The architecture of choice

Puja Mehra
Humans are not unerring. Often enough, perfectly rational people tend to behave irrationally, as any salesman or advertiser would attest. Simply reducing the price from ₹1,000 to ₹999.99 increases sales. Economists used to believe that such human irrationality was compatible with economic theory. Psychologists showed in the 1960s that humans are irrational in a systemic way.

Consider this true story. A class found an exam in which the average score was 72 points out of 100 ‘too tough’. The same set of students were delighted on scoring an average of 70% in a subsequent one. Why? Because the numerical average of the class scores was 96 points. The professor had purposely raised the perfect score to 137 points. This exam was tougher; the average score had dropped. Rationally, the students should have been unhappy. Instead, they were elated.

That professor is behavioural economist Richard Thaler, the winner of the Nobel Prize in Economics this year. He went on to show that even small departures from rationality have outsized impacts, and that limitedly rational humans don’t fit neatly into classical economics. So, he helped develop a new branch of economics, behavioural economics, to study the interplay of human quirks and economic forces.

Prof. Thaler’s work is famously applied in constructing choices. How a choice is framed tends to influence choosers’ behaviour. Choice architects can thus ‘nudge’ choosers in a direction. For instance, by making a pension plan the default option, while giving the choice to opt out, people can be ‘nudged’ towards saving for their retirement. Scores of people have been successfully enrolled into pension schemes by default this way.

Pushing people in the directions that the choice architects prefer is not nudging, though. The nudge philosophy is that the chosen option makes choosers better off as judged by themselves. Say the problem at hand is unhealthy eating habits, which lead to obesity. An extreme solution would be strictly-enforced bans and diktats on food that can be consumed and that which is prohibited. A less extreme public policy would be a sin tax on fat or sugar. Nudge-type policies, on the other hand, would tend to include things like displaying the healthier food options relatively more prominently. Or mandating calorie labels on sweets boxes.

Changing mindsets

Development policies become measurably more effective when combined with insights into human behaviour. A common refrain in India is that constructing toilets will not guarantee cleanliness and hygiene; Swachh Bharat will succeed truly if behaviours change. For which mindsets must change. In experiments conducted in some States, application of behavioural economics successfully changed the sanitation mindset. The World Bank has documented some of the pilots. One such study found that open defecation dropped 11% from very high levels after a community-led total sanitation programme was combined in a few chosen villages with the standard approach of subsidies for toilet construction and information on the transmission of diseases.

Since going out in the open is partly a social norm, the researchers tried to facilitate the building of a new social norm. A technique was used in which volunteers escorted the villagers out to the field where they put some food next to some human waste. The experiment involved watching the flies go back and forth. The villages were nudged into collectively rejecting open defecation by making a declaration in public. The point being that to reap the benefits of sanitation, everybody has to do it together. Behaviours changed measurably.

Another study involved puzzle-solving sessions. It helped understanding the effects of caste on classroom performance. Boys from backward classes were found to be just as good at solving puzzles as boys from the upper castes when the caste identities were not revealed. In mixed-caste groups, revealing each of the boys’ caste created a significant “caste gap” in achievements. The boys from backward classes underperformed by 23%.

The behaviour-informed approach to policy-making recognises that there are two systems of thinking. Thinking automatically and thinking analytically and deliberatively. Just as any tool can be used controversially, and in a way not intended by its creators, nudging is sometimes used for misshaping mindsets, behaviour or manipulation. Examples would include using stigma to deflect blame on to individuals, such as on social media, for systemic problems. The motivator in such cases encourages herd behaviour by making people think quickly. In such situations, it helps to get people to slow down their decision-making, make them think analytically.

An experiment from the U.S. is instructive. People were asked for their views on controversial topics, such as sanctions on Iran, in distinct ways. In the first approach, people were asked why they believed what they did. It immediately made them more argumentative and the polarisation increased. Then, when the same people were asked to explain how they thought the sanctions work, it made them think, and the polarisation and extreme views slowed down.

