vocational training’ (p. 123). Gupta favours ‘universal’ policies in health and education as opposed to the currently existing ‘targeted’ ones. As Gupta rightly notes, ‘[t]argeted policies make sense only when the population concerned in but a fragment of the total’ (p. 137). India spends less that 1 per cent of its GDP on health (p. 141), which Gupta finds ‘inexcusable’. The US spends about 6.8 per cent of its GDP on public health. Gupta reiterates that ‘[u]niversal health does not mean average health, or only health for the poor’ (p. 148). Similar to health, public investment in education is about 3 per cent of our GDP (p. 158). And, Gupta reminds us that ‘Sweden and Denmark allocate over 30 per cent of their GDP to public goods delivery’ (p. 163).

Gupta is disappointed that ‘India’s elite [of] today have committed themselves to commonplace economics and have no patience for the principles of the solar economy’ (p. 40). By commonplace economics, Gupta refers to ad-hoc policies which do not make fundamental improvements in the well-being of people. In contrast, the solar economy, refers ‘to a source of wealth creation that, like the sun, gave without thinking of what it could get in return’ (p. 38). This distinction is borrowed from Georges Bataille, a famous French intellectual and literary figure. Gupta further claims: ‘When the solar economy is in full force its glare makes us colour-blind, race-blind and ethnically blind’ (p. 41). It is not clear how to interpret the ‘solar economy’.

Gupta provides statistics which are indicative of the deep fissures characterising the Indian economy. 93 per cent of the Indian workforce is in the informal sector (p. 119). It contributed 59 per cent off India’s Net Domestic Product when India grew at about 9 per cent (p. 121). Moreover, the informal work in textiles, gems and jewellery, carpets contribute about 32 per cent of our export revenues (p. 121). ‘India’s growth story thus requires a full acknowledgement of the contributions of the small-scale sector and informal labour’ (p. 123). ‘Employing cheap labour is the Indian way of edging out international competition’ (p. 124). The IT sector employs less than 2 million people, contributes about 7 per cent to the GDP and approximately forms 25 per cent of our exports (p. 129). In 2009, 20.82 per cent of FDI went into real estate and construction and it withdrew itself from manufacturing and IT (p. 130). Gupta asks: ‘In 1990 there were 1825 strikes nationwide, but by 2006 the number had dwindled to 192. Why then should entrepreneurs fear strikes today? (p. 135). According to the 2011 census, the rural population in India is little above 69 per cent (p. 185). ‘[U]rbanization cannot be left to happen spontaneously and sporadically, but needs to be engineered keeping in mind the welfare of citizens’ (p. 165). The areas around the State capitals are growing – the Class-I cities such as Raipur, Nagpur, Surat, Pune, Aurangabad. Tirrupur accounts for 23 per cent of India’s garment exports (p. 171). And yes, we should be ‘paying greater attention to the quality of economic growth and not just to quantitative figures’ (p. 168). 45.5 per cent of rural NDP in India is non-agricultural (p. 169). 51 per cent of Mumbai’s population live in slums (p. 178) and the corresponding figure for Ludhiana, a manufacturing industry town, is 50 per cent (p. 183).

On public debt, Gupta is closer to the truth than many mainstream economists in India and across the world. He does not consider high public debt to be bad for the economy as long as investments rise and there is faster economic growth (p. 119). ‘The big paradox of India’s democracy is that free elections and mass hunger go side by side’ (p. 108). In addition, the existence of a ‘patron-client democracy’ implies the ‘lack of public support structures for citizens’ (p. 109). As Gupta rightly observes: ‘failing a proper universal delivery system, patrons are the best way out’ (p. 109) and thus reinforces the need for proper universal delivery systems.

To sum up, Gupta’s observations on the Indian economy are sharp and discerning. But, his thesis of the citizen elite suffers from too many pitfalls and so does his use of the ‘solar economy’ concept. Finally, it is strange that B. R Ambedkar gets only a passing mention (p. 4). Still, the middle four chapters of his book make a valuable addition to our understanding of contemporary India.

