Why Blindly Following Western Economic Policies Won’t Work For The East

Posted on May 26, 2016 in Business and Economy

By Deepanshu Mohan:

Kautilya and Adam SmithWhen ancient Greece fell into decline and Europe entered the Dark Ages, mathematical progress became the realm of the genius of the East. Despite developing independently of Chinese (and probably also of Babylonian) influences, some very advanced mathematical discoveries were made during the nascent times in medieval India. From the application of the zero, to the understandings of revolutionary new concepts of infinity and negative numbers – all ushered in an eastern age of mathematical and scientific enlightenment to the forefront (refer to the works of Indian Mathematicians like Madhava, Brahmagupta) long before Colonialism emerged. Rivers of ink have been spilt studying the influence of scientific thoughts that originated from the East to influence the West in ancient times.

The pursuit of a Western economy’s path to prosperity since medieval times has been dependent on the ability of the state in executing the ideas designed and originated in the works of distinguished scientists, mathematicians, and those who studied society. Germany had scholars like Carl Friedrich Gauss, Wilhelm von Leibniz and Max Planck; France had Marquis de Condorcet and Rene Descartes while United Kingdom had Charles Darwin, Issac Newton and Adam Smith to name a few. All these names were seminal in their country’s pursuit of higher economic, technological growth at a time when countries like Germany, France and UK emerged as factories of the modern world.

Unlike the West, the East today witnesses a growing void in the acknowledgement and application of ideas and concepts put forth by our thinkers and scholars; a void often reflected in the views of our modern political class, policymakers, judges and technocrats. Our views on economic justice are still driven by the concept of “what is just” and “fair” under a neo-Rawlsian umbrella which is more institutional in its constitution and vision. What remains lacking in the views of such policymakers, political class, judges and technocrats is the understanding of an instrumental, endogenous process that is germane to the plurality of our own communities and not something which is shaped entirely by a homogenous Western thinking.

As Amartya Sen aptly puts it in his book, The Idea of Justice, “in the inclusive perspective of nyaya, we can never handover the task of justice to some niti of social institutions and social rules that we see as exactly right, and then rest there, to free ourselves from further social assessment.” In the same way, the concept of economic development in totality must encompass a process of social realisation, integrating collective behavioural and social choice actions.

The Missing Indian Idea Of Developmental Growth

In India’s own economic policy making approach, we observe an over-reliance on the theoretical concepts of neo-liberal economics, a framework which saw its emergence in the US and Europe during the late 1950s. India’s current push for driving Foreign Direct Investment (FDI) as a source of physical capital to increase production for economic growth via its Make in India program can also be seen as a neo-liberal method that excludes the scope and importance on pushing for domestic investment and human capital in its model.

A paper written a few years ago by Indira Hirway, provides useful evidence on how, in spite of the adoption of pro-market policies in most of the South Asian countries, the level of income inequalities continued to widen. Out of the fourteen Asian countries for which sufficient data is available, inequality has increased in eleven countries vis-à-vis – Sri Lanka, China, Cambodia, India, Indonesia and Nepal (to name a few). Malaysia and Thailand were the only two countries where inequalities decreased. In the case of India, the Gini coefficient (a useful parameter for measuring income inequality) has increased from 0.44 to 0.47 during the last decade. While functional variables of a neo-liberal production function may have a useful bearing for increasing a developing economy like India’s productive capacities through capital investment; the mistake, often committed by our policymakers is to treat this approach of growth as an inclusive one.

The issue with India’s path to economic development has been with the implementation of Track II reforms where, in spite of higher and sustained economic growth levels since the early 2000s, the level of public spending on education and healthcare has remained drastically low (less than 3% and 2% of the GDP respectively till now). This has resulted in the accumulation of economic wealth in limited geographical city centres where economic prosperity is enjoyed by the few who directly accrue the benefits, segregating those from lower classes of income as the others who ultimately becoming entirely dependent on the government. Upward income mobility within these lower income classes remains unaddressed owing to a lack of access to good quality education, primary health care and productive employable opportunities for livelihood.

