Atanu Dey On India's Development

Pranab Bardhan on the Indian Economy

One of my gurus at UC Berkeley was Pranab Bardhan, professor of economics. “He has done theoretical and field studies research on rural institutions in poor countries, on political economy of development policies, and on international trade. A part of his work is in the interdisciplinary area of economics, political science, and social anthropology. He was Chief Editor of the Journal of Development Economics for 1985-2003. He was the co-chair of the MacArthur Foundation-funded Network on the Effects of Inequality on Economic Performance. for 1996-2007.”

Everything I know about international trade, I learnt from his lectures. He is matchless in his ability in making difficult concept accessible. It is always a pleasure to listen to him and learn. I spent some time in conversation with him last month in Berkeley. The transcript of the entire conversation I will post later. For now, here is a brief write up.

Walking around the Indian Elephant

Much disagreement in economic policy debates, as in many other debates, can be avoided by the simple expedient of continuing to walk around the elephant. An elephant is a package deal and must be examined from various angles for a fuller comprehension. Matters such as economic growth, inequality, reform, liberalization, privatization and globalization, often end up entangled in semantic differences that can be resolved through a more comprehensive understanding of what they mean.

Economic reform has to be a package deal and furthermore it has to be understood to be so. That’s what Pranab Bardhan, professor of economics at UC Berkeley, said in a recent conversation I had with him. Although considerable progress has been made over the last 20 years in liberalization, particularly deregulation, further progress depends on gaining the support of the general population for reforms. Studies have revealed an overwhelming majority of people oppose reform. According to Bardhan this is because the reforms do not address the anxieties of the general population.

The average Indian is not affected directly by reforms such as in taxation, finance, and international trade. Reform would be more meaningful to them if they understood reform to be not just cutting the size of the government but also the improvement of the quality of governance. Leaders who favor reform have to explain that reforms can directly help the poor and reduce poverty. The poor care more about reforms in institutions such as the police, judiciary, and the bureaucracy because it affects their day to day living.

Bardhan stresses that the government has an important role for the poor. “Social service delivery, education, health, child nutrition, drinking water, irrigation water – all these services, the government has to be involved. That is the role of the government, to provide public goods and services. The problem is the government is in too many things in India and does most things badly. So its role has to be reduced in some areas but in others, it has to more effectively deliver those services.”

Bardhan believes that it is the power of the labor unions in the public sector that hinders privatization to an extent. The richer the industry, the more powerful the unions; they try to get a share of the rents the industry earns. This is in itself not a bad thing but for the fact that 93 percent of Indian labor is in the informal sector. And even in the small organized labor sector, one has to address what he calls the “social vertigo” that labor faces. It arises from the anxiety that if they lose the job, there is no comprehensive social safety net for them. The strategy should be that together with labor law reform, to gradually introduce a safety net for the organized sector at least so that opposition to reform can be defused.

Does liberalization explain the current Indian growth rates? Certainly in the corporate sector, de-licensing and deregulation have played important invigorating roles by unleashing energies that were controlled before. But it is hard to explain why the services sector is the leading sector in India, unlike say in China where manufacturing is the leading sector. Since two-thirds of the services is in the informal sector, they have to be below the reform policy radar. Bardhan while advancing some tentative hypotheses remains puzzled by it.

The growth of inequality is a matter of concern for him. If the majority does not see gains from high growth, then the reforms and consequent high growth rates will not be sustainable. Only if the reforms are communicated to the poor as being part of a package that will help them, will the political opposition to the reforms be contained.

On the liberalization of the education sector, a matter very critical to India’s growth and development, Bardhan was clear that the government should be involved with the funding of lower level education but should not necessarily be involved with the provisioning. But the government must entirely exit from the business of tertiary education. Currently higher education suffers from lack of autonomy and too much interference from the government. But the teachers’ unions are firmly against the reduction in the involvement of the government.

Bardhan is cautiously optimistic about the Indian economy. He feels that ten percent growth is not sustainable though perhaps seven percent could be. But rather than gross growth rates, what interests him is the rate at which the bottom half of the population is growing economically. Even if that section were growing at five or six percent, it would be acceptable. However, it is not and that is so because the bottom half is largely in agriculture which unfortunately is a declining sector. Rural industrialization could raise the income growth rate of the rural population.

The fact is that rural infrastructure – roads, power, irrigation – are declining. What is needed is massive public and private investments in them, and better governance in managing the infrastructure.

For Bardhan, reforms have to be comprehensive package for them to be effective. For them to be politically feasible, the general public has to know which parts of the reforms directly affect them positively. Most importantly, the reforms have to result in efficient social service delivery because that is what matters to the common person. For me, since the Indian economy is metaphorically seen as an elephant, it makes sense to continue to walking around it to fully understand what it is.

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