T C A Srinivasa-Raghavan: The dangers of too much equity

OKONOMOS/ While efficiency has been defined by economists, equity has been left to politicians

It has become something of an article of faith for the Centre-Left, which the Congress claims to represent, that growth must be accompanied by equity. Well, yes, but what exactly does equity mean?

No one has been able to offer a precise definition that can be tested in some reasonable way. This is in sharp contrast to the other aside of the growth debate "" efficiency.

Economists have defined it clearly and precisely. This definition says that production is efficient if more is produced with the least possible use of inputs of capital and labour.

But, by default, the task of describing equity has been left to politicians. It is not very surprising, then, that it is the means of achieving it, rather than the end itself, that has become more important.

Hence, the emphasis on direct methods, such as direct attacks on poverty, the persistent attempt to, so to speak, direct credit, prices, resource allocation and so on. Now, says the prime minister, we will have another prong to this attack, namely, direct devolution of central funds directly to panchayats.

As Amitabh Bachchan might have put it, direct methods result in credit being given directly to those who direct the direction. Indira Gandhi was a case in point. Now Sonia Gandhi is.

The failure to offer a clear definition has had three other effects. One, it has allowed the judiciary to chance its arm and confuse justice with equity. This can be seen in a large number of judgements. The problem, of course, is that justice is about various types of equality, not about equity, which is about distribution.

Second, it has allowed NGO's "" the jholawalla variety at least "" to influence the growth debate. Those who seek policies for improving efficiency have therefore become defensive and apologetic. Look at Manmohan Singh "" Version I (1991-96) is very different from Version II (2004 -?).

But absolutely worst of all is the third consequence. It has ensured that the Communists occupy the moral high ground on very fragile, and often fraudulent, claims. The list of these is too long to be enumerated but we all know what I am talking about; even the Communists, I am sure.

True, equity is hard to define. It is like the case of the man who was asked to define an elephant. He replied, "I don't know but I can tell one when I see one".

This has not daunted economists, some of whom have attempted a rigorous definition. But when applied, these definitions have led to ridiculous consequences.

Mostly, these arise because tastes, preferences and ability are not accounted for. In the name of equity you can end up forcing the very people you are trying help, to do things that they don't want to do.

Thus, if a husband hates oranges but loves apples, and the wife has exactly the opposite preference, equity imposed from above requires an apple and an orange to be divided in halves between the two. This outcome leaves both worse off.

Likewise, when you don't account for ability, or try to equalise rewards between those who are not as productive, you can have a situation where Mr Bachchan is forced to perform for free for those who are not as gifted as he is. The Soviet Union showed this to be the case in a whole range of activities from music to sport to science to medicine to whatever.

If you add all this up, you get a truly horrifying outcome: eventually attempts to ensure equity through direct methods always end up destroying the incentive to produce. The government is a clear case in point. It doesn't perform because it makes no difference to its employees whether they perform or not.

I am not making a Darwinian, survival only of the fittest, case here. But the fact remains that unless you get to an acceptable tradeoff between the efficiency concerns and equity concerns, you will continue to make a mess of things. The key issue is not even the redistribution of income.

The key issue is to ensure that the burden of redistribution is shared equally by everyone. But when you try this, you get the deadweight costs of the bureaucracy that administers the redistribution. And you increase the probability that investment is arbitrarily re-allocated, a la Laloo asking for a wheel and axle factory at Chhapra.

With such a large number of poor people, there is a higher need for re-distribution in India. Therefore, the incidence of costs that accompany efforts at redistribution is also higher. The huge bureaucracy exists solely to ensure that the government's policies of redistribution are implemented, or at least the file says so.

What is alarming is that there is no way of reducing these costs. So, the talk of reducing the revenue deficit, when a very large component of it is civil servants' wages and subsidies, is completely bogus. It will not happen if equity remains a concurrent objective of government policy.

I might be off the mark here, and I hope I am. But there is another danger that those who would govern us must be mindful of. This is the danger of, not to put too fine a point on it, fascism. Let me explain why.

Redistribution of the sort we have seen in India has relied 99.9 per cent on milking the middle class, not the really rich. I know there is a school of thought that says that the largest beneficiary of all the subsidies has been the middle class.

But this is a poor argument for two reasons. One, the middle class has grown over time, which means many poor have climbed into it. Second, if the top part of the middle class is paying for the lower part, which it is, it does not constitute a case for "direct" intervention.

But leave this aside for the moment, and examine the issue of perceptions. The middle class today feels put upon and exploited. As its size grows, it could turn for succour to fascist parties that represent capital.

It has happened before elsewhere in the world and we are not so special that, when the middle class reaches a critical mass, it will not become the support base of a truly fascist party.

This, perhaps, is the real long-term danger of competitive populism posing as a concern for equity. It needs to be properly understood by the political class.