Why Growth Matters (3 page)

Finally, much is made of the so-called Washington Consensus as having driven the shift from the counterproductive policy framework. But this is nothing more than Washington Conceit. The shift in development strategy owed, not to any institutions in Washington, whether Bretton Woods or the US Treasury, but to the theoretical ideas and analysis of actual experience with autarkic policies and mindless interventionism that were the result of domestic experience. That they were then taken over and folded into coherent prescriptions for sound development strategy by Washington institutions, chiefly the World Bank, does not give ownership of these ideas to these institutions.

During the last quarter of the twentieth century, three extraordinarily important countries, India, the Soviet Union, and China, changed their
counterproductive policies that had been based on antimarket fundamentalism and autarkic inward-looking policies on globalization. The changes were self-motivated, as we discuss below, not imposed by Washington. Public opinion and/or the politicians had realized that the “old” model, which some, including Stiglitz and Soros, would like to resurrect in their virtual embrace of what might be called “Jurassic Park Economics,” was not working and a drastic change was necessary.
¹²
“Washington Consensus” was also a popular phrase in the antireform circles because it would galvanize the antireform anti–US imperialism forces that were in retreat by suggesting that the United States, directly or indirectly, was behind the liberal reforms.

It has become fashionable among opponents of the liberal reforms to say that the Washington Consensus has now been replaced by the Beijing Consensus, an ambiguous phrase with little content, but aimed at suggesting that the liberal developmental strategy is now replaced by China's success with a very different state-dominated and state-driven developmental model.
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While China's export-led development appears to suggest that one element of the liberal development model—openness to trade—is part of China's developmental model, many features of China's economy and political regime raise concerns instead of offering a role model. In particular, the huge reliance on the state-owned enterprises (SOEs) has not merely enabled the Chinese regime to have the Communist Party capture these enterprises—which many in the West, and increasingly in China itself, think of as SOBs instead of SOEs—to the advantage of the party functionaries. It has also meant that extensive corruption prevails in China as bureaucrats and party officials seek to put their children and spouses into every enterprise, siphoning a share of the profits themselves. This model is hardly sustainable as the common people begin to resent such corruption and their economic aspirations rise as the Chinese pie grows at an extraordinary pace. The authoritarian regime also denies political agitation for democracy that inevitably is breaking out, as elsewhere. While therefore China has grown dramatically, it is unlikely that the growth performance is sustainable.
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So the mix of political and economic features
that characterizes China is hardly a role model for other nations to adopt for their development.

If growth did follow liberal policies and reforms in the Indian economy, as we argue in this book, still some critics argue that the growth is not “inclusive,” that it has failed to reduce poverty and has not spread to the marginalized groups in society. It is often argued that a policy of redistribution is preferable. This sounds plausible except that the Indian experience, and we might also add the East Asian experience, shows otherwise.
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In 1980, economist Gary Fields, who specializes in poverty, described India as a “miserably poor country.” Yet the reforms that followed, especially beginning in 1991, transformed it from a basket case into a powerful engine of growth, with poverty declining at rates never before observed in the country. Because India experimented within the same democratic framework first with command-and-control and autarkic policies and then with a move away from those controls and toward a greater role for markets and globalization, its experience offers important lessons to other developing countries regarding their development strategies and for the many government aid budgets and NGOs that seek to end poverty in the developing world.

Common sense suggests that we should expect a rapidly growing economy to create more jobs and opportunities for the poor to escape poverty, whereas slow-growing economies would hardly do so. Poor and stagnant economies can no more offer hope to the poor than private-sector enterprises making losses can offer additional jobs. Pro-growth advocates are often confronted with the failure of “trickle-down” economics, which sounds like the Earl of Nottingham and his courtiers and vassals are eating venison and roast legs of lamb at the sumptuously endowed dining table and crumbs are falling to the serfs and dogs below. We don't care for the concept or analogy. Instead we use the now-popular phrase “pull-up” growth strategy, which much better describes what we have observed: a radical, activist set of policies to accelerate growth and to pull
up more of the poor into gainful employment. In fact, with the shift to systemic reforms after the 1991 crisis, Indian growth did take off dramatically and poverty declined as well. And as we demonstrate, the benefits extended to the marginalized groups, with poll data also confirming that these groups actually consider themselves to be better off.
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What is the mechanism by which this happened? Bhagwati argued nearly a quarter century ago that growth would create more jobs (in the rural sector itself) and opportunities for gainful improvement in income (as, for example, through migration to growing urban areas), directly pulling more of the poor above the poverty line and additionally would allow the government to pull in more revenues, which would enable the government to spend more on health-care, education, and other programs to further help the poor.
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Growth therefore would be a double-barreled assault on poverty.

The pre-reform policies produced little growth and therefore undermined any attempt at using growth to affect poverty directly. Slow growth failed to generate revenues, so the ability to finance health and education expenditures was stymied as well.

Why did the Indian government not find the moneys to finance these objectives by raising taxes or diverting, say, military expenditures? It is revealing that Mahbub ul Haq of Pakistan, who reminded us often how arithmetic showed that one less military tank would mean several additional primary schools, joined the cabinet of the military dictator Zia ul Haq, under whom military expenditures did not diminish, Islamism was encouraged, and education of the people was neglected. Arithmetic cannot solve the problem of lack of resources; only appropriate pro-growth policies will.

