Monday, November 16, 2009

Misplaced sympathies and collateral damage

One state government has a program to assist Self Help Groups (SHGs) and their federations start small co-operative stores selling various household provisions. These stores are provided stationary and provisions at concessional rates by absorbing massive subsidies.

While this has partially achieved the intended result of providing remunerative self-employment opportunities for SHGs and also provisions for consumers at lower cost, it has had some very damaging consequences. Apart from the now commonplace pilferage and diversion of the subsidized provisions, this policy has adversely affected the businesses of small shop owners and traders, especially in the rural areas of the state.

In such areas, one SHG run co-operative provision store (which would cater to a few villages) can potentially price out all the private small traders and shop-keepers and sound their death knell. All the hard work and effort that went into gradually building up private businesses is laid waste. Besides, such policies have a very profound and adverse long term effect on entrepreneurial spirit and private economic activity in those areas. It also generates a very harmful dependency syndrome among its beneficiaries. Such policies are therefore unsustainable and the fiscal burdens it imposes on the governments are considerable.

A more effective, less distortionary and sustainable way to achieve the desired objective of assisting these groups is to provide them all required forward and backward linkages (from training to accessing finances to sourcing intermediates and raw materials to marketing final products) to compete more effectively in the existing market. In other words, to borrow the cliched phrase, help and teach a man how to fish instead of giving him the fish!

Even a cursory reading of basic economic principles and countless examples from across the country and elsewhere (over time) have repeatedly shown that any government strategy to lower prices for consumers by market intervention is likely to come up short. This (particular) intervention is too small to make any meaningful dent on prices, and in any case, the government already has in place a policy instrument, the Public Distribution System (PDS), to address precisely this objective. And the most conclusive judgement against the program is that its subsidies place too large a burden on the state finances and therefore is unsustainable.

This example neatly illustrates the complex challenge of designing effective public policies to address poverty and social welfare. I am inclined to accept the view that the state government (and its policy makers, both political leadership and bureaucrats) initiated this program with the objective to "help the poor". But all such programs are generally designed assuming the target group in isolation without considering its impact on the rest of the economy or society. Accordingly, in many cases, its impact taken as a whole tends to be minimal or even negative, thereby causing considerable medium and long-term damage to the economy and the cause of economic development.

Worse still, such programs tend to create large groups of vocal and influential vested interests, who benefit by either pilfering or being part of its contracting chain. These groups invariably co-opt powerful sections of the political class and bureaucracy as rent-seeking stakeholders, and entrenches themselves against any changes to the status quo. Add the weight of the direct beneficiary class (here, the SHGs and their co-operatives), and it requires going against the grain of political correctness to question such popular programs.

Unfortunately many popular welfare programs suffer from precisely this malady. Opponents and critics (especially among the political class and bureaucracy) get immediately branded as anti-development and effectively silenced, even when questioning anything about its implementation, leave alone the outcomes. Debates in the print and electronic media rarely goes beyond the gaggle of general criticisms of populist programs and political expediency. They neither spotlight attention on the adverse consequences of such programs (apart from the rent-seeking and resource drain aspects) nor suggest different designs for the same program nor lay out alternative approaches to achieve the same objectives. Economists and professional public policy academics in India are yet to emerge as an important source of opinion makers on government policies. Neither do they have much influence in policy formulation.

In the circumstances, these programs, with all their attendant flaws, get perpetuated ad nauseum.

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