Neoliberal economists overlook that lag in social sector remains intact, expecially when they praise “Gujarat model”

percapitaBy Counterview Desk

Neo-liberalist policy, simply put, advocates economic liberalization, free trade and open markets, privatization, deregulation, and decreasing the size of the public sector, even as increasing the role of the private sector in modern society. The term was first floated the late 1930s by European liberal scholars to promote a new form of liberalism after interest in classical liberalism petered down. In the decades that followed, neoliberal theory tended to be at variance with the more laissez-faire doctrine of classical liberalism. It promoted instead a market economy under the guidance and rules of a strong state, a model which came to be known as “social market economy”.

Critics of neo-liberalism as an economic ideology say that it spreading throughout the world via international financial institutions and transnational corporate hegemony. “The effects of this colonial phenomenon is especially acute in Latin America where many nations faced debt crises directly related to the international economic system”, says Lara Kelly in Citizens’Peace.Org.  “In order for many nations in Latin America to deal with this economic crisis, they were forced to cede democratic control of their economies to these international actors. Although democratic procedures exist in most countries in Latin America which are implementing the reforms, real democracy is maimed by international economic interference in policy-making.”

Writing in the “Asian Journal of Social Science” (2008), M. Shamsul Haque, a political scientist with the National University of Singapore, says that “neo-liberalism represents both an ideological position and a policy perspective that endorse economic individualism based on market competition, encourage free trade and foreign investment, and oppose state intervention and state-run welfare programmes”.  He adds, “Neo-liberalism is one of the two dominant components of the contemporary anti-state movement known as the New Right — the other component of the movement is neo-conservatism. For these authors, neo-liberalism believes in the supremacy of markets in distributing goods and services, opposes the intrusion of the state into market institutions, and discourages the state’s role as an employer and welfare provider.”

He argues, “In line with this market-biased policy framework, the character of the emerging neoliberal state in the developing world is also reflected in its deeper alliance or partnership with private capital, including both the local business enterprises and transnational firms or investors. Under the influence of structural adjustment programmes, there has been an expansion of public-private partnership in countries such as Korea, Thailand, Malaysia, India, China, Indonesia, Mongolia, Vietnam, and the Philippines in the case of Asia; and Chad, Malawi, Ghana, Senegal, Uganda, Zambia, Zimbabwe, and Mozambique in Africa. Similar trends of the expanding state’s alliance with private capital can be found in almost all countries in Latin America.”

According to Haque, “A major feature of the neoliberal state is its anti-welfare position — it tends to abolish the welfare rights of citizens related to economic security, health services, and education facilities. In most Asian, African, and Latin American countries, the contemporary regimes have increasingly moved toward such an anti-welfare option, which is quite evident in their recent attempts to streamline anti-poverty programs, withdraw food and agricultural subsidies, and introduce user fees for public sector services. This antiwelfarism has emerged in poor African countries such as Jamaica, Zaire, Swaziland, Lesotho, Tanzania, Zimbabwe, and Uganda, where food subsidies and health and education expenditures have been severely cut. These countries have introduced market-led strategies of service delivery such as user charges, which have made basic services such as education and health less affordable to the poor. This double-edged policy option — the retrenchment of government expenditures on social services on the one hand, and the adoption of user charges for such services on the other — represents an increasing anti-welfarism pursued by the state in Africa.”

So far, the Government of India may not have gone thus far, but already voices are being heard that this may become a trend in the coming future. Three senior economists  — two of them working as professors of economics at the Columbia University, Jagdish Bhagwati and Avrind Panagariya, and the third one, Prof Bibek Debroy, who is with the Centre for Policy Research, New Delhi – have prominently argued in favour of the “Gujarat model of growth”, which from available indications, doggedly favours the neoliberal position. Efforts to privatize certain key social sectors, more particularly health and education, on one hand, and achieving a higher growth rate by ushering in a liberalized economic framework, favouring an atmosphere conducive to the corporates and multinational corporations, on other, are the key factors of Gujarat’s movement towards a neoliberal regime.

Debroy’s coffee table argument

Debroy’s coffee table book  – “Gujarat: Governance for Growth and Development” – arguing how Gujarat has been No 1 in economic freedom index successively for several years points out how the well-known trickle-down theory, under which  the high growth rate of Gujarat has led to reduction in poverty rates, has been successfully working. Quoting National Sample Survey (NSS) data, he says, “In line with all-India trends, overall poverty and urban poverty have declined… The real story is in rural Gujarat, where there has been a very sharp drop in poverty, significantly more than all-India trends.” The urban poverty, he said, went down from 20.1 per cent in 2004-05 to 17.9 per cent in 2009-10, while rural poverty went down during the same period, from 39.1 per cent to 26.7 per cent. “In rural Gujarat”, he insists, “the benefits of growth have trickled down.”

