governance, political economy, institutional development and economic regulation

Posts tagged ‘economic growth’

Taming Terror

terror

(photo credit: guns.com)

An inequitable sharing of power and the “glass ceilings” of “closed order” societies, devised to keep the status quo intact, are ripe pickings for terrorism.

Apologists of terror focus on this underlying social explanation for the breeding of terror. But this is cold comfort for the victims of terror who, generally, are as ordinary and as excluded, as those perpetuating terror.

In fact hurting the average citizen is the intended consequence of terror.  The intention of the terrorist is to shatter the credibility of the government’s ability to preserve the rule of law.

The UN Declaration of Human Rights 1948 is a verbose document assuring all manner of Human Rights through its 30 Articles. Of these, the most critical are Articles 3 to 5 which relate to the Right to Life; Freedom from Slavery and The Right against Torture. It is these three which are the primary targets of terror.

Democracy disappoints

Through the second half of the Twentieth Century the anticipated social leveling through the spread of Democracy and since 1990 the economic benefits from Globalization were expected to take away the breeding ground for terror. Sadly this has not happened.

Democracy perversely marginalizes and excludes many, even as it empowers others. In India lower castes have gained through a policy of positive affirmation but religious minorities have lost out. It is all a numbers game with a huge political incentive to encourage identity (religion; ethnicity; caste; culture) politics. In this polarizing game those who have the majority win and the rest lose or are forced to become subaltern partners in governance.

Economic growth an incomplete answer

The notion that growing economic well-being can bridge the divisiveness of culture and identity has been shattered repeatedly. Germany was a rich nation just prior to the World War II but demonized the Jews. British and French kids today join the Islamic State even as the ethnicity obsessed, Right in Europe is resurgent by making immigrants the “fall guys” on whom to pin the woes emanating from the fiscal excesses of the go-go years of the first decade of this century.

Monitored executive discretion can help

Centralized, authoritarian regimes like China seem best placed to manage terror for the simple reason that they have plenty of monitored, executive discretion, which is the key ingredient whilst fighting those who live in “shadows”.

Terror is spread by highly trained and motivated cadres who are rigorously monitored and mentored.  They can only be stopped by a similar cadre. The Israelis know this and that is why they are so successful at surviving in the toughest neighborhood in the World.

But Democracy by definition undercuts executive discretion. Transparency, Open Data and Citizen Voice- all off-springs of the Good Governance framework popularized since the late 1990s, similarly constrain executive discretion.

The most dramatic illustration is the public rebuke given by the Republican controlled Senate to President Obama’s initiative to “socialize” radical Iran by negotiating a nuclear agreement with it. This is a departure from the “norm”, which gave significant leeway to the US President to negotiate Foreign Policy initiatives. We are fortunate that the Indian Prime Minister is not constrained in this manner since Agreements with Foreign Nations are not subject to Parliamentary approval and the Executive has considerable discretion in managing Foreign Affairs.

With both Economic Development and Democracy proving to be unlikely bulwarks against terror what then remains as a cogent strategy to manage this scourge?

Four initiatives present themselves.

First, reduce inequality. This is important because much of it, particularly in developing countries, is the result of massive corruption. This is visible in the workplace; in life styles and in the resource endowments that some people inherit. What can be done about it is less certain. The best, but somewhat dissatisfactory strategy is to constrain the government’s budget to the very minimum, whilst striving to get the biggest bang for the buck. Big governments are bad news. Small, nimble governments are in.

Second, adopt open access structures: The challenge is not to “pull down” the rich by taxing them (France tried but failed) or by banning the consumption of luxury goods (luckily the French view fine wine and cheese as a necessity). The challenge is to open access to good education, health, social protection and formal, private sector jobs based on merit.

Third, Role Models matter. “Open access” systems are not created overnight.  Open access is more than a physical process. As Tagore said it is the mind which has to be opened. Role models are key in building such societies.

One such role model today is Arvind Kejriwal who emulates the entrepreneurial, mass-movement based political principles of Bapu (Mahatma Gandhi).

PM Modi presents the other, more “muscular” model of the dedicated, organizational man who claws his way to the top by pure grit and guile- very similar to what happens in an American Corporate and the Communist Party of China.

