Garibi Hatao Hatao

The old, failed and corrupt political economy of poverty alleviation fights attempts at reform

Jean Dreze, member of the influential, unaccountable and extra-constitutional National Advisory Council, has launched a pre-emptive attack against conditional cash transfers in the pages of today’s Indian Express. It provides an excellent example of how rank paternalism and contempt for the poor Indian’s right to live a free life guides the UPA government’s mindset. This mindset, of course, is covered in the language of “development economics”. In reality it is bad economics and bad for development in addition to being morally repugnant.

Before we look at Mr Dreze’s arguments, let’s look at this conclusion:

The most common argument for cash transfers is that cash makes it possible to satisfy a variety of needs (not just food), and that people are best judges of their own priorities. Fair enough. But if people are best judges of their own interest, why not ask them whether they prefer food or cash? In my limited experience, poor people tend to prefer food, with a gradual shift from food-preference to cash-preference among better-off households…I am more inclined to listen to them than to the learned champions of cash transfers. [IE]

The arrogance in the last sentence must come from sitting close to the Congress party president (another NAC member recently wanted to impose how many dishes could be served at wedding dinners). Mr Dreze, unsurprisingly, does not believe the people are the best judges of their own interests, for he uses the conditional “if”.

Even so, doesn’t he have a point when he says “why not ask them whether they prefer food or cash?” Not quite, because the question is a bit of sophistry. Basic economics will tell you that because cash is most fungible, if you give them cash, the question itself is redundant. If they prefer food they’ll buy food. If they prefer arrack they’ll buy arrack. Neither Jean Dreze nor the National Advisory Council, nor indeed the Government of India has any business dictating what an Indian ought to do with his or her income. Only ‘development economists’ of the dubious sort can think that development is possible when hundreds of millions of adult citizens have the right to vote and procreate but not to decide what to do with their money.

Just because the government gives this money doesn’t mean it can override the individual’s freedom to choose. Neither the government, nor the taxpayer whose money is transferred can deprive the recipient of her freedom.

Let’s consider Mr Dreze’s policy arguments. He first argues that conditional cash transfers won’t work in India (as they did in Latin America) because public services are “missing to a large extent”. This is bizarre, for giving Indians the money to procure services like healthcare and education from private operators allows them to escape having to depend on the government. Just because conditional cash transfers complement public provision in Latin America doesn’t mean they have to do so in India too. There’s no reason—other than socialist ones—why India shouldn’t go in for privately provided, but publicly financed, services. [See this post on the critics of the UID]

Next, he argues that targeting the scheme properly is a problem in India. And in so doing, he expects us to believe that conditional transfers in kind (for instance, food entitlements) can be better targeted than cash. In reality, targeting will remain a problem, not least because of the ‘political economies of development’ which require poverty to remain a problem. A poverty line, even if arbitrarily drawn, helps show the extent of the challenge. But once you target policies around a poverty line you run into all ‘targeting problems’ (see the case of Karnataka’s BPL cards). The entitlement economy also breeds competitive intolerance and political violence.

On these feeble legs Mr Dreze erects his defence of the Public Distribution System (PDS), independent India’s largest and longest running ‘scam’:

First, (food entitlements under PDS) are inflation-proof, unlike cash transfers that can be eroded by local price increases, even if they are indexed to the general price level.

Food entitlements may be “inflation-proof” for the recipient, but not for the government, which still needs to pay for it. It also creates incentives for government to interfere in the pricing of food: from underpaying farmers, to blocking exports, to entering into non-competitive import arrangements. Moreover, Mr Dreze fails to account for the true economic cost of the PDS—procurement, storage, distribution, wastage, pilferage and the associated shadiness that characterises it from bottom to top. Once you see the PDS as mostly inefficient and usually corrupt, you are unlikely to think throwing more money through it is a clever thing to do.

A government that really cares about inflation hurting the poor will be careful about the consequences of its policies. On the other hand, the UPA government listened to Mr Dreze.

Second, food tends to be consumed more wisely and sparingly; cash, on the other hand, can easily be misused.

The contempt for individual freedom apart, there is a practical reason why Mr Dreze is wrong: you can’t save, lend or invest food. Food entitlements will at best lead to hundreds of millions of well-fed, but poor people. To use Atanu Dey’s phrase food entitlements are a pro-poor scheme. They will keep people poor.

Third, food is shared equitably within the family, while cash can easily be cornered by selfish individuals.