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Posted in Book reviews, Economic Growth, Economics, GDP, India | 1 Comment »

Towards an Objective Understanding of Scarcity

Posted by Alex M Thomas on 26th November 2013

When Henry Holt & Co. sent me an advance edition of Sendhil Mullainathan and Eldar Shafir’s Scarcity: Why Having Too Little Means So Much to review, I had presumed it to be another book on the ubiquitous nature of scarcity. However, their book, while acknowledging the phenomenon of scarcity to be omnipresent, argues, in a novel manner, the adverse effects scarcity has on the cognitive resources of individuals. In other words, scarcity (of money, time, etc.) forces people into a scarcity-trap: the poor stays poor; the busy remain busy; and the lonely remain lonely. For, ‘[s]carcity creates a mind-set that perpetuates scarcity.’ The aim of their book, writes Mullainathan and Shafir, is ‘to unravel the scientific underpinnings of scarcity’ in order to make more sense of ‘social and behavioral phenomena’ and is targeted at a ‘wide audience’. Their book is an attempt to present ‘the logic and consequences of scarcity.’

‘Scarcity captures our mind. … It changes how we think. It imposes itself on our minds.’ And, ‘scarcity’s capture of attention affects not only what we see or how fast we see it but also how we interpret the world.’ Hence the authors argue that scarcity ‘is not just a physical constraint. It is also a mind-set.’ The consequence of scarcity, according to Mullainathan and Shafir, is that it makes ‘us less insightful, less forward-thinking, less controlled.’ It reduces our ‘bandwidth’ – our cognitive ability. There is however a positive outcome of scarcity, the ‘focus dividend,’ which makes us more effective in the immediate period but ‘scarcity eventually ends in failure.’ They label the mechanism which reduces our cognitive resources ‘tunneling’. ‘Sometimes when we tunnel, we neglect other things completely.’ ‘Focus dividend’ is a short-term positive outcome of scarcity whereas ‘tunneling’ is a long-term adverse consequence arising from the tax scarcity imposes on our bandwidth. They are, in fact, interdependent phenomena. Based on their experiments, they observe that poor people ‘tunnel’ and therefore do not purchase insurance which would have helped them in the future. For, ‘scarcity taxes bandwidth’ and ‘generates internal disruption’ by lowering ‘fluid intelligence and executive control’. The authors acknowledge the role ‘self-control’ could play in overcoming scarcity, but they note that ‘will-power’ is something which is not yet fully understood. To summarise: ‘[t]he problem is not the person but the context of scarcity.’

Opposite of scarcity is ‘slack’ or ‘abundance’. ‘Slack’, writes the authors, ‘is a consequence of not having the scarcity mind-set.’ Those who have an abundance of resources (money or time) have the luxury not to make trade-offs. Additionally, ‘[s]lack gives us room to fail.’ Scarcity therefore not only leads to ‘greater errors’ due to the bandwidth tax, but also implies that there is ‘less room to fail.’ Marginalist economics treats any unused or underutilised resource as wasteful and inefficient and the authors follow this logic. Although, in the later part of the book, they distinguish between useful and useful slack. Of course, what is useful or wasteful depends on the goals or aims of the individual, organisation or government. The subjective assessment of physical/objective scarcity is also dependent on the goals, and the process of tunneling depends on this subjective measurement of scarcity and the goals. Therefore, the experience of scarcity is in itself conditioned by the goals and they affect each other in a dynamic fashion – reasoning is not limited to the means to achieve the ends, but it also can modify the ends. In the initial chapters, the authors, using results from experiments, quite convincingly argue that the subjective feeling of scarcity generates an objective result – it taxes the bandwidth and lowers the cognitive ability. In fact, the entire book can be seen as an attempt to provide an objective understanding of scarcity (which can be real or imagined or both).

