Piecemeal approach to economic reform

Written by Nirvikar Singh | Updated: Jan 27 2005, 05:30am hrs
The Indian government has recently proposed two policy initiatives that have captured attention. One is innovative in legislative implementation though not in concept, the other seems conceptually more novel at first sight, but may just differ in scale and scope. Both illustrate a well recognised piecemeal approach to reform that needs to change. They indicate a paternalistic approach to Indias governance that has not changed with liberalisation, but which must be confronted and reassessed.

The first initiative is the proposed Employment Guarantee Act (EGA), which says that every household in the rural areas of India shall have a right to at least 100 days of guaranteed employment every year for at least one adult member, for doing casual manual labour at the statutory minimum wage.... The second is the Planning Commissions proposal to tap forex reserves for financing infrastructure investment. Both initiatives address a critical need: we must do more for Indias poorest, and we must have better infrastructure to grow faster. Both have worthy goals. Given Indias intellectual talent and free media, both have been debated extensively. What more is there to add

Begin with the infrastructure initiative. The debate has focused on the degree of import intensity of the spending, and whether that issue is relevant (the answer is, not really, as long as the private sector, instead of the government, imports more). Questions have been raised about the appropriate level of forex reserves, the impact of a higher fiscal deficit, and the underlying constraints on infrastructure development. China and Taiwan have been held up as successful examples of using forex reserves creatively.

Surprisingly, some of the questions revolve around facts about the economy and policy responses that the Planning Commission, even after 50 years of model building, does not seem equipped to deal with. As TN Srinivasan and I argued in an EPW article last June, having an adequate model of the economy, integrating its real and financial aspects, would allow a discussion that goes beyond airing opinions. It would allow one to compare alternative options, and search for policy mixes that might be closer to optimal and a more serious comparison with other economies.

Some questions about policies for infrastructure investment come to mind. Is the Planning Commission saying the RBIs current level of accumulated reserves is too high Was the RBI wrong Is the difference between the two organisations one of goals or of economic models What is the effectiveness of the Commissions spending on infrastructure Can improving the effectiveness of governance (much lower than Chinas and Taiwans, by some measures), in direct government spending as well as in regulatory oversight make a difference If so, how and how much Would further liberalisation of imports be a better policy If so, would this work best through easing import of capital goods for infrastructure, or would boosting private investment make firms willing to bear some costs of infrastructure investment Will the proposed special purpose vehicle be more efficient than other attempts at direct investment (think of nationalised banks and credit cooperatives)

As long as we do not have a serious model, policymaking will continue to rely on piecemeal, partial approaches. This has been recognised as characteristic of economic reform in India, perhaps even a necessary feature of reform by stealth to avoid political battles, but it may be time to modernise and upgrade our formal analytical machinery for policy making. In fact, this upgrade may even create scope for policy packages that will identify and efficiently compensate the losers, making political acceptability easier to achieve.

In the absence of a serious model, policymaking will be piecemeal
The infrastructure and employment proposals have been much debated
The paradox of centralisation without policy coordination must be addressed
How to finance infrastructure investment for future growth seems like an appropriate topic for economists to wrangle about, and to use to make a case for better models. When one is trying to do more for the poor and destitute, it seems even economists should be in total agreement. The EGA has, in some ways, provoked less debate: targeted welfare schemes that rely on self-selection are theoretically sound and many of the issues raised focus on effectiveness and details of implementation.

Yet here, too, one would like to see the discussion broadened to consider the new proposal in the context of existing transfer schemes . Do we have clear data on alternatives to employment guarantees What about other below poverty line schemes, school lunch programmes, micro credit programmes, and even the funds allotted to MPs One has the sense that one more worthy programme is being legislated into being, without sufficient analysis of the costs and benefits of alternative policies, including an assessment of what individual states (besides Maharashtra) can do and are doing.

Lest the above sound curmudgeonly, let me say that the argument here is not one against the social insurance concept behind the EGA, nor against improving infrastructure. Instead, it is plea for more comprehensive policy analysis and policy making. We have a long way to go in this respect, despite the progress that Indias economy has made over the last years.

We still rely on personalities and trusting the pronouncements of those whom we have anointed. This goes with a continuing top-down attitude (not just paternalism, but also maternalism!) that encourages trying to solve problems by fiat, rather than careful policy design. And that tries to protect every group in society in some way or other, resulting in numerous policies and laws that overlap, conflict, and fail to achieve their objectives; indeed, are often counterproductive. This paradox of centralisation without policy coordination needs to be addressed.

The writer is professor of economics, University of California, Santa Cruz