Both role models represent an open access system in operation. For Chief Minister Kejriwal the “entry point” was the Constitutional provisions for pluralism in political parties. In Prime Minister Modi’s case, it is the meritocratic structure of the RSS and the BJP.

That “open access meritocracies” are the best bridge to socialize Radicals, Fundamentalists and Discontents is best illustrated by the recent teaming up of the “Islamist” leaning, People’s Democratic Party (PDP) of Mufti Mohammad Sayeed with the Hindu Right-BJP to form a government in Kashmir. Neither party wears “secularism” on their sleeve but both represent the middle class and that is their biggest glue. In comparison, the National Conference of Kashmir and the Congress are both dynasties run by political aristocrats.

Fourth, grow the middle class. The key to kill terror is to grow the middle class by investing in formal, private sector jobs and state funded, but privately provided, education, health and social protection facilities.

Keeping people productively busy and cruising the “basically comfortable” income frontier is important. Time to restructure the government workplace by opening it up to external skills (they exist in India believe it or not!); balancing worker rights with worker responsibilities and decentralizing authority widely, including to non-state actors thereby co-opting them into governance, so that the “pie” is widely shared.

Capitalism centralizes income and wealth. The government must use its fiscal resources to re-distribute it wisely.

Can Modi Copy Deng?

China

(photo credit: http://www.deeshaa.org)

The thought of Modi, an original and innovative doer if ever there was one, copying anyone, is so implausible that the first instinct is to perish the thought at birth. But it is interesting to list how Modi could “do a Deng” for India.

Deng Xiaoping inherited a China wracked by the inefficiencies, but blessed by the upside of Communism. Principally, five decades of communism had deadened the innately entrepreneurial spirit of the Chinese and sank the economy under the weight of a burgeoning State. But communism had also proliferated a highly disciplined party cadre across the country-much like India’s bureaucracy-except that the Chinese Communist Party marches to a single drumbeat; that of the President/General Secretary/Chairman. In contrast, the Indian bureaucracy is a discordant orchestra with multiple political conductors.

Mao built his Party cadres to weed out all those who either were, or could become, dissenters to his thoughts. Deng used the very same party to unleash the Chinese “animal spirits”. Municipalities and provinces competed viciously with each other to achieve the highest growth numbers in a no-holds-barred, single minded commitment to the bottom line, which could put the partners of Lehman Brothers in the shade.

The extraordinarily successful U turn was not surprising. Party foot soldiers are rarely ideologically committed. On top of it, if there is something in the change for them, they take to it with gusto. The Party took to “capitalism” with a vengeance. It is only now- two decades later- that President Xi is trying to unravel the resultant bundling of public and private interests.

When Deng Xiaoping became the President of China, per capita Gross National Product (GNP) was double of India’s but only around two thirds of Indonesia and Philippines (1996 WB data). By 2012 China’s per capita Gross National Income (GNI) had become nearly four times that of India; more than 1.7 times of Indonesia and nearly double of Philippines. Poverty declined in China from “Indian levels” to just 3% by 2012. Rapid economic growth based on exports, manufacturing and jobs was Deng’s mantra. But we musn’t forget the sacrifices of the Chinese people, who suffered personal and economic deprivations at the altar of national economic growth.

Can Modi do a Deng for India?

Unlike China, India is a soft state. Our citizens live in an asymmetric economic and political environment. On average, our citizens are as economically deprived as the Chinese were. But they have become accustomed to significant levels of personal and political freedom, more typical of a developed democracy. The State “includes” everyone in its warm embrace through food, fuel and income subsidies, which successive governments have honed to a fine art. Significant interest groups all receive a special package of subsidies tailored just for them. The package may not be individually very substantial. It may be threatened by inflation and increasing public fiscal stress. But the important thing is that it exists as a symbol that the State “cares”.

The only way of getting citizens to vote beyond subsidies is to rapidly enhance their individual incomes to a level where stagnating subsidies no longer mean much. For this private sector jobs based growth is the key.

Unfortunately, the world economic environment is now even less supportive of inefficient economies than it was in the “go-go years” till 2008. India remains a hugely inefficient economy because of the high transaction cost of doing business, even by domestic entrepreneurs. Some of this is due to a very inefficient and decentralized but systemic corruption.

