Reading Dreze and Sen: 5 – Integrating Growth and Development

The impact that economic growth has on the lives of people depends on a) income distribution, but also on b) the use made of public revenue generated by economic growth.

For example, the fact that India spends only 1.2% of its GDP on healthcare and China devotes 2.7% is directly relevant to the greater health achievements of China vis-à-vis India. Because of low allocation to public healthcare, many poor people across India are forced to rely on private doctors. Why is that so wrong? First, many private doctors have little or no medical training. Second, patients know very little about diseases, medicines required or indeed why, the possibility of defrauding is huge [in absence of an alternative public healthcare to which they can go to for assistance or advice]. India has started to rely on private healthcare without developing solid public healthcare facilities. In doing this, India is proceeding on a path different from every country that has made a successful health transition [e.g. Britain, Japan, China, Brazil, South Korea, Costa Rica]. All these countries first developed a well-functioning public healthcare system and only then encouraged private health care facilities as auxiliaries. By allocating more of the public revenue generated by economic growth to promoting healthcare, India could more greatly enhance the living conditions of its citizens. Whether growth facilitates development in terms of enhancing the living conditions of people depends on what is done with the public revenue that is generated by growth.

Moreover, while we must recognize the role of growth in facilitating development (in the sense of improving human lives), we also need to recognize that the advancement of human capabilities (through healthcare, education etc) also, in turn, influences the growth possibilities of a country. The state can play a constructive role in developing these human capabilities.

Before the economic reforms in the 1990s, India faced two major failures. First, it was failing to tap the constructive role of the market (especially in terms of promoting initiative, efficiency and coordinating complex economic operations). India’s ‘Licence Raj’ system had made it necessary to take government permissions for private initiatives and this made economic enterprise very difficult; economic enterprise was put at the mercy of bureaucrats. This stifled initiative and nurtured corruption. This failure has been partially remedied in the post-reform period. Arbitrary controls have been removed and there is now a greater openness to international trade – both of which have helped India to achieve a solid basis for high rates of economic growth. Nevertheless, there is more to be done both in terms of removing/simplifying counterproductive regulations and ensuring that regulation, where necessary, is well-aimed.

But there was another, second failure that India needed to address i.e. its failure to tap the constructive role of the state. Government intervention in the pre-reform period was excessive and of a restricting kind. But there were huge areas of activity where it could have engaged in constructive public action which could have achieved a lot. For example, the state could’ve been used to remedy India’s under-developed physical (power, water, roads, rails) and social infrastructure (hospitals, schools etc) and to build a functioning system of accountable public services. The reforms of the '90s have done little to remedy this second failure.

Despite its post-reform increase in growth rates, the benefits of this growth are very unequally shared. Poverty rates have decreased, but a lot more could have been achieved had the distributional side (including provision of essential services) got more attention. India’s failures are huge in terms of widespread undernourishment in general and child nourishment in particular. Other big failures include the lack of provision of healthcare to the bulk of the population and a quarter of the population remaining effectively illiterate.

The two main problems facing the Indian economy are 1) removing the disparities that divide the country into the privileged and the rest while continuing economic growth and 2) bringing more accountability into the running of the economy, especially in the delivery of public services and the operation of the public sector. Both these problems stifle India’s social and economic progress and remain essential parts of the unfinished agenda of growth and development of India. 

[The purpose of the ‘Reading Dreze and Sen’ series of blogs is to briefly summarise some of the arguments given by Jean Dreze and Amartya Sen in their book ‘An Uncertain Glory: India and its Contradictions’. The arguments are of the authors alone and the blogs are merely a recapitulation of them in as simple a way possible (the style is deliberately informal). The aim is to help myself to remember the details of these arguments (writing always helps!) but more importantly to hopefully trigger conversation and provoke contestation regarding the issues raised, even if on small forums like facebook :)]

Reading Dreze and Sen: 4 – Why has India's economic growth only barely benefited its poor?

India’s growth has caused tremendous excitement. The living standards of the middle classes (top 20% of the population by income –or, in other words- people like you and me) have improved greatly. But the story is more complex for many others such as the riksha-wala, the domestic worker or the brick-kiln labourer. Dreze and Sen argue that India’s economic growth has barely altered their abysmal living conditions.

