The nature of growth has to change

Kaushik Basu, chief economist and senior vice president, World Bank, and former chief economic adviser to the government of India, in an interview, speaks on issues ranging from the change in the World Bank’s mission and its engagement with the world, rising inequality in the developed world and managing the undesirable consequences of growth, to behavioural economics, the role of values in public service delivery and the importance of communicating good ideas effectively to policymakers and the general public.

Of late, there has been a lot of heartburn about things like outsourcing, immigration and equity issues surrounding climate change talks. Do you see a rift developing between the North and South?

• I don’t see a new rift developing between industrialized and emerging economies. There have always been some lines of tension, which shift occasionally from one area to another. We are today much more sensitive to the climate consequences of what we do and therefore some of the tension is around those issues. Historically, tensions have developed over World Trade Organization (WTO) negotiations or when the International Labour Organization (ILO) tried to bring in core labour standards common to the world.

How is the World Bank’s mission changing?

• One interesting change is a return to reconstruction work, which was the Bank’s original mission at the time of its founding just after World War II. Due to major political disruptions, some countries in South Asia and the Middle East are reeling under a refugee problem that is a bit like the aftermath of a major war.
• Another broad change is that besides fighting absolute poverty, promoting shared prosperity has been added to the mission goals. This basically attends to inequality by focusing on the growth rate of the bottom 40% vis-à-vis the rest.
• Finally, the arrival of new banks such as the Asian Infrastructure Investment Bank (AIIB) is causing some shift in the World Bank’s mission. These can easily cut into the lending activity but the World Bank will continue to have its strength in knowledge and advisory capability.

What, according to you, is the most important cause of the dramatic increase in inequality in the developed world?

• Technology—one is technological innovation, whereby you can do with less labour, and second is technology that links labour in different parts of the world.
• The share of the wage bill in the gross domestic product (GDP) of rich countries has been declining rapidly. Trends such as robots and outsourcing are holding back incomes of poorer people in rich countries and pushing up incomes of more skilled people in poorer countries, thereby driving up inequality.
• People are also earning a larger share of their income via patents, shares, etc., which is adding to inequality. There is a need for major rethinking of the sources of income for people—say, distributing some equity or share in stocks among workers.

One aspect of growth is inclusiveness—making it accessible to the bottom 40% or 20%. Another aspect is negative side-effects such as conflicts over land acquisition or air pollution. How do we foster growth without these undesirable consequences?

• I think the nature of growth has to change. If we continue in the same way, we are going down a path that is not good for all of us. But you cannot hold back developing countries, which are still abysmally poor. What we need is to think of growth differently. We typically think of growth as more of everything. But growth can also involve, say, breakthroughs in medical research. Instead of eating more food and building fancier houses, if we can make dramatic improvements in our health, the value of that can be huge. This will be growth which is not damaging to the environment but leads to better lives.
• The basic point is that if we are to survive climate change and other challenges, you do not want to slow down growth but change the nature of what it is that we are consuming and what constitutes a better life.

The latest World Development Report ‘Mind, Society, and Behavior’ emphasizes behavioural biases. Maybe people do not have the right goals and values and some moral suasion is required. What is the Bank’s role here?

• This is an extremely important topic. Some underlying values and customs such as a common language or a modicum of trust that are required for a society to function are not written down explicitly in economics because they are taken for granted. The World Development Report tries to bring these into the mainstream of development.
• When the private sector tries to sell a product, it is not just about making the product as nice and cheap as possible. Where it is placed in the shop window, next to what product and with what price tag—those things play on human psychology. The private sector uses their knowledge of the human mind to sell products all the time but the development sector seldom used it. And that was my aim with this report.

So now, you are talking of something which will require more intrusive, paternalistic intervention by the Bank. Isn’t that a political minefield?

• As soon as I know that through one particular action of mine, I will make you choose ‘A’, and by not taking that action you will choose ‘B’, I cannot escape paternalism, because I know that by doing nothing I am prompting you to choose ‘B’. Given the amount of knowledge we have today of human psychology, paternalism is inescapable. It is best to confront it and do it as morally correctly as possible.
• There are two kinds of paternalism. One is where I insist that, like it or not, you have to fasten your seat belt. The other is where I try to persuade you to do something but you have the freedom to reject, but I am using my knowledge of how you think.

As the chief economic adviser, you advocated cash transfers in food subsidy. The current government has done it for the liquefied petroleum gas (LPG) subsidy. Would you support a strong, across-the-board case for cash transfers, or do we have to be selective and cautious?

• In India, this debate is very ideologically split. What we have to do is use a combination, intelligently. We tend to err on the side of trying to deliver too many things to the doorstep. The correction that has to take place is more cash transfers. There are lots of people who are capable of making good decisions once they have the cash in hand. Everything could be done as in-kind transfer if we had a system in place or if people already had the values so that they don’t cheat on the way. But we do not have those values yet.
• Meanwhile, you have to use cash transfers to get rid of cumbersome government bureaucracy, corruption and leakage.
• Food is one area where we can change over vastly more to cash transfers. Over 40% of the food is leaking out under the public distribution system (PDS). It is too big a wastage and by using cash transfers, I believe we will be able to plug quite a bit of this. On the other hand, this does not mean everything should be given over to cash transfers. For instance, healthcare should be provided by the government.

The quality of public service delivery in health and education in India is abysmal. You want the government to play a big role in health and education, but there is this chronic problem that the government is not doing its job well. What is the solution?

• It is a deep, difficult problem. It has something to do with values, which will take some time, but we will have to try to understand this and convey this. Human beings are perfectly capable of carrying out their tasks if they take pride in their work even if there are no rewards or penalties.
• I feel, for instance, that much more than shoring up incomes of the police, shoring up their pride in the task that they do is important so that they feel good and honourable when they walk up to break up a fight, instead of going there in a predatory manner. It sounds a bit preachy but right from the top if you teach people to take honour and pride in the work that they are doing, they do it much better.
• Fortunately, in India, you can see this in the military. I do not have an easy solution, but thinking entirely in economistic terms, giving more incentives or money alone won’t solve this problem.
• You have to, in the long run, work on giving people the right values and I believe this is possible.

Your new book has come out—’An Economist in the Real World’. As an academic economist, what are the major lessons that you have learnt in the policy world?

• For me, the six years spent in the policy world have been full of learning. You realize that having a good idea is pointless unless you are able to convey it and have people understand it. There are two levels of this communication—policymakers and the public. A lot of policy resistance has to do with people’s misunderstanding of things.
• If you propose taxing large incomes in agriculture, it will be dressed up as an attack on agriculture itself, not realizing that only 1% of the sector is going to be taxed. Likewise, you cannot move on the environmental challenges that we face today unless you get people to realize that it is being done in their collective interest.
• Vested interests are important but ideas are also important. When I went into the government, I realized that the biggest stumbling block is that people have set ideas—this is the way an auction should be done, this is the way you should give out a road contract to a private sector entity. If people are set in their ways, it is very difficult to break the status quo. These things are discussed at length in my book.