governance, political economy, institutional development and economic regulation

Posts tagged ‘Thomas Piketty’

Will NITI get it’s hands dirty?

Rajiv-Kumar-NITI

Rajiv Kumar, the new vice-chairman of the Niti Aayog, has made development of an organic, Bharatiya model of development as his mission. He is likely to encounter three problems in this endeavour.

A new, local model of development is doomed from the start in a globalised world 

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First, in a post-ideology world, marked by rapid technological transformations, economic models become outdated even before they can be tested. In these uncertain times, feeling the rocky river bed with one’s feet carefully, while crossing turbulent economic and social currents, seems the wisest option.

Second, isn’t this what Bharat has always done. We have been obsessive about the “uniqueness” of India, which seemingly requires all international experience to be adapted for use locally. This is not necessarily a bad thing, though it has its downsides.

Scaling up rapidly more important than localisation

school lunch

Consider that in the five decades after Independence we have stuck, like leeches, to the Nehruvian development model of ersatz socialism based on a massive industrial public sector accompanied by the outrageous neglect of agriculture, private enterprise or international quality education and health facilities. This, when most other emerging countries, in East Asia, Southeast Asia and Latin America, switched over to a modified Anglo-Saxon, neo-liberal strategy from the 1970s and reaped the benefits of rapid growth.

To be sure, even after 1991, the reform model we followed was Bharatiya. Its core ingredients were incremental rather than big-bang reform — a strategy Russia followed with disastrous results — and careful sequencing of sector reform to minimise the pain from reforms.

It is unclear, however, whether Bharatiya incrementalism helped the poor. Chancel and Picketty (July 2017) estimate that over the period 1980 to 2014 the share of growth accruing to the bottom 50 per cent of adults was 11 per cent in India; 13 per cent in China and only one per cent in the United States. Meanwhile, the top one per cent of adults garnered 29 per cent of the growth in India. China did better by containing the share of this segment at 15 per cent, while the US did worse at 34 per cent. More worryingly, the next nine per cent of adults, from the top, garnered 37 per cent of growth in India, significantly more than in China (29 per cent) and the US (32 per cent). Where we failed spectacularly was in protecting the middle 40 per cent of adults, who got only 23 per cent of the growth versus 43 per cent in China and 33 per cent in the US.

Be shrewd and businesslike not ideologically shortsighted

One Bharatiya innovation which succeeded spectacularly was the phased introduction of currency and capital convertibility. This modified-market approach was validated by India escaping the ill-effects of the 1997 East Asian currency crisis. It is significant that Malaysia followed our innovative approach, endorsed by Jagdish Bhagwati, by reimposing capital controls after 1997, and Iceland did similarly in 2008.

Similarly, our choice of shying away from “big bang” privatisation of the public sector, unlike Latin America in the 1980s and Eastern Europe in the 1990s, worked well. We chose instead to liberalise controls over private investment, thereby enabling private companies to grow and compete with the public sector. This strategy has paid dividends in civil aviation, telecom, minerals and electricity generation. Incremental private sector investment now dominates these sectors and a competitive market-based economy has emerged.

Simultaneously, we contained the social cost of reforms. But a similar policy has not worked in banking. We were too hesitant to give up the political power which comes with the government owning public sector banks. Private banks today account for just one-third of banking assets. The massive economic problem of stressed loan accounts, amounting to around 14 per cent of publicly owned bank assets, is a consequence of our not following through by liberalising the financial sector. Bharatiyata has, unfortunately, become synonymous with crony capitalism in banking.

Aping the turtle gives time to pull a reform coalition together

The GST is operational today due to a strategy of incrementalism, driven by the need for building inter-government consensus. Early indications are positive both on the increase in revenue collected and the enhanced compliance by taxpayers. But the jury is out till the final results come in by April 2018.

In a nutshell, Bharat’s economic policies have always been unique and contextual. Some observers would even say we obsessively reinvent the wheel. It will thus be a tall order for the Niti Aayog to evolve a new Bharatiya model of development, which is completely unknown to us, or the world.

Don’t fix what isn’t broken

Third, do we need a new model of development? The existing model has served us well. The areas for deeper reform are well known and agreed. Indeed, many are already on their way. Hopefully the 15th Finance Commission will continue the task of decentralising fiscal resources, by increasing the share of devolved resources from the 42 per cent existing today towards 50 per cent. This would push the Union government to be more selective in its interventions based on the time-tested principle of subsidiarity — not doing anything that can be efficiently done at a lower level of government. The government is already allocating more resources to agriculture, education and healthcare, which had fallen through the gaps earlier, while also stepping up allocations for defence and infrastructure.