Debroy, interestingly, does not answer as to why the trickle-down effect worked failed in the urban areas, where the rate of urban poverty reduction was not only quite low. In fact, to quote him, the urban poverty figure was 4.3 million in 2004-05 and 4.5 million in 2009-10 – an absolute rise in urban poor in Gujarat. There is reason to ask: If trickle-down growth, which Debroy strongly advocates, has succeeded in rural Gujarat, why has it failed in urban Gujarat? Debroy believes that Gujarat is No 1 in economic freedom index, and is, therefore, the best investment destination. Industrialisation in Gujarat may have taken place at a very fast. Why have the number of urban poor gone up?

Prof Indira Hirway, who heads the Centre for Development Alternatives (CFDA) in Ahmedabad, has contradicted Debroy’s claims on several counts. Basing on the same NSS figures which Debroy quotes, Hirway says in a recent paper, “Though the rate of decline in poverty during 2004-05 – 2009-10 in Gujarat was 8.6 percentage point, the state ranked 9th among the major 20 states in India in poverty reduction. The relatively slow growing states like Uttarakhand, Tamil Nadu, Orissa, Madhya Pradesh, Karnataka, Himachal Pradesh etc. have experienced much higher decline in poverty during this period.  In fact, Gujarat, which stood 7th in the incidence of poverty among the 20 states in 1993-94, maintained its 7th rank in 2004-05 but dropped to 9th rank in 2009-10. In other words, in spite of being the fastest growing state during 2004-05 – 2009-10, Gujarat slipped in its performance in poverty reduction.  This shows that growth alone does not count for poverty reduction, and something more is needed to translate growth into poverty reduction.”

Prof Hirway’s calculations show that Gujarat’s poverty reduction was 8.6 per cent, as against Himachal Pradesh’s 13.4 per cent, Karnataka’s 9.7 per cent, Madhya Pradesh’s 11.6 per cent, Maharashtra’s 13.7 per cent, Orissa’s 20.2 per cent, Rajasthan’s 9.2 per cent, Tamil Nadu’s 12.3 per cent, and Uttarakhand’s 13.7 per cent. Worse, while in rural poverty reduction Gujarat did much better than all-India average (12.4 per cent as against all-India’s 8.2 per cent), in urban poverty reduction the state flopped (2.2 per cent as against all-India’s 4.6 per cent).

A recent Planning Commission note, prepared on Gujarat development on the basis of papers prepared at a seminar Ahmedabad, carries a synopsis of a paper by Prof Sebestian Morris, a faculty at the Indian Institute of Management, Ahmedabad, which says: “What is remarkable of Gujarat is it has been able to maintain and enhance its comparative advantage (in growth) despite a high level of per capita income, when all other highly industrialized (and high income) states have as expected steadily lost their comparative advantage with per capita growth.” But, he argues, “This is due to low labour costs in the state (repressed wages and poor quality of employment), the higher income inequality (for higher rate of savings), high tax concessions and other incentives to corporate investments, vast migrations to Gujarat and the increasing use of capital intensive machinery in Gujarat (low growth of employment and poor shift of labour from primary to non-primary sectors).” Hence the advice, “There is now a need for the state to shift to income distribution.”

NSS data, released last year, are quite revealing. Average salary per day in Gujarat for regular employees is Rs 276.48 for males and Rs 213.10 for females. The national average is higher – Rs 332.37 for males and Rs 253.02 for females (urban and rural areas combined). In fact, salaries to regular employees are higher even in Bihar, not to talk of Maharashtra or West Bengal. Things are no better for casual labour – in Gujarat their average wages (both male and female) are Rs 83.25 in rural and Rs 106.17 in urban area. States with higher average wages for casual labour in urban areas are Karnataka, Maharashtra, Chhattisgarh, Tamil Nadu, Andhra Pradesh, Haryana and Kerala. As for rural areas, the states with higher wages are West Bengal, Tamil Nadu, Karnataka, Andhra Pradesh, Haryana and Kerala. Social scientist Prof Ghanshyam Shah says, “The trend suggests that while labour is available in Gujarat, there is no pressure on employers to pay a higher wages. There is indifference on the part of the state labour department to ensure higher wages. Over a period, labour office staff has dwindled. The state government neglects its labour department, even as promoting the industries department.”