(Puja Mehra is a Delhi-based journalist)

India needs to create greater economic opportunities for all

Maitreesh Ghatak

Thomas Piketty’s 2014 book, Capital in the 21st Century, which documents the rise of sharp income inequality in the developed world since the 1970s, became an unlikely bestseller for an academic book dense with facts and figures. In a recent article with Lucas Chantel, Piketty has turned his gaze on India (‘Indian Income Inequality, 1922-2014: From British Raj to Billionaire Raj?’, goo.gl/gbPEde). Combining income-tax data with household surveys and national accounts, Piketty and Chantel track income inequality from 1922, when the income tax was introduced by the British colonial government, to 2014.

Leaving aside measurement issues, their key finding is that the share of the very rich in the national income, after falling steadily since the late 1930s to the late 1970s, started rising from the early 1980s and has steadily increased since then to reach a historical high in 2014, the latest year covered by their study. And, the share of the bottom half, as well as of those in the middle of the distribution, show the opposite pattern over the same time-period.

Thus, the authors conclude that top income shares were lower relative to the middle class and the poor in the 1950s to the 1970s due to “strong market regulations and high fiscal progressivity”, but this trend went the opposite way with the adoption of “pro-business policies” during the Rajiv Gandhi era, and continued with economic liberalisation. The authors do note their unwillingness to step into the old debate about the effect of reforms on poverty and inequality. But the way they frame their findings lends itself to the interpretation that low growth and government controls are good as they keep inequality down. Well, they do. They also keep average income levels down and more people below the poverty level.

Kuznets Curve

It was Simon Kuznets, who won the Nobel Prize in Economics in 1971, who first pointed out that economic growth leads to an increase in inequality at first, and then a decrease — the phenomenon being subsequently termed the ‘Kuznets curve’. In the early stages of development, those who are richer are better poised to take advantage of the new opportunities while an excess of supply of unskilled labour keeps average wages down.

Eventually, however, capital accumulation leads to an increase in demand for labour that pushes up wages. Also, the increasing role of human capital in production pushes up the returns from acquiring skills. All of this leads to an eventual decrease in inequality.

The part of Chantel and Piketty’s article that has received less attention, in fact, demonstrates this clearly: for the period when inequality was falling, the growth rate of average income was low, and the subsequent rise in inequality has been accompanied by high growth rates. However, the growth rates of the richest have been much higher than the growth rates of those in the middle, and certainly of those in the bottom half, and that explains the trend of inequality. It also demonstrates clearly the validity of the basic logic of Kuznets.

Bridge The Divide

It also highlights the importance of distinguishing between undesirable versus natural inequality. The former emerges because the rich are given more opportunities than the poor while the latter arises even when everyone is given good opportunities, due to differences in skill, effort, and enterprise.

Under the former, we have a class society where one’s background governs one’s opportunities while in the latter people have a reasonable chance of doing well independent of their origins. Cross-sectional inequality can arise in a system that creates more opportunities and, therefore, winners and losers. While the intergenerational persistence of inequality occurs due to unequal distribution of opportunities.

The focus of modern progressive policies should, therefore, be to create greater equality of opportunity, and not to restrict opportunities to equalise outcomes. Growth is not the enemy. Anytime someone criticises the increase in inequality that followed economic reforms, one should remember that 45% of the population was below the poverty line in the early ’90s. That percentage has gone down by almost half since, which means more than 100 million have moved above the poverty line. But before one gets a chance to get complacent, consider this fact: if instead of the income level that defines the poverty line, we take twice that value, even with three decades of relatively high growth, nearly 80% of the population is still below this threshold, which is striking given how stringently the poverty line is defined.

So yes, India has a major inequality problem, in terms of the distribution of gains of growth, reflecting differential opportunities. To tackle this, it needs a much greater investment in health and education, and much more of a conscious effort to create greater economic opportunities to help children from poor families experience upward mobility.

