Redistribution as theft

Alleviating poverty requires economic growth alone.

It is not often that Indian public discourse seriously discusses big ideas. So it was nice to see, a few days ago, a debate in large sections of the mainstream and social media on economic growth vs redistribution. This debate received wider public attention because it was conflated with a personality clash between Jagdish Bhagwati and Amartya Sen, because it became entangled with the hottest political topic of our times and because it came at a time when the issue itself is important.

When faced with two sharply different points of view, it is common—not least in India—to insist that the truth lies somewhere in the middle. This is celebrated as being reasonable, as representing the compromise that is the hallmark of democratic practice and as being the mystic middle path. So when some economists insist that growth is the best way out of poverty while other champion redistribution of wealth, it is to be expected that there will be reasonable people who will say “we need both more growth and more redistribution”. This is a good way to end the debate amicably and drink to reasonability and democratic compromise.

Unfortunately, there’s a difference between appearing reasonable and being right. “We need more growth and more redistribution” is not a reasonable middle position. It is essentially an argument for redistribution but stated in a different form.

Without growth, redistribution is at best a transfer and at worst, theft. If a community earns the same amount of money (or produces goods of the same value) every year, then redistribution takes from Preetam to pay Palani. If Preetam consents to the arrangement, it is a transfer. If he doesn’t, it is theft. Over a period of time, it will make the community more equal, but it doesn’t necessarily make the community less poor, for even after achieving income equality, the average income can be below what is required to subsist.

Growth is the only way to increase the overall income of a community. It can raise the respective incomes of both Preetam and Palani, although Preetam’s income might rise faster than Palani’s. Inequality will rise in such a community—perhaps because Preetam was born into a better endowed family, perhaps because Preetam works harder or perhaps because Palani faces greater social hurdles—but because both Preetam’s and Palani’s incomes rise, the whole community can climb out of poverty. There is vast empirical evidence for this, and growth is the best antidote to poverty. It’s the most effective anti-poverty scheme known to humankind.

Here’s the best thing: in such a society, there is no inherent need to take from Preetam to pay Palani on the grounds of poverty alleviation. There might be other issues—for instance, progressive taxation to finance public goods based on the ability to pay, but not to help a poor Palani out of poverty.

Hey, wait a minute! Isn’t inequality rising? Isn’t that a bad thing? Aren’t Palani’s prospects not handicapped by historical social hurdles? Aren’t Preetam’s disproportionate gains coming from exploiting Palani? The reasonable people who argue that “we need both more growth and more distribution” usually raise these questions to argue for more redistribution. (There are unreasonable people who raise these questions for other reasons, but let’s stick with responding to the reasonable).

Yes, inequality will rise, especially during periods of high growth. But inequality is a social problem only if it is permanent and ossified. However, growth is the best way to ensure that it is not—with growth comes mobility, and the expectation that one can improve one’s life allows societies to thrive despite the inequalities. Ask migrants to New York or Mumbai. Many also see a moral problem with inequality, but why expect the state to solve moral problems? Let the moral conscience of society address its moral problems.

Shouldn’t we account for historical social hurdles that hobble some citizens? Yes, but these are addressed by creating equality of opportunity, not by insisting on equality of outcomes (where Preetam and Palani end up earning the same income). You can achieve equality of opportunity without redistribution—affirmative action and reservations (without subsidies) are ways to address this challenge.

Isn’t Preetam exploiting Palani? This blog post will not attempt a comprehensive critique of Marxist thought. However, the ideas of economic freedom, property rights, voluntary exchange and comparative advantage together prove that Preetam’s gain is not at Palani’s cost. Although the sort of people who argue that Preetam exploits Palani will seldom acknowledge that redistribution, by definition, means that Palani’s gains come at Preetam’s cost. Unlike redistribution, growth creates non-zero-sum or win-win situations. Only growth creates such situations.

From this alone, we should conclude that “we need growth, not redistribution”. But reasonable people will go to great extents to be reasonable. It’s about sequencing, they’ll say, and contend that some redistribution is necessary for growth. It’s unclear why this is called a reasonable argument—if we accept that both Preetam and Palani will be better off with growth, then the decision to take some from one and give it to the other is unnecessary, whimsical and entirely arbitrary. Instead, why not spend extra effort to ensure that there are no constraints to growth in areas that benefit Palani?