Scarcity leads to borrowing. Borrowing, according to the authors, is a ‘simple consequence of tunneling.’ Although, it is conceivable that scarcity can lead to borrowing, it certainly cannot be maintained that all borrowing is because of tunneling. The phenomenon of a debt-trap is nothing new. ‘Scarcity leads us to borrow and pushes us deeper into poverty.’ Scarcity, writes the authors, causes the poor to focus more on immediate (short-term) goals and they overlook long-term goals. The focus on several short-term goals is termed juggling, and is a ‘logical consequence of tunneling.’That is, the poor resort to ‘short-term fixes.’ Can one get out of scarcity? Without some external intervention, the authors argue, it is highly unlikely. For, getting out of the scarcity-trap requires a (long-term) plan but since the goal is not immediate, the scarcity mind-set does not accommodate it. ‘Planning requires stepping back, yet juggling keeps us locked into the current situation.’ Also, ‘future planning requires bandwidth, which scarcity taxes heavily.’ To state the obvious, the authors note that ‘[a]ll this is complicated by the lack of slack.’ Scarcity implies a lack of slack. Similarly, slack implies a lack of scarcity. Owing to the objective effects of scarcity on cognitive resources, getting out of a scarcity-trap is extremely difficult, be it those who lack money or time.

Chapters 7 and 8 are devoted to understanding (income) poverty and some suggestions are offered for improving the lives of the poor. The authors rightly argue that the extant explanation of poverty is largely ‘piecemeal.’ Their major contribution, I think, to studies on poverty is that the poor ‘lack not only money but also bandwidth’ as a consequence of their income poverty. As they ask: ‘Why not look at the structure of the programs rather than the failings of the clients?’ This bandwidth tax is something the designers of social programmes ignore. Therefore, ‘strong incentives’ do not often function well. The authors call for social programmes which are ‘fault tolerant’ given the already taxed bandwidth of the poor. A limit ‘penalises but fails to motivate’ the poor and according to the authors such limits/penalties on incentives are flawed because they do not take into account the cognitive effects of scarcity. ‘Limits create scarcity, the logic goes, which might lead to better management of how the resource is “used.” This almost relies on the psychology of scarcity. But it is flawed.’ A better solution, according to Mullainathan and Shafir, would be ‘to create smaller but more frequent limits.’

A greater focus on the creation of dependable jobs and stable incomes for the poor across the world could be psychologically transformative.

All this is a radical reconceptualization of poverty policy. … Now, rather than looking at education, health, finance, and child care as separate problems, we must recognize that they all form part of a person’s bandwidth capacity.

A powerful and political conclusion emerges from the authors: social engineering should be built on better foundations, in this case, that of the psychology of scarcity.

Chapter 9 is titled ‘Managing Scarcity in Organizations’ wherein the importance of slack is stressed, in contrast to the views espoused by the ‘efficiency experts.’ Organizations should ‘explicitly manage and ensure the availability of slack.’ In other words, the quality of the workplace must be improved – less surveillance, adequate leaves, reduced working hours, etc. For, as the authors note:

Increasing work hours, working people harder, foregoing vacations and so on are all tunneling responses, like borrowing at high interest. They ignore the long-term consequences.

In line with the optimizing story told by marginalist economics, Mullainathan and Shafir emphasise the need to ‘maximize our limited cognitive capacity.’ They call for a greater focus on the ‘cognitive side of the economy’ and even go as far as to suggest the creation of a ‘Gross National Bandwidth’ index!

Despite the authors adopting some static concepts employed in marginalist economics of a very subjective nature, their research points towards a very dynamic and objective understanding of scarcity. Moreover, the adverse consequences of scarcity on cognitive resources highlight the extreme importance of careful social engineering, especially in the reduction of poverty.

