The debate between two of India?s greatest economists, Jagdish Bhagwati and Amartya Sen, is important for India?s policymakers. Are growth targets diverting policy attention from other important development goals? Chief Economic Advisor Kaushik Basu has said the differences are less substantive than they are made out to be, but what is the common ground? Here is my take on the great growth debate.
Begin with some propositions on the ends, or goals, of policy. Obviously, economic growth is good. More explicitly, growth is necessary for development but not sufficient. Development includes enhancing human capabilities and freedoms and so goes beyond growth. Inclusive development extends these benefits to as many as possible. So obviously development is necessary for inclusive development but not sufficient. The final proposition is a bolder one but is plausible, consistent with history, and probably a consensus view: inclusive development is necessary for sustained high growth. Think of it as a positive feedback loop. And remember that political legitimacy is part of the equation.
What are the implications of this framework? If we want rapid and sustained growth, it does make sense to set goals on other dimensions, especially health and education. But growth is still critical, and benchmarking growth is useful?policymakers should have feasible but challenging targets. Policymakers have to track and make progress on multiple fronts but they do this all the time?with inflation, external balances and other measures of economic health. They also have to consider trade-offs between the short and long run, but that is the essence of investing for growth.
So what is the fuss about? Can we say more than the obvious, that investing in human capital and infrastructure, and raising productivity, are necessary for growth and development? What are the means to achieve our complex ends? What should the government do and what can it actually do? Perhaps there are differences in opinion here.
Let?s take health as an example: it figures in Professor Sen?s concerns, and in some of my own recent research. Sen argues for more attention to health goals and outcomes, and more government spending. In India, spending on private sector provision of health care is very high as a percentage of total health spending. The poor are disadvantaged, since they cannot afford sufficient care of high quality. The government must do more and spend more, in this view.
But the National Rural Health Mission is already in place, bumping up public sector health spending. Despite some institutional innovations, however, the problems of poor incentives and inefficient government spending remain. In fact, private sector provision of health care has its own quality problems, though different from the public sector. What is needed are specific organisational reforms. Take the important case of maternal and neonatal health. Institutional deliveries can help improve outcomes over home births. The
Chiranjeevi scheme in Gujarat does this by harnessing private sector doctors? expertise, managing their incentives (monetary and non-monetary) and using public funds to subsidise poor patients. The latter requires improving specific government processes for funds transfers. Another example, LifeSpring Hospitals in Andhra Pradesh, provides purely private sector delivery for the lower middle class, but with attention to cost control through process efficiencies that the public sector will never achieve. The government got it going, however, with start-up capital. Most ambitiously, the Merrygold network in Uttar Pradesh uses a franchise model for private hospitals and clinics, and uses public money to improve standards of operation and care, and to subsidise the poor.
There are lessons here for other seemingly intractable health issues. Malnutrition, India?s biggest national scandal and a focus of Sen?s recent comments, requires targeted public policy attention. But the solution will come through leveraging and improving private sector expertise and efficiency, piggybacking on initiatives like Merrygold, and not through spending more public money without organisational innovation.
There is an even broader lesson, going well beyond the health sector. India has a huge unfinished agenda of economic reform that can be summarised as creating an enabling environment for the private sector to drive growth. This includes ensuring competition and providing effective regulation for consumer protection. Paying attention to the poor does not require direct government provision of services. The government can do better by creating institutional environments that promote efficient production and delivery of goods and services, and separate this from the need to subsidise the poor for basic health and education.
These reforms are needed throughout the economy and no less for services such as basic health care, which matter for growth as well as human well-being. There is no trade-off between these economic reforms and the goal of inclusive development. Concerns for broader measures of human well-being are consistent with policies that alter the way that the government intervenes in the economy at the micro level. Economic reform can be good for growth and for broader well-being.
The author is a professor of economics at University of California, Santa Cruz