Follow Us:
Saturday, December 04, 2021

Reform’s life cycle

Seven per cent GDP growth means 10.5 million new jobs a year; nine per cent GDP growth means 12 million new jobs a year. That’s not just 1.5 million new jobs that aren’t going to be created, that’s also a support base for reforms that now disappears

Written by Bibekdebroy |
November 21, 2008 2:10:50 am

Life is uncertain and modern physics recognises this too. Economists draw a distinction between risk and uncertainty. Risk occurs when probabilities associated with different outcomes are known. Uncertainty occurs when these probabilities are also unknown. Economists usually assume individuals are risk-averse, and uncertainty-averse.

Refinements to theory and the advent of behavioural economics haven’t changed this core perception, notwithstanding contrarian instances from drugs, extreme sports, gambling, sex and stock markets. Or even instances where the same individual is risk-averse in one situation and a risk-lover in another. Generally, individuals prefer status quo and are averse to loss. Experiments with capuchin monkeys have revealed they also share similar behavioural traits. Such attitudes may be functions of evolutionary patterns, with risk-aversion required for preservation, but some risk-loving required for advancement and innovation. Liberalisation and globalisation imply greater exposure to risk/uncertainty. To use the fairground metaphor Wodehouse was fond of, what you lose on swings, you gain on roundabouts. And that’s fine as long as roundabouts are more than swings. Economist mindsets are often influenced by Vilfredo Pareto’s Pareto optimality or Pareto efficiency. If some individuals gain from reforms and none lose, that’s better or superior. Hence, reforms are often described as win-win. But that’s hogwash.

There are no win-win reforms. Every reform has winners and losers. It’s a separate matter that gains to winners more than compensate losses to losers and there are overall welfare gains from reforms. In the absence of actual compensation, the political economy of resistance and preference for status quo remain important. In the early ’90s, as broad-brush generalisation, gainers from reforms were described as efficient trade and industry, small farmers, unorganised labour and consumers. Losers from reforms were characterised as inefficient trade and industry, large farmers, organised labour and bureaucracy. These aren’t rigid compartments. Most of us wear two hats, as consumers and producers. Gains as consumers can conceivably be offset through losses as producers.

Let’s bring in two factoids. First, 72 per cent of the population may live in rural India, but only 55 per cent now earns a living from agriculture, though there are roughly 135 million rural households.

Second, 70 per cent of the population is under-30, with a median age of 24.9 years. One can now make some sweeping assertions.

First, as consumers, reforms benefited across the board, though the degree of gain varies across class and geographical region. These gains through lower prices and better quality are especially true of manufactures, some infrastructure and services. Indeed, had agriculture been completely reformed, Indian consumers would probably have paid more. That’s because global agro prices are more than domestic agro prices, notwithstanding possible efficiency gains from dis-intermediating distribution chains. Consumption gains aren’t pro-rich as is often assumed, since poor households moved away from firewood to LPG, bought bicycles and fans. There was fortune at the bottom of the pyramid.

Second, efficient trade and industry gained and adjusted, despite occasional clamour for protection and this was true of unorganised and small-scale enterprises too.

Third, there were limited gains/ losses in agriculture (both small and large farmers), because required reforms didn’t occur. However, depending on region, there were income gains (even among the relatively poor) through commercialisation, diversification and the creation of off-farm employment opportunities. Service sector growth doesn’t mean only out-sourcing and H-1B visas, even if these are more visible. Core service sector growth means trade, transportation, construction and residual manufacturing that show up in national accounts as services.

Fourth, of 65 million urban households, more than half earn a living from government and quasi-government. And, even in the private sector, at 45-plus, one resists uncertainty and the threat of job losses. Learning new skills at that age isn’t easy, especially if one has historically equated employment security with job security, meaning working for the same enterprise for an unlimited number of years.

One shouldn’t ask why reforms in India are difficult to implement. That question has easy answers. One should instead ask why reforms that have occurred encountered so little resistance. Where was the support base? Though speculative, the answer probably has a lot to do with the younger generation, who also existed in urban (not necessarily metro) and semi-urban India. For them, if reforms didn’t bring immediate prosperity, they at least brought the dream of prosperity. If misfortune now strikes the top of this pyramid, so to speak, and swings are perceived to be more predominant than roundabouts, there are legitimate reasons for worry. Assocham’s report about 25 per cent job cuts may have been withdrawn and may also have been over-inflated. But the issue remains.

Indeed, there are two issues. First, seven per cent GDP growth means 10.5 million new jobs a year. Nine per cent GDP growth means 12 million new jobs a year. That’s not just 1.5 million new jobs that aren’t going to be created, that’s also a support base for reforms that now disappears. Second, there is the question of existing jobs that will be lost and stray reports are floating around — management institute placements, Citigroup, American Express, HSBC, DLF, BT, RBS, ING, Infosys, Jet Airways, not to forget export-oriented sectors like garments (Tirupur, Ludhiana), gems and jewellery, leather, handicrafts, sports goods and chemicals.

There is an argument that increased healthcare expenditure in the United States will help pharmaceuticals and another that recession in West helps low-cost sources like India. The first has limited impact and the second is less valid today than 20 years ago. Part of the problem is that post-1991 young India was exposed to uncertainty, but did not recognise or accept it. Who does when the going is good and the fairy-tale growth story seems ever-lasting? Consequently, interpreted broadly, no insurance was taken against uncertainty and consumption decisions and patterns reflected this unwarranted optimism, referred to as optimism bias or positive illusion and most experiments seem to establish this markedly among the young. Mark Twain defined education as “the path from cocky ignorance to miserable uncertainty”. The cockiness was understandable, the uncertainty wasn’t unexpected. But both misery and ignorance have implications for reforms and one can already witness this in demands for state intervention in labour markets, even in sectors like services historically outside such intervention and in protectionist sentiments in some states.

Regardless of the composition of the incoming Central government, reforms will therefore be more difficult. However, there are reforms and reforms, and the key is composition. Some reforms will be more acceptable than others. One should probably pick efficiency of public expenditure, health, education, social security, roads, housing and administrative law as core elements of the agenda. The rest will simply have to wait until the cyclical downturn is over.

The writer is a noted economist

📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines

For all the latest News Archive News, download Indian Express App.

  • Newsguard
  • The Indian Express website has been rated GREEN for its credibility and trustworthiness by Newsguard, a global service that rates news sources for their journalistic standards.
  • Newsguard