Challenges of Development- Deficit, Welfare and Other Demons

Sharan Banerjee has written a counterpoint essay to my previous post on his blog here. I'll try and answer his numerous critcisms here.

The first thing that Sharan points out, if I've understood him correctly, is that there is no necessary payoff between welfare and business and that the two are not antithetical to one another. I agree with him on this. My point there was that business interests were pushing out welfare to help them keep more money in their pockets by tax cuts.

Regarding debt and deficit, what I meant was not that they are absolutely immaterial, but that debt and deficit scares are being used by the government and corporations to rationalise cuts in welfare, while slashing taxation rates at the same time.

It might have been slightly misconstrued that I was understating the impact of debt and deficit, and I had pointed out that the internal debt owed in Rupees far exceeded the external debt, primarily in USD. A way of reducing this would be to print more currency and 'buy' your own debt, and while this causes inflation, there could be a number of policy checks implemented, and pegging both poverty criteria as well as minimum wage to it. If such policies are not followed, the natural reaction would be to increase Government revenue through taxation of high income groups or maintaining corporate tax rates and wealth taxes, which have been maintained/slashed/done away with respectively, and by increasing Central excise duty on a large number of finished goods(which happened, but could have been increased further without becoming prohibitively expensive). Instead, the government has cut back on spending in vital areas of social welfare like education, healthcare, food security and NREGA. It was here that I pointed out the Union Government was pandering to the interest of the upper classes instead of the poor and lower income groups. So I was not advocating increasing welfare ceteris paribus but advocating a rationalized tax increase to offset the spending in social welfare.

Also, in agreement with Sharan, I did advocate cutting down on subsidies of LPG and petrol, which primarily benefit the middle-class and not the poor. There could be rationalised subsidy cuts across the board which basically finance the middle-class. What I do not believe is that these cuts should not be affecting the poor.

His example of the resounding success of the Tories in the UK as an example of austerity reaping resounding benefits is something I disagree with and here is why:

In the period 2009-2013 (IMF data)

Harsher austerity measures do not imply increased GDP growth and the GDP growth rates achieved are not very impressive either:

The funny thing is, the main period of austerity was in between 2010-2012, and the economy was well on its way to recovery before that. The recent 'spike' around 2014 is largely thanks to the fact that no further austerity policies were enacted during that fiscal period.
As One may counter that the employment rates have risen dramatically during this period, but unemployment rates are still pretty high and as Simon Wren-Lewis explains, it may not be great news. Furthermore, while the average income may have risen in the UK, so has wealth inequality and with cutbacks in social security, that's no reason to cheer about.
While I think a discussion of the UK here is somewhat irrelevant, unless we're talking about 'jobless growth', which I will be turning to next, there's something else that bothers me about the austerity cult as I had pointed out in my previous articles, and it is wonderfully encapsulated by none other than David Cameron in this speech during 2013.
"It means building a leaner, more efficient state.
We need to do more with less.
Not just now, but permanently"

The reason why there people such as myself get worked up about austerity measures is that more often than not, is that it is an attempt to downsize the Government in the long run and if you remember, Modi promised just that with his campaign motto, 'Minimum government, maximum governance', echoing the Republicans in America. What this effectively means is that the spending cuts in healthcare, education and social security may well be permanent(So far, his policies and political rhetoric hasn't given us liberals any reassurance that he is any different from the political Right wing anywhere else). His 'welfare' policies reflect just that, the state receding from its role in social security, and the gradual expansion of the private sector in these areas which violate certain principles of social justice as we liberals see it.

However, since we're not moralising here, let's get on with the extension of my argument in the previous article about why you should care about social welfare and development even if you do only care about growth(assuming a form of sustainability here).

