How Can Indians Be Happier?

From Financial Express, September 30, 2013

How can Indians be happier? 

 The most obvious aspect of the Bhagwati-Sen debate on Indian economic policy is the question of trade-offs between growth and redistribution. A subtler and deeper issue, central to Amartya Sen’s work, is that of goals. Gross domestic product (GDP, or its cousin, GNI—gross national income) per capita provides a single number, capturing purchasing power, and therefore a sense of the standard of living that people can afford. But this misses many complications, having to do with the imperfections and gaps in the ability of markets to value what we really care about.

The UN Human Development Index (HDI) creates a different numerical measure of well-being, including GDP, but also other dimensions of our lives, such as how healthy and how educated we are. But it is still somewhat arbitrary in its weightings of different outcomes, and it still misses some things that matter to us for our well-being. Can we do better in tracking average well-being?

The World Happiness Report (WHR) is precisely designed to get a better understanding of how well off people are in different countries, and what contributes to their sense of well-being. The data comes from asking people carefully calibrated questions about how they evaluate their own life circumstances, with answers chosen on a numerical scale. “Happiness” may be a fuzzy concept, difficult to pin down, but, on average, people can give an accurate sense of how they view their lives. Different surveys can distinguish between temporary and transitory feelings and emotions on the one hand, and an overall, longer-run evaluation of life conditions.

The latest WHR is the second annual effort in what may be a major step forward in understanding systematically what contributes to our overall well-being. In turn, it may help policymakers do better in setting their priorities and choosing policies. To make this concrete, look at where India stands. First, the facts. In the 2013 WHR, India ranks 111th out of 156 countries surveyed. For comparison, the US is 17th, China is 93rd, Bangladesh is 108th and Pakistan is (a surprising) 81st. The IMF GDP per capita rankings out of 187 countries, on the other hand, are: US (6), China (93), India (133), Pakistan (141) and Bangladesh (154). And the HDI rankings, also for 187 countries, are: US (3), China (101), India (136), Bangladesh (146), Pakistan (146).

Note that, unlike the HDI, the happiness ranking does not directly include GDP/GNI per capita—it is based on asking people directly how well off they feel. Hence, by comparing the happiness ranking with GDP per capita, one can get a better sense of the importance of material conditions. For the world as a whole, and for most regions and countries, GDP per capita is the most important variable in explaining happiness (there is a larger, unexplained residual). But “social support” is a very close second. Social support is measured by yes-no responses to the question, “If you were in trouble, do you have relatives or friends you can count on to help you whenever you need them, or not?” The remaining four important, identifiable variables that seem to explain happiness are, in order: healthy life expectancy, freedom to make life choices, generosity, and perceptions of corruption.

The initial take on the data does not provide anything new or surprising for India: material conditions (GDP per capita) matter, as does health. This is in concordance with our familiar indicators of progress. But there is one interesting nugget: India was significantly less happy in 2010-12 compared to 2005-07, despite being richer. What happened? The measure of perceived social support fell dramatically between the two periods. And this happened in a situation where the perception of social support in South Asia is far lower than in any other region of the world.

The data need further investigation and understanding before policy implications can be drawn from them. But the happiness index and its explanatory variables provide some beginning for possible policy innovations. If India’s lack of social support is a consequence of social fragmentation, low trust or erosion of extended family support structures, will government transfer programmes address it, or are deeper changes needed? Indeed, is government action the place to look for possible improvements in societal structures that will increase perceived well-being? The WHR finds that trust in national government is not correlated with happiness (subjective life evaluations), but that government effectiveness, reflecting aspects of honesty and effective delivery of public services, is strongly correlated with life evaluations.

Perhaps the preliminary lesson of the WHR for India’s policymakers is therefore the following one. Before trying to fix problems that have deeper social causes, stay focused on the basics, these being material well-being as measured by average income and by healthy lives; and before doing anything else, figure out how to make the government itself more honest and effective in whatever it needs to do most.

Financial Express, December 6, 2012

Is India’s growth story dead?

 It wasn’t too long ago that we were beginning to discuss 10% growth for India as a realistic aspiration. Some observers even began to question the focus on growth alone (at the expense of other dimensions of development). Recent events have taken care of that worry, though not in a way that might have been desired. India’s growth has slowed sharply. Even the latest, more optimistic forecasts of global investment banks talk of recovery to growth rates in the 6-7% range. That is not bad, but not the stuff of miracles, and not rates that will make a rapid dent in poverty. 

 

In August 2012, Dani Rodrik of Harvard wrote a piece titled “No More Growth Miracles”, arguing that technical progress in manufacturing is becoming more skill- and capital-intensive, and that there is less room to export for new entrants. Hence, growing through labour-intensive manufactured exports, the recipe for the growth miracles of the last six decades, is going to be more difficult than in the past. Compounding this problem for countries such as India is the slowdown in advanced economies, as they age and as they deal with accumulated debt.

According to Rodrik’s analysis, India may have missed the boat. Or, to use another metaphor, we finally decided to join the party as it was winding down. India may chug along at 6-7% growth (not difficult with current saving and investment rates), but the kind of fundamental transformation that double-digit growth can achieve is beyond our reach. Note that the Rodrik story does not discount the importance of domestic policy choices; it just limits what difference they can make in the aggregate. 

One response to this scenario might be to say that India can still make the best of the hand it has been dealt. Along with 7% growth, improvements in income distribution, institutional quality, and the well-being of the poor in non-income-based measures such as basic health, nutrition and education may be the optimal path to follow. This has something to commend it: investing in people may actually make growth more sustainable. Unfortunately, slower growth could also make progress in all these other dimensions harder rather than easier. A focus on redistribution, in particular, can come at the cost of growth, so that the growth rate may fall even further. 

Let us instead argue that growth need not come at the cost of human development, and vice versa. Also let us argue that policy should be designed to pursue these aims simultaneously, and in a way that minimises any trade-offs, for example, focusing on improving the long run opportunities for the poor through health and education, rather than on short run subsidies, whether through in-kind or cash transfers. 

Next, let us ask, how can India create its own growth miracle, despite the tougher global context described by Rodrik? The key to this may be to unbundle India. Much attention is now paid to the role of India’s states, how state-level policies make a difference to growth and human development, and how different states’ performances reflect differences in the quality of governance and policy-making. Think of India as the world and the states as nations. Rodrik’s constraints may have less force in this mini-world: states can grow by getting to the technology frontier, by trading with each other, and so on. For this to work, the Centre has to give them the right environment and resources, taking care of national-level public goods, such as a well-functioning financial system, and giving them more resources, particularly by working out a deal on the Goods and Services Tax that is favourable to the states. And there is plenty of room to deal with equity across the states through a more streamlined, focused intergovernmental transfer system. 

India has been marked by growth that has done less than average (compared to other countries) in bringing down poverty. If one thinks about the reasons for this, whether one focuses on sectors such as agriculture, or human capital deficiencies captured in the lack of health and education, the source of the problems can be found at the state level. And if the states have not performed, much of the problem can be traced to the incentive structures induced by the Centre. This situation can be changed, with the right kind of intellectual framework. 

The project of national integration that began with independence has been quite successful. Indians mostly see themselves more as Indians than before. The media, migration and urbanisation will only reinforce this development. Keeping India together is no longer a worry. The time is really ripe for the Centre to let the states do what they should be best at doing, providing health, education and policies to support local development, and to give them the resources for such tasks. This will increase growth, make it more inclusive, and keep India’s growth story alive.