The magnitude of corruption grabs public attention. It is unseemly but it is not the main impediment to job creation, growth or poverty reduction. In an imperfectly regulated economy, with a large State sector, regulating corruption to reduce its incidence and impact is more important than eradicating it. East Asia in general and indeed China itself, illustrates this.

But bitterly contested democracy does not allow the ruling party the luxury of “plain policy speak” based on cost benefit. A well publicised war against corruption better satisfies the masses that tax money is not being wasted.

More substantively, a policy of adopting increasingly higher levels of transparency and the  depoliticisation of economic regulation by transferring powers to autonomous, technical regulators, can significantly reduce the space for “crony capitalism”.

PM Modi, whilst condemning the “hate speech” of his errant Minister Niranjan Jyoti urged the Rajya Sabha: “let’s get back to work”. His words could well be heeded by government itself. Five fundamental institutional changes can create a Team Modi for targeting poverty; enhancing growth and increasing private sector jobs.

First, Captain Modi has to radically change the manner in which appointments are done in the Union government and adopt a transparently merit based system. For starters PMO should have an HR anchor identifying and tracking potential officers for these positions, using a variety of indicators.

Second, for improving the sustained effectiveness of the Union government, the PM has to ruthlessly prune the political executive and the bureaucracy, of elements who are, or have been ineffective or complicit in corruption. This is not about launching a witch hunt for the corrupt. It is more about identifying effective politicians and bureaucrats (of which individually there is an oversupply) and putting them in the right positions.

Third, it is not enough to improve the Union government. PM Modi has to talk Turkey with those CMs, who are similarly inclined to grow their states. Some, but not all, will be BJP governments. But the real issue here is to form alliances, not for political survival, as was the practice in the past, but for national growth. Network economies spill over across state boundaries and business uses such opportunities to locate where land is cheap, labour is abundant and pre-existing infrastructure is nearby.

CM Naidu previously used this model of cross border spill-over from Karnataka and Tamil Nadu to Andhra Pradesh’s benefit. Western UP and Haryana have similarly benefited from the economic dynamism of Delhi, irrespective of what their State Governments were up to. It is not necessary to have every CM on Team Modi’s Bench. Just getting 50% onboard, sprinkled across the country, can generate strong growth impulses nationally.

Fourth, a institutional focal point for getting CMs on board is needed. The National Development Council exists, but needs support. At the heart of the change is the willingness to share with the states, the fiscal and administrative powers available in the erstwhile Planning Commissions. How it’s is structured will be critical. Yet another anemic Think Tank is hardly fit for purpose.

Fifth, the key administrative unit, at the cutting edge level are the 604 Districts in rural areas and around 3255 “towns”. It is at this level that all reform and change is implemented. Unfortunately, this level of administration remains completely divorced from the direct responsibility for achieving the three point agenda of growth, jobs and poverty reduction in their own areas. This has to change if we are to “Do a Deng”. China determines local targets for national objectives. We must do the same.

PM Modi must provide incentives to States to “push back” senior officers from clunky state secretariats to the field. State secretariats (as also the Union Secretariat) must be slimmed down and District and urban Local Bodies strengthened. This can restore technical competence and gravitas to district and local body administration. The minimum service in field postings for IAS/IPS officers, before they can go to the State Secretariat must be increased to 15 years from the 9 years necessary today.

Every District and Town will also need base line studies of jobs, poverty levels and the size of the local economy. Their annual growth and poverty reduction targets and achievements must be available publicly. The share of local resource allocation must increase and be aligned with the path to achieve these objectives at the local level.

Today District Plans are just local segments of state government projects with specified outputs but with less than adequate linkage to the three overarching objectives. Local “Planning” is more about appeasement of local politicians rather than about achieving national objectives. More rigorous project selection guidelines; filters for assessing poverty reduction, growth and job creation potential; better oversight of expenditure and public participation in decision making are the underpinnings of success.

PM Modi does not have a centralized Party based executive to rely upon, as Deng did. But he can forge a Team of politicians, bureaucrats and non-government professionals who have a passion for lifting India out of poverty via economic growth and private sector jobs. Many are waiting for his call.

