Border-line Chaos
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‘Even if everyone is immoral, there are ways of reducing corruption by changing institutional rules’

Pranab Bardhan talks about growth versus welfare, the Gujarat model and the limits of decentralisation.

AAP chief Arvind Kejriwal AAP chief Arvind Kejriwal

By: Pranab Bardhan

Q: Issues of growth and welfare are likely to come up again in the election campaign. The Sen-Bhagwati argument was a marker of the deba­te. Is it really about welfare versus growth?

A: People like Bhagwati believe we should concentrate on  economic growth and the poor will ultimately be helped; whereas, if you concentrate on other things, growth might suffer and as a result, so will the poor. In that chain of arguments there is a dual process. One is that high growth means more jobs. So if the poor have more jobs, they will have more income. Two, if there’s growth, the economy expands and taxes go up.

With that money, you can fund anti-poverty programmes. On the face of it, this is a plausible argument. But it doesn’t always work. For instance, even in the highest growth period in India, say between 2003-08, most of the evidence shows that employment didn’t grow much. Now, from a poor person’s perspective, what’s the point of growth if you cannot get a job? For example, the highly cited Gujarat model claims a high rate of growth. But employment grew only marginally. That is the general trend: high growth doesn’t necessarily lead to higher employment. Bhagwati’s first channel needs to be shown to be working. If you look at the employment data, the only industry in India that created significant jobs in the high growth period is the construction industry. Let me not go here into the issue why employment grows so sluggishly in India.

Regarding the indirect channel, my objection is that it’s not automatic. Most of the data show that in India, much of the revenue goes towards subsidies. Analysis shows that the overwhelming proportion of subsidies in India go to the relatively better off, the rich, the corporate sector and the middle class. So it’s not necessarily true that just because the government gets more money, it will spend on the poor. Again, let’s look at Modi’s Gujarat government. Under Modi’s tenure, I saw data that the total amount of subsidies to the corporate sector, especially in the form of tax concessions and capital subsidies, was 10 times what was spent on subsidies to agriculture and  food subsidies etc.

In that context, people like Sen say that since it is not automatic that the money coming to the government is spent on the poor, we have to shout for it. In my judgement, they are trying to give strength to the voices of the poor, so that more money is spent on them. The problem is that even if they succeed in getting the government to spend more money, it may not always reach the poor. So there is the question of delivery mechanisms. Sen and Dreze should emphasise this more. Also, they give the impression that all you need to do for growth is spend more money on health, education and nutrition, and that will make people more productive, which will lead to growth. I think that yes, when workers are healthier and better educated they will be more productive. But that is not enough. Even when you have a productive workforce, you need other things, like physical infrastructure and a good investment climate. Private investors need the right incentive to invest. Just having a productive workforce is not enough, and one has to pay attention to some of the reform issues emphasised by Bhagwati.

Q:Given all the talk of the Gujarat model, how would you rate Modi’s governance record?

A: Modi has tried to make governance his main election plank, because he thinks he has a good record. He has done some good things, like electricity reform, which has gone quite far in Gujarat. He has also done well in taking quick decisions and he completely controls the government. But that won’t translate at the Centre; governing this vast, complex, heterogeneous country is very different. His style is to steamroll over opposition, but at the national level this would be a major problem. His personality is polarising and he creates controversy, rather than building consensus. Even if this works in Gujarat, on a pan-India level, he will have serious  problems.

In terms of political governance, 2002 was a disastrous governance failure. Modi will of course say that the SIT has given him a clean chit. There are problems with this position, but even ignoring those, he cannot deny that something horrible happened under his watch. The responsibility is on you, particularly when you control the government with so firm a hand. Your own people have now been indicted. If a politician looks the other way or subcontracts the job of communalism to others, it is a sign of extremely bad governance. Vajpayee spoke of Modi deviating from rajdharma, which is the Sanskrit word for good governance. Someone rebuked by his own prime minister for a lapse in rajdharma cannot go around thumping his “56-inch  chest” on governance.

On economic governance, Modi has many achievements. But at the same time one has to recognise that he has given a lot of subsidies to the corporate sector. Modi may be business-friendly, but he’s not necessarily market-friendly. One should distinguish between the two. If you embrace subsidies, you can’t then complain about welfare programmes for the poor. You’re giving doles to the corporate sector, who deserve it much less. In manufacturing Gujarat’s rank among Indian states was number two 30 years back, and it has remained number two under Modi. Much of the industrial growth under Modi has been in petroleum refineries which create very few jobs. Gujarat’s delivery mechanism for public services is not particularly notable. It is not bad, but other states have done much better. In general Tamil Nadu and Himachal Pradesh have performed much better than Gujarat. If you compare the 2001 and 2011 Census figures on literacy, Gujarat’s rank among the states actually declined. Modi’s trumpeting of himself as Vikaspurush cannot hide the fact that in overall economic performance (counting both growth and welfare services)  quite a few other states have done much better.