Why, hasn’t Mr Dreze heard of families who treat their boy and girl children differently? Can’t food be bartered for arrack or exchanged for cash? Indeed, food or cash, there is nothing to prevent selfish individuals from hurting their families. It is conceit to believe that a government that lacks the competence to deliver drinking water to its citizens can somehow change human behaviour. Social ills need to be addressed, but unless the government is parsimonious in ambitions, outcomes will suffer.

Then again, the irony of disparaging cash is surely lost on Mr Dreze, champion of a scheme to provide, err, cash for work. NREGA is a conditional cash transfer, isn’t it?

Fourth, the PDS network has a much wider reach than the banking system. In remote areas, where the need for social assistance is the greatest, banking facilities are simply not ready for a system of cash transfers (as it is, they are unable to cope with NREGA wage payments).

This is an argument for getting the banking system pervasively into rural areas. Indeed, implementing conditional cash transfers provides banks with an incentive to set up more outlets in rural areas. Liberalising the financial sector to enable greater financial inclusion is necessary in any case, and implementing cash transfers might provide enough of an anchor tenant effect to get it going.

Last but not least, cash transfers are likely to bring in their trail predatory commercial interests and exploitative elements, eager to sell alcohol, branded products, fake insurance policies or other items that would contribute very little to people’s nutrition or well-being.

There is nothing wrong in buying or selling alcohol and branded products. Selling fake insurance policies is illegal. Conflating the two is a manifestation of an ideological prism that abhors free markets and free people. Indians might be poor but they are aspiring for the comforts, fashions and fallacies of modernity. The government has no mandate to prevent his and condemn to have-nots into shall-not-haves.

Mr Dreze’s pre-emptive salvo seeks to defend against the dismantling of the edifice of India’s old, failed and corrupt political economy of poverty alleviation. Ideologues confuse socialism for development. The vested interests that collect rent from the PDS, government hospitals, schools and suchlike are fighting to retain their spoils. Both have little interest in making Indians prosperous.

32 thoughts on “Garibi Hatao Hatao”

  1. Will a private operator take the trouble to set up a hospital/school in the the poorest of villages? What are the people then supposed to do with their cash if there are no services to buy?

    Self proclaimed “realists” like Mr.Pai live in the biggest fantasy land.

    1. So why are private operators taking the trouble to build cellphone towers and SIM card retail/recharge outlets in the poorest of villages?

      Ten years ago, those who accused proclaimed realists of living in fantasy lands would have made the same accusations as they are doing now.

      The answer is they’ll take the trouble because there’s money to be made.

      1. Privately provided, but publicly financed, services sounds good in theory but the practice would be different.The private sector under such privileged conditions would be as corrupt,inefficient,badly managed and irresponsible as our public services are now while creaming of profits to be made.

        It is cheaper and easier to provide benevolent handouts to the poor than to guarantee them a full range of social services as of right.It is also humiliating to be on the receiving end of such handouts but not so if society sees its as a right.In the end there is no shortcut for decent public services like Healthcare and education.

      2. > So why are private operators taking the trouble to build cellphone towers and SIM
        > card retail/recharge outlets in the poorest of villages?

        Because there’s enough value in that particular village for those companies. But comparing hospitals/schools with cellphone companies are not fair i guess. cellphones are subsciption based business with high margins. Not to mention setting up a cell coverage has become very cheap for various reasons. And there are marketing channels which reach even poorest of the villages too. Also, growing coverage map is a necessity in this business for branding reasons. On the other hand, you wont stop going to a particular hospital because they don’t have a branch in your grandma’s hometown. Right? VIllegers won’t even ready to pay Rs 100 as subscription per month (and additional consulting fee), or do they?

        1. We’re comparing food!

          Unless you think people want mobile phones more than food, it’s inexplicable why companies that sell mobile phones will not sell food.

          1. Investments in rural telecom infra have still not been recovered. Despite that, cell companies are there. Setting up rural towers is not cheap. Rural towers, in fact, cost more to operate as they run on diesel generators (because of lack of electricity). Despite that, cell companies are there. I see no reason why hospitals cannot be there.

    2. Hi Sudeep,

      My one pointer here.
      With the policy, there would be enough incentives in place for private players to initiate a business model centered at the rural development. There are some successful models (I have worked in a highly efficient firm based in Mumbai, you can read about it at – ) already in place and a policy like this will definitely proliferate such initiatives.

      Peace

  2. Well argued post! someone should point Jean Dreze to chapters 1-5 of Hal Varian’s Microeconomics. Between a choice of food stamps and cash, Cash provides a larger set of goods, hence ability of a person to maximise his utility function is significantly higher. Basic microeconomics. period.

