http://www.hindu.com/2005/01/03/stories/2005010301861000.htm The Hindu Jan 03, 2005
Guaranteeing employment: a palliative? By T.N. Srinivasan Let us not kid ourselves: an employment generation programme is a palliative and not a means for poverty eradication. AMIT BHADURI's article ( The Hindu , Dec 27, 2004) is an eclectic mixture of micro and macroeconomic arguments, comments on electoral politics, political economy, and above all a plea to the Government to come up with a "much larger employment programme and the right to information at all levels." Many overlapping employment generation programmes (EGP) have been in operation over a considerable period of time, with varying degrees of effectiveness. Professor Bhaduri does not comment on them nor does he offer a precise, quantitative, and time phased description of his "larger" programme as well as a reasoned case for its feasibility and cost-effectiveness. Professor Bhaduri rightly points out that the classic theorems about Pareto optimality of a laissez-faire Competitive Market Equilibrium say nothing on the desirability from a social perspective of the resulting distribution of income, let alone on the existence and dynamic stability of the equilibrium. However, he fails to add the crucial corollary that in attempting to move income distribution in a socially desirable direction policy interventions have to be carefully chosen. Prices in a competitive market play a dual role as signals for an efficient allocation of scarce resources, at a point of and over time, and as determinants of income distribution. While changing the path of income distribution in desired directions, one has to ensure that the policies chosen distort the allocative role of prices the least. Most policies over the first four or so decades of our development, rationalised in the name of poverty alleviation would hardly satisfy this desideratum of policy choice. Until twenty-five years ago our growth was too slow to make any dent on poverty on its own, poverty-oriented programmes were ineffective, and other policy interventions slowed growth and increased poverty from what they might have been. The cancer of corruption and rent seeking these policies induced in the body politic are well known. Professor Bhaduri invokes the Keynesian argument that deficit financing to activate idle capacity would not be inflationary. He asserts that there is idle capacity in cement, steel and transport. The argument applied to an economy closed to international trade so that stimulation of domestic demand (I do not want to enter the debate on the role of price rigidities in Keynesian analysis) was needed to activate idle capacity. In an open economy, such as ours, lack of demand cannot be the reason for idle capacity - with steel and cement being exportable there would always be world demand for them provided we are internationally competitive. Thus the demand constraint as an explanation for idle capacity is overblown and so is any concern, at least for now, about inflation being stoked by any addition to an already huge fiscal deficit. Theories about competitive equilibrium, irrelevance of fiscal deficits, and putting rights based arguments as well as capabilities, entitlements and functionings in their proper modest places are not central to Professor Bhaduri's plea. It rests on the undoubted attractiveness of a well-designed and well-implemented EGP for providing the poor (and only the poor) income earning opportunities in the short run that they do not have in an adequate measure. If, in addition to enhancing the incomes of the poor, the programme also produces valuable assets or goods and services, it is an additional argument in its favour. Having published with N.S.S. Narayana and Kirit Parikh, some quantitative simulations based on a model of the Indian economy, on the effectiveness of rural employment generation programmes, under alternative assumptions about their productivity effects and leakage (to non-poor) propensities, I am certainly sympathetic to Professor Bhaduri's plea. However I have three concerns. First, I am not confident in the ability of our political-administrative system in designing and executing an EGP of a size needed to make a significant dent on poverty. For example, given the differences in governance across States and particularly in the functioning of Panchayati Raj institutions to which Professor Bhaduri rightly assigns the responsibility for executing the EGP, one cannot assume that one can successfully replicate, say in Bihar, what was successful, say, in Maharashtra. Realistically the non-resource political and administrative constraints, rather than constraints of budgetary resources, would restrict the size of the programme. Secondly, the EGP could become a permanent transfer programme to alleviate poverty, and to the extent it is successful, it could divert attention from addressing the fundamental issue of eradicating poverty. Creating employment opportunities otherwise unavailable is certainly an appropriate short-term measure. But the long-term solution is to create an economic, political, and social environment in which the economy generates productive employment opportunities in a sustained manner, for wage earners, casual workers, as well as the self employed (the largest single source of employment for our work force) including women, and take children out of work and keep them in schools. Thirdly, subsidies, justified as pro-poor, should be reconsidered while expanding EGP. Subsidising some goods