Q: Decentralisation is an idea that has gained prominence with the rise of the AAP. What are your views?

A: It is good that Arvind Kejriwal is in favour of decentralisation. Having said that, I find in him an insufficient appreciation of the problems of decentralisation. He thinks mohalla sabhas are going to do everything, but mohalla sabhas in large parts of Delhi would be mostly RWAs, which are middle class, not aam aadmi. I have worked on decentralisation for the last 15-20 years, and most of my village survey work is in West Bengal. Decentralisation has partly worked there, but there are still big problems. There is collusion between local politicians and other vested interests. They essentially capture the panchayat, maybe less in Bengal than in UP, where the sarpanch is essentially in the pocket of the local politician and landed interests. Even in West Bengal there is a lot of political clientelism. Capture is a big problem. It is much easier to capture a panchayat than the Lok Sabha. One of the reasons decentralisation hasn’t worked in India is because we haven’t really embraced the idea. We passed 73rd and 74th Constitutional Amendments but didn’t follow through at the level of the State governments. So, even if you have a good panchayat, you don’t have the money. The money is coming from above, and that’s where the power is. Even if the panchayat is not captured, it won’t succeed unless it has more autonomy and power. The other issue is that its not enough to have money. Quite often, in villages, there is no expertise. A lot of corruption takes place because there simply isn’t the capability to do book-keeping or auditing. Ultimately it is a matter of money because if there was a lot of money, expertise could be hired. But funds from panchayat budgets go unspent because viable projects aren’t undertaken or completed due to a lack of expertise.

Q: Corruption has emerged as an election issue and we’ve seen the AAP form a government on that plank. How effective do you think something like the Lokpal is?

A: Kejriwal and his party should be lauded for bringing the issue in the open, but they don’t seem to have thought it through. They always talk of punishing the bribe-taker. The lokpal they want may be effective in punishing the official. What about the much wealthier bribe-giver? To me, that is just as ,if not more, important. There are also some institutional issues here. One, there has to be institutional change so that the bribe-giver doesn’t have the incentive to give bribes. Two, this assumes that all the corruption is official corruption. But a large part of corruption in India is within the private sector. Lokpal can’t do anything about that. Three, they haven’t thought enough about why there is corruption. You are a powerful public official and I have to go to you as a supplicant for a death or marriage or caste certificate, etc. I have to please you, so I pay a bribe. You have the power because you are the only person who can give me the certificate. What if there were a hundred other people who could also give me the certificate? Then there would be competition and bribery would decline. For example, in India you have a lot of corruption in the passport office.

You don’t see that in the US, but it’s not because they are more moral than us. There you go to the nearby post office and apply for the passport. Suppose the postal officer asks for a bribe, you go to another post office. You deprive the postal officer of the monopoly power over passport applications. Much official corruption occurs because of monopoly power. Many supporters of AAP think corruption is just a matter of personal morals or insufficient punishment. China has the severest punishment for corruption (sometimes, execution), yet corruption is rampant there. Even if I assume everyone is immoral, dishonest, there are ways of reducing corruption by changing the institutional rules to create competition. One needs to come up with institutional changes that could reduce the incentive to give a bribe. The AAP’s approach so far has been rather naive.

Q: Do you think Aadhaar can address corruption?

A: I am generally in favour of Aadhaar, though I understand that there are some concerns people have raised about privacy. But I think the potential benefits from Aadhaar outweigh some of these. But I don’t think we should expect too much from it. Some types of corruption problems will be solved, but others will not. For instance, for the food security bill, or NREGA, Aadhaar will solve the problem of fake job cards or faked identities. So if your biometric data don’t match, it can address that. But it can’t solve the problem of faked BPL cards, for instance. Because BPL is means-tested but Aadhaar is not. Some of the corruption will remain, like the non-poor grabbing the resources meant for the poor, because Aadhaar cannot weigh the definition of the poor. People should have realistic expectations. A good thing is that it is portable, where migrant workers will be now able to access services, or pavement dwellers with no fixed address can get, say, ration cards. However, there are legal issues, like whether it is voluntary or not. If it is voluntary, then it might not be as useful. What has started worrying me in the last 3-4 weeks is that the Congress party seems to be backtracking on its own big project. It is particularly wrong sign when you start with big fanfare and then backtrack — at least that’s the impression.

