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Tuesday, April 13, 2021

Be affirmative

Study Sri Lanka and Malaysia to learn how quotas need not limit economic growth

Written by Ashutoshvarshney |
March 13, 2007 11:28:53 pm

Several arguments have emerged in the ongoing debate on affirmative action. Especially in corporate and economic circles, a dominant argument is that quotas will hurt India’s rise as an economic power, and the government should leave the market forces and merit alone to produce a 21st-century economy. There are quite a few arguments that one can make against quotas. But this particular argument is so weak and so widely believed in economic and corporate quarters that its flaws should be clearly demonstrated.

The key questions are: are there countries that have had a remarkable economic revolution, despite ambitious quotas and reservations? Are there countries whose economic march has been halted or blocked by quotas in employment and/or education? What do we know about such examples, and what inferences can we draw from such comparative evidence?

The focus of the debate has so far been on south India, but the evidence on how quotas and the rise of south India might be related remains less than compelling. On the whole, self-respect movements of the lower castes had preceded the installation of huge quotas in education and jobs. Social scientists have not yet systematically sorted out whether the distinctly better economic and social performance of southern India in recent years, compared to the Hindi-speaking north, is a long-run consequence of those movements, or of the extensive quotas put in place in the 1960s.

Consider two other examples, both better studied: Sri Lanka and Malaysia. In the 1970s, on grounds of relative and historical backwardness, Sri Lanka’s higher education policy allowed an upward revision in the grades of Sinhala students compared to Tamils. There is a consensus in scholarly circles that this policy opened the way for a ghastly ethnic polarisation.

About the same time, Malaysia devised an even more ambitious affirmative action programme. The New Economic Policy, unveiled in 1971, mandated that private companies, mostly in Chinese hands, would have to allocate 30 per cent of their share capital to Malay individuals and financial institutions within two decades. Quotas were to apply to the private corporate sector as well as to jobs in the public sector and seats in higher education.

The policy rationale was simple. Some Malays were rich, but most were poor and rural. In contrast, while some Chinese were poor, most were urban and had substantially higher incomes than the Malays. To reduce social conflict and violence, argued decision-makers, it was necessary to break the link between poverty and ethnicity. Malays had to be economically brought up through government support.

Note the similarity between these arguments and those made by the current government about the OBCs. Note also that Malaysia’s affirmative action programme has been more ambitious than India’s. In India the private sector so far has been left alone.

Over the last four decades, if anything, Malaysia has been among the most successful economies in the developing world. Its average growth rate since the early 1970s has been around 6-7 per cent per annum. In 1960, before the affirmative action programme was launched, its per capita income was $280 (as against India’s $140). Its per capita income today is roughly $5000 (compared to $700 for India). Sometime during 2020-2025 Malaysia will most likely become a first-world country.

In other words, India has had a much less ambitious affirmative action programme than Malaysia, but Malaysia has been economically a great deal more successful. How did it achieve these results?

While pursuing affirmative action, Malaysia also lowered trade tariffs, reformed exchange rate regimes and gave investment incentives. According to the Sachs-Warner benchmark of economic openness, based on trade, exchange rate and investment regimes, Malaysia has been an open economy for over four decades. Affirmative action and market-oriented policies were thus simultaneously pursued, and a balance was struck between the two.

One of the great consequences of the Malaysian strategy was that once Malay anxieties about their poverty and backwardness were addressed, violent social conflict dramatically came down. Since 1969 there have been no Malay-Chinese riots. Affirmative action brought social peace, and peace and stability made it possible for markets to function well.

This brief comparative picture generates two related conclusions for India. First, it is the conflict-aggravating potential of affirmative action that has been repeatedly emphasised in the Indian debate. Whether affirmative action aggravates or dampens conflict crucially depends on whether the economy is growing fast enough to accommodate both affirmative action based claims and market based processes. Despite a rise in Malay privileges and quotas, the Chinese on the whole continued to prosper. Affirmative action did not become a zero-sum game.

Second, the economic critics of India’s affirmative action are getting the political economy of affirmative action wrong. It is a sluggish economy, like Sri Lanka’s, that is undermined by affirmative action. In contrast, in a high-growth environment, even ambitious affirmative action is quite affordable. This point is highly significant, for between Mandal I and Mandal II, there is a radical difference. At the time of Mandal I, a national bankruptcy was brewing. In contrast, India is currently going through an economic boom that is most unlikely to fade. Over the last 2-3 years, India’s investment rate has crossed 30 per cent of GDP for the first time in its history. Whatever other arguments one can make against quotas, purely economically speaking, India can afford Mandal II.

Let me now briefly turn to the theories that have underpinned the economic criticism of Indian quotas. In the various arguments made, two theories can be identified: (a) that further quotas will create more caste conflict, indirectly leaving negative economic consequences; and (b) that quotas will directly lead to inefficiencies in the use of economic resources, as less able people are employed or given reserved seats in higher education. I have already addressed the argument about conflict. What can one say about the links between quotas and economic efficiency?

The argument that more extensive quotas will cause economic inefficiencies is basically right, but it does not follow that India’s economic success will be aborted as a result. Economic growth depends not only on how efficiently public and private investment is used, but also on how much investment is made in an economy. Evidence shows that investors think of several considerations before they invest. Labour laws or recruitment rules are only one factor among many. The size of the market, the future possibilities of growth, the comparative calculus of skills and costs, and the nation’s political stability and social peace are some of the other key factors. If India’s decision-makers continue to put in place market-oriented economic policies that boost investment, while moving forward with affirmative action, thus walking on two legs, India’s economy will also continue to provide long-term opportunities. Despite an extension of affirmative action, investors will invest, as they did in Malaysia.

To conclude, high economic growth and social justice can be combined. To argue the opposite is to not consider the historical and comparative evidence seriously.

The writer is professor of political science at the University of Michigan, Ann Arbor, US varshney@umich.ed

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