Tuesday, July 16, 2013

Star Wars

Amartya Sen is now in Calcutta, and so there is just one topic of conversation. But this time there's a Star-Wars-like twist. The Drèze-Sen and Bhagwati-Panagariya tomes are out. The country is humming with the idea that "Bhagwati versus Sen" sums it all up. Bhagwati, it is alleged, is at the heart of the Modi strategy of unbridled growth, while Sen epitomizes Rahul, or more to the point, the policies of the UPA government. 

Neither of these statements is particularly correct, but who cares?

I don't know Bhagwati very well, and cannot speak for him, though I can quote from a recent interview in the Economic Times which is impressive for its self-centeredness:

"No, we either lie prostrate at the feet of Bhagwatis and Sens; or we engage in unseemly confrontations."

Wow, that takes quite a bit of the cake (though Joseph Anton wants a piece of it as well, but more on JA in another posting).

An interview with Sen appeared today in the Calcutta Telegraph, in which the following exchange took place:

Q: "But Bhagwati has always said…"

A: "Can I not talk about Bhagwati, please? I don’t like talking about Bhagwati. He loves talking about me, I do not like talking about him."

That's right. 

That is, I don't know whether he's right about whether he likes talking about Bhagwati, but he's right in implying that this isn't about Bhagwati vs Sen. It's not about two intellects. (Or perhaps three or four or more: let us not forget the brilliant visionary Jean Drèze and the hard-working Arvind Panagariya, collaborators of Sen and Bhagwati respectively. Er.. and maybe a few hundred other economists?) It's a debate about the nature of economic change: whom it lifts, and whom it casts away.

In this post, I want to cut to the heart of that debate. If you're not an economist, I hope you will get something out of it, and if you are an economist, ditto.

One of the great advantages of having crossed 50 is that can quote yourself. So I will, from an article in the Journal of Economic Perspectives three years ago:

"[W]e would all agree that balanced growth is an abstraction. In many developing countries, economic growth has been fundamentally uneven. First one sector, then another, then a third have grown rapidly but not all together. A list of some instances of this phenomenon would include software development; the outsourcing of services; quick compositional shifts between agriculture and other sectors; the rise of export processing zones; and others. The question really is not whether growth is balanced—it isn’t—but whether the abstraction is a useful one. For many important development questions, I believe the answer is no. This is why I would like to take the reality of 'uneven growth' seriously and use it as an organizing device for a research program…

We could ignore this central issue. One reaction might be that we do not care about distribution as long as the aggregates work right. Or perhaps some form of Coaseian or welfarist 'compensation principle' is believed to be at work. Either reaction assumes away or simply negates a crucial set of development problems revolving around the political economy of intersectoral or intergroup allocation: … theories of occupational choice; history dependence; the political economy of intersectoral allocation; socially determined aspirations; violent conflict; and the question of appropriate redistribution and compensation in the process of development."

Let me serve this up and expand on it some more, dissected into bite-sized pieces:

1. Economic growth is fundamentally uneven (see above). 

2. Looking at rates of growth per person will fail to reveal this basic fact. High growth and extreme inequalities can co-exist. Indeed, they often do. 

3. There are a number of ways to deal with uneven growth. The most important of these is occupational choice: education and training to enter new sectors. But occupational choice is slow (it will often take a generation), and it is imprecise (by the time we're done retraining, the economy may have hared off somewhere else).

4. So other ways need to be found to even out that unevenness. 

5. But wait --- why won't the good old market take care of it? It might: if growth in one sector trickles to another via expanding demand. If software engineers like potatoes, the potato farmer stands to gain. Or the tourist industry. Or hairdressers. Just how strong these intersectoral bonds are is a profoundly empirical question. Is there enough work on assessing these strengths? The simple answer is no: not nearly enough. To simply hope that the bonds will work is no good.

We have now arrived at the heart of the matter: is (5) enough? That is what the debate needs to be about. Not about Bhagwati, and not about Sen.

6. And if (5) isn't enough, what then? Then we are left with two alternatives:

7. Active and sustained government intervention to even things out. Social spending on education. On health. On nutrition. On transportation and communication networks. On minimal safety nets. The market can take care of the cool stuff. The public sector gets a less sexy role: getting the basics right. That is what Drèze and Sen (and frankly, many others) are about.

Failing (7) and provided that (5) fails as well, we have just one option:

8. Sustained, crippling social conflict, not just cutting across class lines but along any marker which can be arrogated for the purpose: religion, caste, geography, language. 


Our aspirations as well as our frustrations are  driven by the lives of others. What is more: the lives of others are on display as never before. The internet and television tell only half this story. The other half is told by the great acceleration: during the Industrial Revolution, the UK took 58 years after 1780 to double its income. The US, 47 years from 1839. Japan 34 from 1885. Brazil, 18 from 1961. Korea, 11 from 1966. And China, well, China's per capita income has been doubling every 7-9 years since 1980. If the lives of others form our aspirational treadmill, the incline has been inexorably ratcheting up.

Such growth, such extraordinary secular prosperity, must be welcomed, but it can cut both ways. We ignore this basic truth at our own peril. 

The items (5), (7) and (8) form nothing less than a research agenda for development economics, and the foundation stone on which all government policy must rest.

Now let's cut out the names, and get to the real issues.