Wednesday, April 23, 2014

Economics and Politics in India

There are many types of ‘sciences’. Physics and chemistry are the ‘hard’ sciences, in which it is possible to state laws (namely the laws of Nature) with a high degree of clarity and testability, using words which mean the same thing to everybody. Then there is biology, in which the fundamental research problems are so complex that it does not possess the same ‘hard science’ status that physics does, although its progress has been remarkable during the last few decades.

There is, in fact, a whole spectrum of 'levels of hardness' in disciplines which we describe as sciences. We have, for example, ‘political science’, which is hardly a science in the sense in which physics is a science. Social science is another example of a (respectable) field of study wherein it is not always easy to clearly state what is being described or discussed.

What about economics?

Last month I was a speaker at a conference in Delhi, where I happened to meet, at the Guest House breakfast table, a very eminent economist of India. He said something to me (half-jokingly, I thought), which he also repeated during his formal lecture at the conference. He gave an example of a person who got a Nobel Prize for his work in economics. His serious ‘joke’ was that, after some years the Nobel Prize was given to another person whose model of economics was just the opposite of that of the earlier person! This is a good example of the fact that some fundamental research problems in economics (as also in, say, psychology) are so complex that it is often difficult to be sure about just what is being investigated or discussed. Of course, we must keep up our efforts to tackle such problems.

By contrast, physics of ‘simple’ systems (or ‘simplifiable’ systems) is a hard-core science because, in it, the conventional reductionistic approach succeeds quite often. Not so for economics.

The reasons why economics is not a hard-core science have been discussed by me elsewhere. Physicists have jumped-in to alleviate the situation, and there is a field of research called econophysics.

Cut to a recent article
by Dr. R. Vaidyanathan, a professor of finance at the IIM, Bangalore. Here is what he writes:

‘After independence, and particularly after the Avadi Congress (1955), the Congress party decided to adopt the “socialistic pattern of society” as our development mantra. The country opted for economic planning under the tutelage of PC Mahalanobis and Prime Minister Jawaharlal Nehru. We essentially opted for the Soviet model in Devnagari script.

‘The entire planning process and the role of the state was hijacked by different shades of Left-wing thinkers, with some criticising the others for not being adequately red. From Mahalanobis downwards, Bengali intellectuals played a very large role in this leftward tilt for more than 40 years and, during the entire period, economists from the other side were denied space or official patronage.

‘If you go back in history, the theoreticians of this failed model -- which we can call the Bengal model for simplicity and also because most of its proponents were (and still are) from that province -- dominated national discourse. Even today, we can say that Amartya Sen is the ultimate guru of this idea of development where the state plays a domineering role.

‘In simple terms, the Bengal model suggested that the state owed every individual something – from womb to tomb. Family responsibility was nationalised and everyone, from children to senior citizens, had a right to expect something from the state.

‘The word 'duty' was abolished from the dictionary and a rights-based society evolved. Some sections of the middle class lapped it up, since the Soviet Union gave legitimacy to this draconian idea and the public sector provided job opportunities to the educated. Nehru called public sector units the temples of modern India. The system was built on layers of regulations and a solid licence-permit-quota raj was created to administer it all. It accentuated corruption and government employees and middlemen became extortionists. Politicians became experts at stealing public funds.

‘Entrepreneurship was frowned upon and profit became a dirty word. Businessmen were derided as “banias” and metaphorically threatened with hanging from the nearest lamp-post. For example, price increases have always been blamed on hoarding by banias – the solution to inflation is thus to go after the banias. However, the system began to crumble once it failed to produce results and the country went near bankrupt in 1991. Once the economy was opened up, people began to demand products and services, which was beyond the comprehension of the government system. Newer opportunities sent public sector units scurrying for subsidies, and the collapse of the Soviet Union in the late 1980s destroyed the theoretical underpinnings of the socialist system.

‘If, in the sixties and seventies, the dream of every new engineer was to join one of the public sector units like BEL, BHEL or HMT, in the 1980s and 1990s, their preferences underwent a sea change.

'But the massively corrupt system refused to die and the Frankenstein state, created over 60 years, found new ways to extend itself by conferring new rights on the people: right to information; right to work (MNREGA), right to food; right to education and now right to health. This is nothing but the state seeking new ways to retain the system of loot based on public resources.