Avoid the temptation to centralise functions – There is enough to do for all.

At the helicopter level of grand plans and policies, there is no gap which the Niti Aayog can address. In fact, it would do well to exercise forbearance in areas where individual ministries are better equipped to take the lead. Where Niti can add value is in addressing the root causes of poor implementation. Tony Blair’s Service Delivery Unit did this to marvellous effect in the UK. Malaysia and Tanzania thereafter copied the template.

Check the plumbing in government. Massive efficiency gains are low hanging fruit

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Niti should focus on the nitty-gritty of getting the plethora of good intentions, embedded in policies, implemented on the ground. This goes beyond close monitoring of targets or punishing laggards. The devil lies in clogged delivery chains, poor metrics to measure results and misaligned incentives, all of which need to be painstakingly mapped and then innovatively declogged. It’s a plumber’s job that needs to be done. Is the Niti Aayog willing to get its hands dirty?

Adapted from the authors article in The Asian Age, September 7, 2017  http://www.asianage.com/opinion/columnists/070917/is-niti-aayog-willing-to-get-its-hands-dirty.html

 

SmartCities: Making the rich smarter

The latest public “dog and pony show”, unveiled on Thursday in Delhi, is the selection of 20 cities across the richest 11 states of India for accessing the governments Smart Cities fund.

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Photo credit: smartcitiesindia.com

The near-complete exclusion of the poor “cow belt” states, except Rajasthan and Madhya Pradesh, can be explained by the need to first push public money to where elections are to be held in 2016 — Assam, Punjab, Tamil Nadu and Kerala — West Bengal being a surprising exclusion.

But what takes the cake is the inclusion of the New Delhi Municipal Council (NDMC), comprising just three per cent of Delhi’s area, which is directly administered by the Centre. The Central government owns nearly 90 per cent of the 44 sq km it comprises with marginal ownership in and around the prestigious Lutyens’ zone of power brokers, lobbyists, old-economy business people, big time realtors and other hangers-on of this rarified ecosystem — the Indian equivalent of the Washington DC Beltway.

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Lutyens Delhi a lush, green bubble in the heart of the capital. photo credit: indiatravelite.com

The NDMC is already a profitable municipality, as indeed it should be. It spends over Rs 3,000 crore ($450 million) every year on serving just 300,000 people — a per capita expense of Rs 1 lakh ($1500) per resident, per year. Compare this with the average spend in the other three municipalities of Delhi of just Rs 7,300 ($110) per capita per year — all currently managed by the Bharatiya Janata Party. More starkly, the average spend for all urban areas, across India, is a shockingly low Rs 1,000 ($15) per capita per year.

Why is the selection of NDMC for yet another barrel of “pork” so disappointing? Three reasons strike out:

First, that this should happen days before the “reformist” budget expected to be presented by the Union minister of finance for 2016-17 is unnerving. The budget is, or should be, about spending public money well and wringing out the maximum public value from it. Allocating subsidies to the rich cannot be part of a pro-poor paradigm. It symbolises all that is wrong with a bureaucracy which is all “spin” and no heart.

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Second, the bane of China style “big government” has been soft budget constraints and poor accountability. Big budgets lead to profligate spending. Bureaucrats are more interested in shovelling money out of the public door into private pockets and marking up their “performance” sheets, than in ensuring that the money is spent in areas where growth and poverty reduction can most be impacted. The casual allocation of Rs 500 crore to the richest local body in India, with the highest per capita income, just so that it can shine even better, speaks of a pernicious tendency in new public financial management to mimic private finance by allocating money where it can be quickly absorbed, rather than risk it where it would create the maximum social and economic value.

Third, it is no one’s case that redistribution of wealth can be done by pulling down those who are well off. But Reserve Bank of India governor Raghuram Rajan’s recent diatribe against the lack of public concern about the optics of vulgar displays of wealth strikes a chord.

Lutyens’ Delhi is the “Kohinoor” of Delhi. A small self-absorbed bubble of power, privilege and wealth. One acre of land here costs Rs 500 crore and sales happen rarely. Why can’t the power elite pay for the privileges they enjoy? Why is it so difficult to convince the 4,000-odd large private property owners — each with a minimum net wealth of at least Rs 100 crore — to pay for retrofitting their beautiful municipality? Isn’t that what participative governance means? Why must poor Trilokpuri in east Delhi comprising the marginalised, poor and the shabbiest of public services pay for keeping Lutyens’ Delhi shining?

