Is it really an either-or case, as some people try to portray?
The 2014 Loksabha polls brought this debate into focus through the Sen-Bhagwati dialogue on this issue. Commonsense dictates that the two are related, but they are neither mutually exclusive nor are they perfectly correlated. Experience shows that economic growth doesn’t automatically trickledown to the bottom; it tends to remain concentrated in top few hands. Likewise, targeting human development indicators will not automatically prop up economic growth. Both should be seen side by side in the right perspective.
Moreover, the large population base, widespread poverty and climate change disturbances must be factored in to the development trajectory.
The Sen-Bhagwati Debate
It is a healthy debate between two factions of researchers. One side is led by Nobel winner professor of economics and philosophy at Harvard University, Amartya Sen, whose idea of development culminates in the capability theory. Sen believes that India should invest more in its social infrastructure like health and education to improve human capabilities that will cause economic growth. Without such investments, he fears that inequality will widen which will ultimately falter the growth process. In the recent book An Uncertain Glory: India and its Contradictions, Sen and Drèze stress on state-led social welfare schemes to solve India’s development problems.
This is opposed by Jagdish Bhagwati, a Columbia University professor of economics. Bhagwati argues that focus on growth is important so that enough resources are available for social welfare programs. In his view, inequality may raise with growth initially but sustained growth will eventually also sustain the social benefit programs to redistribute and mitigate the effects of the initial inequality. In Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries, Bhagwati and Panagariya recommend focus on economic growth as the best way forward.
Origin of the Debate
In a December 2010 speech to MPs, Bhagwati argued that the reforms of 1991 have brought prosperity to even the lowest social classes and hence they must be continued. He also down played the low ranking of India on the human development index (HDI) which originated from the efforts of Sen and the renowned Pakistani economist, Mahbub ul Haq. Bhagwati thinks that the HDI has little scientific basis.
The differences between Sen and Bhagwati may be much smaller than what appears from the media hype. It is certainly not a battle between the left and the right. Yet, Sen attracts left leaning people while those on the right tend to favour Bhagwati’s views. The debate is not about rejecting market economy; it appears to be more about policy preferences rather than policy directions.
For instance, Bhagwati wants growth to precede redistribution to improve people’s capabilities. But Sen wants to focus on increasing capabilities as a way to push growth. He argues that there is no example of unhealthy, uneducated labour producing meaningful growth rates. Bhagwati counters by arguing that putting redistribution before growth is like putting the cart before the horse.
It appears to be more about the process of growth – whether it enriches the rich unequally or spreads down to include even the poor – and the manner of doing so. It is also academic – whether people got lifted out of poverty due to economic growth or redistribution through state policies.
Many critics however point out that the debate bypasses the more pressing issues of global warming and rising population; with fertility rate of 2.6 per women India is still away from the population stabilization target of 2.1, which should have been reached in 2010.
To sum up in one sentence: Bhagwati wants to focus on reforms to push economic growth, and Sen wants the focus on tackling poverty and inequality through social measures.
Beyond Debate, What should India Do
Mind the Inequality Gap
Experience around the world shows that the corporate led economic growth model, India is trying usher in since 1991, is known to promote high inequality with concentration of wealth in few rich hands. It does not automatically benefit the masses without state led redistribution efforts.
A recent Oxfam research report shows that the richest 1 percent have seen their share of global wealth increase from 44 percent in 2009 to 48 percent in 2014. The Wealth of the richest 1 percent is 65 times the wealth of bottom half. In 2014, 80 richest persons have as much wealth as the poorest 50 percent (about 3.5 billion people). In 2013 85 richest persons held that much, significantly down from 388 in 2010.
Development is not just about growth; it is also about its distribution. So it is entirely possible for an economy to grow even rapidly without creating much jobs as has been the case in India recently – growth only increased inequality.
Focus on Infrastructure
The government also failed to create sufficient basic infrastructure – transport, electricity, communication etc – to help the manufacturing sector. What actually grew is the service sector around the IT. Another sector that has gone up is the real estate. It is kind of rent seeking and speculative sector. So services and construction account for roughly 70% of the increase in output over the last 20 years. The industrial growth remained limited to around 18%. As a result, we ended up with large export-import gap.
The corporate sector grew very fast in past two decades, almost double the rate of the rest of the economy. However, it employs barely 12 million people in a country with a work force of over 450 million. Even here, white collar workers might have gained to some extent but the wages of blue collar workers remained largely flat.
Strengthen Welfare Program
Human development indicators show that the benefits of growth did not each people at the bottom. As Sen points out, many countries with lower per capita income than India have done better. For instance, in Bangladesh infant mortality has come down below that of India’s, starting with much higher figure, and open defecation is limited to just 8% population there compared with India’s over 50%. A unique and outstanding example comes from Bhutan and its use of Gross National Happiness (GNH) to guide development. It’s human development index (HDI) increased from 0.146 in 1991 to 0.522 in 2010 without unduly impairing its cultural, spiritual or natural treasures. Compare it with India’s current HDI of around 0.55.
Clearly, what counts is the distribution of economic growth and its translation into human wellbeing, not the quantum of economic growth.
Without consistent higher economic growth India risks being stuck in the low-income trap for a longer time. It needs to offer the private sector and foreign investors opportunities to earn consistent long-term profits. Securing their interests is much easier if GDP is growing at 8% than at 4-5%. Further, strong institutions are necessary to achieve consistent economic growth and development. It means focusing on good governance, consistent and clear polices and freedom from corruption.
Invest in Skill Development and Entrepreneurship
As the government is shifting focus from agriculture to manufacturing, the challenge is to support this transition by retraining agricultural workers for more productive jobs with better wages. This means that government must focus on areas like skill development, entrepreneurship, and education. The NDA must avoid the UPA type mistakes – it converted a lot of social expenditure into rights and obligations that were enforceable even by the courts. It can potentially turn into problem when the economy slows down.
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