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Ensuring equitable development through reforms

S. Mahendra Dev

There is a lot of talk on growth and equity but there is no operational plan. What we need is an immediate plan for achieving equitable development.

THERE HAS been a lot of debate on the development strategies to be followed in developing countries. One of the main criticisms of globalisation and economic reforms is that they do not have a `human face' and have not achieved equitable development. Although economic growth has improved, inequality and poverty have not declined. Employment growth declined in spite of higher economic growth. Reforms have not succeeded in achieving equitable development in Latin America and Africa. On the other hand, the experience of South East and East Asia with economic reforms and poverty reduction has been much better. The common minimum programme of the United Progressive Alliance Government also indicates the need for equitable development. In the context of the preparation of an approach paper for the 11th Five Year Plan, it is important to consider a few lessons based on Indian and international experience during the reform period. This is need to operationalise a plan for equitable development during the 11th Plan period.

First, equity matters for development. It is important for its own sake and for higher growth. If we reduce personal, rural-urban and regional disparities, growth will increase. If we define equity in terms of empowerment and increase in the participation of the poor, there will be no trade-off between growth and equity.

Secondly, sequencing of reforms or phasing of public policy is important for equitable development. Experience has shown that in spite of higher growth in several countries including India, several regions and sections of society remain excluded from the process. In many countries, during the reform period, public expenditure as a percentage of GDP has been low and declining. As a result, public investment in rural development has declined sharply in most of the Asian countries. Consequently, agricultural growth slowed down in most countries in the 1990s. The average annual rate of growth of gross capital formation (which includes both private and public investment) also slowed down in many countries.

Trade liberalisation has been associated with increased ratio of trade to GDP, improved export performance and diversification towards manufactured exports. However, linkages to employment are not so well established. Moreover, trade liberalisation has adversely affected government revenues, which will constrain the ability to increase public expenditure. The financial sector has historically had an urban bias. Liberalisation intensifies this bias. On balance, the macro policies have not been pro-employment and pro-poor in the post-reform period in many developing countries including India. Therefore, there is need to have pro-poor macro policies.

Thus, sequencing of reforms is important. Priority should be given to policies that improve employment growth. According priority to public investment in physical (irrigation, roads, communications, transport, electricity, etc.) and human infrastructure (health, education, etc.) is considered important for equitable growth. Also, priority to rapid growth in agriculture and the rural non-farm sector is important for poverty reduction.

The third lesson, related to the second, is that a structural change in economy should follow the agriculture-industry-service sequence. In GDP shares, India jumped from agriculture to services without concentrating on manufacturing. Also in many South East Asian countries, there has been a shift in employment from agriculture to manufacturing. The share of employment in manufacturing in Malaysia is 50 per cent, in Korea 62 per cent and in China 31 per cent. In India it is only 22 per cent while the share of agriculture is more than 60 per cent. Therefore, there is need to develop industry to improve employment. Jumping to services is not the solution. A high agriculture growth of four per cent and industry growth of more than 10 per cent are needed for better structural change. In India, growth acceleration has been significant in the service sectors. These include trade, hotels, transport, communication services, financing, insurance, real estate and business services. Importance should have been given first to agriculture, manufacturing, rural infrastructure, etc., in reforms for better employment, incomes and equity.

Fourthly, one of the important areas for priority is physical and social infrastructure. There is need for greater public investment in infrastructure in rural and urban areas to create more employment. The Government has to play a major role in providing education and health care facilities. A comparison between Andhra Pradesh and Rajasthan in education shows that Rajasthan did exceedingly well in the 1990s. According to a study, Andhra Pradesh may join the rank of BIMARU States in education, going by the current progress. A sustained emphasis on education and health is needed in the next decade in many States for equitable development.

Fifthly, South East Asian and East Asian experience shows that globalisation with better initial conditions has increased employment and incomes for workers and led to equitable development. Developing countries should learn from China on agricultural growth, rural non-farm employment, public investment and human development. The impact of growth on poverty reduction is significant. The elements of Chinese experience such as high and labour-releasing agricultural growth, favourable income distribution through broad-based agricultural growth, availability of infrastructure, higher levels of literacy and skills, inducements for the location of enterprises in rural areas and easy access to credit and inputs are very relevant to developing countries. Those who support liberalisation say China's high economic growth and impact on poverty are due to economic reforms since 1978. However, initial conditions — that prevailed before the introduction of reforms — need to be taken into consideration. China's success is due to better initial conditions. It introduced land reforms and invested in infrastructure, health and education before introducing reforms. This led to high agriculture growth and better human development. In other words, reforms work better in a more egalitarian society. The investment rate in China is 35 to 44 per cent compared with 25 per cent in India. Infrastructure investment is 19 per cent of GDP compared to two per cent in India in the 1990s. Foreign direct investment also plays an important role in improving investment in China. One important debate in India relates to the impact of FDI particularly on retail chains of employment.

Sixthly, development of technology is important for equitable development. For example, the spread of the green revolution in the poorer States of India shows its potential for reducing regional disparities in development. Also, small farmers benefited from technology. This is because gains from technology are widely distributed. Therefore, stepping up agricultural growth through biotechnology holds prospects for reducing regional and inter-personal disparities. The experience with information technology is equally encouraging and holds the prospect of raising productivity in agriculture and industry. There is need to exploit the potential from these emerging technologies for equity across households and regions.

Better governance

Seventhly, it has been recognised that better governance is very important for equitable development. For better implementation of sectoral policies and poverty alleviation schemes such as National Rural Employment Programmes and social security programmes, community participation and better governance are needed. All over the world it is recognised that decentralisation in terms of transferring power to local councils is important for equitable development. However, governance has to be contextualised in relation to socio-economic environment.

Eighthly, equality of opportunities is important. Even if we do not follow equitable distribution of assets, everyone should get equal opportunity for better education and health. Indian economy is on a high growth track. The country is likely to attain more than seven per cent growth, next to China's nine per cent in 2005-06. While the Indian Government has implemented policies that unleashed the country's tremendous growth potential, it should also embark on a process of social transformation to end discrimination on the basis of caste, class and gender. We need to pay more attention to provide clean water, access to health care and high quality education to all. At the national level, public action should see that Bihar, Madhya Pradesh, Chhattisgarh, Jharkhand, Uttar Pradesh and Orissa and the poor in other States get enhanced opportunities for improving education, health and incomes.

The ninth lesson is having economic reforms in socio-economic environment. The rationale behind the ongoing economic reforms in India, and their consequences and prospects, has generally been discussed in the parlance of economics. However, the economic phenomena represent largely a superstructure, profoundly influenced by the underlying socio-political factors. Economic reforms may not be sustainable if the burden falls disproportionately on the poorer sections. Therefore, there may be need for meaningful reforms in line with socio-political factors.

To conclude, there is need to operationalise a plan for achieving equitable development during the 11th Plan period. The action plan should cover priority areas such as agriculture, employment and social sectors. It should aim at removing economic and social deprivation across regions. Also it should have a provision for socially disadvantaged sections. At present there is a lot of talk on growth and equity but there is no operational plan. We strongly advocate an immediate operational plan for achieving equitable development.

(Prof. S. Mahendra Dev is Director, Centre for Economic and Social Studies, Hyderabad.)

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