The Hardest Lessons to Unlearn

Amit Varma, of India Uncut, has an OpEd up in the Asian WSJ chastising the National Rural Employment Gaurantee Act (NREGA) in India –

Politics is often about grand gestures, and the Congress Party’s 37-year-old new general secretary, Rahul Gandhi, understands this perfectly. Shortly after landing his position last month, Mr. Gandhi demanded that Prime Minister Manmohan Singh extend a massive cash redistribution scheme, the National Rural Employment Guarantee Act (NREGA), to all 593 districts of the country…

As wth most political gestures, the goal of NREGA is certainly well intentioned. In many ways, it’s a more energetic / invasive version of the goal pursued by “living wage” advocates in the US. While our economic interventionalists wish to push incomes higher by raising the cost to employers (invisible unemployment be damned), Indian politicians go many steps further, take the nasty employers out of the question altogether, and directly (attempt to) provide 100 days of government employment a year.

The problem, as Varma dutifully notes, is that a nasty bureaucrat can be far worse than a nasty capitalist –

…As expected, NREGA has proved little more than a siphon for corrupt bureaucrats, not a boon to the poor. And now, there are numbers to back up that assertion…In the financial year beginning in April 2006, only 6% of the households registered under the scheme actually received their 100 days of employment.

…The CEFS study focused on the state of Orissa, and found that about 75% of the funds spent in Orissa had been “siphoned and pocketed by the government officials.” “We could not find a single case where entries in the job cards are correct and match with the actual number of workdays physically verified with the villagers,” the study noted. Out of a total $187 million in public monies spent in the state during the 2006-2007 fiscal year, around $127 million was effectively stolen.

And so, despite the fantastic progress being made in the upper echelons of the Indian economy, the bottom rungs appear mired in the same old licence-raj enforced, feel-good economic populism that’s haunted the country for nearly 50 years. One response is to criticize the implementors and “throw out the bums” to replace them, presumably, with better-intentioned bums.

The better response, however, is to dispel the notion that government make-work programs can ever provide the wealth so desparately needed in rural India. The problem is that the sorts of policies that can / will actually lift rural/poor incomes are anti-thetical to political grand-standing –

Instead of promising government jobs to agricultural workers, India’s government could do far greater good by stimulating competition–and investment–in rural India. As it is, government too often gets in the way. For example, one law limits the geographic area in which farmers can sell their produce, and some states require farmers to sell to monopolist distributors. Another law restricts produce shipments across state lines. Topping it all off, India is one of the biggest defenders of market-distorting agricultural tariffs in the World Trade Organization’s Doha Round negotiations.

It might be hard to believe but, in India the original goal of these trade-restrictive policies was to protect local farmers in the first place. Shielding from cross town competition coupled with state-sanctioned distribution channels was supposed to prevent “race to the bottom” price competition amongst supplier-farmers.

Interestingly, there are important analogues in the US where similar outcomes are being pursued by our own (well intentioned) “buy local” and “Fair Trade” advocates. Of course, the post-modern Western raisons du jour layer in pollution, oil consumption, hatred of middlemen, and the like in addition to farmer welfare as arguments for restrictive trade policy. Thankfully, in the US, these are still voluntary “movements” and our politicians haven’t attached the brute force of government to these memes (yet)…

17 thoughts on “The Hardest Lessons to Unlearn

  1. for once i actually kinda agree with you. given the options between clueless, apathetic, inefficient, and sometimes venal (but always know it all) bureaucrats on one hand, and businesspeople on the other, the latter are sometimes better (provided, of course that there is a modicum of competition). this is because at least the business-person is reliably led by his/her self interest, and sometimes that might include a role for the employee. on the other hand, bureaucrats are sometimes needed to ensure that traders’ cartels do not develop; there is ample evidence that well-organized middlemen and traders have and do continue to routinely fleece the primary producers in the villages. often bureaucrats are in fact “captured” by, or in cahoots with well organized middlemen (for evidence see ela bhatt’s “we are poor but so many” (oup)). the solution seems to be large scale organization of primary producers, such as trade unions, which can both bargain effectively with government bureaucrats, and with traders and other middlemen. its undeniable that market power (i.e. bargaining power) increases with organization. someone has to make sure that the “right” kind of people organize.

    just because bureaucrats are bad does not make the middleman “nice”; its not a zero sum situation between the middlemen and government bureaucrats (as i said, they could be in cahoots with each other).

  2. I like Amit Varma’s ideas on small government, and free markets. But, the problem is a politician that advocates small goverment and loosens restrictions on business will have a hard time getting elected in rural India. The people that are getting stifled by the bureaucracy are the exact same people that line up to vote for politicians that support policies that favor big government. Come election time, the poor vote for the candidate that promises to take money out of big business and put it in the hands of the poor. They are never going to vote for someone who says that he is going to invite more businesses into town.