    1. Basic Microeconomics is based on assumptions. Assumptions don’t hold in the real world. period.

    2. Microeconomics hinges on Ceteris Paribus and perfect market conditions. Never ever enough to explain social services and public spending. I have to disagree with Pai. Until there is enough evidence to suggest that essential services will reach the remotest parts of our country, the Govt simply needs to be the provider of services.

  3. Just because a government sounds similar to governance, that’s not the primary responsibility of a government. Political Philosophy and political dignity is the reason why governments exist. At least Dreze does not understand it owing to his specific ideological affiliation. You don’t even have that excuse.

    Utilitarian ideas of John Locke were a derivative — not an assertion or an assumption or a requirement. Dreze takes the derivative for an assumption and you want to argue the derivative is a requirement. What a strange, strange situation.

    1. Hi Latin Voter,

      I’m only a layman and have never studied sociology,economics,political science etc extensively.Therefore,what you say sounds interesting and makes me very curious.

      “Just because a government sounds similar to governance, that’s not the primary responsibility of a government. Political Philosophy and political dignity is the reason why governments exist.”

      What is this political philosophy and political dignity you talk about?Any articles,research or info on it would be much appreciated.

      Thanks,
      Benjamin D.

    2. Lot of big words with no substance. Troll much? John Locke was very far from a utilitarian.

      Political philosophy is the reason for government? What the hell does that mean? The government exists BECAUSE of an academic discipline? Or a philosophical discipline? Or do you mean to say that a certain political philosophy enshrines government?

      The hamsters in your head do not translate your profound thoughts (not) to us peasants out here on the interwebz. You may want to keep that in mind next time you bother your royal index finger with the arduous task of typing.

  4. Nitin…

    Agreed with most of the points of rebuttal. However, there is no substitute for public healthcare. In fact, CCT is more effective if public health facilities are better. After implementing Arogyasri by YSR in AP, govt. is paying more and more to private hospitals as people go to them for even basic health needs. It would be wiser for govt to improve PHCs by investment that saves taxpayer money and helps people save more money. The public health centers are a shame to civilized society, we are not even speaking about aspiring world power. CCTs, if properly designed, will be the way to go using UIDs. We can save on PDS and other centrally-sponsored schemes.

    1. Aravind,

      Good points. In fact, that should be the fundamental objective as I’ve been arguing (and an upcoming column will reiterate): government should be compelled to deliver basic services competently.

      The question is: should we rely on this alone? I think not…because our understanding of how governments ought to do things is also changing in the light of experience and empirical evidence. If, for some reason, healthcare outcomes can be achieved entirely through private provision (but supported by government funding), why should we reject that ex ante?

      CCT will no doubt be more effective if public health facilities are better. In fact, if decent universal public healthcare is available, CCT for healthcare might be rendered irrelevant. My own opinion is that the case for CCT is because our system doesn’t allow competent public services (exceptions apart), and private operators perform relatively better where there is competition. CCTs are therefore the second-best solution: government pays, private sector provides.

      [Why do I think our system doesn’t allow competent public services? Well, because the incentive structure in hiring, pay and career advancement does not depend to any significant degree on how well a civil servant does the job. Fixing this is a challenge of enormous proportions and delivery of public services can’t wait.]

  5. 1. Jean derez is not the only person who is against CCT- also, he holds that CCT is not a substitute for PDS and should work as an adjunct. which is the method that has worked in many countries. CCT works, sure, but it comes with a lot of riders, and most of them have to do with how leak-proof the system is and how large the system is.

    2. The cry for CCT not being the mainstay came most strongly not from academics, but activists, Right to food movement among others have been campaigning against a total substitution, and this is because on ground, things work a whole lot different than on paper and sitting next to SG.

    3. International development community, not many of whom work with JNU, and the scientific consensus on the matter is also that CCT must be tried out, tailored and adjusted to local needs. Evidence from sri lanka and som african countries suggests that there are situations, particularly of low access and areas of conflict and extreme poverty where people prefer food to cash.

    4. PDS in india sucks and it is an addictive, non-empowering system, no one argues with that, not even the right to food crowd. But till the rural banks and other infrastructre is in place, and in places were there is no food to buy with money- and india has a lot of them- a broken system is better than no system at all.

    5. One thing Derez and the right o food movement have going for them, as opposed to you, Mr pai, and i do not mean to offend, is that they are activists, their board meetings take place in huts and they shuttle between delhi and the gaon. This does not make their bad theories good, but sure as hell does make them more authoritaitve than free market proponents who cannot live without their macbooks. it is time that the free market divas get out there, and see hunger from outside the AC vehicles.