It also needs a much more conscious effort to bring the rich under the tax net. And, in particular, inheritance taxes, which go after the main source of inequality of opportunity —wealth.

(The writer is Professor, Economics, London School of Economics)

The Sveriges Riksbank Prize in Economic Sciences 2017

The Royal Swedish Academy of Sciences

Richard H. Thaler has incorporated psychologically realistic assumptions into analyses of economic decision-making. By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes.

Limited rationality: Thaler developed the theory of mental accounting, explaining how people simplify financial decision-making by creating separate accounts in their minds, focusing on the narrow impact of each individual decision rather than its overall effect. He also showed how aversion to losses can explain why people value the same item more highly when they own it than when they don't, a phenomenon called the endowment effect. Thaler was one of the founders of the field of behavioural finance, which studies how cognitive limitations influence financial markets.

Social preferences: Thaler's theoretical and experimental research on fairness has been influential. He showed how consumers' fairness concerns may stop firms from raising prices in periods of high demand, but not in times of rising costs. Thaler and his colleagues devised the dictator game, an experimental tool that has been used in numerous studies to measure attitudes to fairness in different groups of people around the world.

Lack of self-control: Thaler has also shed new light on the old observation that New Year's resolutions can be hard to keep. He showed how to analyse self-control problems using a planner-doer model, which is similar to the frameworks psychologists and neuroscientists now use to describe the internal tension between long-term planning and short-term doing. Succumbing to shortterm temptation is an important reason why our plans to save for old age, or make healthier lifestyle choices, often fail. In his applied work, Thaler demonstrated how nudging – a term he coined – may help people exercise better self-control when saving for a pension, as well in other contexts.

In total, Richard Thaler's contributions have built a bridge between the economic and psychological analyses of individual decision-making. His empirical findings and theoretical insights have been instrumental in creating the new and rapidly expanding field of behavioural economics, which has had a profound impact on many areas of economic research and policy.

India need a psycho-economic boost

Ajit Ranade

When a person decides to buy a flat, it reflects his or her optimism about the future. There is confidence that one will have enough income flowing in, to pay for the monthly instalments. This optimism is not because of job security, but because of the belief that one will get a new job, even if one becomes unemployed. The same is true for an entrepreneur setting up a new factory or new business. It’s called risk taking, but that is not to imply reckless gambling. It reflects the investor’s confidence about the future returns on the investment. If that confidence starts to wane, then potential home buyers refrain or postpone their decisions. Investors adopt a wait-and-watch attitude. If everyone in the economy starts becoming extra-cautious, the decline in confidence and economic activity becomes self-fulfilling. As the economy slows down, people say, “See I told you so! It was wise to not invest and take unnecessary risk now.”

This decline can happen even if the economy is fundamentally sound. What causes investor or home buyer confidence to wane? It could be anecdotes, actual economic evidence, broken trust in government or socio-political developments. Not to overstate this, but there is an element of psychology that keeps the economy chugging. The government’s role is as much to provide the right policy environment, as to provide a psychological atmosphere that is conducive to risk taking about the future, and inspire confidence in the people.

The Keynesian solution

John Maynard Keynes called these the “animal spirits” which guide buyer and investor behaviour. When those spirits are in a downward spiral, the end result could be recession, if not outright depression. His remedy was to suggest countercyclical policy, which has become the hallmark of Keynesianism. This includes an injection of both fiscal and monetary stimulus. This involves increasing government spending or cutting taxes, or both, and decreasing interest rates. Despite many attempts at discrediting the efficacy of Keynesian remedies, to this day policy-makers continue to repose faith in them. Sure, the effects could last only for a short term, but if that helps the economy into a higher gear, or break out of the “pessimism spiral”, it would have served its purpose.

