Fill out the brief form below for access to the free report.

Growth Pays, Populism Does Not

Article by Amity Shlaes July 17, 2012 //   7 minute read

Surjit Ballah, Indian Express Indian elections are always intriguing, and sometimes, even after the fact, revealing. The two recent elections, May 2004 and May 2009, confounded experts and politicians alike. The 2004 election was widely expected to be won by the BJP led NDA, and the May 2009 election was expected to be a mirror image of the close 2004 election. As we now know, the Congress won only 145 seats in 2004, a number close to what it obtained in the 1996 and 1998 elections. In 2009, the Congress party was not expected to do much better; but it did, winning 206 seats, a number within striking distance of  Narasimha Rao’s 244 seats in 1991. So what caused these surprises? Speculation abounds that the NDA delivered stable aggregate growth during its tenure, but failed to deliver on the inclusion front. Congress’s aam aadmi (poor ordinary man) it is widely believed, trumped BJP’s India Shining (crony capitalism, growth only for the rich etc.). It is widely believed by Congresswallahs that it was the redistributive nature of the high growth during 2004 to 2009 that led the Congress to the resounding victory in 2009. They fulfilled their promise to the aam aadmiand were handsomely rewarded. Nothing succeeds like political success and so the Congress embarked on a kind of populism that would embarrass even Hugo Chavez of Venezuela. This populism, it was believed until perhaps only a few months ago, would propel the Congress to better Mr. Rao’s triumphant 244 seats, and who knows, perhaps even achieve the simple majority of 273 seats. The future is not known, but the past is. How accurate is the Congress belief that they (UPA-I) provided significantly more inclusion than the NDA it defeated in 2004? What we do know is that per capita GDP growth was the highest, ever, during 2004-09. Could it not be that the aam aurat rewarded the Congress in 2009 for delivering high growth rather than assumed populism? One cannot, and one should not, define inclusion independent of the level of growth. If a poor person’s income rises by 1 percent per annum (ppa), and non-poor growth is 0.5 ppa, the process is very inclusive, and is so in the same sense as shared misery. Contrast that with a poor person’s income rising by 3 ppa and non-poor incomes rising by 4 ppa. In this instance, there is lower inclusion but higher welfare gains for the poor, at least according to my, how shall we put it, ideological bias. This argumentative Indian debate can go on, and unfortunately it does. But to understand economic and electoral outcomes, I believe, one needs to analyze both welfare in the aggregate sense (as in the example above) and inclusion in the narrow sense. The latter I defined in my earlier article, Gandhi’s Experiments with Populism, Indian Express, July 14, 2012, as the gains of different socio-economic groups relative to a “norm”. In the Indian context, the hierarchy of income is as follows: the poorest are the Scheduled Tribes (ST), followed by Scheduled castes (SC), Muslims, other backward castes (OBC), and the relatively rich “others”. My suggested definition of measuring inclusion per se  is to compare the improvement (growth) of each group with the growth of “others”. This yields a growth gap for each group. Changes in this gap (e.g. from being negative to becoming less negative, or from being less positive to more positive etc.) are indicative of whether one period has more, or less, inclusion, than another. Note that by looking at relative growth, the absolute level of growth is factored out of the definition of narrow inclusion. The earlier article was explicit about the fact that there was higher growth during UPA-I, and higher growth for all socio-economic classes. And higher growth for the poor is undoubtedly something policy makers should strive to achieve. But it is of more than academic interest to assess whether, all things considered, there was more or less inclusion in one political regime vs. another. Especially, when one political regime has made it its badge of identity that it will follow more populist policies, even at the expense of growth. Towards this end, I examine inclusion during the two political regimes, NDA and UPA-I, for more than 15 indicators. The results are presented in the scorecard table. Each indicator gets a score of 0 or 1, depending on whether relative growth was better or worse. The maximum score for any item is 4, given that there are the four “poor” groups being analyzed. For aggregate indicators (e.g. inequality) the maximum score is 1. The final tally in terms of both growth and inclusion: 23 for the NDA period and 17 for UPA-I. Note that UPA gets a mark each for higher aggregate growth in consumption and wages. Regarding inequality per se, the UPA period was better in two areas (wage and education inequality) while the NDA was better with regard to the change in consumption inequality. The exercise reported here and in the previous article is meant to be suggestive, and illustrative. But some reasonably firm conclusions. First, that the NDA did not lose the 2004 election because it was bad in terms of inclusion; it was better. Second, the UPA handily won the 2009 election because it had delivered high growth, and not because it delivered more inclusion. Third, all the evidence post 2009 states that the populist policies continued to be followed by UPA-II is associated with considerably less growth. Is it just a coincidence that the Congress is politically unpopular and has lost nearly every election it has fought under the new more populism-less growth formula? I think not. Notes: 1. The relative change in the indicators above has been calculated for each socio-economic group (ST, SC, Muslim, OBC) relative to others

Up Next:

How Markets Fuel Growth W. Michael Cox on July 17, 2012