Q: Are the civil services to blame for the gapss in delivery?

A: In the civil services, the system creates warped incentives.  There are risks to taking a bold decision. It may or may not work. When I know that vigilance offices are always watching me, I won’t take a bold decision. Why? Because if I do, and it does not work, and somebody gains as a result of the decision not working, then there will be an ostensible case, as if I took the decision deliberately to profit that man. Whereas if I take the non-risky but low-payoff decision, the company doesn’t gain much, but I save my skin, which one will I take? This obsession with affixing blame is part of the problem of why, say, public sector enterprises are inefficient. We don’t incentivise bureaucrats to make bold decisions. This is in contrast to China, where the local official’s promotion depends on certain well-specified criteria. One is the economic performance of the district you are in charge of. Suppose I am a corrupt local official. I will still steal, but not too much, because if I do that then my district’s performance suffers. And I won’t get promoted. So it is in my self-interest to ensure the district does well. Indian district collectors have no such incentive. If the district goes to the dogs, it doesn’t matter, he’ll be transferred in two years anyway. The Chinese system is non-democratic but they think in terms of incentives, we are not.

Q: You mentioned earlier that there are no jobs being created. But the jobs that are created go unfilled because of a skills deficit. How can that be addressed?

A: For me, the skill-formation question is a major issue, one that goes to the much larger issue of how to restructure the education system. No government seems to have given enough thought to this. They announce more universities, more IITs and IIMs, but that’s not the way to address this very real problem. I have suggested that we borrow ideas from Germany and the US. In Germany, after you leave school or even Grade 8, this whole population is streamed towards vocational training, acquiring specialised skills. These vocational training centres collaborate with firms that are potential employers, who also fund them. By getting involved in vocational training, they can catch good workers early, so these students are like trainees in the company. That is a model that is highly imitable in India. In the US, the overwhelming majority of high school graduates go to community colleges, which are local. They are funded entirely by local taxes, are almost free and extremely accessible. The tiny percentage of people who do very well can transfer to universities. That’s how it should be. How many people are really cut out for good university education? Most people go into jobs for which you don’t need a bachelors or a masters degree. We need to adapt these models to our circumstances and restructure our education system to encourage skill formation. It’s also important to link up to potential job-givers and involve them in the process. We should be setting up skills-training centres in villages and small towns, rather than expanding universities.

Q: There have reports that growth rates in China are coming down and that we don’t know what’s going on there.

A: There is no doubt that China’s growth rates are slowing. For one, it is ageing. I expect the growth rate to decline over time, but not that much, because its savings rate is very high, and with that kind of savings rate, you cannot do too badly. Indeed the reason I think India’s growth rate will also rebound is that the savings rate is reasonably high. The other reason for China’s growth rate to remain high is that they are spending a large part of the GDP on R&D, which will lead to innovation and growth. China is already beating the US on green technology, and they’re looking for sectors they can enter.

Q: There’s a perception that we can’t trust Chinese data.

A: That’s true but there are indirect ways of checking on industrial growth, like electricity consumption etc. So those checks largely show that there is only a little gap between official statistics and independent estimates. Either way, Chinese growth rate is very high. Having said that, India’s service sector growth is very badly recorded and India’s data are only slightly better than Chinese data.

Q: But the sense is that the poor quality of Indian data is due to incompetence, while Chinese data is political.

A: Sure. But Indian data can also be political. State government may change their data because of the criteria of fund allocation. So I would not be surprised if there were corresponding manipulations in Indian data also. No doubt it’s much more in China though. I expect that by 2020, their growth rate will come down to 6-7 per cent.

Q: Do you think a lower growth rate will stress the political system and force the communist party to make political concessions?

A: Well, 6-7 per cent is not all that low. I think the political unrest will come from other reasons. As a result of growth, property prices have gone up, and as a result, even the middle class cannot afford houses. That is a source of resentment. Secondly, eventually the middle class will start questioning the government’s actions, as is already happening on microblogs. But it’s difficult to predict. The government knows socialism doesn’t hold the country together. It is trying to substitute — the glue now is nationalism. Every Chinese learns in school of a century of humiliation — that 19th century on, from the Opium War, they’ve been humiliated. And now is the time to reclaim their position in the world. So they’ve cleverly used nationalism. I wouldn’t be surprised if things explode, but if I were to bet, the party will probably manage to control things for some time to come.

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