One of the other possible explanation for the short-sightedness in economic approach of a developing state like India, can be associated with the existing nature of our political system. A democratic system warrants political parties to achieve quick results and implement policies with short-term implications that allow them to score points in the next election cycle; while ignoring the long-term economic costs of such policies that are usually attached with short-term benefits.

The ad hoc policy decision of the nationalisation of all large banks in India in 1969 can be cited as one such example that resulted in long-term economic costs. The returns associated with social investments in skill development, primary education and healthcare facilities are long term (in the form of human capital development) and are part of a macro strategy for improving the productivity of workers and for enhancing aggregate effective demand in the economy. In this effect, the evidence on sustained economic development, in the recent past, is skewed more towards state led authoritative political regimes such as South Korea, Singapore, Mainland China etc.economic warfare

An Alternative: Social Choice Theories & Collective Action

In welfare economics, utilitarianism emerged as the official theory of studying the overall welfare of given societies in an economy (with contributions from Jeremy Bentham, John Stuart Mill, Pigou etc.). Our policy framework needs to be assessed in light of a question raised by the title of a famous essay by Richard Easterlin, “Will raising the income of all increase the happiness of all?” Putting happiness as a self-evident fact at the center of a utilitarian, totalistic approach is a prescription offered by many economists including Amartya Sen himself (refer to his works on Happiness, Well Being & Human Capabilities reflected in the book on Collective Choice and Social Welfare).

It would be pertinent to acknowledge the work put forth by some of the early social choice theorists who focused on the development of a framework for rational and democratic decisions for a group, paying attention to the preferences and interests of all its members. (Refer to Kenneth Arrow’s work on the impossibility theorem in his book on Social Choice and Individual Values).

The social choice theoretical applications are particularly useful in indigenizing self-assessing developmental process within pluralistic societies; away from the transcendental thinking of an ideal, uniform process of economic development usually projected as a ‘one size fits all’ (similar to the neo-liberal framework or the neo-Rawlsian idea of justice as fairness). The social choice theoretical framework is not a single theory, but a cluster of models and results concerning the aggregation of individual inputs (e.g., votes, preferences, judgments, welfare) into collective outputs (e.g., collective decisions, preferences, judgments, welfare). Information on interpersonal comparisons of well-being and relative advantages turns out to be particularly crucial in the resolution of an inclusive, long-term process of economic development.

There is a strong need for the Indian state, particularly the policymakers to acknowledge the role and importance of social choice theories that allow the emergence of complete symbiosis between the process of institutional reforms along with behavioural changes. As a useful example cited by Sen in his work on economic justice, mentions Condorcet’s (a French philosopher and mathematician) emphasis on the importance of women’s education in medieval France as a need for institutional reforms in securing such a change; a change that is realized by a larger effort to recognize the need for women’s voices in public affairs. Condorcet’s views here reflect the symbiosis needed between the process of reforming institutions that are driven by the collective needs of a society; in the above case, acknowledging more participation of women over time in the public policy decision-making framework.

In India and across the developing world, a fresh look in our public policy framework is required, that, at a micro level is institutionally designed combining elements from both Kautilya’s views on Indian political economy (in Arthashatra, where he acknowledged the role of institutions in planning and directing efficient economic performance, including the imposition of restrictions and prohibitions to promote good conduct at a society level) and Ashoka’s views on advancing the welfare and freedom of people in general (his optimistic views were based on the belief of making more people behave better by promoting self-awareness and persuading them to reflect more) .

At a macroeconomic level, it is critical to end the tug of war that manifests in the clear lacuna evident between the growth phase and the redistribution phase. The mainstream growth process that creates exclusion as well as inequalities tends to overpower the redistribution process and intensifies exclusion. Both the growth phase and the redistribution phase should be complimentary to each other for mainstream growth to be more inclusive.

If we simply talk about principles of fair, equitable and sustainable growth as a precursor to economic development for the overall well-being of a nation’s economy; it is critical in every developing economy like India to have a self-drawn map for developmental growth. The nature of such development beyond the maximisation of comparative economic advantages, warrants an institutional self-assessing process realising the collective social choice of societies in the process; one which is less transcendental in achieving what is “ideal” as against what is pertinent.

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