Speaker:

Santosh Mehrotra, Co-author and adviser to the Planning Commission, Government of India

Discussant:

Prof Sir Richard Jolly, Honorary Professor, Institute of Development Studies, University of Sussex

Chair:

Andrew Shepherd, Director of Programmes and Research Fellow, Rural Policy and Governance Group (RPGG), ODI

1. Santosh Mehrotra opened by outlining six barriers to equitable growth and achieving the MDGs that his book addresses:

1. hierarchy between economic policy and social policy
2. orthodox, not home grown, paradigms of macroeconomic policy
3. low level, inequity and inefficiency of public expenditure
4. organisational failure in state delivery of services – inappropriate decentralisations
5. recent over-emphasis on privatisation/private-public partnerships (PPP) in basic social services (BSS)
6. inconsistency of donor policies

2. Barrier 1: policy hierarchy between economic and social policy. He contended that economic policy is often set first, with social policy being left to address the effects of economic policy. Also, Ministries of Finance focus on macro-level aggregates e.g. growth, whereas welfare ministries and civil society deal with disaggregated impacts e.g. for different social groups. This is replicated at international level, where the Bretton Woods Institutions (BWIs) drive economic policy and other institutions – notably UN ones – have to deal with the social consequences. He believed that this could be overcome – this model was abandoned in rich welfare-states following the Great Depression and WW2, and that the role of the BWIs was declining; but other donors’ approaches were important too.

3. Barrier 2: orthodox not home-grown, macroeconomic policy. Here he stressed the failures of SAP and neoliberal policies, and noted that the high-performing economies of China, India and East Asia did not follow this paradigm. To overcome this barrier, he called for enlightened donors to attack the paradigm, on the model of Japan following the BWI’s analysis of the Asian financial crisis of 1997, or recent UK White Paper criticism of conditionality.

4. He identified three synergies for pro-poor growth:

• Growth that benefits the poor disproportionately – employment elasticity of growth should be higher. Industrial policy for LDCs today should focus on micro enterprises and SMEs due to growing significance of informal employment;
• Social policy that delivers health, education and nutrition outcomes;
• Directly targeted poverty reduction programmes to induce growth – e.g. measures for landless and marginal farmers, 50% of world’s $1/day poor.

And he noted that a study in the book showed that the initial level of income poverty and health status across 50 countries strongly affected growth – the worse the initial poverty and health indicators, the worse the economic performance.

5. Looking at Barrier 3: the low level, inequity and inefficiency of public expenditure, he drew a contrast between the historical experience of rich countries, where public expenditure rose steadily from 1880 to 1980, and recent advice to LDCs to cut public expenditure. Yet his research found that public expenditure on health and education does impact on outcomes. Therefore, international policy advisors should focus on tax raising, not expenditure pruning. Progressive measures were needed to raise revenue: he suggested that VAT, with exemptions on the consumption of the poor, had a good track record in China and India. Earmarked taxes should be allocated to BSS – expenditure on BSS tended to be progressive in outcome, whereas the benefits of other public spending were often captured by richest.

6. Barrier 4 concerned institutional design failures in the state delivery of services, particularly inappropriate decentralisation since 1990. He felt recent decentralisation was driven too much by a desire to limit the power of the central state; yet despite this, services were still vertically accountable to central line ministries. He argued for horizontal accountability to communities through radical decentralisation, devolving functions, finance and functionaries. This would require:

• a capable central government;
• an empowered local government;
• mechanisms for local communities to effectively exercise their voice.

He gave examples of this in practice as Ceara state in Brazil, or Madhya Pradesh’s Education Guarantee programme re literacy.

7. He said that Barrier 5: a misconceived faith in private sector and NGOs in BSS again ignores rich country history. It took government intervention from the second half of the 19th century onwards to make access to BSS universal in the rich world. These countries did not move into targeting and PPP approaches until well after universal access was established. On overcoming this barrier, it seemed that it was becoming accepted that health privatisations not achieved better outcomes in LAC, and regarding water, PPPs had risen in urban areas but TNCs were now backing off.