Ergo, what appears reasonable is not quite reasonable: we need growth, not redistribution. The state can ensure growth by getting out of the way of private enterprise, ensuring public goods are provided, acting as an impartial referee, ensuring equality of opportunity and a level playing field. Governments are not good at redistribution: it involves taking money from people who don’t want to give it up and passing it through a system where everyone wants to grab as much as they can get. That is why redistribution is attractive to politicians who are keen to listen to intellectuals who say it is necessary.

The use and misuse of poverty lines

The undesirable consequences of using a macroeconomic indicator as a criterion for entitlement.

Earlier this week, the UPA government’s Planning Commission announced that there has been a significant reduction in poverty in India over the last decade—essentially, during the UPA’s two terms in office—from 37.2% in 2004-05 to 21.9% in 2011-12. In other words, while there were 407.1 million poor people in India in 2004-05, the number had come down to 269.3 million by last year. The Planning Commission uses the Tendulkar method (see Rathish Balakrishnan’s explainer on the brief history of poverty lines in India) but it is quite likely that poverty will show a decline regardless of the method adopted to measure it. This is good news.

What was meant to advertise the UPA government’s achievement has actually put it in a spot. How can the UPA government now justify providing deep, open-ended food subsidies to over 822 million people? Does subsidising food for the non-poor, at tremendous cost and contingent liability to the exchequer, have the same justification as delivering essential food to those who absolutely cannot afford it? Not quite. If the Opposition parties mount a political challenge along these lines, it is unlikely that the UPA’s dubious poverty arithmetic will prevail. If.

Let’s consider a broader issue. What is a poverty line good for? Whatever the formula used, a poverty line provides a useful estimate of the level of poverty in a population. How it changes tells us whether public policies are helping or hindering poverty alleviation. The rate of change allows us to compare—albeit in hindsight—which set of policies are more effective in raising incomes. As the Planning Commission’s figures show, poverty declined at an average rate of 0.74% between 1993-94 and 2004-05, and at 2.18% between 2004-05 to 2011-12. This correlates with the higher economic growth rates achieved in the 2000s compared to the 1990s. This is consistent with the empirical observation that economic growth lifts people out of poverty.

What the poverty line is not good for is as a selection tool to identify beneficiaries for entitlements. This is because it is practically impossible to estimate whether a particular person earns more or less than the given poverty line income. This fact is lost on many policymakers and intellectuals—just how does one assess whether a person earns less or more than Rs 33 a day? There are no objective methods to test and verify incomes—no financial records, salary slips, bank accounts and so on. So we are left with self-declaration. However, if people know that those deemed below the poverty line will receive benefits from the government, they are likely to declare themselves poor. To take one example, in 2006, 91% of the families in Karnataka state declared themselves below poverty line.

The Planning Commission can set up expert groups that propose formulas involving automatic exclusion, automatic inclusion and scoring indices. Such methods only create an illusion of accuracy while creating a political economy—read corruption and political patronage—for the procurement of Below Poverty Line (BPL) cards. Note also that once a person acquires a BPL card, she is BPL for life. Such is the bluntness of poverty line-based schemes that they presume that a person, once deemed poor, will remain poor for life. This makes the BPL card even more valuable.

Moreover, for the sake of argument, even if we assume that it is possible to perfectly assess incomes, is it sensible to deny an entitlement to a person earning Rs 34, because the poverty line is set at Rs 33? What about Rs 35? Rs 36? Where do we stop? Any number you pick is arbitrary.

What this means is that while poverty lines are useful as macroeconomic performance indicators, they are useless when used as ‘entitlement lines’. If budgets were infinite, we could live with the leakages and inefficiencies in the knowledge that those who really deserve assistance are not deprived. However, budgets are not infinite, which means that public funds end up in the hands of undeserving people, while there isn’t enough money for essential public goods like education, health, security, roads, electricity and communications. Look at the state of our government schools, hospitals, police stations and roads and ask why they are in such a decrepit condition. It is politically suicidal for any government to cut back on subsidies and entitlements. It is fairly easy, in comparison, to cut down on capital expenditure on public goods.

That’s why misusing the poverty line as an entitlement line is counterproductive—it slows down the rate at which poverty declines.

Related Link: My Takshashila colleague Pavan Srinath’s critique of the poverty line, on the INI Transition State blog.

