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Thursday, Mar 02, 2006


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Growth with or vs Equity

S. Balakrishnan

Look to Sweden for an example

A major reason for the sudden visibility of extreme wealth and increased income inequality is the explosive growth of financial markets.

It is an age-old debate in economics and development. Should we focus on maximising the rate of growth or poverty reduction?

A lot of economists think it is absurd to even pose this question. How can poverty be removed without growth, they ask?

In the background are a number of fundamental issues. The liberals think the State is responsible for providing equality of opportunity to the disadvantaged sections of society. But equality of opportunity only offers a level playing field and does not (obviously) assure the same outcome for all. That will vary significantly because of differences in individual endowments of intelligence and talent. Despite the best of everything being available, the attainments of a substantial number of people will be below average. There are plenty of examples of wastrels among the scions of rich families. Nor is there any law that given opportunity every poor kid will make good.

The net result is that even those who are not dregs may find themselves outside the job market because they lack theskills for employability in a dynamic ecosystem. Thus, even the affluent US has a disproportionate incidence of poverty.

The Marxian solution was from each according to ability and to each according to need. Every State must have a commitment to ensure the latter. Sweden is a classic example of a `passed' (as opposed to `failed') nation state. It has liberty, democracy, free markets and a cradle-to-grave welfare system. Its education and health care are State-funded and easily among the very best in the world.

How could they afford it? The answer would shock our reformers - with some of the highest taxes in the world! The State gets a big bang out of every buck because of efficiency, the quality of governance and institutions.

Rapid growth or wealth-creation is no guarantee for the disappearance of poverty.

The growth-favouring argument is the trickle-down effect - the benefits will in course of time percolate to the poorest.

Asset values are not correlated to today's prices but prospects. And, in an environment of high optimism, the future entirely determines the present. Add to this the increasing trend of converting everything to tradeable financial paper and you have the perfect prescription for overnight billionaires.

There is little doubt that the extraordinary growth of the financial sector has stimulated global growth in a big way much as international trade has. There is also no doubt that this is the way forward. Those who think globalisation is all evil are missing a very basic point - that the world would be a far worse place without it. (As was said long ago, 'democracy is the worst form of Government known to man save any other").

In India, the conflict need not be so sharp. The Government is rightly increasing its outlays on infrastructure and social services. Coupled with the fast strides of the private sector, we just might manage to succeed in having the best of growth, employment and poverty alleviation.

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