The onus shall be on the middle class…

The world economy is at the threshold of a new era. People realise this, of course, though from different perspectives: the software developer in the US feels his job is threatened, the call centre employee in India finds a new lifestyle, European and American business schools look to Singapore for greener educational pastures and third world immigrants make up sizeable fractions of many industrialised countries? populations. Some argue that globalisation is nothing new, that we saw it all 100 years ago. Yet, today?s low costs of physical transport and (especially) of information transfer will have far deeper impact. To paraphrase Al Jolson in the first ?talking picture,? ?You ain?t seen nothing yet.?

Another new development is China?s rise as a low-cost producer of an enormous quantity and variety of manufactured goods. Japan?s rise through the 1980s created ample tension in the US; China is 10 times as big and still has a long way to go. Some researchers draw parallels between what is happening now?with China?s export-led growth, the dollar?s role as a reserve currency and the US current account deficit?and the period of Europe?s spectacular post-war growth, when US external economic policies also supported that process. But that was a recovery; Europe had been economically advanced since the Renai-ssance. China?s rise will bring about a world economic order that has not been seen for over 500 years.

India has the potential to be yet another global growth pole. India and China both realise this and the prospects of gains from trade and cooperation have spurred historic moves towards resolving past political and strategic tensions (there?s a glimmer of hope of this change being extended to Indo-Pak relations). ?India?s software and China?s hardware? is one popularly perceived complementarity. India?s management and China?s labour might be another one, at least in some contexts. With all their differences, one commonality has been their relative shift from the state to the market, as the driver of economic growth. The two also have similar concerns about growing economic inequality.

In India, somewhat old-fashioned rhetoric about the links between globalisation, the market and inequality still persists, driven by the ?old left.? Responses based on extolling the virtues of the market for economic growth do nothing to resolve these concerns. At a different level, Gurcharan Das goes back to Aristotle to stress the importance of the middle class and praises the role of this brash new class in India, while writers such as Pavan Verma (The Great Indian Middle Class) and Pankaj Mishra (Butter Chicken in Ludhiana) are disturbed and even repelled by its lack of social concern. Policy discussion in India often has this flavour of a college debate, with eloquence overriding analysis.

In an important paper, published in 1998 in an obscure economic journal (Keio Economic Studies), Abhirup Sarkar provided an important component of the analytical underpinnings of the policy approach that India?s Prime Minister and finance minister have articulated in the past few months. The essence of the dry mathematical model is as follows. The middle class is distinguished from the rich and the poor by not only their income levels, but the kinds of goods they purchase. These middle class consumption patterns are important in affecting the extent of innovation and the extent of innovation is what drives growth.

Sarkar shows that simple redistribution policies will not break an equilibrium where the economy is stuck in stagnation. Instead, raising a sufficient number of the poor to the middle class, by improving their productivity, will work. Thus, there is room for the perspective of Milton Friedman, as well as Amartya Sen, in such an analysis: the market does its work, provided the initial conditions are right. But the easiest or most obvious policies are not necessarily the ones that the government should follow.

In concrete terms, policies to improve the human capital of the poor are the right ones, if the model is to be a guide. This is precisely where India seriously lags China, in areas such as health, nutrition, and education. The policy focus should be squarely on how the government can achieve this better than it has over the last 50 years. Getting the government out of the habit of meddling in matters in which it has no business, or which are lower priorities, would certainly help. Reorganising government to be more transparent and accountable cannot hurt either.

This is not the end of the story, however. Public goods, such as infrastructure, and law and order, matter for private productivity. This is another important role for government (it can easily be added to Sarkar?s model), complementing, not replacing, the market. The problem in India is, again, how to do this efficiently. The middle class has been used to a low level of public goods and has dealt with government inefficiency through de facto private provision, following the lead of the elite in seceding from participation in the requisite collective action. This has to change in India, else it will end more like Latin America than East Asia. Latin America has high inequality and a narrow middle class, and governments there have not achieved sustained, broad-based growth.

India can do better. And it is up to the middle class to make it happen, because it wields disproportionate influence on government policy, and sets expectations for government performance. Karnataka?s new chief minister recently claimed, ?Bangalore cannot become Singapore.? But it can, if the government does its job well. And India can be China, or rather, China plus political freedom. India?s middle class, as it swells in numbers through market-driven growth, has to shoulder the responsibility to make it happen. L?etat, c?est vous.

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