It's interesting that Sharan brings up the Solow growth model. He is correct in concluding that people saving money in banks will contribute to GDP growth, everything else remaining the same or ceteris paribus. The interesting thing about the Solow growth model though, is that according to it, both technological progress and a skilled labour force is also essential to growth. As I see it, however, that for this to happen, social mobility and education need to be guaranteed and the welfare cuts do nothing to make that happen. Without social mobility or education, you're stuck with a more or less fixed locus of skilled labour within the population. Someone could argue that for all practical purposes, the concentration of technologically skilled labour will always be coming primarily the well-off, assuming the existence of 'relative poverty', which is something that has no quickfire solution(No, Marxists and Anarchist friends/haters, that's not gonna happen no matter what you think), and they would be correct, which is why it does seem like the Modi and Jaitley are going to be trying to finance institutes of technology both through the public and private sectors to at least ensure that even within the middle class, they would look to expand the technologically and scientifically literate mass(I won't get be drawn into an argument regarding Hindutva science here though). But there's a bigger problem here with just focussing on technological development too.

One reason why  even conservative regimes within certain developing economies still invest in technology etc. while cutting back on almost everything else is because of fears of a 'Middle Income Trap'. This is basically a situation across emerging economies such as Brazil, South Africa, Mexico, Russia etc. where the income levels have stagnated in the middle income category. In another light, the question could be reframed as 'Why other than Japan and the Asian Tigers, no emerging economy has been able to transition to a developed economy?' The guidelines for this can be seen from this this report of the Asian Development Bank, which is probably why the Government is gung-ho about building an information economy.

However, if this paper by Larry Summers and Lant Pritchett is to be believed, then the mad rush to maintain growth rates and avoid the middle income trap may be self-defeating, since according to them, unnaturally high periods of growth(>6%) are often followed by slowdown and a high growth rate may indeed be a forecast of imminent slowdown as a case of 'regression to the mean', and that income levels are poor indicators of the same. If this is true, excessive worrying about how to avoid the middle income trap may well be pointless before ensuring a sustainable development plan.

And perhaps we can learn from South Korea here, which ensured comprehensive education and healthcare while embarking on a quest to achieve astronomical economic growth.

Sharan makes a point by saying high unemployment and low income can be offset by investing in infrastructural development and I am in almost complete agreement with him here, but there remain a few caveats. For one, unskilled labour in infrastructural development is often temporary labour and furthermore, such labourers are subject to inhumane working conditions. Especially since the present Government has an extremely apathetic view of labour rights and unions, I have concerns that such projects might well turn into mirrors of the infrastructural development projects in the Gulf. Of course, this doesn't mean that such projects shouldn't happen, but that serious labour law and minimum wage reforms are required before such development can take place, deregulation of labour will only lead to labourers being forced to work for less wage and for longer hours.

Where I completely disagree with Sharan however, is in his views on social choice and welfare.

For instance, his example of the choice made by BPL household to prioritise labour over education is basically the reason why we have welfare schemes such as 'Mid-day Meals', which for all its apparent ridiculousness and flaws, have indeed drawn students to schools since it reduces a significant part of their families' expenditures.

The value of social welfare lies in the fact that they allow individuals and groups greater freedom in making social choices and grant them greater social mobility, which is vital if the middle-class is to expand significantly.

The ability to make a choice for say, higher education, which has real risks in the chance that it does not pay off, is severely compromised without a lack of a social safety net like employment guarantee or food security. If for nothing else, social welfare schemes should exist for this purpose.

As I pointed out in an earlier post, while the PDS is leak-prone, the leakage in case of food security has reduced to 20%. While Sharan says the point regarding the criticism of cash transfers as efficent/ineffective is 'moot', but I think it isn't. I stated earlier that the utilisation unconditional cash transfers are subject to personal preferences, and in the long run, do much less with regards to food security than a PDS. Even assuming Conditional Cash Transfer Schemes, the problem of inflation and local variations of foodgrain prices are issues that cannot be solved unless the CCTS is both inflation adjusted and price sensitive, which may end up being more expensive than a PDS.

I would be fine with a National Income Guarantee instead of the NREGA, but I somehow assumed that the NIG would be even more reprehensible to people on the economic right than the NREGA, since the NREGA at least provides work to for income.

(I'd probably write more, but I'm drowsy.)