Why do Democracies Remain Poor?

Nobel Laureate Amartya Sen says that democracies have, without exception, abolished famine. A free press and lively opposition ensure that early warnings are given about drought and starvation, and political competition obliges the ruling party to take remedial as well as preventive measures.

But a bad monsoon last season caused starvation deaths in several states. The Supreme Court has ordered the government to ensure that free grain was made available to the destitute in affected areas. Some people died nevertheless.

Does this indicate that Sen is wrong? Not really. He observed two decades ago that while democracies do not tolerate mass starvation, they seem rather tolerant of mass poverty. Now, mass poverty will inevitably lead to occasional starvation, especially in a bad monsoon. So, the recent deaths constitute a vindication rather than contradiction of Sen’s thesis.

Why are democracies so tolerant of poverty? Professor Ashutosh Varshney of Notre Dame University has shown that poverty levels are high in several poor countries that have been democratic for decades. Why?

Because, says Varshney, democracy encourages direct rather than indirect attacks on poverty. And since direct attacks are less effective than indirect attacks, poverty falls only slowly.

Direct attacks on poverty include subsidies, job reservations, and the transfer of assets to the poor (through land reform or cheap loan schemes like IRDP). The indirect route covers measures to accelerate GDP growth and productivity, such as market- friendly policies and public investment in primary education and health.

The overall development record suggests that direct attacks have a limited impact. They can certainly relieve distress caused by droughts or other natural disasters.

But raising incomes on a sustained basis requires a sustained drive for higher productivity, which is rarely ensured by subsidies or job reservations. Often direct measures are no more than palliatives: They relieve rather than cure poverty.

Besides, subsidies and other entitlements are cornered mainly by the non-poor. Job reservations benefit mainly the creamy layer in each beneficiary caste. Leakages in anti-poverty programmes are massive.

Even land reform has a limited impact. Comprehensive land reform in Kerala in the 1950s and 1960s had little impact on poverty. By contrast, land reform in West Bengal in the 1980s had a sizable impact because it was accompanied by rural electrification and green revolution technology.

The lesson: Redistribution by itself achieves little, and achieves much more in a policy climate emphasising higher productivity.

Development specialists now emphasise productivity-enhancing policies such as realistic exchange rates, trade liberalisation, financial liberalisation, flexible labour regulations, and greater overall competition and foreign investment.

These measures work best in conjunction with good governance and high public investment in education and health.

But this is not widely understood by politicians, nor do they find it easy to communicate it to voters. So political parties that pursue economic reform when in power do not argue for it in election campaigns.

The largest-ever public survey by Yogendra Yadav in 1996 showed that only 12 per cent of the rural electorate (and 20 per cent of the total electorate) was aware of any change in economic policy whatsoever.

Economic reforms produce losers as well as winners. The losses typically come upfront, the gains later. The losses are concentrated on a relatively small number of losers who protest bitterly. The gains are thinly spread over a huge number of consumers, who find it difficult to see the connection with reform. Losers blame the government, while the gainers think their own cleverness and hard work that has made them better off.

This is why politicians in democracies prefer direct to indirect attacks on poverty. Voters can easily identify a party with a particular subsidy, job reservations or cheap loan. They cannot easily identify a party with increased productivity.

Direct measures may be less effective in tackling poverty than indirect ones, but they are far more visible to voters. And that, says Varshney, is a major reason why democracies are tardy in reducing poverty.

I wish to add an additional reason. Democracies are majoritarian rather than egalitarian. There is no reason at all for a democracy to favour the bottom 30 per cent: The middle 50 per cent have more votes. In theory, the bottom 30 per cent could be organised into a bloc that is electorally decisive.

But if that happened, surely the middle 50 per cent would get organised too. In practice, caste, religion, occupation and other such issues provide greater incentives for organising electoral groups than income.

Small farmers want subsidised water and fertilisers no less than large ones. Middle castes want job reservations no less than dalits or tribals.

What economists regard as leakages of entitlements to the non-poor are not really seen as leakages at all by politicians. It makes sense for politicians to propose entitlements that benefit the majority of the population rather than the poorest 30 per cent.

This explains why politicians happily subsidise water, electricity, fertilisers and food for all income groups, and provide job reservations for castes accounting for up to 85 per cent of the population in some states.

The middle is where the most votes lie. Limiting entitlements to the poorest may seem sound economic policy, but is politically unattractive. Middle-class capture of entitlements occurs in all democracies, even rich ones like the US.

So, do not blame the venality and incompetence of Indian politicians alone for the slow reduction of poverty. It is a consequence of democracy too.

What do you think?