As a fan of Development economics & Public policy, I cannot help looking deep at policy initiatives, beyond their marketed outcomes and the accompanying theatrics, for I strongly concur with Milton Friedman's quote: “One of the great mistakes is to judge policies and programs by their intentions rather than their results.”
How do we ensure justice & fairness in Public policy? The Rawlsian idea of "veil of ignorance" propounds that, when a person in charge of public policy, knows nothing of his own stake / position in the society, could be trusted with designing a just system – acceptable to all the stakeholders – of all race, colour, sex, class, position in the society. Here is the twist. What if the veil of ignorance results in indifference & apathy? "Let them eat cake" is what "a great princess" said when told that the peasants had no bread to eat. This is famously misattributed to Marie Antoinette, the last queen of the First French Republic. Now, isn't it an opportune moment to reappraise our collective conscience in the wake of the COVID-19 triggered miseries such as plight of migrant workers & starving poor, and to rewrite the social contract?
Poverty, hunger, ignorance and illiteracy are a few characteristic deprivations that mark human suffering. British writer Tim Worstall's essay titled "Abject Poverty Is The Natural State Of Mankind, Wealth The Thing Created" appeared in the Forbes. The title conveys a thought-provoking message that wealth creation happens by active effort & intervention. Beginning from the dawn of civilization, when man started to domesticate animals & clear forests for agriculture, to the recent visualization of a black-hole, everything involved organized investment of our physical & mental effort as well as material resources. Mankind or its predecessor being, had set off the journey by inventing and discovering primitive things, aided by rudimentary tools and eventually today we are at the cusp of the 4th industrial revolution. This has obviously raised human productivity 1000 folds – in terms of capacity to produce lots of food, long distance travel, telecommunication, space exploration, medical science and finally spending leisure time in activities like literature, arts, music, drama and painting – as a creator, as well as, as a consumer. This remarkable stride in standard of living is taken for granted and hugely underappreciated. Shouldn't our journey so far, serve as a spur for the grand journey that is ahead of us? What difference in our collective strategy could make this further grander?
Stories and ideas told in the past, when subjected to fresh scrutiny, in the light of availability of new tools & contexts, could lead us to new perspectives. India's Economic Survey 2019-20 (published in Jan 2020) focuses on wealth creation for 130+ crore Indians and unveils an ambitious strategy to address supply side as well as demand side constrains. Whose concern is it anyway to create wealth for all the 130 crore Indians in an inclusive fashion? It is of definite concern for those currently suffering poverty, civil society organizations / NGOs, self-help groups, charities, philanthropists, altruists, international organizations like UN, World Bank, IMF and of course the government itself. What about the already affluent classes and elites? In this class, I consider the present middle classes (including, of course the Neo-middle classes that benefitted from Rao’s LPG reforms in 1990s), the upper classes, the business tycoons and the power elites. Are they concerned, if not worried at the plight of their poor fellow humans? If at all they are concerned, what is the underlying drive? It could be social justice & egalitarianism (equality & freedom), wishful thinking, compassion, benevolence or altruism. My intent in this essay is to inspect whether there could be a business case as a driving force to the problem of poverty alleviation, apart from the conscience driven ones, mentioned above.
In a primitive, resource-based economy, wealth can be thought of as a fixed pie, which can be extracted and consumed. But, as economies graduate to higher levels of sophistication, becoming more capable of higher value addition, wealth creation and expansion happens by boosting innovation & productivity in STEM fields. How else did we escape Malthusian trap? This idea was aptly documented & theorised by Joseph Schumpeter, the father of entrepreneurship. Today, humans constitute a global civilization, one that is characterised by knowledge-based economy and hence, the resultant wealth accretion is a positive sum game i.e. your gain is not my loss and vice-versa.
Does culture sanction wealth creation & accretion? Hinduism's heterodox philosophy endorses Hedonism, a way of living, driven by consumption & materialism. Swami Vivekananda too had said that the Western world should learn spirituality from the East, while teaching materialistic pursuits to the East. No doubt that fetishization & over greed are definite killers, yet materialism can be taken as a useful marker of prosperity, to measure the standard of living, if not as the only measure. Remember: There's no nobility in poverty (Courtesy: Jordan Belfort – The Wolf of Wall Street 😊).
The apex of the Abraham Maslow's “Hierarchy of Needs” pyramid shows "Self-actualization", which suggests that, one become everything that one can become. The culmination of this notion of individualism is a very important outcome of renaissance in Europe. How about collective actualization, a scaled-up version that says, let us all together do that which is in our best collective interest? If the entire human population, as a system, could somehow adopt a collective strategy, with everyone doing what he is capable of, with individual & collective ambitions and aspirations acting in unison, what wonders could be achieved?
