A prescription for inclusive growth

India?s economy is growing more robustly than many thought would ever be possible. As one would expect from argumentative Indians, there is a vigorous, continuing debate about the causes and consequences of this growth performance. The main concerns are, unsurprisingly, the sustainability and inclusiveness of the country?s economic growth. There is almost total agreement on ends, but debates on means shade into polarisation. Underlying this disagreement is a failure of the conceptual framework for making policy choices. The problem is that discussion is couched in moralistic terms: people and policies are made out to be ?good? or ?bad,? without recognising that everyone has a mix of self-interest and altruism, and that the details of system design are what is crucial to move beyond good intentions to socially positive outcomes. Suppose we step back from entrenched positions and ask: what systemic changes would actually make a difference? What then follows? Here are five key changes for India.

Make it easier for entrepreneurs to start, grow and wind up businesses. Despite the continued rhetoric over the meaning and effects of reforms, it has to be clear by now that private sector dynamism is going to drive growth. Indian industry has become more competitive (see Murali Patibandla?s excellent book, Evolution of Markets and Institutions, for some evidence), and therefore more efficient. This process needs to be continued and supported?it will also generate the jobs that India?s people need. Specific policy actions include further financial sector reform, bankruptcy reform, a redesigned competition policy, and government regulation, especially at the state and local level, that supports a level playing field.

Restructure the civil service. The paradox here is that enormous talent and skill leads to such poor results. Incentives and competition are part of the answer. Top civil servants need to be rewarded better, and more transparently, and they need to compete for their jobs, through more flexibility in entry (and exit) at higher levels of the civil service. Reducing numbers at the lower levels through attrition would reduce government?s feudal nature as a source of patronage jobs, and help to pay for performance.

Decentralise effectively. State governments should give local governments the authority and resources to really make a difference to their constituents where they are supposed to do so. The center should give state governments the same mandate. In practical terms, this means streamlining the messy and wasteful intergovernmental transfer system, and giving lower level governments more effective tax powers. I have already argued for this ad nauseum. Ultimately, this will also put more pressure on politicians to deliver.Higher-level governments will still have to manage the playing field, and prevent local elite capture, without stifling decentralisation.

Pay real attention to health and nutrition. Evidence and common sense tell us that this is fundamental to well being. Economic analysis suggests that direct improvements in health in India have been as valuable to well being as improvements in income. Yet vast segments of the population continue to suffer needlessly. The solution is not to throw money at the problem. The systemic failure is that government has either destroyed performance incentives for those in the health profession who work for government, or ex-cluded private providers from partnerships. Try public support of private initiatives and joint monitoring of quality of outcomes. Effective decentralisation to the states will also help for public health.

Educate everyone. India?s record here is as abysmal as that in health. Again, government intervention has often enervated and corrupted the educational profession at all levels. Needless controls continue to substitute for effective certification and quality monitoring. The evidence here is again that restructuring the system to provide better incentives to those who deliver services (reward good performance, punish fraud, make information available that lets consumers choose better) will do more good than stepping up spending without any systemic change. Education and training at all levels need fixing. In many cases, industry needs to be made a full-fledged partner in changing the system, through funding as well as redesign. Allowing foreign investment into higher education would free up public resources for primary education.

One could add to my list, but it is better to be parsimonious in goal setting. India?s government has failed by trying to do too many things. Its laws, regulations and plans still suffer from trying to please everyone, ending up without clarity or coherence. Some of what I have left out will be driven by what is included. What?s new, then? Maybe the means (single-mindedly emphasising incentives, information and competition) are new, not the ends. That is part of the answer to why things haven?t changed so far?we need to learn better. Another reason lies in interest groups?Raghuram Rajan and Luigi Zingales have recently formalized this idea in a model where sectoral coalitions hold back education and institutional reform. The solution to this logjam is to alter endowments, but there is no obvious mechanism to achieve this in their model. My own suggestion is that India?s size and diversity may help. Effective decentralisation may allow regions with growth-supportive coalitions to flourish in the short run, and pull up the rest of the country in the long run. In that case, the third of my five changes will be the lynchpin of growth for India.

?The writer is professor at the University of California, Santa Cruz