In his recent review of the World Bank’s World Development Report 2006 — on equity and development — which was published in The Economic Times, (October 19), Arvind Panagariya levelled three criticisms which are worth addressing. The first criticism, that “greater equity does not guarantee less poverty”, was stated in terms of redistributions of income among top earners. Professor Panagariya says that “anyone well versed in the history of policy making in India would get chills at the thought of targeting income distribution”. But the World Development Report defines equity in terms of equality of opportunities, rather than of incomes, and the difference is not purely semantic. The report argues for policies that expand the educational, productive and political opportunities of the poor and excluded, whilst avoiding capture of public policies by influential interest groups at all levels. While very high income inequality levels may be inconsistent with equal opportunities, our main emphasis was not on income redistribution. The emphasis was on the losses to India from not giving millions of the poor in rural and urban areas the same starting chances as the wealthy had.
The second criticism is that a concern with equity motivated disastrous regulatory policies pursued in India from the 1950s to the 1970s, at great cost to the country’s poverty reduction process. We agree! Indeed, as Prof Panagariya acknowledges, the report noted that the “history of the twentieth century is littered with examples of ill-designed policies pursued in the name of equity that seriously harmed ... growth”. We argue (in Chapter 9 of the report) that one of the policy pathologies of past decades was the pursuit of growth-dampening policies in the name of equity, of which communist and populist economic policies are particular examples. Not only have these policies generally hampered growth and poverty reduction; they have also failed to deliver the kind of equity we advocate. The economic liberalisation of the last 20 years has unlocked enormous potential, and shown India’s capacity for sustained growth and poverty reduction. The need to allow markets to provide the right incentives for people to be productive has long been central to the bank’s advice, and indeed features prominently in last year’s World Development Report, on the investment climate. In this year’s report, we focused instead on the need to provide people with the opportunities and endowments they need in order to take advantage of those market incentives. The report provides various examples of policies that, by expanding the productive potential of the poor, could contribute to both equity and growth, and could make markets work for all. Poor people in countries such as India need both the incentives that markets generate, and greater opportunities to respond to them. That message is complementary — not inimical — to Prof Panagaryia’s indictment of wrong-headed, heavy-handed distortion.
Panagariya’s third criticism is that, by not questioning why households (and other firms) fail to invest in some mid-size Indian firms with high returns to capital, we show analytic weakness. But, as noted in the chapter to which he refers, capital markets in developing countries may fail to work for several reasons. There are various information flow problems and contract enforcement failures that prevent savers from lending to or investing in potentially highly lucrative enterprises. Savers may be unable to see how productive the investments really are or, even if they see it, may feel unsure that they can efficiently enforce repayment, given existing institutions. Banking spreads cause the opportunity cost of capital to differ between savers and borrowers. Loan administration costs mean that interest rates facing different borrowers can differ substantially. Tackling the profound market failures and political and institutional biases that both create inequality of opportunity and restrict market-based growth is surely central to India’s future development. The balance of the evidence in economics suggests that countries do best when they combine the power of market-based growth, with equitable access to its opportunities and rewards. (The writers co-directed the World Bank’s World Development Report 2006, on equity and development)
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