We are not quite in a recession, nor are we anywhere remotely near a depression. But the fact is that we are in danger of the self-fulfilling prophecy nature of investment and consumer behaviour. The data need to be restated to understand the seriousness of the situation. GDP growth declining continuously for six quarters in a row, down from 9.2% to 5.7%. Investment share of GDP, which creates new factories and businesses for tomorrow, falling for almost five years. The latest data from the Centre for Monitoring Indian Economy show that even the project pipeline is drying up. Newly announced projects at ₹84,500 crore are at a four-year low. Even the stalled projects which have been revived are only 6% during this fiscal year, as against 25% last year. The value of stalled projects is at a record high of ₹13.2 lakh crore. During the last years of the previous government, projects were stalled due to delays in approvals and clearances, legal disputes and charges of corruption. But these issues were tackled, and yet new projects are not picking up. In fact, in terms of the number of new private sector projects announced in the latest quarter, it is at a 13-year low.

The short point is that investor enthusiasm is lacking, especially from the private sector. Added to their lack of demand is the reluctance of supply of investible funds.

Cautious banks

Banks, despite being flush with deposits (partly thanks to demonetisation), are in no mood to extend new credit. This is because of the increasing burden of bad loans (called non-performing assets, or NPAs). The ratio of NPAs has been continuously going up for five years. Either you have to write-off the loans and book losses, or ask shareholders to bring more equity capital. The new bankruptcy code and procedure is promising, but is as yet untested for timeliness and effectiveness. There is also a suggestion to collect all the bad loans (that is, toxic waste) from the various banks and move them to a freshly capitalised bank, the so-called “bad bank”. The bad bank would focus solely on liquidating the collateral, bringing in fresh owners and managers to run distressed companies. Once freed from NPAs, the existing banks can resume lending to the healthy sectors. This is a promising idea as well and worth pursuing. The government cannot shy away from funding the rescue of India’s banking. It has to provide capital to the new “bad bank” or to recapitalise the beleaguered public sector banks, where most of the NPAs reside.

This is where the Keynesian wisdom of stimulus is worth recalling. All four drivers of economic growth are sputtering. While reviving exports may need boosts like a weaker rupee or more export-linked incentives, consumption and investment sentiment can certainly be boosted by conventional Keynesian tools. Corporate income tax can be reduced to 25% as promised two years ago. Excise taxes on petrol and diesel need to be reduced. These are indirect taxes, hurt the poor more, are regressive and feed into general inflation through logistics and energy costs.

Four steps

On the spending side, the government can focus on the following four areas. First, provide fresh capital either to existing banks or the new “bad bank”. Second, provide some version of a wage subsidy as an incentive to labour intensive sectors. A version of this was offered to the textile and garment sectors last year, but can be improvised and extended. The successful model of Odisha in the garment sector can be replicated. Third, give a big boost to affordable housing, by funding land acquisition for the builder, and interest rate subvention for the home owner. The States of Kerala and Maharashtra have interesting and replicable models. Fourth, keep a big focus on exporters, especially in labour intensive sectors, including agriculture. This includes a weaker exchange rate, quicker refund of GST credit and expanding the scope of the Merchandise Export from India Scheme and Service Exports from India Scheme.

All of these are short-term economic stimuli, but can also provide a psychological boost to the animal spirits. Of course, consumer and investor confidence can return and sustain only when the Keynesian boost is buttressed by credibility of implementing longer-term reforms.

(Ajit Ranade is an economist)

From Economic Analysis to Inclusive Growth

Kemal Derviş and Karim Foda

Most economies are seeking a recipe for inclusive economic growth, whereby high rates of investment, rapid innovation, and strong GDP gains are pursued alongside measures to reduce income inequality. Conservatives insist that growth requires low taxes and incentives such as flexible labor markets to encourage entrepreneurship. But reducing inequality requires higher levels of government spending and taxation (except when government is pursuing deficit spending to stimulate a depressed economy).

