India: Go Micro For Macro Speed

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Mar 2007
, March, 23 2007 - At a time when the Indian economy is registering the highest growth rates ever, the biggest preoccupation now - and rightly so - is to ensure that we are able to develop a model for sustainable growth. We welcome Professor Joseph Stiglitz in Mumbai. At ET, we're privileged to host this breakfast meeting between you and Nachiket Mor of ICICI Bank.

This session is meant to explore issues relating to India's search for a more inclusive model of growth. We would also explore whether a market-based poverty alleviation model could emerge as a key instrument for change - something that Mr Mor has been a big proponent of through his pioneering work in microfinance. Over to you, Nachiket.

NACHIKET:

There is a certain school of thought, at least in India, which says that growth is most important. Let's take some growth figure, say 8 to 9, 9 to 10. Grow fast and increase tax revenues. The finance minister is credited with beating his own deficit target every year. The tax revenue, this year, is well above projections. So the 'fruits of growth' in some senses are going to pay back. So one paradigm is to grow, increase tax revenues, use tax revenues to fund poverty alleviation schemes, like the employment guarantee scheme. What is wrong with this idea?

PROF STIGLITZ:

Let me go back one step and generalise. In general, the trickle-down economics doesn't work. The fact is that if the economy grows, it isn't inclusive, and sometimes, the poor can be worse off. It depends on policies. If there's more financial and market integration, when you have competition from American cotton, the prices will be pulled down. So in a trade agreement the country might get richer, but the poor might actually be worse off.

NACHIKET:

You had referred to it in one of your articles, in the South African situation , the flexible labour laws kept driving the minimum wage down. It might have helped achieve overall growth, but perhaps didn't do much for inclusive growth.

PROF STIGLITZ:

Exactly, you leave out the bottom. The notion that it is automatically inclusive is clearly wrong. The more sophisticated version is the one you've got - it isn't automatic inclusion . So, can we do it only by using tax revenues? I think tax revenue expenditures can make a big difference, but it is not enough. In the sense, people don't want a handout. It's a question of self-respect and also a question of 85% of the country in the rural sector, if they're left behind you can't have a sustained development.

NACHIKET:

There's also this anxiety about how one could build a tax transfer to get the money across... one of our former Prime Ministers had stated that for every dollar that is sent out from New Delhi only 15 cents actually reach the destination. Is there that anxiety as well?

PROF STIGLITZ:

Yes, that's a good point. It's more efficient to make people more productive than to make them receive transfers. The transfers system has two wedges. There's always a cost of raising tax revenue and then the cost of distributing the money. It certainly makes more sense to increase the livelihoods.

NACHIKET:

Are there also other reasons for concern here? Because (otherwise) the pure pro-growth person might say (that by thinking about inclusive growth) we're getting distracted by going back to balanced regional development and competitive taxation policies. The other side says (that even if you are concerned only about growth) if you keep the poor out they'll rise-up in revolt. And, in addition, you could face labour shortages . There's already anecdotal evidence that BPO sector is facing labour shortages. It's a sector that is very controversial from the US point of view (because they are displacing US workers) but here they're not getting the kind of talented people they expected to get. What are the dangers of growing without being inclusive?

PROF STIGLITZ:

What you have just pointed out are the key problems. One is that in a democracy, there are too many people who are left out and this leads to social and political tension and that's a function of the degree of disparities. We've seen in extreme cases in America, the rich natural resources are used by two-thirds of the people and the others are crying out, why don't they have a share in that? The other point is also correct - just as you have growth, you need a trained labour force. What has made India successful in the whole IT boom? The trained people.

But, underneath that you need a whole level of education and you see that in a particular way, the standard theory had predicted that globalisation would bid up unskilled wages in emerging countries and would, therefore, lead to lessening inequality. But that's not happening. One of the interpretations is that globalisation requires a certain level of skill among the unskilled. The least-skilled workers are going to be completely cut out and will not be part of the market economy. Unless you start moving people up that ladder you won't have people taking advantage of the benefits of globalisation.

