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A decentralized growth model for states

  • States should view this pandemic as an opportunity to create more economic hotspots so that employment opportunities for the local population grow even outside the urban centers.

With millions of workers desperately returning to their native hometowns and villages, after being stripped of their dignity and means of livelihood, the pandemic has not only made many states—with massive migrating populations—to receive a large influx of these workers, it has also given them an opportunity to reprioritize their socio-economic outlook.

Economic geography, as a sub-field in economics, often receives a lot of policy-attention in international trade, allowing nations to maximize their economic potential and production in certain commodities and services where they have a comparative advantage for gains in trade. In a pre-covid world, urbanization, as a process, was seen concentrated in economic centers, projected as hotspots for attracting capital and becoming destinations for exports. This generated employment, attracting millions to migrate to these places from far-away rural corners.

It seems there is now a pressing need to revisit this dynamic of an urban-biased economic geography to bring the focus back on developing more proximate economic hotspots within states, where states invest in building their own comparative advantages, creating more opportunities for local populations. This is critical at a time when supply-chains of commodities, and even labour movements, are likely to disengage from far metropolises, and move much closer for production-distribution-consumption needs. Prime Minister Narendra Modi in a recent address too, emphasized this aspect, pushing for becoming more “Vocal for Local".

The question is: How can a state at the bottom of the development pyramid maximize this opportunity for transforming its economic policymaking framework and allow its own population to gain in social and economic terms?

There are at least five areas that states with low gross state domestic product and per capita incomes must focus on.

First, carry out deeper structural reforms in factor markets (land, labour, enterprise, capital, tech-penetration) to crowd-in private investors and bring long-term investments. This won’t happen by focusing on one factor of production alone. There has been a lot of discussion around the suspension of pre-existing labour laws in some states to attract more investment. However, state administrations are erring in making ad-hoc suspensions or removing laws that actually take away the agency and security of workers and give greater autonomy and bargaining power to employers. This only exacerbates worker exploitation.

At a time when almost 28-30% of the organized workforce is unemployed, and millions within the unorganized, contractual workforce have lost jobs and lack adequate social safety nets, a reorientation of existing labour laws needs to safeguard worker-interests as against abandoning them. Further, factor market reforms need to be complimented with other measures to give enterprises a broader set of incentives to invest in.

Second, states with embedded comparative advantages in production and distribution of certain commodities or services, given their socio-economic, socio-cultural capital networks, need to leverage these to scale. For example, if a state produces the best quality textile-products in apparel, or manufactures the best quality carpets for exports and has micro, small and medium enterprises engaged in them, there is a strong case to be made for viable firms to provided more advantages of scale through targeted fiscal incentives and credit lines from financial institutions. This can help these firms scale up production as demand picks up.

Third, states need three-to-five-year employment policies to ensure that everyone within the respective states who wishes to work has a job with a basic social-safety net. This helps bring rates of involuntarily unemployment down. Having a medium to long-term fiscal plan focused on employment generation, more regularized public data on employment, and promoting worker-intensive sectors of occupation, will offer locals with opportunities for livelihood, including to those who have returned to their villages.

Fourth, imbibe lessons of effective decentralization and building social capital from Kerala. This is vital particularly for poorly-developed states that need sustained public investments in building their human capital through greater spending in healthcare, education, social service delivery (say, mother-child care support, family planning counselling, unemployment insurance, and basic nutritional access to the poor). Kerala has championed in these basic areas along with other states like Tamil Nadu, Goa and Sikkim.

The fifth aspect is closely related to the fourth, and is about decentralizing governance, allowing greater decision-making power and financial autonomy to local communities and women-led groups. States where this has been done have seen improvement in administrative governance at local levels, more efficient micro-finance institutions and self-help groups, among others.

A greater investment in social capital catalyzes and empowers local community members to feel a part of the governance process and strengthens the state-citizen contract. Additionally, it creates a robust feedback loop on policy-implementation locally, allowing the executive and legislative branches to take cognizance of concerns and respond to them.

When a national crisis strikes—as it did with this pandemic—it often reorders the governance and social planning architecture of a state, particularly in terms of reallocating resources. This crisis offers states an opportunity to do just that, and it must not be missed.

The author is associate professor of economics at O.P Jindal Global University

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