The Scandinavian economic model is often invoked to bridge this gap. The Danish “flexicurity” system, in particular, has historically delivered solid economic performance alongside low inequality. Leading economists such as Philippe Aghion have published excellent analyses of how this model could balance growth, equality, and overall satisfaction of citizens elsewhere in the world.


These economists argue that labor markets with few restrictions on hiring and firing, low taxes on entrepreneurship, and generous incentives for innovation are compatible with a relatively equal income distribution, high social spending by government, and equalizing social policies such as universal free education.

This model has sustained an ongoing debate in Europe, one that is now relevant in the United States, because Donald Trump’s new administration has promised to help globalization’s “losers” while improving innovation and growth. But in the US, it is far more difficult, politically, to argue for generous public spending on education, health care, and financial security for retirees, because doing so always raises the specter of high taxes.

An inclusive growth model would seem to have to square the policy circle. It would have to increase substantially public spending, particularly on education, unemployment benefits and training, and health.

It is useful to look at the numbers from the oft-cited Danish and Swedish examples. Generally speaking, these countries have excellent economic indicators. Although GDP growth is not higher than in the US, most people share a high standard of living, and surveys show that Scandinavians (particularly Danes) are some of the happiest people in the world. But, as the following chart shows, these countries also have some of the highest government spending- and taxation-to-GDP ratios in the OECD.
Hypothetically, if the US adopted Denmark’s universal free education policy, but kept its tax-to-GDP ratio unchanged, its fiscal deficit would exceed 6% of GDP. The US has run deficits that high only during World War II and the Great Recession of 2008-2009, when a huge stimulus package was implemented to spur recovery. So, just providing universal free education in the US would run the country’s deficit up to the highest level ever recorded in normal times.

In the context of this comparison, it would seem that the circle cannot be squared without a major macroeconomic shift. Scandinavian countries are smaller and can more efficiently collect revenues and administer public services. But even if the US approached this efficiency – a difficult feat in such a large and diverse country – social solidarity still would demand high effective taxes, as it does in Denmark and Sweden.

Another crucial component of the Scandinavian model is labor-market flexibility. On the OECD “Employment Protection Legislation” index, the US scores a 1.2 on a 0-5 scale, where zero indicates full flexibility. Meanwhile, France and Germany come in at 2.8, Italy at 2.9, and Denmark and Sweden at 2.3 and 2.5, respectively. This shows that, though Scandinavian labor markets are more flexible than elsewhere in continental Europe, the US labor market is far more flexible – and provides less security – than any of them.

Such broad static accounting suggests that we should proceed cautiously in applying lessons from the Scandinavian model to large countries like the US. Then again, to assess a model’s long-term impact on citizens’ welfare, we would need a more dynamic analysis over the course of at least a decade. Only then could we gauge how strongly investment and innovation would respond to incentives, how much free universal education would cost in the medium term, or how demographic structures would affect different social policies.

Economic analysis alone cannot settle the political debate between right and left. What it can do is help to narrow and focus that debate. The key is for participants on both sides to be more explicit about the values and objectives they believe that society should pursue, and to quantify their assumptions about how dynamic performance will respond to particular incentives. Only then can a democracy choose effectively between potential paths.

Good economic analysis can enable “constructive populists” to debate the “post-fact, fanciful populists” who seem to be on the rise, with a realistic alternative discourse – one that is transparent and based on credible expectations of economic policies and outcomes. In other words, economic analysis can facilitate good choices; it cannot make them.

A bad year for workers, and other bad news

JINOY JOSE P

C’mon! You relayed some bad news last week as well!

Oh, my apologies. Maybe it’s a statement of mind. In any case, we only interpret the world as it is. Yes, last week we discussed the question of how unequal the world has become (‘Maximum wages, Jeremy Corbyn, and more’, January 12). And you may have noticed that the latest Oxfam study endorses this. 

What does it say?

It says just eight men own the same wealth as the poorest half of the world. Oxfam says India’s richest 1 per cent owns more than half the country’s wealth. The study, which was billed a “neo-marxist canard” by critics, didn’t surprise inequality watchers, but shocked the rest of the world for what it has revealed. 