  3. I do not know if Amit Varma has mentioned this or not, but the act states that it is mandatory for the Gram Panchayat to maintain employment rolls and records of the employment, provide them online through the District/Block Office and to anybody and everybody who wishes to see the records (This provision is not through the Right to Information Act, but is part of NREGA itself). You can also do so for some districts at nrega.nic.in. This level of guaranteed transparency is quite unprecedented in Indian babudom. Because of this provision, several NGOs and local interest groups have taken up the initiative to ensure that corruption is minimized. Hopefully, this act would not suffer from the ailments of ill-implementation that most other well-intentioned government schemes do.

  4. free markets are all very well but i think you ignore history and politics at your peril. remember that both the first and second welfare theorems assume all contracts are enforceable so that the state always has a role (however invisible it is in arrow-debrue). In fact, it is hard to think of an example in the twentieth century Asia (which i know well) where the state has not played a key role in fostering economic growth (japan, korea,china,taiwan, etc. etc.).

    the question is really not more or less intervention, but what kinds of internvention and how to make them incentive compatible with entrepreneurial objectives.

    for instance, one signal failure of the indian state is in providing health and education to its population, but I am pessimistic that a free(r) market will do any better. i say freer because there is already plenty of enterpise in these areas and the results are dismal. again, when I say health and education provision I mean it for the majorit of the populace — so don’t think apollo hospitals and posh private schools but rather the hordes of “free-market” quacks selling medicines and the cheap numerous private schools set up in rural and semi-rural india.

    the market mechanism works well when consumers are well-informed about the quality of product they are receiving and can act on that information to punish poor quality providers. In poor rural india, individuals have (and this is convincingly documented) very poor notions of what constitutes good medical care (getting injectsions and pills is the usual metric) so that they are in a pretty poor position to server as discriminating consumers. second, private providers (remember that most health visits in India are to the privat sector) face perverse incentives since repeat custom (whci is their maximand) involves skewing treatment to the kinds of thing consumers expect. add this to the fact that most of these “doctors” are also selling these medicines themselves to the patients and you have a pretty perverse incentive system. it’s hard for me to see how “freeing” this market from regulations will lead to better outcomes. there are of course other alternatives (recognizing officially a class of medical service provider that is not a doctor for instance) but those seem to require additional (or at least alternative) regulation.

    of course there are other areas where its easier to see how the state provides perverse incentives for growth, but I think that the argument has to be made on a sector by sector basis rather than on some more general, abstract, level. this requires getting down to the specific details of the market mechanism and the market failure the state is seeking to solve (if any) so I think statements like the “state should do more to stimulate investment in rural india” are content-free at best without further details.

  5. i’d just like to add my agreement to the statement about muster roll availability. i think that the initial roll out of the NREGA was actually flawed in that while it depended largely upon civil society to ensure transparency, it was actually implemented in areas where there was minimal cc or RTI activism.

    the reports we are reading about now are all part of this ‘civil society’ which is basically the only mechanism that will make beaurocrats responsive. the problem is that the development of civil society is largely an endogenous process, so its hard to influence it very much from the outside, although certainly attempts in this direction are important.

  6. I find it hard to believe that when the project was dreamt up, the politicos and the bureaucrats did not know that most funds would be siphoned off. From their point of view what is there NOT to like in something like this. They can be seen as doing something for the poor while at the same time lining their already fat pockets, the poor be damned.

    Couple of my uncles and cousins are farmers and still live in a village and I would be a rich man today if I got a rupee for every time I heard them bitch about the bureaucrats and mai-baap sarkar. From what I hear from them, they do not care for things like FREE power or the sops that the government throws at them. All they want is better connectivity (better infrastructure) with the towns/sabzi mandis and lifting of onerous restrictions on where they can sell their produce etc. What they need is for the government to get out of their way. For them, schemes like NREGA are a total waste of time and money.

    And I am not sure if this means anything or not but my cousins wants their kids to be anything but farmers!!

    If I recall correctly, NREGA was the brainchile of Jean Dreze, a belgian economist living in Delhi.

  7. I agree that the state is corrupt and incompetent. but it exists within Indian society that shares those characteristics as well. second, while there are certainly individuals who would rather not receive subsidized goodies from the state — they are probably in the minority. to take a simple example — the GOI has a free mosquito net distribution program in place in some states. while of course the state is corrupt and incompetent so that only about 5% of the populatiion is covered, it is next to impossible to sell equivalent ITNs at market rates in these areas since now there is a belief that one has a right to these nets for free. so, sadly, individuals would rather hold out indefinitely for a free net and risk malaria than buy one at market rates. what i’m trying to say is that the state’s actions have created particular psychologies that are going to be very hard to overcome.

