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Dirty D-word & unspoken subsidy

Name: Pranab Bardhan

Studied in: Presidency College, Calcutta University and Cambridge University, England

Inspired by teachers: Bhabatosh Datta, Dipak Banerjee, Amartya Sen, Robert Solow, James Meade

Taught at: Massachusetts Institute of Technology, Indian Statistical Institute and Delhi School of
Economics before joining Berkeley

Prominent students who took
his class
: Stan Fischer (former governor of Bank of Israel), Larry Summers (former chief economist of World Bank), Bhaskar Datta, Amitava Bose, Eric Verhoogen

Interests: Films, literature,
politics, writing opinion pieces in newspapers and blogs

The world knows him as an economist whose expertise spans rural institutions in poor countries, political economy of development policies and international trade. But Pranab Bardhan, professor of graduate school in the department of economics at the University of California, Berkeley, has another attribute — storytelling — that’s known only to his friends and students.

Be it first-hand experience of the streets in China around the time of the Tiananmen Square crackdown or the intricacies of the behaviour of the academic elite in Oxford and Cambridge, or his childhood in Santiniketan and Calcutta, Bardhan has a repository of stories that have enthralled his students and colleagues for years.

“Some of them prodded me to write these stories and that’s what I have done,” Bardhan told The Telegraph, explaining the trigger behind his memoir in Bengali, Smriti Konduyon (Memory Scratching), which has been serialised in Desh, the Bengali magazine published by the ABP Group, for the last one year. The book is scheduled to be released by Amartya Sen at Rotary Sadan on December 30 at 6pm.

In town for the release of the book and some lectures, Bardhan spoke to Devadeep Purohit. Excerpts from the interview:

Politics of dole

Business people use this expression — politics of dole — to describe money spent on anti-poverty programmes and I have objections to this term. Most of the subsidies of the Indian government are actually to the business class and middle and upper classes, but that is not regarded as dole. Giving help to the poor for education, health, food or employment is called dole and to me, this is really tendentious. This serves to distract from the huge amount of subsidies and handouts of the government to better-off people in the form of petroleum subsidies, diesel, fertiliser, LPG and several other subsidies. There are estimates that suggest that the amount of subsidies for better-off people is about three to four times more than the money the government spends on anti-poverty programmes.

Secondly, I am not sure the recent Assembly election results proved that giving help to the poor does not work. Both in Madhya Pradesh and Chhattisgarh, the incumbent government won and they had some successful anti-poverty programmes (including, for example, employment and food security programmes). It so happens that in Rajasthan, where the Congress government focused on some measures for the poor, it did not succeed electorally… One does not know whether (Ashok) Gehlot lost just because he was depending on anti-poverty programmes, some people say that his party has been undermined by internal faction fights.

Thirdly, some of these programmes are not always helping the poor. If they are effectively delivered, not just the poor people benefit, the entire economy benefits at least through productivity rise. So, one should not look upon them only as unproductive doles. The problem is, the way they are delivered in most parts of India, there is a lot of leakage and inefficiency. One should try to stop those.

But this is not an argument that effective service delivery to the poor will be enough for bringing about economic growth, you also need to build infrastructure — roads, electricity and ports.

Sen versus Bhagwati

The media turned an honest debate into a political football and misinterpreted the intentions of both sides. I have seen statements in the media that Sen and (Jean) Dreze are providing the rationale for Congress policies, whereas Bhagwati and (Arvind) Panagariya are providing that for Modi or the BJP.

One should not forget that Sen and Dreze are often very critical of the Congress party. Also, Bhagwati has said some good things about Modi, but he doesn’t support everything about him.

Let me say that people are underestimating the similarities in their positions on the policy issue and distorting their genuine differences. The similarities are, as I understand it, both sides want reforms, both sides want growth and both sides want reduction in poverty. On these three things, both sides agree.

The difference is in terms of the methods of achieving those objectives. Bhagwati, as I understand it, says you cannot on a sustainable basis help the poor unless you focus on growth. It is the growth that will bring down poverty, that is the argument. Directly, growth provides more jobs to the poor. Secondly, once growth happens, it generates more tax revenues and there will be more to spend on the poor.