NACHIKET:

Also, even though we are living in a global economy, lack of factor mobility remains a problem and one can't easily import talent. So what then in your view the way ahead? There's always the long-term perspective concerning health, education, but that's 20 years from now. What do we do tomorrow? Do we have to live with this reality for several years, before change happens? The government has indeed increased its expenditure in the Sarva Shiksha Abhiyan (SSA) and the National Rural Health Mission (NHRM) but to me, these look like slow burn measures.

PROF STIGLITZ:

That's where one has to take a comprehensive approach. (There is) no single instrument. Different instruments have different lags. That's where one aspect is the self-help and the microcredit scheme. One could think of those as instruments that can increase well-being of the rural sector very rapidly , if programmed well. It may not be the basis of the long-term solution to the development problem, but it could be an important stage in the process. In other words, the woman who is able to supplement her income by raising chickens or vegetable gardens can have her income increase two-three fold very quickly, say from $300 to $800. It's very little, but it's a massive change in quality of life. They'll harness the human capital and her children would then be able to make the transition into the full-fledged market economy. Raising chickens in villages isn't the basis for long-term strategy for development, but it's a step in the transition. One has to see them not as the end point but a stage. You can't ignore the other stages - with all this focus on microcredit, you have to also focus on the small and medium enterprises.

NACHIKET:

What they call the 'missing middle' , where the jobs are created.

PROF STIGLITZ:

Exactly, because this would not be creating jobs even as they're making a difference to the families , particularly, if it is done as part of a more comprehensive social development programme. We spoke about BRAC (Bangladesh-based NGO formerly known as Bangladesh Rural Advancement Committee) particularly , where they have programmes on women's health, strong schools and legal rights. It has already changed the balance of power. What they've done is very interesting, there is a lot of vertical integration.

NACHIKET:

So you're saying that microcredit is one part of the answer. Let me take you to another area where there's less consensus - the infrastructure piece. What about ports, airports and rural roads? The belief is that if the government is making money it should spend it. Even if it wasn't , given a factor-surplus economy well within the production possibility frontier, a Keynesian sort of approach where deficits are increased should be taken. There's a sense that China has taken that road as it has buried the deficit within banks, unpaid pension liabilities , inside unpaid environmental debts. But it has also said, "I want to build linkage engines and not simply growth engines" . Do you see that as a short-term measure?

PROF STIGLITZ:

I think there is a great scope for infrastructure , I put a lot of emphasis on that, including rural roads. It directly links to incomes farmers receive particularly in a global market where prices are at freight on board (FoB). And if you could do anything to reduce the cost of delivery to ports, it goes directly to the pockets of farmers, if the markets are working well. There are some very clear links which would improve costs.

NACHIKET:

Would you say that the government needs to go and build, because the problem really is which road it should choose? Or, should it go ahead and build all roads? When the government constructed the Golden Quadrilateral, there was muted criticism. But, everyone says now it's a great idea.

PROF STIGLITZ:

If you believe in the virtues of globalisation - larger markets increase incomes and allows for specialisations. What you are doing is creating larger markets, moving up from the village markets to the national market and then to the global market. Historically , the experience has been that in these projects you can waste money. But India is so far away from that stage that I don't think you're worrying about over-investment in infrastructure. In Japan, there may be an argument (for over-investment ), but in India, no way.

NACHIKET:

What about the cities? One of the things about inclusive growth that people believe will happen is that cities will absorb more people. In one of your articles, you had said we should focus perhaps on a second Green Revolution and growth in agriculture. No question that needs to happen but there might be a limit, because of land policies, fragmentation and smaller land holdings, etc. There is however also a concern that even migration into cities will not be easy. Do you think Mumbai is already overcrowded? Hong Kong has these skyscrapers and we don't ? Maybe we can absorb six times more like Sao Paulo. What is your sense?

PROF STIGLITZ:

I think that given India's population, a billion plus, and the difficulties of managing very large cities, along with problems of scale of the city and limited opportunities, finance does tend to be concentrated. Cities act as centripetal forces for industry, moving away from large areas. All the growth industries in US have been outside the cities, even in IT. These centres have become cities like Seattle. Silicon Valley too was outside of San Francisco.

There might be issues of scarcity of land. One of the real challenges India is facing in going forward is the slow growth in agriculture. And there is a possibility that it could be worse.

NACHIKET:

So we're back to where we started, what do we do then? There's one additional concern about the longer run provision of health and education - that if one leaves it to the government it will never get done but if you move everything to the private sector, even with government financing and vouchers, there is the fear that the poor will face exclusion.

PROF STIGLITZ:

I think one has to be very circumspect about the private for-profit provisions of health and education , even if it's financed by the government. The reason goes back to my own work actually, economics of information. These two industries, health and education are by definition, bought uninformed. You go to a doctor because you don't know what is wrong with you. They're fundamentally different from food or other products markets. The markets aren't working well and perhaps will not work well in these areas. When people talk about America and its universities, they're all NGO universities. They're truly not-for-profit . The for-profit universities have been a disaster.

NACHIKET:

What you're saying is there may not be a shortcut around improving government efficiency. You need to work out and find a way in which government delivers what it promises, in a way that's sensible and this must be on the supply side because the demand side may not know what they want.

PROF STIGLITZ:

Some ideas are promising. There are all kinds of partnerships, like public private partnerships (PPPs), government-NGO partnerships, where each one is supervising the other in a way. There are good NGOs who are saying the government isn't delivering the services. An NGO is a watchdog, and the government can be a watchdog too.

NACHIKET:

But you're saying that markets domain is out, it's mainly the values domain and the interest domain which are playing out in a very simplistic way. The markets aren't playing out as much.

PROF STIGLITZ:

Not as much, but I don't want to rule it out completely. In a study I started a long time ago in blood banks I found that the for-profit blood banks had no incentive to make sure the quality of blood was right. Now you can do it, but in the beginning it was difficult , they would get professional donors and alcoholics as well.

NACHIKET:

I hear you on the longer term; now let's see the shorter term, particularly the linkage issues. One thing that I'm personally very passionate about is the issue of access to finance. Otherwise, I feel that you can get locked in your current income. I think the point that you're making in your draft paper is because of surplus labour, etc, there is an opportunity of getting 100% returns . But, because you don't have access to finance you may not make use of that opportunity. In India, that is a huge issue with as many as 400-500 million people without this access. In addition we don't have an identity card or an effective credit bureau for a large part of our population and thus the poor can't build portable credit histories which they can take from bank to bank or from place to place as they migrate in search of work.

PROF STIGLITZ:

Most of the rural farmers have zero labour wage, they're surplus labour so they'll work at a very low wages. And so you'll get what we call the agency theory cost, the monitoring turning into self-monitored , transforming inputs into outputs. The only problem is access to credit. And the thing I joke about, it's not about giving credit, it is about getting it back. That's an information problem, who will pay back and who won't and it undermines the credit markets, you can't have them working without that information. The alternatives , particularly where there's a money lender mafia, is that interest rates are too high that it doesn't make sense. If you bring the interest rates down, they can increase their output and their wellbeing , fairly easy and quickly.

One of the important aspects of BRAC was that they pay a lot of attention to everybody's buying things and selling to other people. Baby chickens die, so they trained women for seven days. Then they improved the quality of feed. We're not just talking about transportation but the whole supply chain.

NACHIKET:

We, as a bank, are trying to catalyse the creation of specialised companies. We are worried about the BRAC style - the same company doing dairy, schools, finance. Our preference is for specialised finance entities and specialised dairy entities. What the finance entity does is that it observes and brings in the right people.

PROF STIGLITZ:

The model needs someone who can pay attention. Since it's the finance that is doing it, they're picking up the tab for failures.

NACHIKET:

In a sense, providing equity, not debt.

PROF STIGLITZ:

It looks like debt, but it's really equity. That mindset is very important. It was important for success of venture capital in Silicon Valley. They asked a question - what do these guys need to bring the product to the market? They have the idea but nothing else.

Moreover, You need to have someone thinking of all the forward linkages. That's what's so impressive about Bangladesh. It's showing up in the macro-indicators . The big success is that these NGOs have worked wonders . You can see it in reproduction rates, literacy rates and in the HDI (Human Development Index). Though poverty remains and big problems aren't solved, but it's an example for the question you posed - what can we do as a next step while we're waiting for twenty years?

ET:

It's been a very stimulating discussion. Thank you, Prof Stiglitz and Nachiket, for taking time off to do this.

Source : Economic Times
 

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