Nature itself could serve an inspiration for our purpose. The idea of "mother nature" or "mother earth", being one integrated system, working in unison is rooted in multiple cultural traditions. It has also been propounded in science. The Gaia hypothesis proposes that all organisms and their inorganic surroundings on Earth are closely integrated to form a single and self-regulating complex system, maintaining the conditions for life on the planet. Looking at the nature, in the micro level, Particle swarm optimization (PSO) is an algorithm inspired by the social behaviour of many animals living in colonies and operating in teams as seen in birds, ants or fishes. This has inspired & driven us to solve various engineering problems. Is it possible to adopt a grand social engineering strategy to maximise everyone’s welfare & prosperity, without or with minimal deadweight loss?
Recent events related to the human agony caused by COVID-19 has prompted me to give solid form to some of my thinking, that I have been involved in, for a while now. It provided me a context and an opportunity. The government of India has responded with Atmanirbhar Bharat Abhiyan – a package of relief, reforms and resources. In my opinion, a stimulus package must not only be to address the newly risen challenges, instead it must address the issues in a holistic manner – answering questions such as where do we as a nation want to be after 10 years, 20 years and so on – particularly in the changed context, in which all the previous road maps are no longer relevant.
I must say that I am a bit disappointed by the economic package as it doesn’t adequately address the question of boosting demand. It focusses too much only on reviving the supply side, as if it is only a starting trouble. There are some appreciable measures like enhanced allocation to MGNREGA, extension of NFSA to presently excluded demography like migrant workers, affordable rental housing for urban poor & migrants, extending PMAY-CLSS for 1 more year, investment in farm-gate infrastructure such as cold chain & processing infrastructure, deregulation of Agri-marketing. But these measures are a small portion in the entire sum. About 85% of value of the estimated measures are by way of liquidity support (meaning: intended to solve supply side issues) through RBI - credit guarantee and interest subvention of fixed capital, working capital, etc. The demand side, which is characterised by purchasing power hasn’t been accorded adequate attention. Perhaps the government is embracing Neoliberalism of Reagan-Thatcher era (eg: privatisation of railways), or it is keeping its powder dry for more tough time that are to come. We can only speculate now.
I suppose that it wouldn't be out of context here to recall how Japan underwent the "lost decade" (1991-2001) which Paul Krugman has argued is an example of a liquidity trap (a situation in which monetary policy is unable to lower nominal interest rates because it is already close to zero). It is still a matter of debate as to whether Japan has really recovered from the impact of the lost decade. The much-touted antidote, called “Abenomics”, after the Prime Minister Shinzo Abe's strategy that combines fiscal expansion (Keynesianism), monetary easing (Monetarism), and structural reform hasn't been able to make any sustained impact. Japan failed to get out of the prolonged depression due to multiple factors – remarkable amongst them being its ageing population. Ageing population means lower Labour Force Participation Rate, leading to a high Dependency ratio (At present, it is approximately 70 for Japan and 50 for India. This means that 30% of Japan’s population work & earn to support themselves & their dependents – i.e. the remaining 70%). This translates to an inability to sustain high Purchasing power, thereby weakening Consumption, a key pillar of Aggregate demand.
The point that I am trying to argue here is that an expansionary monetary policy couldn’t get the economic engine running in Japan. In the similar manner, the Atmanirbhar Bharat Abhiyan focusses too much only on reviving the supply side. In Japan, expansionary monetary policy couldn't get the engine running because of the skewed demography i.e. huge aged population, who couldn't make productive contribution to the economy. Hence, the consumption pillar remained weak. Today, in India too, the consumption pillar is weak, not due to skewed demography, but due to a demography that is handicapped, both due to (a) short-term deprivations such as inadequate relief (in the wake of COVID-19) such as wage support, income support, financial support to the poor and, (b) long-term deprivations like inability to access social infrastructure – like education, healthcare and, any form of institutional support that can lead the deprived classes to upward socio-economic mobility. As I have mentioned at one place above, I have been thinking about these long-term deprivations & ways to market the need to address these as being in the best interest of the already well-off too, for quite some time. This COVID-19 & the inadequate demand & consumption boosting measures, has given me an opportunity for this analysis.
