Contemporary debates on economic policy remind me of the parable of the six blind men and the elephant. As in the parable, matters such as economic growth, inequality, reform, liberalization, privatization and globalization often end up entangled in semantic differences that can be resolved through a more comprehensive understanding of what they mean. Much disagreement can be avoided by simply walking around the elephant.
Economic reform has to be a package deal and furthermore it has to be understood to be so. That’s what Pranab Bardhan said in a recent chat I had with him. A Cambridge-trained economist, Bardhan has taught at the Delhi School of Economics, MIT, and, for the past 30 years, at the University of California at Berkeley. He chairs the MacAthur Foundation International Research Network on “Inequality and Economic Performance.” His deep insight into economic development—he was the chief editor of the prestigious Journal of Development Economics for 18 years—makes him the ideal person to talk to about India’s experience with economic reforms.
(Picture by: Indranil Bhoumik/Mint)
Sitting in his Berkeley office, with a view of the Golden Gate bridge across the beautiful San Francisco Bay, I asked him where India is going in terms of liberalizing its economy and what policies India should be looking at. Bardhan believes that although considerable progress has been made over the past 20 years in liberalization, particularly deregulation, further progress depends on gaining the support of the general population for reforms. Studies have shown that an overwhelming majority of people oppose reform. According to him, this is because reforms do not address the anxieties of the general population.
The average Indian is not affected directly by reforms in tax, finance, and international trade. Reform would be more meaningful to them if they understood reform to be not just cutting the size of the government, but also improveming the quality of governance. Leaders who favour reform have to explain that reforms can directly help the poor and reduce poverty. The poor care more about reforms in institutions such as the police, judiciary, and the bureaucracy because it affects their day-to-day living.
Bardhan says the government has an important role for the poor. “Social service delivery, education, health, child nutrition, drinking water, irrigation water. The government has to be involved in all these services. That is its role—to provide public goods and services. The problem is the government is in too many things in India and does most things badly. So, its role has to be reduced in some areas but in others, it has to deliver services more effectively,” he said.
Bardhan believes that it is the power of the labour unions in the public sector that hinders privatization to an extent. The richer the industry, the more powerful the unions; they try to get a share of the rents the industry earns. This is in itself not a bad thing but for the fact that 93% of Indian labour is in the informal sector. And even in the small organized labour sector, one has to address what he calls the “social vertigo” that labour faces. It arises from the anxiety that if there are job losses, there is no comprehensive social safety net for workers. The strategy should be to gradually introduce a social safety net for organized sector labour to go with labour law reform, so that opposition to reform can be defused.
Does liberalization explain the current Indian growth rates? Certainly in the corporate sector, de-licensing and deregulation have played important invigorating roles by unleashing energies that were controlled before. But it is hard to explain why the services sector is the leading sector in India, unlike, say, in China, where manufacturing is the leading sector. Since two-thirds of the services is in the informal sector, they have to be below the reform policy radar. Bardhan while advancing some tentative hypotheses remains puzzled by it.
The growth of inequality is a matter of concern for him. If the majority does not see gains from high growth, then the reforms and consequent high growth rates will not be sustainable. Only if the reforms are communicated to the poor as being part of a package that will help them will the political opposition to the reforms be contained.
On the liberalization of the education sector, Bardhan was clear that the government should be involved with the funding of lower-level education, but should not necessarily be involved with the provisioning. But the government must entirely exit from the business of tertiary education. Currently, higher education suffers from lack of autonomy and too much interference from the government. But the teachers’ unions are firmly against the reduction in the involvement of the government.
Bardhan is cautiously optimistic about the Indian economy. He feels that 10% growth is not sustainable though perhaps 7% could be. But rather than gross growth rates, what interests him is the rate at which the bottom half of the population is growing economically. Even if that section were growing at 5%-6%, it would be acceptable. However, it is not, and that is so because the bottom half is largely in agriculture, which unfortunately is a declining sector. Rural industrialization could raise the income growth rate of the rural population.
The fact is that rural infrastructure—roads, power, irrigation —are declining. What is needed is massive public and private investments in them, and better governance in managing the infrastructure. For Bardhan, reforms have to be a comprehensive package for them to be effective. For them to be politically feasible, the general public has to know which parts of the reforms directly affect them positively. Most importantly, the reforms have to result in efficient social service delivery because that is what?matters?to?the?common?man.
Atanu Dey is chief economist of Netcore Technologies. Comment at email@example.com