Already, economists are working out theoretical explanations on why the neo-liberal growth does not work. A recent book by Kamal Nayan Kabra, Malcolm S. Adisheshiah chair professor of economics of development and decentralized planning, Institute of Social Sciences (ISS), New Delhi, has argued what he calls “growth orthodoxy”, which propagates that rate of growth of gross national product (GNP), as determined by the market forces, is the sole criterion of development. Such a GNP-centric model, he says in his book, “Appropriate Development: People First”, published by ISS, is based on the assumption of “trickle-down processes” which could be achieved by “increased public revenue as a fallout of higher GNP”, which would help run “state-led anti-poverty programmes.”

In fact, Kabra says, neo-liberalism is achieved essentially with the help of state intervention, exploding the myth that the policy’s main concern is to minimize state control. He says, “Since the GNP-centric development policy regime implies a free hand to the market forces, they acquire a big hand in deciding the pattern of production, especially by way of imitating the pattern seen in the rich countries.” In the third world countries, “the elites … tend to take the attainment of the life style and consumption pattern prevalent in the rich world as the summit of accomplishment and they go all the way to imitate their pattern of production.” The regime undermines the need for “expansion of the home market”; it overlooks the fact that “increase in the proportion of wage goods in the total product of a country by engaging the available work force in the decentralized production of the poor persons’ goods and services” should be central to development.

Panagariya’s selective data

Another economist who is in favour of the neo-liberal regime is Prof Arvind Paragariya of the Columbia University, who argues that perhaps the most exceptional feature of Gujarat’s success is the performance of manufacturing. In a recent article, he says, “Compared with the national average of 15 per cent, manufacturing in Gujarat accounted for 27.4 per cent of the Gross State Domestic Product (GSDP) in 2009-10.” Taking issue with this, Hirway says, “Panagariya has used the available data only partially… He does not see that (1) in urban areas, where 43 percent population lives, there is no such acceleration, and in fact there is clear deceleration. The urban poverty ratio declined by 1.1 percentage point during 1993/94-2004/05 and by almost half the rate, 0.56 percentage point, during 2004/05 – 2009/10); (2) the rate of decline in overall poverty in Gujarat is much lower than many other states which have shown much lower GDP growth.”

Hirway also says that what Panagariya and economists of his ilk refuse to see is that “there has been rapid deceleration in the human development achievements in the state with the state achieving poor improvement in the HDI in the past decade.” She underlines, “As the latest report of the Planning Commission states, Gujarat’s HDI was 0.466 in 2000, and it rose to 0.527, showing an improvement of just 0.061 in 2008. The state ranked almost at the bottom (18th among the major 20 states) in terms of improvement in HDI during this period! Also, overall rank of the state HDI declined from 6th in 2000 to 8th in 2008. In the case of literacy, the state showed an improvement of 18.02 percentage points during the past decades, but this improvement was much less compared to other states. In fact, the state is 16th among the major 20 states in this improvement!”

Prof Hirway wonders, “The question is – can we reduce poverty faster? With more than 10 per cent (10.27) rate of growth of SDP per year Gujarat state has achieved 1.7 percentage point decline in poverty. This implies that the elasticity of poverty reduction to growth is very low, 0.17. At the all-India level this elasticity is 0.27. Is it possible to go faster when a little less than one fourth of the population is under poverty?”

Slow reduction in poverty percentage, especially in the urban areas, according to Hirway, has been caused by “the decline in the number of factories by 0.23 percent per year in spite of 9.1 per cent in the total invested capital per year indicates that the average invested capital per factory has increased 2.5 times in less than a decade.” In fact, during this period, “the share of wages as percentage of net value added declined by 3.25 percent per year, from 11.83 in 1998-00 to 8.5 percent in 2007-08. Gujarat ranks 15th in the share of wages in the net value added. Kerala is at the top with 22.47 percent share of wages, followed by West Bengal  (21.89 percent), Tamil Nadu (16.37 percent) and Punjab (15.27 percent). Clearly, the gains in productivity are not passed on to the workers in Gujarat.”

The economist underlines, “The rapid growth of the SDP in the state is accompanied by a very small increase in the wages, implying once again that the gains of rising productivity are not passed on to workers… The state ranked 14th in major 20 states with respect to the male wages and 8th in female casual wage rate in rural areas. In the case of urban casual workers, the state ranked 7th in male casual workers and 14th female casual workers. Similarly in the case regular workers also the state ranked 18th and 13th for male and female workers respectively in urban areas and 17th and 9th in the case of rural areas. In short, the repressed wage rates have excluded masses of workers in the state away from the gains of development.”

According to Hirway, since the mid 1990s (1995 onwards), and particularly since the beginning of the new millennium, one observes some basic changes: Firstly, there developed a stronger nexus between the state and the capitalist class, where the state government started thinking in terms of becoming the fastest growing state in the country and in the world and getting the state-of-the-art technology in the state, and the corporate sector was also very keen to take advantage of the opportunities. “The state government offered favours to the enterprising class to become the fastest growing most prosperous state and the latter demanded all kinds of favors – subsidies, incentives, grants to bring investments to Gujarat”, she says.