I think these are generally correct propositions. But while the first proposition is theoretically correct, it so happens that in India growth has not created that many jobs. The economy has grown at a fast rate between 2003 and 2008-09, but not enough jobs have been created. Even Gujarat’s high industrial growth in recent years has largely involved expansion of the petro-chemical sector, which is highly capital-intensive.

Bhagwati and his associates have sometimes said that growth has not created enough employment in India because of bureaucratic controls, particularly labour regulations. I personally think that while labour laws may put some restrictions, it is not the main reason why employment is not growing. For employment growth, we also need basic infrastructure — electricity, roads — and adequate vocational training and skill formation among workers.

The second proposition is also right that growth will result in more revenues and you can spend the extra revenue on poor people. But there is no guarantee that just because the government has extra money, they will spend it on poor people.

In a sense, Dreze and Sen are trying to create public awareness of the importance of using this extra revenue for the poor. If nobody demands it, nobody protests about it, much of the handouts will go as they have always gone to the better off.

So the Bhagwati position, even when correct, may not be enough to transform the lives of the poor. You may need to have specific policies and provisions of helping the poor, otherwise poverty will not automatically decline at a fast enough pace.

I largely agree with Sen and Dreze. But some people have got the impression that their view is that growth is important, but if you do more on health, education and nutrition, that will provide more growth because people will be more productive.

But I think as I have already mentioned that itself may not be enough (as the experience of Maoist China or Kerala and Sri Lanka in the recent past shows). You need particularly better infrastructure — like electricity and roads — and a better investment climate, for which you may need less controls, regulations and bureaucratic delays.

It is also the case that just pushing more money into anti-poverty programmes is not enough, the delivery structure and governance need a major overhaul. But Dreze and Sen point out some remarkable improvements in a few states in recent years in this matter.

India catching up with China

These are the two largest countries of the world, with ancient agrarian civilisations, and with the adoption of sharply different political and economic regimes, and so they are often compared. Around 1990, per capita income was very similar between the two countries. Since 1990, China has grown at a much faster rate and also removed poverty at a much faster rate than India. Now the question is often asked, will they converge? On that question, the point is: converge in what?

I think most people have in mind converging in terms of the growth rate. There are reasons to think that the Chinese growth rate will go down, say in the next 15 years.

One, because the Chinese population is ageing faster whereas India is a much younger country. Younger people are more productive than old people. So on that ground alone, some people think that India’s growth is going to go up and Chinese growth is going to go down because of this demographic advantage for India.

But I should qualify this, India’s demographic advantage is only a potential advantage. Now, the question is whether that potential will be realised. Yes, there will be a lot of young people. But for them to contribute to the economy, you have to give them good jobs. Unfortunately, fertility rates being what they are in different parts of India, this bulge of young people will be in less well-governed states like Bihar, Uttar Pradesh — where fertility rates are high — but not in the south, where the fertility rates have already gone down quite a bit. So, if this large number of young people in different parts of north India do not get good jobs, it might be political explosive as there will be a huge number of unemployed people.

There is another argument that over time the Chinese savings rate will go down and to that extent the help that economic growth gets from savings will not be there.

The third reason is in order to grow faster, the Chinese will need new innovations. As of now, there is no comparison between innovations in the US, Japan, Germany and China. India, of course, is innovating less than China.

Though the Chinese are trying in a big way through investments in research and development, and they are expected to do better than us, one doesn’t know how far they will be able to compensate for the other reasons why growth will go down.

Right now, India is growing at 4 to 5 per cent and I don’t see any reason why India cannot grow at 7 to 8 per cent. So, the Chinese growth rate is likely to fall in the next 15 years, while India’s average long run growth rate will be higher than today’s level and so they will come nearer.

But mere convergence of growth rates does not mean that the gap in levels of living in the two countries will converge. Even if their growth rates are the same, the gap in levels of living will still remain. For this gap to be bridged, India has to grow at a substantially faster rate than China, but that doesn’t look realistic.

