Keeper of the flame

The PM needs to intensify globalisation and other reforms. The growth process, now needs to be supplemented, not by programmes such as the Employment Guarantee Scheme, but by well thought-out schemes to assist the poor, writes Jagdish Bhagwati

The Prime Minister, a supremely successful practitioner of globalisation, turned India, starting 1991, from an inward-looking set of policies to a robust embrace of foreign trade and inward direct foreign investment. This change from a sceptical, even a hostile, view of globalisation to seeing its immense potential and taking advantage of it instead, was among a cascade of unfolding but still incomplete economic reforms that have changed India from a slow-growing economy into a fast-growing economy, unleashing on to the economic scene the “million mutinies” that VS Naipaul observed with an artist’s uncanny eye and applauded.

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Yet, both on the world and on the Indian scenes, there are some sceptics, among them my distinguished colleague Professor Joseph Stiglitz, whose repeated efforts at writing on globalisation have met with increasingly brutal reviews in prominent magazines and newspapers, including The Economist (which, in a second uncomplimentary review of his latest book, embarrassingly asks its readers to read my book instead) and The Financial Times. My globalisation book answered many of the critics of globalisation who think that it harms social agendas. It demonstrated that globalisation has a human face, instead of lacking one. I, therefore, confine myself here, like the Prime Minister, to the question of ‘Globalisation and India’, addressing the main fallacies that still mar the Indian policy scene.

Fallacy 1: It is sometimes asserted that the growth of the Indian economy has little to do with the increased opening to trade.

This proposition has been amply refuted by Professor Arvind Panagariya, another of my distinguished colleagues who develops this argument in greater depth in his forthcoming book, India: An Emerging Giant (Oxford 2007), and the world-class developmental economist, Professor TN Srinivasan of Yale University.

Fallacy 2: But then globalisation-assisted acceleration in the growth of the Indian economy is supposed to have neglected the poor.

Nearly everyone who has measured the change in poverty knows, however, that this is simply not true. Both urban and rural poverty have declined with growth. It is hard to imagine that a stagnant economy can pull people out of poverty. As I say, common sense and economics do go together sometimes! So, when we decided over 40 years ago on growth as a principal strategy (not the only policy) to reduce poverty, we were correct: the problem, until the reforms, rather was that there was little growth.

Yes, different types of growth can have differential effects on poverty reduction. Thus, the proliferation of government-assisted highly capital-intensive projects, as proposed in the Sixties by economists writing on choice-of-techniques, and the inward-looking strategy that prevented the growth of labour-intensive manufactured exports, were among the mistakes that reduced the impact of growth on the poor. But these were ironically the policies favoured by the very economists who now lament our poverty.

I might also add that much is made by anti-reformers, clutching at straws, of the recent work of the former MIT student Petia Topolova, who uses district-level data to argue that trade has not reduced poverty. This work has been effectively toppled over by the more sophisticated work of my former Columbia student, Devashish Mitra, who now holds a Chair at Syracuse University, with Rana Hasan and Beyza Ural, whose works are forthcoming in the new journal, India Policy Forum, which has been started by the National Council of Applied Economic Research and Brookings Institution.

Fallacy 3: The return of the Congress to power at the Centre has also been treated as reflecting the fact that globalisation created the urban-rural inequality.

Quite aside from the question of whether economic reforms, or their subset consisting of pro-globalisation policy shifts, led to such an increase in inequality, one must ask: was inequality behind the reversals?

I have argued that the real issue in the elections has been poverty reduction, not increase (if any) in inequality, whether rural-urban, or in the incomes going to the top and bottom 5 per cent of households. As long as there was little growth under the pre-reform policy framework, the incumbent Congress was returned to power without much ado, as few thought economic betterment was possible in the light of the dismal changes in their lives. So, we had what I have called the “non-revolution of falling expectations”: a fatalistic aise hi chaltahai. But once growth picked up, as did the decline in rural poverty, the poor began to ask for more: the revolution of rising expectations, or what I call the “revolution of perceived possibilities” took over. Oliver Twist asked for more but got less. In India’s democracy, the poor could ask for more and turn to parties in opposition in an anti-incumbency move. And so most incumbents, whether the Congress or the BJP, lost in the elections.

If I am right, then poverty decline, and the self-referential demands arising from it, was at the heart of the political revival of the Congress at the Centre. But then globalisation’s effect on reducing poverty must be applauded. Inequality had, in my view, no political salience. And so, even if inequality has increased and, in turn, this increase is to be attributed to globalisation, it is irrelevant.

Polls do show that the poor resent reforms and inequality. But when asked about reforms, do they understand what ‘reforms’ mean? They are on so many dimensions! Asked about ‘inequality’, only fools (and the poor are not fools; they have to have their wits to survive) will say that they approve of it!

I am confident that if polled with sophistication, the poor will talk about poverty, not inequality as conventionally measured mechanically by economists and bandied about in Indian debates. To see this by analogy, let me say that as I look at New York itself, the rich on Park Avenue like George Soros, in the financial sector are continually making tons of money so that the top 5 per cent are getting more and the bottom 5 per cent, which includes Harlem where mostly the poor Blacks live, are getting less. But it would be news indeed if this is causing anguish in Harlem.

So, much as we dislike the spending in the hotels of Mumbai and New Delhi by the rich, or their growing wealth in Bangalore, it does not follow that the poor in the hinterland of Andhra Pradesh are agitated by it. But inequality closer-by can be important. Thus, workers with stagnant wages will resent their CEOs getting incomes 200 times their wages.

The Prime Minister, therefore, needs to intensify globalisation and other reforms, not abandon them. And the growth process, which has worked so well in helping reduce poverty, now needs to be supplemented, not by programmes such as the Employment Guarantee Scheme that is particularly susceptible to corruption, but by well thought-out schemes to assist the poor in accessing health and education that the early planners nearly a half-century ago were well aware of but which got the short shrift politically for reasons that included paucity of revenues in a stagnant economy.

Jagdish Bhagwati is University Professor, Economics and Law, at Columbia University, and the author of In Defense of Globalization (Oxford, 2004), being reissued shortly with an afterword. He is completing a new book titled, Terrified by Trade: The Paradox of Protectionism in the United States (Oxford, 2007)