India, China growth stories

AN ODE TO KENNETH ARROW

I recount a day dream experienced after reading the flood of tributes to Kenneth Arrow, often described as the founding father of the modern ‘Social Choice’ theory. He is best known for his ‘Impossibility theorem’. He demonstrated that it was impossible to formulate a social preference ordering or voting system that can consistently and sensibly reflect the preferences of a set of individuals with diverse views.

Apparently, simple conditions of democracy or non-dictatorship, full individual sovereignty, unanimity (if all individuals in a group, prefers choice ‘a’ over ‘b’, the group should also so prefer ‘a’ to ‘b’), freedom from irrelevant alternatives (if some alternative choices have been ranked, removal of one of them should not change the ranks of other choices) and uniqueness of group rank imposed together in a ‘choice’ situation result in erratic behaviour.

This was in 1951. The Noble Prize came in 1972 making him the youngest winner. The dream wandered from Arrow, to another work inspired by this lucidly simple proof. This was the ‘Theory of the second Best’ of Richard Lipsey and Kevin Lancaster in 1956. Simply put, it enunciates that in a sub-optimal equilibrium, resetting one condition to optimality, without simultaneously resetting all other conditions optimality gets you worse-off than originally. It is thus better to consciously strive for second best solutions rather than optimal situations.

The dream drifted back to another work for which Arrow is famous — his work on endogenous growth or ‘Learning by Doing’ or simply, in a very colloquial sense, corporations and organisations get better and more efficient with time if they simply keep focussing on what they are doing.

The dream unaccountably wandered off to the differences between the Indian and Chinese growth stories. In Mao’s time, both countries were equally deficient on most parameters compared to the advanced economies. Both had similar sized economies.

India was, if anything slightly ahead on most parameters. Enter Deng Xiaoping in the post-Mao era. He retained ‘non democracy’ by whatever name you call it but, together with his successors, systematically reset all governance processes relating to ‘matters economic’ towards ‘optimality conditions as per suggestions of US trained advisors. Not at once or equally in all provinces and they are admittedly still nowhere there, but systematically and continuously.

Equally admittedly, China is facing all sorts of problems in these troubled times, but which country isn’t? It is equally true that sooner or later they will run into the challenge of reconciling their politics of governance with their management of economics, but as off now are already five times larger in size than India. Also, though a predominantly manufacturing/export manufacturing-oriented economy, they have a service sector more than twice the size of the entire Indian economy and a digital or e-economy larger even than the US digital/e-economy.

What about us? We are undoubtedly a robust democracy. Also, notwithstanding what one set of politicians say about the others, governance practices have mostly been well intentioned. All governments have grappled with reform and growth problems.
Development and growth have both undoubtedly happened. All policies invariably focus on securing ‘optimality’. All states are equally important for allocation of investment and infrastructure. Manufacturing-based employment has always been offered to all states (backward area development, freight equalisation etc).

Similarly, provision of justice (each case equally important, no acceleration at any cost), affirmative action (simultaneous and equal in all institutions) or citizenship/human rights has been consistently given priority. In no specific case can any fair person accuse the state for being consciously ‘partial’ unless it was to a minority or the disadvantaged. All laws apply with equal rigour in metropolitan as also rural centres.

Ramshackle cities

The dream then flitted off to the sorry fact that despite all this, we all experience ramshackle cities, educational and health systems, reservation riots and increasingly ever higher levels of unemployment. The social stress levels have gone up. Any or every event can set off riot li­ke conditions-whether it is a bullock cart race or a college debate or even a simple celebratory get-together over a meal.

If you ask any adult, they all express a strong desire for change, even if it implies paying more. They are willing, to pay more for treatments at a government hospital. All they want is due attention, with adequate equipment in hygienic conditions. None likes getting fleeced at a private set up but all perforce go there. All say that the same hospitals/ cities/universities were outstandingly good in the 1960s/ 1970’s but have deteriorated.

If you ask any doctor or bureaucrat, serving or retired, for ideas on how to restore quality, each will give his/her personal opinion that granting fullest autonomy and corporate governance thereby creating a ‘public’ institution which is neither ‘private sector’ or ‘governmental’ is now the best way forward. But then, the same ideas had occurred in the previous and earlier decades. The word ‘autonomous’ is now often used to describe the same institutions and yet ‘autonomy’ is still felt required? The dream wrestled with the paradox before flitting off to another paradox.

India is among the most difficult countries on ‘ease of doing business’ index. We apparently have the most stringent procedures for environmental clearance. It often takes years to get clearances. Manufacturing is our smallest sector. Yet environmental pollution is our biggest problem. Similarly, construction laws and rules are extremely complex and time consuming. Even extending a balcony in a flat involves multiple authorities/permissions. Yet though India has an official Urbanisation Index of about 30%, the World Bank satellite ‘night light’ based assessment places it nearer 60%. How can World Bank be so wrong?

The locked spirals of paradoxes woke me up wondering what on earth Indian day to day problems have anything to do with Arrow’s work or even other paradoxes like ‘Fallacy of Composition’ and ‘Money Illusion’ much liked by theorists. Maybe the answers are blowing in the wind as Bob Dylan, the current Noble literature prize winner, once crooned?

(The writer is former chairman, Exim Bank of India)

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