Growth Key To Scaling Socio-economic Pyramid
History, insight, and a little observation is telling us that economic growth is the most powerful instrument for the advancement and scaling of the socio-economic pyramid. Growth coaxes more from a ‘deprived’ ecosystem as against the developed.
Economic growth is a process, not an event. This is often missed by the policymakers when they ‘design’ the big bang policy reforms to usher in the ‘animal spirit’.
Growth unfolds as a series of events.
Growth is a wonderful thing, a true multiplier
While the rate of growth is important, so is the trajectory and pattern. Depending on circumstances similar rates of growth can have a very different effect on key imperatives and broader indicators of human development.
A balanced, equitable growth is a catalyst and triggers a virtuous circle of social harmony, ecological balance, wellness, justice, and inclusion manifesting in participatory democracy. It creates demand, increases employment opportunities, induces consumer hope, builds confidence in entrepreneurship, and incentivises investment, triggering and promoting sustainable growth, even prosperity.
A double-edged sword
The PM appreciates that despite rhetoric around ‘aatmnirbhar’ and ‘Make in India’ the economic policies should factor in an increasing globalised world, that offers opportunities and (but) even more complex challenges. We are witnessing the advent of the digital led, technology focussed ecosystem that has moved from the ‘catch-up’ potential, and for those agile, offers ‘leapfrogging’ possibilities.
There is a correlation and even strong evidence that ‘rapid and sustained’ growth is the fuel for social mobility and provides the momentum to escape out of poverty. A Crux study highlights that a 10% increase in income reduces poverty rate by about 25%. And that in mid developed states, particularly in the northern India, a 1% increase in income could result in a 4-5% decline in poverty with very low inequality.
Inequality is treacherous; but...
Inequality may not be such a bad thing if caused by high growth and accompanied by consistent growth rate.
Our erudite readers will appreciate that in a high growing economic milieu, it is not necessarily the case that the deprived do not benefit; it is just that they benefit less compared to the people with longer strides and better start. Similarly, and contrary to a widespread belief, rapid growth does not necessarily lead to increased inequality.
However, there is no denying a causal relationship between growth and inequality (and vice versa), but no ‘consistent’ relationship between inequality and changes in income.
While our policymakers debate why some nations fail, and others succeed, history has several lessons and a larger consensus.
Jobs: asset poor can encash, afford
Why the two sides of the Indo-Pak or the US-Mexico border evolved so differently is in some ways similar to asking why the bordering states Odisha and Andhra, bestowed with similar natural advantages, and located in the same geography, ‘inheriting’ similar talent evolved so differently. A similar question is why Telangana emerged as the software citadel. The Crux study across 44,000 respondents, covering 14 states asked exactly these questions.
The study used a combination of comparative analysis and case studies to analyse why states with identical federal policies, similar backgrounds had very different outcomes across several growth parameters including export, job creation, formalisation of business, even HDI etc.
History takes a long time in making
While in almost every instance economic reform generated an initial spurt, the degree to which these were sustained was determined by the extent to which the policymakers were able to significantly accelerate reforms. The Crux insight articulates that political-economy forces are a major antecedent of observed outcomes. Leadership, governance at large, and indeed envisioning capacity of institutions and implementational ability at the local level is key.
A key aspect of the study focussed on the formalisation of the economy, which in the short run seems anti-small, pro-large and loaded against the poor. However, over a period, formalisation enhances the pie, providing a larger share for everyone, and an overall significance for the economy as growth percolates and spreads the benefits of development. Starting, with the better off, it encompasses the middle-income, providing pay checks to those who don’t have, increasing the size of those who have, and eventually the eradication of poverty.
Growth is important. However, the rate of growth more so. While we ‘talk’ doubling farmers’ income, a 2% vs 4% (typical growth in the agri sector) may mean a fourfold income increase vs thirty-fold since independence. Our low growth rate particularly of the pre-reform period has excluded two generations; pushed the inflection point at least another two generations into the future.
Economy is not an individual
Students of development will understand ‘weakness of growth’, the macroeconomic consequences of a weakening economy are experienced, but recognised much later. In year one it lives on hope, in the second on its capital. What seems rational human behaviour, i.e. ‘consume less, save more’ during tough times has exactly the opposite effect on the economy. It decreases demand, spiralling a vicious cycle of low consumption, lower demand, and negligible investment. A prolonged down-phase plunges the economy, leads to an insidious decline that consumes years, sometimes decades to revive, leaving it far behind competitors.
People on both sides of the political aisle must realise that India just does not have the resources to play Robin Hood, however romantic it may seem. In contrast, economic growth enlarges the basket, affording a meaningful and sustainable portion for everyone, making most people self-reliant, independent of the ephemeral largesse of the state.
The PM must focus on intertwining and even combining economic reforms with social mobility policies, encouraging the deprived to holistically participate in the opportunities, and the endowed to grow the pie. Labour reforms must not only aim at enhancing competitiveness but cored on creating growth opportunities. Higher education must enhance skill. Similarly, financial inclusion must also focus on gender equality, agri reforms on rural development.
It is almost inevitable that in "developing’ democracies a government ultimately gives way to the pressure of individual interests (and their electorate).
The first minister must not buckle down to the extent that "institutional sclerosis" develops and aggravate the rut that he has inherited.
