The pot-holed road

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Posts Tagged ‘Inclusive growth

THE FALLACY OF INCLUSIVE GROWTH

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(This article was published on June 18, 2012 on the website of Centre Right India)

Underneath the warm glow it evokes, is there more to the idea of “inclusive growth” than meets the eye? Can inclusive growth ever deliver on its promise of rapid growth with real, out-of-turn benefits for the poor, or is it another pie in the sky, in the way our fixation with the mixed economy turned out to be? Is it possible that an idea you just cannot say no to, is actually deeply flawed at the level of its very DNA?

Here’s an analogy that sheds some light.

Imagine a typical class in a typical school. The greater number of students, say, about 40 percent, falls into the category of the average, neither good nor particularly bad. About 20 percent are above average and some in this lot are truly brilliant students. Those in the bottom 20 percent are laggards and way behind the rest of the class.

If a strategy similar to that implied by inclusive growth were to be followed, it would mean that the teachers would devote a disproportionate share of their time, and the school would devote a disproportionate share of its resources, to focus on the bottom 20 percent, hoping to bring their performance up by a notch or two. The average students would perhaps suffer only marginally under this policy, but the top 20 percent comprising the above average and the brilliant, would suffer grievously.

They will suffer not because they find themselves falling back into the middling, mediocre lot, but in terms of that higher potential within them that would now go wasted. Their sophisticated questions and doubts in the mind about topics ahead of their class level will not be entertained. The library will not carry the advanced and higher level books that could whet their curiosity and sate their thirst for knowledge.

When this class graduates, there will be a far greater degree of equality in the grades of the students. However, this equality would have been achieved as much by pulling up the bottom 20 percent as by stifling the top 20 percent. In real life, it is extremely unlikely that with extra attention and focus, the under-achievers get transformed into over-achievers. It’s more likely that some, perhaps many, succeed in making the transition from laggards to the average category. In other words, where these students were originally destined for low level occupations not requiring academic competence—a factory worker, a cab-driver, a mason, a carpenter—they would now be pulled up to become book-keepers, shop assistants, bank-tellers, machine operators etc.

At this point, it’s easy to conclude that the policy has worked because it has brought about a much-needed improvement in the bottom-most layer. Isn’t this the very purpose of inclusion, and a key social objective?

Well, not so fast. Think as well of what we stand to lose.

Because of their innate talent and enterprise, the upper layer will continue to remain at the top. Students from this category will still go on to become qualified engineers, scientists, doctors, managers etc., but with a crucial difference. The scientists will now turn out to be run of the mill scientists, competent enough for routine experimentation but quite removed from that cutting edge of research that generates inventions and discoveries, or the advances that push back the frontiers of knowledge. There will be far fewer of those doctors and engineers who have the ability in them to blaze a new trail with new cures and new technologies. And, there will be fewer managers with skills to innovate, to think of new ways to improve efficiency and cut costs, and to make available to consumers more and more at lower prices.

How does it matter? Does it really add up to a significant loss to the economy? Consider this.

The wealth created, or the economic value added—a chunk of which, incidentally, ends up with the government as tax—when an ordinary scientist, engineer or doctor becomes a brilliant one is far more than when a plumber is pulled up to become a bank teller. This point is well recognised in free market economies where incremental talent is accordingly rewarded so extravagantly. Top managers, lawyers, doctors, sportspersons etc. earn so much more not because their talent is twice or thrice that of their lesser peers but because that edge, the extra something they bring to their profession, generates so much more value for their customers, their employers, and by extension, for the wider economy. When a scientist is competent, he can be trusted with the routine stuff. When he’s brilliant, he’s capable of inventions and discoveries.

He acquires the ability to re-write the rules of the game and becomes a game-changer. Over a period of time, game-changers go on to change for the better the lives of people around them.