For example, between 1993-4 and 2009-10, the average per capita rural expenditure (average expenditure of a rural person) increased at the very very low rate of 1% per year (and even for urban areas the figure was only 2% per year). There has been a slowdown of real agricultural wages in the post-reform period[1]. The growth of real wages for other parts of the economy has also been relatively slow, especially for casual or so-called ‘unskilled’ workers. The contrast to China is striking - real wages in manufacturing in China grew at 12% per-year (!!) from 2001-10, compared with 2.5% per year in India. 

The rate of poverty decline in India has been much slower than in other developing countries as a whole in the last 20 years, despite economic growth being much faster in India. 

But why has economic growth in India led to such a small increase in the wages and incomes of the poor?

One important reason is India’s economics is propelling a ‘jobless growth’ i.e. a failure to generate employment. In India, the rapid economic growth in the last 20 years has been driven by ‘services’. And a large part of the growth in services has been heavily concentrated in skill-intensive sectors (like software development, financial services and other specialized work) rather than in the labour-intensive sectors.  This has enabled the more educated section of the workforce to earn much higher wages and salaries. But the bulk of our workforce is not  involved in services, but is instead engaged in agriculture or other sectors (this includes the ‘informal sector’ which employs 90% of our labour force). Here, wages and productivity are very low.

Dreze and Sen state that India’s lack of progress in education and healthcare also prevents people from entering and flourishing in general manufacturing jobs. The progress of living standards is extremely slow (living standards include longevity, health security, literacy, educational opportunities, child undernourishment, social status etc). For example, India has a higher proportion of undernourished children than almost any other country in the world, even after 30 years of rapid economic growth. Many countries have made huge improvements in health and nutrition status of their respective populations in a shorter time, even with lower rates of economic growth (The following blogs will say more about this).

The authors argue that for economic development to take place, India needs not just growth-friendly institutions that encourage initiative but it also needs to give a central role to education which is critical to the formation of knowledge and skills (which, in turn, is essential for the process of socio-economic development).  In short, Dreze and Sen stress that it’s essential for India to focus on developing ‘human capital’ because this is crucial for growth and development.  

[The purpose of the ‘Reading Dreze and Sen’ series of blogs is to briefly summarise some of the arguments given by Jean Dreze and Amartya Sen in their book ‘An Uncertain Glory: India and its Contradictions’. The arguments are of the authors alone and the blogs are merely a recapitulation of them in as simple a way possible (the style is deliberately informal). The aim is to help myself to remember the details of these arguments (writing always helps!) but more importantly to hopefully trigger conversation and provoke contestation regarding the issues raised, even if on small forums like facebook :)]

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[1] This picked up after the introduction of MREGA in 2006. 

Reading Dreze and Sen: 3 - A Short History of India's Economic Growth

At the time when Dreze and Sen were finishing their book, India’s growth rate had fallen to 6.2% which was considered by numerous people as a ‘dismal growth figure’. The decline from the previous years’ growth rates of 8-9% was considered alarming. But Dreze and Sen point out that during 2011-12 (when they were concluding this book), India’s growth rate was still the 2^nd fastest in terms of economic growth among all the large economies in the world, trailing only behind China (which had also experienced a decline). Compared to the one-time ‘star performer in the economic field’ Brazil whose growth rate had fallen to 0.8%, India wasn’t doing too badly at all.  But, despite that caveat, Dreze and Sen admit that one needs to take the economic slowdown seriously. This is not because growth is important in itself; its because growth generates resources which allow India to a) expand individual incomes and b) utilize the public revenue to meet social commitments.

The authors go on to give a short history of India’s fast growth. When India gained independence, it moved at a slow (but steady) pace for 3 decades – it grew at 3.5% per year. This was ‘painfully slow’ for purposes of rapid development and poverty reduction. In the 1980s, however, India picked up (and grew at a 5% per year). Following the economic reforms of the early 1990s (led by Manmohan Singh, then the Finance Minister), India made faster progress and established a new norm of RAPID GROWTH. Dreze and Sen stress that the robustness of India’s high growth is undoubtedly connected to the economic reforms of the ‘90s. India hovered between 5 and 6%, went up to 7% and then even crossed 9% for several years (2005-08)!

But even after 2 decades of rapid growth, India is still one of the poorest countries of the world. India’s real income per head is still lower than most countries outside sub-Saharan Africa. As the authors point out, millions in India still lack basic requirements of satisfactory living: be it nutritional food or healthcare, decent work conditions or warm clothes in the winter. Growth alone is unlikely to end these problems, but growth does enable an easier solution to such deficiencies.