Everyone loves a good outrage

The reform agenda must be defended from Montek Singh Ahluwalia’s attackers

As far as op-eds go, this one marks a new low from P Sainath. It is not uncommon for him to frame grave issues in a divisive manner by conflating them with unrelated matters—like, for instance, agrarian crises and beauty pageants. This technique seeks to arbitrage outrage, as if decent people cannot be anguished at a tragedy without having to contrast it with an unrelated celebration. But when Mr Sainath links the poverty line, expenses incurred by the Planning Commission chief while traveling on official business overseas, the lavishness with which some tycoons spend their private funds and dubious dealings of crony capitalism, it can’t merely be his usual, unfortunate and misguided conflation.

Make no mistake: Mr Sainath’s hatchet job on Montek Singh Ahluwalia is part of an internal campaign against reform-minded individuals within the UPA government. This week’s manufactured controversy over renovation expenses of toilets in the Planning Commission’s headquarters is another manifestation of the same campaign.

Let us examine Mr Sainath’s cleverly framed allegations. His case is that at Mr Ahluwalia’s travel expenses are exorbitant, at an average of $4000 per day abroad. You would think he would give you some comparable data to prove Mr Ahluwalia has been unusually proliferate in spending public funds. Say, for instance, the average daily expenditure when cabinet-ranked Indian officials travel abroad on official business. Or for instance, the average daily expenditure incurred by Mr Ahluwalia’s counterparts from other countries. These would be like-for-like comparisons. Mr Sainath, however, does not do that. He compares these to a income of a person on India’s poverty line. All this proves is that $4000 is much higher than Rs 28. It does not even come close to proving that public funds were misspent, nor does it show that Mr Ahluwalia was unusually liberal with his expense budget. The onus of doing this research is on Mr Sainath, the person making the argument.

How Mukesh Ambani spends his personal wealth is irrelevant to the argument—he is free to spend his money as he pleases, even if it does not suit our tastes—, so is a discussion on cronyism and corruption in IPL. You don’t need to read the Planning Commission’s response to conclude that Mr Sainath’s allegations are sensationalistic nonsense.

But why choose Mr Ahluwalia at all? Mr Sainath’s arguments against profligacy would have been worthy of respect if he had compared the travel expenses of the top officials of government—from President Patil to the lowest ranking minister of state. How much, for instance, does Sonia Gandhi, as chairperson of the National Advisory Council, spend on her foreign trips? Whatever her political role, she’s an official of equivalent rank. How much do the members of the National Advisory Council spend on their foreign and domestic trips? Unless we have some numbers to compare with, we can’t say anything about Mr Ahluwalia’s trips.

What we do know is that Mr Ahluwalia is among the few people known to be advocating economic reforms in the UPA government. Singling him out with a view to making him the lightning rod for public outrage has all the signs of a political hatchet job. The objective is to discredit the reformist agenda by associating it with imaginary wrongdoing. After running the Indian economy to the ground, the socialists that haunt the UPA government’s policymaking are now trying to bury the narrative of reform, liberalisation and markets through subterfuge and intellectual dishonesty.

It’s no different with the renovation expenses of public toilets in Yojana Bhavan, the Planning Commission’s headquarters. One of the earliest reports on this, in the Times of India, again compared toilet renovation expenses with the the poverty line. Few in the mainstream or social media bothered to ascertain the scope of the renovations and compare it with similar renovations conducted in New Delhi’s public and private buildings. The purpose of the revelations was to insinuate wrongdoing on the part of Mr Ahluwalia, rather than to establish whether there was any wrongdoing at all.

Mr Ahluwalia is guilty: of not throwing his credibility on the line to compel the UPA government to launch the second-generation reforms, and to prevent it from engaging in monumental fiscal irresponsibility that has put India’s future at risk. Like his mentor Prime Minister Dr Manmohan Singh, he becomes complicit in the UPA’s misgovernance. He will have to answer these charges both to the nation and to history. This does not mean he’s lavishing public funds on unnecessary foreign excursions, building gold-plated toilets or taking a cut from the renovation contractor.

It is fair for the Opposition parties to politically exploit the situation to their advantage. However, it is in the national interest not to allow a campaign of unfair personal calumny to discredit the reform agenda—or indeed, to prevent Mr Ahluwalia from a chance to redeem his reformist record—to succeed. The Acorn completely agrees with Mint’s editorial defence of Montek Singh Ahluwalia. Mr Ahluwalia has “done far more for the poor than the busybodies and peddlers of poverty porn who are now attacking him.”