Bhagwati’s popular myth

The third economist who has been favouring Gujarat model is Prof Jagdish Bhagwati, again of the Columbia University. He delivered a lecture on “Debunking Populist Myths that Undermine Prosperity – Lessons from and for Gujarat” in the last week of December 2011 at Gandhinagar. The main message of the lecture was that Gujarat economy is doing very well, not only in terms of economic growth (with the highest rate of growth of per capita income during 2000-2010 among the states in India) but also in social sectors. He also gave his certificate that Gujarat is on the right track and its economic growth will (and has) automatically lead to social development.

Among Bhagwati’s arguments is, Gujarat’s achievements in human development have been better than many other states in the recent years. Gujarat has experienced 57.5 per cent increase in literacy between 1951-2011 – higher than what has been achieved by Maharashtra or Kerala; the rate of decline in infant mortality rate (IMR) between 1971-2009 was again better in Gujarat than in these two states; and the increase in the life expectancy at birth since 1970 also has been higher in Gujarat than in Kerala or Maharashtra. Stating his neo-liberal position, the economist believes, “In the first phase of development it is important to raise the rate of growth of SDP to generate revenues for promoting social sector in the subsequent phase. Gujarat has generated revenues and now it is promoting its social sectors.”

Arguing against this, Hirway says, “Though Gujarat did experience a higher rate of growth in literacy during 1951-2011 than Kerala (which started at a much higher level) and Maharashtra (marginally higher), seven other states have seen a much higher rate of growth in literacy during this period. The decadal growth rates in literacy show that the increase in literacy in Gujarat was of 18.02 percentage points during 1991-2011 (during the period of the new growth model) with the state ranking 16th among the major 20 states in India in the rate of growth. The state that ranked 4th in literacy in 1981, slipped to 5th rank in 2001 and to 6th in 2011. Similarly, seven other states are ahead of Gujarat in the decline of IMR since 1970… The decline in IMR in the state during 1991-2009 was 30 points with the state ranking 10th among the major 20 states in India in the decline; the rank of the state in IMR slipped from 8 1n 1981 to 11 in 2001 and 2011.” In the case of the life expectancy at birth (LEB) also, “the rank of Gujarat slipped from 9th in 1992 to 10th in 2006, and with the LEB of 65.2 years, the state ranked 10th among the major 20 states in India.”

In fact, data show that Gujarat has a highest percentage of informal (and casual) workers, and they receive repressed wages. According to the latest NSSO data, Gujarat ranks 10th and 14th in casual as well as in regular wage rates in rural and urban areas and poor social protection. Hirway says, “Trickling down of benefits of growth to the masses through productive employment has not happened in the state. The main burden of including the excluded therefore falls on redistribution of the revenues earned through the high rate of growth. This has again proven to be a difficult task, firstly because redistribution does not change the basic process of growth that is responsible for exclusion and marginalization, making redistribution efforts increasingly weaker. Secondly, the strong vested interests developed during the first phase of growth are not likely to permit the required level of redistribution in the second phase. The unholy alliance between the capitalist class and the state has made the state less pro-labour or even anti-labour. Thirdly, by gifting all kinds of favours to the corporate sector to promote rapid growth, the state seems to have promoted crony capitalism, under which the corporate sector has flourished in the state.”

In a recent article, a young economist, Mihir S Sharma, who is editor of the Opinion page of the Business Standard, interestingly, quotes Prof Debroy, a great advocate of neoliberal growth, to point towards Gujarat’s lag in the social sector. Sharma wonders, has Gujarat done a better job of raising growth rates? “Gujarat in 2004-12 grew 3.6 per cent faster than it did in 1994-2002. Meanwhile, Bihar grew 6.5 per cent faster, if from a lower base. But better-off Maharashtra’s growth was 5.8 per cent faster in that period, and Tamil Nadu’s was 4.7 per cent”, he says, adding, Gujarat chief minister Narendra Modi “stoutest defenders are forced to accept that Gujarat has done less well than it should have on social indicators.” He quotes Debroy to state how “the state administration started focusing on social outcomes only around 2007.” He underlines now Debroy tries to argue that since indicators change with a lag, the effects are not yet visible in the data. “This makes perfect sense — and as a defence of Gujarat’s effectiveness as a development model, it’s unanswerable.” But one should remember that Debroy is discussing the Gujarat model, and the person who sets the government’s focus “ignored social outcomes for six years. That person is Modi, and the fact that Gujarat’s social indicators haven’t kept up with its growth is, indeed, still an indictment of his leadership and priorities.”

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