March 7, 2011

Reforms win elections

The December issue of Pragati made the case that India’s economic reform agenda remains critically incomplete, and that further reforms are urgently needed. A proximate cause is the lukewarm embrace of liberal economic policies by the Congress party, not merely its erstwhile allies of convenience on the Left.

This argument was extended in the January issue, suggesting that the Right has failed to make a convincing case for its agenda, and thereby—consciously or otherwise—ceded the moral high ground to the Left. Let us now flesh out what the Right needs to do to recapture the narrative.

The Left’s trump card—and this is true whether in India or the United States—is to claim that its ideology and policies are “pro-poor”, whereas those of the Right are “pro-rich”. This must be challenged. The Left’s claim suggests that policies centred on social policy and redistribution, which redistribute slices of the existing pie, will help the poor, whereas Rightist policies that are oriented towards economic growth will “make the rich richer and the poor poorer”, and at best represent a “trickle down” of wealth from the rich to the poor. These claims must be exposed as the intellectually bankrupt clichés they are.

Ironically, it is the Left’s policies that are anti-poor. Redistribution without economic growth is perforce a zero-sum game. By merely taxing the rich and transferring resources to the poor, you give the poor an incentive not to work or educate themselves, even as you destroy the motivation of the rich to work and remain productive. In the long run, this retards the growth of the pie, or worse still, shrinks it. The outcome: Everyone ends up being a loser.

By contrast, an emphasis on liberal economic policy reforms, which foster rapid growth and structural transformation, will help make the pie larger, and allow everyone—rich and poor—to benefit. In other words, economic growth will help ensure that we are in a game with a win-win outcome.

Another important distinction must be noted. Critics on the Left often confuse, or deliberately conflate, poverty and inequality. This too must be challenged. Poverty, which means that one-third of the people in our country cannot adequately feed and look after themselves, is morally reprehensible—there is no disputing that. Inequality, however, is a different issue. The Left considers an unequal distribution of income ipso facto immoral. What is wrong with an unequal distribution of income, so long as poverty has been eradicated? Would we rather not live in a world in which everyone can feed themselves, and in which there are also rich folk—as opposed to a world in which income is equally distributed and everyone is poor? The answer is self-evident.

The Right must aggressively make the case that liberal economic policies, while they may exacerbate inequality (and even that is debatable), will reduce poverty. As Jagdish Bhagwati has argued, it is not a question of passive “trickle down” but of active “pull up”, in which the poor are lifted of poverty into gainful employment and steady income through the fruit of economic growth.

How do we make a liberal economic policy agenda politically palatable to the electorate? There seems to be a sense in both major political parties that this is not possible—which is possibly the reason why it has not been wholeheartedly embraced by either of them.

It is a universal law in politics that what matters most in electoral outcomes is economic performance in the year or two preceding an election (not just GDP growth, but also employment, and to a lesser extent inflation). To be more precise, a good economy leading up to an election benefits the incumbent, whereas the opposite favours the challenger. There is a large body of evidence that this is the logic underlying political outcomes in the West, especially presidential elections in the United States.

Similar trends can be seen in India as well. In recent research, Arvind Panagariya of Columbia University and Poonam Gupta of the Indian Council for Research on International Economic Relations (ICRIER) have found, using carefully constructed constituency level data on several recent elections that, controlling for other relevant factors, rapid economic growth in the period just before an election increases the incumbent’s probability of re-election. The recent success of Nitish Kumar in Bihar’s state election is a case in point.

This leads to a two-step syllogism. First, we must make the case that liberal economic policies will lead to more rapid growth, higher incomes, employment, and reduced poverty. Two, we must point out that evidence this in turn lead to electoral success. Then, it will be only a matter of time before forward-looking politicians take the cue and re-orient their political platforms towards furthering economic reform. It is worthwhile remembering Adam Smith’s advice that people respond to incentives. If we can get our politicians to respond to the carrot that can ensue from good economic policies, we are well on our way to securing prosperity not just for ourselves but for generations to come.

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