Social development or investment in infrastructure?

Tuesday, 24 September 2013 00:10 -     - {{hitsCtrl.values.hits}}

Economists and planners have debated the issue of whether a nation should invest in its social development, things like education health and women and children’s sector development, as against investing in physical infrastructure and industrial development, creating jobs, from time immemorial. Recently two groups of prominent economists who focus on India have brought this debate into prominence. Nobel Laureate Amartya Sen of Harvard and Jean Dreze, who is a Professor at Allahabad University, in their book ‘An Uncertain Gory: India and Its Contradictions’ raised the conundrum as to why India’s social development record is so negative, in a country where there have been six decades of fair elections, a free press, the rule of law and other good governance factors, which should, in normal circumstances, deliver rulers who are responsive to the needs of India’s poor. Horrific social indicators Notwithstanding these ‘democratic’ credentials, in fact India has some of the world’s worst failures in health, education and women’s and child’s development issues. Social indicators in India leave no doubt whatsoever on that. For example, 400 million Indians do not have electricity, half of all Indians indulge in what is labelled as ‘open defecation,’ immunisations rates are even lower that sub-Saharan Africa. While many women and children are undernourished, among wealthier Indians obesity and diabetes is spreading. Extreme poverty is rife and maternal deaths in childbirth are too common. Female infanticide is estimated to result in approximately 600,000 female foetuses being aborted each year.   In their book Sen and Dreze attempt to set out the reasons for these horrific social indicators. Their thesis is that the Indian ruling political class has never been properly accountable to India’s needy majority. Sen and Dreze point out that the lessons drawn from nearly every emerging economy is that as economies grow , big public spending interventions aimed at lifting health, education and women and children’s rights result in rapid gains. India however is the exception. In reality its lagging social problems actually serve to drag down economic growth. When one looks at expenditure on public health, the issue is brought into focus, India spend a shameful US$ 39 per person per year on public health. Compare this with China’s US$ 203 or Brazil’s US$ 483. Some Indians spend their own money on doctors and quacks masquerading as medical men, but this is money spent on curative medicine not on preventive steps and better health education. The Indian Government spends more on subsidising fertiliser for farmers than on public healthcare. Fuel subsides, useful for the financially better off, rather than the poor, are equally costly. India’s State provided education is a mess. Even the poor send their children to private classes, where the tutors actually show up. Sen and Dreze argue that the Government fails primarily due to deeply entrenched inequalities which riddle Indian society – especially caste and communal issues. The ruling coterie, demarcated and defined mainly by caste, gender, education and financial strength, has a complete and utter lack of interest – verging sometimes on contempt – on the rest of the population. Divided views The opposite point of view has been articulated by two other economists of Indian origin, Jagdish Bhagwati, an economist Professor at Columbia University and Arvind Panagariya, also of Columbia. They argue that although India has suffered for long – from what has been derogatorily described as the ‘Hindu rate of growth’ of 4% or less – there has been a steady improvement since 1990. Bhagwati and Panagariya, in their work, argue forcefully for more liberal reforms in India, specifically to labour laws and land ownership. They argue that pushing GDP over the Hindu rate of growth by creating jobs, letting business flourish and raising revenue for the State would all reduce poverty, instead of pouring money into the social sector. Their view is that market reforms that began with the opening up of the Indian economy in 1991 will help generate the growth needed to pull poor Indians out of poverty. Bhagwati and Panagariya criticise Sen and Dreze, on the ground that they are not pro-growth, but instead promote redistribution through vast social welfare programs as the means of pulling people out of poverty. They say that without economic growth, there is nothing one can redistribute! It is only growth that makes the surpluses for redistribution available. Sen and Dreze respond by saying that they have consistently taken the position that the power of economic growth as means of pulling people out of poverty has been one of their consistent themes, even in their earlier book of 1989, ‘Hunger and Public Action’. The power of growth mediated economic security is clearly articulated and outlined there. This theme is also highlighted in ‘An Uncertain Glory’. While economic growth is very important of improving poor people’s lives, it has necessarily to be combined with targeting specific resources to attack illiteracy, ill health, under nutrition and drawbacks from which the poor suffer. The central point in ‘An Uncertain Glory’ is that economic growth is greatly