In this article, Deepanshu Mohan speaks of the need to unlearn the theoretical neo-liberalist idea of inclusive growth, to delve into a more pragmatic approach where growth and redistribution are hinged on to each other, and how government interference is imperative to purge growth inequalities that stemmed out from the pro-market policies.
In the age we live in, the process of securing a persistent rate of higher economic growth is considered to be the ultimate means of achieving prosperity for all. Economists and policymakers insouciantly use the word ‘inclusive growth’ in penning down the objectives and rationale for every policy and reform measure.
It becomes pertinent thus to explore the underlying neo-liberalist idea of inclusive growth that fails to apply in evidence to the developing world context (specifically to India in South Asia).
The idea of inclusive growth has shaped our understanding of growth since the mid-1960s. The process of achieving such growth encompasses an inclusion of all sections as beneficiaries and partners in growth, and envisages that an inclusion of the excluded should be embedded in the growth process.
Such growth, as expected, by itself will then lead to a high elasticity of poverty reduction (higher reduction of poverty in per unit of growth), also reducing income inequalities at individual and group levels.
Curve of Inequality
Simon Kuznets (1966) explained how inequalities do not last for long. According to Kuznets, ‘Economic inequality increases over time while a country starts developing; however, after a certain average income is attained, inequality becomes to decrease’.
The curve of inequality — the Kuznets curve — is inversely U-shaped, where inequalities tend to decline after a point because of two reasons: Firstly, with higher economic growth, the tax revenue of governments is likely to increase, enabling them to spend more on infrastructural development, education, healthcare and skill development; particularly in backward areas where the need of such social investment is felt more, in improving opportunities for people lacking the capital to grow.
And secondly, after the initial period of economic growth and boom, the stated expectation of neo-liberal advocates is that it will trickle down to people, by creating more jobs and incomes for many.
Jagdish Bhagwati cites the need of ‘Track II’ reforms in developing countries where he calls for the government to massively spend the economic benefits from liberalising markers on healthcare, education, etc. for the initial growth to trickle down and achieve the principles of equity and sustainability.
It Just Widens
In a her 2012 paper, Indira Hirway provides some useful empirical evidence from South Asia to debunk myths attached to ‘inclusive’ theoretical application of neo-liberalist version of economic growth. Hirway explains how, in spite of the adoption of pro-market policies in most South Asian countries, the level of income inequalities continue to widen.
Out of the 14 Asian countries studied, inequality has increased in 11 — including Sri Lanka, China, Cambodia, India, Indonesia and Nepal. Malaysia and Thailand were the only two countries where inequalities decreased at the margin. In the case of India, the Gini coefficient (a measure of income inequality) rose from 0.44 to 0.47 during the last decade.
The issue with the Indian case has primarily been with the implementation of Track II reforms where, in spite of higher, sustained economic growth levels from early 2000s, public spending on education and healthcare has remained drastically low (less than 3 per cent and 2 per cent of the GDP, respectively, till now). This has resulted in the accumulation of economic wealth in limited geographical city centres where economic prosperity is enjoyed by the few who directly accrue the benefits, leaving ‘the others’ entirely dependent on the government. Upward income mobility within these lower income classes remains an issue due to the lack of adequate education, health standards and access to increasing productive job opportunities.
In the field of employment and labour, scholars indicate a poor performance in generating productive employment with ‘decent work’ conditions. In India, the unemployment rate increased from 1.96 per cent in 1993-94 to 2.2 per cent in 1999-2000, to 2.37 per cent in 2004-05 and to 2.06 per cent in 2009-10.
Though different reasons are cited for explaining this increase by economists, trends show the rate of growth of employment including the rate of growth of ‘decent work’ has been far from satisfactory.
This is not just true in the case of India but other developing economies as well. According to the ILO, during 1995-2006, open unemployment grew by 22 per cent, pegging the global unemployment rate at 6.3 per cent. While the output growth rate was much higher than job growth, it is appalling how the obsession with production as the ultimate factor of inclusive and consistent growth still wheels the imagination of our policymakers.
Need an Alternative
A major limitation of the theory underlying the neoliberal policy framework is that it leaves two important macro-economic components outside its purview — natural resources or natural capital, and unpaid work or work that is outside the production boundary but within the general production boundary of the UN System of National Accounts. Both these exclusions are associated with the excluded sections of population, relevant for developing economies.
So, there is a strong need for policymakers in India and across the developing world to give a fresh look at the macroeconomic framework underlying the present policies. It is critical to end the tug of war between the growth and the redistribution phases as there is a clear lacuna between these two.
The mainstream growth process that creates exclusion as well as inequalities tends to overpower the redistribution process and intensifies exclusion in the process. As supported by Hirway, ‘both the growth phase and the redistribution phase should be complimentary to each other for the mainstream growth process to be inclusive’.
For this, first, the macroeconomic policy framework warrants a radical change, where we need a vision shift in moving from short term focus goals to a more long-term focus.
It is also important that growth in developing economies continues to remain more labour-intensive and broad-based, as a generation of production employment opportunities on a large scale is perhaps the best way for including the excluded and marginalized sections of the population. This can be achieved by investing more in the development of small and medium-scale enterprises and providing an easier line of credit to their development.
Secondly, it is critical to adopt a rights-based approach accepting the citizenship’s rights of people. Provision of education, healthcare, basic infrastructural needs are part of the basic rights of every citizen. A persistent increase in social investments such as education and healthcare are attached with long-term benefits and are part of a macro strategy for improving productivity of workers and for enhancing aggregate effective demand in the economy.
It would, therefore, be useful for developing economies to think afresh on the theoretical applications of existing neo-liberalist policies that somewhere have failed to include the excluded and in the process modify the theoretical basis of such policies to indigenize them more suitably with a longer term focus.
Deepanshu Mohan is the executive director of Centre for International Economic Studies at O.P. Jindal Global University.
Note: This article was previously published in The Hindu Business Line, on 27 May, 2016.