Congratulations to India for appointing Raghuram Rajan as the new governor of its central bank. It would be hard to think of anybody better qualified -- not even Janet Yellen. But condolences to India for the news that monetary and financial policies aren’t the main obstacles to its prosperity. The economy needs better management, all right, but not at the Reserve Bank of India.
Rajan, a former chief economist at the International Monetary Fund and for many years a professor at the University of Chicago’s Booth School of Business, is justly celebrated in the U.S. for sounding an alarm before the crash about the systemic risks of financial innovation. His views were widely dismissed, but all too soon he was vindicated -- more dramatically than he could have wished. His book “Fault Lines” reflects at length on those lessons; it will be required reading for many years.
Monetary policy and financial reform loom large in India right now because of the recent slowdown in growth, the steep fall in the rupee, and the need to modernize India’s financial sector -- a topic on which Rajan has done a lot of work. Vital as these issues are, the causes of the country’s recent disappointing performance mainly lie elsewhere, and beyond the reach of any RBI governor, however able.
For years -- well before the radical economic reforms of the early 1990s and in the two decades since -- the main question about India has been: Does this country sincerely want to be rich?
Visit Beijing, and there’s no doubt what China’s leaders want: growth, first and foremost -- to raise living standards; to create jobs, pacify the population and keep the Communist Party in power; to secure China’s rightful place in the global order. Growth isn’t just the top priority, it’s also the overriding priority. It’s literally in the air they breathe: China wants growth at any price. Despite China’s recent slowdown, growth at any price is what it’s had, and the country has been transformed from top to bottom, overwhelmingly for the good.
India’s feeling about growth (or the feeling of its political class, at any rate) is that it’s all very well, but... It’s all very well, but it won’t improve public services, attack illiteracy or lift the burden of disease. It’s all very well, but it won’t end poverty or secure social justice. It’s all very well, but what about inequality?
This ambivalence, which Chinese policy makers would see as a form of derangement, pervades India’s public discourse -- and India is a vibrant democracy in which public discourse matters. Recently, in an intellectual confrontation that could only happen in India, the authors of two contending texts on the subject of growth have been slugging it out, and their quarrel has been national news.
Jagdish Bhagwati and Arvind Panagariya are the authors of “Why Growth Matters” (published in India as “India’s Tryst with Destiny”; maybe the claim that growth matters was judged as too provocative for the local market). The book argues that growth helps the poor and advances social goals in its own right, and that it also provides the means for the government to spend more on education, health care and other social programs.
It documents the surge in growth that followed the liberalization of the early 1990s -- which the authors vigorously advocated -- and rebuts a variety of claims about the supposed shortcomings of that experience. One can only commend their bravery: Against the odds, they defend a program that more than quadrupled gross domestic product in 20 years and visibly improved the lives of Indians rich and poor, urban and rural at a rate never previously seen.
Amartya Sen and Jean Dreze are the authors of “An Uncertain Glory.” (Love that title.) They acknowledge that the reforms of the early 1990s boosted growth, though choose not to dwell on their failure to support them at the time. They also agree that the growth has done some social good. Their book, however, concentrates on what growth has so far failed to do for the poor and disadvantaged. They go further, arguing that social investment is necessary from the start for the right kind of growth -- it shouldn’t wait, as Bhagwati and Panagariya suppose it must, until the country can afford it.
The two sides and their respective supporters have been battling in the Indian press. The quarrel has become needlessly personal (though that helps sales, obviously). Points of disagreement have been overemphasized, obscuring the many things about which the two camps agree. Believe it or not, Bhagwati and Panagariya are against poverty and are for good schools and hospitals; Sen and Dreze are in favor of economic growth. The quarrel, when viewed dispassionately, is mainly about the order in which economic reforms are undertaken -- about what comes first, rather than about what matters most.
Even though, to put it mildly, my sympathies in this debate lie with Bhagwati and Panagariya more than with Sen and Dreze, I still want to recommend “An Uncertain Glory.” Sen and Dreze are right to draw attention to the limits of India’s success and how much remains to be done. They are exemplary scholars, and everything they say is worth careful study.
But Bhagwati and Panagariya are right on the main points. First, growth may not guarantee sustained social progress, but it’s the essential condition for it. Second, liberalization in India worked. Third, that program of reform is unfinished. The main failure of India’s post-reform development has been lack of growth in labor-intensive industries (see China). And the main cause of that undue tilt toward capital-intensive development has been the insane tangle of labor-market rules that the 1991 reforms left untouched.
An uncertain glory, indeed. Only in India would it be necessary -- and controversial -- for two leading scholars to make the case that growth matters. Unless and until the country and its politicians stop saying, “Growth is all very well, but...” the country’s amazing potential will go unfulfilled.
(Clive Crook is a Bloomberg View columnist.)
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