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Posted in Behavioral Economics, Book reviews, Economics, Marginalist economics | No Comments »

Misunderstanding Economic Growth and Development

Posted by Alex M Thomas on 25th August 2013

If two previous posts dealt with trying to understand how economic growth may or may not translate into development, this post goes a step behind and discusses what economic growth means. More importantly, this post examines what economic growth does not mean. The motivation for this blog post comes from Jagdish Bhagwati and Arvind Panagariya’s 2013 book titled Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries. Note that the following paragraphs are not intended to be a detailed review of the book; only their central premise – ‘the centrality of growth in reducing poverty’ (p. 4) – will be engaged with. The blog post, however, ends with a critical commentary on the authors’ methodology (focusing on authors’ engagement with opposing views, presentation of authors’ own arguments and referencing), as contained in the Preface, Introduction and the first three chapters. Also, no comments are offered on the data analysis present in their book.

A premise is ‘a statement or proposition from which another is inferred or follows as a conclusion.’ Bhagwati and Panagariya start with the premise that economic growth entails increase in employment opportunities and an improvement in income per person. This is also their conclusion, and forms the title of their book. They write:

Bhagwati argued nearly a quarter century ago that growth would create more jobs and opportunities for gainful improvement in income, directly pulling more of the poor above the poverty line and additionally would allow the government to pull in more revenues, which would enable the government to spend more on health-care, education, and other programs to further help the poor. Growth therefore would be a double-barrelled assault on poverty. (p. xix)

Further, they write: ‘growth helps by drawing the poor into gainful employment’ (p. 23). A simple question is sufficient to negate this view. Does the market create jobs after taking into account the abilities and skills of the poor? Of course not! If so, there would not be any unemployment or underemployment. A well-educated (and healthy) workforce is necessary so as to actually ‘gain’ from the newly created employment opportunities. [Not to forget the hardships involved in deskilling and reskilling.] And, it is not logically necessary for employment opportunities to increase when the economy grows. Jobless growth is a possibility where the surplus is not used to create further jobs; more often, it is a question of whether jobs are being created at the same pace as at which the economy grows.

By definition, economic growth entails a rise in income. But whose income? Economic growth can co-exist with the rich getting richer. Or, economic growth can give rise to stagnant wage shares amidst productivity rises. Growth can be export-led. It can be service-led. It might favour capital-intensive over that of labour-intensive technology. A rise in real GDP can happen because of a variety of reasons. It is these ‘reasons’ that one must investigate. For, it is here that we will find answers as to who the beneficiaries of economic growth are. It is to the mechanisms or processes which generate economic growth that we must attend to in order to comprehend which sector/classes/groups are losing out. For example, the nature and consequences of service-led growth will be very different from that of growth that is manufacturing-led. Bhagwati and Panagariya repeat the same fallacy, pointed out in the previous paragraph, in the following passage.

Conceptually, in an economy with widespread poverty, labor is cheap. Therefore, it has a comparative advantage in producing labor-intensive goods. Under pro-growth policies that include openness to trade (usually in tandem with other pro-growth policies), a growing economy will specialize in producing and exporting these goods and should create employment opportunities and (as growing demand for labor begins to cut into “surplus” or “underemployed” labor) higher wages for the masses, with a concomitant decline in poverty. (p. 23; see p. 43 as well)

Conceptually, in an economy with excess labour supply, labour is cheap. Bhagwati and Panagariya argue that a growing economy with cheap labour will adopt labour-intensive techniques. This reasoning assumes that an unemployed farmer or school teacher can easily and naturally be employed in a firm which exports computer parts. The authors’ views seem to indicate a gross misunderstanding of the actual economic dynamics of any society (see below as well). Moreover, one is not just concerned with mere employment, but with employment that provides good working conditions – including sick leave, maternity leave, overtime wages, etc.

‘The pie has to grow; growth is a necessity’ (p. xx). Yes, a larger surplus makes it feasible for each claimant to get a greater share, including the government. The contention is with respect to the feasibility and who these claimants are. According to Bhagwati and Panagariya, growth automatically and naturally generates higher incomes per person thereby ‘directly pulling more of the poor above the poverty line.’ Growth is not manna from heaven which everyone gets in equal amounts. It is based on definite political, economic and social institutions/processes – wage bargaining, possibilities of reskilling, mobility of labour, gender, caste, family structure, social security nets (family based or from the government) and so on. In this context, the authors rightly note the negative effects excessive licensing, government monopolies and protectionism can have on the growth of an economy (p. xii).