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.

Three thoughts on Independence Day

On keeping the republic, getting incentives right and projecting power

For contemplation on Independence Day—the Absent Indian Voter Syndrome; All poor, all backward and the wages of Lax Indica.

From the archive: Three thoughts on on Republic Day 2009, 2008, 2007, 2006, 2005 and Independence Day 2008, 2007, 2006, 2005, 2004.

All poor, all backward

When the not-so-poor label themselves poor, the really poor suffer

“If numbers are anything to go by,” Mint says in today’s editorial, “the second incarnation of the United Progressive Alliance (UPA) is likely to notch an unenviable record: an upward march in the number of poor in India.” Why? Because an “expert” committee appointed by the ministry of rural development “felt” that the actual number of rural poor are much higher than the 28.3% that the Planning Commission claims. Based on this “feeling” they upped it to 50%. One gets the feeling that they were feeling a little too ungenerous, for surely, there are people who feel that more than one in two people that they meet in villages are abjectly poor.

This cannot be mere statistical quibbling: A big increase in the number of poor in any country is a political matter. It raises interesting questions. Was the UPA-I’s record so unenviable that five years of its rule has made more people poor than any recent interval of our history? More remarkably, how did the UPA succeed at the hustings with such a disastrous record? [Mint]

Not only is the feeling-based poverty rate setting dubious, the methodology to identify the poor is more so.

Anyone who doesn’t spend large sums of taxpayer’s money based on feeling will know that if the expert committee’s recommendations are accepted, a whole lot of people will claim to be below the poverty line. Many will figure out ways to declare themselves abjectly poor, thereby increasing corruption at local government levels. (Look what happened in Karnataka). Political entrepreneurs will quickly figure out how to secure votes by promising to make their voters poorer. Just as more and more communities aspire to become backward or scheduled castes, more and more communities will aspire to become poor. Oh, their social standing, political empowerment and economic wealth will have nothing to do with these labels, of course.

So what? Well, without accurate measures of how many really poor people there are in India, it is very hard to devise policies to actually help them. Properly targeted policy measures will become harder, if not impossible. Besides, those who genuinely need government assistance will find themselves in competition with better-connected opportunists. Raising the poverty line wrongly is a good way to trample those who are really below it.

Wealth creation: Advani’s take

Modern India’s leaders must stop disparaging wealth creation

L K Advani’s speech at CII was a lot better than Manmohan Singh’s: for he recognised the need for the government to match the ambition of the population. [Yossarin has a fuller analysis]

Rather, the soaring ambitions, aspirations and expectations of the Indian people, especially India’s youth, make it obligatory on any government to work with matching ambition. Anything less would mean letting down our people, letting down our youth.

By ambition, I mean, first of all, expansion of the prosperity net to include all those sections of our society who have so far remained either deprived of the fruits of India’s economic growth or received only some crumbs.

What India has witnessed in recent years is growth with widening inequalities. A very responsible person in our public life, a former governor of the Reserve Bank of India—no less—, recently stated that the earnings of 20 richest Indians exceeds those of 30 crore poor Indians. If this is true, it is shocking. Lopsided growth, however high its rate, can never be sustainable. This is the reason why the exclusive talk of 9 per cent GDP growth rate by some people in government or in the business community does not enthuse the general public.

Forbes magazine, which is famous for tracking the wealth of businessmen around the world, has predicted that India will have more billionaires than any other country in the world by 2017. Frankly, this does not gladden me at all. Rather, I would be delighted if, ten years from now, we are able to eliminate abject poverty from India. [via Offstumped]

Unlike Dr Singh, Mr Advani didn’t spout dangerous nonsense about earning less being a national duty. But his discomfort with wealth creation was unwarranted, and is disturbing if it is genuine. It not only misses the point that wealth creation and poverty elimination are not in opposition. It also contradicts the earlier part of his speech about matching ambitions: eliminating poverty is unambitious. Creating the conditions that allow the people to become wealthy is a far more ambitious goal.

Related Link: Atanu Dey’s commentary on Mr Advani’s economic agenda (in a speech to FICCI) in the March 2008 issue of Pragati.