Themes > Current Issues
10.03.2010
The Political Economy of the Enabling State
Jayati
Ghosh
This
year's Economic Survey contains a new and unusual chapter, entitled
''Micro-foundations of Inclusive Growth''. It is unusual because it
is largely theoretical, thereby providing an addition to the generally
descriptive review of the Indian economy over the past year according
to the government's own perception. It also contains, possibly for the
first time in an Economic Survey, an explicit statement of what might
be described as the present Government's economic philosophy and its
approach to certain crucial questions of economic policy. That this
is indeed the case was confirmed by the echo some statements found in
the Finance Minister's Budget Speech.
It is certainly welcome that the basic goal of economic policy is identified as inclusive growth, recognising that ''growth must not be treated as an end in itself but as an instrument for spreading prosperity to all'' (p. 22). Inclusive growth in turn is given a more precise definition than is usual, as growth that improves the incomes and other measures of conditions of life of the bottom 20 per cent of the population.
This inclusive growth is to be delivered by a change in focus to an enabling government, which is seen as ''a Government that does not try to directly deliver to its citizens everything that they need. Instead, it (1) creates an enabling ethos for the market so that individual enterprise can flourish and citizens can, for the most part, provide for the needs of one another, and (2) steps in to help those who do not manage to do well for themselves'', for example by ''directly helping the poor by ensuring that they get basic education and health services and receive adequate nutrition and food'' (p. 23).
It is immediately clear that this is a vision of the economy in which it is taken for granted that the market mechanism generally delivers the economically-desired outcomes for most citizens, and the role of government is therefore mainly to ensure that such markets function smoothly and to take care of the stragglers ''for there will always be individuals, no matter what the system, who need support and help''. This vision excludes the possibility of the process of market-driven economic growth itself generating greater material insecurity and impoverishment for a significant section. Trickle-down is seen to operate for most of the population; for the bottom fifth, the government has to step in.
Obviously, in such a framework, public delivery of essential goods and services will necessarily be targeted to those that are defined as poor. The chapter contains an eloquent argument in favour of redefining the nature of public delivery to minimise direct involvement of the state in favour of market-based mechanisms such as coupons and vouchers targeted to the poor. This is what allows for the claim that more can be achieved with less fiscal resources, by eliminating the administrative costs of running large public schemes.
This would be a major departure from current practice, with potentially far-reaching implications in a very wide range of goods and services that are seen to constitute essential socio-economic rights. It is impossible to discuss all the different implications here, so I will briefly consider only the interventions proposed for the food economy. The arguments have wide applicability with reference to other sectors as well.
Managing the food economy
There is an extended discussion on how to manage the food economy, which is only to be expected given that food price inflation is clearly the most significant economic problem in the country at present. Yet the discussion presents several different arguments which turn out to be mutually inconsistent. In keeping with the overall approach of an ''enabling'' state rather than an actively interventionist one, it is proposed to do away with the existing system of government food procurement and distribution. It is argued that this is prone to corruption, adulteration and similar flaws, and that it is necessary to craft policy that takes into account that people are the way they are (not always ethically sound) and craft incentive-compatible policies accordingly. So this is to be replaced with a system of food coupons (of a certain value of money) given directly to targeted households, that can be exchanged for wheat or rice at market prices, giving the freedom of choice to households about the shop from which to purchase.
This proposal betrays some ignorance about the background of the current food subsidy and the purposes of the public system of food procurement and distribution in India. These were (and fundamentally remain) to provide farmers with a minimum price that covers their costs, to ensure that basic food grain is transported from surplus to deficit areas of the country, and to build up a system of buffer stocks that protects the country from international price volatility and external dependence. It is because the market mechanism was found wanting in achieving any of these goals that such measures were deemed necessary – and the persistence of such measures not only in India but in many countries across the world (including most developed ones) suggests that this is still the case. Food security within a nation as large as India is not possible without ensuring the viability of food production by domestic farmers and the existence of a national distribution system that tries to reach deficit areas quickly. There is no way that replacing this with a system of food coupons to selected households could achieve these basic aims.
There is of course the further question of how to ensure that the public at large - and the poor in particular - get access to affordable food. This too is a current function of the Public Distribution System, but it has been less than successful in meeting it for a variety of reasons. The Economic Survey correctly recognises the many problems in the existing system, but tends to treat the entire system as homogeneous across the country. There are states in the country (such as Kerala and Tamil Nadu, and to a lesser extent Andhra Pradesh) where the PDS is a strong, functioning and largely non-corrupt system, and there are other states where the opposite is true. Surely, policy makers need to study and understand these differences if they actually want to make the system work.
