Dangerous Ideas Harm The Economy
Dreze is a very good economist, and a committed person who truly lives the
life of a ground-level social activist. While Jean and I might occasionally
differ about our economics, I have nothing but the greatest regard for his
acumen and persona.
I began with Jean because he is a major advocate of the UPA government's idea of setting up a programme that gives 100-days of livelihood of everyone below the poverty line. Jean and other activists are pushing hard for this programme to come into effect, and you will probably see a lot more them in the public eye during this winter session of Parliament.
Most people who have criticised this idea have done so in terms of the havoc it will wreak upon the exchequer. Columnists have come up with different estimates of the fiscal cost of the 100-days programme and these vary between a high of Rs.60,000 crore per year to an initial first year estimate of Rs.30,000 crore rising to around Rs.45,000 crore per year in the future.
to the detractors, these are killing numbers and, if implemented, will send
the deficit for an everlasting toss. For Jean and his compatriots, the
numbers are less than what the critics claim and if there is political
will, a non-deficit form of financing can always be found.
problem with the employment guarantee idea is not so much to do with its
effect on the fiscal deficit, although I guess that the impact is nowhere
near as trivial as its proponents suggest. Instead, my contention is that it
is bad Keynesianism which, while it will flare the deficit, will do very
little to invigorate demand and create better purchasing power for the poor.
Sir Alec Guinness playing King Charles I in "Cromwell" said, "Democracy is an old fallible Greek idea that expects extraordinary achievements from the most ordinary people." Charles was wrong. But to twist his phrase, it could be said "The Keynesian theory of government expenditure expects extraordinary managerial skills, perspicacity and honesty from the most ordinary of government servants." In Keynes' system, a very astute government decides to spend Rs.X crore on public investment. In successive stages, this additional investment of Rs.X crore multiplies to an overall extra income of say Rs.5X crore, the "5" being the multiplier - implying
each person spends on consumption 80 per cent of every extra rupee that he
gets as additional income. Given that the poor would consume at least 90 per
cent of what they earn, it could be argued, therefore, that an extra
Rs.30,000 crore of annual investment in employment guarantee programmes
could eventually lead to a ten-fold increase in income.
reason why one should be sceptical of this multiplier scenario is
institutional. States that have the greatest concentration of people living
below the poverty line are precisely those which are atrociously governed.
the more ill-governed, the greater are the leakages in the system. So,
advocates suggest two ways of by-passing these leakages: dealing directly
either with the rural NGOs or the village panchayats. Even if we were to
assume that all rural NGOs are honest and efficient, the fact is
The 100-days livelihood programme means well; it has exactly the right kind of political ring for the UPA; but it can't work. And we cannot expect it to work merely by stating "Where there is a will there is a way". You can't erase decades of poor governance by politically correct sounding talk.
Published: Business World, December 2004