 

Trilokpuri

Trilokpuri, East Delhi, a festering sore where only the marginalized exist. Photo credit: Indianexpress.com

Had Thomas Piketty been part of the Smart City selection committee he would have torn out his hair in a fit of Gaelic rage at the callousness with which public money has been wasted and inequality worsened. What indeed was the selection process which has generated such a warped result?

The allocation instrument is a “challenge fund” devised by the usual suspects: Fly in, fly out consultants. As expected, on paper, the process appears transparent and efficient. It is a beauty contest. Municipalities send in their proposals seeking Central government funds for up to Rs 500 crore ($75 million) over four years. But they must match the Central government allocation and also meet the criterion of performance efficiency which includes standard metrics like collection efficiency, proactivity, etc. Nothing wrong with that at all. The killer is that there is no criteria on what impact the project will have on reducing urban poverty or on reducing the depth of deprivation in access to basic public services in poor localities.

Is it any surprise then that the Smart City fund is merely ending up elevating the “boats” which are already afloat? And how is that so different from the infamous National Rural Employment Guarantee Act (NREGA) of the United Progressive Alliance, which similarly incentivised the ability to use funds quickly? Rich states like Tamil Nadu, with average informal wages way above the national average national, quickly pulled out most of the funds, whilst the poor, badly organised states faced an empty treasury by the time they got their act together. As before, the mightiest wins yet again.

Political pork, lazy bureaucrats, the use of public funds for private gain by the elites is all old hat in India and across the developing world. Nothing new in that. The pity is that it needn’t be this way. The anguish is that old style cornering of public funds with no regard for ensuring equity, persists like a deep-seeded rot.

Prime Minister Narendra Modi of all people, should know the negative feeling generated from being excluded by the establishment. He must have experienced the chagrin of public money being wasted on “gilding the lily” whilst millions of poor children, like him, had to make do with a subsistence existence. Or is human memory so frail that one quickly forgets the bad times? Former Prime Minister Manmohan Singh was fond of establishing his humble roots by saying that as a child he studied under the village lamp post. But in the 10 years that he was in power, millions of children continued to study in exactly the same way.

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The preoccupations of the “Delhi Durbar” are pretty compelling. That is why they say you can wear a crown in Delhi. But don’t sleep easy — it isn’t permanent.

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The lonely statue of King George V after it moved from under its domed canopy  in India Gate – since awaiting another incumbent-and relegated to a museum.

Adapted from the authors article in Asian Age January 30, 2016http://www.asianage.com/columnists/exclusive-cities-715

Small guys always win

Star Wars episode VII tells it like it is, in reel life. The small guys — with fire in the belly and a higher moral purpose as their force — always win in the end.

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In this universe, big is evil. Thomas Picketty, the celebrated French economist, agrees. The bigger you get the further behind you leave most people. Just a handful hoarding wealth can’t be good and it isn’t.

Government of the underdogs but not for the underdogs

India has a long tradition of the government trying to protect small guys against the big guys. Our post-colonial mindset and our laws pretend to penalise the rich and big business. In actual fact, they work against the middle class and the poor. To make things worse, government has been pretty poor at doing the things rich people and big business could do, like investing in infrastructure and creating jobs.

The government in China manages to do this. But the government there has some advantages: The tight social compact between it and citizens and its credibility based on sustained growth, increasing incomes and improving lifestyles. Higher levels of homogeneity help.

In real life, of course, being big is often an advantage. Teenagers will agree instantly. Older folk may not be so sure. A great body with bulging muscles looks awesome at 19. But as the 40s kick in, things begin to sag and get lumped around as useless weight. Nations are no different. India is a big, old nation with a governance history and systems developed over the last 500 years. It is unsurprising that it is flabby today.

Our options

We can go two ways. Either we can reenergise the existing, highly-centralised system of governance or invent a new, highly-decentralised system celebrating the small guy.

Technology enables efficient centraisation

Technology enables and often induces a higher degree of centralisation today than ever before. In earlier times the bigger an empire became, the more loosely were the far reaches managed. It took the British force, marching up from Calcutta, three months to relieve the siege of the Lucknow Residency in 1857.