What is clear is that targeting tends to add to the problems, not only because of the significant administrative costs associated with identifying the poor and monitoring them, but because of well-known errors of unfair exclusion from and unjustified inclusion in the list of poor households. That is why the states with more successful PDS are those that have such a large number of declared below-poverty-line (BPL) households that they are close to universal in nature. The Survey argues that the Unique Identification System (UID) will solve that problem, but that is to believe that there can be a technological fix to what is essentially a socio-economic problem. The UID card only identifies a person; the description of that person as belonging to a poor or non-poor household remains as cumbersome, problematic, politically charged and administratively challenging as ever.
The Survey does provide some useful and interesting proposals with respect to managing the foodgrain stocks, and correctly argues for a more flexible approach in releasing stocks that is not only responsive to market pressures but also anticipates them. Indeed, the need to prevent foodgrain allocation from becoming a political tool in the hands of the Centre vis-à-vis the state governments is all the more pressing in the light of recent experience. However, it should be obvious that such a proactive role of the state in preventing food price increases would not be possible at all if the entire system is replaced with a system of food coupons!
There is another comment with direct relevance to the food economy that deserves to be noted. In keeping with the overall perspective that markets generally know best, the Survey argues for erring on the side of less control whenever there is some doubt on the matter. This is then used to suggest that a ban on futures trading in essential commodities is unwarranted. ''An enabling Government takes the view that if we cannot establish a connection between the existence of futures trading and inflation in spot prices, we should allow futures trade.'' (p. 24) Yet there are least two flaws with this argument.
First, as any econometrician would know, it is generally possible to question any link between two economic phenomena, and so the argument about whether future trading has been associated with significant spot price changes will definitely continue well after all the cows have come home. Yet globally, the existence of contango in commodity markets (when prices in the futures markets are higher than the spot prices) associated with substantial holding of long positions by index traders, has been seen as indicative of speculation driving changes in spot prices. It is next to impossible to provide a clear and explicit link that will satisfy those determined not to see it. Second, and perhaps more significantly, there are important conceptual reasons to be wary of allowing futures trading in any commodity in which there is significant public intervention in the form of minimum support prices etc., because these provide an easy floor for speculators. So, this is not a case of allowing something because we do not have enough information on either side of the argument, but preventing speculative activity that can cause great harm even as its possible benefits are minimal.
Enabling markets and empowering the citizenry
There are several other issues that are discussed, for which similar arguments could be made. But it is the broader perspective underlying this chapter which deserves more careful consideration. The goal is clearly benevolent: improving the economic conditions of the bottom quintile of the population. Yet the means that have been proposed suggest a lack of awareness of the political economy of both markets and government in India, and the social and economic context within which policies are implemented. This is somewhat surprising, because within the chapter there is a discussion of the need to recognise extant social realities, even though it is more concerned with culture and social norms.
The point is essentially this: both markets and government policies do not function in a socio-political vacuum but within complex social realities in which power relations are deeply entrenched. So, it is not that there are individuals all operating on level playing fields, with some having a few disadvantages such as lower income and assets and less education. Rather, the processes of striving for power, and keeping it, unfold through the medium of markets. The impact of government policies depends upon the extent to which they enable different sets of actors with different power positions to fight for their rights or advance their own positions.
That is why ''free'' market functioning tends to accentuate existing inequalities, both social and economic. To the extent that government policies are aware of this and are designed to reduce this effect, they are more successful. All economic policies therefore have distributive implications, whether or not these are officially recognised. A government that is genuinely enabling for the citizenry as a whole, and for the poorest citizens, has to act decisively in their favour, and also has to provide good quality public services that the poor are not excluded from.
In such a context, it is worth stepping back and examining how much of the declared goal of inclusive growth in the Economic Survey actually informs the most recent policy statement of the government, the Union Budget. Surprisingly, the most important initiatives constitute direct attacks on the incomes of the bottom quintile of the population: the hike in fuel prices and indirect taxes, which will definitely increase the price of necessities; the reduction in food subsidy; the embarrassingly small increases in funds for agricultural schemes, especially in the most devastated regions; the paltry amounts allocated to education and health, which cannot possibly ensure good quality public provision that reaches the poorest. Conversely, the enabling aspect of government is very clearly evident with respect to big business, in the form of tax breaks, subsidies for agribusiness and the like.
