Decentralize to empower the bottom of the income pyramid

Over the last three decades, it has become customary to disregard the fears of the “little woman” at the bottom of the income pyramid, as mere misinformed or worse—unenlightened, unreasonable insecurity.

Unrequited love for markets

After all, markets, if regulated appropriately, have delivered wonderfully and poorer economies have benefited more than developed ones. South Asian per capita GDP (PPP2017 constant) grew by 3.3X over the period between 1990 to 2019 versus 0.7X growth for the world.

Even better, global poverty (income below US $1.9 per person per day 2011 PPP) was 9.2 percent in 2019—a mere one fourth of its level in 1990. In India, poverty more than halved from 47.6 percent in 1993 to 22.5 percent by 2011. The data for subsequent years is fuzzy.

China, more than any other economy, is symbolic today of the power of the open, global economy with international markets absorbing its industrial surplus, providing access to technology and directing capital to its efficient and hungry, industrial soak pits.

As if to sound the death knell on “big government”-led Socialism, even Cuba is reforming to deal with the stress from the COVID-19 pandemic—a transformation almost as big as Saudi Arabia permitting women to drive.

Not one to be left behind, last month, India’s Finance Minister announced a substantive privatisation of India’s sprawling public sector including the erstwhile flag carrier Air India and poorly managed banks.  This sounds sensible albeit dated, rather than daring, to anyone living outside India. But for the Indian government—still labouring under the “socialist” tag inserted into the constitution in 1976—to publicly acknowledge private management and capital as the hope for rejuvenating the economy, is akin to China renouncing its Communist Party.

Pandemic induced reforms sustains “markets” as a default option

Some of these bold reform initiatives might also be to dispel the global doom and gloom spread by the pandemic. Relative to what might have been, if the world had simply chugged along at the 2019 rate of GDP growth of 2.8 percent till 2021, the world now will end 2021 with a loss of around 7 percent of growth valued at US $6.15 trillion (current terms). This equals the entire GDP, in 2019, of the seventy-nine Low Income and Lower Middle-Income economies (India is one such). It is also this low-income end of the global economy which will take the longest to recover and where the maximum pain will be inflicted.

India alone accounts for 42 percent of this economic segment. India is expected to suffer a permanent loss of around 12 percent of its economy which was slowing even before the pandemic struck in 2020. Pulling the economy back to a sustainable growth of 8 percent per year needs structural reform—privatisation could be one such, if implemented quickly, to stop the annual bleed of around 1 percent of GDP (INR 2 trillion) from losses incurred by publicly-owned utilities, industrial companies and financial institutions. Stressed assets of publicly-owned banks are expected to reach a level of 12 to 14 percent in 2021 or around 5 percent of GDP.

Cheap loans anyone

Borrowing to fill the hole in government revenues is not a sustainable option, especially in the context of the pre-pandemic level of GDP growth of 4 percent (real) versus the 6.25 percent plus yield on the benchmark 10-year government bond—despite heroic efforts by the Reserve Bank of India to keep the yield within the Laxman Rekha of 6 percent, including via the “twist”—selling near duration bonds to buy long duration ones. Sustained borrowing at high rates unsupported by higher growth rates is fiscally worrisome.

Funding welfare protection for the poor

Critiquing the celebrated 1991 reforms towards the end of the United Progressive Alliance government in 1996, eminent economists Deepak Nayyar and Amit Bhadari noted that sustainable economic reforms, whilst eminently desirable, must insulate the poor from the downsides of reduced welfare and unemployment, if they were to be politically feasible. A homespun version of this approach is Gandhi-ji’s advice that the marginalised should suffer no further harm from administrative action.

Implementing deep economic reform, whilst insulating the bottom four quintiles from the downside, is no mean task. The instruments of democratic functioning are too noisy and lack the incentive to adopt a Janus-like approach—a soft human touch for the marginalised and a tough stand versus the well-endowed, who as recent trends suggest, are the most likely to benefit disproportionately from global economic reform.

Global inter-connectedness makes such asymmetric regulatory action difficult. Just as we lack the international tools to stop the global immiseration caused by tax havens and clever accounting, governments face the impossible task of incentivising domestic growth just enough to garner the benefits of additional jobs and revenue from incremental value addition. Parting with more incentives than necessary enriches the top quintile, robs the bottom four quintiles, depletes the treasury and risks finger-pointing of collusion. Doing nothing risks a continuing decline in economic growth, which remains the most necessary of pre-conditions for shared prosperity.

Public sector efficiency gains a potent medium term source for savings

A no-brainer is to significantly improve government effectiveness. The Worldwide Governance indicators WGI—a bench- mark, multiple source index measuring the quality of governance—indicate a near secular improvement in India of four of the six indicators over the period 2014 to 2019, i.e., control of corruption, government effectiveness, regulatory quality, political stability and the absence of violence. In the remaining two indicators there is a worrying backslide—the rule of law and voice and accountability.

China is a spectacular example of an economy thumbing its nose at the neo-liberal democratic construct as a pre-condition for poverty reduction and sustained growth. But it is a solitary example of the success of a hybrid approach to business liberalisation sans political liberalisation. Possibly, contextual factors—impossible to replicate elsewhere—might explain the paradox. Nevertheless, there are two take-aways to ponder.

Decentralize functional mandates, finances and capacity to local government

First, reworking and strengthening the effective mandates and capacities of local governments is a political architectural change waiting to happen. Today, cities and villages are mere appendages of remote state governments.

Political decentralisation has already been implemented in Jammu & Kashmir. It is a template which should be considered nationally. If it is good for J&K, why not for the rest of the country?

Bringing cutting edge governance closer to the people is a key ingredient for improving accountability and efficiency. China’s single party model enables inner party control, as an additional instrument, to ensure governance effectiveness across long (three tier) implementation chains. Democracy disables this control mechanism and relies on citizens instead to enforce accountability via the judiciary and the periodic vote. Significantly larger mandates and administrative and fiscal capacity at the local level are a natural corollary for democratic India, enabling citizens to exercise proximate control over a larger share of the economic pie.

Trim the fat in the middle (State Governments) integrate networks and tax structures nationally

Second, technology is multiplying the network and scale effects of physical infrastructure. Consider, how deep electrification of the economy (transport, industrial, agricultural and household energy needs) and the addition of higher levels of renewable energy will demand integrated grid management, at a never before level, to avoid outages of the kind suffered last month, in the isolated Texas grid ERCOT 2021 due to an extreme weather event. Safe, universal data protocols, standardized supply of health and education services, a single market for products and services and a single value added tax system, all point to the compulsion to take the “noise” out of the middle heavy, clunky political architecture, we inherited at Independence.

An opportunity presents itself over the next four years. Twenty- seven state governments are set to sequentially go to the polls with two more overlapping with the national election in 2024. Integration through decentralization could be a catchy slogan.

This article first appeared in March 13, 2021. Reprinted in March 16, 2021

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