By W.A Wijewardena –
India chooses: But what will happen when it is the thinking of 2 leading economists being put to vote?
Two contenders for leadership with stark differences
India, the world’s supposed-to-be the-largest democracy if one goes by the number of voters, is now in the process of choosing its next leadership. The two leading contenders have stark differences.
The incumbent government party, United Progressive Alliance or UPA, is led by young Cambridge University MPhil Degree holder Rahul Gandhi, an heir of the famous Nehru-Gandhi family born to rule the country. The opposition Bharatiya Janata Party or BJP is led by a commoner, one-time canteen runner at a bus terminal and a street-educated politician, Narendra Modi, commonly known in India now as ‘Namo’.
Modi v Rahul becoming Bhagwati v Sen
But behind these two figures, there are two leading economists whose thinking on appropriate economic policy has now been put to test among Indian voters. One is Nobel Laureate Amartya Sen and the other is Nobel Laureate in waiting, Jagdish Bhagwati. In 2013, as if they were writing two economic manifestos to the two contenders, they published two books – just three months apart from each other.
The first book was published by Bhagwati with another academic at Columbia University in USA – Aravind Panagariya under the title ‘Why Growth Matters: How Economic Growth in India reduced Poverty and Lessons for other Developing Countries’. The other book was published by Sen with Jean Dreze – the Belgium born naturalised Indian economist – under the title ‘An Uncertain Glory: India and its Contradictions’.
The web ‘live mint’ together with The Wall Street Journal has now termed that the ‘Battle between Rahul and Modi’ is a ‘Battle of thoughts between Sen and Bhagwati’ (available here ).
Bhagwati: Growth first and redistribution later
The Bhagwati-Panagariya Policy Proposition or BPPP is clear: They argue that before anything, economic growth should come so that the economy will produce enough to uplift the poor and redistribute the wealth among all the citizens in the form of essential social services. If these two steps are reversed, the result will be the loss of both. They have found many examples from Asia, including Sri Lanka, Africa and Latin America to substantiate their claim. For instance, in Sri Lanka, even before the country thought of producing, the policymakers were at the job of ensuring social redistribution through the government. The result was, once a prosperous nation, receding to oblivion over a few decades.
On the other hand, the countries that followed BPPP in East Asia were able to maintain a high economic growth for a number of decades and reduce their poverty levels too in the process. One classic example is Malaysia which managed to reduce its headcount poverty ratio from a little over 50% in mid 1960s to less than 5% in late 1990s. Hence, for Bhagwati and Panagariya, growth matters. Consequently, for India too, growth should matter at the present stage of its development.
Sen: If redistribution is ignored, calamities will derail growth
On the other hand, Sen-Dreze Policy Proposition or SDPP focuses on the need for maintaining a fair redistribution of wealth through the government right from the beginning. This is in accord with Sen’s long held thinking that development is simply freedom that has three pillars. The first pillar is the political freedom and transparency in all exchanges among people. The second pillar is the freedom of opportunities including the freedom for access to credit. The third pillar is the freedom involved in economic protection from abject poverty which is alleviated through payments in the form of supplementing the incomes of the poor and providing relief to the unemployed until they could find jobs.
SDPP therefore seeks to move along a growth path that assures gradual building of a society which not only has high growth but also equity, fairness and justice. It does not generate social tensions, instability or disharmony and hence provides enough space for policy makers to pursue economic reforms that aim at bringing high economic growth to a society on a sustainable basis. Hence, SDPP has a passion for growth; but it has a greater compassion for the poor.
Ultimate goal of economic policy: “Self-perfection”
Economists today are reappraising the ultimate goal of economic policy. For many decades, the goal of policy was to produce more and more goods and services in an economy, known as ‘economic growth’, so that people will have a higher level of material wellbeing. Then, it was pointed out that while growth produces higher material wellbeing, it ignores many other quality aspects of human living. This led to the search for a new goal called ‘economic development’ that comprises economic growth and many more.
In this many more parts were included making growth available to all called ‘inclusive growth, equity in sharing wealth, empowering marginalised groups like minorities and women, protection of environment and sustaining growth, creating a just society that protects freedom of choice, thought and expression’ on the one hand and ‘property rights’ on the other.
A society aspiring to be just with human freedom should have as its essential attributes ‘observance of rule of law and maintenance of law and order’ associated with freedom to elect suitable rulers or fire them if they are not worthy. Then the question arose what should be the ultimate purpose of living as a human being. That was relegated to yet a wider goal called ‘development’ that includes economic development as a necessary condition but helping people to attain ‘self-perfection’ that gives them ultimate happiness.
Don’t enjoy fruits before trees are even planted
The difference between BPPP and SDPP is not the coverage of what a society should do. It is about what should be done first and what should be done later. BPPP suggests that it should be done in two stages, that is, growth first and redistribution later. They have historical reasons for making that suggestion.
In countries where redistribution became a priority, it became a monster over the time eating up all the resources and making economic growth a near impossibility. At the end, neither was achieved, prompting Singapore’s leader Lee Kuan Yew to refer to Sri Lanka, a country that made that daring experiment for decades, ‘as a country that had enjoyed the fruits even before planting the tree’. Hence, from a nation’s long term point of view, BPPP is well justified.
Sen: I’m not a pro-subsidy man
On the other hand, SDPP suggests that both growth and redistribution should be pursued simultaneously. Their argument is if growth is pursued to the exclusion of redistribution, societies will flare up and even the pursuit of growth objective may be made difficult. That was proven in the General Elections of 2004 in India itself.
In that election, the BJP government that had pursued a high economic growth target with the required economic reforms which were considered anti-poor was voted out and UPA coalition that had promised even a minimum number of work days for the rural poor was voted in.
Sen has rejected the idea that he is a pro-subsidy economist. In many discourses and as well as the launch of his book in India, he has said that what he stands for is targeted subsidies and not for generalised subsidies. For instance, he says that money for guaranteeing 100 day work in a year for rural people has cost the Indian Government some $ 1 billion. But the subsidy on power and fertiliser of which the benefits had been derived mostly by the rich has cost the government many times more. His argument is therefore directing the subsidies for the poor and not for providing universal subsidies that benefit the rich as well. But, this is a view held by Bhagwati as well.
India’s widespread shame should not be continued
Sen has been particularly concerned about the wide-spread poverty and deprivation of Indians in general. The number of people earning below $ 1 a day in India has been 300 million or 25% of the whole population. Half the Indians do not have toilet facilities and Sen says it is something about which India should be ashamed of.
Illiteracy and undernourishment is widespread in India. Normally, when economic growth takes place, its benefits are expected to trickle down to the low income classes improving their conditions. But Sen says that he does not believe in ‘trickle-down’ effect and India’s high economic growth has basically benefited the rich classes. Hence, Sen says that something should be done urgently to arrest the situation before it becomes too critical and impossible to change.
Economists coming to the fore at national elections
In any other year, the diverse views expressed by the two leading Indian economists could have been dismissed as just another intellectual debate. But it is not so when they have been embraced by the two political alliances that are seeking an endorsement for their policy from the voters at the elections.
The growth strategy proposed by Bhagwati and Panagariya has been accepted by Narendra Modi while the same proposed by the rival economists, Sen and Dreze, has been accepted by Rahul Gandhi. Hence, the long standing intellectual battle between Bhagwati and Sen has now become a battle between Modi and Rahul.
Modi promises quick growth and economic reforms
Modi’s election manifesto has proposed, among others, continuous high economic growth, investment in infrastructure to facilitate that economic growth and economic reforms to sustain the growth so achieved. Bhagwati’s main criticism of the UPA government is that it could not sustain the initial economic growth because it failed to carry out the needed economic reforms, despite it being headed by the ‘father of Indian economic reforms in 1990s’ – Manmohan Singh.
For instance, India’s national flag carrier, Air India, had been operated at colossal losses for many years making it totally bankrupt. Yet, Manmohan Singh-led UPA government failed to reform the airline and make it profitable. Similarly, India’s coal monopoly, State-owned Coal India Ltd. or CIL, has been fixing prices high and supplying low quality coal to consumers who are again State-owned power producers.
On a complaint made by Maharashtra Power Generation Company, Competition Commission of India had imposed a thumping fine of Indian Rs. 18 billion or $ 300 million on CIL in 2013 with a recommendation to the government that it should end the state coal monopoly by allowing more players. Yet, the Manmohan Singh government had failed to act on that. It is widely believed that Modi, if elected to power, will consider privatising both monopolies as an urgent economic reform.
The Middle Class: The king-maker
The past economic growth in India has boosted its Middle Class into a formidable force now. Having maintained growth rates significantly higher than the historical average of 4% per annum, both the BJP and UPA governments in the past have been responsible for augmenting the middle class in India.
However, since it is about 20-25% of India’s population, it has now earned the status of king maker in Indian politics. Hence, it is the political leader who is able to satisfy the aspirations of the middle class that will be able to command a distinctive advantage at the elections.
The middle-class not worried about equity
The middle class in any country is made up of people who cannot be satisfied easily because their aspirations are multifarious. Their impatience in everything in life – whether it is driving on the road or getting a job or advancing in career or building the dream home – makes them choose the government that can act swiftly and resolutely. They are not worried about whether the poor are uplifted or whether income is redistributed in their favour. All they are worried is whether they could be fattened as quickly as possible.
This type of a value system possessed by the middle class will not give a value to any policy proposal that seeks to deliver equity in the society. Hence, Sen-type of economic policies, though embraced by UPA contenders, are not valued by an electorate made up of newly rich middle class people. Instead, they want high economic growth that will ensure in the short run more jobs, more roads, more schools, and more facilities and so on.
It is the Bhagwati type of economic policy that will satisfy their aspirations. In this context, it is Modi and not Rahul who is favoured by the middle class in India. Modi has two other trump cards in his sleeve to enchant the middle class. He stands for anti-corruption and Hindu nationalism that have flared up the sentiments of voters throughout the country. The moderate stand taken by Manmohan Singh government on these two issues has been viewed by middle class voters as a sign of weakness.
Sen, the critic of Hindutva, cannot endorse Modi
Sen has been critical of Hindutva movement in his ‘The Argumentative Indian’ and ‘Identity and Violence’. In his ‘The Idea of Justice’, he has argued for the virtues of secularism for steering state action. Hence, he cannot support the BJP which stands for everything he cannot approve of as a free thinker. As such, it is quite natural for UPA led by Rahul Gandhi, the Cambridge educated politician, to embrace his philosophy.
Though Bhagwati is also for secularism as the guiding principle of state action, his emphasis on economic growth has appealed to Narendra Modi who has in fact tested it in Gujarat State from 2000 as its Chief Minister. Hence, it is not Bhagwati who has gone behind Modi but Modi who has embraced Bhagwati.
John Maynard Keynes: Ideas are dangerous for good or evil
It is the British economist John Maynard Keynes who said in the concluding pages of General Theory that ideas “are more powerful than is commonly understood. Indeed, the world is ruled by little else. Sooner or later, it is ideas, not vested interests, which are dangerous for good or evil”.
Hence, ideas play an important role in framing human destiny for good or bad. At the Indian elections that are taking place now, two ideas by two great Indian economists have been put to test by the electorate. Of them, only one will emerge the winner. But the world in general and Indians in particular will have to wait for many more years to learn of their final outcome and the eventual impact on the destiny of India.
*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at email@example.com