  8. 6 Bombayplan: “the question is really not more or less intervention, but what kinds of internvention and how to make them incentive compatible with entrepreneurial objectives.”

    Well said! The most efficient free markets in the world today are successful precisely because their governments were, at least in the initial stages, proactive on a selective and strategic basis. The operative word is strategic, which most planner types either do not get or shun completely because it limits their power base. Your reference to education and health as two sectors of the Indian economy ill suited for the free market really resonated with me. I wish the US would recognize the same reality as far as health care is concerned.

    Your comments voiced the concerns of rural/agricultural India that probably accounts for more than 80% of the Indian population and will be forced to wait another 50 years before the free market bounties trickle down to the last village.

  9. I agree that the state is corrupt and incompetent. but it exists within Indian society that shares those characteristics as well.

    Hear! hear! Bombayplan, you da man!

  10. free markets are all very well but i think you ignore history and politics at your peril. remember that both the first and second welfare theorems assume all contracts are enforceable so that the state always has a role (however invisible it is in arrow-debrue). In fact, it is hard to think of an example in the twentieth century Asia (which i know well) where the state has not played a key role in fostering economic growth (japan, korea,china,taiwan, etc. etc.).

    bombay plan, i completely agree with most of what you say except a few nitpicks. first, the state does not always have the incentive to intervene “developmentally”(i.e. in the ‘right’ way); that is why labor unions etc. are so important. they provide a countervailing force both to organized business interests and the organized bureaucracy (otherwise it becomes a positive sum situation between the state and business, as the latter demand and receive protection against competition). vinod is theoretically correct in observing that if all markets were equally competitive (not just the labor/primary producer market)some gain would accrue to producers. but as herbert simon has pointed out, sufficiently competitive markets rarely exist; reality (as it exists) is a world of organizations and firms.

    a second (very minor) point is about the arrow-debreau theorem. you are right in that they assume the enforceability of contracts, and this opens up a role for the state. but this role is not always necessary (again in theory), since many contracts are self-enforcing (i.e. they are nash equilibriums). this is a minor theoretical point since in reality there are far too many variables. also there are other mechanisms than the state to enforce contracts (social pressure etc.), but these can mostly function only within particular communities or groups where ostracization has real costs for the individual being ostracized.

  11. Topping it all off, India is one of the biggest defenders of market-distorting agricultural tariffs in the World Trade Organization’s Doha Round negotiations.

    The main reason why India (and many other countries from South America, Central America, Africa) defended tariffs in Doha round was that governments in Europe and US were not ready to similarly remove their own trade distorting tariffs and subsidies. US government pays huge subsidies to its cotton and corn farmers and at the same time insists that developing countries shouldn’t do so. The subsidies issue in US baffles me because in case of cotton the top 7.2% of the cotton farmers in the US get 86% of the cotton subsidies. This top 7.2% is almost invariably big agribusiness companies and not individual farmers. Brazil recently won a case against the US in the WTO on this very issue.

    I agree that there are several laws that apply to investment in agriculture and trade that crosses state boundaries in India which simply don’t make sense and hamper employment generation in rural areas. Also NREGA coupled with RTI act of Oct 2005 has the potential to be implemented cleanly without corruption.

    However with regards to removal of tariffs and subsidies to the farmers I believe that this needs to happen across the board in all countries. So far US has been pushing free trade agreements (NAFTA, CAFTA, WTO negotiations) which call for removal of subsidies and tariffs in other countries without showing the willingness to do so at home.

  12. CSE – Centre for Science and Environment, India has the best objective analysis of NREGA that I have seen. If someone is interested in knowing why something like NREGA is needed, details on NREGA’s work its track record of successes (few) and failure, and lessons learnt, this site must be visited. The NREGA, of all places, has worked in two BIMARU states, (Rajastan and MP), so with corrections maybe NREGA could work

    free markets are all very well but i think you ignore history and politics at your peril.

    bombayplan — I bow to your wisdom.

    ” Adam Smith’s invisible hand – the idea that free markets lead to efficiency as if guided by unseen forces – is invisible, at least in part, because it is not there. ” – Joseph Stiglitz

  13. India will be slightly better off if there is absolutely no government at all.

    brown — you’re in luck apparently. According to many, the right honourable PM Manamohan Singh seems to be leading India there :-)

  14. What’s wrong with buying “local”? The government is not forcing it down anyone’s throat. If I want to buy garlic grown in California and not in China, that’s my choice. And since when did so-called Libertarians get in the business of telling people what’s good for them.

  15. KR – please re-read the last paragraph – particularly the words “thankfully” and “voluntary”.