Undergraduate Economist

Perspectives of an economics student

Archive for the 'GDP' Category

60 Years after the 2nd Five-Year Plan: On Economic Theory, Planning & Policy

Posted by Alex M Thomas on 18th June 2016

Picking up Ajit Dasgupta’s A History of Indian Economic Thought (1993) motivated me to revisit India’s 2nd Five Year plan (1956-61) and the Mahalanobis model in light of the structural changes in India’s economy and developments in economic theory, particularly of demand-led growth theory. Although 60 years have passed since the inception of the 2nd Five Year plan, the ‘Approach to the Second Five Year Plan’ contains ideas which are particularly important today, especially after the closure of the Planning Commission. In its place, we now have the NITI (National Institution for Transforming India) Aayog which assumes that Indian manufacturing and service sectors are currently operating ‘on a global scale’ and what is now needed is ‘an administration paradigm in which the government is an “enabler” rather than a “provider of first and last resort”’ (see Cabinet Secretariat resolution, 1 January 2015).

Why economics?

Economics is the study of commodities – its production, distribution and consumption. Economics provides us with the determinants of aggregate production (GDP), employment, and income distribution. This allows us to understand our economic surroundings better and consequently enables us to improve existing economic conditions. This may be carried out through general economic policies (for example, progressive taxation to reduce income and wealth inequalities and monetary policy to combat inflation) or through targeted economic policies (for example, fertilizer subsidies to improve agricultural productivity and tax concessions to foreign investors). Ultimately, economic interventions are made based on an assumption and several aims. The assumption is that economic theory tells us how economies function. The interventions are carried out to satisfy certain normative aims (for example, equity and freedom). This distinction is made in textbooks by distinguishing between positive and normative economics. For instance, if a particular society is not uncomfortable with unemployment its economic policies would not be aimed at reducing unemployment.

Objectives of the 2nd Five Year Plan

In this section, the economic objectives of the 2nd Five Year Plan are presented. All excerpts from the 2nd Five Year Plan are taken from here.

“The current levels of living in India are very low. Production is insufficient even for satisfying the minimum essential needs of the population….” Therefore, it was imperative to increase aggregate production. But, the economic architects of the plan did not visualize money as an end in itself.

“A rising standard of life, or material welfare as it is sometimes called, is of course not an end in itself. Essentially, it is a means to a better intellectual and cultural life. A society which has to devote the bulk of its working force or its working hours to the production of the bare wherewithals of life is to that extent limited in its pursuit of higher ends.”

Moreover, economic policy was aimed at an increase in activity levels and “also in greater equality in incomes and wealth.”

The Plan Document clearly favours social gain over private gain. In other words, private enterprise was regulated such that the economic yields benefitted all. To put it differently, a recognition of negative externalities was present.

“The private sector has to play its part within the framework of the comprehensive plan accepted by the community. … Private enterprise, free pricing, private management are all devices to further what are truly social ends; they can only be justified in terms of social results.”

More clearly,

“Economic objectives cannot be divorced from social objectives and means and objectives go together. It is only in the context of a plan which satisfies the legitimate urges of the people that a democratic society can put forward its best effort.”

The Plan Document also recognized the dual nature of urbanization – that economies of scale have both positive economic externalities and negative environmental externalities.

The 2nd Five Year Plan on economic inequality

The 2nd Five Year Plan clearly recognized that the gains from economic development are skewed and trickle down is not automatic. For the gains from economic development to be inclusive, two institutions have to be strong: trade unions and the democratic state.

“The gains of development accrue in the early stages to a small class of businessmen and manufacturers, whereas the immediate impact of the application of new techniques in agriculture and in traditional industry has often meant growing unemployment or under-employment among large numbers of people. In course of time this trend gets corrected partly through the development of countervailing power of trade unions and partly through state action undertaken in response to the growth of democratic ideas.”

There is a passage similar to Thomas Piketty’s view on wealth inequalities and the role of progressive taxation in reducing such inequalities in the document.

“The most important single factor responsible for inequalities of income and wealth is the ownership of property. Incomes from work are by no means equal, but in part at any rate, they have some justification in terms of productivity or relative scarcity. Some types of work are, however, remunerated more liberally than others for reasons which are not directly connected with productivity. Differential monetary rewards are often a matter of tradition an existing psychological or social rigidities. It has also to be borne in mind that capacity to work effectively at higher levels depends on a person’s education and training, and these are a matter of the accident of birth or circumstances. A large expansion of general and technical education for all classes of people irrespective of their paying capacity is over a period a potent equaliser. The point is that while inequalities in incomes from work have to be corrected, the case for taxation based specifically on wealth or property needs to be carefully examined.”

India needs to seriously consider a tax on wealth given the wide disparities of income and wealth. The connection between ‘productivity’ and ‘social rigidities’ is noteworthy and requires to be addressed through labour laws, education policy, food policy, employment policy and so on.