Besides, raising tax rates runs into the usual problem that this remains an unpopular course of action in democratic countries. This resentful attitude to taxes, unless they are to be paid by others and not oneself, is beautifully captured in the Beatles song “Taxman”:

       
Let me tell you how it will be

       
There's one for you, nineteen for me

       
'Cause I am the taxman, yeah, I'm the taxman

       
Should five per cent appear too small

       
Be thankful I don't take it all

       
'Cause I'm the taxman, yeah I'm the taxman

       
If you drive a car, I'll tax the street
,

       
If you try to sit, I'll tax your seat
.

       
If you get too cold, I'll tax the heat
,

       
If you take a walk, I'll tax your feet
.

The closing stanza says it all:

       
Now my advice for those who die

       
Declare the pennies on your eyes

       
'Cause I'm the taxman, yeah, I'm the taxman

       
And you're working for no one but me
.

Growth raises revenues without government's having to raise tax rates, as India experienced with the reforms since 1991. Only then, as our analysis shows, could the Indian government finally find the moneys to adequately fund the health-care, education, and other programs to help the poor.

Redistribution, as distinct from growth, cannot be the answer to removing poverty. In countries such as India, China, and Brazil, the large numbers of the poor mean that redistribution will do little and that, too, will not be sustainable. A peasant may get no more than another
chappati
or burrito a day: we quote the great communist economist Kalecki of Poland, who told one of us in 1962 that the problem for India is that “there are too many exploited and too few exploiters.” The pie has to grow; growth is a necessity.
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We also discuss in this book that, while India has demonstrated that growth can be inclusive in its direct impact, the India policy framework, because of its bias against large-scale enterprises and rigid labor legislation that militates against hiring more labor, has not gotten as much “bang for its buck” as the Far Eastern economies. In short, both growth and its inclusiveness could have gone further if only these additional reforms had been undertaken.
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The reforms are works in progress. The
counterproductive policy framework was so extensive, and the difficulty of introducing reforms in a democratic framework is so arduous, that we have described it as “cleaning up after a tsunami.”

We have called the reforms that produce growth and directly impact on poverty Track I reforms. Those that are aimed at providing health care and education, among other programs, such as guaranteed employment in rural areas, all made possible by increased revenues, we have called Track II reforms. Track II reforms can stand only on the shoulders of Track I reforms; without the latter, the former cannot be financed. Indian experience therefore shows how, starting with the post-1991 Track I reforms, revenues were generated that would finally enable the country to undertake the Track II reforms on a significant scale.

Interestingly, the sequence where Track I reforms led to revenues that made Track II reforms possible can also be observed in the case of Brazil. Track I reforms were undertaken by President Cardoso, whose successor, President Luiz Lula, stood on Cardoso's shoulders when he undertook Track II policies that additionally helped the poor.

Track II reforms involve social engineering, and some of the issues in health care and education are considered at length in
Chapters 16
and
17
; they are central today to delivering the poor from poverty and into well-being by judicious use of the new revenues (and for that matter, even inflows of foreign aid). We hope to demonstrate that the task of delivering the poor from poverty therefore has many dimensions, but they all center on using growth as the core strategy.

In fact, the
Economist
recently (September 8, 2012) ran the cover story “Countries Across the Continent [of Asia] Are Building Welfare States—With a Chance to Learn from the West's Mistakes.” This story is really about Track II reforms. But it does not make frontally the connection with growth. In all cases covered in the story, the editors consider how, after long periods of sustained growth, resulting from Track I reforms, such countries as India, China, and (less dramatically) Indonesia have turned to Track II reforms, which, of course, have been made possible
(as in Brazil, also as we discussed earlier) entirely because increased revenues have resulted from the growth produced by Track I reforms.

Interestingly, the country that has turned most prominently to Track II reforms, as distinct from frittering away the added revenues on expenditures other than for the poor, has been India. This shows, in turn, that India's liberal democracy has provided the political mechanism that channeled the revenues to Track II reforms. Countries such as South Korea grew fast for long periods of time, but Track II reforms have gained traction only after democracy progressively replaced an authoritarian regime. In the same vein, Track II reforms have lagged behind Track I reforms in China because of lack of democracy.

So, India offers a role model for reform today. Growth follows Track I reforms. Increased revenues, thanks to democracy, are spent on Track II reforms. In this way, growth works its twofold magic: through a happy and necessary marriage of economics and politics. Here is a model for other developing countries, indeed.

W
hen Jawaharlal Nehru, India's first prime minister, virtually handpicked by Mahatma Gandhi, addressed the newly independent nation at the “stroke of the midnight hour,” as August 14 turned into August 15, 1947, he spoke in the tradition of the great orators over the ages: straight from the heart and in his own eloquent words, without the use of speechwriters
¹
and the teleprompter that afflicts and mars the impact that even gifted politicians have today.
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He struck all the great themes that had marked the independence movement, defining the tasks before the leaders of independent India and the vision that framed them. In particular, he touched upon the two pillars on which he thought that India's destiny uniquely rested: the politics of democracy and the economics of poverty removal.

On democracy, it is clear that he defined it in the broadest sense in which we regard it, not simply equating the concept with elections but rather spelling out what today we would call the institutions of a liberal democracy. He reminded his audience that “our endeavor” should be “to build up a prosperous, democratic and progressive nation, and to create social, economic and political
institutions
which will ensure justice and fullness of life to every man and woman.”
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