Sudhir Mulji: Empowerment vs regulation

Empowering people requires withdrawing much of economic legislation

India is fortunate in the quality of economic researchers that she attracts. Nick Stern, for example, did his most extensive survey work of economic and social change in the village of Palanpur in Uttar Pradesh, a task which he did for 30 years mainly out of his affection for India and her people.

At the same time, his career, after various academic posts, culminated as chief economic adviser to the World Bank and now to his present role as a permanent secretary to the British Treasury.

At a recent seminar, he spoke of development in poorer countries and specifically on his last book written with Dethier and Halsey Rogers, Growth and Empowerment.

The theme of his talk was the need for empowering people, by which he meant ensuring that they can participate effectively in economy and society.

However, before I turn to his main theme, it may be worth remarking on some, almost parenthetical, macroeconomic comments that he made, which have relevance to our immediate problems.

In common with other participants, Stern fully acknowledged that a primary economic deficiency for most developing countries was a lack of infrastructure and he pointed out that in his experience infrastructural investment is seldom financed by the private sector.

As a practitioner of applied economics and a policy maker he had discovered only 25 per cent of the investment, and that too primarily only in the telecommunication sector, comes from private investment; 75 per cent has to be publicly financed either by the government or other public institutions like the World Bank.

The implication""if it is proper to draw any conclusion from peripheral comments""is that a government concerned about infrastructure would be unwise to wait for private sector participation. In substance, this is essentially a government's task.

Proposing this reason for government participation in economic activity is quite in contrast to Keynesian demand management, which has caused such controversy in the developed world.

The characteristic reason for government intervention in developing countries is not Keynesian but rather what Adam Smith described as the third (in priority) duty of a government after the duties of providing defence and justice, namely to provide those public goods that yield social profit but not private profit.

Public works which we can now characterise as infrastructural development constitute this third set of duties.

Of course, no one suggests that governments themselves should build roads and bridges; but the finance will need to come from public institutions with the hope of recovering as far as practical from the users of these facilities.

This is so much in accord with common sense that the argument for public and private partnership in preference to public finance is essentially sterile.

The dilemma of advanced developing countries is that if the need is for greater infrastructure investment, and, as Adam Smith or Nick Stern suggests, the vehicle for such investment has to be primarily government, or at least financed by the government, the problem essentially is the creation and encouragement of budgetary imbalances and fiscal deficits, which are thought to be unsustainable.

The curious feature of this problem is not a shortage of resources.

It is now widely recognised and was recently elucidated by the FT columnist Martin Wolf that richer developing countries like China and perhaps India have ample foreign exchange reserves and high savings rates, but that they suffer from the Paradox of Thrift, that is instead of spending their savings for their self-evident collective needs they accumulate substantial foreign exchange reserves and bank them with richer countries.

The catch for both Stern and Wolf is that while both these economists would presumably prefer developing countries to spend some of their resources, neither would necessarily advocate expenditure by the public authorities with its concomitant consequence of higher public debt and fiscal imbalance.

The supposed incompetence of those who deal with public expenditure has effectively destroyed an economic tool in development economics. You can justify increase in expenditure but not increase in government expenditure.

The problem is not where the money should be spent but that it should be spent properly with due care and good governance, and from this point on, most seminars degenerate into an enumeration of anecdotes of what constitutes good and bad governance.

Then we have a steady list of familiar horror stories of dictatorships, corruption, bureaucracy, and populism.

Clearly these fundamental drawbacks cannot be easily countered; but it is the task of academics in the social field to seek that principle as would confound such forces.

The principle that Stern puts forward as a potential counterweight to useless public expenditure is one which he describes as self-empowerment.

He and his colleagues attempt to connote self-empowerment somewhat clumsily in unhelpful verbal definitions, but its essence comes out more in denotation and examples.

Stern illustrates self-empowerment by repeating a story from the World Bank Report of 2000-01, where they quote Basrabai from Gujarat, who said: "At first I was afraid of everyone and everything; my husband, the village, sarpanch and the police. Today I fear no one. I have my own bank account. I am the leader of my village saving group ..."

Clearly, the ability to access money enables the poor to develop and fight for their rights, and it is probably true to say that such a will to fight is a justifiable target for economic development.

The precise course it should follow is not well-defined but that does not make the goal imprecise. The difficulty, if there is one, is that these social targets require the sort of micro economic programmes where generalisations are not easy to come by.

It is too far removed from the technical business of interest rates, exchange rates, and all that jargon that economists and businessmen are familiar with.

Yet it seems to me that even in the field of empowerment some generalisations are possible. If I were to choose official actions that have been taken to empower people""admittedly not necessarily only the poor people""it seems to me that Manmohan's effective abandonment of the fixed exchange rate in 1991 did far more to empower the Indian people than almost any other action.

By removing the economic justification for exchange control, the single economic step empowered a great many to participate in the economic and social life of their own development.

If there is any commendable rule that one could advocate to advance the empowerment of people, it is to withdraw economic legislation as much of it serves little social purpose for which it was introduced apart from allowing those who think they know better to dictate to those who have less opportunity to express themselves.

In various activities, whether it be competition law or municipal law, we might do more to empower people by introducing no legislation but scrapping existing rules which Partha Shah has recently illustrated as so damaging to the economic and social activity of the people.

Clearly, they should just be scrapped. If they were, the people would be much more empowered and do us more good than the jungle of regulations that still determine our daily lives.

The views here are the author's and not of any organisation

sjmulji@aol.com