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.

The Other Vidarbha

When villagers are free to do what they want

Jaideep Hardikar of DNA reports something that P Sainath somehow manages not to (linkthanks Neelakantan). A village in Vidarbha that refused to take up the UPA government’s “debt relief” measures and…is doing rather well for itself.

The Girata SHG, to which he’s a mentor, is imitating his mode—farming and live stock management that reduces risks and shields them from volatilities. “We transport milk in autorickshaws to Washim, where we sell it,” informs Prakash. The dairy collective clocks a monthly income of Rs4 lakh with a net profit of Rs1 lakh, which is shared equally by its 20 members. That comes to a modest Rs5,000 a month-per head or Rs60,000 per annum, in addition to the returns from agriculture. Each member contributes Rs100 to the collective as his monthly saving. Thus the 20 members save Rs2,000 every month, or Rs24,000 annually.

A majority of the villagers are now linked to this activity. Now, the neighbouring 23 villages have decided to follow the model, with Girata as the epicenter. “We’ll increase our production, form a 23-village federation, and diversify into processing,” says Prakash. The collective that owns an autorickshaw, a tractor, and a deep-freezer now wants to buy a van with a chiller for better milk transportation. The SHG has also set up an outlet at Washim to sell milk to consumers. Two women’s collectives of the village have taken on the responsibility of keeping the financial records of the village dairy. [DNA]

Imagine the UPA government’s policy initiatives had focused on building good roads and reliable power supply instead of seeing the problem as one of “debt”.

The Girata initiative is an experiment—it’s too early to tell whether it will succeed. But what it shows is that people take the initiative to help themselves. Imagine the government stopped discouraging from doing so.

Related Links: Vidarbha whodunit; half-baked solutions; and Suvrat Kher’s post on groundwater management that was published in Pragati.

Groundwater management and farmers’ suicides

Poor management of groundwater resources contributes to agrarian distress—but is anyone listening?

Over at Reporting on a Revolution, Suvrat Kher throws more light on an angle that is almost entirely missing from the national discourse on farmers’ suicides.

…if the wells themselves are dry then there is no backup for failed rains. A Tata Institute of Social Sciences report on farmer suicides found that farmers had little or no groundwater available to them during times of rain failure. A combination of complex hydrogeology and poor management of groundwater resources has exerted a powerful influence on the lives and livelihoods of Maharashtra farmers.

(Tushaar) Shah makes the following recommendation for complex hydrogeological terrains:

What hard-rock India needs is a new mindset of managing dug wells as dual-purpose structures, for taking out water when needed and putting water into the aquifers when the surplus is running off. Recharging aquifers needs to get the first charge on monsoon run off. Unfortunately, government planners give it the last priority.

Water available for recharge is estimated after allowing for the requirements of existing and planned surface reservoirs. This is absurd in a country where 70 percent of irrigated areas and 90 percent of drinking water needs are met from groundwater.

Is the government listening? The Prime Minister of India’s special relief package for Maharashtra farmers wants to attack the problem on a broad front which includes tinkering with the economics of cotton farming, encouraging a diverse array of crops and reducing dependence on pesticides and fertilizers. But water underlies any successful agricultural strategy. In terms of water it lists irrigation development as the only long term solution to the water problems faced by farmers and doles almost 10 times more money to irrigation development than to watershed development. Irrigation development in the language of the government of India means canal irrigation (read mega infrastructure projects) and not local groundwater irrigation.

This despite the revealing statistic that even though thousands of crores of Rupees have been spent on canals, they irrigate just about 15% of arable areas over the landmass of India and marginal farmers and farmers with small landholding benefit most not from canal networks but through groundwater irrigation. [Reporting on a Revolution/What’s with the Climate]

Goodbye cotton, hello soyabean

The rational farmers of Maharashtra

Just how does P Sainath position facts that show how Maharashtra’s farmers are capitalising on the opportunity created by rising global foodgrain prices? Oh, by saying that they are replacing one type of volatility (planting cotton) by another (soyabeans).

After pointing out how farmers are reaping the benefits of growing soyabeans, he goes on to point out the risks of growing soyabeans, and the dangers of planting the same crop season after season. As if there are crops that somehow defy these risks.

