The pot-holed road

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Posts Tagged ‘fallacy of inclusive growth

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