Published in The Edge Malaysia, 11 - 17 August 2014.
John Maynard Keynes once said that practical men, who believe themselves exempt from the influence of philosophers and economists, are usually the slaves of some defunct economists. If we take this as true and that we really are slaves of some defunct economists, we better make sure we get our economist ‘masters’ right then.
In the Indian public sphere, two highly-respected Indian economists, Amartya Sen and Jagdish Bhagwati, have launched into a fascinating debate on the appropriate path for India’s development. In this particular debate, the “sequencing of economic policies” boils down to the following:- As India grows, should it sequence redistribution simultaneously with growth – the Sen position – or should it focus on growth first and sequence redistribution later – the Bhagwati position – after having achieved some level of income associated with that higher growth? Quite naturally, these positions are also widely debated in Malaysia with inclusive growth being a mantra of the current government. It may seem obvious that growth with inclusion is a normatively “good” thing but if a renowned economist such as Jagdish Bhagwati argues for something different, it is worth exploring the arguments against simultaneous growth and redistribution. This is best illustrated through the Indian economy.
Sequencing is an important issue due to limited resources. If Indian policymakers choose growth and redistribution simultaneously, then some of the resources that it dedicated to redistribution will not be dedicated to growth, thus potentially reducing India’s overall economic growth. However, if they choose to grow first and then redistribute later, then they have a higher likelihood of maximizing India’s growth rate, thus generating more income for the government via tax collection and thereafter, be able to redistribute wealth from a larger resource base.
While the latter situation may seem enticing given a future larger wealth pool, we must consider as well the differences in discount rates of the future between Indian policymakers and the Indian citizens to whom the benefits of redistribution would be targeted to accrue. These citizens are going to be the poor and the very poor in India. Their discount rate of the future is generally higher than that of the policymakers. Given the scarcity of their resources, it is difficult for them to save and invest even if they wanted to as most of their needs are short-term and are pressing.
Thus, while they may gain a bigger share of the economic pie in the future from redistribution under the Bhagwati argument, there is a powerful argument for helping the poor lower their discount rates for the future in the present, improving their outlooks and, importantly, hope for their futures and thus encourage them to save and invest for the future. The first-order way to do that is to undertake the Sen position – to redistribute simultaneously with growth.
By continuing ongoing social welfare programs and implementing new ones such as jobs-for-all programs or conditional cash transfers, policymakers can help further lighten some of the shortterm scarcity burden that often pervades the poor and very poor. More importantly, they may reduce the discount rate of the future and induce the poor and very poor to both invest in themselves and their children and allocate economic decision-making inter-temporally, rather than one period at a time.
These savings and investments will have benefits to Indian growth over the medium- and longterm as well. Huge deficits in, for example, human capital development will stunt India’s growth past the short-term, diminishing any positive benefits from a pure growth strategy in the present. Sure, one could argue that a pure growth strategy increases economic opportunities for the poor which also serves to reduce their discount rates. The problem with that argument is that many of these jobs will be low-skilled jobs, because these are the types of jobs for which India’s poor and very poor are capable of in the present, given the huge human capital deficit. A more sustainable long-term growth policy would prescribe medium- to high-skilled jobs, moving up the value chain, but if the poor are incapable of those jobs, then simply creating those jobs would be meaningless. It is therefore critical that immediate development of human capital is required, enabling the poor to take advantage of higher-skilled jobs.
Supporters of the Bhagwati position often point, rightly, to India’s large fiscal deficit as a reason to avoid redistribution efforts in the present. They argue that only with growth can India gain larger tax revenues to reduce the fiscal deficit and to gain the funds required to redistribute. The most persuasive counter-argument against this position, however, is that India can undertake revenue-neutral redistributive policies simply by eliminating its massive subsidy bill. The subsidy bill in India presently gives more benefits to the rich, directly and indirectly. Worse still, the benefits get higher as we move up the income distribution. Thus, eliminating this incredibly regressive subsidy bill could open up the funds required to maintain and increase social welfare programs. Another counter-argument is that if the government is going to full on support growth, it will also require additional funds; it is thus inconsistent of supporters of the Bhagwati position to use a high fiscal deficit as an argument against redistribution, but be comfortable with increasing funds for the purposes of supporting growth.
Another reason for supporting the Sen position is a more humane perspective. Infant mortality in India is still much higher vis-à-vis other middle-income countries, malnutrition is rampant, and the education system fails to enroll secondary school students and is of very low quality as well. These are the types of problems that need to be solved at an immediate basis rather than after some indeterminate amount of time at which growth was sufficient in India to generate the level of income required to adequately redistribute income to the poor.
The case for immediate redistribution with growth is very strong; not only does it help the poor in the present, it helps them in the future as well by reducing their discount rates of the future, improving health and education outcomes, and providing them with the tools to truly participate in future Indian economic growth. The Sen position is thus the appropriate one in this debate, and thus, if we are to be slaves to some defunct economist, we should let that economist, in this context, be Amartya Sen.