Growth, Redistribution, and the Popperian Pressure of Prehistory

Here we go again, straight into the old debate as to from what the poor benefit more: growth or redistribution. It has been rekindled by the near simultaneous appearance of two books written by Indian economists. I think I am justified in calling professor Jacques Dreze an (honorary) Indian, given his attachment to that country (even if I definitely do not share his and professor Amartya Sen’s prescriptions…).

The debate, although in tune with the times of the Great Financial Crisis and the anti-capitalist fervor it has generated, should not have been started at all. Almost all empirical studies show that straightforward GDP growth is the best recipe for improving both: income growth and consumption growth of the poor (however defined). Coefficients in these studies explain between 50% and 100% impact of each 1% growth in GDP. Capitalist economic growth over the two centuries (exactly from 1820 to 2000, using Angus Maddison data) reduced the percentage of world poor population living on $1 a day from over 80% to about 20% over that period. And the most recent study (October 2009) by Xavier Sala-i-Martin and Maxim Pinkowski for the 1970-2006 period, reduces the percentage much further down.

But enough with diligent empiricists and their generalized numbers. Let us use the economic history for a change by referring to countries close to the hearts of the protagonists of “going much further, faster” as the intrepid redistributionists, Sen and Dreze, suggest in their book “An Uncertain Glory: India and Its Contradictions” (Princeton UP). I have in mind India of their liking, that is India with its independence between 1947 and the 1991 reform, the period that according to Jagdish Bhagvati and Arvind Panagariya made India “a basket case” and only 1991 reform turned it into an engine of growth (“Why Growth Matters”, Public Affairs).

There is no doubt that Nehru’s India definitely chose in 1947 a close to Soviet one planning style with central management of the economy imposed upon the largely privately-owned economy. State sector was to dominate the Indian economy of the future (in fact it did in terms of investment but it never succeeded in repeating that feat in terms of output…). What matters more for the debate is the elaborate care of interventionists, or tinkerers, for the various groups of the poor during the long period of the dirigiste India.

Another country, close also geographically, went for the time being even further in the direction of the dirigiste economy. In Sri Lanka at one point state ownership, under the Trotskyists-led government, reached 70% of output. Interventionists created also, what was called by a renown Hungarian economist, Janos Kornai, a premature welfare state. Premature in a sense that attempted at too low development level (measured conventionally by the GNP per capita).

The ruling elites in these two countries undoubtedly cared a lot for the difficult situation of the poor. There is no doubt about their good intentions. The problem is that – as it should be remembered – a very unattractive place is paved with good intentions. As unintended consequences of measures dictated by good intentions matter a lot.

Incidentally, I have seen such good intentions in words (not in action) a few years ago at a conference in New Delhi. It is fashionable, and even politically correct nowadays, to talk about discrimination and/or exclusion from whatever. There, it was discrimination due to the exclusion from banking services. A few statism-minded disputants, among them a manager of a state-owned bank, were thinking aloud about ways to help those poor who cannot use banking services. For example through the use of mobile phones, etc. And, then, I heard one voice of common sense, this time from a participant from the private sector. He said that the best way to raise the level of inclusion would be to create jobs for the low-skilled in the manufacturing and municipal services’ sectors. With jobs – and resultant earnings – they would discover some benefits of using banking services. Again, intentions were undoubtedly the best, but what about the real economic outcomes of the suggested half-baked or quarter-baked ideas?…

In a recent book of mine (“Economic Futures of the West”, Edward Elgar) I devoted, just a few pages to the issue of why people more often than not choose bad institutions. By bad I meant those bringing about unintended, harmful consequences. After all, communism in its many (all horrible) varieties has been tried out not so long ago and it failed ignominiously – from Soviet Union to Cambodia. As far as the present China is concerned, whatever successes it achieved since 1978 and the later reforms have been the result of the introduction of some capitalist market measures, not the welfare measures (that in reality have been reduced).

But if somebody would like to argue that the jury is still out on China, lets shift attention back to countries with the well meaning politicians: India and Sri Lanka, and compare them with Taiwan and South Korea. In 1950 the latter countries were as poor as India, but at the turn of 1950s and 1960s they reformed their economies by making more room for the market internally and become much more open to the external world. In 1980 they were t e n t i m e s richer than India or Sri Lanka in terms of per capita income (and a decade later that ratio was even higher). Public expenditures remained low in Taiwan and South Korea for decades and the welfare state took a marginal share of these resources. But thanks to the 3-4 times higher GNP per capita growth over a long period, a poor Taiwanese or a Korean was much better off than a middle income Indian or Sri Lankan.

The question is, then, why it is necessary to make the same errors, again? Why the “bleeding hearts” never give up? Why they recommend, again, the same, rehashed ideas, or new ones which – one may expect on the basis of experience – are going to fail anew or for the first time (but not unexpectedly)?

In my book I referred to what Karl Popper called the pressure of prehistory. Over the very large part of human history, people lived in small hunting-gathering bands. The collective solution was the only one, reducing the extremely high uncertainty of surviving in the inhospitable environment. They shifted to agriculture (first with group and later with private ownership), then to commercial society, then to industrial and now – in the rich West – to postindustrial, service society. All individualistic and private property-based.

However, the subconscious, half-formed preferences from the distant past survived somehow. Collective solutions are good and individualistic are bad. And if that is not enough, collectivistic solutions appeal to higher morals. It does not matter that, as Adam Smith rightly wrote, it is not from the good will of the baker that we get our daily bread, but from his enlightened self-interest. There will always be those who are going to propose to do it collectively to help the poor – even if the results will be for an umpteenth time negative or even disastrous…