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How did India become one of the poorest countries of the world?Dreze and Sen point out that it wasn’t always so. Adam Smith, in his book The Wealth of Nations (1776) attempted to explain the roots of India’s prosperity. When the East India Company gained its first foothold in India, India was famous of its industrial exports (their quality was apparently a cause of concern for European manufacturers!). Even a comparison of wage rates and prices indicates that the real wages of Indian labour in economically active regions were not lower- and sometimes even higher – than those received by their counterparts in many European countries.

The rapid decline of the relative position of the Indian economy took place during the British Raj (this was also recognized by Adam Smith). The decline continued throughout the 19^thcentury and the first half of the 20^th century. Long periods during British rule actually saw the per capita real income of India actually declining! According to a study, the annual growth rate of India per capita income was 0.1% between 1900-01 and 1946-7. The growth rate was positive, but was so only because the dismal GDP growth rate (0.9%) was countered by the low population growth rate (0.8%) which reflected the high mortality rates under British rule. 

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Given this history, India’s post-independence growth rate of 3.5% per annum sure does seem like a positive change. But this growth rate did not bring about any major transformation in people’s living conditions. Till the 80s, there was virtually no reduction of poverty.

This is often blamed on India’s ‘socialist’ planning. Dreze and Sen, however, argue that this was not because of socialism per se, but because of the KIND of policies that India followed. India did not even follow the kind of policies found in Russia or most other Communist countries. For example, one thing that communist countries were committed to was free, universal school education. ‘socialist’ India did not go down that way! As a result, India advanced very little in providing schooling opportunities to its children. Unlike other communist countries, India saw under-allocation of public money to make the country literate. The authors point out that the implication of this – to blame the neglect of school education in India’s planning on ‘socialist planning’ absolves India of its own culpability in this mistake.Interestingly, Dreze and Sen suggest that even India’s economic planning was not very ‘socialist’. Most of the economy was firmly in the private sector and, while the government did intervene in many ways, there was no sweeping nationalization of industries and no land reforms.

Early economic planning failed ‘more completely’, say the authors, in social infrastructure and tertiary industries than in primary and secondary production. Growth rates in the primary and secondary sectors (roughly, agriculture and manufacturing, respectively) were HIGHER in the first 15 years that followed the 1st Five Year Plan (1951) than in the first 15 years post-economic reforms in 1991. The growth rate of the tertiary sector was slower in the first period, as was that of GDP. The notion that planning brought the economy to a halt in the Nehruvian years is not easy to substantiate).

The period of sustained moderate growth came to an end in the mid-60s when India was hit by the worst successive droughts and when it fought 2 costly wars with Pakistan (in 1965 and 1971). Agricultural production crashed and India’s GDP turned negative. This was also a period of significant changes in the politics of economic policy. Nehru (died in 1964) was succeeded by Indira Gandhi who politicized economics. Under her, commercial banks were nationalized (this was chosen for political reasons). Similarly, import quotas and industrial licenses were used to reward her supporters and punishing her opponents! Even the most inconsequential economic activity apparently now needed governmental approval. This had terrible effects on the economy; it a) stifled economic initiatives b) encouraged corruption and c) led to the abuse of power. People paid a huge price for all this.

Things started looking up in the 1980s. India experienced growth acceleration, which was helped by recovery of the agricultural sector. GDP rose to 5% per year in this decade. The green revolution began to show its effects – the agricultural sector grew faster than ever before (yields shot up by 30% in the ‘80s)! Agricultural wages grew, and there was a sustained decline in poverty.

However, the 1980s were also a period of fiscal deficits, trade deficits and foreign debt. This was compounded by rising oil prices and disruption of remittances from the Persian Gulf. India ran out of foreign exchange reserves. A ‘structural adjustment program’ followed under strict conditions imposed by the IMF.

After a while, the policy of cuts in public expenditure (inc social spending) gave way to gradual reforms. The GDP growth rate picked up post-1993 and continued to grow henceforth. The impact of reforms on economic growth in these years was definitely a significant achievement.

