T C A Srinivasa-Raghavan: Virtues of economic Darwinism

OKONOMOS

Ever since he left the government, in spirit if not in letter yet, Arvind Virmani, who now directs ICRIER, has emerged as one of India's leading thinkers on India. Considering how much competition he has, that is no mean feat.

Virmani does it better because he has a sense of causality that goes beyond regressions. He connects to the present and the future to the past in a credible way by going beyond the data.

In a recent paper he has examined the link between policy regimes, economic growth and poverty. He concludes that while competition is necessary, it is not sufficient. You also need the pressure and the ability to compete. "Policies that put pressure on producers and factors to compete, and enhance their ability to do so, have the strongest effect."

This is a Darwinian view, some will say. But as the most Darwinian of all societies "" the US "" consistently shows, that does not make it wrong, morally or otherwise.

It does, however, make it impractical when the weak not only outnumber the strong but also have the vote. The US went into full adult franchise mode only when the imbalance had been rectified almost entirely.

Be that as it may, Virmani's main insight is that if the two, pressure and ability, are out of balance, it is entrepreneurship that comes to the rescue. Happily, India has plenty of it, whence the success of policies that have increased competitive pressure in the economy.

Conversely, "government policies that suppressed or limited competition or created government monopolies retarded TFPG (total factor productivity growth) and GDP growth." In India, he says, the increase in the ability to compete has kept pace with, or exceeded, the increased competitive pressures.

From this he draws an important lesson, namely, that in low income democracies, public monopolies can do more harm than good because they can get captured by politicians whose focus is on distribution and not growth. "In contrast in the case of private monopoly regulatory capture can be impeded by an independent professional regulator and the government department."

More importantly, and not least because he is an economist, he talks about the unpredictable consequences of reform. "The non-linearity arises from the complex interplay between the laws and rules, evasion of these rules and corruption that facilitates such evasion."

This part of the analysis would have been richer if he had dwelt on the sociology of law in India . Our country is yet to move, as it were, from status to contract.

The result is that people of high status enjoy immunity from the law that encourages law-breaking. For instance, even finance ministers, let alone other politicians, sometimes do not file tax returns,.

Then, just as he is blowing nicely into the clarinet, he strikes a false note. "Poverty, which rose during the socialist period, has been on a clear down trend during the reform period." Discretion is often the better part of valour.

Another false note is "government total expenditure or investment expenditure does not have a positive effect on growth." What he means surely is that government doesn't manage its investments very well. That is a separate issue, and perhaps doesn't have much to do with government investment per se.

Also, this statement is hard to reconcile with his view that "acceleration of rural growth and poverty reduction requires greater attention to productivity enhancing activities such as aquifer (ground water) management and recharge; better drainage systems, watershed management, training of farmers in water harvesting and other scientific practices, revival of extension systems/information flows, and better agriculture related R&D." Only the government can pay for these things, surely?

Methodologically, I think, Virmani has fallen into the post hoc ergo propter hoc (after this, therefore, because of this) trap. But it's easy enough to clamber out of it.

All you have to do is to keep the whole, and not just the economic, context of past actions in view.

*Policy Regimes, Growth and Poverty in India: Lessons of Government Failure and Entrepreneurial Success, ICRIER WP NO 170, October 2005