Residency

Today a trained and equipped special force can reach a trouble spot anywhere in India within a day. Things can be monitored in real time, across enormous distances, providing early signals of “hot spots” or flashpoints for potential trouble. Social media has created a new, real time, citizen-centric information ecosystem. For every two Indians there is one mobile connection. Of these 20 per cent are smart phones. Within five years there will be as many mobile connections as Indians and 60 per cent of these will be smart phones.

Standardisation is another advantage of centralisation. Education, health, products and services all reflect the “Big Mac” effect — places change but the service remains the same. This is very attractive if you are a fan of robotic life. It also reduces the cost of doing things.

But centralized templates sap innovation

But there are problems which come with big, centralised empi-res. One problem is how to manage the concentration of power at the top. Humans have coped with inequity for generations. But “glass ceilings” sap potential and deaden the desire to innovate and take risks.

Choice is at the heart of efficiency. Old, immigrant nations like the United States retain their mojo because people choose to become citizens; virtually no one is born to a job and everyone has a voice. China is also a meritocracy, though choice is limited there.

But humans are neither robots nor pets. We are honed to express our individuality, search for better alternatives, a better way of doing things.

Inefficient, small, good guys versus efficient, big, bad guys

In Star Wars terms, India is the good guy and China the bad guy. We are the small good guy. We cannot destabilise the world economy. China can. We do not have a history of flexing our muscles. China does. We don’t deliberately infringe human rights. China puts national interest above human rights. But we the inefficient small guy, unlike Singapore, Mauritius or Malaysia, whilst China is the efficient, big guy.

starwars

Competition and choice make decentralized systems efficient

Large, efficient democracies are not born overnight. They are nurtured over six to eight generations. Ours is just three generations old. Our Constitution recognises that one size does not fit all. That is why it establishes state and local governments. Most state governments haven’t empowered local governments, partly because even their own empowerment is very recent. Smaller state governments work better than bigger ones. The shining stars are the five southern states, Punjab and Haryana. Gujarat and Maharashtra are the outlier, efficient, big states. The bigger northern and eastern states illustrate that size is a handicap especially if coupled with antagonistic social diversity.

Choice is embedded in our Constitution. But powerless local governments make choice a redundant option. Our nascent democracy makes us obsessive about potential threats to the unity of India. Destabilising threats from our immediate neighborhood heighten this paranoia.

Consciously dumbing down the Center to the bare essentials of sovereignty is the only way of making the big guy efficient. Empower state governments by transferring human development and social protection functions with the required financial resources. Make the transfers conditional to states empowering their local governments in turn. A cascading stream of resources empowering the smaller guys is the mantra for equity with efficiency. It is only then that India will become an efficient good guy, even as we grow bigger and bigger.

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Adapted from the authors article in Asian Age December 26, 2015 http://www.asianage.com/columnists/small-guys-always-win-373

Restart: The last chance for the Indian Economy

Restart

Mihir Sharma’s book (Random House 2015) is the one for you if you are a policy wonk but at a loss for arresting sound bites; a businessperson looking for bright and engaging things to say at your next meeting; a student of economics, politics or sociology grappling with the question why things are so difficult to do in India; or an expatriate keen to remain in touch with the undercurrent of “happening” things in India

Priced at Rs 1.38 per page this is an attractively packaged book for the itinerant reader, which is possibly the only kind of reader available today, in this networked, audio-video afflicted world. Its six parts consist of 68 handy chapters, each of just two to three pages, with its very own evocative title – very readable just after take-off; before landing or in those rare moments between the last public announcement and the arrival of the meal trolley.

Mihir is a master at reeling in the reader and keeping her engaged with very stark opinions, some of which are seemingly evidenced but all of which are likely to strike a chord in the reader….gosh! Wish I had thought of it that way or…wish I could have said that!

He is an entertainer at heart and pulls no punches in going all out at doing just that.

This is not however a 101 quickie to brush up on the Indian Economy complete with a statistical abstract. The relentless but sparkling wit is uplifting for those who like the play of language and know English well; have the time to be titillated and have a rudimentary awareness and interest in the Indian economy and politics.

For those who don’t share these interests “Restart” will most likely nudge them to delve deeper into more serious tomes on the subject or at the very least start reading the newspaper Mihir currently works for-Business Standard.

Despite the tough talk and brusque tone of the book, Mihir is at heart a romantic with a touching but wholly misguided belief in the possibility of “clean” or moral” capitalism.