or services consumed by the poor (such as primary education, healthcare and sanitation) for the reason that there is a significant beneficial, social externality in enabling the poor to consume more than what they would have in the absence of a subsidy, is eminently worthwhile. However, not charging for scarce power or subsidising fertilizer use or cross subsidy of passenger transport by Railways, etc., and even a large part of public distribution system for food grains cannot possibly be rationalised on grounds of social externality. Elimination of such subsidies would generate resources for a larger EGP. Privatisation of public enterprises will also raise resources. Whether a public enterprise makes a profit or loss is irrelevant in deciding whether to privatise it. The loss (profit) of a socially justified public enterprise has to be made up from (add to) general revenues. Privatisation of public enterprises (including a large part of the financial sector) that have no social rationale, and at the same time creating a competent and independent regulatory system to ensure that a possibly inefficient public enterprise is not replaced by an efficient private monopoly, should raise large resources. If our panchayats and other relevant bodies could identify the truly needy in their jurisdictions, a simple transfer of income to the needy would be most cost effective in addressing poverty. Only if such unconditional transfers are viewed as insulting the self-esteem of the recipient or distorting work/leisure choices, EGP is a better alternative. In an environment conducive to the generation of productive opportunities in the normal course, the economy would be growing at a rapid and sustainable pace, and the fruits of growth would be widely shared. The social environment, obviously, would be free of any discrimination based on caste, class or sex. The political environment would be a thriving participatory democracy with efficient and incorruptible judicial and administrative systems. I am afraid our economy is currently nowhere close to such an environment, nor are our social, political and administrative environments. The facts that (a) high fiscal deficits have not kindled inflation;(b) foreign reserves continue to grow; (c) real interest rates are at all time lows; (d) commercial banks are holding far more government paper than they are required to hold;(e) the current account has been in surplus for two years in a row;(f) the rate of domestic savings (investment) in 2002-03 the same (less) compared to 1990-91; and above all, (g) GDP rate of growth has slowed down since the peak of 7.8% in 1996-97 and appears to be converging to the contemporary Hindu rate of growth of about 6%, are consistent with the hypothesis that the domestic investment climate is poor. India attracts as much foreign direct investment as Thailand WHICH EXPERIENCED A SEVERE financial crisis in 1997, and a tenth of the inflows to China in 2003. Our poor country invests its reserves in U.S. Government securities yielding very low rates of return. However, with fiscal deficits already high, it may be unwise to use of part of foreign exchange reserves for domestic investment with higher return, say in infrastructure, since any mechanism for doing so would necessarily increase the fiscal deficit. A serious and sound empirical analysis is needed of whether (a) the fiscal deficit is sustainable, (b) reserves are far more than would be needed to smooth trade fluctuations and (self) insure the economy against a financial crisis of foreign origin and indeed, (c) whether the real binding constraints on the growth process of the economy are the dominant presence of a slowly reforming, inefficient and inflexible public sector in crucial power and the financial sectors. Fiscal deficits are indeed too high and some analysts have found India's macro indicators to be similar to those of countries that experienced a macroeconomic and financial crisis. Notwithstanding bright spots such as our IT and telecommunication sectors, the failure to address the fiscal consolidation, dilly-dallying relating to the implementation of the Electricity Bill, the rhetoric on privatisation of the Left parties, the shelving of any change in labour laws, failure to complete trade reforms and clinging on to demands for counterproductive special and differential treatment in the Doha round negotiations, and the persistent infrastructure bottlenecks do not leave much room for optimism about creating soon an economic environment for eradicating poverty through rapid growth. Until then there is no better alternative to an EGP of a scale consistent with implementation capacities, for alleviating poverty. Let us not kid ourselves: it is a palliative and not a means for poverty eradication. (The author is Samuel C. Park Jr. Professor of Economics, Department of Economics, and Chair, South Asia Studies Council, Yale University, Newhaven, CT USA) _________________________________ Labour Notes South Asia (LNSA): An informal archive and mailing list for trade unionists and labour activists based in or working on South asia. LNSA Mailing List: Labour Notes South Asia To subscribe send a blank message to: <[EMAIL PROTECTED]> LNSA Web site: groups.yahoo.com/group/lnsa/ Run by The South Asia Citizens Web www.sacw.net _________________________________ ------------------------ Yahoo! Groups Sponsor --------------------~--> What would our lives be like without music, dance, and theater? 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