Comments: Arjun Sengupta

Ke-young Chu, Sanjeev Gupta, and Vito Tanzi
Published Date:
May 1999
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I am sorry that Stanley Fischer is not here, because I was going to pay him a compliment. His presentation showed clearly how the IMF has changed. He listed five points that are important for combining economic growth and equity: macrostability, fiscal reform—a fair and efficient tax system with moderate tax rates—and reduction in unproductive expenditure. The IMF used to stop here, but Fischer has added composition of expenditure and well-targeted social safety nets.

The issue here, as both papers in this afternoon’s discussion point out, is that even in these five policy areas, there can be conflicts and trade-offs. Is it possible to maintain macroeconomic stability with all these different elements, particularly a low tax rate and an adequately financed social security system? But even more important is what the IMF has still not fully recognized, something that has been raised in these discussions: if a state is really going to look at all the aforementioned aspects of equity, it will not be a minimalist state. A lot more discussion is needed to see how government can succeed where the market has failed.

But I do believe that the conflicts among macroeconomic stability and income growth and equity are not always real. It is quite possible to have a well-designed, equitable system within the constraints of macroeconomic stability. The Chilean experience is a good example. In India, a development program aiming at macrostability with growth and reduction of poverty and inequality would attach maximum importance to agriculture, particularly agriculture in the rain-fed, rather than irrigated, small farms. Such a program could have maximum impact not only on growth but also on employment and reduction of poverty. In addition, one may add microenterprise-based development.

We have done calculations that show it is possible for India to grow at 7–8 percent a year, with a growth rate in agriculture of about 4 percent; this is not very high compared with other countries but represents quite a jump for India. This pattern of growth would reduce poverty to about 5–6 percent in 10–12 years. Currently, India’s poverty ratio—those living below the poverty line—is about 30 percent.

But such an adjustment scenario is difficult in a system like India’s, because the employment created will not match the unemployment profiles in different parts of the country. People living in the four states with highest unemployment—Bihar, Madhya Pradesh, Uttar Pradesh, and Rajastan—have very little education and a low level of skills, and will continue to experience high unemployment. The high-growth scenario mentioned above creates greater employment opportunities in the richer states (Maharastra, Tamil Nadu, and the southern states), but leaves pockets of high unemployment in states with low human capital formation. This would cause tremendous social problems—unless migration is allowed, or jobs are provided in these high-unemployment areas, which would require a massive, well-designed, well-financed, and well-managed program of employment generation. We still do not have a government capable of doing this.

Similarly, if agricultural growth is left to the market alone, it will not take place. If microenterprise growth is left to the market alone, it will not take place. The government will have to intervene actively and find ways to channel investment to those areas. Only if the government succeeds in channeling resources to these areas can India succeed in maintaining macroeconomic stability, lowering inflation, and reducing poverty.

I am glad that this seminar has furthered the discussion of these choices. Fischer’s statement shows that the IMF has moved from the earlier, limited focus on macroeconomic stability and is now talking about expenditure composition and social safety nets. This is a tremendous advance from the 1985–86 period. And if we can work out ways to help government succeed where markets fail, we will solve many of these problems.

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