‘The moth-eaten state structure has been unable to cater to these rights, and people, anyway, found ways to buy their way into the system. With huge resources now being devoted to sustaining these rights, klepto capitalists have found ways to manipulate the free market and the state to fatten themselves.

‘It is in this bleak and degenerate scenario that we have seen the emergence of the Gujarat model with an alternate vision of a new polity, enabled by a minimal state. The idea has always been around – with the late C Rajagopalachari being one of its backers – but in essence the Gujarat model is about having the state play a lesser role, and the people a larger one.

‘The model is simple. Entrepreneurship is encouraged and celebrated. People should have huge opportunities for employment, but not necessarily in government jobs. Individuals and families should work/earn/eat and live on their own efforts instead of depending on a benevolent state. Individuals are responsible for their actions.

‘The concept of a small state means having fewer regulations and more self-regulation. A self-regulatory framework policed by an effective law enforcement machinery which guarantees swift and severe punishment for violations can be the best form of governance.

‘The Gujarat model, for example, is to charge for power but provide it 24 hours. The Bengal model is to provide power free or with heavy subsidies -- with the people getting more power cuts rather than power. Unfortunately, the Bengal model has become the norm all over India. It is the Gujarat model, whatever its shortcomings, that offers a different paradigm and different set of possibilities.

‘The battle between Nehruvian socialism and Rajaji’s self-restrained market economy has just been joined. It is a tectonic shift and it need not be trivialised by looking only at growth numbers or indicators based on one’s ideological preferences. The fact is Nehru’s vision has failed completely and it is Rajaji’s that needs to be given a chance now. The Gujarat model is an antidote to the flawed Bengal model.’

In India there is currently a fierce debate going on about the ‘best’ economic model we should adopt. The quality of the political debate is handicapped by the fact that economics, by its very nature, is not a hard-core science (except for some parts like econophysics etc.). But how to explain this to the typical, ‘down-to-Earth’, ‘grassroots level’, often only semi-literate, politician; as also to the innocent, gullible public in these times of near-instant TV and Internet-facilitated propaganda?

Which Economics Model is the Best

Economics, politics and philosophy are hopelessly intertwined, and this is one more reason why much of economics is not a proper, hard-core, science.

Since much of economics is a soft science, the experts have a whale of a time attacking one another’s models, and emphasizing those parameters of economic growth and well-being which support their stand. And since economics and politics are inseparable, it is easy for a politician to quote from that economic theory or model which suits his/her agenda. And this action acquires respectability if the economist quoted happens to be a Nobel Laureate.

The human tragedy is that, more often than not, truth or ‘reality’ is not knowable. And even where it is knowable, it is not always quickly knowable. Truth triumphs, ultimately (satyamev jayate), but it happens often that by the time truth triumphs, much damage has occurred already. Moreover, in real-life situations, truth is seldom relevant; what matters more is the perceptions of truth in the minds of the people involved. This fact of life is exploited, not only by politicians, but also by intellectuals and opinion leaders. It also explains why, not only political discourse, but even a well-reasoned and logical discussion among honest and well-meaning intellectuals may go on endlessly, never reaching the ‘correct’ conclusion, if at all there is a correct and universally acceptable conclusion.

But let us come back to economics. I think there is a strong case for abolishing the Nobel Prize for certain parts of economics, and I have given some reasons above. Here are some more. Since economics can seldom be separated from politics and philosophy, a Nobel in economics is just about as justifiable as one for politics. Since we shudder at the very thought of a Nobel Prize for politics, we should have a similar attitude for the award for economics. Just look at the potential for misuse and mischief. Political arguments can acquire respectability by quoting an economist who has had a Nobel, and this has the potential of being damaging for those societies in which the literacy rate is low. Another large and vulnerable group in this context is that of students (and this applies even to high-literacy-rate countries). Economic models do not have a large shelf life, so the respectability given to one or the other of them by a Nobel is not desirable.

Instead of economics, there could be a Nobel for social service, or philanthropy, or conservation of the environment.

The problems of economics as a serious and important field of study stem from the fact that any economy is a so-called complex adaptive system. Statistical analysis plays a major role in economics, and one should normally look only at averages and trends and indicators (for whatever they are worth). It is easy for any unscrupulous politician or intellectual to quote data selectively to further his cause and to attack the opposition.