 

And what’s that?

Well, it appears that over the next 20 years, 500 people will hand over $2.1 trillion to their heirs. Mind you, this sum is larger than the GDP of India. Again, the incomes of the poorest 10 per cent of the world population increased by less than $3 a year between 1988 and 2011, while the incomes of the richest 1 per cent increased — hold your breath — 182 times. 

But I read that poverty rates are falling across the globe.

They are. The poor are not as poor as they were, say, a few decades ago. For instance, between 2012 and 2013 alone, 100 million people were lifted out of “extreme poverty” (living on less than, say, ₹125 a day). Hunger is also declining. In developing countries, only about 13 per cent of the people are undernourished, against more than 23 per cent in 1990.

But it’s the gap between the rich and the poor that we’re more worried about. If we don’t fix this through policies and corporate action, things will get worse. As things go now, our poverty eradication targets will also miss their deadlines. 

How so?

A new report from global labour watchdog ILO says that “working poverty” rates are not falling rapidly and this could undermine the UN Sustainable Development Goals of eradicating poverty. Hence, the number of workers earning less than $3.10 (about ₹200) a day is expected to increase by more than five million over the next two years in developing countries, including India.

What’s the prognosis, then?

No shortcuts here, but to check inequality as much as we can via policies and individual acts. And the most important thing is to create more decent jobs — work that pays well, while offering enough social security cover for workers. This forms the crux of the UN’s 2030 Agenda for Sustainable Development. 

Is the agenda being pursued with the earnestness it deserves?

I must disappoint you there. The trends reveal otherwise. A new report from ILO shows the number of working age people without proper employment will hit 200 million in 2017. That’s a new record (if you can call it one in the first place). ILO says global unemployment will rise by 3.4 million this year, and by 2.7 million in 2018; that’s because the workforce is growing faster than jobs being created. ILO has bad news for those who work, as well.

What’s that, now?

In all likelihood, they won’t get a raise this year thanks to a myriad reasons, from global slowdown to declining empathy towards workers’ rights. Global wage growth, inflation-adjusted, fell to its slowest pace in four years in 2015 (data for 2016 is yet to come). Half of the workers in southern Asia and nearly two-thirds in sub-Saharan Africa face extreme or moderate poverty, says the ILO.

The mirage of inclusive growth

Deepanshu Mohan

In the age we live in, the process of securing a persistent rate of higher economic growth is considered to be the ultimate means of achieving prosperity for all. Economists and policymakers insouciantly use the word ‘inclusive growth’ in penning down the objectives and rationale for every policy and reform measure.

It becomes pertinent thus to explore the underlying neo-liberalist idea of inclusive growth that fails to apply in evidence to the developing world context (specifically to India in South Asia).

The idea of inclusive growth has shaped our understanding of growth since the mid-1960s. The process of achieving such growth encompasses an inclusion of all sections as beneficiaries and partners in growth, and envisages that an inclusion of the excluded should be embedded in the growth process.

Such growth, as expected, by itself will then lead to a high elasticity of poverty reduction (higher reduction of poverty in per unit of growth), also reducing income inequalities at individual and group levels. 

Curve of inequality

Simon Kuznets (1966) explained how inequalities do not last for long. According to Kuznets, ‘Economic inequality increases over time while a country starts developing; however, after a certain average income is attained, inequality becomes to decrease’.

The curve of inequality — the Kuznets curve — is inversely U-shaped, where inequalities tend to decline after a point because of two reasons: Firstly, with higher economic growth, the tax revenue of governments is likely to increase, enabling them to spend more on infrastructural development, education, healthcare and skill development; particularly in backward areas where the need of such social investment is felt more, in improving opportunities for people lacking the capital to grow.

And secondly, after the initial period of economic growth and boom, the stated expectation of neo-liberal advocates is that it will trickle down to people, by creating more jobs and incomes for many.

