Monday, June 30, 2014

Three development tensions of India

I have an op-ed in Indian Express with Lant Pritchett on three challenges of India's development experience - managing equitable growth, revitalizing a 'flailing' state, and unlocking the potential of states. A longer version is below.

In the euphoria surrounding the election results, it is tempting to avoid facing up to the harsh realities of making development happen. Even for those who characterize the election as “the dawn after the dusk before” in the new light of day India’s development challenges remain essentially the same. These challenges were not overcome by an election, nor can be overcome by doing more of the same, even if effectively, but by doing things differently.

There are, and have been for some time, three central tensions of India’s development experience. The first tension is to sustain a development model which generates rapid economic growth but also creates jobs and produces equitably shared benefits.  The second tension is to deliver effective governance with a “flailing state”. The third tension is to manage national cohesion in a vast and diverse country - where there are as many India’s as there are Indians. None of these three existential tensions of modern India have changed with the electoral results. Let’s examine each.

India needs a dynamic growth strategy, one that goes beyond unproductive dichotomies that pits growth against redistribution, rural against urban, and small against big. The ongoing growth versus redistribution debate, reflected in the recent acrimonious battle between two distinguished pairs of economists, obscures more than it illuminates. This dualism, which pitches one world-view against another ostensibly opposing one, is a gross simplification.

India is far from alone in having gone through this debate. In its initial World Development Reports (WDRs), the World Bank proposed a “two-and-half legged stool” strategy for economic growth – policies for creation of productive labor demand supported by those for development of human capital, and underpinned by a system of “half-a-leg” of a basic safety net. However, with time, the WDRs and global discourse have gravitated towards a single-leg strategy of redistribution, revolving around social transfers, best exemplified by the Latin American Conditional Cash Transfer (CCT) programs.

India, especially over the past decade, has been an enthusiastic adopter of this single-legged stool strategy. The employment guarantee program and food security legislation are totemic illustrations. In this context, it is important to bear in mind that even in Latin America, as in East Asia, the vast majority of people emerged out of poverty not through transfers but through earned incomes from productive jobs created. 
We therefore argue in favor of a development strategy that combines economic growth with productivity. This requires the replacement of the prevailing model of static redistribution of products that revolves around handing out dole with redistribution of productivity that creates the conditions for increased economic growth. This redistribution would equip all Indians, especially the poor, with skills that enhance their productive potential. In other words, India’s development agenda should be framed around economic growth which is underpinned by re-distribution of productivity.

Such redistribution of productivity requires public policies that can enable access to a basic set of essential goods and services for all Indians, irrespective of their economic station. A recent McKinsey report indicates that nearly 650 million Indians are income deprived and need support to access these essential goods and services. This would enable them to develop certain core human resource competencies that are necessary to access opportunities in the modern economy. It will also ensure the ultimate objective of a dignified life for all Indians.

Needless to say, this productivity agenda has to be complemented with the more widely discussed reforms to release infrastructure constraints, deregulation to improve the ease of doing business, removing labor market rigidities, deepening and broadening of the financial markets, and so on. Pro-market and pro-poor need not be contradictory.

Second, the achievement of all development objectives is closely dependent on a state which is effective in the implementation of its core functions. The weak state capability is an obstacle to the achievement of all the ambitions of an “aspirational” India. This weakness is reflected in issues as wide-ranging as the abysmal student learning levels in public schools to the intermittent and poor quality of electricity and water supply and their persistently high distribution losses. It contributes as much to perpetuating the pervasive harassment of citizens approaching the government for statutory services, as to fuelling the large-scale corruption that arises from failure to design and manage contracts with private parties that protect public interest.
This has in recent years resulted in a steady erosion of the commitment of the middle-class to public provision of services. The perception of a weak state and the resultant feeling that governments cannot get the basics done has spawned three trends. One, the belief that government institutions cannot deliver good quality services – education, health care etc – has led people to vote with their feet to private service providers. Two, the belief that public services are so irretrievably damaged have led to the belief that cash or benefits transfers is more effective. Finally, the deep disengagement of those entrusted with the responsibility of delivering these services, not only in their role as providers but also as users, has depleted any incentive to improve performance.     

Restoration of state capability is not easy, given its close interaction with political and civil society dynamics. The commonest causes for degeneration in state capability include politicization of bureaucratic processes, administrative indiscipline, erosion of accountability in the discharge of official responsibilities, weakened supervision and monitoring, and ubiquitous corruption. Any meaningful effort at restoration has to address these failures. The role of state governments is central to success in improving capability of the Indian state.

Finally, on social cohesion, its religious and linguistic dimensions have, rightly so, received much attention. However, a more functionally important dimension revolves around the role of Indian states in its federal structure.

It is now well acknowledged that most of the dynamism of the Indian economy over the past decade has come from its states. Even as New Delhi slowed down, many progressive states aggressively pushed reforms, invested in infrastructure, and courted private investments. These state economies, many as large as medium-sized countries, did not go through anything like the weakness experienced by the national economy. Astute observers and investors no longer see a “one India”, but prefer to look at the country as “many Indias”. A new government with an ambitious growth target would want the engines of its growth at full throttle.

Indeed the Prime Minister has recently acknowledged that “India’s progress lies in the progress if states”, and affirmed that issues raised by the states will be considered on “priority”. This calls for the central government to step back from dictating to states and let them chart their varying natural growth trajectories. The most sustainable strategy to promote national economic growth is for the central government to facilitate, not micro-manage, state’s unlock their development potential.

The most egregious example of such shepherding is in the role of the Planning Commission. The one-size-fits-all norms and components of all national programs impose stifling and highly inefficient restrictions on states. The annual state plans for each program is made in a routine manner without consideration for the widely varying requirements of states. The result is lack of state ownership and routine, at best, efforts at implementation.

It is time to move beyond this and embrace an approach that allows states enough design and operational flexibility in these programs. The central government should clearly outline the objectives and broad implementation guidelines and leave it to the state governments to prepare detailed plans that meet their requirements. The state Chief Ministers should be encouraged to lead its design and implementation as his or her government’s program. When state governments have the resources and the freedom to address their development problems, it is most likely to generate accountability and effectiveness, both missing from the current paradigm.

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