Some reforms - such as 1) greater openness to international trade 2) relaxation of internal controls  - occurred fairly early, and other occurred later. Some – such as 1) privatisation of certain public enterprises 2) extensive labour reforms 3) permissibility of FDI in specific sectors- are still being debated. Some people are frustrated by the gradualism of these reforms, but Dreze and Sen argue that these reforms do need informed public debate. Unfortunately, debate about them proceeds along ‘pro-market’ vs ‘anti-market’ lines, whereas these actually require a specific, case-by-case assessment of arguments. The case for specific reforms needs to be judged not by its impact on growth but by their impact on peoples’ lives. Dreze and Sen conclude by saying that one of the main problems with the reforms was not what they tried to do, but with what they did not even ATTEMPT to achieve. This, they say, has extended the deeper biases of the pre-reform period.

[The purpose of the ‘Reading Dreze and Sen’ series of blogs is to briefly summarise some of the arguments given by Jean Dreze and Amartya Sen in their book ‘An Uncertain Glory: India and its Contradictions’. The arguments are of the authors alone and the articles are merely a recapitulation (in as simple a way possible). The aim is for myself to remember them (writing always helps!) as well as to get these arguments out in the public arena and mainstream. The hope is to start conversations regarding the issues raised :)]

Reading Dreze and Sen 2: India's problems are not because of its democratic character, but rather due to a lack of it.

Given that China has done much better than India in using its economic growth for the advancement of public services and social infrastructure (which means the provision of basic social services such as schooling, healthcare, safe water, drainage, housing etc), some people in India are often tempted to think that this is because China is authoritarian and India a democracy. The conclusion that these persons reach is that it is India’s democracy that is to blame for its lag behind China. But Dreze and Sen argue that this needs to be questioned.

They point out that, in China, policies are decided at the top, with little scope for pressures from below (i.e. from citizens like us). It is a fact that Chinese leaders – although authoritarian - have been strongly committed to eliminating hunger and illiteracy, and this has certainly helped China’s socio-economic advancement. But authoritarian political systems like China always remains fragile because government leaders can arbitrarily change their priorities in a counter-productive direction and citizens can do very little about it.

Dreze and Sen stress that the gravity of this danger is made clear by the following example: from 1959-62, a catastrophic famine occurred in China. The regime failed to understand what was going on, there was no public pressure against its policies and so it continued its policy mistakes for 3 years, resulting in the death of 30 million (I.e. 30,000,000) people. This is highly unlikely in a democracy which allows room for public pressure, and in which the government is forced to be more accountable to citizens.

 

Another example they provide of the fragility of the process of economic and social advancement through an authoritarian system is China’s economic reforms in 1979. These reforms involved a huge retreat from the principle of universal healthcare coverage: the proportion of rural population covered by free or heavily subsidized healthcare crashed to around 10% within a few years. In a democracy, healthcare could not have been withdrawn so easily and swiftly. This withdrawal of universal entitlement to healthcare reduced the progress of longevity in China, and China’s large lead over India in life expectancy dwindled over the following 2 decades (falling from a 14 year lead to just 7 years)[1]. 

Being a democracy, India has the advantage of having political leaders who are accountable to its citizens (the UPA regime’s rout in the 2014 elections is a good example of the advantage of being a democracy; if India was not a democracy, its citizens would not have been able to effectively show their disfavor regarding UPA’s policies much less bring about its end). But how much a democracy is able to achieve depends largely on what issues are brought into political engagement i.e. what issues are considered important enough by citizens and are translated into ‘demands’ by the public from the government.

Making certain issues important in the public mind is not easy and does take time (it took many years and the Delhi Gang-rape of 2012 to make women’s right to safety a public demand), but once these issues become a ‘normal’ public demand, they are less capable of being ignored by a democratic government. On the other hand, decisions by authoritarian governments are taken by a handful of leaders at the top and - even when benevolent and public-oriented - can be suddenly and arbitrarily withdrawn. 
   

Given India’s multiple problems, some may be tempted to demand that India gives up or reduces its commitment to democracy for which so many have fought and out of which so much good has come to India. But the continuance of India’s problems is not because of democracy, but instead because MORE use has not been made of the opportunities offered by a political democracy and a free society to solve the problems that so many Indians continue to face.