Indian Blood is Expensive

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Indian diplomacy was at its worst last week. It conducted the PMs visit to the US as if he was attending a seminar on economics, in Neemrana. If India is a superpower (perennially waiting to happen), it came across, on the one hand, as a country sapped of all energy and squabbling about petty matters whilst on the other, punching way above its weight (as usual), by seeking to “inform” international debate on marco-economics, political strategy and social development. When will our politicians learn to control their babus egos? International agendas should be set by politicos to project a short, simple and credible message, not waffle on about everything under the Sun.  

Iran, in sharp contrast, showed real leadership and stole the thunder. The freshness of Iran’s approach to international rapprochement and the staleness of India’s squabbling with Pakistan couldn’t have been starker. The Pakistani perception of India and its leaders, aired on Pakistani television as bumbling compromisers, unable to live up to meaningful actions was true, but humiliating.

India used to be a Banyan tree spreading its roots. Today it has become a Baobab tree. Massive from the outside. Hollow from within. This is despite having the best technical talent and intellect in the world. Indians leave India to grow, get respect abroad (like Raghuran Rajan) and only then have the choice to return home to be recognized. The Indian private sector has similar constraints. Indians invest 1 % of GDP abroad (the real figure is higher but the IMF and the GOI do not share with us their assessment of investments abroad using havala) because of the ease in doing business, even in nearby Bangladesh, Myanmar and Srilanka.

Modi spoke on Sunday, from the ramparts of Rohini in Delhi, of “small” nations leaving India behind. It seems he was referring to East Asia, which overtook India in the late 1970s. He could as well have referred to our neighbours in South Asia and Myanmar, who have more recent successes. After Bangladesh, India is the poorest country in this region (World Bank definition of people with income below $2 per day). Srilanka, Nepal and Pakistan all do better than us. Both Srilanka and Bangladesh kept economic growth above 6% in the period 2009-2012 (World Bank Development Data). Even Nepal, managed to keep it above 5%, astoundingly despite (or perhaps because of) an undefined political architecture or credible government. In Pakistan, growth trended upwards from 1.6% in 2008 to 4.2% in 2012. Indian growth meanwhile declined to 3.2% in 2012. The manner in which Srilanka, Bangladesh and Myanmar have shaken off their erstwhile, crabbish lethargy of looking inwards is thrilling for business. We can learn from them.

External and internal conflict is a major growth retardant. The lengthy literature on the negative impact of conflict and violence on social capital and community well-being highlights the importance we need to give to the Rule of Law and Security. Sheikh Hasina in Bangladesh has met the extremist challenge upfront. Rajapaksa similarly tamed the Tigers in Srilanka. India’s inability to take strategic and bold steps to root out terrorism is attributed to our being a democracy and hence a soft State.  Nothing could be further from the truth.

If you are poor and marginalized, the Indian state would appear extremely hard and uncaring for your rights. Over 700 million people fall in this category. We are a country still enthralled with inherited social and ritual, class status. In this respect we are very similar to the UK and differ from our true team mate, the US. However, the US acts only in national interest. This is their ethos. You make it or break on your own. If we want to be taken seriously by the US (and the world) we have to first deal with what ails us within.

It is wrong to rush to the US to shake a few limp hands, limply. It is tragic to have leaders who represent no one, or to have those who drive from the back seat. It is unwise to degrade babudom into a quivering jelly of indecision even though we all know that both growth and social inclusion are based on selective but firm and effective state intervention. It is a crime to waste our intellectual and entrepreneurial talent overseas and be poorly served at home. It is unconscionable to spill Indian blood so casually but continue shaking hands with a Pakistani, puppet, Prime Minister. Yes, the nations of the world will applaud this conciliatory, rational approach. But what they respect, is America’s single minded determination to “hunt and gun down” the perpetrators of violence which spilt American blood in America.  Even tiny UK attacked Argentina (admittedly better known for its beef than its military prowess) in a display of the essence of sovereignty; the monopoly of the State over violence within its territory. The world fears China’s single minded, uncompromising pursuit of national interest. If we want to play with the big boys we have to emulate their tactics.

Any poor Indian looking to buy blood for an operation faces prohibitive prices and often scarcity. Why is the blood of our babus in uniform, so cheap then? Let’s value it better.  

 

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