That’s why a Sachin Tendulkar may not be twice the batsman that a Gautam Gambhir or Suresh Raina is, but he earns many, many times more. It’s also a pointer to why the U.S., one of the most dynamic free market economies in the world, is also its most technologically advanced, with an outsized share of the Nobel Prizes every year. It’s also—no surprise here—the richest and most powerful country in the world.

Remarkably, even as the talented have thrived in the U.S., its ordinary working people too have done very well for themselves. A revealing example is that of car ownership. If we reckon car ownership as a measure of inclusion, the U.S. is the most inclusive society in the world. The fact is, this country has almost as many cars as there are people. Here, you can be poor and broke, on the dole or surviving on food stamps, and chances are you would still have a car.

It was not always like this. Not until Henry Ford came along with his Model T car. Introduced in 1909, it first sold for about $850 when competing cars cost more than $2000. By 1915, the price had dropped to $440 and efficiency at the assembly line had increased so much that it took only 93 minutes to assemble one car. At the time of the launch in 1909, the cars were assembled by hand and each car took 12.5 hours to put together. By the time production of the Model T ceased in 1927, over 15 million of these had been made (a record that stood its ground until 1972 when it was overtaken by the Volkswagen Beetle) and life in America had changed for the better for so many of its ordinary working people. All because of one man who changed the rules of the game, and ended up changing millions of lives for the better.

Henry Ford succeeded in America because soon after he started with the Model T, he could discontinue assembly by hand and switchover to mass production techniques, redeploying and rationalising his operations and work-force the way he thought fit. Ironically, more than eighty years after the last of the Model T had rolled off the production line, when a leading Indian airline struggling with rising costs and losses wanted to retrench about 1900 of its work-force during a time of global recession, there was an outcry, and the whole country—the government, the opposition, the media and the wider public—came down upon it with such a heavy hand, it was forced to back down. Without exaggeration, a Henry Ford in India would have died a bitter, broken man.

Inclusive growth may (or may not) deliver on its promise of inclusion but, because it willy-nilly implies a lid on talent and enterprise, it will certainly extract an unreasonable cost from the economy. This cost is paid in the form of opportunities missed, and the life-changing experiences foregone.

Think of a long distance race where a few runners sprint ahead, others follow behind, and some at the back fall down in sheer exhaustion. The welfare state goes out of its way to care for those who collapse onto the tracks (the so-called safety net). But inclusive growth is about actively managing the outcome of the race; those who elbow their way ahead of the pack are imposed a handicap to slow them down, while all manner of extra advantages are given at great cost to those following behind. The grand idea is that as the race heads to a conclusion, all the runners would be bunched together at the finishing line in a heart-warming display of cohesion. Not surprisingly, it is a race that never sets records; it is a race of, and for, the also-rans; a race that ennobles performance below human potential, nothing but a feel-good name for mediocrity.

I began this essay with a mundane example of a typical class in a typical school. Here’s an example from the realm of fantasy to drive home the same point. Imagine that the process of evolution was under control of a government with overriding faith in “inclusive evolution”. Somewhere around the time that homo-sapiens evolved into hunter-gatherers, the mandarins in the bureaucracy suddenly wake up to the fact that this species has left behind others in the ape family and, what is more, was threatening to pull way ahead of the pack. The official machinery now kicks into overdrive.

The homo-sapiens is ordered to be held back at the level of the hunter-gatherer while resources get poured into training chimps and gorillas in the fashioning and use of tools. No, this is not all. The consequences can be truly horrifying where the government determines that the relevant yardstick is not just disparity within the ape family, but within all living organisms, and resources are diverted into enabling the amoebae and other protozoa to catch up.

Time and tide wait for no man. As we slow down in the cause of inclusion, we allow others around us to zip ahead of us. Before we even know it, we end up slowing down a lot more than what we had bargained for. And, when we push hard on the accelerator to make up for lost time, we discover the engine has little extra power in reserve.

It has happened before and, going by the evidence today, it is happening all over again.

(Part 2 will look at the flawed economics of inclusive growth)

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Written by Ranjan Sreedharan

September 3, 2012 at 12:28 am

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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