The core of the 2nd Five Year Plan: the Mahalanobis model

From the previous paragraphs, we can state the following as the normative economic aims of the 2nd Five Year Plan: (1) expansion of output and employment opportunities, (2) reduction of income inequalities, and (3) inclusive economic growth and development. The economic core of the 2nd Five Year Plan is constituted by the Mahalanobis model. As Ajit Dasgupta writes in A History of Indian Economic Thought, “The purpose of the model was to determine the optimal allocation of investment between different productive sectors so as to maximise long-run economic growth in India” (p. 164). In other words, the aim of this model is to increase the pace of aggregate economic activity in India.

The Mahalanobis model is a two-sector model with a capital goods and a consumption goods sector. The model tells us how the resources are to be distributed between these two sectors such that maximum economic growth is achieved. Note that the then production was insufficient to meet the basic needs of the Indian populace. There are inter-sectoral relations due to which one sector cannot exist (or grow) without the other. To produce consumption goods, capital goods are required. For the workers and capitalists in both sectors, consumption goods are needed. Employing the Mahalanobis model is to some extent vindicated because the model assumes “capital to be the effective constraint on output” and India lacked good physical infrastructure.

Note also that this model assumes that there are no demand constraints. As Dasgupta writes, “The higher the proportion of investment (i.e. of the current output of capital goods) that is allocated to the further production of capital goods, the higher the long-run growth rate of output” (p. 165). The dual character of investment is not clearly understood for investment creates productive capacity and is a component of aggregate demand. Logically, a solution can be found such that the addition to capacity is validated by the demand generated but it is a knife-edge equilibrium as in Harrod.

Dasgupta points out that the Mahalanobis model has been criticized “for being concerned exclusively with investment and for identifying investment with the production of capital goods” (p. 165). Yes, demand constraints and human capital investment are ignored. Another criticism of the model has been its neglect of foreign trade (p. 166). However, the model could be modified easily to account for foreign investment and consumption whereas the incorporation of demand constrains and human capital would not be easy.

Conclusion: the relevance of economic planning

Since the 2nd Five Year Plan, much time has passed and the Indian economy has undergone several changes. Developments have taken place in economic theory too, particularly in the areas of economic growth and development. While the Mahalanobis model has its limitations, the normative aims of the 2nd Five Year Plan are still valuable today. The expansion of employment opportunities needs to be at the forefront of any macroeconomic or growth strategy. As written in the 2nd Five Year Plan, “From the economic as well as from the larger social view point, expansion of employment opportunities is an objective which claims high priority”. However, NITI Aayog, the successor to the Planning Commission works within ‘an administration paradigm in which the government is an “enabler” rather than a “provider of first and last resort”’. The market cannot be expected to provide accessible and good quality education, health, housing and living environments to all. With existing economic and social inequalities, the need for economic planning is even more. Social costs require to be assessed and not ignored in the name of economic efficiency and economic growth.

An economic planner ought to know the implicit assumptions and scope of economic theories and be knowledgeable about legal and institutional constraints of policy implementation. The economic planner must therefore be an excellent economist and an experienced bureaucrat.

Tags: , , , , , , , , ,
Posted in Development Economics, Economic Growth, Economic Thought, Economics, Employment, GDP, India, Indian Plan Models, Macroeconomics | No Comments »

Some Thoughts on Debt: The Indian Case

Posted by Alex M Thomas on 30th April 2014

Any entity, private or public, needs to borrow if its expenditure exceeds its income. The difference between expenditure and income will then be the volume of debt. This post discusses the following: the meaning and role of debt, a brief overview of various kinds of debt, the fundamental difference between private and public debt, the structure of the Indian debt market, corporate debt and government debt in India. The post ends with some reflections and suggestions.

It is public or government debt which receives maximum attention in the media and rightly so.  Some of the other kinds of debt are external debt (the proportion of a country’s debt borrowed from foreign lenders), household debt and corporate debt. Households borrow money in order to meet various needs such as the purchase of assets, for purposes of education, for medical expenses, etc. Corporate debt refers to the excess of expenditure over income which is financed through borrowing (via issuance of bonds and debentures) by the private non-bank sector. In India, besides these different kinds of debt, agricultural indebtedness has received significant attention from academics, policy makers and political agents. A market for credit is important not just for long-term asset purchases or constructing plants but it is also important for daily business transactions, and today, also for usual consumption needs. One needs only to look at the booming credit card industry for confirmation.