enhanced and facilitated by public investments made very early in education, health and women and children’s sectors. This is proved by the track record of nations like Japan, China, Korea and Singapore. So this is the basic divide between the Sen and Dreze camp and the Bhagwati and Panagariya camp: The former hold the view that investments in public health and education and other social sectors would, along with the benefits of the market economy, take the majority of Indians out of poverty. The latter firmly believe that India must focus primarily on economic growth and infrastructure, to generate the economic growth to fund social welfare programs. The issue is: Which is the path to sustained inclusive rapid economic growth? Political stance This disagreement on economic development strategy has even reached the field of politics in India. The position taken by Sen and Dreze, in favour of social welfare programs, is the hallmark of India’s ruling Congress Party. Bhagwati and Panagariya, on the other hand, stake out the position that the opposition BJP ruled State of Gujarat, ruled by pro-private sector Chief Minister Narendra Modi, as a model for economic growth and social progress. Chief Minister Narendra Modi is on the verge of being anointed as the BJP’s candidate for the Prime Minister ship of India at the 2014 parliamentary elections. Amartya Sen has come out openly against Narendra Modi. Interviewed on a television program, Sen has categorically stated that “I do not want Modi to be my Prime Minister. As an Indian citizen I could say that we Indians don’t want a situation where the minorities feel insecure and could legitimately think that there was organised violence against them in 2002. That’s a terrible record. As an Indian citizen I do not want an Indian Prime Minister who has that kind of record.” Sen’s reservations about Modi are based on his understanding of the Gujarat leader as a communally divisive figure. The alleged inaction of the Gujarat State Government and the State Police when an anti-Muslim pogrom was carried out by extreme Hindu elements in 2002 has been blamed by some critics on Modi’s reluctance to act against his electoral base. Sen goes further and questions Modi’s governance model. Modi has been portrayed by the Indian business community as pro-business and decisive, taking quick decisions and getting them implemented efficiently. For example, when Chief Minister Mamata Bannerjee of West Bengal kicked Tata Automobile’s nano factory out of West Bengal, over an issue of illegal expropriation of farm land, Modi contacted Tata’s doyen, Ratan Tata, and gave land in Gujarat and got the factory operating in short order. But Sen has expressed the view that the economic growth reputation of Mode is overrated. Sen says: “The Gujarat model draws on very good strengths that Gujarat traditionally had. Modi could also have taken note of the fact that Gujarat’s record in education and health care is very bad.” The fact is that India’s National Family Health Survey disclosed that between 1998/99 and 2005/06, the percentage of underweight children in Gujarat increased to 47%. When Chief Minister Modi, was questioned about these numbers, his answer was astoundingly Marxian, not of the Karl Marx mode, but more of the Harpo, Chico and Groucho Marx mode: Modi blamed Gujarati’s middle class girls for being more interested in beauty than health! “If a mother tells her daughter to have milk, they have a fight. She’ll tell her mother, ‘I won’t drink milk, I’ll get fat.’” Food security The Indian Food Security Bill, approved recently by India’s Parliament, has the support of Sen and Dreze. This will give some two-thirds of India’s population 5kg of subsidised grain at a cost of billions to the Government. This extravagance has been widely criticised as a meaningless handout for the poor. Critics have pointed out that the money could have been spent in a more beneficial way. But Sen has criticised the middle class critics of the Food Security Scheme. Sen points out that the Indian middle class benefits from subsidised electricity, subsidised fertiliser, subsidised cooking oil, no taxation on many items on which there should be a tax, like the import of jewellery. These are accepted by the majority poor Indians. But the whole issue of fiscal responsibility is only raised when there is a scheme to provide subsidised food for the poor! Sen warns: “I find that double standards of the prosperous very worrying.” As a model of good governance for an Indian state, Sen goes to the extent of comparing and contrasting Modi’s Gujarat with Chief Minister Nitish Kumar’s Bihar. Sen points out that “Nitish Kumar’s focus on education and healthcare is definitely admired and efficient. He is trying to learn from Japan, Korea, Taiwan, Hong Kong and Singapore. He is trying to have a healthy educated labour force… Yes, I do think that his record at the moment is very good.” Sen further says on the comparison of the Gujarat model with the Bihar model: “The comparison is slightly unfair. Nitish is dealing with the poorest state in India. Modi is dealing with a relatively richer state. I think in his condition Nitish is showing great vision in a way that will be very important for the future of Bihar.” Middle path? Is there a middle path between the two extremes promoted by these economists? Parhta