What Amartya Sen doesn’t see: Growth-oriented reforms, not populist schemes, will benefit the economy

27 Jul, 2013, 10.47AM IST

Sen has never called for an end to the licence-permit raj,
 liberalisation of foreign trade and investment in
banking, telecommunications and civil aviation.

By Arvind Panagariya

The ongoing 'Bhagwati versus Sen' debate has generated more heat than light, necessitating correction. As an equal co-author of India's Tryst with Destiny, which defines the Bhagwati position, my stake in the debate is second to none.

Two extreme characterisations of the positions of the two sides have emerged. The first has it that the differences between them are minimal with each side expressing the same ideas in a different language. The second depicts Bhagwati as advocating solely growth and Sen solely social spending. Both characterisations are plain wrong.

Begin with the point on which the two sides agree. We have no disagreement with Sen on the objective. He would like to see poverty, illiteracy, ill health and other deprivations eliminated. We whole-heartedly accept this goal. Indeed, as India's first prime minister Jawaharlal Nehru wrote in The Discovery of India, the 1938 planning committee of the Congress had adopted this very goal for development planning and the latter indeed guided our policies in the entire post-Independence era.

But agreement ends here. Sen thinks that the starting point for achieving the desired goal must be an immediate massive attack on illiteracy and ill health. This would not only directly contribute to better education and health, it would also bring about faster growth by producing a healthier and more literate workforce. Higher growth would in turn yield larger revenues, allowing further attack on illiteracy and ill health. A virtuous cycle will thus emerge.

In this story, growth automatically follows improved literacy and health. This is perhaps why Sen sees little need for policies directly aimed at accelerating growth, what we call Track-I reforms in our book. In the past, Sen has never written calling for an end to the licence-permit raj, liberalisation of foreign trade and investment or generous entry to private players in banking, telecommunications and civil aviation. Indeed, he has been outright disdainful of anyone writing or reporting on foreign investment liberalisation.

Therefore, if in 1991 India embraced many of the Track-I reforms, writings by Sen played no role in it. Growth literature to which Sen contributed was wholly esoteric. The intellectual origins of the reforms are to be found instead in the writings of Bhagwati, both solely and jointly with Padma Desai and T N Srinivasan.

Our view on development policy is almost the opposite of Sen. India began with an extremely low tax base as well as low income at Independence. This meant that the available revenues were small. Providing for public investment in industry, agriculture, infrastructure, defence and administration left meagre revenues for investment in education and health. Therefore, the option was to either settle for slow progress all around or pursue growth-friendly Track-I policies that would allow rapid expansion of incomes and revenues.

Our tragedy was that, unlike South Korea and Taiwan, which foresaw the importance of Track-I reforms as early as the late 1950s and early 1960s, we went in the opposite direction and progressively slid into a command and control system. The result was slow growth as well as slow progress in education and health.

But when we eventually accepted the lesson of history beginning in 1991, the results were spectacular: growth accelerated and social spending rose as well. Our view, therefore, is that Track-I reforms provide the true starting point for any poor country. On the one hand, rapid growth directly empowers the citizens through increased incomes that they can use to buy high-quality education and health in the marketplace. On the other hand, it gives the government ever-rising revenues to further enhance public expenditures on health and education.

Our differences with Sen also extend to how the government should deliver nutrition, education and health to the citizenry, a subject we discuss under the rubric of Track-II reforms in our book. Sen firmly believes that the state must directly deliver food, employment, education and health through its elaborate bureaucratic machinery. So he passionately advocates the food security Bill and employment guarantee scheme and rejects cash transfers, vehemently opposes education vouchers in favour of government-run schools and slams the door on private health services.

Under Track-II reforms, we advocate an approach that empowers beneficiaries instead of public providers. We argue that revenues must be redistributed to the beneficiaries through cash, school vouchers and health insurance, allowing them to decide whether they want to buy food, education and health from private or public providers.

Let me conclude with two questions for Sen. First, if he believes that India suffers from the worst illiteracy and ill health and also that high literacy and good health are the sine qua non of sustained rapid growth, what is his explanation for the 7.2% per annum growth that India has sustained for two decades ending in 2011-12? Or, since he is even more critical of education and health achievements of Gujarat, how does he explain its 8.4% annual growth over the same two decades?

Second, if the presumption of the sufficiency of education and health for rapid growth is flawed but Sen sincerely believes in the importance of the latter, will he support the pending Track-I reforms such as granting firms the normal hiring and firing rights, exit of the government from manufacturing and freer entry to private providers in higher education?

(The writer is professor of Indian political economy at Columbia University)

Source: http://economictimes.indiatimes.com/opinion/comments-analysis/what-amartya-sen-doesnt-see-growth-oriented-reforms-not-populist-schemes-will-benefit-the-economy/articleshow/21391218.cms