The pot-holed road

Thoughts about India, the United States, and occasionally, the world at large.

Archive for December 2010

Why “inclusive growth” is a fallacy

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The idea of “inclusive growth” is a fallacy notwithstanding its current popularity among India’s (quite unintelligent) “intelligentsia”. In this brief essay, I explain why the real choice is between fast growth and slow (or less fast) growth, and why inclusive growth in practice can only be a variant of slow growth.

The reason is simple. Since the observed realities in economics do not lend themselves to the possibility of a magic wand, the objective of inclusive growth can only be achieved by diverting resources from the more productive parts of the economy to less productive (albeit socially desirable) uses. Of course, the stated intention is to do good and enable the poorest to catch up with all the rest. Diverting money into less productive uses is then about sacrificing a part of your potential GDP growth, all for a good cause which may be summed up as “We must do better than the morally repugnant trickle-down economics.”

Conceptually, this throws up two very knotty issues. On paper, the sacrifice imposed on the productive economy should show up as equivalent benefit in a less productive side of the economy. In practice—and this is particularly true of countries like India with massive governance problems—the transmission losses can be so large as to make the exercise one of value destruction rather than value addition. We end up with the damages outweighing the benefits by far.

The other issue, far more important and far less appreciated, is about the long-term consequences of such policies. This is about the power of what economists would call the “multiplier” and what in common language would be called compounding. When you decide to sacrifice GDP or potential GDP, there is a loss to begin with. Had this not been sacrificed, the next year this portion would have automatically contributed to more production and more growth, with even greater growth and production the year after. And so it would go on as a negative multiplier for all the years thereafter.  Therefore, as policies aimed at inclusion are persisted with over the years (and when they get out of hand), the compounded sacrifice of GDP and potential GDP shows up as a big hole in the economy that we don’t even realize exists. This is because the hole takes, not the detectable shape of “what was once, and now is no more”, but rather the invisible form of “what may have been, but is not”.

I believe this is a huge, huge point that India’s gung-ho, do-gooder economists, politicians and policy-makers have never grasped. That is why we are so happy to keep on repeating the same mistakes over and over, although in different labels and guises. The “brilliant” concept of the mixed economy that would have combined the best of socialism and capitalism has now made way for the idealism of “inclusive growth” where growth will continue to be fast, at the same time, with real out-of-turn benefits for the poor. And why would this happen? Apparently, because it is our wish, we have willed it so in our hearts. Indeed? And how did the “mixed economy” end up giving us the worst of both systems? Well, if you are an Indian, you would know by now this country never runs out of excuses.

The real irony of course is that if India had not gone down the “welfare” way, the sheer power of GDP growth alone would have pulled far more people out of poverty than all the welfare schemes of the government put together. If this seems hard to believe, just look at the record of the East Asian countries that began at India’s level and are now far ahead. Or, for that matter, take the example of China which, beginning from the eighties, has lifted millions more out of poverty than we have.

Ever heard of a “Mao Tse-tung National Poverty Alleviation Scheme?” or a “Deng Xiaoping Rural Employment Guarantee Act”?

 

Written by Ranjan Sreedharan

December 26, 2010 at 1:47 pm

Inclusive growth and its necessary corollary “inclusive loot”

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Ranjan Sreedharan

Thrissur, December 20, 2010

I have always been suspicious of this whole idea of “inclusive growth”. In fact, in one of my essays titled “The fallacy of inclusive growth” I make the point that you only have a choice between fast growth and slow (or less fast) growth, that in practice inclusive growth can only imply slower growth compared to your potential. Recent events in India have added a new dimension to this debate; we now have to seriously consider whether “inclusive growth” is also a façade for “inclusive loot”.

Now that the evidence is out, the logical link that binds the two together is not hard to decipher. Inclusive growth is all about spending huge amounts of public money, ostensibly with the aim of doing good to the poor of the country. In reality, the higher the outlay on such schemes, the greater will be the pilferage and the money lost to “leakages”; the more the budgeted expenditure, the more the money that gets siphoned off.

However, this is not all. A little thought would suggest that when you double the expenditure, the scope for pilferage would more than double, simply because the level of oversight and control that can be exercised over the money spent is not (indeed, cannot be) simultaneously doubled. What this means is that when government spending on any particular scheme is doubled (and in these days of the Sonia raj, there is so much of doubling and tripling all around) it cannot be accompanied by a doubling of the monitoring mechanism or the systems and procedures in place to check corruption. Therefore, where an efficient set-up restricts pilferage to 10 percent out of a budget spend of, say, Rs.10 lakhs, the same set-up would likely see a 15 percent siphoning off when expenditure doubles to Rs.20 lakhs. In this example, in the journey from a Rs.10 lakh spend to a Rs.20 lakh spend, the “leakage” increases more than proportionately from one to three lakh rupees.

There’s another reason why, given time, this would indeed be the case. The fact is, no-one is born corrupt. We become corrupt for a variety of reasons, perhaps the most important of which would be the examples around us of people who are corrupt and who appear to be merrily getting away with it. Because this conveys the very seductive message that it is possible to be on the take without having to pay any penalty. Now, link it to the environment created by an activist government where spending on multiple “welfare” schemes is forever on the rise and which, in turn, generates ever more examples of people around you who are merrily “getting away” with it. Corruption now becomes a self-fulfilling prophecy. Sonia Gandhi was recently heard bemoaning the “shrinking of the moral space” in India’s political class today. Actually, a lot of it is intrinsic to the path she has laid out for the country and, therefore, is of her own making.

Finally, the real price is the country’s future that gets shorted. Despite the leakages, all the money spent does give rise to a sizable constituency of “freeloaders” who are privileged to live off the handouts from the government. Sooner than later, between the “freeloaders” and the “looters” (whose numbers are also substantial because loot takes place at the bottom of the pyramid as well), the numbers swell into a critical mass that becomes a powerful vested interest dedicated to maintaining the status quo, no matter what the larger costs are.

This then becomes a “reform” resistant country where the cracks (when they appear) are promptly papered over and bad policies keep piling up because any kind of course correction would involve making too many people unhappy. And since economics based on delusion has a strictly limited shelf life, matters cannot go on like this indefinitely. Typically then, reform-resistant economies “wake-up” into a nightmare with a full-fledged crisis on hand which now makes reforms imperative. All of a sudden, the political will to carry out reforms is also easier to muster. By this logic, India should soon be running into another “1991” moment, maybe not so severe, but serious enough to give rise to the next set of real reforms − as opposed to the tinkering that passes off for reforms these days.

I believe (and I am unable to resist this) I may have framed a new law about corruption in government circles. In my honour, let it be called Ranjan’s law of corruption in government.

Written by Ranjan Sreedharan

December 15, 2010 at 11:43 am