Crony capitalism can’t “make in India”

He castigates Indian industrialists, as government stooges and mere rentiers, living off their ill-gotten gains gathered in cahoots with an obliging and corrupt government. This naïve 1990’s belief peddled by the multilateral and bilateral donors, principally to assure tax payers at home that their money is not going down the tubes as aid, assumes that it is possible to do business “nobly”.

Sadly the murky history of business fortunes, not just in India, but across the world, does not substantiate this belief except in the new age IT world where innovation trumps connections. But vast amounts of wealth is generally acquired by outwitting the next guy and hanging on to as many monopolies as one can. As Warren Buffet put it- owning the only bridge over a raging river is the best investment.

One would expect Mihir, the realist and straight talker, to defend business a bit more and castigate the government a lot, for perpetuating the crony capitalism we see around us. The job of business is to protect the bottom line of its shareholders in whatever environment it operates in. It is the job of the government to create the right environment.

Poor regulation and worse infrastructure-the missing link

His vision of manufacturing led growth and jobs is “old word” of huge assembly lines like in the US and China. In this world the key to competitiveness is producing to scale. No space here for the virtues of micro, village or small industry. Mihir uses harsh words, albeit deservedly, for industrial and labour regulations, which constrain scaling up by small but outstanding entrepreneurs.  This is now conventional wisdom. But are poor regulations really the key constraint to create an additional 6 million jobs a year or is there considerable scope for additional employment creation just by improving the abysmal and pervasive shortage of infrastructure-an outcome of poor governance and worse public decision making over the last decade?

The urban pot of gold

He subscribes to the view that there is no substitute for rapid urbanization- again something which has become conventional wisdom. Villages are sinks of depravity per Mihir. His analysis of why Indian cities do not live up to his expectation of being social modernisers- breaking down traditional social cleavages and forging new, modern identities is that they are not built as work places and instead are just better places to live in than villages.

Could his view be shaped by the cities he has lived in? Jamshedpur, the TATA exemplar industrial town; the ageing but genteel Calcutta with its heritage of absentee landlords languidly taking in the country air as their barge sailed up the Ganges on their annual soiree to collect rent and its more modern but still investment starved, going-to -pieces, version of Kolkata; babudom afflicted Delhi and Chandigarh where nothing is produced but files? Would he have a different view of he had grown up in Tirupur, Ludhiana or Dhanbad- workplace associated developments all. Is this vision also founded on a premise that good, rewarding work has to be associated with industrial activity? In Mihir’s words good work is that which produces things other people value and will pay for.

Washington calling?

He subscribes to the Washington consensus theology of markets, price decontrol, delicensing and private investment led growth to solve problems and unclog the pipes of the economy. But curiously, he is silent on the associated conundrum of increasing inequity in assets and income, highlighted by Thomas Piketty recently with concentration of wealth in the top 0.1% of the world population which threatens the consensus around growth and possibly throttles any chance of developing a less “angry” society sharply divided between the “haves” and the “have nots”.

The chicken or the egg of social change and economic development

Ironically, albeit correctly, for Mihir social change is fundamental for economic development. His silver bullet for social change, growth and economic development is to “get women working”. This may sound odd to those who believe women already do that and more, though not necessarily in a formal workplace. Consider that across the hilly and tribal regions of India it is women who are the “workers” at home and in the forests and yet this does not automatically lead to women’s empowerment or substantial change in aggregate economic outcomes.

Indeed, the evidence seems to show that it is economic development which provides new entry points by delinking financial reward from ritual status allowing those previously marginalized by culture, ethnicity or religion to empower themselves. This, in fact, is one key driver for migration of the marginalized to where work is available.

But this book is not about options or prescriptions for change. That will follow, one hopes, possibly in a Steven Levitt (Freakonomics) type problem solving sequel to Restart. This book is designed to perturb our placid intellect; churn the mind; force it to react, even aggressively, to challenge Mihir’s outrageous, cynical, trite, trivial and acerbic but always delightfully insightful, in-your-face, logic.

The publishers have been unfair to Mihir Sharma by marketing “Restart” merely as a book on the Indian economy and its problems. Yes, Restart does use the economy lens. But it is actually about all-of-India, in the style of a Ramachandra Guha epic- minus the scholarship.  This is of course as it must be because decision making, attitudes and behavior, which are at the heart of Mihir’s discourse, are interlinked processes.

Is this really the last chance for the Indian Economy as the title claims? I would seriously doubt that. These are turbulent times, which India is negotiating quite well, thank you. But I would have titled the book as “Restart: A pill to shake up India”.

 

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