Wonky policy wonks

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    Wonky policy wonks

    By Bibek Debroy indian express columns Posted: Mon Jan 17 2011

    It was the epoch of belief. It was the spring of hope. We had everything before us. The line, “It was the best of times, it was the worst of times”, from A Tale of Two Cities is clichéd. Everyone quotes it. “Belief”, “hope”, “everything before us” are from the succeeding sentences. The World Bank has just released the “Global Economic Prospects 2011”. We have been told India and China will contribute half the global growth in 2011. In 2012, India’s rate of growth at 8.7 per cent will overtake China’s rate of growth at 8.4 per cent. There are various reasons driving China’s deceleration of growth to a trend of around 8.5 per cent, ageing population being one.
    Similarly, there are various reasons why India’s growth can accelerate to a trend of around 10 per cent, young population being one. Therefore, it shouldn’t be surprising, in the next few years India’s growth rate will exceed China’s, though bases are quite different. For example, at market exchange rates (MERs), China’s per capita income in 2010 was $4,283, while India’s was $1,176. That’s a fair amount of catching up to do. In PPP (purchasing power parity) exchange rates, China’s per capita income was $7,518, while India’s was $3,290.

    If this overtaking of China was not enough to get us excited, PwC recently updated its March 2006 study, The World in 2050, and told us India will become the second largest economy in the world in PPP terms by 2050, overtaking the US and behind China.

    A report from HSBC has also recently surfaced, with the same title of The World in 2050. Methodologies differ across these two reports, and HSBC projects in constant 2000 US dollars, finding that India will continue to be third in size, after China and the US. In 2000 US dollars, India’s per capita income in 2050 will be 5,060. HSBC is a bit more pessimistic about India than PwC, or Goldman Sachs and assorted BRIC reports.

    A short while ago, there was an ADB-funded study, India 2039: An Affluent Society in One Generation. That talked about an Indian per capita income of $22,000 in 2039. Let’s not get into the nitty-gritty of models and forecasting. The simple point is that if one builds in labour input and currency appreciation, in addition to capital input, India should have high rates of growth and the nature of the exponential function is such that projections blow up beyond 2030, regardless of whether one uses PPP or not. Earlier projections often stuck to 2020 or 2025, and so weren’t as spectacular as those that extend beyond 2030.

    The global downturn of 2007 and its aftermath have advanced timelines. If India was supposed to overtake a developed country at a certain date, the date has now been brought forward. However, many countries in the world have got into what is called the middle-income trap. Policies have not been conducive enough for a country to graduate beyond a per capita income of around $5,000.

    To go back to ****ens, it was also the worst of times. It was the age of foolishness. It was the epoch of incredulity. It was the winter of despair. “In economics, there is no accountability for the consequences of your advice. And that is particularly so in an ascriptive society like India.” Jagdish Bhagwati said this and this is relevant because today’s policy-making environment is increasingly harking back to the late 1960s to mid-1970s, policies that led India to losing two development decades. It is fashionable to blame policy-makers for what went wrong then. But one tends to forget that those policy-makers were, to quote Keynes, slaves of defunct economists. We had the Hazari Committee report in 1967, Dutt Committee report in 1969 and the Wanchoo Committee report in 1971. We also had the Dagli Committee report in 1978. There were several such committee reports.

    It was economists who were important in policy-making who drew the wrong conclusions from Hazari/Dutt/Wanchoo and ignored Dagli. Without naming them, they have never quite been held to task. On the contrary, they have been rewarded with awards. In simple terms, what did those policies do? They restricted supply and made India a shortage economy.

    Post-1991 policies removed supply bottlenecks, where reforms were introduced. We now have a situation where policy-makers don’t know what is driving either growth or inflation. On inflation, we were earlier told it would slow down, hopes riding on the base effect. The base effect is wearing thin, and food price inflation shows no signs of easing, because agri-products are still supply-constrained. The finance minister, the deputy chairman of the Planning Commission and the Chief Economic Adviser have now told us inflation is a good thing, because it is reflective of higher growth and greater demand in rural areas.

    However, the signal the government conveys is that growth isn’t a good thing, not unless it is inclusive, whatever that expression might mean. Let us, therefore, not ask why NREGA was at all necessary, if we had introduced policies that reformed Indian agriculture, especially in dry-land areas. Let us not ask if right to food and right to education legislations would have been needed if policies to enhance income growth had been introduced. Let us not ask why anti-poverty programmes have failed to reduce poverty. Let us not question why public expenditure is inefficient.

    Instead, we have evidence (and there will be more when National Sample Survey’s results surface) that growth has led to increase in inequality. One doesn’t mean inequality in access to inputs like health, education, land, financial markets and law and order. One means inequality in outcomes, like income or consumption expenditure.

    There are processes which explain this increase in inequality that are inevitable in a process of fast growth. They were documented by Simon Kuznets, and Montek Singh Ahluwalia himself explored this in the late 1970s. However, this increase in inequality is bad. This will be true even if poverty declines, because by changing the poverty line, we will demonstrate 50 per cent (or even more) of India is still below the poverty line. Hence, we do not want growth, because it is inherently “exclusive” in character.

    This is a deeper point than tightening monetary policy to rein inflation. This emerging consensus among policy economists, reinforced by the National Advisory Council (NAC), is not very different from the consensus of the mid 1960s. Bhagwati and Dagli received short shrift then and that continues to be the case today.

    How about including policy-making economists within the ambit of the proposed Public Services Delivery Act, making them liable for the opportunity costs of lost economic growth?

    The writer is Delhi-based economist [email protected]
     
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