The problem is that enabling markets does not always translate into empowering people: often the reverse is the case. Clearly, whatever be the more sensitive statements made in the Economic Survey, the basic philosophy of the government has not changed from an obsessive focus on growth at any cost.
It is certainly welcome that the basic goal of economic policy is identified as inclusive growth, recognising that ''growth must not be treated as an end in itself but as an instrument for spreading prosperity to all'' (p. 22). Inclusive growth in turn is given a more precise definition than is usual, as growth that improves the incomes and other measures of conditions of life of the bottom 20 per cent of the population.
This inclusive growth is to be delivered by a change in focus to an enabling government, which is seen as ''a Government that does not try to directly deliver to its citizens everything that they need. Instead, it (1) creates an enabling ethos for the market so that individual enterprise can flourish and citizens can, for the most part, provide for the needs of one another, and (2) steps in to help those who do not manage to do well for themselves'', for example by ''directly helping the poor by ensuring that they get basic education and health services and receive adequate nutrition and food'' (p. 23).
It is immediately clear that this is a vision of the economy in which it is taken for granted that the market mechanism generally delivers the economically-desired outcomes for most citizens, and the role of government is therefore mainly to ensure that such markets function smoothly and to take care of the stragglers ''for there will always be individuals, no matter what the system, who need support and help''. This vision excludes the possibility of the process of market-driven economic growth itself generating greater material insecurity and impoverishment for a significant section. Trickle-down is seen to operate for most of the population; for the bottom fifth, the government has to step in.
Obviously, in such a framework, public delivery of essential goods and services will necessarily be targeted to those that are defined as poor. The chapter contains an eloquent argument in favour of redefining the nature of public delivery to minimise direct involvement of the state in favour of market-based mechanisms such as coupons and vouchers targeted to the poor. This is what allows for the claim that more can be achieved with less fiscal resources, by eliminating the administrative costs of running large public schemes.
This would be a major departure from current practice, with potentially far-reaching implications in a very wide range of goods and services that are seen to constitute essential socio-economic rights. It is impossible to discuss all the different implications here, so I will briefly consider only the interventions proposed for the food economy. The arguments have wide applicability with reference to other sectors as well.
Managing the food economy
There is an extended discussion on how to manage the food economy, which is only to be expected given that food price inflation is clearly the most significant economic problem in the country at present. Yet the discussion presents several different arguments which turn out to be mutually inconsistent. In keeping with the overall approach of an ''enabling'' state rather than an actively interventionist one, it is proposed to do away with the existing system of government food procurement and distribution. It is argued that this is prone to corruption, adulteration and similar flaws, and that it is necessary to craft policy that takes into account that people are the way they are (not always ethically sound) and craft incentive-compatible policies accordingly. So this is to be replaced with a system of food coupons (of a certain value of money) given directly to targeted households, that can be exchanged for wheat or rice at market prices, giving the freedom of choice to households about the shop from which to purchase.
This proposal betrays some ignorance about the background of the current food subsidy and the purposes of the public system of food procurement and distribution in India. These were (and fundamentally remain) to provide farmers with a minimum price that covers their costs, to ensure that basic food grain is transported from surplus to deficit areas of the country, and to build up a system of buffer stocks that protects the country from international price volatility and external dependence. It is because the market mechanism was found wanting in achieving any of these goals that such measures were deemed necessary – and the persistence of such measures not only in India but in many countries across the world (including most developed ones) suggests that this is still the case. Food security within a nation as large as India is not possible without ensuring the viability of food production by domestic farmers and the existence of a national distribution system that tries to reach deficit areas quickly. There is no way that replacing this with a system of food coupons to selected households could achieve these basic aims.
There is of course the further question of how to ensure that the public at large - and the poor in particular - get access to affordable food. This too is a current function of the Public Distribution System, but it has been less than successful in meeting it for a variety of reasons. The Economic Survey correctly recognises the many problems in the existing system, but tends to treat the entire system as homogeneous across the country. There are states in the country (such as Kerala and Tamil Nadu, and to a lesser extent Andhra Pradesh) where the PDS is a strong, functioning and largely non-corrupt system, and there are other states where the opposite is true. Surely, policy makers need to study and understand these differences if they actually want to make the system work.
