Pandit Jawaharlal Nehru, the first and a charismatic Prime Minister of independent India, believed that the state only could decide what is best for the nation. Hence, setting up massive public sector units to let them acquire commanding heights of the Indian economy remained his priority. Those gradually became inefficient, cradles of wastage and corruption, and caged in the “tiger” of private and creative energy and initiatives for many years. Nehru had no faith in the private entrepreneurs.
By cautiously integrating into the world economy, once India broke free from this stifling era in 1991 and allowed for greater private participation and for more domestic and international competitions, the “tiger’’ seems to have been uncaged. As a result, the notorious never-changing average Hindu growth rate of 3 %-- a term satirically coined by the famous Indian economist Prof. Krishna Raj, with which India grew in her first 40 years, for the first time started to rise to eventually reach an average of about 6.5 % in the last decade. The “tiger” seems to be roaring with all its might, yet in cautious measures and with gradualism, taking India into the 21st century with reforms that can be termed as her ‘second independence’ – from the clutches of the ‘License Raj,’ while also not allowing the newfound enthusiasm to let it lapse into financial crises that the other East Asian Tigers recently had been mired with.
However, do these reforms actually help the poor? Or do they make the rich richer, and the poor poorer? Experiences of those sub-national states in India, which hadn’t been doing well before, suggest otherwise. So do the tales of Soviet Russia and the East European transition economies. They all point towards one crucial question: are reforms anti-poor?
A critical analysis of this question will lead to a clearer understanding of the issue. Since India actually started reforming, the number of people living below the poverty line has been declining by roughly one percent per year. This implies that as many as 200 million people have escaped from the clutches of poverty in the past two decades. The reforms are actually the best bet for poverty reduction. They are aimed at building an open, competitive and productive economy, which will grow faster, create more jobs, and in time, wipe out poverty. An 8% GDP growth rate for over 5 years might make the top 10% richer by 100 times, but if it also enables 100 million people to rise above the poverty line, is it a gamble we will be unwilling to take? The answer is no. Reforms don’t hurt the poor. Scrapping licensing has hurt the corrupt bureaucrat and the bribe-giving businessman. Privatizing public sector units have hurt the overpaid underperforming worker, who is now expected to deliver. The opening up of the economy has hurt those Indian companies who are unreceptive and unwilling to change and compete. Labour reforms do not actually hurt the poor; the United States and United Kingdom, countries having the most flexible labour markets on earth, have actually witnessed a remarkable decline in activities falling under the category of ‘trade unionism’.
For long, economists in India have argued that subsidies don’t really benefit those at the bottom of the pyramid. They actually are gobbled up by the rich agriculturalists and those who have connections inside the corridors of power. The subsidies actually distort the price mechanism and misallocate society’s scarce resources. Hence, scrapping of subsidies don’t really damage the poor.
Markets are not inherently ‘good’ or ‘bad’. What is important is to understand the conditions under which they fail, or display inefficiency. They fail not because they are unresponsive to price changes, but due to lack of incentives, and improper information. There are two ways through which the poor will rise. One is through rapid economic growth, and this only the market can deliver. It is a wonder that the Government in India still needs to be reminded of this simple yet powerful truth, and has to be persuaded to keep out of production of goods and services. The State has to play the role of an enabler, and not a commander.
But it is through the second way that the poor will truly rise. The Government must invest, and invest heavily, in education, health and key infrastructure. It must empower the poor, and ‘expand their capabilities’, to quote Prof. Amartya Sen, so that they have more choices. As our economy has transformed over the years, our understanding of how to tackle poverty has also metamorphosed. In the 1950s and 60s, we focused on land reforms and land ceilings, and to some extent succeeded. But then, the overwhelming reality that redistributive measures hurt the very class that controls the system, and that in a democracy, there is a limit to radical measures, dawned upon us. Then, in the 70s and 80s, the romantic notion of wiping out poverty through employment guarantee fascinated the entire nation. The very idea of creating durable economic and social assets and eliminating poverty simultaneously was too tempting. We spent a monumental amount of money, and that turned out to be a monumental failure. Because of the Government’s faulty deliverance mechanism, the poor came face-to-face with very few tangible benefits, and most of the money was drained out in paying for administrative costs and in ‘leakages’. Also, so much stress was laid on equality of income that the country’s policy makers forgot the salience of equality of opportunity. Equality of income, which anyhow is a utopian concept, was sought to be brought about by the Government not by making the poor richer, but the rich poorer.
Only after the economic reforms of 1991, a general consensus emerged that the Government must limit itself to toning up primary education facilities, healthcare systems, and infrastructure. This coupled with rapid economic growth (for which we must reform), and improved governance at the grassroots level, will bring down poverty at an unprecedented rate. As per Prof. Sen, development is all about enlargement of opportunities for the individuals in society. Investing in education, health and infrastructure will lead to an expansion of their capabilities – by increasing their freedom to pursue what they value.
