From Financial Express November 9, 2012

Inclusive growth in the US and India

The US Presidential election has just concluded, and Barack Obama has been re-elected. Voters in exit polls said they cared most about the economy, but what they really meant were their own material circumstances in the economy. What may have carried the day for President Obama was the sense that he cares more for the middle class (where almost every American likes to place himself or herself) than his erstwhile opponent. 

In fact, the choice between the two candidates illustrated clearly two very different conceptions of society and justice. Mitt Romney’s infamous remarks branding almost half of the country as lazy free-riders were in a centuries-old tradition of the rich justifying wealth as deserved through talent and hard work (or before that, as divine will). Romney and his party simply refused to recognise that inequality of opportunity has grown dramatically in the US, so that the growing inequality of outcomes is not determined on a level playing field. Growth in the US has been far from inclusive.

Barack Obama, on the other hand, has had a vision that is completely consistent with the idea of inclusive growth. Interestingly, in 2007, Ifzal Ali and Hyun Hwa Son of the Asian Development Bank provided a theoretical and empirical analysis of inclusive growth that resonates conceptually with Obama’s policies, as well as with what has been attempted in India. Ali and Son look at the distribution of opportunities across different parts of the income distribution. Thus, they focus on opportunities rather than outcomes such as income. In this, they are following the work of Nanak Kakwani and others. To make things concrete, they use access to health and education as examples of opportunities. They apply a specific index of opportunity to health and education data from the Philippines, to measure precisely how inclusive growth has been in that country.

As many have argued, health and education are to be valued in their own right, as well for their importance in helping to level the playing field for earning income. Barack Obama recognised this in pushing for wider and more equal access to healthcare, and for improvements in access to higher education through expanded federal student loan programmes. In some ways, then, the US agenda is not that different than India’s attempts to improve access to health and education across the country.

Of course the levels of development, institutional details, and scope and scale of challenges are very different in the US and India. One similarity, though, has been the lead role played by the federal (central) government in both countries, in health, especially, in the US. The American suspicion of government applies particularly to the federal government, and that has created a political battle over healthcare reform. But one only has to look at examples such as civil rights, the national highway system, and the GI Bill which funded college for returning World War II veterans of all socio-economic groups to realise that the Centre has played positive roles on major issues in recent US history.

In the Indian case, too, the justification for the Sarva Shiksha Abhiyan and National Rural Health Mission has been that the Centre needed to step up because the states were failing to do their part. The problem in India has been that central direction has tended to be confused with central implementation without adequate capacity, or more with a lack of consideration of appropriate incentives for modifying behaviour. Even in the US, these kinds of problems do arise, and the challenges for a poorer country like India are bound to be greater.

As I have argued in other columns, there is a case for considering innovations in revenue-sharing across levels of government, to improve the efficiency of expenditures, as well as to build government capacity in the longer run. The Ali and Son framework offers a way of comparing the distribution of improved opportunities, and hence the inclusiveness of growth in some important dimensions, for different types of policies and implementations. Hence, it should be possible to see if policy design and implementation at the state or local level does better than centralised decision-making.

In the US, my guess is that the successful Massachusetts experiment in universal healthcare would not have spread to other states, and the federal government’s push was very likely the right way to address the problem of lack of access to healthcare. The Indian situation is very different, though, in starting point and in scale. It might be worthwhile to give Indian states more resources and incentives to try and improve healthcare access themselves, with flexibility to innovate and experiment. If just Uttar Pradesh can pursue more inclusive policies, that would affect a population roughly the size of Brazil’s. That would be an impressive achievement.