The pursuit of equity threatens poverty alleviation
election victories by the Marxist Communist party in the Indian states of
West Bengal and Kerala, the strong showing by Ollanta Humala in the first
round of Peru's presidential election, the election of Evo Morales as
Bolivian president and land grabs by local officials in China have re-energised
leftwing critics of pro-market policies in the developing world.
They had previously argued that such outward-orientated policies led to
increased poverty, but the evidence from China and India has decisively
laid that charge to rest. Therefore, they have now shifted their critique
to equity, arguing that market reforms widen the gap between rural and
urban populations. They further claim that this lamentable phenomenon is
turning the citizens of India, China and Latin America away from reforms.
But the argument is wrong and pernicious. These critics have not only
diagnosed the above developments incorrectly, they seem oblivious to the
dismal history of equity-driven policies in the developing world. For a
start, it is premature to assert that Latin America is turning away from
reformist policies. In March, Costa Rica handed the presidency again to
Nobel laureate Oscar Arias, who says he firmly believes in democracy, free
markets and fiscal discipline. Colombia has just given Alvaro Uribe, the
reformist president, a landslide re-election victory.
Even the victories by a few left candidates reflect Latin America's
maturing democracy rather than a leftward march. The policies of Luiz
Inacio Lula da Silva, the Brazilian president, can hardly be described as
antithetical to globalisation. The same applies to Michelle Bachelet,
Chile's new president. Even Mr Morales's election had its origins in the
indigenous majority asserting itself rather than a red revolution.
Finally, in Peru's June 4 run-off, polls now overwhelmingly favour Alan
Garcia, who wants to ally his country with the pro-reform governments of
Brazil, Chile and Colombia.
In China, the land grabs are to be attributed to the absence of democratic
institutions rather than to rising rural-urban inequality. When a
commissar or his cronies grabs your land in China, especially if it
becomes more valuable with growth, you cannot turn for redress to
In India, aspirations aroused by rapidly rising incomes, rather than by
inequality, have been translated into politically effective demands for
yet more improvement, as reflected in the frequent uprooting of incumbent
governments. The victory of the Marxists in Kerala over the incumbent
Congress fits this pattern. As for the Marxist leadership in West Bengal,
which has been repeatedly returned to power, it has fully embraced
market-orientated reforms and unabashedly courts foreign investors and
captains of industry.
But if inequality is a red herring, the faulty diagnosis also endangers
the process of growth and poverty alleviation. No country illustrates this
better than India, which placed equity at the centre of policymaking in
the earlydecades of development with devastating results. Virtually all
anti-growth and anti-poor policies India has been struggling to shed for
two decades had their origins in the pursuit of equity.
Thus, the desire to establish a socialistic pattern of society was at the
heart of the dominant role Indian policymakers assigned to the public
sector in industry. When the relatively relaxed investment and import
licensing regime of the 1950s led to rapid growth of private industry, it
was concern for equity that led Indira Gandhi, then prime minister, to
erect the massive regulatory structure that even 20 years of reforms have
not been able entirely to demolish. To cap the concentration of economic
power, Gandhi confined all future investments of undertakings with assets
exceeding Dollars 27m to 19 capital-intensive "core" industries.
To encourage small entrepreneurs, she went on to reserve virtually all
labour-intensive products, exported in large volumes today by China, for
exclusive production by small-scale units. Considerations that large banks
did not adequately lend to smaller enterprises or open rural branches led
Gandhi to nationalise them. Undertakings with 100 or more workers were
denied the right to fire employees.
To be sure, equity-orientated policies that improve opportunities for the
poor without compromising efficiency and growth do exist. The catch,
however, is that once equity becomes central to policymaking,
capture the policies in the name of fairness. The policies then adopted
are precisely those that impede growth and poverty alleviation.
Financial Times May 31, 2006