Given the authors’ belief in a strict one-way causation running from economic growth to development, they argue for carrying out growth-enhancing reforms first, which they refer to as Track I reforms. Subsequently, the surplus can be redistributed by the government to achieve development; this can be through transfer payments of various kinds. These are known as Track II reforms. They argue:

Track II reforms can only stand on the shoulders of Track I reforms; without the latter, the former cannot be financed. (p. xxi)

Of course, they can be financed through government borrowing and there is ample literature on the issues surrounding debt-sustainability in relation to achieving full employment. One wishes to see a more nuanced understanding of such matters.

This separation of growth from development is not just illogical and untrue, but also dangerous to public policy. Often, for purposes of economic theorising, in order to carefully study the causal relations between variables, some boundaries are drawn and certain assumptions are made. But, an import of this technique into the domain of public policy is methodologically flawed, where the abilities of individuals to seek jobs and actually work and earn (higher) incomes crucially depend on their social, cultural and economic backgrounds. In other words, while the distinction between economic growth and development might be reasonable for some purposes, in practical politics, they go together. Moreover, if the policy objective is to ensure good quality of life for all, then it must be the case that, to use the authors’ terminology, both Track I and II should be undertaken at the same time, with perhaps a greater emphasis on Track II reforms.

A fundamental error underlies the authors’ belief that ‘growth’ is an automatic process which takes place when the government lets the private players have a completely free hand, international trade is free, and capital can freely flow in and out of the country. It is this notion which makes the authors’ note that ‘Track II reforms involve social engineering…’ (p. xxi). That is, in their view, Track I reforms require no ‘social engineering’. Nothing could be farther from the truth! A ‘market’ is an engineered institution. The belief that ‘free markets’ will deliver both economic and social justice is quite easily discernible from their statements. Making commodity markets free (from both government and private monopolies) is certainly beneficial for economic growth as well as for wider socio-economic development. But, given the (historical or otherwise) arbitrariness (as opposed to ‘merit’) involved in the ownership of various forms of assets, and the tendency of markets to favour the powerful, there is always a crucial role for the government and civil society to intervene in order to ensure social justice (especially in the arenas of education and health). After all, is this not what we mean by participatory democracy?

The preceding commentary is based on a partial reading of Bhagwati and Panagariya’s book, as noted in the introductory paragraph. Their conception of growth, at best, seems superficial and at worst, they misunderstand the dynamics of economics growth as well as development. The view of ‘free markets’ generating growth with rising incomes per person is never an automatic process. It requires visible hands and is indeed social engineering. We end with a few observations on their methodology. For them, all that their critics say are myths; Part I of their book is titled ‘Debunking the myths.’ On one occasion, some of the critics, who are hardly ever named (and therefore not cited), are accused of being ‘intellectually lazy’ (p. 25; also see p. 32, p. 34, p. 35 for the unnamed critics). On the other hand, the following phrases are used for arguments in their own support: ‘state-of-the-art techniques’ (p. 31), ‘detailed state- and industry-level data’ (p. 31), ‘compelling nature of evidence on the decline of poverty under reforms and accelerated growth’ (p. 33), ‘irrefutable evidence’ (p. 37), ‘evidence…is unequivocal’ (p. 38) and ‘these authors’ superior methodology’ (p. 43). Out of the total number of references excluding data sources and reports (around 125 in number), about 37% (around 47 in number) are references to the authors’ work, either as a sole author, a co-author or as the editor of the volume. This is very striking. And, out of citations to Panagariya’s work (about 27 in number), 14 of them are newspaper articles published in the Times of India or Economic Times. It is indeed unfortunate to come across so many fundamental errors in a book like this, because growth does matter, although not at all in the way Bhagwati and Panagariya expound in their book!

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