In our present context of Atmanirbhar Bharat Abhiyan, government has laid too much emphasis on boosting the liquidity in the supply side, hoping that enhanced access to loan would kick start the economy. This is simply not possible. What else can explain the over ₹8 lakh crore parked by commercial banks with the RBI at a meagre interest (reverse repo is 3.75%, at present). There could be two explanations for this: (1) There is very slow loan take-off, as businesses are wary of producing more, as they don't foresee demand picking up in the short & medium term due to pre-accumulated inventory, (2) Banks perceive lending to be too risky and hence consider it safe to earn an assured interest from their deposits with RBI, albeit at a low rate of interest (This is lazy banking at work!). If banks see lending as risky, why can't the policy mandarins in New Delhi see the reason behind. Liquidity measures will clear all the hurdles in starting the production line. So, production can begin at full steam. But, whom to sell everything that is produced now? Won't untapped/excess supply result in NPA, deteriorating bank balance sheets? Nearly 60% of India's GDP is composed of domestic private consumption i.e. goods & services consumed by end consumers. If this critical pillar, called consumption is left weak, no matter how much ever liquidity is provided, the economic engine cannot run in full speed. Isn't this evident from the tepid response of the economy since last year wherein RBI has been cutting rates in successive policy reviews, but to no avail. Perhaps it would take an Atmanirbhar Bharat Abhiyan 2.0 for the government to shed its stubborn refusal to resort to fiscal packages in the form of infra spending, bailout to troubled sectors and more direct transfer measures.
After having made a convincing case that supply related measures alone are not sufficient, let me present my thinking on the kinds of demand boosting measures needed, so that people start spending money on all kinds of things, to kick start the engine of economy.
Economists & scholars from other social sciences have spoken elaborately of and made advocacy for helicopter money (non-liability creating cash transfer), freedom dividend (proposed by Andrew Yang, a candidate in the 2020 Democratic presidential primaries), transfer payments – for any generic untied purpose to specific ones (like India’s JAM trinity for subsidy disbursal, PM-KISAN), universal basic income and so on. The idea, here is to increase the velocity of money – by putting it in the hands of those who are more likely to spend a higher proportion of it, rather than simply keep it idle in Bank (called higher Marginal propensity to spend – in economics). There could be only so much velocity of money, that is attainable, as a given ecosystem supports. Coming from a STEM background, I cannot stop comparing the velocity of money with the speed of light. The speed of light depends on the medium it travels. It is faster when the medium is less dense (Light travels faster in air than in water). Additionally, the speed of light has a known upper limit as well (3,00,000 km/s) which is the maximum permitted by the medium (here: space-time fabric). Hence, it is the medium or the ecosystem that determines the velocity. In conclusion, a good way of boosting demand in these times of trouble is to pump money into the pockets of the poor – either by way of new jobs created by fiscal measures (eg: FDR’s New deal as a response to the interwar Great depression in 1930s or direct welfare payment (eg: Pradhan Mantri Garib Kalyan Yojana 2020 – free food grains & Rs 500 per month to women PMJDY account holders). The eventual focus is to increase the number of actors in the economy, by first bringing them into the picture (so as to make them part of the consumption driven aggregate demand) and then paying them, (in order to boost their purchasing power) – to increase the velocity of money.
The bottom-line is that, the poor need to be paid – either wages or free cash transfer, simply to quicken the economic recovery, which is in everyone’s interest – including the super-rich. That looks like an unnecessary burden on the taxpayers (rich or otherwise). Do the rich (or taxpayers in general) really benefit from this type of arrangement?
"Inclusive growth" has been the watchword for quite some time now. It's been seen frequently in 12th Five-year plan related documents, UN Millennium Development Goals (MDGs), UN Sustainable Development Goals (SDGs), India 2020 by A. P. J. Abdul Kalam and lately NITI Aayog's New India by 2022 vision document. Is inclusive growth helpful to all? How does it help the rich?
In the above few blocks, I recorded my observation on the Atmanirbhar Bharat Abhiyan's inadequate focus on demand/consumption. I will leave it to the best judgment of Delhi based politicians & Mumbai based business captains to formulate the means of boosting demand. Next, I will move on to the long-term deprivations, mentioned above. To address long-term deprivations, we need to think of sustainable measures for the government (or any funding entity) in a manner that the actions are aimed at long-term impacts, which is usually politically nonrewarding. To ditch short-sightedness in public policy, takes immense courage. It might involve making unpopular trade-offs. Throughout history, lives of transformational leaders like M.K.Gandhi, Nelson Mandela, Lee Kuan Yew, Franklin D. Roosevelt and Mustafa Kemal Atatürk show that sincere leadership calls for audacity (willingness to take unpopular decisions in the interest of long term good) and not mere theatrics (intended to score short-term brownie points). Audacity could involve sacrificing today's pleasure in the favour of tomorrow's (intertemporal choice), whereas theatrics could involve sacrificing interests of vulnerable & deprived sections in the favour of the elites' interests.
Here is a poignant fact that must urge us into quick action. We know for a fact that education is a great equalizer. We are in the midst of a global learning crisis (marked by learning poverty) that stifles the opportunities and aspirations of hundreds of millions of children. Learning poverty is defined as the percentage of children who can’t read and understand a simple story by the age of 10. Why Focus on Reading? Because, it is the first step to help children achieve their potential, making him an active participant in the mainstream society. Reading is a gateway for learning, as the child progresses through school—and conversely, an inability to read slams that gate shut. Why is age 10 important? For most children, turning 10 is an exciting moment. At that stage, they learn more about the world and expand their horizons, shaping perspectives. If a child isn't capable of reading, it is the miss of opportunity by a generation of time. It takes his offspring to get a chance to succeed in that endeavour again. Doesn't this slowdown the pace of our collective goals?