[The purpose of the ‘Reading Dreze and Sen’ series of blogs is to briefly summarise some of the arguments given by Jean Dreze and Amartya Sen in their book ‘An Uncertain Glory: India and its Contradictions’. The arguments are of the authors alone and the blogs are merely a recapitulation of them in as simple a way possible (the style is deliberately informal). The aim is to help myself to remember the details of these arguments (writing always helps!) but more importantly to hopefully trigger conversation and provoke contestation regarding the issues raised, even if on small forums like facebook :)]

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[1] Chinese authorities eventually reintroduced social health insurance on a large scale from around 2004. 

Reading Dreze and Sen: 1 - India needs to strive for more than economic growth

There has been some slackening of the growth rate of India’s economy very recently (which is partly related to the global slump). But Dreze and Sen point out that even with its diminished growth rate India is still one of the fastest-growing economies of the world. This is something that we have to keep in mind – despite the hue and cry about an ‘economic slowdown’ in India, our growth rate is still not THAT bad. 
         But still, they agree that India should strive for higher, faster growth. This can be a huge source of strength for it as the fruits of economic growth can be used for the advancement of human lives.

Although agreeing that India has achieved a lot since Independence, both economically and socially, Dreze and Sen emphasise that there is scope for A WHOLE LOT MORE. There have been major shortcomings and breakdowns – even though the privileged as well as our media tends to overlook these. The neglect of these problems in public reasoning [say, in debates on news channels or in our general public consciousness] is harmful because in a democracy it is usually through such discussion and understanding that serious problems are addressed. Although we must celebrate India’s economic progress, one must also remember that its societal reach has been very very limited.

One serious issue is that income distribution in India has been getting more unequal in recent years – this is something we share with China. But China has witnessed a rapid rise in real wages from which Chinese working classes have benefitted. In contrast, India has had relative stagnant real wages.   

A second issue is that the public revenue generated by rapid economic growth has not been used to expand social and physical infrastructure in a determined and well-planned way. In this, India is far behind China.

Third, despite its economic growth, India continues to lack essential social services for a huge part of the population. Schooling, heath-care, provision of safe drinking water and drainage are some examples of crucial social services. 

Another problem is that while India has overtaken other countries in terms of its real income, it has been overtaken in terms of social indicators by many of these countries - even by some of its poorer neighbours! 
For example, India has caught up with China in terms of GDP growth but it lags far behind China in terms of longevity (how long people live), literacy, child nourishment and maternal mortality. In South Asia itself, a much poorer Bangladesh has overtaken it in terms of social indicators (such as life expectancy, immunization of children, infant mortality, child nourishment and girls’ schooling). Even Nepal is catching up with India (inspite of its GDP being just 1/3^rd of India’s)! 20 years ago, India used to have the 2^nd best social indicators among 6 South Asian Countries (i.e. among India, Pakistan, Bangladesh, Sri Lanka, Nepal and Bhutan) – now.. it’s the 2^nd worst (ahead only of ‘problem-ridden Pakistan’)!  

So, while India has been climbing up the ladder of per capita income (average income of a person per year has been increasing), it has been slipping in terms of social indicators.

Economic growth generates income. But in India, the income generated by growth has been unequally shared (to put it simply, the rich get more than the poor). Moreover, the resources created have not been used to address the social deprivation of the poor and marginalized.

There is much work to be done – India has to make use of the fruits of economic growth a) to enhance the living conditions of the people and b) to reduce the massive inequalities in India’s economy and society.

Apart from that, India needs to address its far-reaching failure in governance and organization. One instance of this is the mismanagement of the power sector – most of us have suffered from India’s persistent power failures and some of us may know that 1/3^rd of India’s population has no electricity at all! This is a massive failure (only 1% of China’s population suffers from this problem). But the sad state of the power sector is only part of the serious failure to provide good physical infrastructure. Similar deficiencies can be seen in water supply, drainage, garbage disposal, public transport, and so on.

So, Dreze and Sen conclude that while maintaining a consistently high growth rate is surely important, India needs to strive for something larger than that - It needs to utilise the fruits of its growth to address the disparities and deficiencies mentioned above.     

[The purpose of the ‘Reading Dreze and Sen’ series of blogs is to briefly summarise some of the arguments given by Jean Dreze and Amartya Sen in their book ‘An Uncertain Glory: India and its Contradictions’. The arguments are of the authors alone and the blogs are merely a recapitulation of them in as simple a way possible (the style is deliberately informal). The aim is to help myself to remember the details of these arguments (writing always helps!) but more importantly to hopefully trigger conversation and provoke contestation regarding the issues raised, even if on small forums like facebook :)]