8. Finally, Barrier 6 was inconsistency in donor policies. He said that, despite commitments to development in the shape of the International Development Targets (1996) or the MDGs (2000), aid fell throughout the 1990s and the share going to BSS was stagnant. Aid has risen recently but trade policies undermine the impact of this. Ways forward were equitable market access and an end to the agricultural subsidies of the EU, US and Japan – which undermine LDC agricultural growth.

He concluded by stating that if these barriers can be overcome, there can be serious progress towards the MDGs.

9. Richard Jolly as discussant first said that it is important to realise that this book draws on the experience of countries that have shown it is possible to make rapid progress in BSS and poverty reduction.

10. He said that it fills a major theoretical gap, and does so empirically, by analysing this experience to elaborate the link between the human development frame and macro-economic policy, in four ways:

• by explicitly developing a macro-economic and structuralist framework;
• by focussing on how growth could be structurally pro-poor - rural agricultural growth, taxation and expenditure dimensions– whereas the Washington Consensus has been anti-poor and even often anti-growth;
• by showing the synergies – at macro-level, between income poverty reduction, the expansion of human functionings and economic growth; and at the micro level, between the provision of BSS and the expansion of capabilities and functionings;
• and fourthly by explicitly incorporating agency, particularly of women.

11. Finally, it differs in a number of ways from current orthodoxy, e.g. the contrast between industrial countries’ experience in public expenditure with the ‘minimalist state’ policies they promote. For all these reasons it is a major contribution.

Discussion

12. In the discussion, a number of questions were raised, including:

• What are the specific differences in the book’s macroeconomic policy recommendations, compared with the current orthodoxy?
• Were current reforms in Venezuela the kind of approach he was advocating?
• Was population growth a further barrier?
• What were the political issues around low expenditure on basic services in India – and on decentralisation and local elite capture of the benefits?
• How would climate change affect the model of growth and poverty reduction?
• Could radical decentralisation deliver the uniform quality of services that was needed?

13. In reply, Santosh Mehrotra said:

• Re macroeconomic policy advice, the first difference was the process. Governments would have to develop their own policy options, which analyse the macro-micro and economic-social linkages, before the IMF came to discuss with them. The IMF’s defence of its failure to do this is that it doesn’t have the staff capacity to do the in depth analysis for every country. Specific policy differences would include industrial policy – going beyond simply creating an environment for FDI and export competitiveness – and land reform, in Southern Africa, South Asia and some parts of Latin America.
• In Latin America there were several interesting developments – partly initiated by Argentina rebuffing the IMF in 2001, perhaps the biggest coup yet against the IMF.
• While the absolute number of poor people in India hadn’t changed from 1983 to 2004, the number had only risen in 4 states – in the other 26 it had fallen. So it was more complex than a simple matter of population. Similar internal differentiation could be seen in China.
• Climate change was not in the book for reasons of space. Hastening the demographic transition could help bring pressure off natural resources through lowering population growth. But a dual track approach to energy generation could help, combining an essential expansion of fossil-fuel generating power with decentralised off-grid and renewable sources (e.g. river hydro) for rural households as had worked in China.
• Regarding radical decentralisation and the centre/local relationship, he stressed that macro-economic policy would have to stay as a centre competence. Also, local delivery would be for basic social services only, and would need to be supported by a capable central government. He cited Ceara state in Brazil, and the progress in access to education for girls and Scheduled Castes through the Madhya Pradesh Education Guarantee programme of the late 1990s as prime examples of this in action.
• Regarding local elite capture of benefits from decentralisation, he said that this argument was a ruse used by national elites to preserve their own capture. “Democratising corruption” might be more developmental and would be more visible at local level, thus aiding transparency and accountability. It is a problem that only about 20 countries have right to information legislation. Many still use official secrets legislation to hide corruption. This is a huge tragedy.

14. Concluding, Richard Jolly warned that the international aid coherence agenda risks reinforcing the hierarchy between economic and social policy that the book highlights, if in practice the BWIs set a macro-economic framework which UN institutions then have to fit to.