Concern about India’s reform agenda

I am not very happy with the focus on the financial sector liberalisation for the last few years. I am largely in favour of liberalisation in the rest of the economy — agriculture, industry, trade — but finance is something different. If you liberalise the financial sector too much, the money can rush out of the country quickly and that can have very bad effect on the economy. Some Latin American countries have suffered from this for quite some time.

In the matter of financial sector liberalisation, India has, for many years, maintained caution. But for the last two to three years, it seems that caution is going down. For example, the macro managers are allowing large short-term dollar denominated debts, which I think can be very dangerous. Many economies have suffered when their short-term dollar denominated debts have gone out of control.

On the issue of short-term debt, capital flows and financial sector liberalisation, I think there should be much more careful and extensive debate in the country.

Change in Bengal

I haven’t seen substantial change either in industrial expansion or in investment in infrastructure. I also don’t see any substantial change in skill formation.

I think the issue of land acquisition, on which the earlier government had problems in the context of industrial expansion, is yet to be resolved. Though it seems some sense is dawning on the new government that the problem has to be addressed. The new Land Acquisition Act that the central government has adopted is flawed in many respects, but it is a step in the right direction.

Apart from land, one needs capital. In Bengal, local capital and entrepreneurial spirit are not that strong. The business sector has not been healthy for quite some time, the state has a lot of declining industries, the declining industries have not been replaced by new thriving industries.

So, there is a long way to go. Land is one constraint, capital is another and infrastructure is another constraint.

What Bengal needs now is a sensible discussion and a concerted approach by all. There are many intelligent people in all political parties in Bengal. Besides, there are people who are not political people at all. Let’s all sit down together and thrash out the issues.

But unfortunately, the situation in Bengal for a long time is highly politically polarised and that is not helping a sensible discussion. This political polarisation has been a major problem in Bengal. Now, Trinamul has won the elections both at the state and panchayat levels, but one has to see whether they will be able to give leadership in new directions.

Taking the middle path

I don’t really believe that Left and Right labels mean much. I think one has to be clear about one’s objectives. I would consider myself Left if by Left people mean a commitment to social justice. But if the meaning of Left implies necessarily favouring the state over markets, I am not Left.

I personally think that the market has a lot to contribute in coordination of resource allocation and disciplining inefficiency. If you don’t allow market competition, then the state tends to be a monopoly and that might be exploiting the poor as much as a private monopoly. So, the market to me — particularly in the sense of active competition — is important. As soon as you hear this, you may say this person is not Left. This is the wrong way to look about it.

Most of us want social justice. But the question is, how do you get there? What are the issues?

There comes the importance of the middle way. I will say both the state’s and market’s roles are important. In that sense, I am in favour of both, and eager to curb the excesses and distortions of both.

A large part of the world is realising this. Take for example the case of China. China is a so-called communist country, but China has gone for capitalism and for market in a much bigger way than India. This is a peculiar situation today, that the most vigorous pursuit of capitalism in the world today is being presided over by a party which calls itself communist. That means, in reality if not in rhetoric, they are taking a middle way, too. They know that the state has a big role, but they are giving tremendous importance to the market.

It is an example that the most successful way is to take the middle path.

Achieving academic excellence

In India, the education bureaucracy interferes and stifles in every sphere of education — from student admission, curriculum development, rigid exam systems to faculty appointment, promotions and salaries, and research grants.

My support is more for autonomy and avoidance of political interference, if one’s goal is achieving academic excellence.

Total independence, however, to the institution may have its own problems. This might create a low-level equilibrium of mediocrity and cronyism. The good American universities escape this through a culture of competition, and good teachers move to another university if they are dissatisfied with the low-level equilibrium of mediocrity, and that’s true for good students as well.

The mediocrity of education levels in West Bengal has pushed many good students (and faculty) to go elsewhere.

But competition also causes problems and markets often lead to inequality. Say a student from a humble background in Purulia may not be as mobile as students from better-off backgrounds. The way to solve this problem is by providing generous scholarships and student loans, so that every one gets a chance to be mobile.

So, instead of interfering with the affairs of academic institutions, the politicians and bureaucrats should try to create an atmosphere of competition in which even the poorest student get an opportunity. But this is a time-consuming process.