Mr Sainath, unsurprisingly, fails to underline three really important points: first, that given a chance, farmers can help themselves by taking advantage of available opportunities. Second, information about prices, weather and market conditions enabled this. And third, following from the above, just letting them do what they like (and not placing value judgements on what they should grow) is the best solution.

Related post: Rising foodgrain prices present an opportunity for Indian farmers

Killed by bad policy

A thousand Lalit Mehtas will risk their lives fighting corruption. And how entirely avoidable this could have been.

There is an outcry over the murder of Lalit Mehta, an upright public-minded citizen, who was allegedly killed while attempting to expose the corruption in the National Rural Employment Guarantee Scheme (NREGS) in Palamau, Jharkhand. The public attention should help focus attention on the crime and bring the guilty to justice.

The murder provides a convenient excuse for proponents of the dubious scheme to reiterate their argument that the NREGS is being undermined by corruption. Prime Minister Manmohan Singh and Jean Drèze, the scheme’s chief proponent, have already done it. It is easy for Dr Drèze to blame the intermediaries and district officials for Mr Mehta’s brutal killing. But those who designed the system—and that includes Dr Drèze—can’t escape their share of the blame.

Any fool can design a scheme that would work if only there were no dishonest people in the world. As The Acorn has argued, the way the NREGS is designed creates huge new incentives for corruption. The proponents claim that the controls they had put in to check corruption would somehow work better than the controls that had been put in place to check corruption in the past. It should be clear to everyone by now that those controls don’t work. They only put good people like Mr Mehta in harm’s way.

Let’s remember now that among the UPA government’s acts of monumental irresponsibility ranks the extension of the NREGS to all districts in India, despite knowing that it is not quite working as touted. There are hundreds of Palamaus out there and thousands of Mr Mehtas will face threats to life and limb. These would have been avoidable with some clear thinking, competent policy design and responsible leadership.

In fact bad policy design only compounds a more fundamental flaw: bad policy vision. As Rohit Pradhan notes, the NREGS is designed to keep people in villages. And as Atanu Dey writes, it is also a scheme that is designed to keep them poor.

Rising food prices = opportunity for India’s farmers

And the cost of lost opportunities

For all its rhetoric about protecting rural India, when the real opportunity came, the UPA government decided to deprive the farmer of a chance of making a better livelihood.

Now everyone knows that rising food prices are bad for the economy, and very much so for the poor. Yet it is possible to protect those at greatest risk through the use of targeted food subsidies and even direct cash transfers. Such an approach would have been doubly beneficial: first, farmers would have enjoyed greater incomes from high international prices and second, farmers would have responded to the price signal by growing more food-grains, thereby increasing the global supply and helping check inflation.

Barring exports was the dumb thing to do. It harms farmers. It prevents them from making more money at a time when they could have made more money. It prevents them from investing in better seeds, fertilisers and farming technology that could increase agricultural productivity (India’s is among the lowest in Asia). Capturing productivity gains would have had long-term benefits.

In its “new deal for global food policy” the World Bank says as much:

While higher grain prices are clearly a burden to poor net purchasers of food, they also present an opportunity to stimulate foodgrain production and enhance the contribution of agriculture to medium-run growth. For example, higher prices weaken the rationale for costly floor prices or import tariffs for grain, and may facilitate the implementation of politically difficult trade reforms. Higher grain prices can also help to reverse a generally declining trend in government, private sector and donor investment in the agricultural sector.

Agricultural producers such as Brazil, Malaysia and Thailand have made significant progress in agricultural commercialization in recent years, and have increasingly undertaken investments in research and extension necessary to promote increased agricultural productivity and reduced agricultural risk.

However, some of the short-run policy options discussed above may limit the scope for longer-term solutions. For example, policy responses that seek to control markets through mandated grain prices, export restrictions, forcible procurement, or direct government involvement in marketing activities are likely to lower the food supply response over the medium term. In contrast, alternative measures such as the piloting of market-based risk management tools in Malawi, and the improvement of publicly accessible market information systems in India and Mali, are all likely to mobilize significant new resources in the private sector to cut marketing costs and improve efficiency of grain markets over the medium term. [WB]

Related Links: In addition to the World Bank’s excellent backgrounder see this post by Alex Evans at the Global Dashboard. Update: Paul Collier’s op-ed in the Times makes some very good points.