The Evolution of Thinking About Development – Part 2

This interview was published in the ERF “Forum“, Vol. 21 No.2 Autumn 2014 ERF keeping in tune with changing economic thought on development strategies and policies has interviewed Ravi Kanbur to solicit his views at this critical juncture in the history of the Arab World. During the “market versus state” debate, civil societies have taken on an increasing role in providing public services. Can civil societies replace the role of the state in implementing development strategies? As I noted above, a major shift in development thinking is indeed the broadening of the conventional market versus state disRavi_kanburcourse to take into account the role of civil society. This is important and crucial, but I do not think civil society is a substitute for the state. Sure, there is some implementation that can be better done by civil society organizations and, very importantly, they have a central role to play in making the voices of the poor and vulnerable heard, but there are some things that only the state can and should do. Let me illustrate this with what is known in the literature as “the Bangladesh paradox”, which is that despite having very low ratings for its state institutions from standard sources such a Transparency International, Bangladesh performs very well on social indicators such as girls schooling. Some analysts put this down to the successful and vibrant Bangladeshi civil society, of which the prominent Grameen Bank is only one example. There is no doubting the vitality of civil society in Bangladesh, but we must also look at the enabling environment of laws, regulation and infrastructure which complements their functioning. There is of course huge room for improvement on the part of the state, but I think we would do well to look at state and civil society as partners rather than substitutes. How important are political institutions for development and what do you think about the significant changes taking place in the MENA region? I am not qualified to speak on the politics of the MENA region! However, I will say that we economists do have a tendency to ignore political and other institutions in our discussion of economic policy. Let me take as an example of this the following ritual dance between economic analysts and policy makers, which is seen not just in MENA but the world over. The dance has three steps. First, economic analysts (often associated with International Financial Institutions like the World Bank and the IMF) do an incidence analysis of subsidies and show that they are badly targeted to the poor. Second, they show that the same or greater poverty reduction could be achieved at far lower fiscal costs if the subsidies were replaced by programs targeted to the poor. Third, policy makers reject the recommendation as politically naïve, since they anticipate the reaction from those above the poverty line to the removal of subsidies. The dance then stops, only to start again when then next set of household survey data are released, or when the next fiscal crisis hits. What can economists do to break out of this cycle, of analysis which is high quality but impotent in the face of political constraints? I have argued that they should still do the analysis, which they are good at, but experiment with a range of political constraints and a range of instruments, to provide policy makers not with a single answer (remove subsidies and replace with programs targeted to the poor), but with a range of options for discussion and debate. What can the MENA region learn from the Asian and Latin American experiences in lowering inequality? In fact, the Asia experience is by large one of rising inequality in the last twenty years. If anything, Asia should learn from Latin America. I look at it in terms of a simple framework where market income is asset times rate of return on the asset. The asset can be physical such as capital or land, or it can be human starting with unskilled labor going through different levels of human capital incorporating education and good health. This market income is then modified by taxes and transfers to give the income whose inequality we all care about. Three things determine final inequality—inequality of assets, inequality of rate of return to the assets, and the progressivity of the overall tax-transfer regime. Global trends in technology are dis-equalizing rates of return to assets—between capital and labor, and between labor of different skill levels. Globalization of trade and investment is transmitting these trends to all countries. A business as usual scenario will thus increase inequality. The answer to this is not to stand against the global tide of technical progress, which is neither feasible nor desirable, but to equalize the distribution of assets, particularly human assets, through purposive policy actions. In fact this is what Latin America has done through massive conditional cash transfer programs which on the one hand have transferred income to the poor, but on the other hand have done so by incentivizing acquisition of human capital. The overall effect has been to stem the tide of rising inequality to an extent that the mantle of “growth with equity” has moved from East Asia to Latin America. I believe this is the lesson which the Latin American experience teaches the world. What do you think about the recent book “Capital in the Twenty-First Century” by Thomas Piketty? Perhaps more striking than the book is the phenomenon that the book has become! The book itself is based on a long running exercise in data gathering by a group of economists including Piketty, Atkinson Atkinson, Saez, Alvaredo and others, and this aspect of the work is magisterial. I am also sympathetic to Piketty’s argument that economists should be open to a number of sources of information, including contemporary novelists such as Jane Austen in England and Balzac in France, whose writings reflected the society they saw around them. The theorizing developed in the book has been criticized as being incomplete. For example, the empirical wok on inequality incorporates financial wealth, while the conceptual framework relates output to labor and physical capital in the usual way. It also seems to go against a number of theory models which would predict an eventual decline in inequality. Finally, the “grand” policy prescription of a global wealth tax has also been criticized as being somewhat utopian. These criticisms aside, the book has clearly touched a nerve, and its success is a reflection of the great concern about rising inequality that is felt the world over. It is this concern which I believe should guide economists’ research in the coming years, and for that reason I believe this book will be referred to for a long time to come.
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