By cautiously integrating into the world economy, once India broke free from this stifling era in 1991 and allowed for greater private participation and for more domestic and international competitions, the “tiger’’ seems to have been uncaged. As a result, the notorious never-changing average Hindu growth rate of 3 %-- a term satirically coined by the famous Indian economist Prof. Krishna Raj, with which India grew in her first 40 years, for the first time started to rise to eventually reach an average of about 6.5 % in the last decade. The “tiger” seems to be roaring with all its might, yet in cautious measures and with gradualism, taking India into the 21st century with reforms that can be termed as her ‘second independence’ – from the clutches of the ‘License Raj,’ while also not allowing the newfound enthusiasm to let it lapse into financial crises that the other East Asian Tigers recently had been mired with.
However, do these reforms actually help the poor? Or do they make the rich richer, and the poor poorer? Experiences of those sub-national states in India, which hadn’t been doing well before, suggest otherwise. So do the tales of Soviet Russia and the East European transition economies. They all point towards one crucial question: are reforms anti-poor?
A critical analysis of this question will lead to a clearer understanding of the issue. Since India actually started reforming, the number of people living below the poverty line has been declining by roughly one percent per year. This implies that as many as 200 million people have escaped from the clutches of poverty in the past two decades. The reforms are actually the best bet for poverty reduction. They are aimed at building an open, competitive and productive economy, which will grow faster, create more jobs, and in time, wipe out poverty. An 8% GDP growth rate for over 5 years might make the top 10% richer by 100 times, but if it also enables 100 million people to rise above the poverty line, is it a gamble we will be unwilling to take? The answer is no. Reforms don’t hurt the poor. Scrapping licensing has hurt the corrupt bureaucrat and the bribe-giving businessman. Privatizing public sector units have hurt the overpaid underperforming worker, who is now expected to deliver. The opening up of the economy has hurt those Indian companies who are unreceptive and unwilling to change and compete. Labour reforms do not actually hurt the poor; the United States and United Kingdom, countries having the most flexible labour markets on earth, have actually witnessed a remarkable decline in activities falling under the category of ‘trade unionism’.
For long, economists in India have argued that subsidies don’t really benefit those at the bottom of the pyramid. They actually are gobbled up by the rich agriculturalists and those who have connections inside the corridors of power. The subsidies actually distort the price mechanism and misallocate society’s scarce resources. Hence, scrapping of subsidies don’t really damage the poor.
Markets are not inherently ‘good’ or ‘bad’. What is important is to understand the conditions under which they fail, or display inefficiency. They fail not because they are unresponsive to price changes, but due to lack of incentives, and improper information. There are two ways through which the poor will rise. One is through rapid economic growth, and this only the market can deliver. It is a wonder that the Government in India still needs to be reminded of this simple yet powerful truth, and has to be persuaded to keep out of production of goods and services. The State has to play the role of an enabler, and not a commander.
But it is through the second way that the poor will truly rise. The Government must invest, and invest heavily, in education, health and key infrastructure. It must empower the poor, and ‘expand their capabilities’, to quote Prof. Amartya Sen, so that they have more choices. As our economy has transformed over the years, our understanding of how to tackle poverty has also metamorphosed. In the 1950s and 60s, we focused on land reforms and land ceilings, and to some extent succeeded. But then, the overwhelming reality that redistributive measures hurt the very class that controls the system, and that in a democracy, there is a limit to radical measures, dawned upon us. Then, in the 70s and 80s, the romantic notion of wiping out poverty through employment guarantee fascinated the entire nation. The very idea of creating durable economic and social assets and eliminating poverty simultaneously was too tempting. We spent a monumental amount of money, and that turned out to be a monumental failure. Because of the Government’s faulty deliverance mechanism, the poor came face-to-face with very few tangible benefits, and most of the money was drained out in paying for administrative costs and in ‘leakages’. Also, so much stress was laid on equality of income that the country’s policy makers forgot the salience of equality of opportunity. Equality of income, which anyhow is a utopian concept, was sought to be brought about by the Government not by making the poor richer, but the rich poorer.
Only after the economic reforms of 1991, a general consensus emerged that the Government must limit itself to toning up primary education facilities, healthcare systems, and infrastructure. This coupled with rapid economic growth (for which we must reform), and improved governance at the grassroots level, will bring down poverty at an unprecedented rate. As per Prof. Sen, development is all about enlargement of opportunities for the individuals in society. Investing in education, health and infrastructure will lead to an expansion of their capabilities – by increasing their freedom to pursue what they value.
2 comments:
4m now on u r my economics guru.ure gr8.Priya(If u remember)
Superb Saagar!!:) Man I dint know this side of u before!!:)
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