What is clear is that targeting tends to add to the problems, not only because of the significant administrative costs associated with identifying the poor and monitoring them, but because of well-known errors of unfair exclusion from and unjustified inclusion in the list of poor households. That is why the states with more successful PDS are those that have such a large number of declared below-poverty-line (BPL) households that they are close to universal in nature. The Survey argues that the Unique Identification System (UID) will solve that problem, but that is to believe that there can be a technological fix to what is essentially a socio-economic problem. The UID card only identifies a person; the description of that person as belonging to a poor or non-poor household remains as cumbersome, problematic, politically charged and administratively challenging as ever.
The Survey does provide some useful and interesting proposals with respect to managing the foodgrain stocks, and correctly argues for a more flexible approach in releasing stocks that is not only responsive to market pressures but also anticipates them. Indeed, the need to prevent foodgrain allocation from becoming a political tool in the hands of the Centre vis-à-vis the state governments is all the more pressing in the light of recent experience. However, it should be obvious that such a proactive role of the state in preventing food price increases would not be possible at all if the entire system is replaced with a system of food coupons!
There is another comment with direct relevance to the food economy that deserves to be noted. In keeping with the overall perspective that markets generally know best, the Survey argues for erring on the side of less control whenever there is some doubt on the matter. This is then used to suggest that a ban on futures trading in essential commodities is unwarranted. ''An enabling Government takes the view that if we cannot establish a connection between the existence of futures trading and inflation in spot prices, we should allow futures trade.'' (p. 24) Yet there are least two flaws with this argument.
First, as any econometrician would know, it is generally possible to question any link between two economic phenomena, and so the argument about whether future trading has been associated with significant spot price changes will definitely continue well after all the cows have come home. Yet globally, the existence of contango in commodity markets (when prices in the futures markets are higher than the spot prices) associated with substantial holding of long positions by index traders, has been seen as indicative of speculation driving changes in spot prices. It is next to impossible to provide a clear and explicit link that will satisfy those determined not to see it. Second, and perhaps more significantly, there are important conceptual reasons to be wary of allowing futures trading in any commodity in which there is significant public intervention in the form of minimum support prices etc., because these provide an easy floor for speculators. So, this is not a case of allowing something because we do not have enough information on either side of the argument, but preventing speculative activity that can cause great harm even as its possible benefits are minimal.
Enabling markets and empowering the citizenry
There are several other issues that are discussed, for which similar arguments could be made. But it is the broader perspective underlying this chapter which deserves more careful consideration. The goal is clearly benevolent: improving the economic conditions of the bottom quintile of the population. Yet the means that have been proposed suggest a lack of awareness of the political economy of both markets and government in India, and the social and economic context within which policies are implemented. This is somewhat surprising, because within the chapter there is a discussion of the need to recognise extant social realities, even though it is more concerned with culture and social norms.
The point is essentially this: both markets and government policies do not function in a socio-political vacuum but within complex social realities in which power relations are deeply entrenched. So, it is not that there are individuals all operating on level playing fields, with some having a few disadvantages such as lower income and assets and less education. Rather, the processes of striving for power, and keeping it, unfold through the medium of markets. The impact of government policies depends upon the extent to which they enable different sets of actors with different power positions to fight for their rights or advance their own positions.
That is why ''free'' market functioning tends to accentuate existing inequalities, both social and economic. To the extent that government policies are aware of this and are designed to reduce this effect, they are more successful. All economic policies therefore have distributive implications, whether or not these are officially recognised. A government that is genuinely enabling for the citizenry as a whole, and for the poorest citizens, has to act decisively in their favour, and also has to provide good quality public services that the poor are not excluded from.
In such a context, it is worth stepping back and examining how much of the declared goal of inclusive growth in the Economic Survey actually informs the most recent policy statement of the government, the Union Budget. Surprisingly, the most important initiatives constitute direct attacks on the incomes of the bottom quintile of the population: the hike in fuel prices and indirect taxes, which will definitely increase the price of necessities; the reduction in food subsidy; the embarrassingly small increases in funds for agricultural schemes, especially in the most devastated regions; the paltry amounts allocated to education and health, which cannot possibly ensure good quality public provision that reaches the poorest. Conversely, the enabling aspect of government is very clearly evident with respect to big business, in the form of tax breaks, subsidies for agribusiness and the like.
The problem is that enabling markets does not always translate into empowering people: often the reverse is the case. Clearly, whatever be the more sensitive statements made in the Economic Survey, the basic philosophy of the government has not changed from an obsessive focus on growth at any cost.
© MACROSCAN 2010