Coming to the Gujarat model, since Modi-bashing was a fashionable pastime till recently, the economic model his team has been implementing in Gujarat has been the object of fierce attacks. I would not mind that if a balanced picture were presented to the hapless voter. Anyway, there are economists who are very impressed by the results in Gujarat. I shall quote one of them here (Swaminathan S. Anklesaria Aiyar), mainly for the purpose of restoring the balance in the presentation of facts. This is what Aiyar writes:

‘One annual report has long provided indicators of governance. This is Economic Freedom of the States of India (EFSI), written by Bibek Debroy, Laveesh Bhandari and me. The 2013 EFSI report shows Gujarat has been No. 1 in economic freedom for the last three years, widening its lead over others. On a scale from 0 to 1, its overall freedom score has improved from 0.46 to 0.65. Tamil Nadu comes a distant second with 0.54. Economic freedom is not identical to good governance. But lack of economic freedom typically means poor governance — a jungle of rules and obfuscating bureaucrats that promote corruption, delay and harassment. This hits everybody from farmers and consumers to industrialists and transporters.

‘What exactly is economic freedom? EFSI uses a methodology adapted from Economic Freedom of the World, an annual publication of the Fraser Institute. Data for Indian states is not available on many issues. So, EFSI limits itself to 20 indicators of the size and efficiency of state governments, their legal structure and property rights, and regulation of labour and business.

‘Many of these indicators directly measure governance — the proportion of stolen property recovered; proportion of judicial vacancies; proportion of violent crimes; proportion of investigations completed by police and of cases completed by the courts; and the pendency rate of corruption cases. The list is by no means comprehensive, but provides strong clues.

‘Gujarat is the best state in pendency of corruption cases, and in the proportion of non-violent crime. It is close to the top in completion of police investigations. It scores poorly in judicial vacancies and recovery of stolen property.

‘Its quality of government spending is high: it has the lowest ratio of administrative GDP to total GDP. Spending is focused on infrastructure rather than staff. Modi’s repeated state election victories show that his approach produces high voter satisfaction. Gujarat is not a classical free-market state. It has large, expanding public sector companies, and substantial taxes on capital and commodities. It has many subsidies, though fewer than in other states. Still, business thrives in its business-friendly climate. One businessman told me that in Tamil Nadu, it took six months and several visits (and payments) to ministries for industrial approval. But in Gujarat, the ministry concerned called him the day before his appointment, asking for details of his proposal. Next day, he found the bureaucracy had in advance prepared plans of possible locations for his project, and settled the matter on the spot. This was unthinkable elsewhere, and showed both efficiency and honesty. Corruption has not disappeared in Gujarat, but is muted.

‘Modi’s Jyotigram scheme provides 24/7 electricity for rural households, plus reliable power at fixed times for tubewells. This explains why Gujarat has India’s fastest agricultural growth (10%/year for a decade, say economists Gulati and Shah). Indian agriculture is crippled by regulations, but Gulati shows that Gujarat has the highest agricultural freedom among states. Modi charges farmers for power, and so all his three state power companies are profitable. By contrast, power companies in other states with free rural power have accumulated losses of almost Rs 200,000 crore.

‘Critics accuse him of giving cheap land to favoured industrialists. But state and national governments the world over use such sops to attract industries. Unlike most politicians, Modi has clearly not enriched himself.

‘Good governance includes communal peace. So, the 2002 Muslim killings reflect terribly on Modi. For some, it puts him beyond the pale. But since 2002 the state has been peaceful. In 2011-12 , Gujarat had the lowest Muslim rural poverty rate among all states. Its overall poverty rate for Muslims (11.4%) was far lower than for Hindus (17.6%). This was also true of six other states, so Gujarat is not unique in this. 

‘In sum, EFSI and other studies show that Gujarat has good governance. It has social and communal flaws. But it is India’s top state in economic and agricultural freedom. That’s not hype.'

University and college teachers must perform an important duty in this context: They must present a balanced view of economics to the students. This remark of mine (in fact this entire article) has been necessitated by an incident that occurred today: On the eve of voting tomorrow, the Principal of a local college has resorted to mass emailing to the entire student community, promoting, among other things, a particular economic model, favoured by a particular bunch of Indian economists and their political cohorts. He also put the contents of this mass email on the official website of the college. The view presented is not at all a balanced one; it is one-sided and therefore not true to student expectations.

We expect exemplary and responsible behaviour from teachers.

Postscript added on 26 April 2014

Supplementary reading: