Why Growth Matters (16 page)

The reference to Coca Cola is no better, serving as a cheap shot against multinational investment; but it also betrays the assumption that Coca Cola is drunk by the elite or the Westernized middle class, not by the truly poor. It is more likely, however, that the former derive their caffeine from espresso coffee as well whereas the poor are the ones who must depend on Coke instead! (p. 199)

In fact, we would go further and argue that the inefficiencies caused by pre-reform policies hurt not the rich, but the poor and the lower middle class. This is because the rich manage to insulate themselves against the inefficiencies. Thus, take the Drèze-Sen derision of concern with whether private operators should be allowed to run city buses. Anyone who has had to ride for an hour and a half in a Delhi bus—as Bhagwati did twice a day, from his small sublet in the suburb of Motibagh to Delhi University—will not scoff at the notion that one might improve the service by letting in the private sector; only those who enjoyed high salaries and consulting incomes and drove Fiats could insulate themselves from the question of efficient city bus service. Similarly, if reforms could improve the electricity supply, that would help the poor man who slept on a charpoy and used a small portable fan to cope with the heat of the Delhi summer, by reducing the frequent interruptions in electricity supply that made the fan inoperative. The rich, on the other hand, had their own generators that took over during the interruptions of electricity supply, so they could continue sleeping in their air-conditioned bedrooms.

Yet another populist myth, propagated in the Western media and repeated often by left-wing commentators in India, is that the Bretton Woods institutions that were captive to the so-called Washington Consensus imposed the reforms on India. This is yet another epithet used by Joseph Stiglitz, who was vice president of the World Bank and oversaw its activities in many developing countries.
¹⁰

However, Washington Consensus is nothing but Washington Conceit. Proposals for freer trade worldwide, and for promoting prosperity in India and other developing countries, owed to theoretical and empirical work that was developed in the early 1960s by Indian economists, and then influenced thinking and policy at the World Bank.
¹¹
In one of his early papers written before he started expressing skepticism of free trade, Dani Rodrik said that the World Bank had produced no basic research: he was indeed right.

Reforms as the result of something called the Washington Consensus would have an extra edge in India, where many are keenly aware of sovereignty and, on the intellectual Left, resent the United States.

But it makes no sense to say that the reforms were exogenously “imposed” from Washington, whether by the Bretton Woods institutions or the US Treasury. The crisis in 1991 provided an opportunity to change course. Ever since Bhagwati and Desai (1970) provided the agenda for reform that the post-1991 reforms would begin to implement in earnest, it was
domestic
thinking and writing, and the growing sense that Indian policy makers had shot themselves and the economy in both feet with counterproductive policies that drove home the need for reforms. A significant part of the conditionality attached to the loans secured by India from the Bretton Woods institutions simply underlined what India itself wanted to do. In fact, the Bretton Woods institutions wanted to push further—for example, introducing a proper exit policy for the firms and an end to licensing of consumer goods imports in the early 1990s—but were unsuccessful because of Indian domestic political constraints. These, too, were matters on which many reform-minded economists from India had written for years earlier.

If there is still any doubt about this, just ask: If this was unpalatable and imposed exogenously, why did India not revert back to its bad old ways once the crisis was behind it? In fact, successive governments only reinforced the reforms, though with varying boldness and pace. Panagariya was at the World Bank from 1989 to 1993 and knows firsthand that after the first structural adjustment loan of December 1991, which concluded in December 1992, the World Bank chose to lend to India not because the latter accepted its conditions but because the Bank
wanted to stay involved in the country. It was the World Bank that needed India rather than the other way around.
¹²

It is pertinent to quote the late Prime Minister Narasimha Rao on this subject since it was during his tenure that the reforms were launched. Rao's reluctance to say almost anything about the reforms is well known. But when asked whether the reforms had been undertaken under pressure from the International Monetary Fund and the World Bank, he is reported to have said:
¹³

The reforms initiated by my Government were designed both as a measure to meet an immediate situation as well as a long-term strategy for the country in the changed world conditions.

We thought that these reforms were necessary and this has now been confirmed and has acquired a national consensus cutting across political parties.

However, to say that they were made at the behest of the World Bank and IMF is not correct.

We have evolved a model which is suited to our conditions, which is being termed as the middle way and Market Plus.

India's experience in launching reforms is no different from that of Russia and China. As Padma Desai, a leading economist expert on Russia, has observed, Mikhail Gorbachev decided that the Soviet Union could not go on with the old policy framework under which the country was declining rapidly. Their reformers drew intellectual inspiration from several sources. What did the Washington Consensus have to do with it?

Just as the Indian and Soviet reforms were therefore endogenously arrived at, so were those in China. The Washington Consensus had nothing to do with the reforms in these three major countries.

Dear Countrymen, to achieve this ambitious target [of doubling India's per capita income in ten years], we have to undertake many important reforms in our economy. At the same time, we need to implement necessary reforms in our administration, our judiciary, in education and in other areas. Reforms are the need of the hour. . . . To reform is to turn the inevitability of change in the direction of progress. To reform is to improve the life of every citizen. Take, for example, the reforms in the power sector. . . . These will... ensure adequate availability of power for increasing production and employment. Similarly, the reforms that we are implementing in the telecom sector will enable us to provide cheaper telephones, mobile phones, and Internet services in all parts of the country. There is no scope for either apprehension or fear about economic reforms. I remember that some people had expressed similar fears even during the Green Revolution. These fears later proved to be baseless. . . .

I urge our farmers, workers, other producers, industrialists, and our intelligentsia to contribute to building a consensus in favor of economic reforms.