Mukhopadhyay of the Centre for Policy Research, New Delhi, says what is required is a policy which falls in the middle of this sliding scale with reform oriented growth and infrastructure development at one end and Government-led redistribution of wealth at the other end. However, if the Indian growth story is to get going, ‘the state has to learn how to function’ efficiently. For example, what is the point of increasing Government spending on healthcare or education if quality and efficiency of the State delivery system is not competent? The same point has been made in Sri Lanka by a politician. But what is the alternative: Can business and enterprise be expected to provide such services for the poor who are unable to pay a commercial price for such services? Arvind Subramaniam of the Peterson Institute for International Economics at Washington says that this Sen-Dreze/Bhagwati-Panagariya debate is hitting the headlines just at this time due to the perceived crisis in the Indian economy and the slowdown in growth. However, whatever the context and timeframe, the fundamental issue this dichotomy has raised has to be addressed, if the Indian economic growth story is to be placed back on track. Sri Lanka How does Sri Lanka stand on these issues? In the 1930s, the then State Council elected by universal franchise initiated extensive social welfare programs. Free education and free healthcare was the start. Thereafter food subsidies and free rationed rice followed. While these programs were blanket, without any targeting, later fiscal discipline brought about the need for targeting of poverty alleviation and food stamps, Janasaviya, Samurdhi, etc., were implemented. Although these were targeted in theory, in practice there were and are massive leakages. In addition, subsidised transport and fuel, plus water and energy subsidies, etc. placed a heavy load of social welfare expenditure on the budget. So, in more ways than one, Sri Lanka epitomises the welfare state. Naturally as a consequence, expenditure in other sectors suffered. Most infrastructure development is and was implemented using grant funds from donors or borrowed money, on concessional and commercial terms. The Gal Oya Valley development was the last large project that was done using our own money. The point made in India on the efficiency of the Government delivery system is very much an issue here. Politicians and analysts have publicly stated that given the inefficiencies of the delivery systems in the State education and healthcare systems, there is no purpose in increasing financial allocations. In reality the Sri Lankan State machinery, indeed, has to learn ‘how to function better’. To fill the competency void, the entrepreneurs have stepped in. Private schools and private tuition, private health care and hospitals proliferate. There is much to be desired in the regulatory framework. The situation is dire, on the healthcare side, malnutrition, obesity, non communicable disease such as diabetes, and communicable diseases such as dengue are at epidemic levels. In education, the skill gap is huge. The investment in the social sector has resulted in very high aspirations, which the welfare economy cannot meet. No wonder the country has seen three consecutive youth revolts – 1971, 1976 to 2009 and 1989. The south west quarter of the island is relatively overdeveloped while the rest of the country has been deprived of resources. For the first time the 2013 statistics shows that the Northern, Eastern, Central and North Central Provinces have outperformed the Western Province in economic growth terms. Post-tsunami and post-war expenditure, the ‘disaster and peace dividend,’ as some cynics have described it, explains the north east situation. The Western Province has been sucking resources from the rest of the country. Financial service providers take deposits from all over the island and lend in Colombo! Gradually with districts and provinces being empowered through initiatives such as the Integrated Rural Development Programs, the Accelerated Mahaweli Project, decentralised budgets, etc., the rest of the country is making some headway. Analysts question whether if investments in infrastructure were made from the 1930s as an alternative to the special welfare expenditure, power generation, highways, high speed railways, heavy industry, etc., the underdevelopment and this huge disparity of the south west quarter and the rest of the country, and the resultant violence, could have been avoided? But if so would we have had our virtual first world social indicators? Currently huge investments are being made in infrastructure, by using borrowed money. The social sectors, education, health, and women’s and children’s protection programs are starved of taxpayers’ money. The huge military establishment which won the war is still fully mobilised; running hotels and restaurants, whale watching tours, commercial air services, veterinary clinics, hair dressing saloons, maintaining parks, rehabilitating historic buildings, etc. There is a need, clearly, for Sri Lanka also to move into the middle path, in between the economic philosophies of Sen-Dreze and Bhagwati-Panagariya. But will it happen in our populist democracy? (The writer is a lawyer, who has over 30 years of experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)

Recent columns