    Perhaps, the next shala will be in the neighbouring sugar cane feilds of pune.

    I used to think a free market would fix everything, till life put me in a village. now, i think we need to better than PDS, bette than CCT and better than free market.

    Anand

    PS
    the international food policy researh institute compares some CCT vs food programs

  6. Hey, an interesting post. An article on similar line was put up on the “retributions” blog. Now in-spite of the good government’s self-proclaimed conscience making a case against CCTs, the legal government has in the previous decade started “Trusting” the poor, or at least attempting to do so. Of the top of my head at the national levels the following programmes are directly or indirectly connected to “Conditional Cash Transfer” (CCTs):
    1. Dhanalakshmi scheme of 2008 by Ministry of Women and Child Development.
    2. Janani Suraksha Yojana (JSY), 2005 which was a revamped version of the maternity benefit scheme,
    3. Balika Samruddhi Yojana, this one was quite an old scheme, again by Min of women and Child Dev,
    4. The Sarva Siksha Abhiyaan,
    5. Kasturba Gandhi Balika Vidyalay Scheme.

    Further the state governments have been very enthusiastic about experimenting with this concept. Examples are: The Delhi government ‘Ladli Scheme’, and to a certain extent the MDMS schemes.

    However the “Big Brotherly” attitude is still quite prevalent. Witness the recent turmoil in the ‘Micro-Finance Industry’; especially the ‘Malegam Committee Report. This report in a way does exactly what Mr Jean asks for. It artificially puts a limit on what an individual can do with regard to financial planning. Thus limits on indebtedness and agencies the individual can approach for loans. And one of the reasons is to protect the lower income households from ‘multiple borrowings’; this might be cause the right to financial management of personal resources is frequently and wrongly bench marked against education levels- well credit card debt anybody.

    Imagine a nationwide roll-out of this strategy for all income classes. So now a person in a middle income bracket can only take 1 house loan and 1 car loan, and this limit is for the household, cause the government in its infinite wisdom, considers this to be the appropriate limit which can be managed by the middle income household.

    Well excuse the rant, anyways nice post.

    Mike.

  7. //In my limited experience, poor people tend to prefer food..//

    That must be some extremely limited experience. Because the points raised here are valid and validated by what one sees in the real world.

    In the UK, often near a Starbucks or other similar shops, you will find both beggars and sellers of Big Issue magazine (only homeless persons sell the magazine). Regulars often have their favourite Big Issue seller from whom they buy their copy of the magazine, and for whom they might buy a coffee or a sandwich; some stand with the seller and smoke a cigarette too. Very rarely do we see anyone buy the beggar a coffee or a sandwich. Why? Because people *know* beggars prefer money. The Big Issue seller is earning it; the beggar wants you to spare some change. Both are poor but they know the arguments Nitin is making here.

  8. Why doesn’t one heed Bihar successful experiment of bicycles for school going girls? Direct cash transfers and not by providing the bicycles.

    1. No. Anything in Gujarat and Bihar shouldn’t be talked about if you are going to express good about them. You can’t ask for being fair in this case. People shouldn’t change their perspective of these states being terrorising and being extremely savage respectively. Now you are asking why then Nitish Kumar won the elections by a very great margin? Please, don’t advertise all those things….

      1. Sad but, alas, true. In India, one sees these days far too many faux-secularists. I am not a supporter of an fanatical group to clarify. Hinduism: a word employed far oft and little understood. These bumbling idiots can scant wrap their heads around culture and religion. In India, these faux-secularists, under the auspices of Nehru Dynasty and their partners, have fermented a besieged mentality in the minorities of India. I hope I am wrong about that. In America, people boast of equality and freedom. This is so because these ideas were a novelty in the Western world when America was divined. Europe had for the larger part of her history little care for such ideas. But in India, these ideas are intrinsic to the Indian Culture, Bharatiya Sanskruti, Hinduism. Minorities have for ages prospered in India. In ancient times, there was persecution, but the caste system was far more dynamic than the 19th century detritus. It is only with the attack of the barbarians of Central Asia in name of Islam that India started sinking. Yes, I said it. The Maughal rule of India was one of the lowest points in Indian history. India who boasted Universities unlike any other place in world were destroyed. This Hindu culture because of whom scientific advanced were was burnt, literally. I hate how the Indian media have such opportune amnesia of this past…

        Also Nitin,

        I, fully, agree with you. It is an insult to deem the Poor incapable of making decisions for their lives. They are poor, not retarded.

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