Whose collective goals? Why should the rich care? Why should this – “miss of opportunity by a generation of time”-type issues – bother the already affluent & well-off?
I can argue this as an extension of the idea of velocity of money discussed above at one point – just for the sake of easy understanding, although velocity of money idea is primarily used to study money supply and inflation. A non-inclusive system, with lower velocity of money, lower business sophistication, sets an inherent limitation on highest enjoyable standard of living that is to be offered by the system. For example, let’s say that you have all the money in the country and the rest of the population is experiencing abject poverty. What do you spend it on? Other participants in the economy must have something to trade with you. This sort of inequality is detrimental to the prosperity of the rich as well, as they might have the purchasing power but no market to buy from, and hence nothing to consume. Why else do you think the rich people from poor regions / countries migrate to rich regions / countries? Also, there is literature supporting the view that economic & social inequality make difficult the process of recovery from a recession, precisely due to weak purchasing power.
Provisioning of inclusive social infrastructure is critical for India to also escape middle income trap – an inability of the economy to develop and grow, after reaching an income level – due non-transitioning from resource-based to knowledge-based economy, the main reason of which is inadequate investment in long-term capacity building of human resource in an inclusive manner. Timely investment in high quality education – primary, secondary, higher education, R & D is the assured way to escape middle income trap. These measures must also be accompanied with necessary social reforms. It is very urgent to get out of feudal hangover and move on as one species – or one family perhaps – as strongly rooted in Indian culture through phrases such as Yaadhum Oore Yaavarum Kelir and Vasudhaiva Kutumbakam. The blue-collar era is over. We are at the dawn of 4th industrial revolution, the meaning of which is that we no longer have the option of poverty reduction by providing blue-collar industrial jobs in huge numbers to the masses – like the way many industrialised countries have done, most recently China. Hence, today it is more costly than a decade ago, to set in motion the process of alleviating the masses from poverty. But, the cost of inaction is tremendous – which can include social unrest, extremism, violence, hatred, communalism, discontent & disillusionment. All low-tech jobs, that formed low hanging fruits in the blue-collar era have now been replaced by robots, marking the end of human role in the assembly lines. But our education curriculum hasn’t adequately kept up. In his most viewed TED talk, “Do schools kill creativity?”, Sir Ken Robinson highlights how the education system that was designed for assembly line & mass production era (2nd industrial revolution), hasn’t changed much. I would like to conclude that, investing in high quality education & healthcare for everyone must be a high priority. It is a sustainable measure for the government and would lead to long-term impacts in terms of boosting the demand and consumption in the economy and raising standards of living for everyone.
In this last part of this essay, I would like to present a counter-intuitive idea. Philanthropy, which is characterised by broad-mindedness, is in short supply. But I am unconvinced that the generous contribution of billionaires towards social infrastructure – like schools, libraries, hospitals, investment in vaccine development – are driven by purely philanthropic or conscience driven motives. They have probably understood, after reaching the pinnacle of wealth, that such acts are the only and definite ways to ensure survival & prosperity for themselves and their progeny. I deeply speculate that the generous spending by some super-rich is driven by rational self-interest (and not altruism), after they look at the big picture and attain a realisation of sorts. (If the Earth itself is gone, due to climate change, pollution, pandemic, terrorism and so on, would their cash in billions protect? If humanity doesn’t survive, so doesn’t my progeny. This idea can be visualised at multiple levels). But it is personally very costly for individuals to think in this fashion, unless they are in the apex of the pyramid already. We have another parallel here. The CSR spending by corporations is not out of altruism, instead it is a tool to promote rational self-interest – beginning from self-preservation to perpetuation of business interests. What else do we make of some super-rich actively pursuing & lobbying for mass education? Some of them are pumping their personal fortunes into this. Human misery is rationally responded to by a few like Andrew Carnegie, John D. Rockefeller, Bill Gates, Warren Buffett & George Soros. Some relevant phrases that I could think of are – Ethical egoism and Enlightened self-interest.
In my lifetime I would like to see a world where the highest priority is accorded to alleviate the long-term deprivations – by making highest possible resource allocation for social infrastructure such as quality schooling for the masses & free / universal / affordable healthcare. Freebies or public goods are to be judged based on social context & fiscal capacity of governments. In ultimate analysis, I would like to conclude saying that there is a strong political, business and rational case to alleviate poverty – as I have shown that it will boost overall consumption & standard of living for everyone. This is indeed a moment of truth, to reassess our collective conscience, ambition and strategy.
Edit-1: Another relevant read: The transformation of King Ashoka and Bill Gates