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.

 

The Politics of Emotion: Understanding India's Current Predicament

Many observers have commented at length on India’s apparent policy drift, in which economic reforms are being stalled, or even reversed. The last Union Budget’s retrospective taxation and anti-tax-avoidance moves prompted The Economist magazine to answer its question, “what does the Indian government want?” with a discussion of “three theories: that it is clueless, that it wants symbolic control, and that it wants cash.” The tax and investment policy mess is just one dimension of an odd state of affairs in Indian policymaking. What the government wants is perhaps best understood by considering what the individuals in the government want. And here the underlying emotions may be the best guide to understanding what is happening and what will come next.

In 2009, Dominique Moïsi came out with a slim volume titled, The Geopolitics of Emotion, with a subtitle, How Cultures of Fear, Humiliation, and Hope Are Reshaping the World, which summarises his central argument. Moïsi’s analysis is impressionistic and broad-brush, focusing on fear in the West and humiliation in the Arab or Muslim world, with hope associated with Asia, particularly China and (ironically) India. Indeed, hope had been rising for many in India for the first decade of the 21st century, making the current mood a stark contrast. The informal nature of the book’s arguments should not detract from the theme that emotions are powerful predictors of behaviour. With this in mind, one can extend this theme to the level of policymakers in India.


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Lessons from India's Voters

In my last column, I wrote about learning from China. The experience of other countries, especially those that share key characteristics with India, is obviously important as a guide for policymakers. But there are important lessons from India’s own experience. Democratic voting allows the individual experiences of citizens to be articulated, albeit in an aggregate and imprecise manner. Drawing the right lessons from India’s latest elections is vital.

The stock market seemed to conclude that the outcome in Uttar Pradesh was a bad one for India’s economic future. Since the UP state assembly election did nothing to consolidate the political position of the ruling party’s heir apparent, it may be that uncertainty and jockeying for position at the Centre will continue, both within the ruling party, and in the wider coalition. Capricious coalition partners and powerful ministers may continue to block or divert needed and potentially beneficial economic reforms.

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