Jagdish Bhagwati cites the need of ‘Track II’ reforms in developing countries where he calls for the government to massively spend the economic benefits from liberalising markers on healthcare, education, etc. for the initial growth to trickle down and achieve the principles of equity and sustainability.

 It just widens
In a her 2012 paper, Indira Hirway provides some useful empirical evidence from South Asia to debunk myths attached to ‘inclusive’ theoretical application of neo-liberalist version of economic growth. Hirway explains how, in spite of the adoption of pro-market policies in most South Asian countries, the level of income inequalities continue to widen.

Out of the 14 Asian countries studied, inequality has increased in 11 — including Sri Lanka, China, Cambodia, India, Indonesia and Nepal. Malaysia and Thailand were the only two countries where inequalities decreased at the margin. In the case of India, the Gini coefficient (a measure of income inequality) rose from 0.44 to 0.47 during the last decade.

The issue with the Indian case has primarily been with the implementation of Track II reforms where, in spite of higher, sustained economic growth levels from early 2000s, public spending on education and healthcare has remained drastically low (less than 3 per cent and 2 per cent 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, leaving ‘the others’ entirely dependent on the government. Upward income mobility within these lower income classes remains an issue due to the lack of adequate education, health standards and access to increasing productive job opportunities.

In the field of employment and labour, scholars indicate a poor performance in generating productive employment with ‘decent work’ conditions. In India, the unemployment rate increased from 1.96 per cent in 1993-94 to 2.2 per cent in 1999-2000, to 2.37 per cent in 2004-05 and to 2.06 per cent in 2009-10.

Though different reasons are cited for explaining this increase by economists, trends show the rate of growth of employment including the rate of growth of ‘decent work’ has been far from satisfactory.

This is not just true in the case of India but other developing economies as well. According to the ILO, during 1995-2006, open unemployment grew by 22 per cent, pegging the global unemployment rate at 6.3 per cent. While the output growth rate was much higher than job growth, it is appalling how the obsession with production as the ultimate factor of inclusive and consistent growth still wheels the imagination of our policymakers.

Need an alternative
A major limitation of the theory underlying the neoliberal policy framework is that it leaves two important macro-economic components outside its purview — natural resources or natural capital, and unpaid work or work that is outside the production boundary but within the general production boundary of the UN System of National Accounts. Both these exclusions are associated with the excluded sections of population, relevant for developing economies.

So, there is a strong need for policymakers in India and across the developing world to give a fresh look at the macroeconomic framework underlying the present policies. It is critical to end the tug of war between the growth and the redistribution phases as there is a clear lacuna between these two.

The mainstream growth process that creates exclusion as well as inequalities tends to overpower the redistribution process and intensifies exclusion in the process. As supported by Hirway, ‘both the growth phase and the redistribution phase should be complimentary to each other for the mainstream growth process to be inclusive’.

For this, first, the macroeconomic policy framework warrants a radical change, where we need a vision shift in moving from short term focus goals to a more long-term focus.

It is also important that growth in developing economies continues to remain more labour-intensive and broad-based, as a generation of production employment opportunities on a large scale is perhaps the best way for including the excluded and marginalized sections of the population. This can be achieved by investing more in the development of small and medium-scale enterprises and providing an easier line of credit to their development.

Secondly, it is critical to adopt a rights-based approach accepting the citizenship’s rights of people. Provision of education, healthcare, basic infrastructural needs are part of the basic rights of every citizen. A persistent increase in social investments such as education and healthcare are attached with long-term benefits and are part of a macro strategy for improving productivity of workers and for enhancing aggregate effective demand in the economy.

It would, therefore, be useful for developing economies to think afresh on the theoretical applications of existing neo-liberalist policies that somewhere have failed to include the excluded and in the process modify the theoretical basis of such policies to indigenize them more suitably with a longer term focus.

(The writer is executive director of Centre for International Economic Studies at OP Jindal Global University)