—
Prime Minister Atal Bihari Vajpayee in a speech in Hindi
from the Red Fort on Independence Day, August 15, 2000

I
n
Part I
, we emphasized that growth is necessary for alleviating poverty in a country that starts out poor, that growth reduces poverty directly by pulling the poor into gainful employment, and that it facilitates additional poverty reduction by generating revenues that enable the financing of redistributive programs principally aimed at the poor.
¹
We also demonstrated that the growth-centered strategy for alleviating poverty, with these double-barreled outcomes reinforcing
each other, worked once the reforms introduced significantly since 1991 turned India from a slow-growing economy to a rapidly growing one.

Therefore, the reforms that India has undertaken so far to accelerate growth and to additionally address the plight of the poor through the now-feasible redistributive antipoverty programs have gone some way toward pulling the country out of a state of hopelessness that prevailed until 1980.
²
Yet, the process of reforms remains a work in progress, and a lot more still must be done.

Since independence, Indian planners and politicians have chosen to attack poverty through both growth and redistribution. Because the level of income at independence was extremely low and increased by only a small amount until at least the 1980s due to slow growth, the revenues available for redistribution remained meager. However, with growth having accelerated, especially since 2003–2004, more generous amounts of revenue have accrued to the government, making large-scale redistributive programs, such as the National Rural Employment Guarantee Scheme, possible.

While this is good news, 300 million or more citizens remain below the official poverty line. Moreover, since the official poverty line is itself set at the subsistence level, many among the officially non-poor are far from having a comfortable existence.

Therefore, the need for sustained and accelerated growth, which is progressively more inclusive in its impact, remains acute. Likewise, the redistributive programs must be made more effective even as they expand with the intention of providing greater benefits to the poor.

This strategy calls for future reforms to proceed on two tracks:

       
•
  
Track I: reforms aimed at accelerating and sustaining growth while making it even more inclusive.

       
•
  
Track II: reforms to make redistributive programs more effective as their scope widens.
³

The liberalization program since 1991 has paid off handsomely. India grew at a striking 8.5 percent annual rate during the eight years spanning
2003–2004 to 2010–2011. Therefore, at first blush it may seem that the battle for Track I reforms has already been won and nothing more need be done.
⁴
This may even be the view of some within the current United Progressive Alliance (UPA) government, which came to power in 2004 and has chosen to focus almost exclusively on the promotion of social programs—Track II policies.

Yet, it would be wrong to think that Track I reforms have been fulfilled. If truth be told, India is far from done on Track I reforms for two broad reasons. First, the potential for growth remains grossly under-exploited. The economy remains subject to vast inefficiencies. Removing these inefficiencies offers the opportunity not only to arrest the recent decline in growth but also to push the economy to a double-digit growth trajectory. Second, the poverty reduction that
directly
results from growth, in terms of enhanced wages and employment opportunities per percentage point of growth, can be increased: India can get a larger bang for the buck.

As regards the first issue, productivity remains well below the potential. For instance, according to a 2007 Government of India report, 57 percent of the workers were employed in low-productivity agriculture, which produced only 20 percent of the total output in 2004–2005. And even within industry and services, 84 percent of the workers were employed in enterprises with fewer than ten workers, and these enterprises are generally characterized by low productivity.
⁵
Employment in larger private-sector enterprises has been extremely low in comparison to other countries such as South Korea, Taiwan, and China and has been growing at best at a snail's pace.

In services, firms with four or fewer workers accounted for 73 percent of the employment but only 35 percent of the value added in 2006–2007. Even more dramatically, approximately 650 of the largest service sector enterprises produced 38 percent of the value added but employed only 2 percent of the workers that same year. Larger firms also show dramatically higher growth: value added grew at the annual rate of 28.2 percent in firms with five or more workers but only 4.5 percent in the smaller firms between 2001–2002 and 2006–2007.
⁶

Manufacturing exhibits a similar pattern. The point is best illustrated by comparing the employment patterns in apparel in India and China. In 2005, 90 percent of apparel workers in India were employed in enterprises with eighteen or fewer workers. In comparison, only 2.5 percent of the Chinese apparel workers were in such small enterprises the same year. At the other extreme, India employed 5.3 percent of the apparel workers in enterprises with more than two hundred workers, compared with 56.6 percent in China.
⁷

Clearly, huge scope remains for improving efficiency and accelerating the growth rate through progressive expansion of employment in the formal sector. The productivity figures are per worker, of course, rather than for total factor productivity. But total factor productivity is certain to yield the same conclusion because the astonishingly small enterprises are characterized by inefficiencies that should translate into overall inefficiency in that they get much less for the same input than the large enterprises.

Our second reason for continuing with additional Track I reforms is that they would make growth even more inclusive. While all evidence indicates that the acceleration in growth since the 1980s has helped reduce poverty,
⁸
this effect is far more muted in India than in countries such as South Korea and Taiwan in the 1960s and 1970s and in China more recently.

The key reason for this difference has been the nature of the growth. Whereas growth was driven by rapid expansion of highly productive large-scale firms in labor-intensive sectors, such as apparel, footwear, toys, and light consumer goods, in these other countries, it has been propelled instead in India by capital-intensive and skilled-labor-intensive industries, such as automobiles, two-and three-wheelers, engineering goods, petroleum refining, telecommunications, and software. This difference has reflected itself in a rapid movement of workers out of agriculture into gainful employment in manufacturing and services in South Korea and Taiwan in the 1960s and 1970s, and in China more recently, but in a continued heavy dependence of workers on agriculture in India.