There is an overwhelming tendency to impose rules of finance employed by households on the government. This is fallacious. As individuals, we try to live within our means; we borrow reluctantly. Agricultural farmers, industrial firms and service providers need to borrow too. For, it is unlikely that every person who wants to start an enterprise will possess the required funds. If that were so, the meaning of entrepreneurship would have been different from what we know it to be. Similarly, for a government (central, state or local), which is expected to conduct policies which have social and environmental benefits, it becomes necessary to borrow. Taxation incomes are seldom sufficient to meet the recurring and capital expenditure of the government. Moreover, social programmes relating to education, employment, environment, food and health have very long gestation periods. The point is that government bodies (Ministry of Consumer Affairs, Food and Public Distribution, Ministry of Agriculture and Ministry of Drinking Water Supply and Sanitation to name a few) are not profit-maximizing bodies; but, this does not imply that they can be inefficient or irresponsible. By virtue of the fact that they are democratic bodies and because their incomes and borrowing are mainly from households (the voters), it is imperative that their functioning is transparent and organizationally efficient. Government borrowing or public debt is not, or rather, should not be, synonymous with organizational inefficiency.

The sovereign debt in India is issued by the Central and State government. The instruments include Treasury bills, Index bonds and zero coupon bonds. Government agencies, public sector undertakings (PSUs) and government owned banks issue debt instruments – bonds, debentures, commercial paper (CP) and certificate of deposit (CD). The private sector comprising the non-bank corporate sector and private sector banks issue bonds, debentures, CPs and CDs. In advanced economies, the debt market is the preferred route for raising funds. However, in India, the equity market is more preferred than the debt market, and government securities dominate the Indian debt market. [For more details, see the 2004 SEBI working paper no. 9 titled ‘Corporate Debt Market in India: Key Issues and Some Policy Recommendations’. Conditions are changing and more corporate debt is being issued, as a more recent (2013) CRISIL document indicates.]

A 2013 Credit Suisse report on India’s financial sector pointed out the high growth in the debt levels of ten corporate groups – Lanco, Reliance ADA, GVK, Jaypee, Adani Enterprise, Essar, GMR, KSW and Vedanta. Despite profitability pressures, their debt levels rose between 2012 and 2013. Also, 40-70% of the loans are foreign currency denominated. Delays in their planned projects can cause further strain on their cash flows and therefore on their debt servicing ability. Some of them have undertaken asset sales, but they have proved insufficient. Indian banks need to be concerned as well; although, majority of the non-performing assets (NPAs) are from agriculture and small & medium enterprises (SMEs). In 2014, the International Monetary Fund sounded a warning too.

The debt-to-GDP ratio is more important than debt levels themselves. Why is this so? This is because an economy whose GDP is growing faster than its growth in debt will not face the problem of repayment. However, if the GDP grows at a smaller pace than debt growth, the economy will not have adequate surplus (aggregate output net of replacement) to repay the debt. This is what we mean by debt sustainability. In early 2014, the credit rating agency, Moody’s warned that India’s sovereign rating can be affected due to the slowdown in growth and high inflation. [In so far as public authorities, via the central bank, can create money ex nihilo, debt can always be repaid (referred to as monetising the debt). However, this is the case if and only if the public debt is denominated in the local currency. In India, most of the public debt accrues to Indians and is therefore denominated in Rupees.] The following chart compares debt-to-GDP ratio of India with three advanced economies – Australia, UK and US.

 

Data from World Bank

Clearly, advanced economies have different debt-to-GDP ratios (also see this link for data on OECD countries). In short, there is no economic reason why a high debt-to-GDP ratio is bad for the economy; it is the growth in the debt-to-GDP ratio that must be closely monitored and appropriate measures undertaken to ensure that the economy grows at a faster pace than the growth in debt. As previously noted, government expenditure on education, environment and health have long-term positive benefits (significant positive externalities). Over time, these expenditures will boost economic growth and will therefore aid in debt repayments. Of course, the returns from any investment – private or public, depend on the effectiveness of the project undertaken such that they generate the expected yields.

The financial liabilities of the household sector have also risen over time, due to the attractive home loans and increased ease of obtaining credit cards. All economic agents – be it households, corporate bodies or the government, often (and have to) resort to borrowing. This post has shown that the borrowings undertaken by the Indian household sector, the Indian corporate sector and the Indian government have grown over the years. This, per se, is, and should not be a cause of immediate concern. However, this does warrant a more detailed analysis of the ability of the Indian government to make debt repayments, which hinge crucially on the rate at which the Indian economy grows and its rate of inflation. A serious macroeconomic analysis, perhaps based on the economics of Domar, Keynes and Lerner is in order.

Tags: , , , , , , , , ,
Posted in Economic Growth, Economics, GDP, Government, India, Keynes, 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.

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

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!

Tags: , , , , , , ,
Posted in Book reviews, Development Economics, Economic Growth, Economics, Education, Employment, GDP, Government, India, Labour Economics, Macroeconomics, Markets, Neoclassical Economics, Poverty, Unemployment | No Comments »