NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, March 29, 2007

ET:

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.

Continue reading “Interview with Nachiket Mor and Joseph Stiglitz“

(HT: Vijay Dakshinamoorthy)